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EX-31.2 - EXHIBIT - AMERICAN MEDIA INCami-ex312x20140930.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 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 October 31, 2014 was 100.



AMERICAN MEDIA, INC.
 
FORM 10-Q for the Quarter Ended September 30, 2014
 
INDEX
 
 
  Page(s)
 
 
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Balance Sheets as of September 30, 2014 and March 31, 2014
 
Unaudited Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the Three and Six Months Ended September 30, 2014 and 2013
 
Unaudited Condensed Consolidated Statements of Stockholders' Deficit for the Six Months Ended September 30, 2014 and 2013
 
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 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 September 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)
 
September 30,
2014
 
March 31,
2014
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents ($4,036 and $1,525 related to VIEs, respectively)
$
7,560

 
$
3,035

Trade receivables, net of allowance for doubtful accounts of $11,061 and $6,661, respectively ($2 and $1 related to VIEs, respectively)
31,063

 
44,636

Inventories ($680 and $285 related to VIEs, respectively)
2,797

 
10,910

Prepaid expenses and other current assets ($1,903 and $254 related to VIEs, respectively)
25,378

 
16,640

Total current assets
66,798

 
75,221

PROPERTY AND EQUIPMENT, NET:
 
 
 
Leasehold improvements
3,798

 
3,798

Furniture, fixtures and equipment
44,011

 
40,304

Less – accumulated depreciation
(26,730
)
 
(23,128
)
Total property and equipment, net ($31 and $29 related to VIEs, respectively)
21,079

 
20,974

OTHER ASSETS:
 
 
 
Deferred debt costs, net
6,068

 
8,125

Deferred rack costs, net
4,496

 
5,073

Investments in affiliates
438

 
2,859

Other long-term assets
3,624

 
3,841

Total other assets
14,626

 
19,898

GOODWILL AND OTHER IDENTIFIED INTANGIBLE ASSETS:
 
 
 
Goodwill
178,008

 
186,898

Other identified intangibles, net of accumulated amortization of $121,869 and $119,773, respectively ($6,000 related to VIEs, respectively)
261,207

 
269,649

Total goodwill and other identified intangible assets, net
439,215

 
456,547

TOTAL ASSETS
$
541,718

 
$
572,640

LIABILITIES AND STOCKHOLDERS' DEFICIT
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable ($0 and $42 related to VIEs, respectively)
$
19,706

 
$
20,115

Accrued expenses and other liabilities ($3,747 and $122 related to VIEs, respectively)
35,072

 
27,801

Accrued interest
12,570

 
15,897

Deferred revenues ($546 and $1,014 related to VIEs, respectively)
45,825

 
33,318

Total current liabilities
113,173

 
97,131

NON-CURRENT LIABILITIES:
 
 
 
Senior secured notes
365,473

 
469,477

Revolving credit facility
7,600

 
29,000

Other non-current liabilities
6,670

 
7,172

Deferred income taxes
96,281

 
98,833

Total liabilities
589,197

 
701,613

COMMITMENTS AND CONTINGENCIES (See Note 11)


 


Redeemable noncontrolling interests (see Note 10)
4,259

 
3,000

STOCKHOLDERS' DEFICIT:
 
 
 
Common stock, $0.0001 par value; 100 shares and 10,000,000 shares issued and outstanding as of September 30, 2014 and March 31, 2014, respectively

 
1

Additional paid-in capital
945,037

 
822,723

Accumulated deficit
(996,496
)
 
(954,466
)
Accumulated other comprehensive loss
(279
)
 
(231
)
Total stockholders' deficit
(51,738
)
 
(131,973
)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
$
541,718

 
$
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 September 30,
 
Six Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
OPERATING REVENUES:
 
 
 
 
 
 
 
Circulation
$
40,159

 
$
52,604

 
$
86,388

 
$
102,879

Advertising
25,558

 
28,746

 
55,674

 
61,457

Other
8,469

 
9,254

 
10,379

 
16,660

Total operating revenues
74,186

 
90,604

 
152,441

 
180,996

OPERATING EXPENSES:
 
 
 
 
 
 
 
Editorial
9,084

 
9,648

 
18,502

 
19,084

Production
23,072

 
25,603

 
43,084

 
48,838

Distribution, circulation and other cost of sales
12,826

 
16,487

 
25,607

 
32,717

Selling, general and administrative
26,775

 
24,438

 
53,772

 
46,271

Depreciation and amortization
3,190

 
3,625

 
6,548

 
6,717

Impairment of goodwill and intangible assets
18,458

 

 
18,458

 

Total operating expenses
93,405

 
79,801

 
165,971

 
153,627

OPERATING INCOME (LOSS)
(19,219
)
 
10,803

 
(13,530
)
 
27,369

OTHER INCOME (EXPENSES):
 
 
 
 
 
 
 
Interest expense
(13,811
)
 
(15,062
)
 
(27,798
)
 
(29,739
)
Amortization of deferred debt costs
(1,623
)
 
(403
)
 
(2,057
)
 
(788
)
Other income (expenses), net
(15
)
 

 
299

 
(251
)
Total other expenses, net
(15,449
)
 
(15,465
)
 
(29,556
)
 
(30,778
)
LOSS BEFORE INCOME TAXES
(34,668
)
 
(4,662
)
 
(43,086
)
 
(3,409
)
INCOME TAX BENEFIT
(5,891
)
 
(2,944
)
 
(2,271
)
 
(2,456
)
NET LOSS
(28,777
)
 
(1,718
)
 
(40,815
)
 
(953
)
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
(1,285
)
 
(1,076
)
 
(1,215
)
 
(1,076
)
NET LOSS ATTRIBUTABLE TO AMERICAN MEDIA, INC. AND SUBSIDIARIES
$
(30,062
)
 
$
(2,794
)
 
$
(42,030
)
 
$
(2,029
)
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
NET LOSS
$
(28,777
)
 
$
(1,718
)
 
$
(40,815
)
 
$
(953
)
Foreign currency translation adjustment
(66
)
 
88

 
(48
)
 
131

Comprehensive loss
(28,843
)
 
(1,630
)
 
(40,863
)
 
(822
)
Less: comprehensive income attributable to noncontrolling interests
(1,285
)
 
(1,076
)
 
(1,215
)
 
(1,076
)
COMPREHENSIVE LOSS ATTRIBUTABLE TO AMERICAN MEDIA, INC. AND SUBSIDIARIES
$
(30,128
)
 
$
(2,706
)
 
$
(42,078
)
 
$
(1,898
)




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

5


AMERICAN MEDIA, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(in thousands, except share information)


 
Six Months Ended September 30, 2014
 
Shares
 
Common Stock
 
Additional paid-in capital
 
Accumulated deficit
 
Accumulated other comprehensive loss
 
Total stockholders' deficit
BALANCE, BEGINNING OF PERIOD
10,000,000

 
$
1

 
$
822,723

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

 

 

 
(42,030
)
 

 
(42,030
)
Foreign currency translation

 

 

 

 
(48
)
 
(48
)
Issuance of common stock (Note 13)
1,172,150

 

 
205

 

 

 
205

Retirement of common stock (Note 13)
(11,172,150
)
 
(1
)
 
1

 

 

 

Issuance of common stock (Note 13)
100

 

 

 

 

 

Debt for equity conversion, net of expenses (Note 6)

 

 
121,535

 

 

 
121,535

Capital contribution (Note 13)

 

 
573

 

 

 
573

BALANCE, END OF PERIOD
100

 
$

 
$
945,037

 
$
(996,496
)
 
$
(279
)
 
$
(51,738
)



 
Six Months Ended September 30, 2013
 
Shares
 
Common Stock
 
Additional paid-in capital
 
Accumulated deficit
 
Accumulated other comprehensive loss
 
Total stockholders' deficit
BALANCE, BEGINNING OF PERIOD
10,000,000

 
$
1

 
$
822,723

 
$
(900,147
)
 
$
(339
)
 
$
(77,762
)
Net loss

 

 

 
(2,029
)
 

 
(2,029
)
Foreign currency translation

 

 

 

 
131

 
131

BALANCE, END OF PERIOD
10,000,000

 
$
1

 
$
822,723

 
$
(902,176
)
 
$
(208
)
 
$
(79,660
)















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

6


AMERICAN MEDIA, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Six Months Ended September 30,
 
2014
 
2013
OPERATING ACTIVITIES
 
 
 
Net loss
$
(40,815
)
 
$
(953
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation of property and equipment
4,452

 
4,344

Amortization of other identified intangibles
2,096

 
2,373

Impairment of goodwill and intangible assets
18,458

 

Amortization of deferred debt costs
2,057

 
788

Amortization of deferred rack costs
2,793

 
3,339

Deferred income tax benefit
(2,537
)
 
(2,716
)
Non-cash payment-in-kind interest accretion
4,809

 

Provision for doubtful accounts
5,805

 
2,311

Other
1,722

 
483

Changes in operating assets and liabilities:
 
 
 
Trade receivables
7,768

 
2,369

Inventories
8,117

 
(3,484
)
Prepaid expenses and other current assets
(6,972
)
 
(7,553
)
Deferred rack costs
(2,216
)
 
(3,413
)
Other long-term assets
217

 
74

Accounts payable
87

 
(3,282
)
Accrued expenses and other liabilities
7,299

 
2,279

Accrued interest
(680
)
 
(37
)
Other non-current liabilities
(502
)
 
(19
)
Deferred revenues
12,507

 
744

Total changes in operating assets and liabilities
25,625

 
(12,322
)
Net cash provided by (used in) operating activities
24,465

 
(2,353
)
INVESTING ACTIVITIES
 
 
 
Purchases of property and equipment
(5,114
)
 
(5,517
)
Purchases of intangible assets
(2,167
)
 
(2,644
)
Proceeds from sale of assets
9

 
5

Investments in affiliates

 
(2,536
)
Other

 
(300
)
Net cash used in investing activities
(7,272
)
 
(10,992
)
FINANCING ACTIVITIES
 
 
 
Proceeds from revolving credit facility
28,300

 
47,600

Repayments to revolving credit facility
(49,700
)
 
(30,100
)
Proceeds from issuance of senior secured notes
12,500

 

Capital contribution
573

 

Costs incurred in restructuring
(4,315
)
 

Payments for redemption of Odyssey preferred stock

 
(2,023
)
Net cash (used in) provided by financing activities
(12,642
)
 
15,477

Effect of exchange rate changes on cash
(26
)
 
214

Net increase in cash and cash equivalents
4,525

 
2,346

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
3,035

 
2,375

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
7,560

 
$
4,721

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

 
$
137

Non-cash debt for equity exchange
$
123,960

 
$


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

7


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

Note 1 - Nature of the Business

Description of the Business

American Media, Inc. and its subsidiaries (collectively, the "Company", "AMI", "we", "our" or "us") 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 the six months ended September 30, 2014. As of September 30, 2014, we published seven weekly publications: National Enquirer, Star, Globe, National Examiner, Country Weekly, OK! and Soap Opera Digest; four publications that are published 10 times per year: Shape, Men's Fitness, Muscle & Fitness and Flex; 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.

The Merger and Related Transactions

In August 2014, the Company entered into an agreement and plan of merger (the "Merger Agreement") with AMI Parent Holdings, LLC, a Delaware limited liability company (the "Parent"), which is controlled by certain investors of the Company (collectively, the "Investors"), and AMI Merger Corporation, a Delaware corporation and a wholly-owned subsidiary of Parent (the "Merger Sub"), whereby the Merger Sub was merged with and into the Company (the "Merger") with the Company surviving the Merger as a wholly-owned subsidiary of the Parent. As a result of the Merger, the Parent acquired 100% of the issued and outstanding shares of common stock of the Company. See Note 13, "Capital Structure" for further information.

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.

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 and the exchange agreement related to such 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" to permit the Merger, (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 September 2014, the Company entered into an exchange agreement (the "Debt for Equity Exchange Agreement") with the Parent and the Investors pursuant to which the Investors exchanged approximately $121.1 million in aggregate principal amount of senior secured notes of the Company, plus accrued and unpaid interest of approximately $2.9 million, for equity interests in the Parent (the "Conversion").

See Note 5, "Revolving Credit Facility and Note 6, "Senior Secured Notes" for further information regarding the Company's debt agreements and amendments thereto.


8


Liquidity

The Company is highly leveraged. As of September 30, 2014, the Company had approximately $373.1 million of outstanding indebtedness, consisting of $365.5 million of senior secured notes and $7.6 million under the revolving credit facility. Over the next year, the cash interest payments due under these debt agreements are approximately $43.2 million and there are no scheduled principal payments due. As of September 30, 2014, the Company has $7.6 million of cash and $28.0 million available pursuant to the revolving credit facility.

As further discussed in Note 2, "Summary of Significant Accounting Policies - Concentrations," the Company's former 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 transition has had 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.

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 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 from the revolving credit facility, cash generated from operations and the cash interest savings from the Conversion 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.


9


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.

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 September 30, 2014, single copy revenues consisted of copies distributed to retailers primarily by two major wholesalers. During the six months ended September 30, 2014 and 2013, The News Group accounted for approximately 50% and 29%, respectively, of our total operating revenues and The Hudson Group accounted for approximately 12% and 8%, 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 Interlink Companies ("Source"), our former 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 until January 2015 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 $4.9 million is included in the accompanying unaudited condensed consolidated statement of income (loss) for the six months ended September 30, 2014. The total provision for bad debt related to Source is $6.8 million at September 30, 2014.


10


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.

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 six months ended September 30, 2014 and 2013 were insignificant. Inventories are comprised of the following (in thousands):
 
September 30, 2014
 
March 31, 2014
Raw materials – paper
$

 
$
8,468

Finished product — paper, production and distribution costs of future issues
2,797

 
2,442

Total inventories
$
2,797


$
10,910


In August 2014, the Company entered into a long-term paper supply and purchasing agreement pursuant to which a third party manages all aspects of the Company's raw material paper inventory. As a result, the Company will no longer maintain raw material paper inventory.

Note 4 - Goodwill and Other Identified Intangible Assets

As of September 30, 2014 and March 31, 2014, the Company had goodwill with a carrying value of $178.0 million and $186.9 million, respectively, and other identified intangible assets not subject to amortization with carrying values of $248.3 million and $256.9 million, respectively. Other identified intangible assets not subject to amortization consist of tradenames with indefinite lives.


11


Identified intangible assets with finite lives subject to amortization consist of the following (in thousands):
 
 
 
September 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

 
$
(5,185
)
 
$
5,425

 
$
10,610

 
$
(4,964
)
 
$
5,646

Subscriber lists
3 - 15
 
32,702

 
(32,696
)
 
6

 
32,702

 
(32,512
)
 
190

Customer relationships
5 - 10
 
2,300

 
(1,359
)
 
941

 
2,300

 
(1,211
)
 
1,089

Other intangible assets
3
 
11,300

 
(4,807
)
 
6,493

 
9,133

 
(3,264
)
 
5,869

 
 
 
$
56,912

 
$
(44,047
)
 
$
12,865

 
$
54,745

 
$
(41,951
)
 
$
12,794


Amortization expense of intangible assets was $2.1 million and $2.4 million during the six months ended September 30, 2014 and 2013, respectively. Based on the carrying value of identified intangible assets recorded at September 30, 2014, and assuming no subsequent impairment of the underlying assets, the amortization expense is expected to be as follows (in thousands):

Fiscal Year
 
Amortization Expense
2015
 
$
1,931

2016
 
3,663

2017
 
2,168

2018
 
984

2019
 
623

  Thereafter
 
3,496

 
 
$
12,865


During an evaluation of goodwill and other identified intangible assets at September 30, 2014, the Company determined that indicators were present in certain reporting units which would suggest the fair value of the reporting unit may have declined below the carrying value. This decline was primarily due to the continuing softness in the U.S. economy, which impacts consumer spending, including further declines in certain advertising markets, resulting in lowered future cash flow projections.

As a result, an interim impairment test of goodwill and other indefinite lived intangible assets was performed as of September 30, 2014 for certain reporting units in accordance with FASB Accounting Standards Codification (“ASC”) Topic No. 350, “Goodwill and Other Intangible Assets” (“ASC 350”). Impairment testing for goodwill is a two-step process. The first step compares the fair value of the reporting unit to its carrying value, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step of the test is performed to measure the amount of the impairment charge, if any. The second step compares the implied fair value of the reporting unit's goodwill with the carrying value of that goodwill and an impairment charge is recorded for the difference. Impairment testing for indefinite lived intangible assets, consisting of tradenames, compares the fair value of the tradename to the carrying value and an impairment charge is recorded for any excess carrying value over fair value.

The evaluation resulted in the carrying value of goodwill and tradenames for certain reporting units to exceed the estimated fair value. As a result, the Company recorded an estimated pre-tax non-cash impairment charge of $8.9 million and $8.5 million to reduce the carrying value of goodwill and tradenames, respectively, during the quarter ended September 30, 2014. The Company is currently finalizing the second step of the goodwill impairment test. As a result, the impairment charge related to goodwill is an estimate and was recorded since the amount of the impairment charge was both probable and reasonably estimable as of September 30, 2014. The Company will adjust the amount of the impairment charge, as necessary, based upon finalizing the valuation during the third quarter of fiscal 2015.


12


The gross carrying amount and accumulated impairment losses of goodwill, as of September 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
)
Balance, March 31, 2014
$
123,923

 
$
22,064

 
$
31,850

 
$
9,061

 
$
186,898

 
 
 
 
 
 
 
 
 
 
Impairment

 

 
(8,890
)
 

 
(8,890
)
 
 
 
 
 
 
 
 
 
 
Goodwill
$
428,518

 
$
84,905

 
$
112,296

 
$
20,136

 
$
645,855

Accumulated impairment losses
(304,595
)
 
(62,841
)
 
(89,336
)
 
(11,075
)
 
(467,847
)
Balance, September 30, 2014
$
123,923

 
$
22,064

 
$
22,960

 
$
9,061

 
$
178,008


Impairment Charge Assumptions

The fair value of the reporting unit's goodwill and tradenames was based on the Company's projections of revenues, operating costs and cash flows of each reporting unit, considering historical and anticipated future results and general economic and market conditions as well as the impact of planned business and operational strategies. The valuations employ a combination of income and market approaches to measure fair value. The key assumptions used to determine fair value of the reporting unit's goodwill and tradenames as of September 30, 2014 were:

a)
expected cash flow periods of 5 years;
b)
terminal values based upon terminal growth rates ranging from 2% to 3%;
c)
implied multiples used in the business enterprise value income and market approaches of 3.9 to 5.0; and
d)
discount rates ranging from 14% to 15%, which were based on the Company's best estimate of the weighted average cost of capital adjusted for risks associated with the reporting unit.

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

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 six months ended September 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 six months ended September 30, 2014 and 2013 were insignificant.

During the six months ended September 30, 2014, the Company borrowed $28.3 million and repaid $49.7 million under the 2010 Revolving Credit Facility. At September 30, 2014, the Company has available borrowing capacity of $28.0 million after considering the $7.6 million outstanding balance and the $4.4 million outstanding letter of credit. The outstanding balance of the 2010 Revolving Credit Facility on September 30, 2014 of $7.6 million is included in non-current liabilities, as the outstanding balance is not due until December 2015.


13


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 below, 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 September 30, 2014, the Company was in compliance with its covenants under the 2010 Revolving Credit Facility, as amended.

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.

2010 Revolving Credit Facility Amendment

In August 2014, the Company, 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, as amended, restated, modified or supplemented from time to time, entered into Amendment No. 3 (the “Credit Agreement Amendment”) to the 2010 Revolving Credit Facility 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 2010 Revolving Credit Facility) compliance with the requirements set forth therein, the Consenting Lenders 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 2010 Revolving Credit Facility) 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 2010 Revolving Credit Facility 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 2010 Revolving Credit Facility, (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 (each as defined), (iii) consent to the sale of certain assets of the Loan Parties (as defined in the 2010 Revolving Credit Facility), (iv) restrict any payment or distribution in respect of the First Lien Notes (as defined) 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 for the quarterly period ended June 30, 2014, with the SEC and to make it available to the 2010 Revolving Credit Facility lenders.


14


Note 6 - Senior Secured Notes

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

First Lien Notes

In December 2010, we issued $385.0 million aggregate principal amount of senior secured notes, which bear interest at a rate of 11.5% per annum and mature in December 2017 (the "First Lien Notes"). Interest on the First Lien Notes is payable semi-annually on June 15th and December 15th of each year and is computed on the basis of a 360-day year comprised of twelve 30 day months.

During fiscal 2012, the Company redeemed $20.0 million in aggregate principal amount of First Lien Notes. During fiscal 2014, the Company redeemed approximately $2.3 million in aggregate principal amount of First Lien Notes. At September 30, 2014, the Company's total principal amount of First Lien Notes was approximately $362.7 million.

Subsequent to September 30, 2014, the Company repurchased $5.0 million in aggregate principal amount of First Lien Notes at a price equal to 106.5% of the aggregate principal amount thereof, plus accrued and unpaid interest in the open market. After giving effect to this repurchase, approximately $357.7 million aggregate principal amount of First Lien Notes remain outstanding.

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.

Under the First Lien Notes Indenture (as defined below), 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%

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 and mature in June 2018 (the "Second Lien Notes"). Interest on the Second Lien Notes is payable semi-annually on June 15th and December 15th of each year and is computed on the basis of a 360-day year comprised of twelve 30 day months.

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

In September 2014, pursuant to the Debt for Equity Exchange Agreement with the Parent and the Investors, the Investors exchanged approximately $7.8 million aggregate principal amount of Second Lien Notes, plus accrued and unpaid interest, for equity interest in the Parent. At September 30, 2014, the Company's total principal amount of Second Lien Notes was approximately $2.8 million.

Subsequent to September 30, 2014, the Company repurchased $0.6 million in aggregate principal amount of Second Lien Notes at a price equal to 108.0% of the aggregate principal amount thereof, plus accrued and unpaid interest in the open market. After giving effect to this repurchase, approximately $2.2 million aggregate principal amount of Second Lien Notes remain outstanding.


15


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

Under the Second Lien Notes Indenture (as defined below), the Company has the option to redeem the Second 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
 
110.125%
2014
 
106.75%
2015
 
103.375%
2016 and thereafter
 
100%

Second Lien PIK Notes

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

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, the cash interest savings (as defined in the Second Lien PIK Notes Indenture) 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. In August 2014, the Company and the Guarantors entered into an amendment to the Exchange Agreement (the “Exchange Agreement Amendment”) which provides that the Company is not required to apply the cash interest savings to repurchase outstanding First Lien Notes for the semi-annual interest periods ending on June 15, 2014 and December 15, 2014.

The December 15, 2013 and the June 15, 2014 interest payments-in-kind on the Second Lien PIK Notes totaled $1.9 million and $4.8 million, respectively, and were recorded as increases to the aggregate principal amount of Second Lien PIK Notes.

In connection with the Merger Agreement, in August 2014, the Company and certain of its subsidiaries entered into the Note Purchase Agreement with the Investors and the Company issued approximately $12.3 million in aggregate principal amount of additional Second Lien PIK Notes (the "Additional Notes"). The Additional Notes were issued under the Second Lien PIK Notes Indenture and were 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.

In September 2014, pursuant to the Debt for Equity Exchange Agreement with the Parent and the Investors, the Investors exchanged approximately $113.3 million aggregate principal amount of Second Lien PIK Notes, plus accrued and unpaid interest, which represented all of the outstanding Second Lien PIK Notes, for equity interests in the Parent. Upon the cancellation of all outstanding Second Lien PIK Notes, the collateral agreement securing the Second Lien PIK Notes was terminated and the obligations of the Company under the Second Lien PIK Notes Indenture were satisfied in full and the discharge thereof was acknowledged by the Trustee.

As of September 30, 2014, the Company’s total principal amount of Senior Secured Notes was approximately $365.5 million, consisting of $362.7 million principal amount of First Lien Notes and $2.8 million principal amount of Second Lien Notes.


16


Supplemental Indentures

In August 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, 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, 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 Senior Secured Notes then outstanding.

As a result of receiving the requisite consents, in August 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 amended 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.

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 September 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.

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

 
$
382,169

 
$
362,675

 
$
397,129

Second Lien Notes
Level 2
 
2,798

 
2,927

 
10,602

 
10,840

Second Lien PIK Notes
Level 2
 

 

 
96,200

 
95,178



17


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 September 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. During an evaluation of goodwill and other identified intangible assets at September 30, 2014, the carrying value of goodwill and tradenames for certain reporting units exceeded fair value. As a result, the Company recorded an impairment charge that incorporates fair value measurements based on Level 3 inputs. See Note 4, "Goodwill and Other Identified Intangible Assets," for further discussion on measuring the Company's non-financial assets, specifically goodwill and tradenames.

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 September 30, 2014, a valuation allowance of $52.5 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.

In August 2014, as a result of the Merger, a change of control has occurred. Accordingly, management assessed the impact of the Merger for limitations under section 382 of the Internal Revenue Code ("IRC"). Since the Company was in a net unrealized built-in gain position the Company's annual IRC section 382 limitation will likely increase over the next five years. The Company does not expect that the 382 limitation will impact our ability to utilize our tax attributes.

Note 9 - Related Party Transactions

As discussed in Note 1, "Nature of the Business" and Note 6, "Senior Secured Notes," in September 2014, the Company entered into the Debt for Equity Exchange Agreement with the Parent and the Investors pursuant to which the Investors exchanged approximately $121.1 million in aggregate principal amount of Senior Secured Notes of the Company, plus accrued and unpaid interest of approximately $2.9 million, for equity interests in the Parent.

As discussed in Note 6, "Senior Secured Notes," subsequent to September 30, 2014, the Company repurchased $5.6 million in aggregate principal amount of Senior Secured Notes, plus accrued and unpaid interest, from the Investors in the open market.

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 August 2014, the consulting agreement between Roxbury and the Company was terminated. Payments for the services received from Roxbury totaled $50,000 and $60,000 during the six months ended September 30, 2014 and 2013, respectively, and the Company has no outstanding payables to Roxbury at September 30, 2014 or March 31, 2014.


18


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.

Olympia's net income during the three and six months ended September 30, 2014 and 2013 was $1.3 million and $1.1 million, respectively.

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 and six months ended September 30, 2014 and 2013.


19


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 “LLC Conversion”) and its name was changed to Odyssey Magazine Publishing Group, Inc. (“Odyssey Corporation”). Concurrent with the LLC 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 LLC 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

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

 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
2014
2013
 
2014
2013
Balance, beginning of period
$
3,000

$
3,000

 
$
3,000

$
3,000

Net income attributable to noncontrolling interests
1,259

1,076

 
1,259

1,076

Balance, end of period
$
4,259

$
4,076

 
$
4,259

$
4,076


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 and six months ended September 30, 2014 and 2013. The management fees receivable from Radar totaled $2.3 million and $2.2 million as of September 30, 2014 and March 31, 2014, respectively and is part of other long-term assets in the accompanying condensed consolidated financial statements.


20


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 and six months ended September 30, 2014 and 2013.

Odyssey/Unconventional Partners Entertainment, LLC

In March 2013, 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 and six months ended September 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 In Store Services, Inc., formerly known as Distribution Services, Inc. ("DSI"), a wholly-owned subsidiary of American Media, Inc., and $2.3 million in cash in exchange for a 27.5% membership interest in Select Media Services, LLC, a joint venture ("Select"), which operates as a merchandising and in-store services business.

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 $0.2 million and $0.5 million during the three and six months ended September 30, 2014, respectively and are reflected in other income in the accompanying unaudited condensed consolidated statement of income (loss) and comprehensive income (loss).

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

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.


21


On April 3, 2012, the Second Circuit issued a decision reversing the dismissal of the lawsuit and reinstating the antitrust and state law claims (except the defamation claim, which Anderson withdrew), and, on January 7, 2013, the United States Supreme Court declined to review the Second Circuit decision. Following the Second Circuit decision, the case has been proceeding in the District Court and the parties engaged in discovery. Fact discovery was completed in May 2014 and expert discovery was completed in October 2014. Anderson submitted an expert report calculating that damages are approximately $470 million, which would be subject to trebling should Anderson prevail against the defendants in the lawsuit. Defendants, including American Media, Inc. and DSI, also have submitted an expert report on damages, which opines that, separate and apart from the question of liability, Anderson has suffered no damages. The deadline for the parties to file their Motions for Summary Judgment is December 15, 2014.

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.

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.


22


The Corporate and Other segment includes international licensing, photo syndication to third parties and corporate overhead. Corporate overhead expenses are not allocated to other segments and include production, circulation, executive staff, information technology, accounting, legal, human resources and administration department costs. The Corporate and Other segment also includes print and digital advertising sales and strategic management direction in the following areas: manufacturing, subscription circulation, logistics, event marketing and full back office financial functions. 

The Company’s accounting policies for the business segments are the same as those described in Note 2, "Summary of Significant Accounting Policies." The following information includes certain intersegment transactions and is, therefore, not necessarily indicative of the results had the operations existed as stand-alone businesses. Intersegment transactions represent intercompany services, which are billed at what management believes are prevailing market rates. These intersegment transactions, which represent transactions between operating units in different business segments, are eliminated in consolidation.

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

 
Three Months Ended September 30,
 
Six Months Ended September 30,

2014
 
2013
 
2014
 
2013
Operating revenues
Celebrity Brands
$
42,763

 
$
55,116

 
$
89,610

 
$
106,504

Women's Active Lifestyle Group
12,714

 
12,763

 
27,631

 
29,523

Men's Active Lifestyle Group
17,495

 
19,521

 
32,648

 
35,625

Corporate and Other
1,214

 
3,204

 
2,552

 
9,344

Total operating revenues
$
74,186

 
$
90,604

 
$
152,441

 
$
180,996

Operating income (loss)
 
 
 
 
 
 
 
Celebrity Brands
$
12,858

 
$
19,655

 
$
30,751

 
$
38,113

Women's Active Lifestyle Group
1,338

 
98

 
2,871

 
3,112

Men's Active Lifestyle Group
(13,566
)
 
5,764

 
(9,873
)
 
11,051

Corporate and Other
(19,849
)
 
(14,714
)
 
(37,279
)
 
(24,907
)
Total operating income (loss)
$
(19,219
)
 
$
10,803

 
$
(13,530
)
 
$
27,369

Depreciation and amortization
 
 
 
 
 
 
 
Celebrity Brands
$
399

 
$
898

 
$
957

 
$
1,733

Women's Active Lifestyle Group
273

 
177

 
510

 
320

Men's Active Lifestyle Group
275

 
189

 
528

 
349

Corporate and Other
2,243

 
2,361

 
4,553

 
4,315

Total depreciation and amortization
$
3,190

 
$
3,625

 
$
6,548

 
$
6,717

Impairment of goodwill and intangible assets
 
 
 
 
 
 
 
Men's Active Lifestyle Group
17,403

 

 
17,403

 

Corporate and Other
1,055

 

 
1,055

 

Total impairment of goodwill and intangible assets
$
18,458

 
$

 
$
18,458

 
$

Amortization of deferred rack costs
 
 
 
 
 
 
 
Celebrity Brands
$
1,226

 
$
1,566

 
$
2,586

 
$
3,166

Women's Active Lifestyle Group
99

 
76

 
179

 
150

Men's Active Lifestyle Group
10

 
13

 
28

 
23

Total amortization of deferred rack costs
$
1,335

 
$
1,655

 
$
2,793

 
$
3,339



23


Total Assets
September 30,
2014
 
March 31,
2014
Celebrity Brands
$
313,197

 
$
339,617

Women's Active Lifestyle Group
71,125

 
70,828

Men's Active Lifestyle Group
90,589

 
105,994

Corporate and Other (1)
66,807

 
56,201

Total assets
$
541,718

 
$
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 and six months ended September 30, 2014 and 2013. The following tables present revenue by geographic area for the three and six months ended September 30, 2014 and 2013 and the assets employed as of September 30, 2014 and March 31, 2014 (in thousands):

 
Three Months Ended September 30,
 
Six Months Ended September 30,

2014
 
2013
 
2014
 
2013
Operating revenues:
 
 
 
 
 
 
 
United States of America
$
71,424

 
$
87,525

 
$
146,648

 
$
174,761

Europe
2,762

 
3,079

 
5,793

 
6,235

Total operating revenues
$
74,186

 
$
90,604

 
$
152,441

 
$
180,996



September 30,
2014
 
March 31,
2014
Assets:
 
 
 
United States of America
$
533,221

 
$
564,214

Europe
8,497

 
8,426

Total assets
$
541,718

 
$
572,640


Note 13 - Capital Structure

As discussed in Note 1, "Nature of the Business," 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.

Prior to the Merger, the Company had authorized 15,000,000 shares of stock, comprised of 1,000,000 shares of $0.0001 par value preferred stock and 14,000,000 shares of 0.0001 par value common stock. The Board of Directors could determine the rights, preferences and limitations of the preferred stock when issued. Prior to the Merger, there were no shares of preferred stock issued or outstanding, 10,000,000 shares of common stock issued and outstanding and 1,172,150 shares of restricted common stock issued. See Stock Based Compensation below for a further description of the Equity Incentive Plan regarding the shares of restricted common stock.

In accordance with the Merger Agreement, each share of the Company’s common stock issued and outstanding immediately prior to the Merger, including any shares of restricted stock of the Company, were converted into the right to receive $0.1795 per share in cash, and each share of the Company’s common stock was canceled and retired and ceased to exist.


24


Each share of common stock of the Merger Sub outstanding immediately prior to the Merger was converted into and exchanged for one validly issued, fully paid and non-assessable share of the Company’s common stock. Immediately prior to the Merger, Merger Sub had 100 shares of common stock issued and outstanding. As result, immediately after the Merger, the Company has 100 shares of common stock issued and outstanding.

Subsequent to the Merger, the Company has authorized 68,000,000 shares of stock, comprised of 1,000,000 shares of $0.0001 preferred stock and 67,000,000 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 September 30, 2014, there were no shares of preferred stock issued or outstanding and 100 shares of common stock issued and outstanding.

As discussed in Note 6, "Senior Secured Notes," in September 2014, pursuant to the Debt for Equity Exchange Agreement with the Parent and the Investors, the Investors exchanged approximately $121.1 million aggregate principal amount of Senior Secured Notes, plus accrued and unpaid interest of approximately $2.9 million, for equity interest in the Parent.

Also, in September 2014, the Parent made a capital contribution to the Company of approximately $0.6 million in cash.

Stock Based Compensation

In December 2010, the Company adopted an equity incentive plan (the “Equity Incentive Plan”), which provided 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 administered the Equity Incentive Plan and had the authority to determine the recipients to whom awards were 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 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 were entitled to receive dividends, if and when declared by the Company, and could have exercised voting rights with respect to the common shares while the shares were restricted.

Immediately prior to the Merger, there were 1,172,150 shares of restricted common stock issued. In accordance with FASB ASC 718, Compensation - Stock Compensation, the Company recognized 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.

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:




25


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

 
$
2,043

 
$
5,517

 
$

 
$
7,560

Trade receivables, net

 
29,494

 
1,569

 

 
31,063

Inventories

 
1,851

 
946

 

 
2,797

Prepaid expenses and other current assets

 
28,804

 
2,061

 
(5,487
)
 
25,378

Total current assets

 
62,192

 
10,093

 
(5,487
)
 
66,798

PROPERTY AND EQUIPMENT, NET:
 
 
 
 
 
 
 
 
 
Leasehold improvements

 
3,798

 

 

 
3,798

Furniture, fixtures and equipment

 
43,151

 
860

 

 
44,011

Less – accumulated depreciation

 
(26,037
)
 
(693
)
 

 
(26,730
)
Total property and equipment, net

 
20,912

 
167

 

 
21,079

OTHER ASSETS:
 
 
 
 
 
 
 
 
 
Deferred debt costs, net
6,068

 

 

 

 
6,068

Deferred rack costs, net

 
4,496

 

 

 
4,496

Investments in affiliates
531,657

 
513

 

 
(531,732
)
 
438

Other long-term assets

 
3,624

 

 

 
3,624

Total other assets
537,725

 
8,633

 

 
(531,732
)
 
14,626

GOODWILL AND OTHER IDENTIFIED INTANGIBLE ASSETS:
 
 
 
 
 
 
Goodwill

 
173,498

 
4,510

 

 
178,008

Other identified intangibles, net

 
255,207

 
6,000

 

 
261,207

Total goodwill and other identified intangible assets

 
428,705

 
10,510

 

 
439,215

TOTAL ASSETS
$
537,725

 
$
520,442

 
$
20,770

 
$
(537,219
)
 
$
541,718

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

 
$
19,341

 
$
365

 
$

 
$
19,706

Accrued expenses and other liabilities

 
42,053

 
8,014

 
(14,995
)
 
35,072

Accrued interest
12,565

 
5

 

 

 
12,570

Deferred revenues

 
44,929

 
896

 

 
45,825

Total current liabilities
12,565

 
106,328

 
9,275

 
(14,995
)
 
113,173

NON-CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
Senior secured notes
365,473

 

 

 

 
365,473

Revolving credit facility
7,600

 

 

 

 
7,600

Other non-current liabilities

 
6,670

 

 

 
6,670

Deferred income taxes

 
86,773

 

 
9,508

 
96,281

Due (from) to affiliates
203,825

 
(207,957
)
 
4,132

 

 

Total liabilities
589,463

 
(8,186
)
 
13,407

 
(5,487
)
 
589,197

COMMITMENTS AND CONTINGENCIES
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests

 

 
4,259

 

 
4,259

STOCKHOLDERS' (DEFICIT) EQUITY:
 
 
 
 
 
 
 
 
 
Total stockholders' (deficit) equity
(51,738
)
 
528,628

 
3,104

 
(531,732
)
 
(51,738
)
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
$
537,725

 
$
520,442

 
$
20,770

 
$
(537,219
)
 
$
541,718



26


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