AMERICAN MEDIA INC - FORM 10-Q - February 16, 2016

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EX-10.1 - EXHIBIT 10.1 - AMERICAN MEDIA INCexhibit101_amendmentno1tor.htm
EX-32 - EXHIBIT 32 - AMERICAN MEDIA INCami-ex32_20151231.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2015

¨ 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 o
No þ
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 þ
No o
     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
o
 
Accelerated filer
o
Non-accelerated filer
þ
(Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
 
 
 
Yes o
No þ

There is no public market for the registrant’s common stock. The number of shares outstanding of the registrant's common stock, $0.0001 par value, as of January 31, 2016 was 100.



AMERICAN MEDIA, INC.
 
QUARTERLY REPORT ON FORM 10-Q
For the Fiscal Quarter Ended December 31, 2015
 
TABLE OF CONTENTS

 
 
  Page(s)
 
 
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Balance Sheets as of December 31, 2015 and March 31, 2015
 
 
 
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months ended December 31, 2015 and 2014
 
 
 
 
 
 
 
 
 
 





2

American Media, Inc. and its consolidated subsidiaries are referred to in this Quarterly Report on Form 10-Q (this "Quarterly Report") as American Media, AMI, the Company, we, our and us.

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

This Quarterly Report for the fiscal quarter ended December 31, 2015 contains forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Securities Exchange Act"). These forward-looking statements relate to our current beliefs regarding future events or our future operating or financial performance. By their nature, forward-looking statements involve risks, trends, and uncertainties that could cause actual results to differ materially from those anticipated in any forward-looking statements.

We have tried, where possible, to identify such statements by using words such as "believes," "expects," "intends," "estimates," "may," "anticipates," "will," "likely," "project," "plans," "should," "could," "potential" or "continue" and similar expressions in connection with any discussion of future operating or financial performance. Any forward-looking statement is and will be based upon our then current expectations, estimates and assumptions regarding future events and is applicable only as of the dates of such statement. We may also make written and oral forward-looking statements in the reports we file from time to time with the Securities and Exchange Commission (the "SEC").

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;
 
 
 
 
 
•
 
our ability to implement our business strategy;
 
 
 
 
 
•
 
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 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 and affect the readership level of our publications as well as our advertising and circulation revenue;
 
 
 
 
 
•
 
changes in discretionary consumer spending patterns;
 
 
 
 
 
•
 
any disruption in the distribution of our magazines through wholesalers;
 
 
 
 
 
•
 
any loss of one or more of our key vendors or key advertisers;
 
 
 
 
 
•
 
changes in the price of fuel, paper, ink and postage;
 
 
 
 
 
•
 
the effects of possible credit losses;
 
 
 
 
 
•
 
whether we decide to engage in acquisitions, enter into partnerships and joint ventures or execute publishing services agreements in the future;
 
 
 
 
 
•
 
our ability to attract and retain experienced and qualified personnel;
 
 
 
 
 
•
 
adverse results in litigation matters or any regulatory proceedings;
 
 
 
 
 
•
 
any future impairment of our goodwill or other identified intangible assets;
 
 
 
 
 
•
 
the potential effects of threatened or actual terrorist attacks or other acts of violence, war or civil unrest;
 
 
 
 
 
•
 
our ability to maintain an effective system of internal controls over financial reporting;
 
 
 
 
 
•
 
unforeseen increases in employee benefit costs; and
 
 
 
 
 
•
 
changes in accounting standards.

These and other factors are discussed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2015 (the “2015 Form 10-K”) under the heading “Part I, Item 1A. Risk Factors.”

We caution you not to place undue reliance on any forward-looking statement, which speaks only as of the date of this Quarterly Report. We undertake no obligation to publicly update or revise any forward-looking statement contained in this Quarterly Report, whether as a result of new information, future events or otherwise, 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,
2015
 
March 31,
2015
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents ($301 and $880 related to VIEs, respectively)
$
922

 
$
3,452

Trade receivables, net of allowance for doubtful accounts of $3,081 and $3,281, respectively ($1 related to VIEs)
19,577

 
39,412

Inventories ($0 and $95 related to VIEs, respectively)
834

 
873

Prepaid expenses and other current assets ($197 and $198 related to VIEs, respectively)
11,800

 
11,356

Total current assets
33,133

 
55,093

PROPERTY AND EQUIPMENT, NET:
 
 
 
Leasehold improvements
3,748

 
3,801

Furniture, fixtures and equipment
41,120

 
43,979

Less – accumulated depreciation
(33,971
)
 
(30,230
)
Total property and equipment, net ($15 and $25 related to VIEs, respectively)
10,897

 
17,550

OTHER ASSETS:
 
 
 
Deferred debt costs, net
4,560

 
6,383

Deferred rack costs, net
3,888

 
4,824

Investments in affiliates
1,419

 
803

Other long-term assets
2,830

 
3,193

Total other assets
12,697

 
15,203

GOODWILL AND OTHER IDENTIFIED INTANGIBLE ASSETS:
 
 
 
Goodwill
153,998

 
153,998

Other identified intangibles, net of accumulated amortization of $135,580 and $122,791, respectively ($6,000 related to VIEs)
212,804

 
224,181

Total goodwill and other identified intangible assets, net
366,802

 
378,179

TOTAL ASSETS
$
423,529

 
$
466,025

 
 
 
 
LIABILITIES AND STOCKHOLDERS' DEFICIT
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable ($19 and $43 related to VIEs, respectively)
$
9,787

 
$
15,781

Accrued expenses and other liabilities ($0 and $194 related to VIEs, respectively)
29,381

 
44,015

Accrued interest
2,831

 
10,075

Deferred revenues ($0 and $589 related to VIEs, respectively)
25,618

 
26,734

Total current liabilities
67,617

 
96,605

NON-CURRENT LIABILITIES:
 
 
 
Senior secured notes, net
308,306

 
309,569

Revolving credit facility
18,200

 
14,700

Other non-current liabilities
8,239

 
8,352

Deferred income taxes
35,584

 
70,747

Total liabilities
437,946

 
499,973

COMMITMENTS AND CONTINGENCIES (see Note 11)


 


Redeemable noncontrolling interests (see Note 9)
3,000

 
3,000

STOCKHOLDERS' DEFICIT:
 
 
 
Common stock, $0.0001 par value; 100 shares authorized, issued and outstanding as of December 31, 2015 and March 31, 2015, respectively
—

 
—

Additional paid-in capital
945,037

 
945,037

Accumulated deficit
(962,024
)
 
(981,593
)
Accumulated other comprehensive loss
(430
)
 
(392
)
Total stockholders' deficit
(17,417
)
 
(36,948
)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
$
423,529

 
$
466,025



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 December 31,
 
Nine Months Ended December 31,
 
2015
 
2014
 
2015
 
2014
OPERATING REVENUES:
 
 
 
 
 
 
 
Circulation
$
38,191

 
$
43,982

 
$
112,438

 
$
127,003

Advertising
15,693

 
15,711

 
49,578

 
47,211

Other
1,260

 
452

 
11,168

 
10,741

Total operating revenues
55,144

 
60,145

 
173,184

 
184,955

OPERATING EXPENSES:
 
 
 
 
 
 
 
Editorial
5,480

 
6,193

 
18,645

 
21,177

Production
12,475

 
14,784

 
42,256

 
51,329

Distribution, circulation and other costs
8,908

 
9,577

 
26,582

 
29,767

Selling, general and administrative
15,899

 
19,217

 
45,953

 
64,213

Depreciation and amortization
6,513

 
3,947

 
19,858

 
9,985

Impairment of goodwill and intangible assets
—

 
—

 
—

 
18,458

Total operating expenses
49,275

 
53,718

 
153,294

 
194,929

OPERATING INCOME (LOSS)
5,869

 
6,427

 
19,890

 
(9,974
)
OTHER EXPENSES:
 
 
 
 
 
 
 
Interest expense
(9,608
)
 
(11,468
)
 
(29,308
)
 
(39,267
)
Amortization of deferred debt costs
(887
)
 
(487
)
 
(2,603
)
 
(2,544
)
Other income (expense)
—

 
3,479

 
(39
)
 
3,778

Total other expenses, net
(10,495
)
 
(8,476
)
 
(31,950
)
 
(38,033
)
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
(4,626
)
 
(2,049
)
 
(12,060
)
 
(48,007
)
INCOME TAX BENEFIT
(2,338
)
 
(12,405
)
 
(32,642
)
 
(17,552
)
NET INCOME (LOSS) FROM CONTINUING OPERATIONS
(2,288
)
 
10,356

 
20,582

 
(30,455
)
LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES
—

 
(403
)
 
—

 
(407
)
NET INCOME (LOSS)
(2,288
)
 
9,953

 
20,582

 
(30,862
)
LESS: NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
(27
)
 
7

 
(1,013
)
 
(1,208
)
NET INCOME (LOSS) ATTRIBUTABLE TO AMERICAN MEDIA, INC. AND SUBSIDIARIES
$
(2,315
)
 
$
9,960

 
$
19,569

 
$
(32,070
)
 
 
 
 
 
 
 
 
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2015
 
2014
 
2015
 
2014
NET INCOME (LOSS)
$
(2,288
)
 
$
9,953

 
$
20,582

 
$
(30,862
)
Foreign currency translation adjustment
(37
)
 
(63
)
 
(38
)
 
(111
)
Comprehensive income (loss)
(2,325
)
 
9,890

 
20,544

 
(30,973
)
Less: comprehensive (income) loss attributable to noncontrolling interests
(27
)
 
7

 
(1,013
)
 
(1,208
)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO AMERICAN MEDIA, INC. AND SUBSIDIARIES
$
(2,352
)
 
$
9,897

 
$
19,531

 
$
(32,181
)



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 STOCKHOLDERS' DEFICIT
(in thousands, except share information)

 
Nine Months Ended December 31, 2015
 
 
 
 
 
Accumulated
 
 
 
 
Additional
 
other
Total
 
Common stock
paid-in
Accumulated
comprehensive
stockholders'
 
Shares
Total
capital
deficit
loss
deficit
BALANCE, BEGINNING OF PERIOD
100

$
—

$
945,037

$
(981,593
)
$
(392
)
$
(36,948
)
Net income
—

—

—

19,569

—

19,569

Foreign currency translation
—

—

—

—

(38
)
(38
)
BALANCE, END OF PERIOD
100

$
—

$
945,037

$
(962,024
)
$
(430
)
$
(17,417
)



 
Nine Months Ended December 31, 2014
 
 
 
 
 
Accumulated
 
 
 
 
Additional
 
other
Total
 
Common stock
paid-in
Accumulated
comprehensive
stockholders'
 
Shares
Total
capital
deficit
loss
deficit
BALANCE, BEGINNING OF PERIOD
10,000,000

$
1

$
822,723

$
(954,466
)
$
(231
)
$
(131,973
)
Net loss
—

—

—

(32,070
)
—

(32,070
)
Foreign currency translation
—

—

—

—

(111
)
(111
)
Issuance of common stock
1,172,250

—

205

—

—

205

Retirement of common stock
(11,172,150
)
(1
)
1

—

—

—

Debt for equity conversion, net of expenses
—

—

121,535

—

—

121,535

Capital contribution
—

—

573

—

—

573

BALANCE, END OF PERIOD
100

$
—

$
945,037

$
(986,536
)
$
(342
)
$
(41,841
)




















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

6

AMERICAN MEDIA, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Nine Months Ended December 31,
 
2015
 
2014
OPERATING ACTIVITIES
 
 
 
Net income (loss)
$
20,582

 
$
(30,862
)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
19,858

 
10,825

Impairment of goodwill and intangible assets
—

 
18,458

Amortization of deferred debt costs
2,603

 
2,544

Amortization of deferred rack costs
3,852

 
4,249

Deferred income tax benefit
(33,445
)
 
(14,617
)
Non-cash payment-in-kind interest accretion
—

 
4,809

Provision for doubtful accounts
—

 
5,870

Gain on sale of assets
(15
)
 
(3,417
)
Other
(554
)
 
2,434

Changes in operating assets and liabilities:
 
 
 
Trade receivables
19,927

 
4,303

Inventories
39

 
8,819

Prepaid expenses and other current assets
(2,134
)
 
(2,249
)
Deferred rack costs
(2,916
)
 
(3,481
)
Other long-term assets
363

 
153

Accounts payable
(5,992
)
 
(6,597
)
Accrued expenses and other liabilities
(14,497
)
 
9,265

Accrued interest
(7,244
)
 
(11,234
)
Other non-current liabilities
(113
)
 
(85
)
Deferred revenues
(1,116
)
 
4,528

Total changes in operating assets and liabilities
(13,683
)
 
3,422

Net cash (used in) provided by operating activities
(802
)
 
3,715

INVESTING ACTIVITIES
 
 
 
Purchases of property and equipment
(500
)
 
(6,659
)
Purchases of intangible assets
(1,334
)
 
(2,520
)
Proceeds from sale of assets
24

 
3,009

Distributions from affiliates
—

 
2,570

Net cash used in investing activities
(1,810
)
 
(3,600
)
FINANCING ACTIVITIES
 
 
 
Proceeds from revolving credit facility
54,400

 
57,800

Repayments to revolving credit facility
(50,900
)
 
(59,200
)
Proceeds from issuance of senior secured notes
—

 
12,500

Senior secured notes repurchases
(2,000
)
 
(5,975
)
Capital contribution
—

 
573

Costs incurred in restructuring
—

 
(4,315
)
Redemption premium payment
(118
)
 
—

Payment of debt costs
(43
)
 
—

Payments to noncontrolling interest holders of Olympia
(1,150
)
 
(1,202
)
Net cash provided by financing activities
189

 
181

Effect of exchange rate changes on cash
(107
)
 
(248
)
Net (decrease) increase in cash and cash equivalents
(2,530
)
 
48

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
3,452

 
3,030

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
922

 
$
3,078

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

 
$
2

Non-cash debt for equity exchange
$
—

 
$
123,960

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

7

AMERICAN MEDIA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015

Note 1 - Nature of the Business

Description of the Business

American Media, Inc. and its subsidiaries (collectively, the "Company", "AMI", "we", "our" or "us") owns and operates the leading celebrity and health and fitness media brands in the United States. AMI was incorporated under the laws of the State of Delaware in 1990 and is headquartered in Boca Raton, Florida. The Company is a wholly-owned subsidiary of AMI Parent Holdings, LLC, a Delaware limited liability company (the "Parent"), which is controlled by certain investors of the Company (collectively, the "Investors") pursuant to the merger consummated in August 2014 (the "Merger"). As a result of the Merger, the Parent acquired 100% of the issued and outstanding shares of common stock of the Company.

In January 2015, we sold our Shape, Fit Pregnancy and Natural Health publications, which comprised our Women's Active Lifestyle segment, for approximately $60 million in cash plus an earn-out of up to $60 million. See Note 10, "Dispositions" for further information. After giving effect to the divestiture of our Women's Active Lifestyle segment, the Company operates and reports financial and operating information in the following two segments: Celebrity Brands and Men's Active Lifestyle. The Company also provides general corporate services to its segments which is reported as a third, non-operating segment, Corporate and Other. See Note 12, "Business Segment Information" for further information regarding the Company's reporting segments.

As of December 31, 2015, we own and operate a diversified portfolio of 10 publications; National Enquirer, Star, Globe, National Examiner, OK! and Soap Opera Digest are published weekly; Men's Fitness, Muscle & Fitness and Flex are published 10 times per year and Muscle & Fitness Hers is published bi-monthly.

Our fiscal year ends on March 31, 2016 and may be referred to herein as fiscal 2016.

Liquidity

The Company is highly leveraged. As of December 31, 2015, the Company had approximately $326.5 million of outstanding indebtedness, consisting of $308.3 million of senior secured notes and $18.2 million under the revolving credit facility.

As further described in Note 4, "Revolving Credit Facility," subsequent to December 31, 2015, the terms of the revolving credit facility were amended and restated to, among other things, extend the maturity date to June 2017 and modify the financial covenants in effect through the date of maturity.

Over the next year, the cash interest payments due under the Company's debt agreements are approximately $36.3 million and there are no scheduled principal payments due. As of December 31, 2015, the Company has $0.9 million of cash and $12.4 million available for borrowing pursuant to the revolving credit facility.

Several of our smaller wholesalers and our second-largest wholesaler, Source Interlink Distribution ("Source"), ceased operations during fiscal 2015. Since then we have transitioned the previous wholesalers' newsstand distribution to the two remaining major wholesalers. This transition had an immediate adverse impact on single copy newsstand sales and liquidity during fiscal 2015 and into the first half of fiscal 2016.

The Company's substantial indebtedness could adversely affect the business, financial condition and results of operations. Specifically, the Company's level of indebtedness could have important consequences for the business and operations, including the following:

•
requiring the Company to dedicate a substantial portion of its cash flow from operations for payments on indebtedness, thereby reducing the availability of such cash flow to fund working capital, capital expenditures and general corporate requirements or to carry out other aspects of the business;

•
placing the Company at a potential disadvantage compared to its competitors that have less debt;


8

•
increasing the Company's vulnerability to general adverse economic and industry conditions;

•
limiting the Company's ability to make material acquisitions or take advantage of business opportunities that may arise;

•
limiting the Company's flexibility in planning for, or reacting to, changes in the industry;

•
limiting the Company's ability to obtain additional financing to fund future working capital, capital expenditures and other general corporate requirements or to carry out other aspects of the business; and
  
•
exposing the Company to fluctuations in interest rates as the revolving credit facility has a variable rate of interest.

The Company plans to refinance all or a portion of its indebtedness on or before maturity. The Company cannot assure that it will be able to refinance any of its indebtedness on commercially reasonable terms or at all.

As a result of declining operating results and cash flow from operations. the Company implemented management action plans during fiscal 2016 that reduced expenses and capital expenditures. The management action plans included outsourcing technology and operation functions, digital content renegotiations, print order efficiencies and editorial and advertising sales staff consolidation.

Although the Company is significantly leveraged, it expects that the current cash balances, liquidity provided in connection with the revolving credit facility and cash generated from operations, should be sufficient to meet working capital, capital expenditures, debt service, and other cash needs for the next year.

Note 2 - Summary of Significant Accounting Policies

Basis of Presentation

The information included in the foregoing interim condensed consolidated financial statements is unaudited. In the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results of operations for the interim periods presented, have been reflected herein. These unaudited condensed consolidated financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with the audited financial statements and footnotes contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") with respect to the Company's fiscal year ended March 31, 2015 (the "2015 Form 10-K"), which may be accessed through the SEC's website at http://www.sec.gov.

The results of operations for interim periods presented herein are not necessarily indicative of the results of operations that may be expected for the full fiscal year or any other subsequent interim period.

Principles of Consolidation

Our 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 interests in our 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.

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 continually 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 Affiliates and Redeemable Noncontrolling Interests.”


9

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("US GAAP") requires management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and accompanying notes. Management's estimates are based on the facts and circumstances available at the time estimates are made, past historical experience, risk of loss, general economic conditions and trends, and management's assessments of the probable future outcome of these matters. As a result, actual results could differ from those estimates.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out method. The Company writes down inventory for estimated obsolescence and/or excess or damaged inventory. Inventory write-downs during the nine months ended December 31, 2015 and 2014 were insignificant.

The Company is party to a long-term paper supply and purchasing agreement pursuant to which a third party manages all aspects of the Company's raw material paper inventory. As a result, the Company does not maintain raw material paper inventory. The finished product inventory, comprised of paper, production and distribution costs of future issues totaled $0.8 million and $0.9 million, respectively, at December 31, 2015 and March 31, 2015.

Concentrations

We rely on wholesalers for the retail distribution of our magazines. Several of our smaller wholesalers and our second-largest wholesaler, Source, ceased operations during fiscal 2015. A small number of wholesalers are responsible for a substantial percentage of the wholesale magazine distribution business. As of December 31, 2015, single copy revenues consisted of copies distributed to retailers primarily by two major wholesalers.

During the nine months ended December 31, 2015 and 2014, The News Group accounted for approximately 20% and 19%, respectively, of our total operating revenues and The Hudson Group accounted for approximately 5% of our total operating revenues. We have multi-year service arrangements with our major wholesalers, which provide incentives to maintain certain levels of service.

Recently Adopted Accounting Pronouncements

In April 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (Topic 205 and Topic 360) ("ASU 2014-08") which raises the threshold for disposals to qualify as discontinued operations. Under this new guidance, a discontinued operation is (1) a component of an entity or group of components that has been disposed of or is classified as held for sale that represents a strategic shift that has or will have a major effect on an entity's operations and financial results or (2) an acquired business that is classified as held for sale on the acquisition date. This guidance also requires expanded or new disclosures for discontinued operations, individually material disposals that do not meet the definition of a discontinued operation, an entity's continuing involvement with a discontinued operation following disposal, and retained equity method investments in a discontinued operation. ASU 2014-08 was effective for the Company on April 1, 2015. The adoption of ASU 2014-08 did not have an impact on the consolidated financial position, results of operations or cash flows.

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes ("ASU 2015-17"), which simplifies the presentation of deferred tax assets and deferred tax liabilities. The new guidance no longer requires the presentation of current deferred tax assets and deferred tax liabilities on a classified balance sheet, rather requiring all to be presented as non-current. This guidance is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company prospectively adopted this guidance in the third quarter of fiscal 2016. As required by this guidance, all deferred tax assets and liabilities are classified as non-current in our consolidated balance sheet as of December 31, 2015, which is a change from our historical presentation wherein certain of our deferred tax assets and liabilities were classified as current and the remainder were classified as non-current. The March 31, 2015 balance sheet has not been retrospectively adjusted. As this guidance impacts presentation only, the adoption of ASU 2015-17 did not have an impact on the results of operations or cash flows.


10

Recently Issued Accounting Pronouncements

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern (Topic 205) ("ASU 2014-15"), which establishes management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and setting rules for how this information should be disclosed in the financial statements. This guidance is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2016, with early adoption permitted. The Company does not expect the adoption of this guidance to have an impact on the consolidated financial position results of operations or cash flows.

In January 2015, the FASB issued ASU No. 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20) ("ASU 2015-01"), which simplifies the income statement presentation by eliminating the concept of extraordinary items. The guidance is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2015, with early adoption permitted. The Company does not expect the adoption of this guidance to have an impact on the consolidated financial position, results of operations or cash flows.

In February 2015, the FASB issued ASU 2015-02, Consolidations, Amendments to the Consolidation Analysis (Topic 810) ("ASU 2015-02"), which changes the identification of variable interests, the variable interest characteristic for a limited partnership or similar entity and the primary beneficiary determination all of which are intended to improve the consolidation guidance as well as increase transparency and consistency of financial reporting. The guidance is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2015, with early adoption permitted. The Company does not expect the adoption of this guidance to have an impact on the consolidated financial position, results of operations or cash flows.

In April 2015, the FASB issued a proposal for a one-year deferral of the effective date for ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). Under this proposal, the standard would be effective for public entities for annual reporting periods beginning after December 15, 2017 and interim periods therein. ASU 2014-09 supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. As a result of the one-year deferral, ASU 2014-09 will now be effective for the Company on April 1, 2018 using one of two retrospective application methods. The Company has not determined the potential effects on the consolidated financial position, results of operations or cash flows.

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest, Simplifying the Presentation of Debt Issuance Costs (Subtopic 835-30) ("ASU 2015-03"), which requires the presentation of debt issuance costs to be reflected as a reduction from the face amount of the related debt, with amortization recorded as interest expense, rather than recording as a deferred asset. The guidance is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2015, and requires retrospective application. The Company does not expect the adoption of this guidance to have a significant impact on the consolidated financial position, results of operations or cash flows, although it will change the financial statement classification of the deferred debt cost. As of December 31, 2015 and March 31, 2015, the Company had $4.6 million and $6.4 million of net deferred debt costs, respectively, included on the consolidated balance sheets. Under the new guidance, the net deferred debt costs would offset the carrying amount of the respective debt on the consolidated balance sheets.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330) ("ASU 2015-11"), which simplifies the measurement of inventory by requiring certain inventory to be subsequently measured at the lower of cost and net realizable value. The guidance is effective for fiscal years, and interim period within those years, beginning on or after December 15, 2016. The Company does not expect the adoption of this guidance to have an impact on the consolidated financial position, results of operations or cash flows.

In August 2015, the FASB issued ASU 2015-15, Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements-Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, to clarify that an entity may elect to present debt issuance costs related to a line-of-credit arrangement as an asset, regardless of whether or not there are any outstanding borrowings on the line-of-credit arrangement.

From time to time, new accounting pronouncements are issued by the 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, results of operations or cash flows upon adoption.


11

Note 3 - Goodwill and Other Identified Intangible Assets

Goodwill

As of December 31, 2015 and March 31, 2015, the Company had goodwill with a carrying value of $154.0 million. The gross carrying amount and accumulated impairment losses of goodwill, as of December 31, 2015 and March 31, 2015, by reportable segment are as follows (in thousands):

 
Celebrity Brands
Men's Active Lifestyle
Corporate and Other
Total
Goodwill
$
428,518

$
116,806

$
13,680

$
559,004

Accumulated impairment losses
(304,595
)
(89,336
)
(11,075
)
(405,006
)
Goodwill, net of impairment losses
$
123,923

$
27,470

$
2,605

$
153,998


Other Identified Intangible Assets

Other identified intangible assets are comprised of the following (in thousands):

 
Range of lives
(in years)
December 31, 2015
March 31, 2015
Intangible assets subject to amortization:
 
 
 
     Tradenames
15 - 27
$
220,527

$
46,166

     Subscriber lists
3 - 15
32,702

32,702

     Customer relationships
5 - 10
2,300

2,300

     Other intangible assets
3
9,045

7,620

Total gross intangible assets subject to amortization
 
264,574

88,788

     Accumulated amortization
 
(57,770
)
(44,970
)
Total net intangible assets subject to amortization
 
206,804

43,818

Intangible assets not subject to amortization
Indefinite
6,000

180,363

Total other identified intangible assets, net
 
$
212,804

$
224,181


Effective April 1, 2015, certain tradenames with a net carrying value totaling approximately $174.4 million that were previously assigned indefinite lives have been assigned finite lives of 15 years. During the nine months ended December 31, 2015, the amortization expense of these tradenames totaled approximately $8.7 million.

Amortization expense of intangible assets was $12.8 million and $2.9 million during the nine months ended December 31, 2015 and 2014, respectively. Based on the carrying value of identified intangible assets recorded at December 31, 2015, and assuming no subsequent impairment of the underlying assets, the amortization expense is expected to be as follows (in thousands):

Fiscal Year
 
Amortization Expense
2016
 
$
4,330

2017
 
16,200

2018
 
15,290

2019
 
14,736

2020
 
14,501

  Thereafter
 
141,747

 
 
$
206,804



12

Impairments

The Company did not record any impairment charges during the nine months ended December 31, 2015. The Company continues to evaluate goodwill and other identified intangible assets for impairment. Goodwill and other identified intangible assets are material components of the Company's financial statements and impairment charges to the Company's goodwill or other identified intangible assets in future periods could be material to the Company's results of operations.

During an evaluation of goodwill and other identified intangible assets at September 30, 2014, 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 impacted consumer spending, including further declines in certain advertising markets, 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 September 30, 2014 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 performed, as of September 30, 2014, 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 a pre-tax non-cash impairment charge of $8.9 million and $8.5 million to reduce the carrying value of goodwill and tradenames, respectively, during the quarter ended September 30, 2014.

Note 4 - Revolving Credit Facility

The Company maintains a revolving credit facility that provides for borrowing up to $35.0 million, less outstanding letters of credit, which matures in December 2016 (the "Revolving Credit Facility"). The Investors became a lending party to the Revolving Credit Facility in March 2015 and represent a commitment of approximately 42% of the Revolving Credit Facility.

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 interest rate under the Revolving Credit Facility has ranged from 8.00% to 8.25% during the nine months ended December 31, 2015 and 2014. 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, 2015 and 2014 were insignificant.

During the nine months ended December 31, 2015, the Company borrowed $54.4 million and repaid $50.9 million under the Revolving Credit Facility. At December 31, 2015, the Company had available borrowing capacity of $12.4 million after considering the $18.2 million outstanding balance and the $4.4 million outstanding letter of credit.

As further discussed below, in February 2016, the Company amended the Revolving Credit Facility (the "Amended Revolver") to, among other things, extend the maturity date to June 2017 and modify the financial covenants in effect through the date of maturity.

The outstanding balance of $18.2 million at December 31, 2015 is included in non-current liabilities, as the maturity date of the Amended Revolver is June 2017.

The indebtedness under the Revolving Credit Facility, as amended, is guaranteed by certain of the domestic subsidiaries of the Company and is secured by liens on substantially all the assets of the Company and certain of its domestic subsidiaries. In addition, the Company’s obligations are secured by a pledge of all 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.


13

Covenants

Our Revolving Credit Facility, as amended, includes certain representations and warranties, conditions precedent, affirmative covenants, negative covenants and events of default. The negative covenants include financial maintenance covenants comprised of a first lien leverage ratio, a consolidated leverage ratio and an interest coverage ratio. The Revolving Credit Facility, as amended, also contain 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, there is a cap on the total amount of cash available for distribution to our common stockholders.

With regard to the financial maintenance covenants, the first lien leverage ratio covenant must be equal to or less than 4.50 to 1.00 from April 1, 2015 through December 2016. The consolidated leverage ratio covenant must be equal to or less than 5.50 to 1.00 from October 1, 2015 through December 2016. The interest coverage ratio must be equal to or greater than 1.50 to 1.00 from April 1, 2015 through December 2016.

As of December 31, 2015, the Company was in compliance with its covenants under the Revolving Credit Facility.

Although there can be no assurances, management believes that, based on current expectations (including expected borrowings and repayments under the Amended Revolver), the Company's operating results for fiscal 2016 will be sufficient to satisfy the financial covenants under the Amended Revolver. The Company’s ability to satisfy the financial covenants is dependent on the business performing in accordance with its expectations.  If the performance of the Company’s business deviates significantly from its expectations, the Company may not be able to satisfy such financial covenants.  The Company's expectations 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 expectations. If the Company does not comply with its financial covenants, the Company will be in default under the Amended Revolver.

Amended Revolver

In February 2016, the Company, JPMorgan Chase Bank, N.A., as administrative agent (the “Administrative Agent”), and the lenders from time to time party to the Revolving Credit Facility, as amended, restated, modified or supplemented from time to time, entered into the Amended Revolver with the lenders (the “Consenting Lenders”) constituting the Required Lenders (as defined in the Revolving Credit Facility) to, among other things, extend the maturity date to June 2017, modify the financial covenants in effect through the date of maturity, and provide for certain other provisions.

With regard to the financial covenants, the first lien leverage ratio covenant must be equal to or less than 4.25 to 1.00 from January 1, 2016 through June 2017, provided that the first lien leverage ratio covenant will be lowered to 4.00 to 1.00 if the outstanding aggregate principal amount of the Company's first lien notes is less than $250 million. The consolidated leverage ratio covenant must be equal to or less than 5.25 to 1.00 from January 1, 2016 through June 2017, provided that the consolidated leverage ratio covenant will be lowered to 5.00 to 1.00 if the outstanding principal amount of the Company's first lien notes is less than $250 million. The interest coverage ratio was not amended and must be equal to or greater than 1.50 to 1.00 from January 1, 2016 through June 2017.

Note 5 - Senior Secured Notes

Our senior secured notes are comprised of the first lien notes, the second lien notes and the new second lien notes and are collectively referred to herein as the "Senior Secured Notes" and consisted of the following (in thousands):

 
 
December 31, 2015
 
March 31, 2015
   First Lien Notes
 
$
273,175

 
$
275,175

   Second Lien Notes
 
2,198

 
2,198

   New Second Lien Notes
 
39,024

 
39,024

   Unamortized discount
 
(6,091
)
 
(6,828
)
Total debt obligations
 
308,306

 
309,569

Less: current portion of long-term debt
 
—

 
—

Noncurrent debt obligations
 
$
308,306

 
$
309,569



14

The future maturities of the Senior Secured Notes as of December 31, 2015 are as follows (in thousands):

Fiscal Year
 
Amount
2016
 
$
—

2017
 
—

2018
 
273,175

2019
 
2,198

2020
 
—

Thereafter
 
39,024

Total future maturities
 
314,397

Unamortized discount
 
(6,091
)
Total debt obligations
 
$
308,306


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 and mature in December 2017 (the "First Lien Notes"). Interest on the First Lien 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.

During fiscal 2012, the Company redeemed $20.0 million in aggregate principal amount of First Lien Notes. During fiscal 2014, the Company repurchased approximately $2.3 million in aggregate principal amount of First Lien Notes. During fiscal 2015, the Company repurchased approximately $55.5 million in aggregate principal amount of First Lien Notes. In addition, during fiscal 2015, the Company exchanged approximately $32.0 million in aggregate principal amount of First Lien Notes, plus accrued and unpaid interest, for approximately $39.0 million aggregate principal amount of new second lien senior secured notes, which bear interest at a rate of 7.0% per annum and mature in July 2020 (the "New Second Lien Notes"), pursuant to an exchange agreement (the "New Second Lien Notes Exchange Agreement"), as further described below. During the first quarter of fiscal 2016, the Company repurchased approximately $2.0 million in aggregate principal amount of First Lien Notes, at a price equal to 105.9% of the aggregate principal amount thereof, plus accrued and unpaid interest in the open market.

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

Under the First Lien Notes Indenture, the Company has the option to redeem the First Lien Notes, in whole or in part, at the redemption prices set forth below, plus accrued and unpaid interest through the redemption date, if redeemed during the 12-month period beginning on December 15th of each of the years indicated below:

Year
 
Percentage
2015
 
102.875%
2016 and thereafter
 
100%

Second Lien Notes

In December 2010, we issued $104.9 million aggregate principal amounts of senior secured notes, which bear interest at a rate of 13.5% per annum and mature in June 2018 (the "Second Lien Notes"). Interest on the Second Lien 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.

In October 2013, we exchanged approximately $94.3 million aggregate principal amount of Second Lien Notes for an equal aggregate principal amount of new second lien senior secured notes, which bear interest at a rate of 10.0% per annum, are payable in kind, and mature in June 2018 (the “Second Lien PIK Notes”), pursuant to an exchange agreement (the “Second Lien PIK Notes Exchange Agreement”).


15

In September 2014, pursuant to the debt for equity exchange agreement with the Parent and the Investors, the Investors exchanged approximately $7.8 million aggregate principal amount of Second Lien Notes and all of the outstanding Second Lien PIK Notes, plus accrued and unpaid interest, for equity interest in the Parent. As a result, the Company's obligation under the Second Lien PIK Notes were satisfied in full.

During fiscal 2015, the Company repurchased approximately $0.6 million in aggregate principal amount of Second 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 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 our assets (subject to certain permitted liens and exceptions).

Under the Second Lien Notes Indenture, the Company has the option to redeem the Second Lien Notes, in whole or in part, at the redemption prices set forth below, plus accrued and unpaid interest through the redemption date, if redeemed during the 12-month period beginning on December 15th of each of the years indicated below:

Year
 
Percentage
2015
 
103.375%
2016 and thereafter
 
100%

New Second Lien Notes

In January 2015, we issued approximately $39.0 million aggregate principal amount of New Second Lien Notes, which bear interest at a rate of 7.0% per annum and mature in July 2020. Interest on the New Second Lien Notes is payable semi-annually on July 15th and January 15th of each year and is computed on the basis of a 360-day year comprised of twelve 30-day months. As described above, the New Second Lien Notes were issued in exchange for $32.0 million aggregate principal amount of First Lien Notes pursuant to the New Second Lien Notes Exchange Agreement.

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

Under the New Second Lien Notes Indenture, the Company has the option to redeem the New Second Lien Notes at any time prior to January 15, 2018 at a redemption price equal to 100% of the principal amount, plus a “make-whole” premium and accrued and unpaid interest through the redemption date. At any time prior to January 15, 2018, the Company may redeem up to 35% of the New Second Lien Notes from the net cash proceeds of one or more qualified equity offerings at a redemption price of 107% of the principal amount, plus accrued and unpaid interest through the redemption date, provided that at least 65% of the aggregate principal amount of the New Second Lien Notes remains outstanding after the redemption. The Company has the option to redeem the New Second Lien Notes on or after January 15, 2018, in whole or in part, at the redemption prices set forth below, plus accrued and unpaid interest through the redemption date, if redeemed during the 12-month period beginning on January 15th of each of the years indicated below:

Year
 
Percentage
2018
 
107%
2019
 
103.5%
2020 and thereafter
 
100%


16

Note 6 - 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 accompanying financial statements. 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, 2015
 
March 31, 2015
 
 
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
First Lien Notes
Level 2
 
$
273,175

 
$
271,809

 
$
275,175

 
$
282,742

Second Lien Notes
Level 2
 
2,198

 
2,060

 
2,198

 
2,337

New Second Lien Notes
Level 2
 
32,933

 
38,409

 
32,196

 
33,655


The fair value of the First Lien Notes, the Second Lien Notes and the New Second Lien Notes is estimated using quoted market prices for the same or similar issues.

As of December 31, 2015 and March 31, 2015, 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 Company's financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, and the Revolving Credit Facility. The carrying amount of these accounts approximates fair value.

Assets measured at fair value on a nonrecurring basis

The Company's non-financial assets, such as goodwill, intangible assets and property and equipment, are measured at fair value when there is an indicator of impairment and are recorded at fair value only when an impairment charge is recognized. The Company did not record any impairment charges during the nine months ended December 31, 2015. During an evaluation of goodwill and other identified intangible assets at September 30, 2014, the carrying value of goodwill and tradenames for certain reporting units exceeded fair value. See Note 3, "Goodwill and Other Identified Intangible Assets," for further discussion on measuring the Company's non-financial assets, specifically goodwill and tradenames.

Note 7 - Income Taxes

The asset and liability method of accounting for deferred income taxes requires a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company's valuation allowance related to its deferred tax assets, which was $27.1 million at March 31, 2015, was released during the first quarter of fiscal 2016 based on the weight of positive evidence that the deferred tax assets will be realized due to the reclassification of certain tradenames from indefinite-lived to finite-lived, effective April 1, 2015. In the past, the Company's deferred tax liabilities related to indefinite-lived intangible assets were not considered a future source of income to support the realization of deferred tax assets within the net operating loss carryforward period.

As discussed in Note 2, "Summary of Significant Accounting Policies," the Company prospectively adopted ASU 2015-17 in the third quarter of fiscal 2016. As required by this guidance, all deferred tax assets and liabilities are classified as non-current in our consolidated balance sheet as of December 31, 2015, which is a change from our historical presentation wherein certain of our deferred tax assets and liabilities were classified as current and the remainder were classified as non-current. The March 31, 2015 balance sheet has not been retrospectively adjusted.


17

Note 8 - Related Party Transactions

As discussed in Note 4, "Revolving Credit Facility," in March 2015, the Investors became a lending party to the Revolving Credit Facility and represent a commitment of approximately 42% of the Revolving Credit Facility.

As discussed in Note 5, "Senior Secured Notes," during the first quarter of fiscal 2016, the Company repurchased approximately $2.0 million in aggregate principal amount of First Lien Notes, plus accrued and unpaid interest, in the open market from the Investors.
 
Mr. Elkins, a former member of our Board of Directors provided certain financial advisory services to the Company through Roxbury Advisory, LLC ("Roxbury"), a company controlled by Mr. Elkins, while he was a member of our Board of Directors. In August 2014, the consulting agreement between Roxbury and the Company was terminated. Payments for the services received from Roxbury totaled $50,000 during nine months ended December 31, 2014 and the Company had no outstanding payables to Roxbury at December 31, 2015 or March 31, 2015.
 
Note 9 - Investments in Affiliates and Redeemable Noncontrolling Interests

Consolidated Joint Ventures

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. At any time prior to October 2019, the Company could be required to purchase all the limited liability company units, from the other limited liability company member, for a fixed price of $3.0 million cash (the "Olympia Put Option"). Any time from October 2019 through April 2020, the Company could require the other limited liability company member to sell, to the Company, all its limited liability company units 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. 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. The License Fee has been recorded as other identified intangibles, and the final payment was made in April 2013.

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 Company follows the accounting for noncontrolling interest in equity that is 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 interests” in the accompanying financial statements.

Effective September 2015, the Company and the other limited liability company member agreed that the distributions made, by Olympia, to the other limited liability company member would be $1.0 million per year, without deduction or offset, and would represent the only distribution payments to which the other limited liability company member would be entitled to as a member of Olympia. Olympia's net income attributable to noncontrolling interests during the nine months ended December 31, 2015 was $1.0 million and during the nine months ended December 31, 2014 was $1.3 million.


18

Zinczenko-AMI Ventures, LLC

In February 2013, the Company entered into a limited liability company agreement to form a joint venture, Zinczenko-AMI Media Ventures, LLC ("ZAM"), to create a book publishing division. ZAM was initially capitalized by the Company and the other limited liability company member (the "ZAM LLC Member") and the Company and the ZAM LLC Member each received an initial ownership interest of 51% and 49%, respectively, in ZAM. In accordance with the terms of the limited liability company agreement, the Company is responsible for the day-to-day operations and management of ZAM.

The Company has a variable interest in the ZAM joint venture, a variable interest entity. The ZAM 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 Company controls the activities that most significantly impact the economic performance of ZAM as manager of the day-to-day operations. As a result, the Company accounts for the ZAM joint venture as a consolidated subsidiary.

The operating results of ZAM were insignificant to the Company's unaudited condensed consolidated financial statements during the three and nine months ended December 31, 2015 and 2014.

Redeemable Noncontrolling Interests

The following table reconciles equity attributable to the redeemable noncontrolling interests (in thousands):

 
Three Months Ended December 31,
Nine Months Ended December 31,
 
2015
2014
2015
2014
Balance, beginning of period
$
4,000

$
4,259

$
3,000

$
3,000

Capital distributions
(1,000
)
(1,202
)
(1,000
)
(1,202
)
Net income attributable to noncontrolling interests
—

43

1,000

1,302

Other
—

(100
)
—

(100
)
Balance, end of period
$
3,000

$
3,000

$
3,000

$
3,000


Unconsolidated Joint Ventures

We have other joint ventures that we do not consolidate as we lack the power to direct the activities that significantly impact the economic performance of these entities. The Company's investments in affiliates are carried at the fair value of the investment consideration at the date acquired, plus the Company's equity in undistributed earnings from that date. Unless otherwise disclosed below, the operating results of our unconsolidated joint ventures were insignificant to the Company's unaudited condensed consolidated financial statements during the three and nine months ended December 31, 2015 and 2014.

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 Radar Online, 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 nine months ended December 31, 2015 and 2014. The management fees receivable from Radar totaled $2.0 million and $1.9 million as of December 31, 2015 and March 31, 2015, respectively, and is presented within other long-term assets in the accompanying unaudited condensed consolidated financial statements.


19

Select Media Services, LLC

In September 2013, the Company contributed substantially all of its assets comprising the Company's distribution and merchandising businesses operated by In Store Services, Inc., formerly known as Distribution Services, Inc. ("DSI"), a wholly-owned subsidiary of American Media, Inc., and $2.3 million in cash in exchange for a 27.5% membership interest in Select Media Services, LLC, a joint venture ("Select"), which operates as a merchandising and in-store services business. Though the Company 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 Select using the equity method.

The membership interest and cash contribution in Select were adjusted in September 2014, pursuant to a one-time retroactive adjustment back to September 2013. The Company's membership interest was replaced with a participation interest in the earnings of Select and the initial capital contribution was refunded to the Company in October 2014 along with the distribution of the Company's participation interest for the twelve months ended August 31, 2014.

In June 2015, the Company's participation interest in Select was modified and Select redeemed the Company's interest in Select for approximately $1.7 million, which is reflected in other revenues in the accompanying unaudited condensed consolidated financial statements. The proceeds were received in July 2015.

Note 10 - Dispositions

Shape, Fit Pregnancy and Natural Health

In January 2015, the Company and Weider Publications, LLC, a wholly-owned subsidiary of the Company, entered into an asset purchase agreement (the "Purchase Agreement") with Meredith Corporation ("Meredith"). The Purchase Agreement provided for the sale of the Company's Shape, Fit Pregnancy and Natural Health brands and magazines, which comprised its Women's Active Lifestyle segment. The Company received the initial cash consideration of $60.0 million on January 30, 2015 when the transaction closed. The Company is further entitled to additional consideration (the "Additional Consideration"), in the form of a one-time payment, following the completion of Meredith's 2018 fiscal year on June 30, 2018. The Additional Consideration, up to $60.0 million, will be based upon 40% of the accumulated adjusted operating profit of the combination of the Company's Shape brand and Meredith's Fitness brand.

Pursuant to the Purchase Agreement, the Company continued to publish the Shape, Fit Pregnancy and Natural Health magazines with on-sale dates through March 31, 2015, after which Meredith assumed publishing responsibilities for such titles. Effective as of the closing, Meredith assumed control over the digital assets used with Shape, Fit Pregnancy and Natural Health. The Company will have no continuing involvement in the operations of these publications subsequent to March 31, 2015.

Discontinued Operations

Net revenue, pre-tax income from discontinued operations, income tax provision and loss from discontinued operations, net of income taxes are as follows, in thousands:

 
Three Months Ended
 
Nine Months Ended
 
December 31, 2014
Net revenue
$
10,540

 
$
38,171

Pre-tax income from discontinued operations
104

 
2,976

Income tax provision
507

 
3,383

Loss from discontinued operations, net of income taxes
$
(403
)
 
$
(407
)


20

Note 11 - Commitments and Contingencies

Litigation

On March 10, 2009, Anderson News, L.L.C. and Anderson Services, L.L.C., magazine wholesalers (collectively, “Anderson”), filed a lawsuit against American Media, Inc., DSI (now known as In-Store Services, Inc.), 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 and the parties engaged in discovery. On February 14, 2014, American Media, Inc. filed an amended answer and counterclaim in the Anderson Action asserting an antitrust claim against Anderson News. L.L.C. and Charles Anderson, Jr. based on the same events as Anderson’s claims. Two other defendants also filed the same counterclaim. Fact discovery was completed in May 2014 and expert discovery was completed in October 2014. Anderson submitted an expert report calculating that damages are approximately $470 million, which would be subject to trebling should Anderson prevail against the defendants in the lawsuit. Defendants, including American Media, Inc. and DSI, also have submitted an expert report on damages, which opines that, separate and apart from the question of liability, Anderson has suffered no damages.

On December 15, 2014, the parties in the Anderson Action filed motions for summary judgment and to strike certain proposed expert testimony. On August 20, 2015, the District Court granted the summary judgment filed by American Media, Inc., DSI and the other defendants, dismissing all of Anderson’s claims against defendants, and granted in part the motions to strike certain of Anderson’s proposed expert testimony. The court also granted summary judgment dismissing the counterclaims filed by American Media, Inc. and the two other defendants, but did not grant Anderson’s motion to strike defendants’ expert testimony. On August 25, 2015, Anderson filed its notice of appeal of the District Court’s decision granting defendants’ motions. On September 15, 2015, American Media, Inc. filed its notice of appeal of the District Court’s decision granting the motion for summary judgment dismissing the counterclaim. Anderson filed its appellate brief with the U.S. Court of Appeals for the Second Circuit (the “Court of Appeals”) on December 8, 2015. American Media, Inc. and DSI will file their appellate brief with the Court of Appeals by March 8, 2016. The briefing of the appeals should be completed in May 2016.

Anderson is in chapter 11 bankruptcy proceedings in Delaware bankruptcy court. On June 10, 2010, American Media, Inc. filed a proof of claim in that proceeding for $5.6 million (which it amended on December 3, 2013 to reflect the counterclaim (described above) it planned to file in the Anderson Action), but Anderson asserts that it has no assets to pay unsecured creditors like American Media, Inc. An independent court-appointed examiner has identified claims that Anderson could assert against Anderson insiders in excess of $340.0 million.

In an order of the Delaware bankruptcy court, entered on November 14, 2011, American Media, Inc. and four other creditors (collectively, 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 10 defendants. After a temporary stay of discovery pending conclusion of fact discovery in the Anderson Action, discovery in the bankruptcy action proceeded. On December 12, 2014, defendants in the adversary action moved for partial summary judgment seeking dismissal of certain of the Creditors’ claims. The motion was denied on June 11, 2015.


21

While it is not possible to predict the outcome of the Anderson Action or to estimate the impact on American Media, Inc. and DSI of a final judgment against American Media, Inc. and DSI (if that were to occur), American Media, Inc. and DSI believe that the claims asserted by Anderson, in the Anderson Action, are meritless. American Media, Inc. and DSI have antitrust claim insurance that covers defense costs. American Media, Inc. and DSI have filed a claim for insurance coverage with regard to the Anderson Action and certain of their defense costs are being paid by the insurer, and, in the event of a settlement or a damages award by the Court and subject to the applicable policy limits, American Media, Inc. and DSI anticipate seeking reimbursement from the insurer for payment of such settlement or damages. American Media, Inc. 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 celebrity lawsuits are usually inflated and such lawsuits are usually defensible and, in any event, any reasonably foreseeable material liability or settlement would likely be covered by insurance, subject to any applicable deductible and limit. We also periodically evaluate and assess the risks and uncertainties associated with our pending 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 pending litigation, even if insurance were not available, is not expected to have a material effect on our consolidated financial statements.

Note 12 - Business Segment Information

The Company has three reporting segments: Celebrity Brands, Men’s Active Lifestyle 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 they earn revenues and incur 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, Globe, National Examiner, OK! and Soap Opera Digest.

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

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 Corporate and Other segment also includes 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. 

The Company’s accounting policies for the business segments are the same as those described in Note 2, "Summary of Significant Accounting Policies." The following 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.


22

Segment information for the three and nine months ended December 31, 2015 and 2014 are as follows (in thousands):

 
Three Months Ended December 31,
 
Nine Months Ended December 31,

2015
 
2014
 
2015
 
2014
Operating revenues
 
 
 
 
 
 
 
Celebrity Brands
$
41,943

 
$
45,506

 
$
125,877

 
$
135,116

Men's Active Lifestyle
11,396

 
12,325

 
43,093

 
44,973

Corporate and Other
1,805

 
2,314

 
4,214

 
4,866

Total operating revenues
$
55,144

 
$
60,145

 
$
173,184

 
$
184,955

Operating income (loss)
 
 
 
 
 
 
 
Celebrity Brands
$
14,846

 
$
18,275

 
$
43,437

 
$
49,026

Men's Active Lifestyle (1)
2,387

 
2,191

 
10,911

 
(7,682
)
Corporate and Other
(11,364
)
 
(14,039
)
 
(34,458
)
 
(51,318
)
Total operating income (loss)
$
5,869

 
$
6,427

 
$
19,890

 
$
(9,974
)
Depreciation and amortization
 
 
 
 
 
 
 
Celebrity Brands
$
3,292

 
$
409

 
$
9,861

 
$
1,366

Men's Active Lifestyle
964

 
912

 
2,891

 
1,440

Corporate and Other
2,257

 
2,626

 
7,106

 
7,179

Total depreciation and amortization
$
6,513

 
$
3,947

 
$
19,858

 
$
9,985

Impairment of goodwill and intangible assets
 
 
 
 
 
 
 
Men's Active Lifestyle
$
—

 
$
—

 
$
—

 
$
17,403

Corporate and Other
—

 
—

 
—

 
1,055

Total impairment of goodwill and intangible assets
$
—

 
$
—

 
$
—

 
$
18,458

Amortization of deferred rack costs
 
 
 
 
 
 
 
Celebrity Brands
$
1,129

 
$
1,337

 
$
3,809

 
$
3,923

Men's Active Lifestyle
20

 
18

 
43

 
46

Total amortization of deferred rack costs
$
1,149

 
$
1,355

 
$
3,852

 
$
3,969


(1) Includes impairment charge of $17.4 million to reduce the carrying value of goodwill and tradenames during the nine months ended December 31, 2014. See Note 3, "Goodwill and Other Identified Intangible Assets" for further discussion.

Segment information for the assets employed as of December 31, 2015 and March 31, 2015 are as follows (in thousands):

Total Assets
December 31,
2015
 
March 31,
2015
Celebrity Brands
$
315,520

 
$
330,850

Men's Active Lifestyle
79,625

 
86,775

Corporate and Other (2)
28,384

 
48,400

Total assets
$
423,529

 
$
466,025


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


23

Geographic Data

The Company operates principally in two geographic areas, the United States of America and Europe. There were no significant transfers between geographic areas during the three and nine months ended December 31, 2015 and 2014. The following tables present revenue by geographic area for the three and nine months ended December 31, 2015 and 2014 and the assets employed as of December 31, 2015 and March 31, 2015 are as follows (in thousands):

 
Three Months Ended December 31,
 
Nine Months Ended December 31,

2015
 
2014
 
2015
 
2014
Operating revenues:
 
 
 
 
 
 
 
United States of America
$
53,876

 
$
57,698

 
$
168,780

 
$
176,715

Europe
1,268

 
2,447

 
4,404

 
8,240

Total operating revenues
$
55,144

 
$
60,145

 
$
173,184

 
$
184,955



December 31,
2015
 
March 31,
2015
Assets:
 
 
 
United States of America
$
416,725

 
$
458,197

Europe
6,804

 
7,828

Total assets
$
423,529

 
$
466,025


Note 13 - Capital Structure

The Company has authorized 100 shares of $0.0001 par value common stock. At December 31, 2015, there were 100 shares of common stock issued and outstanding. As discussed in Note 1, "Nature of the Business," the Company is a wholly-owned subsidiary of the Parent, which is controlled by the Investors pursuant to the Merger.

We did not make any dividend payments during the nine months ended December 31, 2015 and 2014, and we do not anticipate paying any dividends on our common stock in the foreseeable future. The terms of our Revolving Credit Facility, as amended, restrict our ability to pay dividends, and any future indebtedness that we may incur could preclude us from paying dividends. With respect to the dividend restriction, the Revolving Credit Facility, as amended, and the indentures governing the Senior Secured Notes include a cap on the total amount of cash available for distribution to our common stockholders.

Note 14 - Supplemental Condensed Consolidating Financial Information

The following tables present 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 tables in these notes to the condensed consolidated financial statements:


24

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2015
(in thousands)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
    ASSETS
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
97

 
$
825

 
$
—

 
$
922

Trade receivables, net
—

 
19,186

 
391

 
—

 
19,577

Inventories
—

 
813

 
21

 
—

 
834

Prepaid expenses and other current assets
—

 
16,872

 
415

 
(5,487
)
 
11,800

Total current assets
—

 
36,968

 
1,652

 
(5,487
)
 
33,133

PROPERTY AND EQUIPMENT, NET:
 
 
 
 
 
 
 
 
 
Leasehold improvements
—

 
3,748

 
—

 
—

 
3,748

Furniture, fixtures and equipment
—

 
41,080

 
40

 
—

 
41,120

Less – accumulated depreciation
—

 
(33,946
)
 
(25
)
 
—

 
(33,971
)
Total property and equipment, net
—

 
10,882

 
15

 
—

 
10,897

OTHER ASSETS:
 
 
 
 
 
 
 
 
 
Deferred debt costs, net
4,560

 
—

 
—

 
—

 
4,560

Deferred rack costs, net
—

 
3,888

 
—

 
—

 
3,888

Investments in affiliates
545,140

 
(497
)
 
—

 
(543,224
)
 
1,419

Other long-term assets
57,794

 
2,830

 
—

 
(57,794
)
 
2,830

Due from affiliates
—

 
299,714

 
—

 
(299,714
)
 
—

Total other assets
607,494

 
305,935

 
—

 
(900,732
)
 
12,697

GOODWILL AND OTHER IDENTIFIED INTANGIBLE ASSETS:
 
 
 
 
 
 
Goodwill
—

 
149,488

 
4,510

 
—

 
153,998

Other identified intangibles, net
—

 
206,804

 
6,000

 
—

 
212,804

Total goodwill and other identified intangible assets
—

 
356,292

 
10,510

 
—

 
366,802

TOTAL ASSETS
$
607,494

 
$
710,077

 
$
12,177

 
$
(906,219
)
 
$
423,529

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Accounts payable
 
 
 
 
 
 
 
 
 
Accounts payable
$
—

 
$
9,762

 
$
25

 
$
—

 
$
9,787

Accrued expenses and other liabilities
—

 
24,062

 
5,319

 
—

 
29,381

Accrued interest
2,831

 
—

 
—

 
—

 
2,831

Deferred revenues
—

 
25,506

 
112

 
—

 
25,618

Total current liabilities
2,831

 
59,330

 
5,456

 
—

 
67,617

NON-CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
Senior secured notes
308,306

 
—

 
—

 
—

 
308,306

Revolving credit facility
18,200

 
—

 
—

 
—

 
18,200

Other non-current liabilities
—

 
8,239

 
—

 
—

 
8,239

Deferred income taxes
—

 
99,105

 
(240
)
 
(63,281
)
 
35,584

Due to affiliates
295,574

 
—

 
4,140

 
(299,714
)
 
—

Total liabilities
624,911

 
166,674

 
9,356

 
(362,995
)
 
437,946

COMMITMENTS AND CONTINGENCIES
 
 
 
 
 
 
Redeemable noncontrolling interests
—

 
—

 
3,000

 
—

 
3,000

STOCKHOLDERS' (DEFICIT) EQUITY:
 
 
 
 
 
 
 
 
 
Total stockholders' (deficit) equity
(17,417
)
 
543,403

 
(179
)
 
(543,224
)
 
(17,417
)
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
$
607,494

 
$
710,077

 
$
12,177

 
$
(906,219
)
 
$
423,529



25

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2015
(in thousands)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
    ASSETS
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
1,040

 
$
2,412

 
$
—

 
$
3,452

Trade receivables, net
—

 
38,058

 
1,354

 
—

 
39,412

Inventories
—

 
739

 
134

 
—

 
873

Prepaid expenses and other current assets
—

 
16,207

 
636

 
(5,487
)
 
11,356

Total current assets
—

 
56,044

 
4,536

 
(5,487
)
 
55,093

PROPERTY AND EQUIPMENT, NET:
 
 
 
 
 
 
 
 
 
Leasehold improvements
—

 
3,801

 
—

 
—

 
3,801

Furniture, fixtures and equipment
—

 
43,189

 
790

 
—

 
43,979

Less – accumulated depreciation
—

 
(29,465
)
 
(765
)
 
—

 
(30,230
)
Total property and equipment, net
—

 
17,525

 
25

 
—

 
17,550

OTHER ASSETS:
 
 
 
 
 
 
 
 
 
Deferred debt costs, net
6,383

 
—

 
—

 
—

 
6,383

Deferred rack costs, net
—

 
4,824

 
—

 
—

 
4,824

Investments in affiliates
587,126

 
224

 
—

 
(586,547
)
 
803

Other long-term assets
—

 
3,193

 
—

 
—

 
3,193

Due from affiliates
—

 
300,246

 
—

 
(300,246
)
 
—

Total other assets
593,509

 
308,487

 
—

 
(886,793
)
 
15,203

GOODWILL AND OTHER IDENTIFIED INTANGIBLE ASSETS:
Goodwill
—

 
149,488

 
4,510

 
—

 
153,998

Other identified intangibles, net
—

 
218,181

 
6,000

 
—

 
224,181

Total goodwill and other identified intangible assets
—

 
367,669

 
10,510

 
—

 
378,179

TOTAL ASSETS
$
593,509

 
$
749,725

 
$
15,071

 
$
(892,280
)
 
$
466,025

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

 
$
15,434

 
$
347

 
$
—

 
$
15,781

Accrued expenses and other liabilities
—

 
104,580

 
5,393

 
(65,958
)
 
44,015

Accrued interest
10,075

 
—

 
—

 
—

 
10,075

Deferred revenues
—

 
25,718

 
1,016

 
—

 
26,734

Total current liabilities
10,075

 
145,732

 
6,756

 
(65,958
)
 
96,605

NON-CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
Senior secured notes
309,569

 
—

 
—

 
—

 
309,569

Revolving credit facility
14,700

 
—

 
—

 
—

 
14,700

Other non-current liabilities
—

 
8,352

 
—

 
—

 
8,352

Deferred income taxes
—

 
10,250

 
26

 
60,471

 
70,747

Due to affiliates
296,113

 
—

 
4,133

 
(300,246
)
 
—

Total liabilities
630,457

 
164,334

 
10,915

 
(305,733
)
 
499,973

COMMITMENTS AND CONTINGENCIES
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests
—

 
—

 
3,000

 
—

 
3,000

STOCKHOLDERS' (DEFICIT) EQUITY:
 
 
 
 
 
 
 
 
 
Total stockholders' (deficit) equity
(36,948
)
 
585,391

 
1,156

 
(586,547
)
 
(36,948
)
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
$
593,509

 
$
749,725

 
$
15,071

 
$
(892,280
)
 
$
466,025



26

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2015
(in thousands)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
OPERATING REVENUES:
 
 
 
 
 
 
 
 
 
Circulation
$
—

 
$
38,082

 
$
109

 
$
—

 
$
38,191

Advertising
—

 
15,693

 
—

 
—

 
15,693

Other
—

 
904

 
356

 
—

 
1,260

Total operating revenues
—

 
54,679

 
465

 
—

 
55,144

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
Editorial
—

 
5,276

 
204

 
—

 
5,480

Production
—

 
12,132

 
343

 
—

 
12,475

Distribution, circulation and other cost of sales
—

 
8,866

 
42

 
—

 
8,908

Selling, general and administrative
—

 
15,969

 
(70
)
 
—

 
15,899

Depreciation and amortization
—

 
6,510

 
3

 
—

 
6,513

Total operating expenses
—

 
48,753

 
522

 
—

 
49,275

OPERATING INCOME
—

 
5,926

 
(57
)
 
—

 
5,869

OTHER EXPENSES:
 
 
 
 
 
 
 
 
 
Interest expense
(9,169
)
 
(438
)
 
(1
)
 
—

 
(9,608
)
Amortization of deferred debt costs
(887
)
 
—

 
—

 
—

 
(887
)
Other expenses, net
—

 
—

 
—

 
—

 
—

Total other expense, net
(10,056
)
 
(438
)
 
(1
)
 
—

 
(10,495
)
(LOSS) INCOME BEFORE PROVISION (BENEFIT) FOR INCOME TAXES, AND EQUITY IN EARNINGS OF CONSOLIDATED SUBSIDIARIES
(10,056
)
 
5,488

 
(58
)
 
—

 
(4,626
)
PROVISION FOR INCOME TAXES
6,054

 
(8,510
)
 
118

 
—

 
(2,338
)
EQUITY (LOSSES) IN EARNINGS OF CONSOLIDATED SUBSIDIARIES
13,795

 
(187
)
 
—

 
(13,608
)
 
—

NET INCOME (LOSS) FROM CONTINUING OPERATIONS
(2,315
)
 
13,811

 
(176
)
 
(13,608
)
 
(2,288
)
INCOME FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES
—

 
—

 
—

 
—

 
—

NET INCOME (LOSS)
(2,315
)
 
13,811

 
(176
)
 
(13,608
)
 
(2,288
)
LESS: NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
—

 
—

 
(27
)
 
—

 
(27
)
NET INCOME (LOSS) ATTRIBUTABLE TO AMERICAN MEDIA, INC. AND SUBSIDIARIES
$
(2,315
)
 
$
13,811

 
$
(203
)
 
$
(13,608
)
 
$
(2,315
)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
NET INCOME (LOSS)
$
(2,315
)
 
$
13,811

 
$
(176
)
 
$
(13,608
)
 
$
(2,288
)
Foreign currency translation adjustment
—

 
—

 
(37
)
 
—

 
(37
)
Comprehensive income (loss)
$
(2,315
)
 
$
13,811

 
$
(213
)
 
$
(13,608
)
 
$
(2,325
)
Less: comprehensive loss attributable to noncontrolling interests
—

 
—

 
(27
)
 
—

 
(27
)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO AMERICAN MEDIA, INC. AND SUBSIDIARIES
$
(2,315
)
 
$
13,811

 
$
(240
)
 
$
(13,608
)
 
$
(2,352
)

27

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
FOR THE NINE MONTHS ENDED DECEMBER 31, 2015
(in thousands)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
OPERATING REVENUES:
 
 
 
 
 
 
 
 
 
Circulation
$
—

 
$
112,183

 
$
255

 
$
—

 
$
112,438

Advertising
—

 
49,578

 
—

 
—

 
49,578

Other
—

 
3,981

 
7,187

 
—

 
11,168

Total operating revenues
—

 
165,742

 
7,442

 
—

 
173,184

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
Editorial
—

 
18,050

 
595

 
—

 
18,645

Production
—

 
38,279

 
3,977

 
—

 
42,256

Distribution, circulation and other cost of sales
—

 
26,451

 
131

 
—

 
26,582

Selling, general and administrative
—

 
45,413

 
540

 
—

 
45,953

Depreciation and amortization
—

 
19,848

 
10

 
—

 
19,858

Total operating expenses
—

 
148,041

 
5,253

 
—

 
153,294

OPERATING INCOME
—

 
17,701

 
2,189

 
—

 
19,890

OTHER EXPENSES:
 
 
 
 
 
 
 
 
 
Interest expense
(27,938
)
 
(1,321
)
 
(49
)
 
—

 
(29,308
)
Amortization of deferred debt costs
(2,603
)
 
—

 
—

 
—

 
(2,603
)
Other expenses, net
—

 
1

 
(40
)
 
—

 
(39
)
Total other expense, net
(30,541
)
 
(1,320
)
 
(89
)
 
—

 
(31,950
)
(LOSS) INCOME BEFORE PROVISION (BENEFIT) FOR INCOME TAXES, AND EQUITY IN EARNINGS OF CONSOLIDATED SUBSIDIARIES
(30,541
)
 
16,381

 
2,100

 
—

 
(12,060
)
PROVISION FOR INCOME TAXES
(33,687
)
 
744

 
301

 
—

 
(32,642
)
EQUITY (LOSSES) IN EARNINGS OF CONSOLIDATED SUBSIDIARIES
16,423

 
(1,298
)
 
—

 
(15,125
)
 
—

NET INCOME (LOSS) FROM CONTINUING OPERATIONS
19,569

 
14,339

 
1,799

 
(15,125
)
 
20,582

INCOME FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES
—

 
—

 
—

 
—

 
—

NET INCOME (LOSS)
19,569

 
14,339

 
1,799

 
(15,125
)
 
20,582

LESS: NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
—

 
—

 
(1,013
)
 
—

 
(1,013
)
NET INCOME (LOSS) ATTRIBUTABLE TO AMERICAN MEDIA, INC. AND SUBSIDIARIES
$
19,569

 
$
14,339

 
$
786

 
$
(15,125
)
 
$
19,569

 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
NET INCOME (LOSS)
$
19,569

 
$
14,339

 
$
1,799

 
$
(15,125
)
 
$
20,582

Foreign currency translation adjustment
—

 
—

 
(38
)
 
—

 
(38
)
Comprehensive income (loss)
19,569

 
14,339

 
1,761

 
(15,125
)
 
20,544

Less: comprehensive loss attributable to noncontrolling interests
—

 
—

 
(1,013
)
 
—

 
(1,013
)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO AMERICAN MEDIA, INC. AND SUBSIDIARIES
$
19,569

 
$
14,339

 
$
748

 
$
(15,125
)
 
$
19,531


28

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2014
(in thousands)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
OPERATING REVENUES:
 
 
 
 
 
 
 
 
 
Circulation
$
—

 
$
43,099

 
$
883

 
$
—

 
$
43,982

Advertising
—

 
14,341

 
1,370

 
—

 
15,711

Other
—

 
327

 
125

 
—

 
452

Total operating revenues
—

 
57,767

 
2,378

 
—

 
60,145

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
Editorial
—

 
5,885

 
308

 
—

 
6,193

Production
—

 
14,128

 
656

 
—

 
14,784

Distribution, circulation and other cost of sales
—

 
9,138

 
439

 
—

 
9,577

Selling, general and administrative
—

 
18,641

 
576

 
—

 
19,217

Depreciation and amortization
—

 
3,924

 
23

 
—

 
3,947

Total operating expenses
—

 
51,716

 
2,002

 
—

 
53,718

OPERATING INCOME
—

 
6,051

 
376

 
—

 
6,427

OTHER EXPENSES:
 
 
 
 
 
 
 
 
 
Interest expense
(11,463
)
 
(3
)
 
(2
)
 
—

 
(11,468
)
Amortization of deferred debt costs
(487
)
 
—

 
—

 
—

 
(487
)
Other income
—

 
3,479

 
—

 
—

 
3,479

Total other income (expenses), net
(11,950
)
 
3,476

 
(2
)
 
—

 
(8,476
)
(LOSS) INCOME BEFORE PROVISION (BENEFIT) FOR INCOME TAXES, AND EQUITY IN EARNINGS OF CONSOLIDATED SUBSIDIARIES
(11,950
)
 
9,527

 
374

 
—

 
(2,049
)
PROVISION FOR INCOME TAXES
—

 
(12,491
)
 
86

 
—

 
(12,405
)
EQUITY IN EARNINGS OF CONSOLIDATED SUBSIDIARIES
21,910

 
250

 
—

 
(22,160
)
 
—

NET LOSS FROM CONTINUING OPERATIONS
9,960

 
22,268

 
288

 
(22,160
)
 
10,356

LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES
—

 
(403
)
 
—

 
—

 
(403
)
NET (LOSS) INCOME
9,960

 
21,865

 
288

 
(22,160
)
 
9,953

LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
—

 
—

 
7

 
—

 
7

NET (LOSS) INCOME ATTRIBUTABLE TO AMERICAN MEDIA, INC. AND SUBSIDIARIES
$
9,960

 
$
21,865

 
$
295

 
$
(22,160
)
 
$
9,960

 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
NET (LOSS) INCOME
$
9,960

 
$
21,865

 
$
288

 
$
(22,160
)
 
$
9,953

Foreign currency translation adjustment
—

 
—

 
(63
)
 
—

 
(63
)
Comprehensive (loss) income
$
9,960

 
$
21,865

 
$
225

 
$
(22,160
)
 
$
9,890

Less: comprehensive income attributable to noncontrolling interests
—

 
—

 
7

 
—

 
7

COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO AMERICAN MEDIA, INC. AND SUBSIDIARIES
$
9,960

 
$
21,865

 
$
232

 
$
(22,160
)
 
$
9,897



29

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
FOR THE NINE MONTHS ENDED DECEMBER 31, 2014
(in thousands)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
OPERATING REVENUES:
 
 
 
 
 
 
 
 
 
Circulation
$
—

 
$
123,385

 
$
3,618

 
$
—

 
$
127,003

Advertising
—

 
42,928

 
4,283

 
—

 
47,211

Other
—

 
3,637

 
7,104

 
—

 
10,741

Total operating revenues
—

 
169,950

 
15,005

 
—

 
184,955

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
Editorial
—

 
19,937

 
1,240

 
—

 
21,177

Production
—

 
45,323

 
6,006

 
—

 
51,329

Distribution, circulation and other cost of sales
—

 
28,060

 
1,707

 
—

 
29,767

Selling, general and administrative
—

 
62,063

 
2,150

 
—

 
64,213

Depreciation and amortization
—

 
9,918

 
67

 
—

 
9,985

Impairment of goodwill and intangible assets
—

 
18,458

 
—

 
—

 
18,458

Total operating expenses
—

 
183,759

 
11,170

 
—

 
194,929

OPERATING INCOME
—

 
(13,809
)
 
3,835

 
—

 
(9,974
)
OTHER EXPENSES:
 
 
 
 
 
 
 
 
 
Interest expense
(39,203
)
 
(31
)
 
(33
)
 
—

 
(39,267
)
Amortization of deferred debt costs
(2,544
)
 
—

 
—

 
—

 
(2,544
)
Other income
—

 
3,778

 
—

 
—

 
3,778

Total other income (expenses), net
(41,747
)
 
3,747

 
(33
)
 
—

 
(38,033
)
(LOSS) INCOME BEFORE PROVISION (BENEFIT) FOR INCOME TAXES, AND EQUITY IN EARNINGS OF CONSOLIDATED SUBSIDIARIES
(41,747
)
 
(10,062
)
 
3,802

 
—

 
(48,007
)
PROVISION FOR INCOME TAXES
—

 
(17,858
)
 
306

 
—

 
(17,552
)
EQUITY IN EARNINGS OF CONSOLIDATED SUBSIDIARIES
9,677

 
985

 
—

 
(10,662
)
 
—

NET LOSS FROM CONTINUING OPERATIONS
(32,070
)
 
8,781

 
3,496

 
(10,662
)
 
(30,455
)
INCOME FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES
—

 
(407
)
 
—

 
—

 
(407
)
NET (LOSS) INCOME
(32,070
)
 
8,374

 
3,496

 
(10,662
)
 
(30,862
)
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
—

 
—

 
(1,208
)
 
—

 
(1,208
)
NET (LOSS) INCOME ATTRIBUTABLE TO AMERICAN MEDIA, INC. AND SUBSIDIARIES
$
(32,070
)
 
$
8,374

 
$
2,288

 
$
(10,662
)
 
$
(32,070
)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
NET (LOSS) INCOME
$
(32,070
)
 
$
8,374

 
$
3,496

 
$
(10,662
)
 
$
(30,862
)
Foreign currency translation adjustment
—

 
—

 
(111
)
 
—

 
(111
)
Comprehensive (loss) income
(32,070
)
 
8,374

 
3,385

 
(10,662
)
 
(30,973
)
Less: comprehensive income attributable to noncontrolling interests
—

 
—

 
(1,208
)
 
—

 
(1,208
)
COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO AMERICAN MEDIA, INC. AND SUBSIDIARIES
$
(32,070
)
 
$
8,374

 
$
2,177

 
$
(10,662
)
 
$
(32,181
)


30

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2015
(in thousands)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
Cash Flows from Operating Activities:
 
 
 
 
 
 
 
 
 
   Net cash provided by (used in) operating activities
$
(34,484
)
 
$
34,119

 
$
(437
)
 
$
—

 
$
(802
)
Cash Flows from Investing Activities:
Purchases of property and equipment
—

 
(500
)
 
—

 
—

 
(500
)
Purchase of intangible assets
—

 
(1,334
)
 
—

 
—

 
(1,334
)
Proceeds from sale of assets
—

 
24

 
—

 
—

 
24

Due from affiliates
—

 
(33,145
)
 
—

 
33,145

 
—

Other
—

 
—

 
—

 
—

 
—

   Net cash provided by (used in) investing activities
—

 
(34,955
)
 
—

 
33,145

 
(1,810
)
Cash Flows from Financing Activities:
Proceeds from revolving credit facility
54,400

 
—

 
—

 
—

 
54,400

Repayment to revolving credit facility
(50,900
)
 
—

 
—

 
—

 
(50,900
)
Senior secured notes repurchases
(2,000
)
 
—

 
—

 
—

 
(2,000
)
Redemption premium payment
(118
)
 
—

 
—

 
—

 
(118
)
Payment of debt costs
(43
)
 
—

 
—

 
—

 
(43
)
Payments to noncontrolling interest holder of Olympia
—

 
—

 
(1,150
)
 
—

 
(1,150
)
Due to affiliates
33,145

 
—

 
—

 
(33,145
)
 
—

   Net cash provided by (used in) financing activities
34,484

 
—

 
(1,150
)
 
(33,145
)
 
189

Effect of exchange rate changes on cash
—

 
(107
)
 
—

 
—

 
(107
)
Net increase (decrease) in cash and cash equivalents
—

 
(943
)
 
(1,587
)
 
—

 
(2,530
)
Cash and cash equivalents, beginning of period
—

 
1,040

 
2,412

 
—

 
3,452

Cash and cash equivalents, end of period
$
—

 
$
97

 
$
825

 
$
—

 
$
922



31

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2014
(in thousands)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
Cash Flows from Operating Activities:
 
 
 
 
 
 
 
 
 
   Net cash provided by (used in) operating activities
$
(40,216
)
 
$
42,358

 
$
1,573

 
$
—

 
$
3,715

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

 
(6,659
)
 
—

 
—

 
(6,659
)
Purchase of intangible assets
—

 
(2,520
)
 
—

 
—

 
(2,520
)
Proceeds from sale of assets
—

 
3,009

 
—

 
—

 
3,009

Distributions from affiliates
—

 
2,570

 
—

 
—

 
2,570

Due from affiliates
—

 
(38,833
)
 
—

 
38,833

 
—

Other
—

 
—

 
—

 
—

 
—

   Net cash provided by (used in) investing activities
—

 
(42,433
)
 
—

 
38,833

 
(3,600
)
Cash Flows from Financing Activities:


 


 


 


 


Proceeds from revolving credit facility
57,800

 
—

 
—

 
—

 
57,800

Repayment to revolving credit facility
(59,200
)
 
—

 
—

 
—

 
(59,200
)
Proceeds from issuance of senior secured notes
12,500

 
—

 
—

 
—

 
12,500

Senior secured notes repurchases
(5,975
)
 
—

 
—

 
—

 
(5,975
)
Capital contribution
573

 
—

 
—

 
—

 
573

Costs incurred in restructuring
(4,315
)
 
—

 
—

 
—

 
(4,315
)
Payments to noncontrolling interest holder of Olympia
—

 
—

 
(1,202
)
 
—

 
(1,202
)
Due to affiliates
38,833

 
—

 
—

 
(38,833
)
 
—

   Net cash provided by (used in) financing activities
40,216

 
—

 
(1,202
)
 
(38,833
)
 
181

Effect of exchange rate changes on cash
—

 
(248
)
 
—

 
—

 
(248
)
Net increase (decrease) in cash and cash equivalents
—

 
(323
)
 
371

 
—

 
48

Cash and cash equivalents, beginning of period
—

 
415

 
2,615

 
—

 
3,030

Cash and cash equivalents, end of period
$
—

 
$
92

 
$
2,986

 
$
—

 
$
3,078


Note 15 - Subsequent Events

As discussed in Note 4, "Revolving Credit Facility," subsequent to December 31, 2015, the terms of the Revolving Credit Facility were amended to, among other things, extend the maturity date to June 2017 and modify the financial covenants in effect through the date of maturity.


32

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

The following discussion and analysis of financial condition and results of operations was prepared to provide the reader with a view and perspective of our business through the eyes of management and should be read together with our 2015 Form 10-K and the unaudited condensed consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report. In addition to historical data, this discussion and analysis contains statements that constitute forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including but not limited to those discussed in "Cautionary Statements Regarding Forward-Looking Information" included in this Quarterly Report and "Risk Factors" included in the 2015 Form 10-K.

ORGANIZATION OF INFORMATION

Our discussion is presented in the following sections:

•
Executive Summary

•
Recent Developments and Management Action Plans

•
Results of Operations

•
Operating Segments

•
Liquidity and Capital Resources

•
Contractual Obligations and Other Commitments

•
Seasonality and Quarterly Fluctuations

•
Off-Balance Sheet Financing

•
Application of Critical Accounting Estimates

•
Recently Adopted and Recently Issued Accounting Pronouncements

EXECUTIVE SUMMARY

American Media, Inc., together with its subsidiaries (collectively, the "Company", "AMI", "we", "our" or "us"), is one of the largest publishers of celebrity and health and active lifestyle magazines in the United States, with a diversified portfolio of 10 publications that have a combined monthly print and digital audience of more than 39 million readers and monthly on-line audience of approximately 44 million readers.

In January 2015, we sold our Shape, Fit Pregnancy and Natural Health publications, which comprised our Women's Active Lifestyle segment, for approximately $60 million in cash plus an earn-out of up to $60 million. As a result, the operations of the Women's Active Lifestyle segment have been classified as discontinued operations in all periods presented. After giving effect to the divestiture of our Women's Active Lifestyle segment, we report under a new segment structure beginning in the fourth quarter of fiscal 2015 and accordingly have recast prior period segment amounts.

Our remaining well-known publications cover two primary operating segments: Celebrity and Men's Active Lifestyle. Within our Celebrity segment, our portfolio of brands includes: National Enquirer, Star, OK!, Globe, National Examiner and Soap Opera Digest. Within our Men's Active Lifestyle segment, our portfolio of brands include: Men's Fitness, Muscle & Fitness, Muscle & Fitness Hers and Flex. Our third, non-operating segment, Corporate and Other, includes our international licensing of certain health and fitness publications, photo syndication for all our media content platforms and strategic management services for publishers.


33

We believe our leadership position in these segments provides us with strong competitive advantages in the publishing market. Our iconic brands have enabled us to build a loyal readership and establish relationships with major advertisers and distributors. We have leveraged the strength of our portfolio of brands through joint ventures, licensing opportunities and strategic relationships with several national retailers. We believe the combination of our well-known brands; established relationship with advertisers and distributors; and ability to leverage our brands with major retailers and to monetize content across multiple platforms creates a competitive position that is difficult to replicate.

Our largest revenue stream comes from single copy newsstand sales. Our second largest revenue stream comes from multi-platform advertising. Our primary operating expenses consist of production, distribution, circulation and other cost of sales, as well as selling, general and administrative expenses. We incur most of our operating expenses during the production of our printed magazines, which includes costs for printing and paper. Paper is the principal raw material utilized in our publications. We have a long-term paper supply and purchasing agreement with the largest paper supply broker in the United States that manages all aspects of our raw material paper inventory. The price of paper is driven by market conditions and therefore difficult to predict. Changes in paper prices could significantly affect our business.

We are experiencing declines in our circulation revenue and print advertising as a result of market conditions in the magazine publishing industry. These declines are primarily caused by the disruption in our wholesaler distribution channel, the overall decline in the celebrity newsstand market and the decline in the consumer advertising market coupled with the shift in advertising dollars from print to digital. 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. Since magazines are generally discretionary purchases for consumers, our circulation revenues are sensitive to current economic conditions.

Our fiscal year ends on March 31, 2016 and may be referred to herein as fiscal 2016.

RECENT DEVELOPMENTS AND MANAGEMENT ACTION PLANS

Recent Developments

Digital Initiatives

Our fully integrated print and digital sales team is comprised of more than 60 sales professionals, with a dozen digital brand champion sales staff across all the websites. We believe our structure is highly effective to respond to our advertisers' requests for integrated marketing solutions for combined print and digital, as well as digital-only programs. During the nine months ended December 31, 2015, our digital advertising revenue increased 52% over the comparable prior year period.

We have launched digital editions for all our brands on the following platforms: Texture, Apple newsstand, Google newsstand, Zinio, Amazon Kindle and Barnes & Noble's Nook.

Print Initiatives

The relaunch of Men's Fitness continues to attract new luxury goods advertisers. During the nine months ended December 31, 2015, total advertising revenues increased 17% for Men's Fitness as compared to the prior year period. Men's Fitness continues to attract new lifestyle advertisers including Energizer, FIJI Water, Louis Vuitton, Nautica, Ralph Lauren and SlimFast.

The success of Men's Fitness allowed us to reposition Muscle & Fitness in the marketplace to fill the gap in fitness and training content when Men's Fitness expanded its active lifestyle coverage. In addition to its current readers, the editorial for Muscle & Fitness also targets a new generation of fitness enthusiast by broadening the definition of what "fitness" really means. By expanding the editorial focus to include a wider range of fitness training, physique, cross training and mud races, Muscle & Fitness attracts a wider audience at the newsstand. In addition, we have been able to capture advertising targeted at fitness, in addition to weight training, such as that of Nike and Reebok.

Debt Initiatives

In February 2016, AMI amended and restated the revolving credit facility to, among other things, extend the maturity date from December 2016 to June 2017 and modify the financial covenants in effect through the date of maturity.


34

Wholesaler Disruption

Several of our smaller wholesalers and our second-largest wholesaler, Source Interlink Distribution ("Source"), ceased operations during fiscal 2015. Since then we have transitioned the previous wholesalers' newsstand distribution (approximately 25% of the market) to the two remaining major wholesalers. This transition had an immediate adverse impact on single copy newsstand sales and liquidity during fiscal 2015 and into the first half of fiscal 2016. We are beginning to see a stabilization in the newsstand sales and the wholesale supply chain currently consists of private companies, owned by billionaires, that have been in the distribution business for decades.

Management Action Plans for Cost Savings

We have developed and implemented management action plans that we are forecasting at $25.5 million of cost savings in fiscal 2016 and $3.0 million of cost savings in fiscal 2017 (the "Management Action Plans"). These expense reductions were primarily from outsourcing technology and operating functions, digital content renegotiations, print order efficiencies and editorial and advertising sales staff consolidations. We will realize the benefits from the Management Action Plans during fiscal 2016 and beyond.

RESULTS OF OPERATIONS

The following table provides a summary of our operating results for the three and nine months ended December 31, 2015 and 2014 on a consolidated basis:
 
Three Months Ended December 31,
 
% Change
 
Nine Months Ended December 31,
 
% Change
(dollars in thousands)
2015
 
2014
 
 
2015
 
2014
 
Operating revenues:
 
 
 
 
 
 
 
 
 
 
 
Circulation
$
38,191

 
$
43,982

 
(13)%
 
$
112,438

 
$
127,003

 
(11)%
Advertising
15,693

 
15,711

 
—%
 
49,578

 
47,211

 
5%
Other
1,260

 
452

 
*
 
11,168

 
10,741

 
4%
Total operating revenues
55,144

 
60,145

 
(8)%
 
173,184

 
184,955

 
(6)%
Operating expenses
49,275

 
53,718

 
(8)%
 
153,294

 
194,929

 
(21)%
Operating income (loss)
5,869

 
6,427

 
(9)%
 
19,890

 
(9,974
)
 
*
Other expense, net
(10,495
)
 
(8,476
)
 
(24)%
 
(31,950
)
 
(38,033
)
 
16%
Loss from continuing operations before income taxes
(4,626
)
 
(2,049
)
 
*
 
(12,060
)
 
(48,007
)
 
75%
Income tax benefit
(2,338
)
 
(12,405
)
 
81%
 
(32,642
)
 
(17,552
)
 
(86)%
Net income (loss) from continuing operations
(2,288
)
 
10,356

 
*
 
20,582

 
(30,455
)
 
*
Income (loss) from discontinued operations, net of taxes
—

 
(403
)
 
*
 
—

 
(407
)
 
*
Net income (loss)
(2,288
)
 
9,953

 
*
 
20,582

 
(30,862
)
 
*
Less: net (income) loss attributable to the noncontrolling interest
(27
)
 
7

 
*
 
(1,013
)
 
(1,208
)
 
*
Net income (loss) attributable to American Media, Inc. and subsidiaries
$
(2,315
)
 
$
9,960

 
*
 
$
19,569

 
$
(32,070
)
 
*
* Represents an increase or decrease in excess of 100%.

Operating Revenues

Total operating revenues decreased 8% and 6%, respectively, during the three and nine months ended December 31, 2015 compared to the prior period primarily due to the overall decline in the consumer magazine market (14% and 12%, respectively).

Circulation revenue declined $5.8 million and $14.6 million, respectively, during the three and nine months ended December 31, 2015, compared to the prior year periods. This was due to the overall decline in the celebrity newsstand magazine market, coupled with the discontinuance of our special interest publications and the sale of our Country Weekly publication. Circulation revenue continues to be impacted during fiscal 2016 by the industry-wide disruption in our wholesaler channel as described above.


35

Total advertising revenue remained consistent during three months ended December 31, 2015 and increased $2.4 million during the nine months ended December 31, 2015, compared to the prior year periods, primarily due to an increase in digital advertising revenue.

Other revenue increased $0.8 million and $0.4 million, respectively, during the three and nine months ended December 31, 2015, compared to the prior year periods, primarily due the timing of joint venture losses recognized in prior periods.

The following table summarizes our operating revenues, by type, as a percentage of total operating revenues:

 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2015
 
2014
 
2015
 
2014
Circulation
69%
 
73%
 
65%
 
69%
Advertising
28%
 
26%
 
29%
 
26%
Other
3%
 
1%
 
6%
 
5%
Total
100%
 
100%
 
100%
 
100%

Circulation Revenue

Total circulation of our print publications with a frequency of six or more times per year was approximately 3.1 million and 3.4 million copies per issue during the nine months ended December 31, 2015 and 2014, respectively. As of December 31, 2015, our print publications comprised approximately 25% of total U.S. and Canadian newsstand circulation for weekly publications that are audited by the Alliance for Audited Media.

Our circulation revenue represented 69% and 65% of our operating revenues during the three and nine months ended December 31, 2015, respectively, and 73% and 69% of our operating revenues during the comparable prior year periods. Our circulation revenue is comprised of the following components:

 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2015
 
2014
 
2015
 
2014
Single Copy
80%
 
80%
 
78%
 
78%
Subscription
20%
 
20%
 
22%
 
22%
Total
100%
 
100%
 
100%
 
100%

As of December 31, 2015, our digital subscriptions represent 17% of our 2.0 million paid subscriptions, the highest percentage among our competitive set. Digital subscription revenue represented 1% of our circulation revenue during the three and nine months ended December 31, 2015 and during the comparable prior year periods.

Circulation revenue declined $5.8 million and $14.6 million, respectively, during the three and nine months ended December 31, 2015, compared to the prior periods. Circulation revenue from our continuing publications declined $4.8 million and $9.9 million, respectively, due to the overall reduction in the celebrity magazine sector (14% and 12%, respectively) primarily caused by the industry-wide newsstand distribution disruption. Circulation revenue was further impacted by the planned discontinuance of our special interest publications ($0.5 million and $2.4 million, respectively) and the sale of our Country Weekly publication, in November 2014 ($0.5 million and $2.2 million, respectively).


36

Advertising Revenue

Our advertising revenue represented 28% and 29% of our operating revenues during the three and nine months ended December 31, 2015, respectively, and 26% of our operating revenues during the comparable prior year periods. Our advertising revenue is generated from the following components:
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2015
 
2014
 
2015
 
2014
Print
75%
 
81%
 
79%
 
85%
Digital
25%
 
19%
 
21%
 
15%
Total
100%
 
100%
 
100%
 
100%

Advertising revenue remained consistent during the three months ended December 31, 2015 and increased $2.4 million during the nine months ended December 31, 2015, compared to the prior periods due to higher digital advertising ($0.9 million and $3.8 million), partially offset by the decline in print advertising ($0.7 million and $0.9 million) and the sale of Country Weekly ($0.1 million and $0.5 million).

Other Revenue

Other revenue represented 3% and 6%, respectively, of our operating revenues during the three and nine months ended December 31, 2015 and 1% and 5%, respectively, of our operating revenues during the comparable prior year periods.

During the three and nine months ended December 31, 2015, other revenue increased $0.8 million and $0.4 million, respectively, due to the timing of certain non-recurring revenue streams, partially offset by the reduction in publishing services.

Operating Expenses

The following table provides a summary of our operating expenses for the three and nine months ended December 31, 2015 and 2014 on a consolidated basis:
 
Three Months Ended December 31,
 
% Change
 
Nine Months Ended December 31,
 
% Change
(dollars in thousands)
2015
 
2014
 
 
2015
 
2014
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Editorial
$
5,480

 
$
6,193

 
(12)%
 
$
18,645

 
$
21,177

 
(12)%
Production
12,475

 
14,784

 
(16)%
 
42,256

 
51,329

 
(18)%
Distribution, circulation and other costs
8,908

 
9,577

 
(7)%
 
26,582

 
29,767

 
(11)%
Total cost of sales
26,863

 
30,554

 
(12)%
 
87,483

 
102,273

 
(14)%
Selling, general and administrative
15,899

 
19,217

 
(17)%
 
45,953

 
64,213

 
(28)%
Depreciation and amortization
6,513

 
3,947

 
65%
 
19,858

 
9,985

 
99%
Impairment of goodwill and intangible assets
—

 
—

 
—%
 
—

 
18,458

 
*
Total operating expenses
$
49,275

 
$
53,718

 
(8)%
 
$
153,294

 
$
194,929

 
(21)%
* Represents an increase or decrease in excess of 100%.

We incur most of our operating expenses during the production of our printed magazines, which includes costs for printing and paper. Paper is the principal raw material utilized in our publications. We have a long-term paper supply and purchasing agreement with the largest paper supply broker in the United States. Our paper broker manages all aspects of our raw material paper inventory. The price of paper is driven by market conditions and therefore difficult to predict. Changes in paper prices could significantly affect our business. We believe adequate supplies of paper are available to fulfill our current, as well as future, publishing requirements. We have long-term printing contracts with three major third-party printing companies.

Our production costs, including paper and printing expenses, accounted for approximately 25% and 28%, respectively, of our total operating expenses for the three and nine months ended December 31, 2015 and 28% and 26%, respectively, during the comparable prior year periods.


37

Distribution, circulation and other costs consist primarily of postage, as well as freight to our wholesalers and fulfillment companies for newsstand and subscription distribution. Distribution, circulation and other cost of sales accounted for approximately18% and 17%, respectively, of our operating expenses for the three and nine months ended December 31, 2015 and 18% and 15%, respectively, during the comparable prior year periods.

Total Cost of Sales

Total cost of sales decreased during the three and nine months ended December 31, 2015 compared to the prior periods, primarily due to planned expense reductions pursuant to the Management Action Plans in the following areas: editorial ($0.7 million and $2.5 million, respectively), production ($2.3 million and $9.1 million, respectively) and distribution and circulation ($0.7 million and $3.2 million, respectively).

Selling, General and Administrative

Selling, general and administrative expenses decreased $3.3 million during the three months ended December 31, 2015 compared to the prior year period due to the decrease in employee-related expenses. During the nine months ended December 31, 2015, expenses decreased $18.3 million compared to the prior year period due primarily to the decrease in employee-related expenses ($8.7 million), wholesaler-related bad debt expense ($5.4 million) and accounting and legal fees ($1.9 million).

Depreciation and Amortization

Depreciation and amortization expenses, which are non-cash, increased $2.6 million and $9.9 million during the three and nine months ended December 31, 2015 compared to the prior year periods, primarily due to the reclassification of certain tradenames from indefinite-lived to finite-lived.

Impairment of Goodwill and Intangible Assets

There were no impairment charges recorded during the three and nine months ended December 31, 2015.

During an evaluation of goodwill and other identified intangible assets during the three months ended December 31, 2014, we determined that indicators were present in certain reporting units that would suggest the fair value of the reporting unit may have declined below the carrying value. This decline was primarily the result of the near-term advertising revenue shortfall coupled with the continued softness in the print publication industry overall, which resulted in lowered future cash flow projections.
 
As a result, an interim impairment test of goodwill and identified intangible assets was performed for certain reporting units. The evaluation resulted in the carrying value of goodwill and tradenames for certain reporting units to exceed the fair value. As a result, the Company recorded pre-tax non-cash impairment charge totaling $18.5 million for goodwill and tradenames during the three months ended December 31, 2014.

Non-Operating Items

Interest Expense

Interest expense decreased $1.9 million and $10.0 million during the three and nine months ended December 31, 2015, respectively, when compared to the prior year periods due to the reduction in the aggregate principal amount of senior secured notes outstanding.

Amortization of Deferred Debt Costs

Amortization of deferred debt costs increased $0.4 million and $0.1 million during the three and nine months ended December 31, 2015, respectively, when compared to the prior year periods due to the exchange, in January 2015, of certain senior secured notes.

Other Income (Expenses), Net

During the three and nine months ended December 31, 2015, other income decreased $3.5 million and $3.8 million, respectively, as compared to the prior year periods due to the $3.4 million gain on the sale of our Country Weekly publication in November 2014.


38

Income Taxes

We recorded an income tax benefit of $2.3 million and $32.6 million during the three and nine months ended December 31, 2015, respectively, primarily due to the release of the valuation allowance of $27.1 million. This was a direct result of the reclassification of certain tradenames from indefinite-lived to finite-lived effective April 1, 2015.

Net Income (Loss) Attributable to American Media, Inc.

The $2.3 million of net loss attributable to American Media, Inc. for the three months ended December 31, 2015 represents an $12.3 million decrease from the comparable prior year period. This was primarily due to the $10.1 million decrease in the benefit for income taxes and the $3.5 million decrease in other income, partially offset by the $1.9 million decrease in interest expenses and the $0.6 million increase in operating income.

The $19.6 million of net income attributable to American Media, Inc. for the nine months ended December 31, 2015 represents a $51.6 million improvement from the comparable prior year period. This improvement is primarily attributable to the $29.9 million increase in operating income, the $15.1 million increase in the benefit for income taxes coupled with the $10.0 million decrease in interest expense, partially offset by the $3.8 million decrease in other income.

OPERATING SEGMENTS

Our operating segments consist of: Celebrity Brands, Men’s Active Lifestyle and Corporate and Other. After the divestiture of our Women's Active Lifestyle segment, we report under a new segment structure beginning in the fourth quarter of fiscal 2015. Given this change, we have restated prior period segment information to correspond to the current segment reporting structure. 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.

Our operating segments consist of the following brands in print and digital, as of December 31, 2015:

Celebrity Brands Segment

•
National Enquirer, a weekly, hard news, investigative tabloid covering all celebrities, crime, human interest, health, fashion and beauty;

•
Star, a weekly, celebrity-focused, news-based, glossy magazine covering movie, television and reality stars and music celebrities. Star's editorial content includes fashion, beauty, accessories and health sections;

•
OK!, a younger weekly, celebrity-friendly, news-based, glossy magazine covering the stars of movies, television, reality and music. OK!’s editorial content has fashion, beauty and accessories sections; OKMagazine.com differentiates itself through its use of online communities and social media to encourage a dialog between users, including their editorial point of view;

•
Globe, a weekly tabloid that 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;

•
National Examiner, a weekly tabloid (currently available only in print format) 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; and

•
Soap Opera Digest, a weekly magazine that provides behind-the-scenes scoops and breaking news to passionate soap opera fans every week; SoapOperaDigest.com is a companion site that mirrors the magazine's editorial point of view.


39

Men’s Active Lifestyle Segment

•
Men’s Fitness, an active lifestyle magazine for men 18-34 years old, which positions fitness as the new measure of success, as reflected in its editorial coverage of men’s fashion, grooming, automotive, finance, travel and other lifestyle categories; Men’s Fitness is also home to the latest in exercise techniques, sports training, nutrition and health; Men’sFitness.com provides everything for every man in terms of a healthy and fit lifestyle;

•
Muscle & Fitness, a 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;

•
Flex, a 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 online coverage of all the major bodybuilding competitions, as well as training videos with today’s top bodybuilders;

•
Muscle & Fitness Hers, a fitness physique training magazine designed for active women who want more out of fitness, especially those who work extra hard to achieve a "super-fit" lifestyle, and covers training, nutrition, health, beauty and fashion for today's women;

•
Mr. Olympia, a four-day event held annually in September in Las Vegas attracting more than 50,000 fans of bodybuilding and fitness experts from around the world; includes a two-day health and fitness exposition with 340 exhibitors including physical exercise challenges and merchandising opportunities that culminates with the world's most prestigious and largest event in bodybuilding and fitness, the Mr. Olympia contest; and

•
Weider UK, a wholly-owned subsidiary, publishes Muscle & Fitness and Flex in the United Kingdom, France and Germany and licenses the content in Holland and Australia. Each market edition is in a local language with local content and has its own website. Effective April 1, 2015, we relocated the business activities for these publications from the United Kingdom to our New York offices.

Corporate and Other Segment

This segment includes revenues from international licensing of certain health and fitness publications, photo syndication for all our media content platforms and strategic management services for publishers, including back-office functions. Corporate overhead expenses are not allocated to other segments and are as follows: corporate executives, production, circulation, information technology, accounting, legal, human resources, business development and administrative department costs.

Financial Information Regarding Our Operating Segments

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, if any, to provide a consistent and comparable measure of our performance between periods. Management uses operating income (loss) before impairment of goodwill and intangible assets, if any, 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 for the operating segments are the same as those described in the notes to the unaudited condensed consolidated financial statements in this Quarterly Report, specifically Note 2, "Summary of Significant Accounting Policies."


40

The following table summarizes our total operating revenues by segment:

 
Three Months Ended December 31,
%
Nine Months Ended December 31,
%
(dollars in thousands)
2015
2014
Change
2015
2014
Change
Segment operating revenues:
 
 
 
 
 
 
Celebrity Brands
$
41,943

$
45,506

(8)%
$
125,877

$
135,116

(7)%
Men's Active Lifestyle
11,396

12,325

(8)%
43,093

44,973

(4)%
Corporate and Other
1,805

2,314

(22)%
4,214

4,866

(13)%
Total operating revenues
$
55,144

$
60,145

(8)%
$
173,184

$
184,955

(6)%

Total operating revenues decreased $5.0 million and $11.8 million during the three and nine months ended December 31, 2015 due to the decline in the celebrity magazine sector (14% and 12%, respectively). These declines were partially offset by the increase in advertising and other revenue.

The following table summarizes the percentage of segment operating revenues:

 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2015
2014
 
2015
2014
Segment operating revenues:
 
 
 
 
 
Celebrity Brands
76%
76%
 
73%
73%
Men's Active Lifestyle
21%
20%
 
25%
24%
Corporate and Other
3%
4%
 
2%
3%
Total
100%
100%
 
100%
100%

The following table summarizes our segment operating income (loss):

 
Three Months Ended December 31,
%
Nine Months Ended December 31,
%
(dollars in thousands)
2015
2014
Change
2015
2014
Change
Operating income (loss):
 
 
 
 
 
 
Celebrity Brands
$
14,846

$
18,275

(19)%
$
43,437

$
49,026

(11)%
Men's Active Lifestyle
2,387

2,191

9%
10,911

9,721

12%
Corporate and Other
(11,364
)
(14,039
)
19%
(34,458
)
(50,263
)
31%
Total operating income before impairment
5,869

6,427

(9)%
19,890

8,484

*
Impairment of goodwill and intangible assets
—

—

—
—

18,458

*
Total operating income (loss)
$
5,869

$
6,427

(9)%
$
19,890

$
(9,974
)
*
* Represents an increase or decrease in excess of 100%.

Total operating income before impairment increased $0.6 million and $11.4 million, respectively, during the three and nine months ended December 31, 2015, compared to the prior year periods primarily due to the $4.4 million and $23.2 million decrease in operating expenses, respectively, due to the Management Action Plans implemented by management, partially offset by the $5.0 million and $11.8 million decline in operating revenues, respectively, as previously mentioned above.


41

Celebrity Brands Segment

The Celebrity Brands segment comprised 76% of our consolidated operating revenues for the three months ended December 31, 2015 and 2014 and 73% of our consolidated operating revenue for the nine months ended December 31, 2015 and 2014.

Operating Revenues

Total operating revenues in the Celebrity Brands segment were $41.9 million for the three months ended December 31, 2015, a decline of $3.6 million, or 8%, over the comparable prior year period. For our continuing publications, total operating revenues decreased $2.4 million, or 6%. Circulation revenue declined $3.9 million, or 10%, due to a reduction in the celebrity newsstand sales, partially offset by the 8% increase in advertising revenue ($0.5 million) from Star and OKMagazine.com. This operating performance is counterintuitive to the advertising market which was down 11%. Total operating revenues were further impacted by the planned discontinuance of our special interest publications ($0.5 million) and the sale of our Country Weekly publication in November 2014 ($0.6 million).

For the nine months ended December 31, 2015, total operating revenues were $125.9 million, representing a decrease of $9.2 million, or 7%, over the comparable prior year period. For our continuing publications, total operating revenues declined $4.0 million, or 3%. Circulation revenue declined $7.5 million, or 7%, due to a reduction in the celebrity newsstand sales primarily due to the industry-wide newsstand distribution disruption, partially offset by the 13% increase in advertising revenue ($2.5 million) from National Enquirer, OK! and Star, which is counterintuitive to the advertising market, which was down 11%. Total operating revenues were further impacted by the planned discontinuance of our special interest publications ($2.4 million) and the sale of Country Weekly ($2.8 million).

Operating Income

The Celebrity Brands segment operating income before impairment decreased $3.4 million, or 19%, to $14.8 million during the three months ended December 31, 2015, compared to the prior year. This decline was due to the revenue declines previously discussed coupled with an increase in amortization expenses ($2.9 million) due to the reclassification of certain tradenames from indefinite-lived intangibles to finite-lives of 15 years, effective April 1, 2015. These declines are partially offset by the planned reduction in expenses ($3.0 million) pursuant to our Management Action Plans.

For the nine months ended December 31, 2015, operating income before impairment declined $5.6 million, or 11%, to $43.4 million as compared to the prior year. This decline was due to revenue being discontinued as previously discussed above coupled with an increase in amortization expense ($8.5 million) related to certain tradenames, partially offset by the planned reduction in expenses ($12.1 million) pursuant to our Management Action Plans.

Men’s Active Lifestyle Segment

The Men’s Active Lifestyle segment comprised 21% and 20% of our consolidated operating revenues during the three months ended December 31, 2015 and 2014, respectively, and represented 25% and 24% of our consolidated operating revenues during the nine months ended December 31, 2015 and 2014, respectively.

Operating Revenues

Total operating revenues in the Men’s Active Lifestyle segment were $11.4 million for the three months ended December 31, 2015, a decrease of $0.9 million, or 8%, over the comparable prior year period. This decline was due to the discontinuance of unprofitable Men's Active Lifestyle titles in Australia, Italy and Holland ($1.2 million), partially offset by the $0.3 million increase in digital advertising revenue primarily from Men's Fitness, due to a 35% increase in page views during the three months ended December 31, 2015 over the comparable prior year period.

For the nine months ended December 31, 2015, total operating revenues were $43.1 million, representing a decrease of $1.9 million, or 4%, over the comparable prior year period. This decline was primarily due to the discontinuance of unprofitable Men's Active Lifestyle titles in Australia, Italy and Holland ($3.8 million) coupled with the shutdown of the Muscle & Fitness online store ($0.5 million). These declines were partially offset by the $2.0 million increase in digital advertising revenue from Men's Fitness ($1.3 million) and Muscle & Fitness ($0.7 million) due to a 31% and 20% increase in page views, respectively, during the nine months ended December 31, 2015, coupled with the increase in revenue from the Mr. Olympia event ($0.4 million).


42

Operating Income

The Men’s Active Lifestyle segment operating income before impairment increased during the three months ended December 31, 2015 by $0.2 million, or 9%, to $2.4 million compared to the prior year. Our planned Management Actions Plans reduced expenses by $1.1 million during the three months ended December 31, 2015, partially offset by the revenue declines mentioned above.

For the nine months ended December 31, 2015, operating income before impairment increased $1.2 million, or 12% to $10.9 million compared to the prior year. Our planned Management Action Plans reduced expenses by $4.5 million during the nine months ended December 31, 2015. This was partially offset by an increase in amortization expenses ($1.4 million) related to certain tradenames as discussed above coupled with the discontinuance of certain unprofitable titles previously discussed.

Corporate and Other Segment

The Corporate and Other segment comprised 3% and 4% of our consolidated operating revenues during the three months ended December 31, 2015 and 2014, respectively, and represented 2% and 3% of our consolidated operating revenues during the nine months ended December 31, 2015 and 2014, respectively.

Operating Revenues

Total operating revenues in the Corporate and Other segment were $1.8 million for the three months ended December 31, 2015, a decline of $0.5 million, or 22%, compared to the prior year, primarily due to the planned reduction in publishing services.

For the nine months ended December 31, 2015, total operating revenues were $4.2 million, representing a decrease of $0.7 million, or 13%, compared to the prior year, primarily due to the planned reduction in publishing services ($1.2 million) and book publishing ($0.5 million), partially offset by certain non-recurring revenue streams related to our investments in affiliates ($1.5 million).

Operating Loss

The Corporate and Other segment operating loss before impairment decreased during the three months ended December 31, 2015, compared to the prior year by $2.7 million, or 19%, to $11.4 million. This improvement was attributable to the reduction in operating expenses primarily due to employee-related expenses ($3.3 million), partially offset by the $0.5 million decline in operating revenue mentioned above.

For the nine months ended December 31, 2015, operating loss before impairment decreased $15.8 million, or 31%, to $34.5 million compared to the prior year. This improvement was attributable to the reduction in operating expenses, primarily due to the non-recurring wholesaler bad debt ($5.4 million), employee-related expenses ($8.7 million) and accounting and legal fees ($1.8 million), partially offset by the $0.7 million decline in operating revenue previously discussed.

LIQUIDITY AND CAPITAL RESOURCES

Management’s Assessment of Liquidity

Our operations have historically generated positive net cash flow from operating activities. Our primary sources of liquidity are cash on hand, cash generated from operations, amounts available under our revolving credit facility (the "Revolving Credit Facility") and cash interest savings from our recent debt reduction initiatives.

Our principal uses of cash that affect our liquidity include operational expenditures and debt service costs, including interest payments on and repurchases of our senior secured notes. In addition to the dispositions discussed elsewhere, we expect to continue to evaluate possible acquisitions and dispositions of certain businesses. These transactions, if consummated, could be material and may involve cash or the issuance of additional senior secured notes.


43

As of December 31, 2015, the Company had $0.9 million of cash, $12.4 million available pursuant to the Revolving Credit Facility and a working capital deficit of $34.5 million, of which approximately $25.6 million relates to deferred revenues. In February 2016, we amended our Revolving Credit Facility (the "Amended Revolver") to, among other things, extend the maturity date to June 2017 and modify the financial covenants in effect through the date of maturity.

As of December 31, 2015, in addition to outstanding borrowings under the Revolving Credit Facility, there was $308.3 million principal amount of outstanding senior secured debt. Over the next year, the cash interest payments due under these debt agreements are approximately $36.3 million and there are no scheduled principal payments due.

We expect that our current cash balances, cash generated from operating activities, availability under our Revolving Credit Facility, as amended, and the cash interest savings from the recent debt reduction initiatives should be sufficient to meet working capital, capital expenditures, debt service and other cash needs for the next year.

Our level of indebtedness could have important consequences for our business and operations. See Item 1A, "Risk Factors" included in the 2015 Form 10-K, specifically, "Our substantial indebtedness and our ability to incur additional indebtedness could adversely affect our business, financial condition and result of operations."

Wholesaler Disruption

Several of our smaller wholesalers and our second-largest wholesaler, Source Interlink Distribution ("Source"), ceased operations during fiscal 2015. Since then we have transitioned the previous wholesalers' newsstand distribution (approximately 25% of the market) to the two remaining major wholesalers. This transition had an immediate adverse impact on single copy newsstand sales and liquidity during fiscal 2015 and into the first half of fiscal 2016. We are beginning to see a stabilization in the newsstand sales, and the wholesale supply chain currently consists of private companies, owned by billionaires, that have been in the business for decades. There can be no assurances that our revenue will not be temporarily or permanently reduced if consumers at the impacted retailers do not resume purchasing our publications at the same rate or quantities previously purchased. See Item 1A, "Risk Factors" included in the 2015 Form 10-K, specifically, "Our circulation revenue consists of single copy sales distributed to retailers primarily by two wholesalers, and the loss of either of these wholesalers could materially adversely affect our business and results of operations."

Cash Flow Summary

The following information has been derived from the accompanying unaudited condensed consolidated financial statements for the nine months ended December 31, 2015 and 2014. Cash and cash equivalents decreased by $2.5 million during the nine months ended December 31, 2015. The change in cash and cash equivalents is as follows:

 
 
Nine Months Ended December 31,
 
Net Change
(in thousands)
 
2015
 
2014
 
Net income (loss)
 
$
20,582

 
$
(30,862
)
 
$
51,444

Non-cash items
 
(7,701
)
 
31,155

 
(38,856
)
Net change in operating assets and liabilities
 
(13,683
)
 
3,422

 
(17,105
)
Operating activities
 
(802
)
 
3,715

 
(4,517
)
Investing activities
 
(1,810
)
 
(3,600
)
 
1,790

Financing activities
 
189

 
181

 
8

Effects of exchange rates
 
(107
)
 
(248
)
 
141

Net (decrease) increase in cash and cash equivalents
 
$
(2,530
)
 
$
48

 
$
(2,578
)

Operating Activities

Cash provided by operating activities is primarily driven by our non-cash items, changes in working capital and the impact of our results of operations. Non-cash items consist primarily of the provision (benefit) for deferred income taxes, depreciation and amortization, amortization of deferred debt costs and deferred rack costs and provisions for doubtful accounts.


44

Net cash used in operating activities was $0.8 million for the nine months ended December 31, 2015 as compared to the $3.7 million of net cash provided by operating activities during the comparable prior year period. The decrease is primarily due to the $38.9 million net decrease in non-cash items coupled with the $17.1 million net change in operating assets and liabilities, partially offset by the $51.4 million increase in our results of operations.

Non-cash items decreased, primarily due to the increase in deferred income tax benefit of $18.8 million coupled with the decrease in non-cash payment-in-kind interest accretion of $4.8 million, the decrease in provision for doubtful accounts of $5.9 million and the decrease in impairment of goodwill and intangible assets of $18.5 million, partially offset by the increase in depreciation and amortization of $9.0 million.

The net change in operating assets and liabilities is primarily due to the $23.2 million net change in accounts payable and accrued expenses, the $5.6 million net change in deferred revenue and the $8.8 million net change in inventories, partially offset by the net change in trade receivables of $15.6 million and the net change in accrued interest of $4.0 million.

Investing activities

Net cash used in investing activities was $1.8 million and $3.6 million during the nine months ended December 31, 2015 and 2014, respectively, a decline of $1.8 million due primarily to the $7.3 million decrease in purchases of property and equipment and intangible assets, partially offset by the $3.0 million decrease in proceeds from the sale of assets and the $2.6 million decrease in proceeds from affiliates.

Financing activities

Net cash provided by financing activities was $0.2 million during the nine months ended December 31, 2015 and 2014.

Revolving Credit Facility and Senior Secured Notes

Revolving Credit Facility

The Company maintains a revolving credit facility that provides for borrowing up to $35.0 million, less outstanding letters of credit (the "Revolving Credit Facility").

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 interest rate under the Revolving Credit Facility has ranged from 8.00% to 8.25% during the nine months ended December 31, 2015 and 2014. 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, 2015 and 2014 were insignificant.

During the nine months ended December 31, 2015, the Company borrowed $54.4 million and repaid $50.9 million under the Revolving Credit Facility. At December 31, 2015, the Company had available borrowing capacity of $12.4 million after considering the $18.2 million outstanding balance and the $4.4 million outstanding letter of credit.

As further discussed below, in February 2016, we entered into the Amended Revolver to, among other things, extend the maturity date to June 2017 and modify the financial covenants in effect through the date of maturity.

The outstanding balance of $18.2 million at December 31, 2015 is included in non-current liabilities, as the maturity date of the Revolving Credit Facility, as amended is June 2017.

The indebtedness under the Revolving Credit Facility, as amended, is guaranteed by certain of the domestic subsidiaries of the Company and is secured by liens on substantially all the assets of the Company and certain of its domestic subsidiaries. In addition, the Company’s obligations are secured by a pledge of all 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.


45

Covenants

Our Revolving Credit Facility, as amended, includes certain representations and warranties, conditions precedent, affirmative covenants, negative covenants and events of default. The negative covenants include financial maintenance covenants comprised of a first lien leverage ratio, a consolidated leverage ratio and an interest coverage ratio. The Revolving Credit Facility, as amended, also contain 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, there is a cap on the total amount of cash available for distribution to our common stockholders.

Amended Revolver

In February 2016, AMI, JPMorgan Chase Bank, N.A., as administrative agent (the “Administrative Agent”), and the lenders from time to time party to the Revolving Credit Facility, as amended, restated, modified or supplemented from time to time, entered into the Amended Revolver with the lenders (the “Consenting Lenders”) constituting the Required Lenders (as defined in the Revolving Credit Facility) to, among other things, extend the maturity date to June 2017 and modify the financial covenants in effect through the date of maturity.

With regard to the financial covenants, the first lien leverage ratio covenant must be equal to or less than 4.25 to 1.00 from January 1, 2016 through June 2017, provided that the first lien leverage ratio covenant will be lowered to 4.00 to 1.00 if the outstanding aggregate principal amount of AMI's first lien notes is less than $250 million. The consolidated leverage ratio covenant must be equal to or less than 5.25 to 1.00 from January 1, 2016 through June 2017, provided that the consolidated leverage ratio covenant will be lowered to 5.00 to 1.00 if the outstanding principal amount of AMI's first lien notes is less than $250 million. The interest coverage ratio was not amended and must be equal to or greater than 1.50 to 1.00 from January 1, 2016 through June 2017.

Senior Secured Notes

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 fiscal 2012, we redeemed $20.0 million in aggregate principal amount of First Lien Notes. During fiscal 2014, we repurchased approximately $2.3 million in aggregate principal amount of First Lien Notes. During fiscal 2015, the Company repurchased $55.5 million in aggregate principal amount of First Lien Notes. In addition, during fiscal 2015, the Company exchanged approximately $32.0 million in aggregate principal amount of First Lien Notes, plus accrued and unpaid interest, for approximately $39.0 million aggregate principal amount of new second lien senior secured notes, which bear interest at a rate of 7.0% per annum and mature in July 2020 (the "New Second Lien Notes"), pursuant to an exchange agreement (the "New Second Lien Notes Exchange Agreement"), as further described below. During the first quarter of fiscal 2016, the Company repurchased approximately $2.0 million in aggregate principal amount of First Lien Notes, at a price equal to 105.9% of the aggregate principal amount thereof, plus accrued and unpaid interest, in the open market.

At December 31, 2015, the First Lien Notes represented an aggregate of $273.2 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 Revolving Credit Facility. The First Lien Notes and the guarantees thereof are secured by a first-priority lien on substantially all our assets (subject to certain permitted liens and exceptions), pari passu with the liens granted under our Revolving Credit Facility, provided that in the event of a foreclosure on the collateral or of insolvency proceedings, obligations under our Revolving Credit Facility will be repaid in full with proceeds from the collateral prior to the obligations under the First Lien Notes.


46

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"). In October 2013, we exchanged approximately $94.3 million aggregate principal amount of Second Lien Notes for an equal aggregate principal amount of new second lien senior secured notes, which bear interest at a rate of 10.0% per annum, are payable in kind and mature in June 2018 (the “Second Lien PIK Notes”), pursuant to an exchange agreement.

In September 2014, pursuant to the debt for equity exchange agreement with the Parent and the Investors, the Investors exchanged approximately $7.8 million aggregate principal amount of Second Lien Notes and all of the outstanding Second Lien PIK Notes, plus accrued and unpaid interest, for additional equity interests in the Parent. As a result, the Company's obligation under the Second Lien PIK Notes were satisfied in full. During fiscal 2015, the Company repurchased approximately $0.6 million in aggregate principal amount of Second Lien Notes.

At December 31, 2015, the Second Lien Notes represented an aggregate of $2.2 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 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 our assets (subject to certain permitted liens and exceptions).

New Second Lien Notes

In January 2015, we issued approximately $39.0 million aggregate principal amount of New Second Lien Notes to the Investors, which bear interest at a rate of 7.0% per annum and mature in July 2020. Interest on the New Second Lien Notes is payable semi-annually on July 15th and January 15th of each year and is computed on the basis of a 360-day year comprised of twelve 30-day months. As described above, the New Second Lien Notes were issued in exchange for $32.0 million aggregate principal amount of First Lien Notes pursuant to the New Second Lien Notes Exchange Agreement. The New Second Lien Notes were issued under a new indenture (the “New Second Lien Notes Indenture”), by and among American Media, Inc., the guarantors parties thereto and the trustee. The New Second Lien Notes were issued through a private offering exempt from the registration requirements of the Securities Act of 1933, as amended.

At December 31, 2015, the New Second Lien Notes represented an aggregate of $32.9 million of our indebtedness.

The indenture governing the New 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 New 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 New Second Lien Notes imposes certain requirements as to future subsidiary guarantors.

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


47

Covenant Compliance

As discussed above, our Revolving Credit Facility, the Amended Revolver and the indentures governing the First Lien Notes, the Second Lien Notes and the New Second Lien Notes contain various restrictive covenants.

With regard to the financial maintenance covenants, the first lien leverage ratio covenants must be equal to or less than 4.50 to 1.00 from April 1, 2015 through December 2016 and 4.25 to 1.00 from January 1, 2016 through June 2017, the maturity date of the Amended Revolver, provided that the first lien leverage ratio covenant will be lowered to 4.00 to 1.00 if the outstanding aggregate principal amount of the First Lien Notes is less than $250 million. The first lien leverage ratio is calculated as the Total First Lien Debt to Consolidated EBITDA (each as defined in the Revolving Credit Facility). The consolidated leverage ratio covenant is calculated as the Total Debt to Consolidated EBITDA (each as defined in the Revolving Credit Facility) and must be equal to or less than 5.50 to 1.00 from October 1, 2015 through December 2016 and 5.25 to 1.00 from January 1, 2016 through June 2017, provided that the consolidated leverage ratio covenant will be lowered to 5.00 to 1.00 if the outstanding principal amount of the First Lien Notes is less than $250 million. The interest coverage ratio covenant is calculated as the Consolidated EBITDA to Cash Interest Expense (each as defined in the Revolving Credit Facility) and must be equal to or greater than 1.50 to 1.00 from April 1, 2015 through June 2017. The interest coverage ratio was not amended.

As of December 31, 2015, the first lien leverage ratio was 3.84 to 1.00, the consolidated leverage ratio was 4.30 to 1.00 and the interest coverage ratio was 2.09 to 1.00 and the Company was in compliance with the covenants under the Revolving Credit Facility and the indentures governing the First Lien Notes, the Second Lien Notes and the New Second Lien Notes.

Although there can be no assurances, management believes that, based on current expectations (including expected borrowings and repayments under the Amended Revolver and our recent debt reductions), our operating results for the next twelve months will be sufficient to satisfy the financial covenants under the Amended Revolver. Our ability to satisfy such financial covenants is dependent on our business performing in accordance with our expectations.  If the performance of our business deviates from our expectations, we may not be able to satisfy such financial covenants.  Our expectations 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 expectations (see "Risk Factors" included in the 2015 Form 10-K). If we do not comply with our financial covenants, we would be in default under the Amended Revolver, which could result in all our debt being accelerated due to cross-default provisions in the indentures governing the First Lien Notes, the Second Lien Notes and the New Second Lien Notes.

We have the ability to incur additional debt, subject to limitations imposed by our Revolving Credit Facility, the Amended Revolver and the indentures governing the First Lien Notes, the Second Lien Notes and the New Second Lien Notes. Under our Revolving Credit Facility, the Amended Revolver and the indentures governing the First Lien Notes, the Second Lien Notes and the New 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 is less than 4.50 to 1.00.

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 and amortization, provision for impairment of intangible assets and goodwill, deferred debt costs and deferred rack costs, adjusted for merger and related transaction(s) costs, restructuring costs and severance, costs related to launches, relaunches or closures of publications 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 can provide. 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 it should not be considered 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.


48

Set forth below is a reconciliation of net income (loss) attributable to American Media, Inc. and subsidiaries to Adjusted EBITDA for the three and twelve month periods ended December 31, 2015 and 2014:

 
For the Three Months Ended December 31,
 
For the Twelve Months Ended December 31,
(in thousands)
2015
 
2014
 
2015
 
2014
Net income (loss) attributable to American Media, Inc. and subsidiaries
$
(2,315
)
 
$
9,960

 
$
24,512

 
$
(33,979
)
Add (deduct):
 
 
 
 
 
 
 
Interest expense
9,608

 
11,468

 
40,888

 
53,781

Benefit for income taxes
(2,338
)
 
(11,898
)
 
(49,741
)
 
(13,845
)
Depreciation and amortization
6,513

 
4,277

 
23,953

 
14,575

Impairment of goodwill and intangible assets
—

 
—

 
—

 
18,458

Amortization of deferred debt costs
887

 
487

 
4,070

 
3,007

Amortization of deferred rack costs
1,149

 
1,456

 
5,472

 
6,079

Amortization of short-term racks
2,070

 
2,188

 
8,086

 
7,957

Merger and related transaction(s) costs
—

 
1,585

 
—

 
4,755

Restructuring costs and severance
410

 
(2,645
)
 
7,470

 
3,227

(Gain) loss on sale of publications
—

 
—

 
5,883

 
(3,411
)
Costs related to launches and closures of publications
71

 
1,015

 
30

 
3,144

Restructuring costs related to divestiture of DSI
—

 
—

 
(3
)
 
376

AMI share of costs and bad debt related to wholesaler shutdowns
(308
)
 
457

 
3,273

 
9,325

Investment in new digital strategy
—

 
—

 
—

 
3,979

Pro forma adjustment related to investment in affiliates
—

 
—

 
—

 
1,324

Other
2,362

 
903

 
7,638

 
4,869

Adjusted EBITDA
$
18,109

 
$
19,253

 
$
81,531

 
$
83,621


CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

There have been no material changes in our contractual obligations since March 31, 2015.

SEASONALITY AND QUARTERLY FLUCTUATIONS

Our business has always experienced seasonality, which we expect will continue, due to advertising patterns based on consumer reading habits. Fluctuations in quarterly performance are also due to variations in our publication schedule and variability of audience traffic on our websites. Not all of our publications are published on a regular schedule throughout the year. Additionally, the publication schedule for our special interest publications can vary and lead to quarterly fluctuations in our operating results.

Advertising revenue from our magazines and websites is typically highest in our fourth fiscal quarter due to our health and fitness magazines. During our fourth fiscal quarter, which begins on January 1st, advertisers and consumers are focused on the "New Year and New You." Certain newsstand costs vary from quarter to quarter, particularly marketing costs associated with the distribution of our magazines.

OFF-BALANCE SHEET FINANCING

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


49

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been 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. We evaluate our estimates on an on-going basis, including those related to revenue, trade receivables and allowance for doubtful accounts, goodwill and other intangible assets, income taxes and contingent liabilities.

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
 
There was no provision for impairment charges during the nine months ended December 31, 2015. The Company continues to evaluate goodwill and other identified intangible assets for impairment. Goodwill and other identified intangible assets are material components of the Company's financial statements and impairment charges to the Company's goodwill or other identified intangible assets in future periods could be material to the Company's results of operations.

As of December 31, 2015, the reporting units in our Celebrity segment continue to be negatively impacted by the 12% decline in the celebrity newsstand market and the industry-wide newsstand distribution disruption in our wholesaler channel coupled with the 11% decline in the consumer advertising market. While our current expectations have resulted in fair values of the reporting units in excess of carrying values, if our assumptions are not realized, it is possible that in the future additional impairment charges may be recorded and could be material to the consolidated financial statements. The Company will continue to monitor the recoverability of its remaining goodwill.

Refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2015 Form 10-K for a discussion of our critical accounting estimates.

RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Refer to Part I, Item 1, Note 2, "Significant Accounting Policies," in the notes to the 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 exposure 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, 2015, we had $308.3 million outstanding in fixed rate debt. There are no earnings or liquidity risks associated with the Company’s fixed rate debt. Under the Revolving Credit Facility, we have $18.2 million outstanding in variable rate debt at December 31, 2015. The Company is subject to earnings and liquidity risks associated with the variable rate debt.

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


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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 our international business practices expand.

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 derivative financial instruments, that are designated as hedges, for the purpose of reducing our exposure to adverse fluctuations in foreign currency exchange rates.

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, paper and 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.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive and principal financial officers, we evaluated the effectiveness of our disclosure controls and procedures (as defined in the Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) required by Exchange Act Rules 13a-15(b) or 15d-15(b), as of the end of the period covered by this report. Based upon that evaluation, our principal executive and principal financial officers concluded that our disclosure controls and procedures were effective as of December 31, 2015 to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.

Evaluation of Changes in Internal Control Over Financial Reporting

Under the supervision and with the participation of our management, including our principal executive and principal financial officers, we have determined that, during the quarter ended December 31, 2015, there were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

There have been no material changes to the pending legal proceedings disclosed in our 2015 Form 10-K, under the heading Part I, Item 3, "Legal Proceedings" except for those disclosures made in our Quarterly Reports on Form 10-Q for the quarters ended June 30, 2015 and September 30, 2015 under the heading Part II, Item 1, "Legal Proceedings."

Item 1A. Risk Factors.

There have been no material changes to the risk factors as previously disclosed in our 2015 Form 10-K, under the heading Part I, Item 1A, "Risk Factors."

Item 5. Other Information.

On February 12, 2016, AMI, JPMorgan Chase Bank, N.A., as administrative agent (the “Administrative Agent”), and the lenders from time to time party to the Revolving Credit Facility, as amended, restated, modified or supplemented from time to time, entered into the Amended Revolver with the lenders (the “Consenting Lenders”) constituting the Required Lenders (as defined in the Revolving Credit Facility) to, among other things, extend the maturity date from December 22, 2016 to June 22, 2017 and modify the financial covenants in effect through the date of maturity.

With regard to the financial covenants, the first lien leverage ratio covenant must be equal to or less than 4.25 to 1.00 from January 1, 2016 through June 2017, provided that the first lien leverage ratio covenant will be lowered to 4.00 to 1.00 if the outstanding aggregate principal amount of the First Lien Notes is less than $250 million. The consolidated leverage ratio covenant must be equal to or less than 5.25 to 1.00 from January 1, 2016 through June 2017, provided that the consolidated leverage ratio covenant will be lowered to 5.00 to 1.00 if the outstanding principal amount of the First Lien Notes is less than $250 million. The interest coverage ratio was not amended and must be equal to or greater than 1.50 to 1.00 from January 1, 2016 through June 2017.

The foregoing summary of the Amended Revolver is qualified in its entirety by reference to the actual Amendment No. 1 to the Amended and Restated Revolving Credit Agreement, which is filed herewith as Exhibit 10.1, and is incorporated herein by reference.

Item 6. Exhibits.

See exhibits listed under the Exhibit Index below.



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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 16, 2016
 
by:
/s/ David J. Pecker
 
 
 
 
David J. Pecker
 
 
 
 
Chairman, Chief Executive Officer and President
 
 
 
 
(Principal Executive Officer)
 
 
 
 
 
Dated:
February 16, 2016
 
by:
/s/ Christopher V. Polimeni
 
 
 
 
Christopher V. Polimeni
 
 
 
 
Executive Vice President, Chief Financial Officer and Treasurer
 
 
 
 
(Principal Financial and Accounting Officer)


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Exhibit Index

Exhibit Number
 
Description
10.1
*
Amendment No. 1, dated as of February 12, 2016, to the Amended and Restated Revolving Credit Agreement, dated February 20, 2015 (as amended, restated, supplemented or otherwise modified from time to time), by and among American Media, Inc., JPMorgan Chase Bank, N.A., as administrative agent, and the lenders from time to time party thereto.
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
*
The following materials from American Media Inc.'s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2015, formatted in XBRL (Extensible Business Reporting Language): (i) the Unaudited Condensed Consolidated Balance Sheets, (ii) the Unaudited Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss), (iii) the Unaudited Condensed Consolidated Statements of Stockholders' Deficit, (iv) the Unaudited Condensed Consolidated Statements of Cash Flows and (v) the Notes to the Unaudited Condensed Consolidated Financial Statements.
*
 
Filed herewith.
**
 
Furnished herewith.


54

AMERICAN MEDIA INC Reports