AMERICAN MEDIA INC - FORM 10-Q - August 20, 2014

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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 June 30, 2014

¨ 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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
 
 
Yes 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 July 31, 2014 was 11,172,150.


AMERICAN MEDIA, INC.
 
FORM 10-Q for the Quarter Ended June 30, 2014
 
INDEX
 
 
  Page(s)
 
 
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2014 and March 31, 2014
 
Unaudited Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the Three Months Ended June 30, 2014 and 2013
 
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2014 and 2013
 
 
 
 
 
 
 
 
 
 





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 June 30, 2014 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;
 
 
 
 
 
•
 
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;
 
 
 
 
 
•
 
our ability to implement our business strategy;
 
 
 
 
 
•
 
changes in discretionary consumer spending patterns;
 
 
 
 
 
•
 
changes in general economic and business conditions, both nationally and internationally, which can influence the overall demand for our services and products by our customers and advertisers and affect the readership level of our publications as well as our advertising and circulation revenue;
 
 
 
 
 
•
 
increased competition, including price competition and competition from other publications and other forms of media, such as television, radio and digital concentrating on celebrity news and health and fitness;
 
 
 
 
 
•
 
changes in the price of fuel, paper, ink and postage;
 
 
 
 
 
•
 
any loss of one or more of our key vendors or key advertisers;
 
 
 
 
 
•
 
the potential effects of threatened or actual terrorist attacks or other acts of violence or war;
 
 
 
 
 
•
 
adverse results in litigation matters or any regulatory proceedings;
 
 
 
 
 
•
 
any future impairment of our goodwill or other identified intangible assets;
 
 
 
 
 
•
 
our ability to maintain an effective system of internal controls over financial reporting;
 
 
 
 
 
•
 
the effects of possible credit losses;
 
 
 
 
 
•
 
any disruption in the distribution of our magazines through wholesalers;
 
 
 
 
 
•
 
unforeseen increases in employee benefit costs; 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, 2014 (the “2014 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)
 
June 30,
2014
 
March 31,
2014
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents ($2,857 and $1,525 related to VIEs, respectively)
$
15,060

 
$
3,035

Trade receivables, net of allowance for doubtful accounts of $10,496 and $6,661, respectively ($0 and $1 related to VIEs, respectively)
31,759

 
44,636

Inventories ($807 and $285 related to VIEs, respectively)
9,113

 
10,910

Prepaid expenses and other current assets ($449 and $254 related to VIEs, respectively)
18,388

 
16,640

Total current assets
74,320

 
75,221

PROPERTY AND EQUIPMENT, NET:
 
 
 
Leasehold improvements
3,798

 
3,798

Furniture, fixtures and equipment
41,932

 
40,304

Less – accumulated depreciation
(24,613
)
 
(23,128
)
Total property and equipment, net ($29 related to VIEs)
21,117

 
20,974

OTHER ASSETS:
 
 
 
Deferred debt costs, net
7,691

 
8,125

Deferred rack costs, net
5,265

 
5,073

Investments in affiliates
3,297

 
2,859

Other long-term assets
3,587

 
3,841

Total other assets
19,840

 
19,898

GOODWILL AND OTHER IDENTIFIED INTANGIBLE ASSETS:
 
 
 
Goodwill
186,898

 
186,898

Other identified intangibles, net of accumulated amortization of $120,857 and $119,773, respectively ($6,000 related to VIEs, respectively)
269,628

 
269,649

Total goodwill and other identified intangible assets, net
456,526

 
456,547

TOTAL ASSETS
$
571,803

 
$
572,640

LIABILITIES AND STOCKHOLDERS' DEFICIT
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable ($0 and $42 related to VIEs, respectively)
$
24,961

 
$
20,115

Accrued expenses and other liabilities ($47 and $122 related to VIEs, respectively)
32,263

 
27,801

Accrued interest
2,577

 
15,897

Deferred revenues ($3,216 and $1,014 related to VIEs, respectively)
33,781

 
33,318

Total current liabilities
93,582

 
97,131

NON-CURRENT LIABILITIES:
 
 
 
Senior secured notes
474,286

 
469,477

Revolving credit facility
35,600

 
29,000

Other non-current liabilities
6,934

 
7,172

Deferred income taxes
102,323

 
98,833

Total liabilities
712,725

 
701,613

COMMITMENTS AND CONTINGENCIES (See Note 11)


 


Redeemable noncontrolling interests (see Note 10)
3,000

 
3,000

STOCKHOLDERS' DEFICIT:
 
 
 
Common stock, $0.0001 par value; 14,000,000 shares authorized; 10,000,000 shares issued and outstanding as of June 30, 2014 and March 31, 2014
1

 
1

Additional paid-in capital
822,723

 
822,723

Accumulated deficit
(966,434
)
 
(954,466
)
Accumulated other comprehensive loss
(212
)
 
(231
)
Total stockholders' deficit
(143,922
)
 
(131,973
)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
$
571,803

 
$
572,640

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 June 30,
 
2014
 
2013
OPERATING REVENUES:
 
 
 
Circulation
$
46,229

 
$
50,275

Advertising
30,116

 
32,711

Other
1,910

 
7,406

Total operating revenues
78,255

 
90,392

OPERATING EXPENSES:
 
 
 
Editorial
9,418

 
9,436

Production
20,012

 
23,235

Distribution, circulation and other cost of sales
12,781

 
16,230

Selling, general and administrative
26,997

 
21,833

Depreciation and amortization
3,358

 
3,092

Total operating expenses
72,566

 
73,826

OPERATING INCOME
5,689

 
16,566

OTHER INCOME (EXPENSES):
 
 
 
Interest expense
(13,987
)
 
(14,677
)
Amortization of deferred debt costs
(434
)
 
(385
)
Other income (expenses), net
314

 
(251
)
Total other expenses, net
(14,107
)
 
(15,313
)
(LOSS) INCOME BEFORE INCOME TAXES
(8,418
)
 
1,253

INCOME TAX PROVISION
3,620

 
488

NET (LOSS) INCOME
(12,038
)
 
765

LESS: NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
70

 
—

NET (LOSS) INCOME ATTRIBUTABLE TO AMERICAN MEDIA, INC. AND SUBSIDIARIES
$
(11,968
)
 
$
765

 
 
 
 
 
Three Months Ended June 30,
 
2014
 
2013
NET (LOSS) INCOME
$
(12,038
)
 
$
765

Foreign currency translation adjustment
18

 
43

Comprehensive (loss) income
(12,020
)
 
808

Less: comprehensive loss attributable to noncontrolling interests
70

 
—

COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO AMERICAN MEDIA, INC. AND SUBSIDIARIES
$
(11,950
)
 
$
808







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

5

AMERICAN MEDIA, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Three Months Ended June 30,
 
2014
 
2013
OPERATING ACTIVITIES
 
 
 
Net (loss) income
$
(12,038
)
 
$
765

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
 
 
 
Depreciation of property and equipment
2,260

 
2,003

Amortization of other identified intangibles
1,098

 
1,089

Amortization of deferred debt costs
434

 
385

Amortization of deferred rack costs
1,458

 
1,684

Deferred income tax provision
3,493

 
341

Non-cash payment-in-kind interest accretion
4,809

 
—

Provision for doubtful accounts
4,223

 
200

Other
(531
)
 
461

Changes in operating assets and liabilities:
 
 
 
Trade receivables
8,654

 
(7,228
)
Inventories
1,801

 
(3,104
)
Prepaid expenses and other current assets
(1,748
)
 
(3,857
)
Deferred rack costs
(1,650
)
 
(747
)
Other long-term assets
254

 
56

Accounts payable
4,985

 
11,593

Accrued expenses and other liabilities
4,529

 
(1,563
)
Accrued interest
(13,320
)
 
(13,971
)
Other non-current liabilities
(238
)
 
(59
)
Deferred revenues
463

 
2,760

Total changes in operating assets and liabilities
3,730

 
(16,120
)
Net cash provided by (used in) operating activities
8,936

 
(9,192
)
INVESTING ACTIVITIES
 
 
 
Purchases of property and equipment
(2,541
)
 
(3,331
)
Purchases of intangible assets
(1,077
)
 
(1,013
)
Investments in affiliates
—

 
(250
)
Other
5

 
(299
)
Net cash used in investing activities
(3,613
)
 
(4,893
)
FINANCING ACTIVITIES
 
 
 
Proceeds from revolving credit facility
28,300

 
34,600

Repayments to revolving credit facility
(21,700
)
 
(18,000
)
Payments for redemption of Odyssey preferred stock
—

 
(1,022
)
Net cash provided by financing activities
6,600

 
15,578

Effect of exchange rate changes on cash
102

 
(33
)
Net increase in cash and cash equivalents
12,025

 
1,460

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
3,035

 
2,375

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
15,060

 
$
3,835

 
 
 
 
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Non-cash property and equipment (incurred but not paid)
$
360

 
$
403


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

6

AMERICAN MEDIA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014

Note 1 - Nature of the Business

Description of the Business

American Media, Inc. and its consolidated subsidiaries are referred to herein as American Media, AMI, the Company, we, our and us. American Media, Inc. was incorporated under the laws of the State of Delaware in 1990 and is headquartered in Boca Raton, Florida. The Company is the largest publisher of celebrity and health and fitness magazines in the United States and operates a diversified portfolio of 14 publications. Total circulation of our print publications with a frequency of six or more times per year, were approximately 6.0 million copies per issue during three months ended June 30, 2014.

As of June 30, 2014, the Company published seven weekly publications: National Enquirer, Star, Globe, National Examiner, Country Weekly, OK! and Soap Opera Digest; two monthly publications: Muscle & Fitness and Flex; two publications that are published 10 times per year: Shape and Men's Fitness; and three bi-monthly publications: Fit Pregnancy, Natural Health and Muscle & Fitness Hers.

Our fiscal year ends on March 31, 2015 and is referred to herein as fiscal 2015.

Liquidity

The Company is highly leveraged. As of June 30, 2014, the Company had approximately $509.9 million of outstanding indebtedness, consisting of $474.3 million of senior secured notes and $35.6 million under the revolving credit facility. Over the next year, the cash interest payments due under these debt agreements are approximately $45.9 million and there are no scheduled principal payments due. As of June 30, 2014, the Company has $15.1 million of cash and is fully drawn under the revolving credit facility.

In August 2014, pursuant to the agreement and plan of merger (the “Merger Agreement”) with certain investors of the Company (collectively, the “Investors”), the Investors acquired 100% of the issued and outstanding shares of common stock of the Company through a merger (the “Merger”) whereby a subsidiary of an entity owned by funds managed and/or controlled by the Investors was merged with and into the Company, with the Company surviving the Merger. In connection with the Merger, the Company entered into a Note Purchase Agreement (the “Note Purchase Agreement”) with the Investors pursuant to which the Company issued additional senior secured notes to the Investors at par plus accrued interest for a total purchase price equal to $12.5 million.

Similarly, prior to the execution of the Merger Agreement and the Note Purchase Agreement, the Company entered into various supplemental indentures to, among other things, permit the transactions contemplated by the Merger Agreement and the Note Purchase Agreement and eliminate the Company's obligation to repurchase approximately $12.7 million of senior secured notes, during fiscal 2015, pursuant to the terms of the indenture of certain senior secured notes.

In addition, in August 2014, the Company entered into an amendment to the revolving credit facility to, among other things, (i) amend the definition of "Change of Control," (ii) permit the issuance of additional senior secured notes pursuant to the Note Purchase Agreement and (iii) amend the first lien leverage ratio to be equal to or less than 5.25 to 1.00 from April 1, 2014 through and including the quarter ending June 30, 2015. From July 1, 2015 through December 31, 2015, the first lien leverage ratio must be equal to or less than 4.50 to 1.00, the ratio in effect prior to the amendment.

In August 2014, the Company received a waiver under its revolving credit facility to provide additional time to file the quarterly report on Form 10-Q (the "Quarterly Report") for the quarter ended June 30, 2014 with the Securities and Exchange Commission (the "SEC")and to make it available to the revolving credit facility lenders.

See Note 5, "Revolving Credit Facility" and Note 6, "Senior Secured Notes" for further information regarding the Company's debt agreements and amendments thereto. See Note 15, "Subsequent Events" for further description of the Merger Agreement and Note Purchase Agreement.


7

As further discussed in Note 2, "Summary of Significant Accounting Policies - Concentrations," the Company's second-largest wholesaler ceased operations in May 2014 and filed for bankruptcy in June 2014. The Company is working with the two remaining major wholesalers and retailers to transition the newsstand circulation to them. This is expected to have an adverse impact on single copy newsstand sales and liquidity in fiscal 2015. There can be no assurances that, after completing the transition of newsstand circulation, the Company’s revenues will not be temporarily or permanently reduced if consumers at the impacted retailers do not resume purchasing the Company’s publications at the same rate or quantities previously purchased or if the transition to certain retailers is not successful.

In addition to the liquidity provided by the Merger, as discussed above, the Company has several initiatives designed to further increase liquidity through improvements in payment terms from its customers and vendors and inventory management arrangements.

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;

•
exposing the Company to fluctuations in interest rates as the revolving credit facility has a variable rate of interest;

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

•
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 business industry; and

•
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.

Although the Company is significantly leveraged, it expects that the current cash balances, liquidity provided in connection with the Merger and its revolving credit facility, cash generated from the initiatives described above and 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, 2014 (the "2014 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 unaudited condensed consolidated financial statements reflect our financial statements, those of our wholly-owned domestic and foreign subsidiaries and those of certain variable interest entities where we are the primary beneficiary. For consolidated entities where we own less than 100% of the equity, we record net income (loss) attributable to noncontrolling interests in our unaudited condensed consolidated statements of income (loss) equal to the percentage of the interests retained in such entities by the respective noncontrolling parties. All material intercompany balances and transactions are eliminated in consolidation.


8

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.

Financial information for the Company's unconsolidated joint ventures is reported in the accompanying financial statements with a one-month lag in reporting periods. The effect of this one-month lag on the Company's financial position and results of operations is not significant.

See Note 10, “Investments in Affiliates and Redeemable Noncontrolling Interests.”

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 condensed 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.

Concentrations

As of June 30, 2014, single copy revenues consisted of copies distributed to retailers primarily by two major wholesalers. During the three months ended June 30, 2014 and 2013, The News Group accounted for approximately 37% and 32%, respectively, of our total operating revenues and Source Interlink Companies ("Source") accounted for approximately 10% and 14%, respectively, of our total operating revenues. We have multi-year service arrangements with our major wholesalers, which provide incentives to maintain certain levels of service.

In May 2014, we were notified by our national distributor (the “Distributor”) for our publications in the U.S. and Canada, that due to non-payment of their receivables from Source, our second-largest wholesaler, the Distributor will cease shipping our publications to Source effectively immediately. Further, in May 2014, Source notified us that they were ceasing substantially all distribution operations in the near term and filed for bankruptcy in June 2014. Our Distributor is working with the two remaining wholesalers and retailers to transition the newsstand circulation to them. We estimate that it will take approximately twelve to twenty four weeks for the transition to be completed. Our single copy newsstands sales could be reduced by approximately $10.0 million to $20.0 million during this transition period, depending on the length of time required to complete the transition to the remaining two wholesalers. In addition, after completing the transition, our revenues could 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.

Subject to the terms of our agreement with the Distributor, our exposure for bad debt related to Source is currently expected to be approximately $5.0 million to $7.0 million, of which $3.9 million is included in the accompanying unaudited condensed consolidated statement of income (loss) for the three months ended June 30, 2014. The total provision for bad debt related to Source is $5.8 million at June 30, 2014.

Recently Adopted Accounting Pronouncements

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ("ASU 2013-11"). ASU 2013-11 requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply in settlement of uncertain tax positions. Under ASU 2013-11 unrecognized tax benefits will be netted against all available same-jurisdiction loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the unrecognized tax benefits. ASU 2013-11 was effective for the Company on April 1, 2014. The adoption of ASU 2013-11 did not have an impact on the Company's consolidated financial position, results of operations or cash flows.


9

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09) which 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. ASU 2014-09 is effective for the Company on April 1, 2017 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.

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.

Note 3 - 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 three months ended June 30, 2014 and 2013 were insignificant. Inventories are comprised of the following (in thousands):
 
June 30, 2014
 
March 31, 2014
Raw materials – paper
$
6,882

 
$
8,468

Finished product — paper, production and distribution costs of future issues
2,231

 
2,442

Total inventories
$
9,113


$
10,910


Note 4 - Goodwill and Other Identified Intangible Assets

As of June 30, 2014 and March 31, 2014, the Company had goodwill with a carrying value of $186.9 million and other identified intangible assets not subject to amortization with carrying values of $256.9 million. Other identified intangible assets not subject to amortization consist of tradenames with indefinite lives.

Identified intangible assets with finite lives subject to amortization consist of the following (in thousands):
 
 
 
June 30, 2014
 
March 31, 2014
 
Range of lives
(in years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
Tradenames
8 - 27
 
$
10,610

 
$
(5,074
)
 
$
5,536

 
$
10,610

 
$
(4,964
)
 
$
5,646

Subscriber lists
3 - 15
 
32,702

 
(32,695
)
 
7

 
32,702

 
(32,512
)
 
190

Customer relationships
5 - 10
 
2,300

 
(1,285
)
 
1,015

 
2,300

 
(1,211
)
 
1,089

Other intangible assets
3
 
10,210

 
(3,995
)
 
6,215

 
9,133

 
(3,264
)
 
5,869

 
 
 
$
55,822

 
$
(43,049
)
 
$
12,773

 
$
54,745

 
$
(41,951
)
 
$
12,794


Amortization expense of intangible assets was $1.1 million and $1.1 million during the three months ended June 30, 2014 and 2013, respectively. Based on the carrying value of identified intangible assets recorded at June 30, 2014, and assuming no subsequent impairment of the underlying assets, the amortization expense is expected to be as follows (in thousands):


10

Fiscal Year
 
Amortization Expense
2015
 
$
2,927

2016
 
3,300

2017
 
1,805

2018
 
623

2019
 
623

  Thereafter
 
3,495

 
 
$
12,773


The gross carrying amount and accumulated impairment losses of goodwill, as of June 30, 2014 and March 31, 2014, by reportable segment are as follows (in thousands):
 
Celebrity Brands
 
Women's Active Lifestyle Group
 
Men's Active Lifestyle Group
 
Corporate and Other
 
Total
Goodwill
$
428,518

 
$
84,905

 
$
112,296

 
$
20,136

 
$
645,855

Accumulated impairment losses
(304,595
)
 
(62,841
)
 
(80,446
)
 
(11,075
)
 
(458,957
)
Goodwill, net of impairment loss
$
123,923

 
$
22,064

 
$
31,850

 
$
9,061

 
$
186,898


The Company did not record an impairment charge during the three months ended June 30, 2014 or 2013. 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.

Note 5 - Revolving Credit Facility

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

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 2010 Revolving Credit Facility has ranged from 8.00% to 8.25% during the three months ended June 30, 2014 and 2013.

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 three months ended June 30, 2014 and 2013 were insignificant.

During the three months ended June 30, 2014, the Company borrowed $28.3 million and repaid $21.7 million under the 2010 Revolving Credit Facility. At June 30, 2014, the Company is fully drawn under the 2010 Revolving Credit Facility after considering the $35.6 million outstanding balance and the $4.4 million outstanding letter of credit. The outstanding balance of the 2010 Revolving Credit Facility on June 30, 2014 of $35.6 million is included in non-current liabilities, as the outstanding balance is not due until December 2015.

The 2010 Revolving Credit Facility includes certain representations and warranties, conditions precedent, affirmative covenants, negative covenants and events of default. The negative covenants include a financial maintenance covenant comprised of a first lien leverage ratio. As further discussed in Note 15, "Subsequent Events," in August 2014, the Company entered into an amendment to the 2010 Revolving Credit Facility to, among other things, amend the first lien leverage ratio to be equal to or less than 5.25 to 1.00 from April 1, 2014 through and including the quarter ending June 30, 2015. From July 1, 2015 through December 31, 2015, the maturity date of the 2010 Revolving Credit Facility, the first lien leverage ratio must be equal to or less than 4.50 to 1.00, the ratio in effect prior to the amendment. The 2010 Revolving Credit Facility also contains certain covenants that, subject to certain exceptions, restrict paying dividends, incurring additional indebtedness, creating liens, making acquisitions or other investments, entering into certain mergers or consolidations and selling or otherwise disposing of assets. With respect to the dividend restrictions, the 2010 Revolving Credit Facility includes a cap on the total amount of cash available for distribution to our common stockholders.

As of June 30, 2014, the Company was in compliance with its covenants under the 2010 Revolving Credit Facility, as amended.


11

Although there can be no assurances, management believes that, based on current projections (including projected borrowings and repayments under the 2010 Revolving Credit Facility), its operating results for fiscal 2015 will be sufficient to satisfy the first lien leverage ratio financial covenant under the 2010 Revolving Credit Facility, as amended. The Company’s ability to satisfy the first lien leverage ratio financial covenant is dependent on the business performing in accordance with its projections.  If the performance of the Company’s business deviates significantly from its projections, the Company may not be able to satisfy such first lien leverage ratio financial covenant.  The Company's projections are subject to a number of factors, many of which are events beyond its control, which could cause its actual results to differ materially from its projections. If the Company does not comply with its financial covenant, the Company will be in default under the 2010 Revolving Credit Facility.
  
The indebtedness under the 2010 Revolving Credit Facility is guaranteed by certain of the domestic subsidiaries of the Company and is secured by liens on substantially all 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.

Note 6 - Senior Secured Notes

In December 2010, we issued (i) $385.0 million aggregate principal amounts of senior secured notes, which bear interest at a rate of 11.5% per annum and mature in December 2017 (the "First Lien Notes"), and (ii) $104.9 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 First Lien Notes and 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. During the first quarter of fiscal 2012, the Company redeemed $20.0 million in aggregate principal amount of the First 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 (the “Exchange Agreement”). The Second Lien PIK Notes were issued under a new indenture, by and among American Media, Inc., certain of its subsidiaries listed as guarantors thereto and Wilmington Trust, National Association, as trustee (the “Second Lien PIK Notes Indenture”). After giving effect to this exchange, approximately $10.6 million aggregate principal amount of Second Lien Notes remain outstanding.

The Second Lien PIK Notes are payable in kind at a rate of 10% per annum until the earliest of: (a) December 15, 2016, (b) the closing of a refinancing of the First Lien Notes or (c) upon the occurrence of certain specified events of default relating to the application of the cash interest savings and the right of first offer (any such date being the "Cash Interest Rate Conversion Date"), at which point the interest payable on the then outstanding aggregate principal amount of Second Lien PIK Notes will be payable, in cash, at an interest rate of 13.5% per annum until the June 2018 maturity date. Subject to certain exceptions, cash interest savings resulting from the exchange of the Second Lien Notes must be used by the Company to repurchase First Lien Notes until the Cash Interest Rate Conversion Date. The participating holders have a right of first offer to sell any of their First Lien Notes to the Company before the Company makes repurchases of First Lien Notes from any other holders of the First Lien Notes, including those purchases pursuant to open market repurchases.

The Exchange Agreement also provides that, should the Company effect a refinancing of the First Lien Notes, under certain circumstances the Company may require additional exchanges at its option. Upon completion of a refinancing of the First Lien Notes, the Company may require (i) the participating holders to exchange up to $55.0 million in aggregate principal amount of the Company’s First Lien Notes for Second Lien PIK Notes or, alternatively, new second lien cash pay notes (the “New Second Lien Cash Pay Notes”) to be issued by the Company at a future date pursuant to the terms of the Exchange Agreement and a new indenture that would govern the New Second Lien Cash Pay Notes (the “Optional First Lien Note Exchange”) and/or (ii) the holders of all Second Lien PIK Notes (including any Second Lien PIK Notes received in the Optional First Lien Note Exchange) to exchange all of their Second Lien PIK Notes for New Second Lien Cash Pay Notes (the "Optional Second Lien Note Exchange"). In the event of the Optional Second Lien Note Exchange, certain of the participating holders may have the right to designate one independent director, in total, to the Board of Directors of the Company under certain conditions.

The First Lien Notes, the Second Lien Notes and the Second Lien PIK Notes are referred to herein collectively as the "Senior Secured Notes."


12

The June 15, 2014 interest payment-in-kind on the Second Lien PIK Notes totaled $4.8 million and was recorded as an increase to the aggregate principal amount of Second Lien PIK Notes. As of June 30, 2014, the Company’s total principal amount of Senior Secured Notes was approximately $474.3 million, consisting of $362.7 million principal amount of First Lien Notes, $10.6 million principal amount of Second Lien Notes and $101.0 million principal amount of Second Lien PIK Notes.

See Note 15, "Subsequent Events," for a discussion of the permanent waiver of the Company's obligation to redeem approximately $12.7 million of First Lien Notes, during fiscal 2015, pursuant to the Second Lien PIK Notes Indenture and the Exchange Agreement and the issuance of $12.3 million aggregate principal amount of Second Lien PIK Notes under the Second Lien PIK Note Indenture.

The First Lien Notes are guaranteed on a first lien senior secured basis by the same subsidiaries of the Company that guarantee the 2010 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 2010 Revolving Credit Facility, provided that in the event of a foreclosure on the collateral or of insolvency proceedings, obligations under our 2010 Revolving Credit Facility will be repaid in full with proceeds from the collateral prior to the obligations under the First Lien Notes.

The Second Lien Notes and the Second Lien PIK Notes are guaranteed on a second lien senior secured basis by the same subsidiaries of the Company that guarantee our 2010 Revolving Credit Facility and the First Lien Notes. The Second Lien Notes and Second Lien PIK 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 First Lien Notes Indenture, the Company has the option to redeem the First Lien Notes on or after December 15, 2013, 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
2013
 
108.625%
2014
 
105.75%
2015
 
102.875%
2016 and thereafter
 
100%

Under the Second Lien Notes Indenture and the Second Lien PIK Notes Indenture, the Company has the option to redeem the Second Lien Notes or the Second Lien PIK Notes on or after December 15, 2013, 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
2013
 
110.125%
2014
 
106.75%
2015
 
103.375%
2016 and thereafter
 
100%

The indentures governing the Senior Secured Notes contain certain affirmative covenants, negative covenants and events of default. For example, the indentures governing the Senior Secured Notes contain covenants that limit our ability and that of our restricted subsidiaries, subject to important exceptions and qualifications, to: borrow money; guarantee other indebtedness; use assets as security in other transactions; pay dividends on stock, redeem stock or redeem subordinated debt; make investments; enter into agreements that restrict the payment of dividends by subsidiaries; sell assets; enter into affiliate transactions; sell capital stock of subsidiaries; enter into new lines of business; and merge or consolidate. In addition, the indentures governing the Senior Secured Notes impose certain requirements as to future subsidiary guarantors. As of June 30, 2014, the Company was in compliance with all of the covenants under the indentures governing the Senior Secured Notes.

Note 7 - 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.

13


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):
 
 
 
June 30, 2014
 
March 31, 2014
 
 
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
First Lien Notes
Level 2
 
$
362,675

 
$
387,609

 
$
362,675

 
$
397,129

Second Lien Notes
Level 2
 
10,602

 
10,138

 
10,602

 
10,840

Second Lien PIK Notes
Level 2
 
101,009

 
94,570

 
96,200

 
95,178


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

As of June 30, 2014 and March 31, 2014, 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 2010 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 an impairment charge during the three months ended June 30, 2014 or June 30, 2013.

Note 8 - 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. At June 30, 2014, a valuation allowance of $47.3 million was recorded against the Company's net deferred tax assets, excluding the deferred tax liability for indefinite-lived intangible assets. 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. The Company intends to maintain a valuation allowance until sufficient positive evidence exists to support its reversal.

See Note 15, "Subsequent Events," for a discussion of the Merger wherein certain investors of the Company acquired 100% of the issued and outstanding shares of common stock of the Company. As a result of the Merger, a change of control has occurred and there may be a section 382 limitation on the use of the Company's tax attributes, including the net operating losses. Management does not anticipate a section 382 limitation, if any, to have a material impact on the Company's financial statements as the Company has recorded a valuation allowance against the net deferred tax assets, exclusive of the deferred tax liabilities associated with the amortization of the Company's indefinite-lived intangible assets.

Note 9 - Related Party Transactions

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. In connection with the Merger, as more fully described in Note 15, "Subsequent Events," Mr. Elkins is no longer affiliated with our Board of Directors. Payments for these services from Roxbury totaled $40,000 and $30,000 during the three months ended June 30, 2014 and 2013, respectively, and the Company has no outstanding payables to Roxbury at June 30, 2014 or March 31, 2014.


14

Note 10 - 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. In September 2011, the Company and the other limited liability company member entered into an amendment to the limited liability company agreement (the "Amendment"), which, among other things, extended the time period that the Company could be required to purchase all the limited liability company units from the other member, from April 2015 to October 2019, for a fixed price of $3.0 million cash (the "Olympia Put Option"). The Amendment also extended the time period that the Company could require the other limited liability company member to sell to the Company all its limited liability company units from April 2015 to April 2020, for $3.0 million cash (the “Olympia Call Option”).

In April 2005, the other limited liability company member licensed certain trademarks related to the Mr. Olympia fitness events (collectively, the “Olympia Trademarks”) to Olympia for $3.0 million, payable by the Company over a 10-year period (the “License Fee”). Upon the exercise of the Olympia Put Option or the Olympia Call Option, the ownership of the Olympia Trademarks will be transferred to Olympia. 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.

There was no revenue or net income generated by Olympia during the three months ended June 30, 2014 and 2013.

Zinczenko-AMI Ventures, LLC

In February 2013, the Company entered into a limited liability company agreement to form a joint venture, Zinczenko-AMI 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 will be 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 consolidated financial statements during the three months ended June 30, 2014 and 2013.


15

Redeemable Financial Instrument

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

In June 2011, the Company entered into a limited liability company agreement to form a joint venture, Odyssey Magazine Publishing Group, LLC (“Odyssey”). Odyssey was initially capitalized by the Company and the other limited liability company member (the “Odyssey LLC Member”) with a total of $23.0 million in cash, and the Company and the Odyssey LLC Member each received an initial 50% ownership interest in Odyssey. In April 2012, pursuant to the exercise of a put option by the Odyssey LLC Member, the Company and the Odyssey LLC Member entered into a membership interest purchase agreement (the “Membership Interest Purchase Agreement”), which required the Company to purchase all of the Odyssey LLC Member’s interest in Odyssey.

In August 2012, Odyssey was converted from a limited liability company to a corporation (the “Conversion”) and its name was changed to Odyssey Magazine Publishing Group, Inc. (“Odyssey Corporation”). Concurrent with the Conversion, the membership interest held by each of the Company and the Odyssey LLC Member in Odyssey was canceled and converted into (i) for the Company, 1,000 shares of common stock and 731 shares of series A preferred stock in Odyssey Corporation, and (ii) for the Odyssey LLC Member, 269 shares of series A preferred stock in Odyssey Corporation. In connection with the Conversion, the Company and the Odyssey LLC Member entered into a preferred stock purchase agreement (the “Preferred Stock Purchase Agreement”), wherein the Company purchased the Odyssey LLC Member’s shares of series A preferred stock in Odyssey Corporation and the Membership Interest Purchase Agreement was terminated. The Preferred Stock Purchase Agreement was paid in full as of March 31, 2014.

Redeemable Noncontrolling Interests

There have been no changes to the equity attributable to the redeemable noncontrolling interests during the three months ended June 30, 2014 and 2013.

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. Financial information of the affiliates is typically reported with a one-month lag in the reporting period. The impact of the lag on the Company's investment and results of operations are not significant.

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 consolidated financial statements during the three months ended June 30, 2014 and 2013. The management fees receivable from Radar totaled $2.3 million and $2.2 million as of June 30, 2014 and March 31, 2014, respectively.

Media Brands, LLC

In August 2011, the Company entered into a limited liability company agreement to form Media Brands, LLC, a joint venture ("Media Brands"), to produce, market, sell and distribute various nutritional supplement product lines branded with certain of the Company's health and fitness brands. Media Brands was initially capitalized by the Company and the other limited liability company member (the "Media Brands Member") and the Company and the Media Brands Member each received an initial ownership interest of 50% in Media Brands. Though the Company owns 50% of Media Brands 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 Media Brands using the equity method. The operations of Media Brands commenced during the second quarter of fiscal 2014 and the operating results were insignificant to the Company's consolidated financial statements during the three months ended June 30, 2014 and 2013.


16

Odyssey/Unconventional Partners Entertainment, LLC

In March 2013, Odyssey Magazine Publishing Group, Inc. (“Odyssey Corporation”), a wholly-owned subsidiary of American Media, Inc., entered into a limited liability company agreement to form Odyssey/UnConventional Partners Entertainment, LLC, a joint venture (“OUPE”), to develop and produce a television show based on OK! magazine ("OK!TV"). OUPE was initially capitalized by Odyssey Corporation and the other limited liability company member (the "OUPE Member") and Odyssey Corporation and the OUPE Member received an initial ownership interest of approximately 50% in OUPE. In August 2013, Odyssey Corporation and the OUPE Member amended the limited liability company agreement to provide for an additional limited liability company member to receive a membership interest in OUPE (the "Additional OUPE Member") in exchange for its capital contribution to OUPE.

Odyssey Corporation owns 33.3% of OUPE and can exercise significant influence but 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 OUPE using the equity method. The operations of OUPE commenced during the second quarter of fiscal 2014 when the television show OK!TV was launched and the operating results were insignificant to the Company's consolidated financial statements during the three months ended June 30, 2014 and 2013.

Select Media Services, LLC

In September 2013, we contributed substantially all of the assets, comprising the Company's distribution and merchandising businesses operated by 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. In addition, in September 2013, DSI changed its name to In Store Services, Inc. The ownership interest and cash contribution in Select may be adjusted on August 31, 2014, if required, pursuant to a one-time retro-active adjustment, which would be effective as of September 1, 2013.

DSI can exercise significant influence but 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 operating results were approximately $0.3 million during the three months ended June 30, 2014 and are reflected in other income in the accompanying unaudited condensed consolidated statement of income (loss) and comprehensive income (loss).

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, 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 are engaged in discovery. Fact discovery was completed in May 2014 and expert discovery is scheduled to be completed in October 2014. Anderson has recently 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.

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 below) 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.


17

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. The bankruptcy court, however, entered a stay of discovery pending conclusion of fact discovery in the Anderson Action, which stay was recently lifted by the bankruptcy court, and discovery in the bankruptcy action has commenced. By order dated November 6, 2013, the Delaware bankruptcy court granted American Media, Inc. and four of its co-defendants relief from the automatic bankruptcy stay of litigation against Anderson News, L.L.C. so that they could file a counterclaim in the Anderson Action against Anderson News, L.L.C. alleging that Anderson News, L.L.C. had violated the antitrust laws by engaging in a conspiracy to fix prices that wholesalers would pay publishers for their magazines and seeking an unspecified amount of damages to be proved at trial.  Permission was obtained on January 23, 2014 from the District Court to file the counterclaim against Charles Anderson, Jr. and Anderson News, L.L.C.

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. 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 four reporting segments: Celebrity Brands, Women’s Active Lifestyle, 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, OK!, Globe, National Examiner, Soap Opera Digest and Country Weekly.

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

The Men’s Active Lifestyle segment includes 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.  Playboy is one of many publishers who have taken advantage of these additional services. 

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.

Segment information for the three months ended June 30, 2014 and 2013 and the assets employed as of June 30, 2014 and March 31, 2014 are as follows (in thousands):

18


 
Three Months Ended June 30,

2014
 
2013
Operating revenues
Celebrity Brands
$
46,847

 
$
51,388

Women's Active Lifestyle Group
14,917

 
16,760

Men's Active Lifestyle Group
15,153

 
16,104

Corporate and Other
1,338

 
6,140

Total operating revenues
$
78,255

 
$
90,392

Operating income (loss)
Celebrity Brands
$
17,893

 
$
18,458

Women's Active Lifestyle Group
1,533

 
3,014

Men's Active Lifestyle Group
3,693

 
5,287

Corporate and Other
(17,430
)
 
(10,193
)
Total operating income (loss)
$
5,689

 
$
16,566

Depreciation and amortization
Celebrity Brands
$
558

 
$
835

Women's Active Lifestyle Group
237

 
143

Men's Active Lifestyle Group
253

 
160

Corporate and Other
2,310

 
1,954

Total depreciation and amortization
$
3,358

 
$
3,092

Amortization of deferred rack costs
Celebrity Brands
$
1,360

 
$
1,600

Women's Active Lifestyle Group
80

 
74

Men's Active Lifestyle Group
18

 
10

Total amortization of deferred rack costs
$
1,458

 
$
1,684


Total Assets
June 30,
2014
 
March 31,
2014
Celebrity Brands
$
328,865

 
$
339,617

Women's Active Lifestyle Group
70,080

 
70,828

Men's Active Lifestyle Group
107,916

 
105,994

Corporate and Other (1)
64,942

 
56,201

Total assets
$
571,803

 
$
572,640


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

Geographic Data

The Company operates principally in two geographic areas, the United States of America and Europe (primarily the United Kingdom). There were no significant transfers between geographic areas during the three months ended June 30, 2014 and 2013. The following tables present revenue by geographic area for the three months ended June 30, 2014 and 2013 and the assets employed as of June 30, 2014 and March 31, 2014 (in thousands):


19

 
Three Months Ended June 30,

2014
 
2013
Operating revenues:
 
 
 
United States of America
$
75,224

 
$
87,236

Europe
3,031

 
3,156

Total operating revenues
$
78,255

 
$
90,392



June 30,
2014
 
March 31,
2014
Assets:
 
 
 
United States of America
$
563,018

 
$
564,214

Europe
8,785

 
8,426

Total assets
$
571,803

 
$
572,640


Note 13 - Capital Structure

The Company has authorized 15,000,000 million shares of stock, comprised of 1,000,000 shares of $0.0001 preferred stock and 14,000,000 shares of $0.0001 par value common stock. The Board of Directors can determine the rights, preferences and limitations of the preferred stock when issued. At June 30, 2014, there were no shares of preferred stock issued or outstanding and 10,000,000 shares of common stock issued and outstanding.

Stock Based Compensation

In December 2010, the Company adopted a new equity incentive plan (the “Equity Incentive Plan”), which provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, stock bonus awards and performance compensation awards to incentivize and retain directors, officers, employees, consultants and advisors. Under the terms of the Equity Incentive Plan, the Compensation Committee of the Board of Directors administers the Equity Incentive Plan and has the authority to determine the recipients to whom awards will be made, the amount of the awards, the terms of the vesting and other terms as applicable.

Equity Incentive Plan

In December 2010, the Compensation Committee was authorized to issue up to 1.1 million shares of the Company's common stock through the issuance of restricted stock awards. In July 2013, the Compensation Committee was authorized to issue up to an additional 500,000 shares of the Company's common stock through the issuance of restricted awards.

The shares of restricted stock will fully vest upon the earlier to occur of a change of control or an initial public offering, each as defined in the Equity Incentive Plan (a “Liquidity Event”). The holders of the restricted stock are entitled to receive dividends, if and when declared by the Company, and can exercise voting rights with respect to the common shares while the shares are restricted.

During the three months ended June 30, 2014, the Company granted 44,000 restricted shares to certain key officers, employees, consultants and directors, and 12,800 restricted shares were forfeited by certain former employees and directors upon termination of their employment with the Company or service to the Board of Directors. As of June 30, 2014, there was a total of 1,159,350 shares outstanding in the form of restricted stock awards. Subsequent to June 30, 2014, the Company granted 31,600 shares of restricted stock to certain officers, employees and consultants of the Company and 18,800 shares of restricted stock were forfeited by a member of the Board of Directors and employees upon their resignation.

In accordance with FASB ASC 718, Compensation - Stock Compensation, the Company will recognize stock based compensation expense of approximately $210,000 in August 2014 in connection with the Merger, which resulted in a change of control, which is defined as a Liquidity Event.

See Note 15, "Subsequent Events," for a discussion of the Merger Agreement with certain investors of the Company whereby the investors acquired 100% of the issued and outstanding shares of common stock of the Company.


20

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:




21

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2014
(in thousands)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
    ASSETS
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
10,582

 
$
4,478

 
$
—

 
$
15,060

Trade receivables, net
—

 
29,968

 
1,791

 
—

 
31,759

Inventories
—

 
8,007

 
1,106

 
—

 
9,113

Prepaid expenses and other current assets
—

 
23,225

 
650

 
(5,487
)
 
18,388

Total current assets
—

 
71,782

 
8,025

 
(5,487
)
 
74,320

PROPERTY AND EQUIPMENT, NET:
 
 
 
 
 
 
 
 
 
Leasehold improvements
—

 
3,798

 
—

 
—

 
3,798

Furniture, fixtures and equipment
—

 
41,078

 
854

 
—

 
41,932

Less – accumulated depreciation
—

 
(23,906
)
 
(707
)
 
—

 
(24,613
)
Total property and equipment, net
—

 
20,970

 
147

 
—

 
21,117

OTHER ASSETS:
 
 
 
 
 
 
 
 
 
Deferred debt costs, net
7,691

 
—

 
—

 
—

 
7,691

Deferred rack costs, net
—

 
5,265

 
—

 
—

 
5,265

Investments in affiliates
548,195

 
3,067

 
—

 
(547,965
)
 
3,297

Other long-term assets
—

 
3,587

 
—

 
—

 
3,587

Total other assets
555,886

 
11,919

 
—

 
(547,965
)
 
19,840

GOODWILL AND OTHER IDENTIFIED INTANGIBLE ASSETS:
 
 
 
 
 
 
Goodwill
—

 
182,388

 
4,510

 
—

 
186,898

Other identified intangibles, net
—

 
263,628

 
6,000

 
—

 
269,628

Total goodwill and other identified intangible assets
—

 
446,016

 
10,510

 
—

 
456,526

TOTAL ASSETS
$
555,886

 
$
550,687

 
$
18,682

 
$
(553,452
)
 
$
571,803

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

 
$
24,494

 
$
467

 
$
—

 
$
24,961

Accrued expenses and other liabilities
—

 
31,769

 
5,891

 
(5,397
)
 
32,263

Accrued interest
2,577

 
—

 
—

 
—

 
2,577

Deferred revenues
—

 
30,139

 
3,642

 
—

 
33,781

Total current liabilities
2,577

 
86,402

 
10,000

 
(5,397
)
 
93,582

NON-CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
Senior secured notes
474,286

 
—

 
—

 
—

 
474,286

Revolving credit facility
35,600

 
—

 
—

 
—

 
35,600

Other non-current liabilities
—

 
6,934

 
—

 
—

 
6,934

Deferred income taxes
—

 
102,367

 
46

 
(90
)
 
102,323

Due (from) to affiliates
187,345

 
(191,477
)
 
4,132

 
—

 
—

Total liabilities
699,808

 
4,226

 
14,178

 
(5,487
)
 
712,725

COMMITMENTS AND CONTINGENCIES
 
 
 
 
 
 
Redeemable noncontrolling interests
—

 
—

 
3,000

 
—

 
3,000

STOCKHOLDERS' (DEFICIT) EQUITY:
 
 
 
 
 
 
 
 
 
Total stockholders' (deficit) equity
(143,922
)
 
546,461

 
1,504

 
(547,965
)
 
(143,922
)
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
$
555,886

 
$
550,687

 
$
18,682

 
$
(553,452
)
 
$
571,803




22

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2014
(in thousands)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
    ASSETS
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
420

 
$
2,615

 
$
—

 
$
3,035

Trade receivables, net
—

 
42,724

 
1,912

 
—

 
44,636

Inventories
—

 
10,307

 
603

 
—

 
10,910

Prepaid expenses and other current assets
—

 
21,634

 
493

 
(5,487
)
 
16,640

Total current assets
—

 
75,085

 
5,623

 
(5,487
)
 
75,221

PROPERTY AND EQUIPMENT, NET:
 
 
 
 
 
 
 
 
 
Leasehold improvements
—

 
3,798

 
—

 
—

 
3,798

Furniture, fixtures and equipment
—

 
39,482

 
822

 
—

 
40,304

Less – accumulated depreciation
—

 
(22,461
)
 
(667
)
 
—

 
(23,128
)
Total property and equipment, net
—

 
20,819

 
155

 
—

 
20,974

OTHER ASSETS:
 
 
 
 
 
 
 
 
 
Deferred debt costs, net
8,125

 
—

 
—

 
—

 
8,125

Deferred rack costs, net
—

 
5,073

 
—

 
—

 
5,073

Other long-term assets
—

 
3,841

 
—

 
—

 
3,841

Investments in affiliates
546,696

 
2,248

 
—

 
(546,085
)
 
2,859

Total other assets
554,821

 
11,162

 
—

 
(546,085
)
 
19,898

GOODWILL AND OTHER IDENTIFIED INTANGIBLE ASSETS:
Goodwill
—

 
182,388

 
4,510

 
—

 
186,898

Other identified intangibles, net
—

 
263,649

 
6,000

 
—

 
269,649

Total goodwill and other identified intangible assets
—

 
446,037

 
10,510

 
—

 
456,547

TOTAL ASSETS
$
554,821

 
$
553,103

 
$
16,288

 
$
(551,572
)
 
$
572,640

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

 
$
19,589

 
$
526

 
$
—

 
$
20,115

Accrued expenses and other liabilities
—

 
25,177

 
5,863

 
(3,239
)
 
27,801

Accrued interest
15,897

 
—

 
—

 
—

 
15,897

Deferred revenues
—

 
31,754

 
1,564

 
—

 
33,318

Total current liabilities
15,897

 
76,520

 
7,953

 
(3,239
)
 
97,131

NON-CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
Senior secured notes
469,477

 
—

 
—

 
—

 
469,477

Revolving credit facility
29,000

 
—

 
—

 
—

 
29,000

Other non-current liabilities
—

 
7,172

 
—

 
—

 
7,172

Deferred income taxes
—

 
101,036

 
45

 
(2,248
)
 
98,833

Due (from) to affiliates
172,420

 
(176,552
)
 
4,132

 
—

 
—

Total liabilities
686,794

 
8,176

 
12,130

 
(5,487
)
 
701,613

COMMITMENTS AND CONTINGENCIES
 
 
 
 
 
 
Redeemable noncontrolling interests
—

 
—

 
3,000

 
—

 
3,000

STOCKHOLDERS' (DEFICIT) EQUITY:
 
 
 
 
 
 
 
 
 
Total stockholders' (deficit) equity
(131,973
)
 
544,927

 
1,158

 
(546,085
)
 
(131,973
)
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
$
554,821

 
$
553,103

 
$
16,288

 
$
(551,572
)
 
$
572,640




23

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED JUNE 30, 2014
(in thousands)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
OPERATING REVENUES:
 
 
 
 
 
 
 
 
 
Circulation
$
—

 
$
44,755

 
$
1,474

 
$
—

 
$
46,229

Advertising
—

 
28,610

 
1,506

 
—

 
30,116

Other
—

 
1,520

 
390

 
—

 
1,910

Total operating revenues
—

 
74,885

 
3,370

 
—

 
78,255

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
Editorial
—

 
8,817

 
601

 
—

 
9,418

Production
—

 
19,167

 
845

 
—

 
20,012

Distribution, circulation and other cost of sales
—

 
12,062

 
719

 
—

 
12,781

Selling, general and administrative
—

 
26,208

 
789

 
—

 
26,997

Depreciation and amortization
—

 
3,334

 
24

 
—

 
3,358

Total operating expenses
—

 
69,588

 
2,978

 
—

 
72,566

OPERATING INCOME
—

 
5,297

 
392

 
—

 
5,689

OTHER INCOME (EXPENSES):
 
 
 
 
 
 
 
 
 
Interest expense
(13,956
)
 
(17
)
 
(14
)
 
—

 
(13,987
)
Amortization of deferred debt costs
(434
)
 
—

 
—

 
—

 
(434
)
Other income
—

 
314

 
—

 
—

 
314

Total other (expenses) income, net
(14,390
)
 
297

 
(14
)
 
—

 
(14,107
)
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES, AND EQUITY IN EARNINGS OF CONSOLIDATED SUBSIDIARIES
(14,390
)
 
5,594

 
378

 
—

 
(8,418
)
PROVISION FOR INCOME TAXES
—

 
3,498

 
122

 
—

 
3,620

EQUITY IN EARNINGS OF CONSOLIDATED SUBSIDIARIES
2,422

 
361

 
—

 
(2,783
)
 
—

NET (LOSS) INCOME
(11,968
)
 
2,457

 
256

 
(2,783
)
 
(12,038
)
NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
—

 
—

 
70

 
—

 
70

NET (LOSS) INCOME ATTRIBUTABLE TO AMERICAN MEDIA, INC AND SUBSIDIARIES
$
(11,968
)
 
$
2,457

 
$
326

 
$
(2,783
)
 
$
(11,968
)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
NET (LOSS) INCOME
$
(11,968
)
 
$
2,457

 
$
256

 
$
(2,783
)
 
$
(12,038
)
Foreign currency translation adjustment
—

 
—

 
18

 
—

 
18

Comprehensive (loss) income
(11,968
)
 
2,457

 
274

 
(2,783
)
 
(12,020
)
Less: comprehensive loss attributable to noncontrolling interests
—

 
—

 
70

 
—

 
70

COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO AMERICAN MEDIA, INC. AND SUBSIDIARIES
$
(11,968
)
 
$
2,457

 
$
344

 
$
(2,783
)
 
$
(11,950
)



24

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED JUNE 30, 2013
(in thousands)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
OPERATING REVENUES:
 
 
 
 
 
 
 
 
 
Circulation
$
—

 
$
49,031

 
$
1,244

 
$
—

 
$
50,275

Advertising
—

 
31,120

 
1,591

 
—

 
32,711

Other
—

 
7,085

 
321

 
—

 
7,406

Total operating revenues
—

 
87,236

 
3,156

 
—

 
90,392

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
Editorial
—

 
9,086

 
350

 
—

 
9,436

Production
—

 
22,495

 
740

 
—

 
23,235

Distribution, circulation and other cost of sales
—

 
15,577

 
653

 
—

 
16,230

Selling, general and administrative
—

 
21,054

 
779

 
—

 
21,833

Depreciation and amortization
—

 
3,070

 
22

 
—

 
3,092

Total operating expenses
—

 
71,282

 
2,544

 
—

 
73,826

OPERATING (LOSS) INCOME
—

 
15,954

 
612

 
—

 
16,566

OTHER EXPENSES:
 
 
 
 
 
 
 
 
 
Interest expense
(14,728
)
 
51

 
—

 
—

 
(14,677
)
Amortization of deferred debt costs
(385
)
 
—

 
—

 
—

 
(385
)
Other expenses, net
—

 
(251
)
 
—

 
—

 
(251
)
Total other expense, net
(15,113
)
 
(200
)
 
—

 
—

 
(15,313
)
(LOSS) INCOME BEFORE (BENEFIT) PROVISION FOR INCOME TAXES, AND (LOSSES) EQUITY IN EARNINGS OF CONSOLIDATED SUBSIDIARIES
(15,113
)
 
15,754

 
612

 
—

 
1,253

(BENEFIT) PROVISION FOR INCOME TAXES
(5,612
)
 
5,953

 
147

 
—

 
488

(LOSSES) EQUITY IN EARNINGS OF CONSOLIDATED SUBSIDIARIES
10,266

 
465

 
—

 
(10,731
)
 
—

NET (LOSS) INCOME
765

 
10,266

 
465

 
(10,731
)
 
765

LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
—

 
—

 
—

 
—

 
—

NET (LOSS) INCOME ATTRIBUTABLE TO AMERICAN MEDIA, INC. AND SUBSIDIARIES
$
765

 
$
10,266

 
$
465

 
$
(10,731
)
 
$
765

 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
NET (LOSS) INCOME
$
765

 
$
10,266

 
$
465

 
$
(10,731
)
 
$
765

Foreign currency translation adjustment
—

 
—

 
43

 
—

 
43

Comprehensive (loss) income
765

 
10,266

 
508

 
(10,731
)
 
808

Less: comprehensive income attributable to noncontrolling interests
—

 
—

 
—

 
—

 
—

COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO AMERICAN MEDIA, INC. AND SUBSIDIARIES
$
765

 
$
10,266

 
$
508

 
$
(10,731
)
 
$
808





25

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 2014
(in thousands)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
Cash Flows from Operating Activities:
 
 
 
 
 
 
 
 
 
   Net cash (used in) provided by operating activities
$
(21,525
)
 
$
28,598

 
$
1,863

 


 
$
8,936

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

 
(2,541
)
 
—

 
—

 
(2,541
)
Purchase of intangible assets
—

 
(1,077
)
 
—

 
—

 
(1,077
)
Other
—

 
5

 
—

 
—

 
5

   Net cash used in investing activities
—

 
(3,613
)
 
—

 
—

 
(3,613
)
Cash Flows from Financing Activities:
Proceeds from revolving credit facility
28,300

 
—

 
—

 
—

 
28,300

Repayment to revolving credit facility
(21,700
)
 
—

 
—

 
—

 
(21,700
)
Due to (from) affiliates
14,925

 
(14,925
)
 
—

 
—

 
—

   Net cash provided by (used in) financing activities
21,525

 
(14,925
)
 
—

 
—

 
6,600

Effect of exchange rate changes on cash
—

 
102

 
—

 
—

 
102

Net increase in cash and cash equivalents
—

 
10,162

 
1,863

 
—

 
12,025

Cash and cash equivalents, beginning of period
—

 
420

 
2,615

 
—

 
3,035

Cash and cash equivalents, end of period
$
—

 
$
10,582

 
$
4,478

 
$
—

 
$
15,060


SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 2013
(in thousands)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
Cash Flows from Operating Activities:
 
 
 
 
 
 
 
 
 
   Net cash (used in) provided by operating activities
$
(27,636
)
 
$
17,672

 
$
1,272

 
$
(500
)
 
$
(9,192
)
Cash Flows from Investing Activities:
 
 
 
 
 
 
 
 
 
Purchases of property and equipment
—

 
(3,331
)
 
—

 
—

 
(3,331
)
Purchase of intangible assets
—

 
(1,013
)
 
—

 
—

 
(1,013
)
Investments in affiliates
—

 
(250
)
 
—

 
—

 
(250
)
Other
—

 
1

 
(300
)
 
—

 
(299
)
   Net cash used in investing activities
—

 
(4,593
)
 
(300
)
 
—

 
(4,893
)
Cash Flows from Financing Activities:
 
 
 
 
 
 
 
 
 
Proceeds from revolving credit facility
34,600

 
—

 
—

 
—

 
34,600

Repayments to revolving credit facility
(18,000
)
 
—

 
—

 
—

 
(18,000
)
Payments for redemption of Odyssey preferred stock
(1,022
)
 
—

 
—

 
—

 
(1,022
)
Due to (from) affiliates
12,058

 
(12,058
)
 
—

 
—

 
—

Dividends paid to parent
—

 
—

 
(500
)
 
500

 
—

   Net cash provided by (used in) financing activities
27,636

 
(12,058
)
 
(500
)
 
500

 
15,578

Effect of exchange rate changes on cash
—

 
(33
)
 
—

 
—

 
(33
)
Net increase in cash and cash equivalents
—

 
988

 
472

 
—

 
1,460

Cash and cash equivalents, beginning of period
—

 
683

 
1,692

 
—

 
2,375

Cash and cash equivalents, end of period
$
—

 
$
1,671

 
$
2,164

 
$
—

 
$
3,835



26

Note 15 - Subsequent Events

Merger and Related Transactions

As discussed in Note 1, "Nature of the Business - Liquidity," Note 5, "Revolving Credit Facility," Note 6, "Senior Secured Notes" and Note 13, "Capital Structure," in August 2014, pursuant to the Merger Agreement, certain Investors of the Company acquired 100% of the issued and outstanding shares of common stock of the Company through the Merger, with the Company surviving the Merger. In connection with the Merger, the Company entered into the Note Purchase Agreement with the Investors pursuant to which the Company issued additional Second Lien PIK Notes to the Investors at par plus accrued interest for a total purchase price equal to $12.5 million.

Similarly, prior to the execution of the Merger Agreement and the Note Purchase Agreement, the Company entered into various supplemental indentures to, among other things, permit the transactions contemplated by the Merger Agreement and the Note Purchase Agreement and eliminate the Company's obligation to repurchase approximately $12.7 million of First Lien Notes using the cash interest savings from the semi-annual interest periods ending on June 15, 2014 and December 15, 2014.

In addition, in August 2014, the Company entered into an amendment to the revolving credit facility to, among other things, (i) amend the definition of "Change of Control," (ii) permit the issuance of additional senior secured notes pursuant to the Note Purchase Agreement and (iii) amend the first lien leverage ratio to be equal to or less than 5.25 to 1.00 from April 1, 2014 through and including the quarter ended June 30, 2015. From July 1, 2015 through December 31, 2015, the first lien leverage ratio must be equal to or less than 4.50 to 1.00, the ratio in effect prior to the amendment.

Merger Agreement

On August 15, 2014, the Merger was effective and an affiliate of the Investors merged with and into the Company, with the Company continuing as the surviving entity. Pursuant to the terms and conditions of the Merger Agreement, the Investors acquired the Company for $2.0 million in cash and approximately $513.0 million of outstanding indebtedness remains in place.

Note Purchase Agreement

In connection with the Merger Agreement, on August 15, 2014, the Company and certain of its subsidiaries (the "Guarantors") entered into the Note Purchase Agreement with the Investors.

The Note Purchase Agreement provides, subject to certain conditions, for the Company to issue and sell to the Investors, and the Investors to purchase from the Company, an aggregate principal amount of additional Second Lien PIK Notes (the “Additional Notes”) to be issued under the indenture dated as of October 2, 2013 (as such agreement may be amended, restated or supplemented on the date hereof, the “Second Lien PIK Notes Indenture”), among the Company, the Guarantors and Wilmington Trust, National Association, as trustee and collateral agent (the “Trustee”), such that the aggregate principal amount of the Additional Notes purchased plus the accrued interest thereon from the most recent date to which interest has been paid on the then outstanding Second Lien PIK Notes to the closing date (the “Closing Date”) for the Merger will equal $12.5 million. The Investors will pay $1,000 per $1,000 of principal amount of the Additional Notes to be purchased by the Investors on the Closing Date plus accrued interest thereon from the most recent date to which interest has been paid on the then outstanding Second Lien PIK Notes, for an aggregate purchase price of $12.5 million. After giving effect to the issuance of the Additional Notes on August 15, 2014, approximately $113.3 million aggregate principal amount of Second Lien PIK Notes is outstanding.

The Additional Notes were issued under the Second Lien PIK Notes Indenture and will be treated as a single class under the Second Lien PIK Notes Indenture with, and was assigned the same CUSIP number as, the outstanding Second Lien PIK Notes. The Additional Notes were issued through a private offering exempt from the registration requirements of the Securities Act of 1933, as amended.


27

Supplemental Indentures

On August 15, 2014, the Company received consents from the holders of (a) $218.2 million principal amount of the outstanding First Lien Notes to amend the indenture dated as of December 1, 2010 (as such agreement may be amended, restated or supplemented on the date hereof, the “First Lien Notes Indenture”), among the Company, the Guarantors and the Trustee, (b) $7.8 million principal amount of the outstanding Second Lien Notes to amend the indenture dated as of December 22, 2010 (as such agreement may be amended, restated or supplemented on the date hereof, the “Second Lien Notes Indenture” and, together with the First Lien Notes Indenture and the Second Lien PIK Notes Indenture, the “Indentures”), among the Company, the Guarantors and the Trustee and (c) $101.0 million principal amount of the outstanding Second Lien PIK Notes to amend the Second Lien PIK Notes Indenture, which in each case represented the requisite consents from holders of at least a majority of the aggregate principal amount of the applicable series of notes then outstanding.

As a result of receiving the requisite consents, on August 15, 2014, the Company and the Trustee entered into (a) the Fourth Supplemental Indenture (the “First Lien Notes Supplemental Indenture”) to the First Lien Notes Indenture, (b) the Third Supplemental Indenture (the “Second Lien Notes Supplemental Indenture”) to the Second Lien Notes Indenture and (c) the First Supplemental Indenture (the “Second Lien PIK Notes Supplemental Indenture” and, together with the First Lien Notes Supplemental Indenture and the Second Lien Notes Supplemental Indenture, the “Supplemental Indentures”) to the Second Lien PIK Notes Indenture.

The Supplemental Indentures amend the Indentures to (a) permit the transactions contemplated by the Merger Agreement and the Note Purchase Agreement, including amending the definition of “Change of Control” and permitting the issuance of the Additional Notes pursuant to the Second Lien PIK Notes Indenture and (b) in the case of the Second Lien PIK Notes Supplemental Indenture only, eliminate the Company’s obligation to apply Cash Interest Savings (as defined in the Second Lien PIK Notes Indenture) to repurchase outstanding First Lien Notes for the semi-annual interest periods ending on June 15, 2014 and December 15, 2014 (collectively, the “Amendments”). Pursuant to the terms of the Supplemental Indentures, the Supplemental Indentures became effective, and the Amendments became operative, immediately upon execution of the Supplemental Indentures.

Credit Agreement Amendment

On August 8, 2014, 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 Agreement, dated as of December 22, 2010 (as amended, restated, modified or supplemented from time to time, the “Credit Agreement”), entered into Amendment No. 3 (the “Credit Agreement Amendment”) to the Credit Agreement with lenders (the “Consenting Lenders”) constituting the Required Lenders (as defined in the Credit Agreement).

Pursuant to the Credit Agreement Amendment and subject to the Credit Parties’ (as defined in the Credit Agreement) compliance with the requirements set forth therein, the Consenting Lenders have agreed to (i) waive until the earlier of (x) August 15, 2014 and (y) immediately prior to the consummation of the Merger, any potential Default or Event of Default (each, as defined in the Credit Agreement) arising from the failure to furnish to the Administrative Agent (A) the financial statements, reports and other documents as required under Section 5.01(a) of the Credit Agreement with respect to the fiscal year of the Company ended March 31, 2014 and (B) the related deliverables required under Sections 5.01(c) and 5.03(b) of the Credit Agreement, (ii) permit the transactions contemplated by the Merger Agreement and the Note Purchase Agreement, including amending the definition of “Change of Control” and permitting the issuance of the Additional Notes pursuant to the Second Lien PIK Notes Indenture, (iii) consent to the sale of certain assets of the Loan Parties (as defined in the Credit Agreement), (iv) restrict any payment or distribution in respect of the First Lien Notes on or prior to June 15, 2015, subject to certain exceptions, including the payment of regularly scheduled interest and any mandatory prepayments and mandatory offers to purchase under the First Lien Notes, and (v) amend the maximum first lien leverage ratio covenant.

In August 2014, the Company received a waiver under the 2010 Revolving Credit Facility to provide additional time to file the Quarterly Report with the SEC and to make it available to the revolving credit facility lenders.

Exchange Agreement Amendment

On August 15, 2014, the Company and the Guarantors entered into an Amendment (the “Exchange Agreement Amendment”) to the Exchange Agreement, dated as of September 27, 2013, among the Company, the Guarantors and the Investors.

The Exchange Agreement Amendment provides that the Company is not required to apply Cash Interest Savings (as defined in the Second Lien PIK Notes Indenture) to repurchase outstanding First Lien Notes for the semi-annual interest periods ending on June 15, 2014 and December 15, 2014.


28

Stock Based Compensation
As discussed in Note 13, "Capital Structure," subsequent to June 30, 2014, the Company granted 31,600 shares of restricted stock to certain officers, employees and consultants of the Company and 18,800 shares of restricted stock were forfeited by a member of the Board of Directors and employees upon their resignation.

In accordance with FASB ASC 718, Compensation - Stock Compensation, the Company will recognize stock based compensation expense of approximately $210,000 in August 2014 in connection with the Merger, which resulted in a change of control, which is defined as a Liquidity Event.

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

ORGANIZATION OF INFORMATION

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) was prepared to provide the reader with a view and perspective of our business through the eyes of management and should be read in conjunction with our 2014 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 contains forward-looking statements about our business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those discussed in "Cautionary Statements Regarding Forward-Looking Information" and "Risk Factors" included in this Quarterly Report and the 2014 Form 10-K. Our MD&A is presented in the following sections:

•
Executive Summary

•
Current Developments and Management Action Plans

•
Results of Operations

•
Operating Segments

•
Liquidity and Capital Resources

•
Contractual Obligations and Other Commitments

•
Off-Balance Sheet Financing

•
Application of Critical Accounting Estimates

•
Recently Adopted and Recently Issued Accounting Pronouncements

EXECUTIVE SUMMARY

We are the largest publisher of celebrity and health and active lifestyle magazines in the United States and operate a diversified portfolio of 14 publications. Our celebrity titles together are number one in market share in newsstand circulation in the celebrity category and, on-line, are the fastest growing brands in the category. Our health and active lifestyle titles together have the highest market share of national magazine advertising pages in their competitive set in the United States. Total circulation of our print publications with a frequency of six or more times per year were approximately 6.0 million copies per issue during the three months ended June 30, 2014.

Our well-known publications span three primary operating segments: Celebrity, Women's Active Lifestyle and Men's Active Lifestyle. Within our Celebrity segment, our portfolio of brands includes: National Enquirer, Star, OK!, Globe, National Examiner, Soap Opera Digest and Country Weekly. Within our Women's Active Lifestyle segment, our portfolio of brands includes: Shape, Fit Pregnancy and Natural Health. Within our Men's Active Lifestyle segment, our portfolio of brands include: Men's Fitness, Muscle & Fitness, Muscle & Fitness Hers and Flex.


29

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 brands go beyond the printed page. We engage an audience of men and women every month through not only books and magazines, but also social media, television, and on all digital platforms, from phones and tablets to laptops and desktops. We are embarking on a transformation from a leading media company to a lifestyle brand that informs and entertains while also selling apparel, nutritional products, and recreational activities.

Our largest revenue stream comes from single copy newsstand sales. Our print circulation revenue is 59% of our operating revenue for the three months ended June 30, 2014, of which 77% was generated by single copy sales and the remaining 23% was generated by subscriptions. Single copy newsstand units are sold through national distributors, wholesalers and retailers, and subscription copies are mailed to subscribers and sold as digital copies. As of June 30, 2014, our digital subscriptions represent 24% of our 4.5 million paid subscriptions, the highest percentage among our competitive set. Our digital subscription revenue represented 1% of our total operating revenues for the three months ended June 30, 2014.

Our second largest revenue stream comes from multi-platform advertising. Our print advertising revenue, generated primarily by national advertisers, represented 34% of our total operating revenues and our digital advertising revenue represented 12% of our total advertising revenue for the three months ended June 30, 2014. Our digital advertising revenue represented 4% of our total operating revenues for the three months ended June 30, 2014. Advertising revenue is typically highest in the fourth quarter of our fiscal year due to seasonality.

Our primary operating expenses consist of production, distribution, circulation, editorial and selling, general and administrative. We incur most of our operating expenses during the production of our printed magazines, which includes costs for printing and paper. Distribution and circulation expenses primarily consist of postage and other costs associated with fulfilling subscriptions and newsstand transportation. Editorial expenses represent costs associated with manuscripts, photographs and related salaries.

Paper is the principal raw material utilized in our publications. We purchase paper directly from suppliers and ship it to third-party printing companies. 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 planned, as well as future, publishing requirements. We have long-term printing contracts with three major third-party printing companies. Our production expenses, including paper and printing costs, accounted for approximately 28% and 31% of our operating expenses for the three months ended June 30, 2014 and 2013, respectively.

Sales and marketing of the magazines to retailers is handled by third-party wholesalers through multi-year arrangements. During the three months ended June 30, 2014 and 2013, approximately 47% of our circulation revenue was derived from two of these third-party wholesalers. Billing, collection and distribution services for retail sales of the magazines are handled by a national distributor. In May 2014, our second-largest wholesaler notified us that they were ceasing substantially all distribution operations in the near term and filed for bankruptcy in June 2014. For information regarding the future impact on the Company, see "Current Developments and Management Action Plans - Current Developments - Other Developments" below.

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

Our fiscal year ends on March 31, 2015 and may be referred to herein as fiscal 2015.


30

CURRENT DEVELOPMENTS AND MANAGEMENT ACTION PLANS

Current Developments

Digital Initiatives

Our digital team comprised of senior executives hired from companies such as Fox Mobile, Microsoft and Google continue to improve on our digital investment strategy. Our fully integrated print and digital sales team is comprised of more than 90 sales executives, 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 three months ended June 30, 2014, our digital advertising revenue increased 18%, compared to the three months ended June 30, 2013.

We continue to expand the availability of our print content on digital platforms. In May 2014, we launched the AMI InPrint app, a new mobile app for the iPhone and iPad which provides readers with unlimited access to all our publications and lifestyle books for an introductory price of $0.99 per month. The InPrint app was launched for the Android operating system in July 2014.

We have launched digital editions for all our brands on the following platforms: Apple, Google newsstands, Zinio, Amazon Kindle, and Barnes & Noble's Nook. We are also launching single-subject, single-sponsored "digi-mags" for both Apple and Android operating systems, and we are currently syndicating Shape content on Yahoo! Shine, AOL, Huffington Post, StyleList and Kitchen Daily.

Print Initiatives

The relaunch of Men's Fitness continues to attract new luxury goods advertisers. During the three months ended June 30, 2014, total advertising revenues increased 16% for Men's Fitness as compared to the prior period. From January 1, 2014 through June 30, 2014, there were 41 new lifestyle advertisers, such as Tommy Hilfiger, Macy's and Citizen Timepieces, which had not previously invested in Men's Fitness.

The success of Men's Fitness allows us to reposition Muscle & Fitness in the marketplace to fill the gap in fitness and training content that was left when Men's Fitness expanded its active lifestyle coverage. In addition to its current readers, the editorial for Muscle & Fitness will now also target 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, Muscle & Fitness can attract a wider audience at the newsstand. In addition, we can capture advertising targeted at the fitness realm, but not limited to weight training, such as Nike and Reebok, as well as luxury good advertisers similar to the mix of advertisers in Men's Fitness.

The relaunch of Shape continues to attract new advertising clients. From January 1, 2014 to June 30, 2014, there were 36 new advertisers which had not previously invested in Shape. It is the category leader in print ad pages with a 31% share of market within its competitive set against Self, Fitness and Women's Health. In addition, Shape.com, is number one in total number of page views during fiscal 2015 against this competitive set.

Branded Products

Last year, we became a strategic partner to Microsoft and produced Shape, Men's Fitness and Muscle & Fitness branded exercise and workout videos for Microsoft to incorporate into their Bing Health and Fitness application. In July 2014, we entered into another contract with Microsoft to create and provide additional exercise and workout videos to be distributed through Microsoft offerings.

We are continuing to promote Shape branded products, and launched Shape nutritional products which are available in CVS, Rite Aid, Drugstore.com and Target.  We plan to expand the Shape nutritional products to be on sale in Walmart, Walgreens and QVC in calendar year 2015. 

Pursuant to our long-term agreement with David Zinczenko and his company, Galvanized Media, they continue to work exclusively on Men's Fitness and Muscle & Fitness and the branded book division for AMI utilizing the Men's Fitness, Shape and Natural Health brands. With Mr. Zinczenko's assistance we have redesigned and relaunched Men's Fitness and Muscle & Fitness and published several books. The Men's Fitness branded book The 101 Greatest Workouts of all Time, went on sale in January 2014. The Shape branded books The Bikini Body Diet and Clean Green Drinks: 100+ Cleansing Recipes to Renew & Restore Your Body and Mind went on sale in September 2013 and April 2014, respectively. The Natural Health branded book The Doctor's Book of Natural Health Remedies went on sale in April 2014. Mr. Zinczenko spent more than 20 years at Rodale, where he served as editor-in-chief of Men's Health and general manager of Women's Health and Rodale Books.

31


In September 2013, together with our strategic partners, REELZ Channel, owned by Hubbard Broadcasting, and UnConventional Studios, LLC, we launched OK!TV, a television show based on OK! magazine, which was syndicated in approximately 80% of the United States. In addition to the syndication market, the REELZ channel airs the show the day after it runs in syndication, to approximately 70 million households. The OK!TV show has been renewed for a second season beginning in September 2015.

Other Developments

In May 2014, we were notified by our national distributor (the “Distributor”) for our publications in the U.S. and Canada that, due to non-payment of their receivables from our second-largest wholesaler (the “Wholesaler”), the Distributor will cease shipping our publications to the Wholesaler effective immediately. Further, in May 2014, the Wholesaler notified us that they were ceasing substantially all distribution operations in the near term and filed for bankruptcy in June 2014. On our behalf, the Distributor utilizes wholesalers to sell our publications to retailers for ultimate sale to consumers. Our net sales to this Wholesaler were approximately 10% of our total operating revenues during the three months ended June 30, 2014.

Subject to the terms of our agreement with the Distributor, our exposure for bad debt related to the Wholesaler is currently expected to be approximately $5.0 million to $7.0 million, of which $3.9 million is included in our operating expenses during the three months ended June 30, 2014. The total provision for bad debt related to the Wholesaler is $5.8 million at June 30, 2014.

Our Distributor is working with the two remaining wholesalers and retailers to transition the newsstand circulation to them. We estimate that it will take approximately twelve to twenty four weeks for the transition to be completed. Our single copy newsstand sales could be reduced by approximately $10.0 million to $20.0 million during this transition period, depending on the length of time required to complete the transition to the remaining two wholesalers. In addition, after completing the transition, our revenues could 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.

In August 2014, pursuant to the agreement and plan of merger (the “Merger Agreement”) with certain investors of AMI (collectively, the “Investors”), the Investors acquired 100% of the issued and outstanding shares of common stock of AMI through the merger (the “Merger”) whereby a subsidiary of an entity owned by funds managed and/or controlled by the Investors was merged with and into AMI, with AMI surviving the Merger. In connection with the Merger, AMI entered into a Note Purchase Agreement (the “Note Purchase Agreement”) with the Investors pursuant to which AMI issued additional senior secured notes to the Investors at par plus accrued interest for a total purchase price equal to $12.5 million.
Similarly, prior to the execution of the Merger Agreement and the Note Purchase Agreement, AMI entered into various supplemental indentures to, among other things, permit the transactions contemplated by the Merger Agreement and the Note Purchase Agreement and eliminate AMI's obligation to repurchase approximately $12.7 million of senior secured notes, during fiscal 2015, pursuant to the terms of the indenture of certain senior secured notes.

In addition, in August 2014, AMI entered into an amendment to the revolving credit facility to, among other things, (i) amend the definition of "Change of Control," (ii) permit the issuance of additional senior secured notes pursuant to the Note Purchase Agreement and (iii) amend the first lien leverage ratio to be equal to or less than 5.25 to 1.00 from April 1, 2014 through and including the quarter ended June 30, 2015. From July 1, 2015 through December 31, 2015, the first lien leverage ratio must be equal to or less than 4.50 to 1.00, the ratio in effect prior to the amendment.

In August 2014, we received a waiver under our revolving credit facility providing us additional time to file this Quarterly Report for the quarter ended June 30, 2014 with the SEC and make it available to the revolving credit facility lenders.

See "Liquidity and Capital Resources - Merger and Related Transactions" within this Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," for a further discussion regarding our debt agreements.


32

Management Action Plans for Cost Savings

During fiscal 2014, we developed and implemented management action plans that resulted in $5.1 million of cost savings in fiscal 2014 (the "2014 Management Action Plans"). The expense improvements were primarily in print order efficiency plans and editorial expense reductions. We realized the benefits from the 2014 Management Actions Plan in fiscal 2014 and we will continue to receive certain of these cost savings throughout fiscal 2015 and beyond.

Reference to Management Action Plans refers to the 2014 Management Action Plans.

RESULTS OF OPERATIONS

The following table summarizes our operating results on a consolidated basis:
 
Three Months Ended June 30,
 
 
(in thousands)
2014
 
2013
 
% Change
Operating revenues:
 
 
 
 
 
Circulation
$
46,229

 
$
50,275

 
(8)%
Advertising
30,116

 
32,711

 
(8)%
Other
1,910

 
7,406

 
(74)%
Total operating revenues
$
78,255

 
$
90,392

 
(13)%
Operating expenses
72,566

 
73,826

 
(2)%
Operating income
5,689

 
16,566

 
(66)%
Other expense, net
(14,107
)
 
(15,313
)
 
(8)%
Loss (income) before income taxes
(8,418
)
 
1,253

 
*
Income tax provision
3,620

 
488

 
*
Net loss (income)
(12,038
)
 
765

 
*
Less: net loss attributable to the noncontrolling interest
70

 
—

 
*
Net loss attributable to American Media, Inc. and subsidiaries
$
(11,968
)
 
$
765

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

Operating Revenues

For the three months ended June 30, 2014, total operating revenues decreased 13%, compared to the three months ended June 30, 2013, due to lower circulation revenue ($4.0 million) and lower print advertising revenue ($3.1 million). This was partially offset by higher digital advertising revenue ($0.5 million). Circulation revenue has declined due to the industry-wide disruption in our wholesaler channels due to the shutdown and bankruptcy of one of our major wholesalers coupled with the reduction of the celebrity magazine market. Print advertising revenue was negatively impacted by the decline in consumer advertising coupled with the shift in dollars from print to digital as evidenced by our lift in digital advertising.

The following table summarizes our operating revenues, by type, as a percentage of total operating revenues:
 
Three Months Ended June 30,
 
2014
 
2013
Circulation
59
%
 
56
%
Advertising
38
%
 
36
%
Other
3
%
 
8
%
Total
100
%
 
100
%


33

Circulation Revenue

Our circulation revenue represented 59% and 56% of our operating revenues during the three months ended June 30, 2014 and 2013, respectively. Our circulation revenue is comprised of the following components:

 
Three Months Ended June 30,
 
2014
 
2013
Single Copy
77
%
 
78
%
Subscription
23
%
 
22
%
Total
100
%
 
100
%

Digital subscription revenue represented 2% of our circulation revenue during the three months ended June 30, 2014 and 2013.

Circulation revenue declined $4.0 million during the three months ended June 30, 2014, compared to the prior period due to the industry-wide disruption in our wholesaler channels due to the shutdown and bankruptcy of one of our major wholesalers coupled with the reduction of the celebrity magazine market and the continued softness in the U.S. economy. $1.0 million of the decrease in circulation revenue was attributable to the discontinuance and reduction of special interest publications, with no comparable revenue in the current year period.

Advertising Revenue

Our advertising revenue represented 38% and 36% of our operating revenues during the three months ended June 30, 2014 and 2013, respectively. Our advertising revenue is generated from the following components:

 
Three Months Ended June 30,
 
2014
 
2013
Print
88
%
 
91
%
Digital
12
%
 
9
%
Total
100
%
 
100
%

Print advertising revenue declined $3.1 million or 11%, during the three months ended June 30, 2014, compared to the prior period due to the 11% decline in the consumer advertising market coupled with the shift in advertising dollars from print to digital as evidenced by the $0.5 million or 18%, increase in digital advertising.

Other Revenue

Our other revenue represented 3% and 8% of our operating revenues during the three months ended June 30, 2014 and 2013, respectively. During the three months ended June 30, 2014, other revenue decreased $5.5 million due to the divestiture of our distribution and merchandising businesses in September 2013 ($3.3 million) and the "one-time" custom video projects for Microsoft ($1.8 million), included in the prior year period with no comparable revenue in the current year period.


34

Operating Expenses

Operating expenses during the three months ended June 30, 2014 and 2013 were as follows:

 
Three Months Ended June 30,
 
 
(in thousands)
2014
 
2013
 
% Change
Operating expenses:
 
 
 
 
 
Editorial
$
9,418

 
$
9,436

 
—
 %
Production
20,012

 
23,235

 
(14
)%
Distribution, circulation and other cost of sales
12,781

 
16,230

 
(21
)%
Total production related costs
42,211

 
48,901

 
(14
)%
Selling, general and administrative
26,997

 
21,833

 
24
 %
Depreciation and amortization
3,358

 
3,092

 
9
 %
Total operating expenses
$
72,566

 
$
73,826

 
(2
)%

Total Production Related Costs

Production related costs decreased $6.7 million during three months ended June 30, 2014 as compared to the prior period primarily due to reduced book size and newsstand print orders due to our Management Action Plans.

Selling, General and Administrative

Selling, general and administrative costs increased $5.2 million during the three months ended June 30, 2014 as compared to the prior period primarily due to the wholesaler bad debt ($4.1 million), accounting and legal fees ($0.6 million) and promotion expenses ($0.5 million). These increases have been partially offset by the divestiture of our distribution and merchandising businesses in September 2013 ($0.6 million).

Depreciation and Amortization

Depreciation and amortization expenses, which are non-cash, increased $0.3 million during the three months ended June 30, 2014, as compared to the prior period due to the increases in property and equipment and intangible assets.

Non-Operating Items

Interest Expense

Interest expense decreased $0.7 million during the three months ended June 30, 2014, as compared to the prior period due to the reduction in our cash interest expense payments under the second lien notes, as a result of the exchange of second lien PIK notes for second lien notes, pursuant to the exchange agreement.

Amortization of Deferred Debt Costs

Amortization of deferred debt costs increased during the three months ended June 30, 2014, as compared to the prior period due to the acceleration of amortization associated with the redemption of approximately $2.3 million aggregate principal amount of first lien notes in February 2014.

Other Income (Expenses), net

Other income increased $0.6 million during the three months ended June 30, 2014, as compared to the prior period primarily due to our equity in earnings and investments in certain unconsolidated joint ventures.


35

Income Taxes

We recorded an income tax provision of $3.6 million during the three months ended June 30, 2014. This expense is due to a domestic provision of $3.5 million and a foreign tax provision of $0.1 million due to the amortization, for tax purposes, of certain indefinite-lived intangible assets.

Net Loss Attributable to American Media, Inc.

The $12.0 million of net loss attributable to American Media, Inc. for the three months ended June 30, 2014 represents a $12.7 million increase from the comparable prior year period. This increase is primarily attributable to the $10.9 million decrease in operating income and the $3.1 million increase in provision for income taxes, partially offset by the $0.7 million decrease in interest expense and the $0.6 million increase in other income.

OPERATING SEGMENTS

Our operating segments consist of: Celebrity Brands, Women’s Active Lifestyle, Men’s Active Lifestyle and Corporate and Other. This reporting structure is organized according to the markets each segment serves and allows management to focus its efforts on providing the best content to a wide range of consumers. Our operating segments consist of the following brands in print and digital:

Celebrity Brands Segment

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

•
Star, a weekly, celebrity-focused, news-based, glossy magazine covering movie, television, reality series 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 only available 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;

•
Soap Opera Digest, a weekly magazine that provides behind-the-scenes scoop 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; and

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

Women’s Active Lifestyle Segment

•
Shape, which provides information on the cutting edge of fitness, nutrition, health, lifestyle and other inspirational topics to help women lead healthier lives and offers extensive beauty, celebrity and fashion coverage; Shape.com, which mirrors the magazine’s editorial point of view, features daily coverage for today’s women in the blog “Shape Your Life” and videos such as “The Victoria’s Secret Core Workout,” Shape cover shoots with celebrities, and exercise tips from celebrity personal trainers;

•
Fit Pregnancy, which delivers information on health, maternity fashion, food, parenting and fitness to women during pregnancy and the postpartum period; FitPregnancy.com features the content of the magazine and also contains news and updates to guide expectant mothers through each stage of pregnancy; and
  

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•
Natural Health, which offers readers practical information to benefit from the latest advancements in the fields of health, food, beauty, pets, exercise and advice to improve fitness and the environment; NaturalHealthMag.com is a companion site to the magazine that features health blogs, recipe finders, and various videos that focus on the latest news and updates in the wellness category.

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, and hosts an on-line store for users to buy the products they see on the website;

•
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 the active woman who wants 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;

•
Muscle & Fitness e-commerce, a store selling pre- and post-workout sports nutritional supplements supported by Muscle & Fitness magazine;

•
Mr. Olympia, a four-day event held annually in September in Las Vegas attracting over 50,000 fans of bodybuilding and fitness experts from around the world; includes a two-day health and fitness expo 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, Italy, Germany, Holland and Australia. Each market edition is in a local language with local content and has its own website.

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. The video content services we provide to Microsoft and the services provided by our former distribution services group to publishing and non-publishing clients, such as placement and monitoring of supermarket racks, marketing and merchandising, are also included in this segment.

Corporate overhead expenses are not allocated to other segments are and included in this segment. This includes corporate executives, production, circulation, information technology, accounting, legal, human resources, business development and administrative department costs.

Financial Information Regarding Our Operating Segments

The tables below disclose revenue and operating income (loss) for our reportable 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. 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 financial statements in this Quarterly Report, specifically Note 2, "Summary of Significant Accounting Policies."


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The following table summarizes our total operating revenues by segment:
 
Three Months Ended June 30,
 
 
(in thousands)
2014
 
2013
 
% Change
Segment operating revenues:
 
 
 
 
 
Celebrity Brands
$
46,847

 
$
51,388

 
(9
)%
Women's Active Lifestyle
14,917

 
16,760

 
(11
)%
Men's Active Lifestyle
15,153

 
16,104

 
(6
)%
Corporate and Other
1,338

 
6,140

 
(78
)%
Total operating revenues
$
78,255

 
$
90,392

 
(13
)%

Total operating revenues decreased $12.1 million, or 13%, during the three months ended June 30, 2014, compared to the prior period primarily due to the 20% decline in the celebrity newsstand market and the industry-wide disruption in our wholesaler channels coupled with the 11% decline in the consumer advertising market. This has been partially offset by an 18% increase in digital advertising revenue. In addition, during the three months ended June 30, 2014, other revenue decreased $5.5 million due to the divestiture of our distribution and merchandising services in September 2013 ($3.3 million) and the "one-time" custom video projects for Microsoft ($1.8 million). The following table summarizes the percentage of segment operating revenues:
 
Three Months Ended June 30,
 
2014
 
2013
Segment operating revenues:
 
 
 
Celebrity Brands
60
%
 
57
%
Women's Active Lifestyle
19
%
 
19
%
Men's Active Lifestyle
19
%
 
18
%
Corporate and Other
2
%
 
6
%
Total
100
%
 
100
%

The following table summarizes our segment operating income (loss):
 
Three Months Ended June 30,
 
 
(in thousands)
2014
 
2013
 
% Change
Operating income (loss):
 
 
Celebrity Brands
$
17,893

 
$
18,458

 
(3
)%
Women's Active Lifestyle
1,533

 
3,014

 
(49
)%
Men's Active Lifestyle
3,693

 
5,287

 
(30
)%
Corporate and Other
(17,430
)
 
(10,193
)
 
(71
)%
Total operating income
$
5,689

 
$
16,566

 
(66
)%

Total operating income decreased $10.9 million, or 66%, during the three months ended June 30, 2014, compared to the prior period primarily due to the lower operating revenues previously mentioned. This was partially offset by lower operating costs ($1.3 million) associated with production and distribution of reduced book sizes and newsstand print order. In addition, operating expenses were lowered due to the divestiture of our distribution and merchandising businesses and the Management Action Plans.


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Celebrity Brands Segment

The Celebrity Brands segment comprised 60% and 57% of our total operating revenues during the three months ended June 30, 2014 and 2013, respectively.

Operating Revenues

Total operating revenues in the Celebrity Brands segment were $46.8 million for the three months ended June 30, 2014, representing a decrease of $4.5 million, or 9%, versus prior year. Circulation revenue decreased $3.4 million, or 8%, due to a decline in the celebrity newsstand market coupled with the wholesaler disruption ($2.4 million) and the discontinuance and reduction of special interest publications ($1.0 million). Advertising revenue from continuing publications decreased $1.2 million due to the decline in consumer advertising.

Operating Income

The Celebrity Brands segment operating income decreased $0.6 million, or 3%, to $17.9 million during the three months ended June 30, 2014, compared to the prior period. This decline was due to the reasons mentioned above. Our Management Action Plans implemented during fiscal 2014 reduced costs by $4.0 million during the current period.

Women’s Active Lifestyle Segment

The Women’s Active Lifestyle segment represented 19% of our consolidated operating revenues for the three months ended June 30, 2014 and 2013.

Operating Revenues

Total operating revenues in the Women’s Active Lifestyle segment were $14.9 million during the three months ended June 30, 2014, a decrease of $1.8 million, or 11%, compared to the prior period. This decrease was primarily due to declines in circulation revenue ($1.0 million) and advertising revenue ($0.9 million) for the reasons previously mentioned.

Operating Income

Operating income in the Women’s Active Lifestyle segment decreased during the three months ended June 30, 2014 from the prior period to $1.5 million. This decline was due to the reasons mentioned above. Our Management Action Plans implemented during fiscal 2014 reduced costs by $0.4 million during the current period.

Men’s Active Lifestyle Segment

The Men’s Active Lifestyle segment represented 19% and 18% of our consolidated operating revenues during the three months ended June 30, 2014 and 2013, respectively.

Operating Revenues

Total operating revenues in the Men’s Active Lifestyle segment were $15.2 million during the three months ended June 30, 2014, a decrease of $1.0 million, or 6%, from the prior period. This decrease was primarily due to a decline in circulation revenue of $0.6 million and print advertising of $1.0 million, partially offset by the $0.6 million increase in digital advertising. Print and digital advertising revenue increased $0.5 million and $0.1 million, respectively for Men's Fitness which is directly attributable to the relaunch and reposition of the magazine and the related website. Print advertising revenue for the remaining publications in this segment decreased $1.5 million due to the overall decline in the consumer advertising market, partially offset by the $0.5 million increase in digital advertising revenue.

Operating Income

Operating income in the Men’s Active Lifestyle segment decreased during the three months ended June 30, 2014 from the prior period by $1.6 million, or 30%, to $3.7 million. This decline was due to the reasons mentioned above.


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Corporate and Other Segment

The Corporate and Other segment was 2% and 6% of our consolidated operating revenues for the three months ended June 30, 2014 and 2013, respectively.

Operating Revenues

Total operating revenues in the Corporate and Other segment were $1.3 million during the three months ended June 30, 2014, a decrease of $4.8 million, or 78%, from the prior period. This decline is attributable to the divestiture of our distribution and merchandising business in September 2013 ($3.3 million) and the "one-time" custom video projects for Microsoft ($1.8 million). This has been partially offset by a $0.3 million increase in revenue from our branded books division.

Operating Loss

Total operating loss increased by $7.2 million, or 71%, to $17.4 million during the three months ended June 30, 2014, compared to the prior period. This increase was attributable to the $4.8 million decline in operating revenue coupled with a $5.2 million increase in operating expenses, primarily for the increase in bad debt expense related to the wholesaler shutdowns of $4.1 million, coupled with an increase in legal and accounting fees of $0.6 million. This was partially offset by the $2.8 million decrease in operating expenses related to the divestiture of our distribution and merchandising businesses.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2014, we had cash and cash equivalents of $15.1 million and a working capital deficit of $19.3 million.

Cash Flow Summary

The following information has been derived from the accompanying financial statements for the three months ended June 30, 2014 and 2013. Cash and cash equivalents increased by $12.0 million during the three months ended June 30, 2014. The change in cash and cash equivalents is as follows:
 
 
Three Months Ended June 30,
 
 
in thousands
 
2014
 
2013
 
Net Change
Net (loss) income
 
$
(12,038
)
 
$
765

 
$
(12,803
)
Non-cash items
 
17,244

 
6,163

 
11,081

Net change in operating assets and liabilities
 
3,730

 
(16,120
)
 
19,850

Operating activities
 
8,936

 
(9,192
)
 
18,128

Investing activities
 
(3,613
)
 
(4,893
)
 
1,280

Financing activities
 
6,600

 
15,578

 
(8,978
)
Effects of exchange rates
 
102

 
(33
)
 
135

Net increase in cash and cash equivalents
 
$
12,025

 
$
1,460

 
$
10,565


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 provision (benefit) for income taxes, depreciation and amortization, amortization of deferred debt costs and deferred rack costs, provision for doubtful accounts and impairment of goodwill and intangible assets.

Net cash provided by operating activities increased $18.1 million during the three months ended June 30, 2014 as compared to the same period in the prior year, primarily due to the $19.9 million net change in operating assets and liabilities coupled with the $11.1 million net increase in non-cash items, partially offset by the $12.8 million decrease in our results of operations.

The net change in operating assets and liabilities is primarily due to the $15.9 million net change in trade receivables, the $4.9 million net change in inventories and the $2.1 million net change in prepaid expenses, partially offset by the net change in deferred revenues of $2.3 million and the net change in accounts payable and accrued expenses of $0.5 million.

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Non-cash items increased primarily due to the increase in non-cash payment-in-kind interest accretion of $4.8 million for certain senior secured notes and the increase in provision for doubtful account of $4.0 million directly related to the Source and other wholesaler shutdowns.

Investing activities

Net cash used in investing activities was $3.6 million for the three months ended June 30, 2014, a decrease of $1.3 million, compared to $4.9 million of net cash used during the three months ended June 30, 2013. The decrease is primarily attributable to the $0.7 million decrease in purchases of property and equipment and intangibles assets, coupled with the $0.3 million decrease in investments in affiliates.

Financing activities

Net cash provided by financing activities for the three months ended June 30, 2014 was $6.6 million, a decrease of $9.0 million, compared to $15.6 million of net cash provided during the three months ended June 30, 2013. The decrease is primarily attributable to the $10.0 million decrease in net borrowings under the 2010 Revolving Credit Facility, partially offset by the $1.0 million decrease in payments for the redemption of preferred stock of Odyssey Magazine Publishing Group, Inc.

Merger and Related Transactions

Merger Agreement

On August 15, 2014, the Merger was effective and an affiliate of the Investors merged with and into AMI, with AMI continuing as the surviving entity. Pursuant to the terms and conditions of the Merger Agreement, the Investors acquired AMI for $2.0 million in cash and approximately $513.0 million of outstanding indebtedness remains in place.

Note Purchase Agreement

In connection with the Merger Agreement, on August 15, 2014, AMI and certain of its subsidiaries (the "Guarantors") entered into the Note Purchase Agreement with the Investors.

The Note Purchase Agreement provides, subject to certain conditions, for AMI to issue and sell to the Investors, and the Investors to purchase from AMI, an aggregate principal amount of additional Second Lien PIK Notes (the “Additional Notes”) to be issued under the indenture dated as of October 2, 2013 (as such agreement may be amended, restated or supplemented on the date hereof, the “Second Lien PIK Notes Indenture”), among AMI, the Guarantors and Wilmington Trust, National Association, as trustee and collateral agent (the “Trustee”), such that the aggregate principal amount of the Additional Notes purchased plus the accrued interest thereon from the most recent date to which interest has been paid on the then outstanding Second Lien PIK Notes to the closing date (the “Closing Date”) for the Merger will equal $12.5 million. The Investors will pay $1,000 per $1,000 of principal amount of the Additional Notes to be purchased by the Investors on the Closing Date plus accrued interest thereon from the most recent date to which interest has been paid on the then outstanding Second Lien PIK Notes, for an aggregate purchase price of $12.5 million. After giving effect to the issuance of the Additional Notes on August 15, 2014, approximately $113.3 million aggregate principal amount of Second Lien PIK Notes is outstanding.

The Additional Notes were issued under the Second Lien PIK Notes Indenture and will be treated as a single class under the Second Lien PIK Notes Indenture with, and was assigned the same CUSIP number as, the outstanding Second Lien PIK Notes. The Additional Notes were issued through a private offering exempt from the registration requirements of the Securities Act of 1933, as amended.

Credit Facility and Long Term Debt

Revolving Credit Facility

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


41

During the three months ended June 30, 2014, the Company borrowed $28.3 million and repaid $21.7 million under the 2010 Revolving Credit Facility. At June 30, 2014, the Company is fully drawn under the 2010 Revolving Credit Facility after considering the $35.6 million outstanding balance and the $4.4 million outstanding letter of credit. The outstanding balance of the 2010 Revolving Credit Facility on June 30, 2014 of $35.6 million is a non-current liability, as the outstanding balance is not due until December 2015.

Our 2010 Revolving Credit Facility requires mandatory prepayments of the loans outstanding thereunder to the extent that total revolving exposures exceed total revolving commitments. Our 2010 Revolving Credit Facility requires us to pay, from December 22, 2010 until the commitments expire under our 2010 Revolving Credit Facility, a commitment fee ranging from 0.50% to 0.75% of the unused portion of the revolving commitment. We have the option to pay interest on outstanding balances based on (i) a floating base rate option equal to the greatest of (x) the prime rate in effect on such day; (y) the federal funds effective rate in effect on such day, plus ½ of 1%; and (z) one month LIBOR (but no less than 2%), plus 1%, or (ii) based on LIBOR, in each case, plus a margin. The interest rate under the 2010 Revolving Credit Facility has ranged from 8.00% to 8.25% during the three months ended June 30, 2014.

Our 2010 Revolving Credit Facility includes certain representations and warranties, conditions precedent, affirmative covenants, negative covenants and events of default customary for agreements of this type. The negative covenants include a financial maintenance covenant comprised of a first lien leverage ratio calculated using EBITDA as defined in the 2010 Revolving Credit Facility. In August 2014, we entered into an amendment to the 2010 Revolving Credit Facility to, among other things, amend the first lien leverage ratio to be equal to or less than 5.25 to 1.00 from April 1, 2014 through and including the quarter ending June 30, 2015. From July 1, 2015 through December 31, 2015, the maturity date of the 2010 Revolving Credit Facility, the first lien leverage ratio must be equal to or less than 4.50 to 1.00, the ratio in effect prior to the amendment.

Our 2010 Revolving Credit Facility also contains certain covenants that, subject to certain exceptions, restrict paying dividends, incurring additional indebtedness, creating liens, making acquisitions or other investments, entering into certain mergers or consolidations, prepaying junior debt and selling or disposing of assets.

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

2010 Revolving Credit Facility Amendment

On August 8, 2014, AMI, JPMorgan Chase Bank, N.A., as administrative agent (the “Administrative Agent”), and the lenders from time to time party to the 2010 Revolving Credit Facility, dated as of December 22, 2010 (as amended, restated, modified or supplemented from time to time, the “Credit Agreement”), entered into Amendment No. 3 (the “Credit Agreement Amendment”) to the Credit Agreement with lenders (the “Consenting Lenders”) constituting the Required Lenders (as defined in the Credit Agreement).

Pursuant to the Credit Agreement Amendment and subject to the Credit Parties’ (as defined in the Credit Agreement Amendment) compliance with the requirements set forth therein, the Consenting Lenders have agreed to (i) waive until the earlier of (x) August 15, 2014 and (y) immediately prior to the consummation of the Merger, any potential Default or Event of Default (each, as defined in the Credit Agreement) arising from the failure to furnish to the Administrative Agent (A) the financial statements, reports and other documents as required under Section 5.01(a) of the Credit Agreement with respect to the fiscal year of the Company ended March 31, 2014 and (B) the related deliverables required under Sections 5.01(c) and 5.03(b) of the Credit Agreement, (ii) permit the transactions contemplated by the Merger Agreement and the Note Purchase Agreement, including amending the definition of “Change of Control” and permitting the issuance of the Additional Notes pursuant to the Second Lien PIK Notes Indenture, (iii) consent to the sale of certain assets of the Loan Parties (as defined in the Credit Agreement), (iv) restrict any payment or distribution in respect of the First Lien Notes on or prior to June 15, 2015, subject to certain exceptions, including the payment of regularly scheduled interest and any mandatory prepayments and mandatory offers to purchase under the First Lien Notes, and (v) amend the maximum first lien leverage ratio covenant.

In August 2014, we received a waiver under our revolving credit facility providing us additional time to file this Quarterly Report for the quarter ended June 30, 2014 with the SEC and make it available to the revolving credit facility lenders.


42

First Lien Notes

In December 2010, we issued $385.0 million aggregate principal amount of senior secured notes, which bear interest at a rate of 11.5% per annum, payable semi-annually, and mature in December 2017 (the “First Lien Notes”). During the first quarter of fiscal 2012, we redeemed $20.0 million in aggregate principal amount of the First Lien Notes at a redemption price equal to 103.0% of the aggregate principal amount thereof, plus accrued and unpaid interest. During the third quarter of fiscal 2014, we redeemed $2.3 million in aggregate principal amount of the First Lien Notes at a redemption price equal to 108.6% of the aggregate principal amount thereof, plus accrued and unpaid interest.

At June 30, 2014, the First Lien Notes represented an aggregate of $362.7 million of our indebtedness.

In connection with the Merger, we received a permanent waiver of our obligation to redeem approximately $12.7 million of First Lien Notes, during fiscal 2015, pursuant to the terms of the Second Lien PIK Note Indenture and the Exchange Agreement. See description of Second Lien PIK Notes below.

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

The First Lien Notes are guaranteed on a first lien senior secured basis by the same subsidiaries of the Company that guarantee our 2010 Revolving Credit Facility, the Second Lien Notes and the Second Lien PIK Notes. 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 2010 Revolving Credit Facility, provided that in the event of a foreclosure on the collateral or of insolvency proceedings, obligations under our 2010 Revolving Credit Facility will be repaid in full with proceeds from the collateral prior to the obligations under the First Lien Notes.

See "Supplemental Indentures" below for a discussion of the amendments to the indenture governing the First Lien Notes to, among other things, permit the transaction contemplated by the Merger Agreement and the Note Purchase Agreement, including amending the definition of "Change of Control."

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 currently bear interest at a rate of 10% per annum, are payable in kind, and mature in June 2018 (the “Second Lien PIK Notes”). See description of Second Lien PIK Notes below. At June 30, 2014, the Second Lien Notes represented an aggregate of $10.6 million of our indebtedness.

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

The Second Lien Notes are guaranteed on a second lien senior secured basis by the same subsidiaries of the Company that guarantee our 2010 Revolving Credit Facility, the First Lien Notes and the Second Lien PIK 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).


43

See "Supplemental Indentures" below for a discussion of the amendments to the indenture governing the Second Lien Notes to, among other things, permit the transactions contemplated by the Merger Agreement and the Note Purchase Agreement, including amending the definition of "Change of Control."

Second Lien PIK Notes

In October 2013, we exchanged approximately $94.3 million aggregate principal amount of Second Lien Notes for an equal aggregate principal amount of Second Lien PIK Notes, pursuant to an exchange agreement (the “Exchange Agreement”). The Second Lien PIK Notes were issued under an indenture, by and among American Media, Inc., certain of its subsidiaries listed as guarantors thereto and Wilmington Trust, National Association, as trustee (the “Second Lien PIK Notes Indenture”).

The Second Lien PIK Notes are payable in kind at a rate of 10% per annum until the earliest of: (a) December 15, 2016, (b) the closing of a refinancing of the First Lien Notes or (c) upon the occurrence of certain specified events of default relating to the application of the cash interest savings and the right of first offer (any such date being the "Cash Interest Rate Conversion Date"), at which point the interest payable on the then outstanding aggregate principal amount of Second Lien PIK Notes will be payable at a cash interest rate of 13.5% per annum until the June 2018 maturity date. Subject to certain exceptions, under the Second Lien PIK Indenture cash interest savings resulting from the exchange of the Second Lien Notes of approximately $6.4 million per each semi-annual interest period must be used by the Company to repurchase First Lien Notes until the Cash Interest Rate Conversion Date. The participating holders (as defined in the Exchange Agreement) have a right of first offer to sell any of their First Lien Notes to the Company before the Company makes repurchases of First Lien Notes from any other holders of the First Lien Notes, including those purchases pursuant to open market repurchases. Pursuant to the Merger Agreement, we have obtained a permanent waiver of our obligation to redeem approximately $12.7 million of First Lien Notes, during fiscal 2015, pursuant to the terms of the Second Lien PIK Note Indenture and the Exchange Agreement.

The interest payment-in-kind due on June 15, 2014 totaled $4.8 million and was recorded as an increase to the Senior Secured Notes in the accompanying financial statements. At June 30, 2014, the Second Lien PIK Notes represented an aggregate of $101.0 million of our indebtedness. In connection with the Merger Agreement, we issued $12.3 million aggregate principal amount of additional Second Lien PIK Notes. Currently, the Second Lien PIK Notes represent an aggregate of $113.3 million of our indebtedness.

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

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

The Exchange Agreement also provides that, should the Company effect a refinancing of the First Lien Notes, under certain circumstances the Company may require additional exchanges at its option. Upon completion of a refinancing of the First Lien Notes, the Company may require (i) the participating holders to exchange up to $55.0 million in aggregate principal amount of the Company’s First Lien Notes for Second Lien PIK Notes or, alternatively, new second lien cash pay notes (the “New Second Lien Cash Pay Notes”) to be issued by the Company at a future date pursuant to the terms of the Exchange Agreement and a new indenture that would govern the New Second Lien Cash Pay Notes (the “Optional First Lien Note Exchange”); and/or (ii) the holders of all Second Lien PIK Notes (including any Second Lien PIK Notes received in the Optional First Lien Note Exchange) to exchange all of their Second Lien PIK Notes for New Second Lien Cash Pay Notes (the "Optional Second Lien Note Exchange"). In the event of the Optional Second Lien Note Exchange, certain of the participating holders may have the right to designate one independent director, in total, to the Board of Directors of the Company under certain conditions.

See "Supplemental Indentures" below for a discussion of the amendments to the indenture governing the Second Lien PIK Notes to, among other things, waive AMI's obligation to apply the cash interest savings to repurchase outstanding First Lien Notes and permit the transactions contemplated by the Merger Agreement and the Note Purchase Agreement, including amending the definition of "Change of Control." See also Exchange Agreement Amendment" below for a discussion of the amendment to the Exchange Agreement.


44

Supplemental Indentures

On August 15, 2014, the Company received consents from the holders of (a) $218.2 million principal amount of the outstanding First Lien Notes to amend the indenture dated as of December 1, 2010 (as such agreement may be amended, restated or supplemented on the date hereof, the “First Lien Notes Indenture”), among the Company, the Guarantors and the Trustee, (b) $7.8 million principal amount of the outstanding Second Lien Notes to amend the indenture dated as of December 22, 2010 (as such agreement may be amended, restated or supplemented on the date hereof, the “Second Lien Notes Indenture” and, together with the First Lien Notes Indenture and the Second Lien PIK Notes Indenture, the “Indentures”), among the Company, the Guarantors and the Trustee and (c) $101.0 million principal amount of the outstanding Second Lien PIK Notes to amend the Second Lien PIK Notes Indenture, which in each case represented the requisite consents from holders of at least a majority of the aggregate principal amount of the applicable series of notes then outstanding.

As a result of receiving the requisite consents, on August 15, 2014, the Company and the Trustee entered into (a) the Fourth Supplemental Indenture (the “First Lien Notes Supplemental Indenture”) to the First Lien Notes Indenture, (b) the Third Supplemental Indenture (the “Second Lien Notes Supplemental Indenture”) to the Second Lien Notes Indenture and (c) the First Supplemental Indenture (the “Second Lien PIK Notes Supplemental Indenture” and, together with the First Lien Notes Supplemental Indenture and the Second Lien Notes Supplemental Indenture, the “Supplemental Indentures”) to the Second Lien PIK Notes Indenture.

The Supplemental Indentures amend the Indentures to (a) permit the transactions contemplated by the Merger Agreement and the Note Purchase Agreement, including amending the definition of “Change of Control” and permitting the issuance of the Additional Notes pursuant to the Second Lien PIK Notes Indenture and (b) in the case of the Second Lien PIK Notes Supplemental Indenture only, eliminate the Company’s obligation to apply Cash Interest Savings (as defined in the Second Lien PIK Notes Indenture) to repurchase outstanding First Lien Notes for the semi-annual interest periods ending on June 15, 2014 and December 15, 2014 (collectively, the “Amendments”). Pursuant to the terms of the Supplemental Indentures, the Supplemental Indentures became effective, and the Amendments became operative, immediately upon execution of the Supplemental Indentures.

Exchange Agreement Amendment

On August 15, 2014, AMI and the Guarantors entered into an Amendment (the “Exchange Agreement Amendment”) to the Exchange Agreement, dated as of September 27, 2013, among AMI, the Guarantors and the Investors.

The Exchange Agreement Amendment provides that AMI is not required to apply Cash Interest Savings (as defined in the Second Lien PIK Notes Indenture) to repurchase outstanding First Lien Notes for the semi-annual interest periods ending on June 15, 2014 and December 15, 2014.

Covenant Compliance

As discussed above, our 2010 Revolving Credit Facility and the indentures governing the First Lien Notes, the Second Lien Notes and the Second Lien PIK Notes contain various restrictive covenants. Under our 2010 Revolving Credit Facility, the first lien leverage ratio (Total First Lien Debt to EBITDA, each as defined in our 2010 Revolving Credit Facility) must be equal to or less than 4.50 to 1.00 through March 31, 2014. In August 2014, we entered into an amendment to the 2010 Revolving Credit Facility to, among other things, amend the first lien leverage ratio to be equal to or less than 5.25 to 1.00 from April 1, 2014 through and including the quarter ending June 30, 2015. From July 1, 2015 through December 31, 2015, the maturity date of the 2010 Revolving Credit Facility, the first lien leverage ratio must be equal to or less than 4.50 to 1.00, the ratio in effect prior to the amendment.

As of June 30, 2014, the first lien leverage ratio was 4.31 to 1.00 and the Company was in compliance with the first lien leverage ratio and the other covenants under the 2010 Revolving Credit Facility, as amended, and under the indentures governing the First Lien Notes, the Second Lien Notes and the Second Lien PIK Notes.


45

Although there can be no assurances, we anticipate that, based on current projections (including projected borrowings and repayments under the 2010 Revolving Credit Facility), our operating results for the next twelve months will be sufficient to satisfy the first lien leverage covenant under the 2010 Revolving Credit Facility, as amended. Our ability to satisfy such financial covenant is dependent on our business performing in accordance with our projections.  If the performance of our business deviates from our projections, we may not be able to satisfy such financial covenant.  Our projections are subject to a number of factors, many of which are events beyond our control, which could cause our actual results to differ materially from our projections (see "Risk Factors" included in the 2014 Form 10-K). If we do not comply with our financial covenant, we would be in default under the 2010 Revolving Credit Facility, which could result in all our debt being accelerated due to cross-default provisions in the indentures governing the First Lien Notes, the Second Lien Notes and the Second Lien PIK Notes.

We have the ability to incur additional debt, subject to limitations imposed by our 2010 Revolving Credit Facility and the indentures governing the First Lien Notes, the Second Lien Notes and the Second Lien PIK Notes. Under our 2010 Revolving Credit Facility and the indentures governing the First Lien Notes, the Second Lien Notes and the Second Lien PIK 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 of property and equipment, amortization of intangible assets, deferred debt costs and deferred rack costs, provision for impairment of intangible assets and goodwill, adjusted for gains or costs related to closures, launches or re-launches of publications, restructuring costs and severance and certain other costs. We believe that the inclusion of Adjusted EBITDA is appropriate to evaluate our operating performance compared to our operating plans and/or prior years and to value prospective acquisitions. We also believe that Adjusted EBITDA is helpful in highlighting trends because Adjusted EBITDA excludes the impact of certain items that can differ significantly from company to company, depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments.

Management believes our investors use Adjusted EBITDA as a gauge to measure the performance of their investment in the Company. Management compensates for limitations of using non-GAAP financial measures by using them to supplement GAAP results to provide a more complete understanding of the factors and trends affecting our business than GAAP results alone 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.

Set forth below is a reconciliation of net (loss) income attributable to American Media, Inc. and subsidiaries to Adjusted EBITDA for the three months and twelve months ended June 30, 2014 and 2013:


46

 
For the Three Months Ended June 30,
 
For the Twelve Months Ended June 30,
in thousands
2014
 
2013
 
2014
 
2013
Net (loss) income attributable to American Media, Inc. and subsidiaries
$
(11,968
)
 
$
765

 
$
(64,343
)
 
$
(54,220
)
Add (deduct):
 
 
 
 
 
 
 
Interest expense
13,987

 
14,677

 
57,663

 
59,815

Provision (benefit) for income taxes
3,620

 
488

 
33,701

 
(4,538
)
Depreciation and amortization
3,358

 
3,092

 
14,469

 
10,723

Impairment of goodwill and intangible assets
—

 
—

 
9,238

 
54,523

Amortization of deferred debt costs
434

 
385

 
1,714

 
1,477

Amortization of deferred rack costs
1,458

 
1,684

 
6,359

 
7,478

Amortization of short-term racks
2,055

 
2,035

 
8,601

 
8,116

Restructuring costs and severance
471

 
67

 
3,206

 
1,733

Costs related to launches and closures of publications
132

 
481

 
2,337

 
1,497

Costs related to relaunch of Shape and Men's Fitness
—

 
150

 
—

 
2,820

Restructuring costs related to divestiture of DSI
(15
)
 
—

 
2,761

 
—

Adjustment for net losses of DSI
—

 
—

 
1,716

 
—

AMI share of bad debt related to wholesaler shutdowns
3,872

 
—

 
8,924

 
—

Investment in new digital strategy
—

 
53

 
3,979

 
2,948

Proforma adjustment related to investment in affiliates
312

 
—

 
1,815

 
—

Impact of Superstorm Sandy
—

 
182

 
1

 
4,934

Other
552

 
105

 
5,535

 
4,701

Adjusted EBITDA
$
18,268

 
$
24,164

 
$
97,676

 
$
102,007


Management’s Assessment of Liquidity

Our primary sources of liquidity are cash on hand, amounts available for borrowing under the 2010 Revolving Credit Facility, cash interest savings from the Second Lien PIK Notes, liquidity provided through the Merger and cash generated from operations and the initiatives described below.

The 2010 Revolving Credit Facility provides for borrowing up to $40.0 million, less outstanding letters of credit, and matures in December 2015. As of June 30, 2014, under the 2010 Revolving Credit Facility, we had an outstanding balance of $35.6 million and, after giving effect to the $4.4 million outstanding letter of credit, there were no funds available for future borrowings.

As of June 30, 2014, in addition to outstanding borrowings under the 2010 Revolving Credit Facility, there was $474.3 million principal amount of outstanding senior secured debt, consisting of $362.7 million principal amount of the First Lien Notes, $10.6 million principal amount of the Second Lien Notes and $101.0 million principal amount of the Second Lien PIK Notes. The Second Lien PIK Notes provide for, among other things, interest payments, in kind, at a rate of 10% per annum for approximately the next three years. As discussed above, we are required under the indenture relating to the Second Lien PIK Notes to utilize the cash interest savings from the Second Lien PIK Notes to repurchase certain of our First Lien Notes.

Over the next year, the cash interest payments due under the aforementioned debt agreements are approximately $45.9 million and there are no scheduled principal payments due.

Pursuant to the Merger, we have issued approximately $12.3 million of aggregate principal amount of additional Second Lien PIK Notes and obtained a permanent waiver of our obligation to redeem approximately $12.7 million of First Lien Notes, during fiscal 2015, pursuant to the terms of the Second Lien PIK Notes Supplemental Indenture and the Exchange Agreement Amendment.


47

As previously discussed our second-largest wholesaler ceased operations in May 2014 and filed for bankruptcy in June 2014. We are currently working with the two remaining major wholesalers and retailers to transition the newsstand circulation to them. This is expected to have an adverse impact on single copy newsstand sales and liquidity in fiscal 2015. There can be no assurances that, after completing the transition of newsstand circulation, 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 or if the transition to certain retailers is not successful.

In addition to the liquidity to be provided through the Merger, as discussed above, we have several initiatives designed to further increase liquidity through improvements in payment terms from our customers and vendors and inventory management arrangements.

Our level of indebtedness could have important consequences for the business and operations. See Item 1A, "Risk Factors" included in the 2014 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."

Although we are significantly leveraged, we expect that the current cash balances, liquidity provided through the Merger, cash generated from the initiatives described above and from operations, should be sufficient to meet working capital, capital expenditures, debt service, and other cash needs for the next year.

CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

There have been no material changes in our contractual obligations since March 31, 2014.

OFF-BALANCE SHEET FINANCING

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

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. These estimates, judgments and assumption are affected by management's application of accounting policies. We base our estimates, judgments and assumptions on historical experience and other relevant factors that are believed to be reasonable under the circumstances. In any given reporting period, our actual results may differ from the estimates, judgments and assumptions used in preparing our consolidated financial statements.

Goodwill and Intangible Assets
 
There was no provision for impairment charges during the three months ended June 30, 2014 or 2013. 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 June 30, 2014, we identified four reporting units with an excess fair value over carrying value of less than 25%. As of June 30, 2014, National Enquirer, Flex, Muscle & Fitness and OK! reporting units had goodwill balances of $59.0 million, $7.2 million, $20.5 million and $3.4 million, respectively. In addition, all reporting units in our Celebrity segment have been negatively impacted by the 20% decline in the celebrity newsstand market and the industry-wide disruption in our wholesaler channels 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 an additional impairment charge 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 2014 Form 10-K for a discussion of our critical accounting estimates.


48

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 June 30, 2014, we had $474.3 million outstanding in fixed rate debt. There are no earnings or liquidity risks associated with the Company’s fixed rate debt. Under the 2010 Revolving Credit Facility, we had $35.6 million outstanding in variable rate debt at June 30, 2014. 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.

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.


49

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 June 30, 2014 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 June 30, 2014, 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.


50

PART II - OTHER INFORMATION

Item 1.     Legal Proceedings.

There have been no material changes to the legal proceedings as previously disclosed in our 2014 Form 10-K, under the heading Part I, Item 3, "Legal Proceedings."

Item 1A. Risk Factors.

There have been no material changes to the risk factors as previously disclosed in our 2014 Form 10-K, under the heading Part I, Item 1A, "Risk Factors."

Item 6. Exhibits.

See exhibits listed under the Exhibit Index below.


51

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:
August 20, 2014
 
by:
/s/ David J. Pecker
 
 
 
 
David J. Pecker
 
 
 
 
Chairman, President and Chief Executive Officer
 
 
 
 
(Principal Executive Officer)
 
 
 
 
 
Dated:
August 20, 2014
 
by:
/s/ Christopher Polimeni
 
 
 
 
Christopher Polimeni
 
 
 
 
Executive Vice President, Chief Financial Officer and Treasurer
 
 
 
 
(Principal Financial and Accounting Officer)



52

Exhibit Index

Exhibit Number
 
Description
2.1
 
Agreement and Plan of Merger, dated as of August 15, 2014, among AMI Parent Holdings LLC, AMI Merger Corporation and American Media, Inc. (incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed with the SEC on August 15, 2014).
4.1
 
Fourth Supplemental Indenture, dated as of August 15, 2014, between American Media, Inc. and Wilmington Trust, National Association, as Trustee and Collateral Agent, to the Indenture, dated as of December 1, 2010, among American Media, Inc. (as successor by merger to AMO Escrow Corporation), the guarantors party thereto and Wilmington Trust, National Association (as successor by merger to Wilmington Trust FSB), as Trustee and Collateral Agent, relating to the 11½% First Lien Senior Secured Notes due 2017 (incorporated herein by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed with the SEC on August 15, 2014).
4.20
 
Third Supplemental Indenture, dated as of August 15, 2014, between American Media, Inc. and Wilmington Trust, National Association, as Trustee and Collateral Agent, to the Indenture, dated as of December 22, 2010, among American Media, Inc., the guarantors party thereto and Wilmington Trust, National Association (as successor by merger to Wilmington Trust FSB), as Trustee and Collateral Agent, relating to the 13½% Second Lien Senior Secured Notes due 2017 (incorporated herein by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K filed with the SEC on August 15, 2014).
4.3
 
First Supplemental Indenture, dated as of August 15, 2014, between American Media, Inc. and Wilmington Trust, National Association, as Trustee and Collateral Agent, to the Indenture, dated as of October 2, 2013, among American Media, Inc., the guarantors party thereto and Wilmington Trust, National Association, as Trustee and Collateral Agent, relating to the 10% Second Lien Senior Secured PIK Notes due 2018 (incorporated herein by reference to Exhibit 4.3 to the Registrant's Current Report on Form 8-K filed with the SEC on August 15, 2014).
10.1
 
Note Purchase Agreement, dated as of August 15, 2014, among American Media, Inc., the subsidiary guarantors party thereto, certain funds and accounts managed by Chatham Asset Management, LLC and Omega Charitable Partnership, L.P. (incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the SEC on August 15, 2014).
10.2
 
Amendment No. 3, dated August 8, 2014, to the Revolving Credit Agreement, dated December 22, 2010 (as amended, restated, modified or supplemented from time to time), among American Media, Inc., JPMorgan Chase Bank, N.A., as administrative agent and the lenders from time to time party thereto (incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the SEC on August 14, 2014).
10.3
 
Amendment, dated as of August 15, 2014, among American Media, Inc., certain subsidiaries party thereto, Chatham Asset Management, LLC and Omega Charitable Partnership, L.P., to the Exchange Agreement, dated as of September 27, 2013, among American Media, Inc., certain subsidiaries party thereto, Chatham Asset Management, LLC and Omega Charitable Partnership, L.P. (incorporated herein by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed with the SEC on August 15, 2014).
10.4
 
Waiver to Revolving Credit Agreement, dated August 15, 2014, among American Media, Inc., as borrower, JPMorgan Chase Bank, N.A., as Administrative Agent, and the lenders from time to time party thereto (incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the SEC on August 19, 2014).
31.1
*
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer.
31.2
*
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.
32
‡
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
101.INS
%
XBRL Instance Document
101.SCH
%
XBRL Taxonomy Extension Schema Document
101.CAL
%
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
%
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
%
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
%
XBRL Taxonomy Extension Definition
*
 
Filed herewith
‡
 
This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

53

%
 
Users of XBRL data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

54

AMERICAN MEDIA INC Reports