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AMERICAN MEDIA INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) ORGANIZATION OF INFORMATION The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) was prepared to provide the reader with a view and perspective of our business through the eyes of management and should be read in conjunction with our audited consolidated financial statements and the accompanying notes included elsewhere in this Annual Report. In addition to historical data, this discussion contains forward-looking statements about our business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those discussed in "Cautionary Statements Regarding Forward-Looking Information" and "Risk Factors" included in this Annual Report. Our MD&A is presented in the following sections: • Executive Summary • Current Developments and Management Action Plans • Results of Operations • Operating Segments • Liquidity and Capital Resources • Contractual Obligations and Other Commitments • Seasonality and Quarterly Fluctuations • Off-Balance Sheet Financing • Application of Critical Accounting Estimates • Recently Adopted and Recently Issued Accounting Pronouncements EXECUTIVE SUMMARY We are the largest publisher of celebrity and health and active lifestyle magazines in the United States and operate a diversified portfolio of 14 publications. Our celebrity titles together are number one in market share in newsstand circulation in the celebrity category and, on-line, are the fastest growing brands in the category. Our health and active lifestyle titles together have the highest market share of national magazine advertising pages in their competitive set in the United States. Total circulation of our print publications with a frequency of six or more times per year were approximately 6.0 million copies per issue during the fiscal year ended March 31, 2014. Our well-known publications span three primary operating segments: Celebrity, Women's Active Lifestyle and Men's Active Lifestyle. Within our Celebrity segment, our portfolio of brands includes: National Enquirer, Star, OK!, Globe, National Examiner, Soap Opera Digest and Country Weekly. Within our Women's Active Lifestyle segment, our portfolio of brands includes: Shape, Fit Pregnancy and Natural Health. Within our Men's Active Lifestyle segment, our portfolio of brands include: Men's Fitness, Muscle & Fitness, Muscle & Fitness Hers and Flex. 29-------------------------------------------------------------------------------- Table of Contents We believe our leadership position in these segments provides us with strong competitive advantages in the publishing market. Our iconic brands have enabled us to build a loyal readership and establish relationships with major advertisers and distributors. We have leveraged the strength of our portfolio of brands through joint ventures, licensing opportunities, and strategic relationships with several national retailers. We believe the combination of our well-known brands, established relationship with advertisers and distributors, and ability to leverage our brands with major retailers and to monetize content across multiple platforms creates a competitive position that is difficult to replicate. Our brands go beyond the printed page. We engage an audience of men and women every month through not only books and magazines, but also social media, television, and on all digital platforms, from phones and tablets to laptops and desktops. We are embarking on a transformation from a leading media company to a lifestyle brand that informs and entertains while also selling apparel, nutritional products, and recreational activities. Our largest revenue stream comes from single copy newsstand sales. Our print circulation revenue is 57% of our operating revenue for the fiscal year ended March 31, 2014, of which 78% was generated by single copy sales and the remaining 22% was generated by subscriptions. Single copy newsstand units are sold through national distributors, wholesalers and retailers, and subscription copies are mailed to subscribers and sold as digital copies. As of March 31, 2014, our digital subscriptions represent 23% of our 4.1 million paid subscriptions, the highest percentage among our competitive set. Our digital subscription revenue represented 1% of our total operating revenues for the fiscal year ended March 31, 2014. Our second largest revenue stream comes from multi-platform advertising. Our print advertising revenue, generated primarily by national advertisers, represented 31% of our total operating revenues and our digital advertising revenue represented 12% of our total advertising revenue for the fiscal year ended March 31, 2014. Our digital advertising revenue represented 4% of our total operating revenues for the fiscal year ended March 31, 2014. Advertising revenue is typically highest in the fourth quarter of our fiscal year due to seasonality. Our primary operating expenses consist of production, distribution, circulation, editorial and selling, general and administrative. We incur most of our operating expenses during the production of our printed magazines, which includes costs for printing and paper. Distribution and circulation expenses primarily consist of postage and other costs associated with fulfilling subscriptions and newsstand transportation. Editorial expenses represent costs associated with manuscripts, photographs and related salaries. Paper is the principal raw material utilized in our publications. We purchase paper directly from suppliers and ship it to third-party printing companies. The price of paper is driven by market conditions and therefore difficult to predict. Changes in paper prices could significantly affect our business. We believe adequate supplies of paper are available to fulfill our planned, as well as future, publishing requirements. We have long-term printing contracts with three major third-party printing companies. Our production expenses, including paper and printing costs, accounted for approximately 29%, 27% and 35% of our operating expenses for the fiscal years ended March 31, 2014, 2013 and 2012, respectively. Sales and marketing of the magazines to retailers is handled by third-party wholesalers through multi-year arrangements. During the fiscal years ended March 31, 2014, 2013 and 2012, approximately 43%, 43% and 35%, respectively, of our circulation revenue was derived from two of these third-party wholesalers. Billing, collection and distribution services for retail sales of the magazines are handled by a national distributor. In May 2014, our second-largest wholesaler notified us that they were ceasing substantially all distribution operations in the near term and filed for bankruptcy in June 2014. For information regarding the future impact on the Company, see "Current Developments and Management Action Plans - Current Developments - Other Developments" below. Our financial performance depends, in large part, on varying conditions in the markets we serve. Demand in these markets tends to fluctuate in response to overall economic conditions and current events. Economic downturns in the markets we serve generally result in reductions in revenue as a result of lower consumer spending, which can lead to a reduction in advertising revenue. Our fiscal year ended on March 31, 2014 and is referred to herein as fiscal 2014. References to our fiscal year (e.g. "fiscal 2014") refer to our fiscal year ended March 31st of the applicable fiscal year. 30-------------------------------------------------------------------------------- Table of Contents CURRENT DEVELOPMENTS AND MANAGEMENT ACTION PLANS Current Developments Digital Initiatives We continue to expand the availability of our print content on digital platforms. Our digital revenue for fiscal 2014 increased 83% to $23.1 million, over the comparable prior year period driven by our digital team comprised of senior executives hired from companies such as Fox Mobile, Microsoft and Google and the continued implementation of our digital investment strategy. We now have a fully integrated print and digital sales team of more than 90 sales executives, with a dozen digital brand champion sales staff across all the websites. We believe our structure is highly effective to respond to our advertisers' requests for integrated marketing solutions for combined print and digital, as well as digital-only programs. We continue to expand our digital distribution platform across our other well-known brands by launching digital magazines, or "digi-mags," and building out our other websites. We have launched digital editions for all our brands on the Apple and Google newsstands and Zinio, Amazon Kindle and Barnes & Noble Nook platforms. We are also launching single-subject, single-sponsored "digi-mags" for both Apple and Android operating systems, and we are currently syndicating Shape content on Yahoo! Shine, AOL, Huffington Post, StyleList and Kitchen Daily. In May 2014, we launched the AMI InPrint app, a new mobile app for the iPhone and iPad which provides readers with unlimited access to all our publications and lifestyle books for an introductory price of $0.99 per month. The InPrint app was launched for the Android operating system in July 2014. Print Initiatives The relaunch of Men's Fitness and Shape in both print and digital formats continues to be successful as advertising revenues continue to increase. During fiscal 2014, advertising revenues increased 45% and 18% for Men's Fitness and Shape, respectively, as compared to prior year. We published one less issue of Shape magazine during fiscal 2014 versus the prior year period. In April 2013, we redesigned and repositioned Men's Fitness, from a gym-focused, work-out only magazine to one targeting young men with active lifestyles with fitness as the new measure of success. The new editorial vision of Men's Fitness has continued to attract new luxury goods advertisers. From October 1, 2013 through March 31, 2014, there were 22 new lifestyle advertisers, such as Channel Sport, which had not previously invested in Men's Fitness. In May 2013, Shape regained the number one share-of-market position in newsstand sales growth and print advertising pages. It is the category leader in print ad pages with a 31% share of market within its competitive set against Self, Fitness and Women's Health. The relaunch of Shape continues to attract new advertising clients, and from October 1, 2013 to March 31, 2014, there were 36 new advertisers which had not previously invested in Shape. Arnold Schwarzenegger has returned to AMI as the Group Executive Editor for Muscle & Fitness and Flex upon the completion of his term as governor of California. Since Mr. Schwarzenegger's return, we have experienced an increase in advertising revenues at Muscle & Fitness. During fiscal 2014, advertising revenue increased 12% for Muscle & Fitness over the comparable prior year period. One of our nutritional supplement advertisers has launched an Arnold Schwarzenegger branded line of supplements supporting the four pillars of fitness: performance, power and strength, nutrient support and recovery. These supplements are available at most major health and nutrition specialty stores as well as through on-line retailers. To support this launch, we have secured an exclusive commitment for both print and digital advertising starting with the October 2013 edition of Muscle & Fitness. Branded Products In the beginning of fiscal 2014, we became a preferred digital content partner for Microsoft and entered into agreements to produce Shape, Men's Fitness and Muscle & Fitness branded exercise and workout videos for Microsoft to incorporate into their Bing Health and Fitness application. We are continuing to promote Shape branded products, and launched Shape nutritional products which are available in CVS, Rite Aid, Drugstore.com and Target. Based on the success of the launch, we will expand the Shape nutritional products to be on sale in Walgreens in fiscal 2015. In July 2013, we signed a license agreement for a line of Shape women's active wear which will be designed by a major apparel designer and is expected to be in retail stores by November 2014. 31-------------------------------------------------------------------------------- Table of Contents Pursuant to our long-term agreement with David Zinczenko and his company, Galvanized Media, they continue to work exclusively on Men's Fitness and Muscle & Fitness and a branded book division for AMI utilizing the Men's Fitness, Shape and Natural Health brands. With Mr. Zinczenko's assistance we have redesigned and relaunched Men's Fitness and Muscle & Fitness and published several books. The Men's Fitness branded book The 101 Greatest Workouts of all Time, went on sale in January 2014. The Shape branded books The Bikini Body Diet and Clean Green Drinks: 100+ Cleansing Recipes to Renew & Restore Your Body and Mind went on sale in September 2013 and April 2014, respectively. The Natural Health branded book The Doctor's Book of Natural Health Remedies went on sale in April 2014. Mr. Zinczenko spent more than 20 years at Rodale, where he served as editor-in-chief of Men's Health and general manager of Women's Health and Rodale Books. In September 2013, together with our strategic partners, REELZ Channel, owned by Hubbard Broadcasting, and UnConventional Studios, LLC, we launched OK!TV, a television show based on OK! magazine, which was syndicated in approximately 80% of the United States. In addition to the syndication market, the REELZ channel airs the show the day after it runs in syndication, to approximately 70 million households. Other Developments In September 2013, we divested substantially all of the assets primarily used in the distribution and merchandising businesses operated by Distribution Services, Inc. ("DSI"), a wholly-owned subsidiary of American Media, Inc. DSI was an in-store product merchandising and marketing company doing business in the U.S. and Canada. DSI serviced the Company by placing and monitoring its print publications, as well as third-party publications, to ensure prominent display in major national and regional retail, drug and supermarket chains. DSI also provided marketing, merchandising and information gathering services to third parties, including non-magazine clients. The divested assets, which consisted primarily of working capital (exclusive of $3.7 million in accounts receivable which are being collected by AMI), the sales and support workforce and certain other related assets, were contributed together with $2.3 million cash in exchange for a membership interest in a limited liability company. In October 2013, we exchanged approximately $94.3 million aggregate principal amount of our 13.5% second lien notes due June 2018 (the "Second Lien Notes") for an equal aggregate principal amount of new senior secured notes, which bear interest at a rate of 10.0% per annum, payable in kind, and mature in June 2018 (the "Second Lien PIK Notes"), pursuant to an exchange agreement (the "Exchange Agreement"). The Exchange Agreement provides for, among other things, interest payments, in kind, at a rate of 10% per annum until December 15, 2016 or earlier upon the occurrence of certain specified events, at which time interest payments on the Second Lien PIK Notes will be payable in cash at a rate of 13.5% per annum. Subject to certain exceptions, we are required under the indenture governing the Second Lien PIK Notes and the Exchange Agreement to utilize the cash interest savings to repurchase certain of our 11.5% first lien notes due December 2017 (the "First Lien Notes"). After giving effect to this exchange, approximately $10.6 million principal amount of Second Lien Notes remains outstanding. See "Liquidity and Capital Resources" for further discussion regarding the Second Lien Notes and the Second Lien PIK Notes. During the third quarter of fiscal 2014, we recorded a pre-tax non-cash impairment charge of $9.2 million for the Men's Active Lifestyle segment tradenames. In February 2014, we repurchased approximately $2.3 million aggregate principal amount of our First Lien Notes in accordance with the Second Lien PIK Notes' Exchange Agreement. In May 2014, we were notified by our national distributor (the "Distributor") for our publications in the U.S. and Canada that, due to non-payment of their receivables from our second-largest wholesaler (the "Wholesaler"), the Distributor will cease shipping our publications to the Wholesaler effective immediately. Further, in May 2014, the Wholesaler notified us that they were ceasing substantially all distribution operations in the near term and filed for bankruptcy in June 2014. On our behalf, the Distributor utilizes wholesalers to sell our publications to retailers for ultimate sale to consumers. Our net sales to this Wholesaler were approximately 14% of our total operating revenues during the fiscal year ended March 31, 2014. Subject to the terms of our agreement with the Distributor, our exposure for bad debt related to the Wholesaler is currently expected to be approximately $5.0 million to $7.0 million, of which $2.0 million is included in our operating expenses for the fiscal year ended March 31, 2014. Our Distributor is working with the two remaining wholesalers and retailers to transition the newsstand circulation to them. We estimate that it will take approximately twelve to twenty four weeks for the transition to be completed. Our single copy newsstand sales could be reduced by approximately $10.0 million to $20.0 million during this transition period, depending on the length of time required to complete the transition to the remaining two wholesalers. In addition, after completing the transition, our revenues could be temporarily or permanently reduced if consumers at the impacted retailers do not resume purchasing our publications at the same rate or quantities previously purchased. 32-------------------------------------------------------------------------------- Table of Contents In July 2014, we received waivers under our revolving credit facility providing us additional time to file this Annual Report for the fiscal year ended March 31, 2014 with the SEC and make it available to the revolving credit facility lenders. In August 2014, we entered into an agreement and plan of merger (the "Merger Agreement") with certain investors of AMI (collectively, the "Investors") for the Investors to acquire 100% of the issued and outstanding shares of common stock of AMI through a merger (the "Merger") whereby a subsidiary of an entity owned by funds managed and/or controlled by the Investors will be merged with and into AMI, with AMI surviving the Merger. In connection with signing the Merger Agreement, we also entered into a note purchase agreement (the "Note Purchase Agreement") with the Investors pursuant to which we will issue additional Second Lien PIK Notes to the Investors at par plus accrued interest for a total purchase price equal to $12.5 million. The closing of the Merger and the closing under the Note Purchase Agreement are expected to occur after the filing of this Annual Report with the SEC on the date hereof. See "Liquidity and Capital Resources - Merger and Related Transactions" within this Item 7, "Management's Discussion and Analysis of Financial Condition and Results and Operations," for further information regarding the Merger Agreement and the Note Purchase agreement. In addition, in August 2014, prior to executing the Merger Agreement and the Note Purchase Agreement, AMI entered into an amendment to the revolving credit facility to, among other things, (i) amend the definition of "Change in Control," (ii) permit the issuance of additional Second Lien PIK Notes pursuant to the Note Purchase Agreement and (iii) amend the first lien leverage ratio to be equal to or less than 5.25 to 1.00 from April 1, 2014 through and including the quarter ended June 30, 2015. From July 1, 2015 through December 31, 2015, the first lien leverage ratio must be equal to or less than 4.50 to 1.00, the ratio in effect prior to the amendment. Similarly, prior to the execution of the Merger Agreement and the Notes Purchase Agreement, AMI entered into various supplemental indentures to, among other things, permit the transactions contemplated by the Merger Agreements and the Note Purchase Agreement and eliminate AMI's obligation to repurchase approximately $12.7 million of First Lien Notes using the cash interest savings from the semi-annual interest periods ending on June 15, 2014 and December 31, 2014. See "Liquidity and Capital Resources - Merger and Related Transactions" within this Item 7, "Management's Discussion and Analysis of Financial Condition and Results and Operations," for further discussion. Management Action Plans for Revenue Enhancement and Cost Savings During fiscal 2012, we developed and implemented management action plans totaling $31.7 million of cost savings in fiscal year 2012 (the "2012 Management Action Plans"). The expense reductions were primarily in the production area related to the renegotiation and extension of our RR Donnelly printing contract, print order reductions to increase efficiencies for all of our publications, reduced book sizes to be comparable to our competitive set, reduced general and administrative and employee related expenses, as well as paper rate savings based on our in-house purchasing strategy. We realized the benefits from the 2012 Management Action Plan in fiscal 2012, 2013 and 2014 and we will continue to receive certain of these cost savings throughout fiscal 2015 and beyond. During fiscal 2013, we developed and implemented management action plans that resulted in revenue enhancements of $8.4 million and operating income of $3.1 million from the publishing of 27 additional pop-iconic special issues, primarily in the Celebrity Brands segment. In addition to the revenue enhancements, we developed and implemented management action plans that resulted in $13.7 million of cost savings in fiscal 2013 (the "2013 Management Action Plans"). The expense improvements were primarily in the manufacturing area related to the ongoing benefits from our RR Donnelly printing contract, print order efficiency plans, paper rate savings based on our in-house purchasing strategy, efficient book sizes and reduced employee-related expenses. We realized the benefits from the 2013 Management Action Plan in fiscal 2013 and 2014 and we will continue to receive certain of these cost savings throughout fiscal 2015 and beyond. During fiscal 2014, we developed and implemented management action plans that resulted in $5.1 million of cost savings in fiscal 2014 (the "2014 Management Action Plans"). The expense improvements were primarily in print order efficiency plans and editorial expense reductions. We realized the benefits from the 2014 Management Actions Plan in fiscal 2014 and we will continue to receive certain of these cost savings throughout fiscal 2015 and beyond. Reference to Management Action Plans refers to the 2012 Management Action Plans, 2013 Management Action Plans and 2014 Management Action Plans, collectively. 33-------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS The following table summarizes our operating results on a consolidated basis: Fiscal years ended March 31, % Change (in thousands) 2014 2013 2012 '14 vs. '13 '13 vs. '12 Operating revenues: Circulation $ 196,421 $ 212,720 $ 228,683 (8 )% (7 )% Advertising 120,578 107,151 126,117 13 % (15 )% Other 27,222 28,655 31,816 (5 )% (10 )% Total operating revenues $ 344,221 $ 348,526 $ 386,616 (1 )% (10 )% Operating expenses 304,118 348,601 320,299 (13 )% 9 % Operating (loss) income 40,103 (75 ) 66,317 * * Other expense, net (60,096 ) (61,464 ) (61,533 ) (2 )% - %Loss (income) before income taxes (19,993 ) (61,539 ) 4,784 (68 )% * Income tax provision (benefit) 33,278 (5,994 ) (17,509 ) * (66 )% Net loss (income) (53,271 ) (55,545 ) 22,293 (4 )% * Less: net (income) attributable to the noncontrolling interest (1,048 ) (694 ) (726 ) 51 % (4 )% Net loss attributable to American Media, Inc. and subsidiaries $ (54,319 ) $ (56,239 ) $ 21,567 (3 )% * * Represents an increase or decrease in excess of 100%. Operating Revenues Total operating revenues decreased slightly during fiscal 2014 due to a decline in circulation revenue and the divestiture of DSI, which was mostly offset by the increase in advertising revenue. Advertising revenue continues to increase as a result of the market acceptance for the editorial repositioning of Shape and Men's Fitness. On a pro forma basis, after the divestiture of DSI, total operating revenues would have increased $5.8 million or 2% during fiscal 2014. Other revenues would have increased $8.7 million or 64% primarily due to our digital initiatives and continuing success of the Mr. Olympia event. During fiscal 2013, total operating revenues decreased 10% due to a decline in circulation and advertising revenue. Advertising revenue declined as print advertisers shifted their advertising dollars from print to broadcast for the 2012 Summer Olympics coupled with the impact of Superstorm Sandy which caused media planning delays and cancellation of print media commitments. The following table summarizes our operating revenues, by type, as a percentage of total operating revenues: Fiscal years ended March 31, 2014 2013 2012 Circulation 57 % 61 % 59 % Advertising 35 % 31 % 33 % Other 8 % 8 % 8 % Total 100 % 100 % 100 % Circulation Revenue Our circulation revenue represented 57%, 61% and 59% of our operating revenues during fiscal 2014, 2013 and 2012, respectively. Our circulation revenue is comprised of the following components: Fiscal years ended March 31, 2014 2013 2012 Single Copy 78 % 78 % 78 % Subscription 22 % 22 % 22 % Total 100 % 100 % 100 % 34-------------------------------------------------------------------------------- Table of Contents Digital subscription revenue represented 2%, 3% and 1% of our circulation revenue during fiscal 2014, 2013 and 2012, respectively. Circulation revenue declined $16.3 million and $16.0 million during fiscal 2014 and 2013, respectively, compared to the prior fiscal year due to the continued softness in the U.S. economy, coupled with the decline in the celebrity magazine market and the discontinuance and reduction of special publications. Circulation revenue was further impacted during fiscal 2013 by the temporary closures of thousands of stores in the Mid-Atlantic and Northeast regions due to Superstorm Sandy. Advertising Revenue Our advertising revenue represented 35%, 31% and 33% of our operating revenues during fiscal 2014, 2013 and 2012, respectively. Our advertising revenue is generated from the following components: Fiscal years ended March 31, 2014 2013 2012 Print 88 % 91 % 94 % Digital 12 % 9 % 6 % Total 100 % 100 % 100 % Advertising revenue increased $13.4 million during fiscal 2014 due to higher ad spending by beauty, packaged goods, luxury goods and pharmaceutical advertisers, primarily in Shape and Men's Fitness as a result of the market acceptance for the editorial repositioning of these magazines. In addition, advertising revenue has also increased in Star and OK! magazine due to the performance of our superior marketing programs, content integration and greater efficiencies in reaching our target audience. Advertising revenue decreased $19.0 million during fiscal 2013 due to reduced ad spending by beauty, packaged goods and luxury goods advertisers, primarily in Shape and Star. During fiscal 2013, these print advertisers shifted their advertising dollars from print to broadcast for the 2012 Summer Olympics. There was also a reduction in ad spending by pharmaceutical advertisers, primarily in Men's Fitness, Muscle and Fitness and Flex. During fiscal 2013, these print advertisers canceled their advertising dollars for sports nutrition and diet products due to federal regulatory complaints on their products. All of these advertisers returned to these publications during the first quarter of fiscal 2014 with new products. Lastly, several of these advertisers' ad agencies were impacted by Superstorm Sandy in fiscal 2013, which caused media planning delays and cancellation of print media commitments. Other Revenue Our other revenue represented 8% of our operating revenues during fiscal 2014, 2013 and 2012. During fiscal 2014, other revenue decreased $1.4 million primarily due to a decline in revenue from the DSI divestiture in September 2013. On a pro forma basis, to reflect the divestiture of DSI, other revenues would have increased $8.7 million or 64%, due to the increase in revenues from the Microsoft projects, the Mr. Olympia event and management fees and income from certain joint ventures. During fiscal 2013, other revenue decreased $3.2 million primarily due to a 10% decline in newsstand sales for the publishing industry, which caused a $3.0 million revenue shortfall in DSI, which was partially offset by a $0.6 million increase from publishing services, coupled with the non-recurring termination fee we received in fiscal 2012 of $1.4 million upon the termination of one of our international licensing agreements. 35-------------------------------------------------------------------------------- Table of Contents Operating Expenses Operating expenses during fiscal 2014, 2013 and 2012 were as follows: Fiscal years ended March 31, % Change (in thousands) 2014 2013 2012 '14 vs. '13 '13 vs. '12 Operating Expenses: Editorial $ 38,510 $ 40,850 $ 43,008 (6 )% (5 )% Production 89,195 95,809 112,281 (7 )% (15 )% Distribution, circulation and other cost of sales 57,241 65,742 77,020 (13 )% (15 )% Total production related costs 184,946 202,401 232,309 (9 )% (13 )% Selling, general and administrative 95,731 81,745 79,451 17 % 3 % Depreciation and amortization 14,203 9,932 8,539 43 % 16 % Impairment of goodwill and intangible assets 9,238 54,523 - (83 )% * Total operating expenses $ 304,118 $ 348,601 $ 320,299 (13 )% 9 % * Represents an increase or decrease in excess of 100%. Total Production Related Costs Production related costs decreased during fiscal 2014 and 2013 compared to the prior year periods primarily due to planned expense reductions pursuant to the Management Action Plans in the following areas: $2.3 million in editorial expenses, $6.6 million in production expenses and $8.5 million in distribution and circulation during fiscal 2014 and $2.2 million in editorial expenses, $16.5 million in production and $11.3 million in distribution and circulation during fiscal 2013. Selling, General and Administrative Selling, general and administrative costs increased $14.0 million and $2.3 million during fiscal 2014 and 2013, respectively, as compared to the prior year periods. Expenses increased during fiscal 2014 primarily due to the continued investment in our digital strategy ($1.1 million), bad debt expense related to wholesaler shutdowns ($4.7 million), higher advertising sales expenses primarily for salaries and commissions ($2.7 million), increase in outside services ($2.8 million) and restructuring costs, severance and closure of certain publications ($1.0 million). These increases have been partially offset by the divestiture of DSI ($0.2 million). The increase during fiscal 2013 is primarily attributable to a $1.3 million bad debt expense related to a single advertiser and our continued investment in our digital strategy. Depreciation and Amortization Depreciation and amortization expenses, which are non-cash, increased $4.3 million and $1.4 million during fiscal 2014 and 2013, respectively, as compared to the prior year periods due to the increases in property and equipment and intangible assets. Impairment of Goodwill and Intangible Assets During an evaluation of goodwill and other identified intangible assets during fiscal 2014 and 2013, we determined that indicators were present in certain reporting units that would suggest the fair value of the reporting unit may have declined below the carrying value. This decline was primarily the result of the near-term advertising revenue shortfall coupled with the continued softness in the print publication industry overall, which resulted in lowered future cash flow projections. As a result, an interim impairment test of goodwill and other indefinite-lived intangible assets was performed as of December 31, 2013 and 2012 for certain reporting units. The evaluation resulted in the carrying value of goodwill and tradenames for certain reporting units to exceed the fair value. As a result, the Company recorded a pre-tax non-cash impairment charge totaling $9.2 million for tradenames and $54.5 million for goodwill and tradenames during fiscal 2014 and 2013, respectively. 36-------------------------------------------------------------------------------- Table of Contents Non-Operating Items Interest Expense Interest expense decreased $1.4 million during fiscal 2014 and increased $1.4 million during fiscal 2013 when compared to the prior year period due to the additional interest on the First Lien Notes during the registration default period in fiscal 2013. Amortization of Deferred Debt Costs Amortization of deferred debt costs increased during fiscal 2014 due to the acceleration of amortization associated with the redemption of approximately $2.3 million principal amount of First Lien Notes in February 2014. The redemption of approximately $20.0 million principal amount of First Lien Notes during fiscal 2012 resulted in a decrease in amortization expenses of the related deferred debt costs during fiscal 2013. Income Taxes We recorded an income tax provision of $33.3 million during fiscal 2014 due to the $40.3 million valuation allowance which was recorded against the Company's net deferred tax assets. During fiscal 2013 and 2012, we recorded an income benefit of $6.0 million and $17.5 million, respectively. The decrease in income tax benefit is due to the elimination of a previously recognized valuation allowance of $17.7 million against the Company's deferred tax assets during fiscal 2012. Net Loss Attributable to American Media, Inc. The $54.3 million of net loss attributable to American Media, Inc. for fiscal 2014 represents a $1.9 million decrease from the comparable prior year period. This decrease is primarily attributable to the $40.2 million increase in operating income and the $1.4 million decrease in interest expense, partially offset by the $39.3 million increase in provision for income taxes. The $56.2 million of net loss attributable to American Media, Inc. for fiscal 2013 represents a $77.8 million increase from the comparable prior year period. This increase is primarily due to the $66.4 million increase in operating loss and the $11.5 million decrease in income tax benefit. OPERATING SEGMENTS Our operating segments consist of: Celebrity Brands, Women's Active Lifestyle, Men's Active Lifestyle and Corporate and Other. After the divestiture of the DSI business, which was included in and comprised the majority of our publishing services segment, the publishing services segment has been combined with the Corporate and Other segment effective with the quarter ended September 30, 2013. Given this change, we have restated prior period segment information to correspond to the current segment reporting structure. This reporting structure is organized according to the markets each segment serves and allows management to focus its efforts on providing the best content to a wide range of consumers. Our operating segments consist of the following brands in print and digital: Celebrity Brands Segment • National Enquirer, a weekly, hard news, investigating tabloid covering all celebrities, crime, human interest, health, fashion and beauty; • Star, a weekly, celebrity-focused, news-based, glossy magazine covering movie, television, reality series and music celebrities. Star's editorial content includes fashion, beauty, accessories and health sections; • OK!, a younger weekly, celebrity-friendly, news-based, glossy magazine covering the stars of movies, television, reality and music. OK!'s editorial content has fashion, beauty and accessories sections; OKMagazine.com differentiates itself through its use of online communities and social media to encourage a dialog between users, including their editorial point of view; • Globe, a weekly tabloid that focuses on older movie and television celebrities, the royal family, political scandals and investigative crime stories that are less mainstream and more salacious than the National Enquirer; 37-------------------------------------------------------------------------------- Table of Contents • National Examiner, a weekly tabloid (currently only available in print format) consisting of celebrity and human interest stories, differentiating it from the other titles through its upbeat positioning as the source for gossip, contests, women's service and good news for an older tabloid audience; • Soap Opera Digest, a weekly magazine that provides behind-the-scenes scoop and breaking news to passionate soap opera fans every week; SoapOperaDigest.com is a companion site that mirrors the magazine's editorial point of view; and • Country Weekly, a weekly magazine that for almost two decades has been the authority on the music and lifestyle of country's biggest stars; CountryWeekly.com is a companion site that focuses on music and news. Women's Active Lifestyle Segment • Shape, which provides information on the cutting edge of fitness, nutrition, health, lifestyle and other inspirational topics to help women lead healthier lives and offers extensive beauty, celebrity and fashion coverage; Shape.com, which mirrors the magazine's editorial point of view, features daily coverage for today's women in the blog "Shape Your Life" and videos such as "The Victoria's Secret Core Workout," Shape cover shoots with celebrities, and exercise tips from celebrity personal trainers; • Fit Pregnancy, which delivers information on health, maternity fashion, food, parenting and fitness to women during pregnancy and the postpartum period; FitPregnancy.com features the content of the magazine and also contains news and updates to guide expectant mothers through each stage of pregnancy; and • Natural Health, which offers readers practical information to benefit from the latest advancements in the fields of health, food, beauty, pets, exercise and advice to improve fitness and the environment; NaturalHealthMag.com is a companion site to the magazine that features health blogs, recipe finders, and various videos that focus on the latest news and updates in the wellness category. Men's Active Lifestyle Segment • Men's Fitness, an active lifestyle magazine for men 18-34 years old, which positions fitness as the new measure of success, as reflected in its editorial coverage of men's fashion, grooming, automotive, finance, travel and other lifestyle categories; Men's Fitness is also home to the latest in exercise techniques, sports training, nutrition and health; Men'sFitness.com provides everything for every man in terms of a healthy and fit lifestyle; • Muscle & Fitness, a fitness physique training magazine appealing to exercise enthusiasts and athletes of all ages, especially those focused on resistance training, body fat control, sports nutrition and supplements; MuscleandFitness.com provides workout videos and nutritional advice, and hosts an on-line store for users to buy the products they see on the website; • Flex, a magazine devoted to professional bodybuilding featuring nutrition, supplement, and performance science content for bodybuilding enthusiasts and coverage of all professional and amateur bodybuilding contests; Flexonline.com features online coverage of all the major bodybuilding competitions, as well as training videos with today's top bodybuilders; • Muscle & Fitness Hers, a fitness physique training magazine designed for the active woman who wants more out of fitness, especially those who work extra hard to achieve a "super-fit" lifestyle and covers training, nutrition, health, beauty and fashion for today's women; • Muscle & Fitness e-commerce, a store selling pre- and post-workout sports nutritional supplements supported by Muscle & Fitness magazine; • Mr. Olympia, a four-day event held annually in September in Las Vegas attracting over 50,000 fans of bodybuilding and fitness experts from around the world; includes a two-day health and fitness expo with 340 exhibitors including physical exercise challenges and merchandising opportunities that culminates with the world's most prestigious and largest event in bodybuilding and fitness, the Mr. Olympia contest; and • Weider UK, a wholly-owned subsidiary, publishes Muscle & Fitness and Flex in the United Kingdom, France, Italy, Germany, Holland and Australia. Each market edition is in a local language with local content and has its own website. 38-------------------------------------------------------------------------------- Table of Contents Corporate and Other Segment This segment includes revenues from international licensing of certain health and fitness publications, photo syndication for all our media content platforms and strategic management services for publishers, including back office functions. The video content services we provide to Microsoft and the services provided by our former distribution services group to publishing and non-publishing clients, such as placement and monitoring of supermarket racks, marketing and merchandising, are also included in this segment. Corporate overhead expenses are not allocated to other segments are and included in this segment. This includes corporate executives, production, circulation, information technology, accounting, legal, human resources, business development and administrative department costs. Financial Information Regarding Our Operating Segments The tables below disclose revenue and operating income (loss) for our reportable segments. We use operating income (loss) as a primary basis for the chief operating decision maker to evaluate the performance of each of our operating segments and present operating income (loss) before impairment of goodwill and intangible assets to provide a consistent and comparable measure of our performance between periods. Management uses operating income (loss) before impairment of goodwill and intangible assets when communicating financial results to the board of directors, stockholders, debt holders and investors as well as when determining performance goals for executive compensation. Management believes this non-GAAP measure, although not a substitute for GAAP, improves comparability. Management also believes our stockholders, debt holders and investors use this measure as a gauge to assess the performance of their investment in the Company. We prepared the financial results of our operating segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist in making internal operating decisions. Our calculations of operating income (loss) herein may be different from the calculations used by other companies, therefore comparability may be limited. The accounting policies for the operating segments are the same as those described in the notes to the financial statements in this Annual Report, specifically Note 2, "Summary of Significant Accounting Policies." The following table summarizes our total operating revenues by segment: Fiscal years ended March 31, % Change (in thousands) 2014 2013 2012 '14 vs. '13 '13 vs. '12 Segment operating revenues: Celebrity Brands $ 202,580 $ 215,946 $ 233,885 (6 )% (8 )% Women's Active Lifestyle 56,875 51,892 65,072 10 % (20 )% Men's Active Lifestyle 66,698 60,770 60,853 10 % - % Corporate and Other 18,068 19,918 26,806 (9 )% (26 )% Total operating revenues $ 344,221 $ 348,526 $ 386,616 (1 )% (10 )% Total operating revenues decreased $4.3 million, or 1%, during fiscal 2014 primarily due to the 11% decline in the celebrity newsstand market. The decline of revenue in the Corporate and Other segment was primarily due to the divestiture of DSI. This was mostly offset by higher advertising revenues in the Women's and Men's Active Lifestyle segments. During fiscal 2013, total operating revenues decreased $38.1 million, or 10%, primarily due to reduced advertising spending in the Women's and Men's Active Lifestyle segments, coupled with a 10% decline in the celebrity newsstand market. 39-------------------------------------------------------------------------------- Table of Contents The following table summarizes the percentage of segment operating revenues: Fiscal years ended March 31, 2014 2013 2012 Segment operating revenues: Celebrity Brands 59 % 62 % 60 % Women's Active Lifestyle 17 % 15 % 17 % Men's Active Lifestyle 19 % 17 % 16 % Corporate and Other 5 % 6 % 7 % Total 100 % 100 % 100 % The following table summarizes our segment operating income (loss) before impairment for goodwill and intangible assets: Fiscal years ended March 31, % Change (in thousands) 2014 2013 2012 '14 vs. '13 '13 vs. '12 Operating income (loss) before impairment: Celebrity Brands $ 73,276 $ 75,114 $ 73,479 (2 )% 2 % Women's Active Lifestyle 6,318 4,823 12,990 31 % (63 )% Men's Active Lifestyle 20,968 18,163 19,847 15 % (8 )% Corporate and Other (51,221 ) (43,652 ) (39,999 ) 17 % 9 % Total operating income before impairment $ 49,341 $ 54,448 $ 66,317 (9 )% (18 )% Impairment of goodwill and intangible assets 9,238 54,523 - Total operating income (loss) $ 40,103 $ (75 ) $ 66,317 Total operating income before impairment decreased $5.1 million, or 9%, during fiscal 2014 primarily due to the lower operating revenues previously mentioned. This was partially offset by lower operating expenses related to the divestiture of DSI and the Management Action Plans. Total operating income before impairment decreased $11.9 million, or 18%, during fiscal 2013 primarily due to the lower operating revenue previously mentioned. This was partially offset by the planned expense savings pursuant to the Management Action Plans. The pre-tax non-cash impairment charge for goodwill and intangible assets was $9.2 million and $54.5 million during fiscal 2014 and 2013, respectively. The fiscal 2014 charge of $9.2 million impacted the Men's Active Lifestyle segment tradenames. The fiscal 2013 charge impacted the Celebrity Brands segment goodwill by $42.8 million, the Women's Active Lifestyle segment tradenames by $3.9 million and the Men's Active Lifestyle segment goodwill and tradenames by $7.8 million. The pre-tax non-cash impairment charges were primarily the result of 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. See the notes to the consolidated financial statements in this Annual Report, specifically Note 3, "Goodwill and Other Identified Intangible Assets." Celebrity Brands Segment The Celebrity Brands segment comprised 59%, 62% and 60% of our total operating revenues for fiscal 2014, 2013 and 2012, respectively. Operating Revenues Total operating revenues in the Celebrity Brands segment were $202.6 million for fiscal 2014, representing a decrease of $13.4 million, or 6%, over the comparable prior year period. Circulation revenue decreased $15.9 million which was caused by an 11% decline in the celebrity newsstand market ($11.7 million), coupled with the discontinuance and reduction of special interest publications ($4.2 million). This decline was partially offset by the $2.8 million increase in advertising revenue primarily due to the performance of Star and OK!'s superior marketing programs, content integration and greater efficiencies in reaching our target audience. 40-------------------------------------------------------------------------------- Table of Contents Total operating revenues in the Celebrity Brands segment were $215.9 million for fiscal 2013 representing a decrease of $17.9 million, or 8%, over the comparable prior year period. Circulation revenue decreased $16.7 million during fiscal 2013, of which $6.3 million was due to the discontinuation of certain titles and $10.4 million was due to the 10% decline in overall newsstand sales for the publishing industry. Advertising revenue declined $6.1 million due to the consumer magazine sector being down 5%, as well as the impact of Superstorm Sandy. These decreases have been partially offset by an increase in operating revenue of $4.9 million during fiscal 2013 as compared to the same period of prior year due to the acquisition of OK! in June 2011. Operating Income The Celebrity Brands segment operating income before impairment decreased $1.8 million, or 2%, to $73.3 million during fiscal 2014. This decline was due to the reasons mentioned above. This was partially offset by our Management Action Plans implemented in fiscal 2013, which reduced expenses by $11.5 million during fiscal 2014. Operating income before impairment in the Celebrity Brands segment increased during fiscal 2013 from prior year by $1.6 million, or 2%, to $75.1 million, primarily attributable to the planned expense reductions resulting from the implementation of our Management Action Plans. Women's Active Lifestyle Segment The Women's Active Lifestyle segment represented 17%, 15% and 17% of our consolidated operating revenues for fiscal 2014, 2013 and 2012, respectively. Operating Revenues Total operating revenues in the Women's Active Lifestyle segment were $56.9 million during fiscal 2014, an increase of $5.0 million, or 10%, from prior year. This increase was primarily due to the repositioning of Shape magazine which successfully generated revenue from beauty, fashion and retail advertisers. The $5.7 million increase in advertising revenue over prior year was accomplished with only ten issues of Shape magazine compare to eleven issues published in the prior year. This increase in advertising revenue was partially offset by a $1.0 million decline in circulation revenue due to publishing one less issue of Shape magazine. Total operating revenues in the Women's Active Lifestyle segment for fiscal 2013 were $51.9 million, a decrease of $13.2 million, or 20%, from prior year. We reduced the frequency of Shape magazine, to match our competitors' schedules, from 12 times per year to 10 times per year, resulting in one less issue in fiscal 2013, or $4.0 million in operating revenues, which was partially offset by a 205% growth in digital traffic for Shape.com, or $0.9 million in operating revenues. The remaining decrease is due to the consumer ad market being down 7%, caused by a shift of advertisers, such as Procter & Gamble, Coca Cola and Kraft Foods, from print to broadcast for the 2012 Summer Olympics and Superstorm Sandy, which negatively impacted advertising revenue by $10.1 million primarily for Shape magazine. Operating Income Operating income before impairment in the Women's Active Lifestyle segment increased during fiscal 2014 from prior year by $1.5 million to $6.3 million. The operating expenses increased $3.5 million, primarily due to an investment in Shape's book size, which resulted in higher production costs. This was more than offset by the increase in operating revenues discussed above. Operating income before impairment in the Women's Active Lifestyle segment decreased during fiscal 2013 from prior year by $8.2 million to $4.8 million. This decrease in operating income was primarily attributable to Shape magazine as described above. This was partially offset by the implementation of our Management Action Plans, which reduced total operating expenses by approximately $5.0 million. Men's Active Lifestyle Segment The Men's Active Lifestyle segment represented 19%, 17% and 16% of our consolidated operating revenues for fiscal 2014, 2013 and 2012, respectively. 41-------------------------------------------------------------------------------- Table of Contents Operating Revenues Total operating revenues in the Men's Active Lifestyle segment were $66.7 million during fiscal 2014, an increase of $5.9 million, or 10%, from prior year. Advertising revenue increased $5.0 million, which is directly attributable to the relaunch and reposition of Men's Fitness magazine and the related website. In addition, the revenue from the September 2013 Mr. Olympia event increased $1.4 million, or 37%, from prior year. This was partially offset by a $0.9 million decline in circulation revenue. Total operating revenues in the Men's Active Lifestyle segment for fiscal 2013 were $60.8 million, a minimal decrease from prior year. Our digital initiatives and the success of the 2012 Mr. Olympia event resulted in an increase in operating revenue of $1.8 million. This was partially offset by the 7% decline in the ad market for consumer magazines which negatively impacted advertising revenue by $1.2 million, coupled with a $0.6 million newsstand shortfall caused by the newsstand industry decline of 10%. Operating Income Operating income before impairment in the Men's Active Lifestyle segment increased during fiscal 2014 from prior year by $2.8 million, or 15%, to $21.0 million. This increase was attributable to higher advertising volume, as discussed above, partially offset by the increase in costs associated with the Mr. Olympia event. Operating income before impairment in the Men's Active Lifestyle segment decreased during fiscal 2013 from prior year by $1.7 million, or 8%, to $18.2 million. This decrease was attributable to the $1.6 million increase in operating expenses, primarily due to our investment in digital as we continue to implement our digital strategy. Corporate and Other Segment The Corporate and Other segment was 5%, 6% and 7% of our consolidated operating revenues for fiscal 2014, 2013 and 2012, respectively. Operating Revenues Total operating revenues in the Corporate and Other segment were $18.1 million during fiscal 2014, a decrease of $1.9 million, or 9%, from prior year. This decrease was due to the $9.8 million decline in revenue due to the DSI divestiture in September 2013, partially offset by $4.8 million from the video projects with Microsoft and $1.7 million in management fees and income from certain joint ventures. Total operating revenues in the Corporate and Other segment for fiscal 2013 were $19.9 million, a decrease of $6.9 million, or 26%, from prior year. This decline was primarily due to the non-recurring termination fee we received in fiscal 2012 of $1.4 million upon the termination of one of our international licensing agreements. In addition, operating revenue declined due to discontinued titles ($0.5 million) and the inclusion of special issues published during fiscal 2012 in the Corporate and Other segment ($2.0 million). During fiscal 2013, all special issues published have been included in the operating segment of the parent magazine. Operating Loss Total operating loss increased by $7.6 million, or 17%, to $51.2 million during fiscal 2014. This increase was attributable to the $1.9 million decline in operating revenue coupled with a $11.5 million increase in operating expenses, primarily for the continued investment in our digital strategy, costs related to launches and closures of publications and other non-recurring expenses coupled with the $3.5 million increase in non-cash depreciation and amortization expense. These increases are partially offset by the $9.3 million decrease in operating expenses related to the DSI divestiture. Total operating loss increased by $3.7 million, or 9%, to $43.7 million during fiscal 2013. This increase was attributable to the $6.9 million decline in operating revenue partially offset by the $3.4 million reduction in operating expenses primarily due to the implementation of the Management Action Plans. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2014, we had cash and cash equivalents of $3.0 million and a working capital deficit of $21.9 million. 42-------------------------------------------------------------------------------- Table of Contents Cash Flow Summary The following information has been derived from the accompanying financial statements for fiscal 2014, 2013 and 2012. Cash and cash equivalents increased by $0.7 million during fiscal 2014 and decreased by $2.9 million during fiscal 2013, respectively. The change in cash and cash equivalents is as follows: Fiscal years ended March 31, Net Change in thousands 2014 2013 2012 2014 vs. 2013 2013 vs. 2012 Net (loss) income $ (53,271 ) $ (55,545 ) $ 22,293 $ 2,274 $ (77,838 ) Non-cash items 72,434 71,229 6,570 1,205 64,659 Net change in operating assets and liabilities (9,382 ) (572 ) (7,184 ) (8,810 ) 6,612 Operating activities 9,781 15,112 21,679 (5,331 ) (6,567 ) Investing activities (18,820 ) (12,680 ) (35,857 ) (6,140 ) 23,177 Financing activities 9,509 (5,016 ) (1,706 ) 14,525 (3,310 ) Effects of exchange rates 190 (267 ) (175 ) 457 (92 ) Net increase (decrease) in cash and cash equivalents $ 660 $ (2,851 ) $ (16,059 ) $ 3,511 $ 13,208 Operating Activities Cash provided by operating activities is primarily driven by our non-cash items, changes in working capital and the impact of our results of operations. Non-cash items consist primarily of provision (benefit) for income taxes, depreciation and amortization, amortization of deferred debt costs and deferred rack costs, provision for doubtful accounts and impairment of goodwill and intangible assets. Net cash provided by operating activities decreased $5.3 million during fiscal 2014 as compared to fiscal 2013, primarily due to the $8.8 million net change in operating assets and liabilities, partially offset by the $1.2 million net increase in non-cash items coupled with the $2.3 million increase in our results of operations. The net change in operating assets and liabilities is primarily due to the $12.5 million net change in trade receivables, the $4.7 million net change in prepaid expenses, the $2.2 million net change in other long-term assets and the $1.7 million net change in inventories, partially offset by the net change in accounts payable and accrued expenses of $6.1 million, the net change in other non-current liabilities of $3.6 million and the net change in deferred revenues of $3.3 million. Non-cash items increased primarily due to the increase in provision for income taxes of $39.3 million, the increase in depreciation and amortization of $4.3 million, the increase in provision for doubtful account of $2.5 million and the increase in non-cash payment-in-kind interest accretion of $1.9 million for the Second Lien PIK Notes, partially offset by the decrease in the impairment charge for goodwill and intangible assets of $45.3 million and the net decrease in amortization of deferred debt and deferred rack costs of $1.5 million. Net cash provided by operating activities decreased $6.6 million during fiscal 2013 as compared to fiscal 2012, primarily due to the $77.8 million decrease in our results of operations, partially offset by the $64.7 million net increase in non-cash items and the $6.6 million net change in operating assets and liabilities. Non-cash items increased primarily due to the impairment charges of $54.5 million, the decrease in deferred tax benefits of $11.2 million, the increase in depreciation and amortization expense of $1.4 million and the increase in provision for doubtful accounts of $1.3 million, partially offset by the decrease in amortization of deferred rack and deferred debt costs of $2.4 million and the decrease in other non-cash items of $1.5 million. The net change in operating assets and liabilities is primarily due to the $10.6 million net change in trade receivables, the $5.4 million net change in deferred rack costs, the $4.2 million net change in inventories and the $1.6 million net change in accrued interest, partially offset by the net change in accounts payable and accrued expenses of $9.4 million and a $5.8 million change in other working capital items. Working capital items have decreased due to the overall decline in operating revenue from the continued softness in the U.S. economy and the decrease in consumer discretionary spending. 43-------------------------------------------------------------------------------- Table of Contents Investing activities Net cash used in investing activities was $18.8 million for fiscal 2014, an increase of $6.1 million, compared to $12.7 million of net cash used in investing activities for fiscal 2013. The increase is primarily attributable to the $4.0 million increase in purchases of property and equipment and intangibles assets, coupled with the $2.2 million investment in affiliates. The increase in purchases of intangible assets is due to our continued investment in our digital strategy. Net cash used in investing activities was $12.7 million and $35.9 million for fiscal 2013 and 2012, respectively. The fluctuation in cash used is primarily attributable to the acquisition of OK! during fiscal 2012, which used $23.0 million in cash. Financing activities Net cash provided by financing activities for fiscal 2014 was $9.5 million, an increase of $14.5 million, compared to $5.0 million of net cash used for fiscal 2013. The increase is primarily attributable to the $12.0 million increase in net borrowings under the 2010 Revolving Credit Facility and the $5.8 million decrease in payments to the noncontrolling interest holders of Olympia and Odyssey, partially offset by the $2.3 million increase in redemption payments on the First Lien Notes and the $0.8 million increase in payments for the redemption of Odyssey preferred stock. Net cash used in financing activities for fiscal 2013 was $5.0 million, an increase of $3.3 million, compared to $1.7 million for fiscal 2012. The increase is primarily attributable to the $13.5 million decrease in proceeds in Odyssey from noncontrolling interest holder, the $8.4 million increase in payments to noncontrolling interest holders of Odyssey and the $2.0 million decrease in net proceeds from the 2010 Revolving Credit Facility. These decreases have been partially offset by $20.6 million decrease in redemption payments on the First Lien Notes. Merger and Related Transactions Merger Agreement On August 15, 2014, AMI entered into the Merger Agreement with the Investors, pursuant to which and subject to the satisfaction or waiver of the conditions described therein, an affiliate of the Investors will merge with and into AMI, with AMI continuing as the surviving entity. Pursuant to the terms and conditions of the Merger Agreement, the Investors will acquire AMI for $2.0 million in cash, payable upon the closing of the Merger. In addition, approximately $513.0 million of outstanding indebtedness will remain in place. Each of AMI and the Investors has made certain representations and warranties in the Merger Agreement. The Merger Agreement also contains certain covenants and agreements, including, among others, restrictions on the operations of AMI's business prior to the closing of the Merger. The board of directors of AMI may change its recommendation to its stockholders to adopt the Merger Agreement following the occurrence of one or more other intervening events that were not know on the date of the Merger Agreement, and the board of directors of AMI determines in good faith that failure to make a change in its recommendation would be inconsistent with the directors' fiduciary duties under applicable law. The consummation of the Merger is subject to certain closing conditions, including, among others, (i) the absence of a material adverse effect on AMI and its subsidiaries since the date of the Merger Agreement, (ii) the issuance, sale and purchase of AMI's Second Lien PIK Notes in accordance with the Note Purchase Agreement, (iii) compliance with the drag-along obligations set forth in the Stockholders' Agreement, dated as of December 22, 2010, as amended, among AMI and its stockholders, (iv) the absence of any order that makes the Merger illegal, or that enjoins or otherwise prohibits the closing of the Merger and (v) there are no existing defaults under any of the Debt Documents (as defined in the Merger Agreement) that are continuing after giving effect to all Debt Waivers (as defined in the Merger Agreement). The Merger Agreement may be terminated under certain circumstances, including, among other, (i) by the Investors or AMI if (A) one or more of the conditions set forth in the Merger Agreement has not been fulfilled as of August 29, 2014, or such later date provided by the Merger Agreement (the "Outside Date"), (B) the required stockholder vote is not obtained or (C) any governmental entity has issued an order restraining, enjoining or otherwise prohibiting the closing of the Merger; (ii) by AMI if all conditions to the Investors' obligation to consummate the Merger continue to be satisfied, AMI stood ready, willing and able to consummate the Merger, and the Merger has not been consummated within two business days of the Outside Date; and (iii) by the Investors, if the board of directors of AMI changes its recommendation. 44-------------------------------------------------------------------------------- Table of Contents The Merger Agreement provides that if AMI terminates the Merger Agreement under certain circumstances, AMI will be required to pay to the Investors a termination fee equal to $5.0 million plus reimbursement of expenses. Note Purchase Agreement In connection with the Merger Agreement, on August 15, 2014, AMI and certain of its subsidiaries (the Guarantors") entered into the Note Purchase Agreement with the Investors. The Note Purchase Agreement provides, subject to certain conditions, for AMI to issue and sell to the Investors, and the Investors to purchase from AMI, an aggregate principal amount of additional Second Lien PIK Notes (the "Additional Notes") to be issued under the indenture dated as of October 2, 2013 (as such agreement may be amended, restated or supplemented on the date hereof, the "Second Lien PIK Notes Indenture"), among AMI, the Guarantors and Wilmington Trust, National Association, as trustee and collateral agent (the "Trustee"), such that the aggregate principal amount of the Additional Notes purchased plus the accrued interest thereon from the most recent date to which interest has been paid on the then outstanding Second Lien PIK Notes to the closing date (the "Closing Date") for the Merger will equal $12.5 million. The Investors will pay $1,000 per $1,000 of principal amount of the Additional Notes to be purchased by the Investors on the Closing Date plus accrued interest thereon from the most recent date to which interest has been paid on the then outstanding Second Lien PIK Notes, for an aggregate purchase price of $12.5 million. The issuance, sale and purchase is expected to close upon the satisfaction of certain closing conditions, concurrently with the Merger. After giving effect to the issuance and assuming a closing date for the Merger of August 15, 2014, approximately $113.3 million in aggregate principal amount of Second Lien PIK Notes will be outstanding. The Additional Notes will be issued under the Second Lien PIK Notes Indenture and will be treated as a single class under the Second Lien PIK Notes Indenture with, and will be assigned the same CUSIP number as, the outstanding Second Lien PIK Notes. The Additional Notes will be issued through a private offering exempt from the registration requirements of the Securities Act of 1933, as amended. Credit Facility and Long Term Debt Revolving Credit Facility In December 2010, we entered into a revolving credit facility maturing in December 2015 (the "2010 Revolving Credit Facility"). The agreement governing the 2010 Revolving Credit Facility provides for borrowing up to $40.0 million, less outstanding letters of credit. During fiscal 2014, the Company borrowed $95.6 million and repaid $78.6 million under the 2010 Revolving Credit Facility. At March 31, 2014, the Company had available borrowing capacity of $6.6 million after considering the $29.0 million outstanding balance and the $4.4 million outstanding letter of credit. The outstanding balance of the 2010 Revolving Credit Facility on March 31, 2014 of $29.0 million is a non-current liability, as the outstanding balance is not due until December 2015. Our 2010 Revolving Credit Facility requires mandatory prepayments of the loans outstanding thereunder to the extent that total revolving exposures exceed total revolving commitments. Our 2010 Revolving Credit Facility requires us to pay, from December 22, 2010 until the commitments expire under our 2010 Revolving Credit Facility, a commitment fee ranging from 0.50% to 0.75% of the unused portion of the revolving commitment. We have the option to pay interest on outstanding balances based on (i) a floating base rate option equal to the greatest of (x) the prime rate in effect on such day; (y) the federal funds effective rate in effect on such day plus ½ of 1%; and (z) one month LIBOR (but no less than 2%) plus 1%, or (ii) based on LIBOR, in each case, plus a margin. The interest rate under the 2010 Revolving Credit Facility has ranged from 8.00% to 8.25% during fiscal 2014. Our 2010 Revolving Credit Facility includes certain representations and warranties, conditions precedent, affirmative covenants, negative covenants and events of default customary for agreements of this type. The negative covenants include a financial maintenance covenant comprised of a first lien leverage ratio calculated using EBITDA as defined in the 2010 Revolving Credit Facility. In August 2014, prior to executing the Merger Agreement and the Note Purchase Agreement, we entered into an amendment to the 2010 Revolving Credit Facility to, among other things amend the first lien leverage ratio to be equal to or less than 5.25 to 1.00 from April 1, 2014 through and including the quarter ended 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. See "Credit Agreement Amendment" below for additional discussion. Our 2010 Revolving Credit Facility also contains certain covenants that, subject to certain exceptions, restrict paying dividends, incurring additional indebtedness, creating liens, making acquisitions or other investments, entering into certain mergers or consolidations, prepaying junior debt and selling or disposing of assets. 45-------------------------------------------------------------------------------- Table of Contents The indebtedness under our 2010 Revolving Credit Facility is guaranteed by certain of our domestic subsidiaries and is secured by liens on substantially all our assets. In addition, our obligations are secured by a pledge of all the issued and outstanding shares of, or other equity interests in, certain of our existing or subsequently acquired or organized domestic subsidiaries and a percentage of the capital stock of, or other equity interests in, certain of our existing or subsequently acquired or organized foreign subsidiaries. The equity interests of American Media, Inc. have not been pledged to the lenders. Credit Agreement Amendment On August 8, 2014, AMI, JPMorgan Chase Bank, N.A., as administrative agent (the "Administrative Agent"), and the lenders from time to time party to the Revolving Credit Agreement, dated as of December 22, 2010 (as amended, restated, modified or supplemented from time to time, the "Credit Agreement"), entered into Amendment No. 3 (the "Credit Agreement Amendment") to the Credit Agreement with lenders (the "Consenting Lenders") constituting the Required Lenders (as defined in the Credit Agreement). Pursuant to the Credit Agreement Amendment and subject to the Credit Parties' (as defined in the Credit Agreement) compliance with the requirements set forth therein, the Consenting Lenders have agreed to (i) waive until the earlier of (x) August 15, 2014 and (y) immediately prior to the consummation of the Merger, any potential Default or Event of Default (each, as defined in the Credit Agreement) arising from the failure to furnish to the Administrative Agent (A) the financial statements, reports and other documents as required under Section 5.01(a) of the Credit Agreement with respect to the fiscal year of AMI ended March 31, 2014 and (B) the related deliverables required under Sections 5.01(c) and 5.03(b) of the Credit Agreement, (ii) permit the transactions contemplated by the Merger Agreement and the Note Purchase Agreement, including amending the definition of "Change in Control" and permitting the issuance of the Additional Notes pursuant to the Second Lien PIK Notes Indenture, (iii) consent to the sale of certain assets of the Loan Parties (as defined in the Credit Agreement), (iv) restrict any payment or distribution in respect of the First Lien Notes on or prior to June 15, 2015, subject to certain exceptions, including the payment of regularly scheduled interest and any mandatory prepayments and mandatory offers to purchase under the First Lien Notes, and (v) amend the maximum first lien leverage ratio covenant. First Lien Notes In December 2010, we issued $385.0 million aggregate principal amount of senior secured notes, which bear interest at a rate of 11.5% per annum, payable semi-annually, and mature in December 2017 (the "First Lien Notes"). During the first quarter of fiscal 2012, we redeemed $20.0 million in aggregate principal amount of the First Lien Notes at a redemption price equal to 103.0% of the aggregate principal amount thereof, plus accrued and unpaid interest. The total cash interest savings from the December 15, 2013 interest payment on the Second Lien Notes and Second Lien PIK Notes totaled $2.6 million and was used to repurchase approximately $2.3 million in aggregate principal amount of First Lien Notes at a redemption price equal to 108.6% of the aggregate principal amount thereof, plus accrued and unpaid interest on February 28, 2014. At March 31, 2014, the First Lien Notes represented an aggregate of $362.7 million of our indebtedness. The indenture governing the First Lien Notes contains certain affirmative covenants, negative covenants and events of default customary for agreements of this type. For example, the indenture governing the First Lien Notes contains covenants that limit our ability and that of our restricted subsidiaries, subject to important exceptions and qualifications, to: borrow money; guarantee other indebtedness; use assets as security in other transactions; pay dividends on stock, redeem stock or redeem subordinated debt; make investments; enter into agreements that restrict the payment of dividends by subsidiaries; sell assets; enter into affiliate transactions; sell capital stock of subsidiaries; enter into new lines of business; and merge or consolidate. In addition, the indenture governing the First Lien Notes imposes certain requirements as to future subsidiary guarantors. The First Lien Notes are guaranteed on a first lien senior secured basis by the same subsidiaries of the Company that guarantee our 2010 Revolving Credit Facility, the Second Lien Notes and the Second Lien PIK Notes. The First Lien Notes and the guarantees thereof are secured by a first-priority lien on substantially all our assets (subject to certain permitted liens and exceptions), pari passu with the liens granted under our 2010 Revolving Credit Facility, provided that in the event of a foreclosure on the collateral or of insolvency proceedings, obligations under our 2010 Revolving Credit Facility will be repaid in full with proceeds from the collateral prior to the obligations under the First Lien Notes. See "Supplemental Indentures" below for a discussion of the amendments to the indenture governing the First Lien Notes to, among other things, permit the transactions contemplated by the Merger Agreement and the Note Purchase Agreement, including amending the definition of "Change in Control." 46-------------------------------------------------------------------------------- Table of Contents Registration Rights Agreement In connection with the issuance of the First Lien Notes, the Company entered into a registration rights agreement (the "Registration Rights Agreement") with the holders and the guarantors of the First Lien Notes, which, among other things, required the Company to file an exchange offer registration statement with the Securities and Exchange Commission (the "SEC"). Pursuant to the Registration Rights Agreement, the Company was required to offer to exchange (the "Exchange Offer") up to $365.0 million of the 11.5% senior notes due December 2017 (the "Exchange Notes"), which were registered under the Securities Act of 1933, as amended, for up to $365.0 million of our First Lien Notes, which we issued in December 2010. The terms of the Exchange Notes are identical to the terms of the First Lien Notes, except that the transfer restrictions, registration rights and additional interest provisions relating to the First Lien Notes do not apply to the Exchange Notes. The Company was required to commence the Exchange Offer once the exchange offer registration statement was declared effective by the SEC and use commercially reasonable efforts to complete the Exchange Offer no later than February 24, 2012. Since the Exchange Offer was not completed until November 20, 2012, a registration default occurred and the Company incurred approximately $1.3 million in additional interest on the First Lien Notes during the registration default period. The registration default did not impact our compliance with the indentures governing the First Lien Notes, the Second Lien Notes or the 2010 Revolving Credit Facility. Second Lien Notes In December 2010, we issued $104.9 million aggregate principal amount of senior secured notes, which bear interest at a rate of 13.5% per annum, payable semi-annually, and mature in June 2018 (the "Second Lien Notes"). In October 2013, we exchanged approximately $94.3 million aggregate principal amount of Second Lien Notes for an equal aggregate principal amount of new second lien senior secured notes, which currently bear interest at a rate of 10% per annum, are payable in kind, and mature in June 2018 (the "Second Lien PIK Notes"). See description of Second Lien PIK Notes below. At March 31, 2014, the Second Lien Notes represented an aggregate of $10.6 million of our indebtedness. The indenture governing the Second Lien Notes contains certain affirmative covenants, negative covenants and events of default customary for agreements of this type. For example, the indenture governing the Second Lien Notes contains covenants that limit our ability and that of our restricted subsidiaries, subject to important exceptions and qualifications, to: borrow money; guarantee other indebtedness; use assets as security in other transactions; pay dividends on stock, redeem stock or redeem subordinated debt; make investments; enter into agreements that restrict the payment of dividends by subsidiaries; sell assets; enter into affiliate transactions; sell capital stock of subsidiaries; enter into new lines of business; and merge or consolidate. In addition, the indenture governing the Second Lien Notes imposes certain requirements as to future subsidiary guarantors. The Second Lien Notes are guaranteed on a second lien senior secured basis by the same subsidiaries of the Company that guarantee our 2010 Revolving Credit Facility, the First Lien Notes and the Second Lien PIK Notes. The Second Lien Notes and the guarantees thereof are secured by a second-priority lien on substantially all our assets (subject to certain permitted liens and exceptions). See "Supplemental Indentures" below for a discussion of the amendments to the indenture governing the Second Lien Notes to, among other things, permit the transactions contemplated by the Merger Agreement and the Note Purchase Agreement, including amending the definition of "Change in Control." Second Lien PIK Notes In October 2013, we exchanged approximately $94.3 million aggregate principal amount of Second Lien Notes for an equal aggregate principal amount of Second Lien PIK Notes, pursuant to an exchange agreement (the "Exchange Agreement"). The Second Lien PIK Notes were issued under an indenture, by and among American Media, Inc., certain of its subsidiaries listed as guarantors thereto and Wilmington Trust, National Association, as trustee (the "Second Lien PIK Notes Indenture"). 47-------------------------------------------------------------------------------- Table of Contents The Second Lien PIK Notes are payable in kind at a rate of 10% per annum until the earliest of: (a) December 15, 2016, (b) the closing of a refinancing of the First Lien Notes or (c) upon the occurrence of certain specified events of default relating to the application of the cash interest savings and the right of first offer (any such date being the "Cash Interest Rate Conversion Date"), at which point the interest payable on the then outstanding aggregate principal amount of Second Lien PIK Notes will be payable at a cash interest rate of 13.5% per annum until the June 2018 maturity date. Subject to certain exceptions, under the Second Lien PIK Indenture cash interest savings resulting from the exchange of the Second Lien Notes of approximately $6.4 million per each semi-annual interest period must be used by the Company to repurchase First Lien Notes until the Cash Interest Rate Conversion Date. The participating holders (as defined in the Exchange Agreement) have a right of first offer to sell any of their First Lien Notes to the Company before the Company makes repurchases of First Lien Notes from any other holders of the First Lien Notes, including those purchases pursuant to open market repurchases. Pursuant to the Merger Agreement, we have obtained a permanent waiver of our obligation to redeem approximately $12.7 million of First Lien Notes, during fiscal 2015, pursuant to the terms of the Second Lien PIK Notes Indenture and the Exchange Agreement. The interest payment-in-kind due on December 15, 2013 totaled $1.9 million and was recorded as an increase to the Senior Secured Notes in the accompanying financial statements. At March 31, 2014, the Second Lien PIK Notes represented an aggregate of $96.2 million of our indebtedness. The interest payment-in-kind due on June 15, 2014 totaled $4.8 million and was recorded as an increase to the Second Lien PIK Notes. In connection with the Merger Agreement, we issued approximately $12.3 million aggregate principal amount of additional Second Lien PIK Notes. Currently, the Second Lien PIK Notes represent an aggregate of $113.3 million of our indebtedness. The indenture governing the Second Lien PIK Notes contains certain affirmative covenants, negative covenants and events of default customary for agreements of this type. For example, the indenture governing the Second Lien PIK Notes contains covenants that limit our ability and that of our restricted subsidiaries, subject to important exceptions and qualifications, to: borrow money; guarantee other indebtedness; use assets as security in other transactions; pay dividends on stock, redeem stock or redeem subordinated debt; make investments; enter into agreements that restrict the payment of dividends by subsidiaries; sell assets; enter into affiliate transactions; sell capital stock of subsidiaries; enter into new lines of business; and merge or consolidate. In addition, the indenture governing the Second Lien PIK Notes imposes certain requirements as to future subsidiary guarantors. The Second Lien PIK Notes are guaranteed on a second lien senior secured basis by the same subsidiaries of the Company that guarantee our 2010 Revolving Credit Facility, the First Lien Notes and the Second Lien Notes. The Second Lien PIK Notes and the guarantees thereof are secured by a second-priority lien on substantially all our assets (subject to certain permitted liens and exceptions). The Exchange Agreement also provides that, should the Company effect a refinancing of the First Lien Notes, under certain circumstances the Company may require additional exchanges at its option. Upon completion of a refinancing of the First Lien Notes, the Company may require (i) the participating holders to exchange up to $55.0 million in aggregate principal amount of the Company's First Lien Notes for Second Lien PIK Notes or, alternatively, new second lien cash pay notes (the "New Second Lien Cash Pay Notes") to be issued by the Company at a future date pursuant to the terms of the Exchange Agreement and a new indenture that would govern the New Second Lien Cash Pay Notes (the "Optional First Lien Note Exchange"); and/or (ii) the holders of all Second Lien PIK Notes (including any Second Lien PIK Notes received in the Optional First Lien Note Exchange) to exchange all of their Second Lien PIK Notes for New Second Lien Cash Pay Notes (the "Optional Second Lien Note Exchange"). In the event of the Optional Second Lien Note Exchange, certain of the participating holders may have the right to designate one independent director, in total, to the Board of Directors of the Company under certain conditions. See "Supplemental Indentures" below for a discussion of the amendments to the indenture governing the Second Lien PIK Notes to, among other things, waive AMI's obligation to apply the cash interest savings to repurchase outstanding First Lien Notes and permit the transactions contemplated by the Merger Agreement and the Note Purchase Agreement, including amending the definition of "Change in Control." See also "Exchange Agreement Amendment" below for a discussion of the amendment to the Exchange Agreement. Supplemental Indentures On August 15, 2014, AMI announced that it has received consents from the holders of (a) $218.2 million principal amount of the outstanding First Lien Notes to amend the indenture dated as of December 1, 2010 (as such agreement may be amended, restated or supplemented on the date hereof, the "First Lien Notes Indenture"), among AMI, the Guarantors and the Trustee, (b) $7.8 million principal amount of the outstanding Second Lien Notes to amend the indenture dated as of December 22, 2010 (as such agreement may be amended, restated or supplemented on the date hereof, the "Second Lien Notes Indenture" and, together with the First Lien Notes Indenture and the Second Lien PIK Notes Indenture, the "Indentures"), among AMI, the Guarantors and the Trustee and (c) $101.0 million principal amount of the outstanding Second Lien PIK Notes to amend the Second Lien PIK Notes Indenture, which in each case represented the requisite consents from holders of at least a majority of the aggregate principal amount of the applicable series of notes then outstanding. 48-------------------------------------------------------------------------------- Table of Contents As a result of receiving the requisite consents, on August 15, 2014, AMI and the Trustee entered into (a) the Fourth Supplemental Indenture (the "First Lien Notes Supplemental Indenture") to the First Lien Notes Indenture, (b) the Third Supplemental Indenture (the "Second Lien Notes Supplemental Indenture") to the Second Lien Notes Indenture and (c) the First Supplemental Indenture (the "Second Lien PIK Notes Supplemental Indenture" and, together with the First Lien Notes Supplemental Indenture and the Second Lien Notes Supplemental Indenture, the "Supplemental Indentures") to the Second Lien PIK Notes Indenture. The Supplemental Indentures amend the Indentures to (a) permit the transactions contemplated by the Merger Agreement and the Note Purchase Agreement, including amending the definition of "Change of Control" and permitting the issuance of the Additional Notes pursuant to the Second Lien PIK Notes Indenture and (b) in the case of the Second Lien PIK Notes Supplemental Indenture only, eliminate AMI's obligation to apply Cash Interest Savings (as defined in the Second Lien PIK Notes Indenture) to repurchase outstanding First Lien Notes for the semi-annual interest periods ending on June 15, 2014 and December 15, 2014 (collectively, the "Amendments"). Pursuant to the terms of the Supplemental Indentures, the Supplemental Indentures became effective, and the Amendments became operative, immediately upon execution of the Supplemental Indentures. Exchange Agreement Amendment On August 15, 2014, AMI and the Guarantors entered into an Amendment (the "Exchange Agreement Amendment") to the Exchange Agreement, dated as of September 27, 2013, among AMI, the Guarantors and the Investors. The Exchange Agreement Amendment provides that AMI is not required to apply Cash Interest Savings (as defined in the Second Lien PIK Notes Indenture) to repurchase outstanding First Lien Notes for the semi-annual interest periods ending on June 15, 2014 and December 15, 2014. Covenant Compliance As discussed above, our 2010 Revolving Credit Facility and the indentures governing the First Lien Notes, the Second Lien Notes and the Second Lien PIK Notes contain various restrictive covenants. Under our 2010 Revolving Credit Facility, the first lien leverage ratio (Total First Lien Debt to EBITDA, each as defined in our 2010 Revolving Credit Facility) must be equal to or less than 4.50 to 1.00 through March 31, 2014. In August 2014, we entered into an amendment to the 2010 Revolving Credit Facility to, among other things, amend the first lien leverage ratio to be equal to or less than 5.25 to 1.00 from April 1, 2014 through and including the quarter ended June 30, 2015. From July 1, 2015 through December 31, 2015, the maturity date of the 2010 Revolving Credit Facility, the first lien leverage ratio must be equal to or less than 4.50 to 1.00, the ratio in effect prior to the amendment. As of March 31, 2014, the first lien leverage ratio was 3.97 to 1.00 and the Company was in compliance with the first lien leverage ratio and the other covenants under the 2010 Revolving Credit Facility and under the indentures governing the First Lien Notes, the Second Lien Notes and the Second Lien PIK Notes. Although there can be no assurances, we anticipate that, based on current projections (including projected borrowings and repayments under the 2010 Revolving Credit Facility), our operating results for the next twelve months will be sufficient to satisfy the first lien leverage covenant under the 2010 Revolving Credit Facility, as amended. Our ability to satisfy such financial covenant is dependent on our business performing in accordance with our projections. If the performance of our business deviates from our projections, we may not be able to satisfy such financial covenant. Our projections are subject to a number of factors, many of which are events beyond our control, which could cause our actual results to differ materially from our projections (see Risk Factors included in Part I, Item 1A of this Annual Report). If we do not comply with our financial covenant, we would be in default under the 2010 Revolving Credit Facility, which could result in all our debt being accelerated due to cross-default provisions in the indentures governing the First Lien Notes, the Second Lien Notes and the Second Lien PIK Notes. We have the ability to incur additional debt, subject to limitations imposed by our 2010 Revolving Credit Facility and the indentures governing the First Lien Notes, the Second Lien Notes and the Second Lien PIK Notes. Under our 2010 Revolving Credit Facility and the indentures governing the First Lien Notes, the Second Lien Notes and the Second Lien PIK Notes, in addition to specified permitted indebtedness, we will be able to incur additional indebtedness as long as on a pro forma basis our consolidated leverage ratio is less than 4.50 to 1.00. 49-------------------------------------------------------------------------------- Table of Contents Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures Adjusted EBITDA, a measure we use to gauge our operating performance, is defined as net income (loss) attributable to the Company plus interest expense, provision (benefit) for income taxes, depreciation of property and equipment, amortization of intangible assets, deferred debt costs and deferred rack costs, provision for impairment of intangible assets and goodwill, adjusted for gains or costs related to closures, launches or re-launches of publications, restructuring costs and severance and certain other costs. We believe that the inclusion of Adjusted EBITDA is appropriate to evaluate our operating performance compared to our operating plans and/or prior years and to value prospective acquisitions. We also believe that Adjusted EBITDA is helpful in highlighting trends because Adjusted EBITDA excludes the impact of certain items that can differ significantly from company to company, depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. Management believes our investors use Adjusted EBITDA as a gauge to measure the performance of their investment in the Company. Management compensates for limitations of using non-GAAP financial measures by using them to supplement GAAP results to provide a more complete understanding of the factors and trends affecting our business than GAAP results alone can provide. Adjusted EBITDA is not a recognized term under GAAP and does not purport to be an alternative to income from continuing operations as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Additionally, Adjusted EBITDA is not intended to be a measure of free cash flow available for management's discretionary use as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. The presentation of Adjusted EBITDA has limitations as an analytical tool, and it should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Because not all companies use identical calculations, our presentation of Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. Set forth below is a reconciliation of net (loss) income attributable to American Media, Inc. and subsidiaries to Adjusted EBITDA for fiscal 2014, 2013 and 2012: Fiscal years ended March 31, in thousands 2014 2013 2012 Net (loss) income attributable to American Media, Inc. and subsidiaries $ (54,319 ) $ (56,239 ) $ 21,567 Add (deduct): Interest expense 58,353 59,779 58,423 Provision (benefit) for income taxes 33,278 (5,994 ) (17,509 ) Depreciation and amortization 14,203 9,932 8,539 Impairment of goodwill and intangible assets 9,238 54,523 - Amortization of deferred debt costs 1,664 1,433 1,584 Amortization of deferred rack costs 6,585 8,340 10,561 Amortization of short-term racks 8,581 8,123 9,363 Restructuring costs and severance 2,802 2,395 5,450 Costs related to launches and closures of publications 2,686 2,121 2,379 Costs related to relaunch of Shape and Men's Fitness 150 2,670 - Restructuring costs related to divestiture of DSI 2,784 - - Adjustment for net losses of DSI 2,676 - - AMI share of bad debt related to wholesaler shutdowns 5,052 - - Investment in new digital strategy 4,032 2,895 - Proforma adjustment related to acquisition of Soap Opera Digest - 439 - Proforma adjustment related to investment in affiliates 1,502 - - Impact of Superstorm Sandy 183 4,752 - Other 5,080 5,140 5,890 Adjusted EBITDA $ 104,530 $ 100,309 $ 106,247 50-------------------------------------------------------------------------------- Table of Contents Management's Assessment of Liquidity Our primary sources of liquidity are cash on hand, amounts available for borrowing under the 2010 Revolving Credit Facility, cash interest savings from the Second Lien PIK Notes, liquidity provided through the Merger and cash generated from operating and the initiatives described below. The 2010 Revolving Credit Facility provides for borrowing up to $40.0 million, less outstanding letters of credit, and matures in December 2015. As of March 31, 2014, under the 2010 Revolving Credit Facility we had an outstanding balance of $29.0 million and available borrowing capacity of $6.6 million after giving effect to the $4.4 million outstanding letter of credit. As of March 31, 2014, in addition to outstanding borrowings under the 2010 Revolving Credit Facility, there was $469.5 million principal amount of outstanding senior secured debt, consisting of $362.7 million principal amount of the First Lien Notes, $10.6 million principal amount of the Second Lien Notes and $96.2 million principal amount of the Second Lien PIK Notes. The Second Lien PIK Notes provide for, among other things, interest payments, in kind, at a rate of 10% per annum for approximately the next three years. As previously discussed, we are required under the indenture relating to the Second Lien PIK Notes to utilize the cash interest savings from the Second Lien PIK Notes to repurchase certain of our First Lien Notes. The total cash interest savings from the December 15, 2013 interest payment totaled $2.6 million and was used to repurchase $2.3 million in aggregate principal amount of First Lien Notes, on February 28, 2014, at a redemption price of 108.625%, plus accrued interest. Over the next year, the cash interest payments due under the aforementioned debt agreements are approximately $45.9 million and there are no scheduled principal payments due. Pursuant to the Merger, we have issued approximately $12.3 million of aggregate principal amount of additional Second Lien PIK Notes and obtained a permanent waiver of our obligation to redeem approximately $12.7 million of First Lien Notes, during fiscal 2015, pursuant to the terms of the Second Lien PIK Notes Supplemental Indenture and the Exchange Agreement Amendment. As previously discussed our second-largest wholesaler ceased operations in May 2014 and filed for bankruptcy in June 2014. We are currently working with the two remaining major wholesalers and retailers to transition the newsstand circulation to them. This is expected to have an adverse impact on single copy newsstand sales and liquidity in fiscal 2015. There can be no assurances that, after completing the transition of newsstand circulation, our revenue will not be temporarily or permanently reduced if consumers at the impacted retailers do not resume purchasing our publications at the same rate or quantities previously purchased or if the transition to certain retailers is not successful. In addition to the liquidity to be provided through the Merger, as discussed above, we have several initiatives designed to further increase liquidity through improvements in payment terms from our customers and vendors and inventory management arrangements. Our level of indebtedness could have important consequences for the business and operations. See Item 1A, "Risk Factors - Our substantial indebtedness and our ability to incur additional indebtedness could adversely affect our business, financial condition and result of operations." Although we are significantly leveraged, we expect that the current cash balances, liquidity provided in connection with the Merger and our 2010 Revolving Credit Facility, cash generated from the initiatives described above and from operations, should be sufficient to meet working capital, capital expenditures, debt service, and other cash needs for the next year. 51-------------------------------------------------------------------------------- Table of Contents CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS The following table summarizes our principal contractual obligations as of March 31, 2014: Payments due by period Less than 1-3 4-5 After 5 (in thousands) Total 1 Year Years Years Years Long-term debt (1) $ 507,003 $ - $ 29,000 $ 478,003 $ - Debt interest (2) 217,060 56,025 110,864 50,171 - Mr. Olympia, LLC put option (3) 3,000 3,000 - - - Long-term agreements (4) 261,616 46,697 88,218 91,688 35,013 Operating lease obligations 24,017 2,334 3,910 5,942 11,831 Consulting agreements (5) 20,069 5,820 5,480 5,508 3,261 Total contractual cash obligations (6) $ 1,032,765 $ 113,876 $ 237,472 $ 631,312 $ 50,105 (1) Includes principal payments on Revolving Credit Facility and Senior Secured Notes. See the notes to consolidated financial statements in this Annual Report, specifically Notes 4, "Revolving Credit Facility" and Note 5, "Senior Secured Notes," for further discussion of long-term debt. The total future obligation includes the repurchases of First Lien Notes in accordance with the Second Lien PIK Notes and the semi-annual interest payment-in-kind for the Second Lien PIK Notes through and including December 15, 2016. (2) Includes interest payments on both fixed and variable rate obligations and the commitment fee on the unused portion of the 2010 Revolving Credit Facility. The interest to be paid on the variable rate obligation is affected by changes in our applicable borrowing rate. The total future obligation includes the semi-annual interest payment-in-kind for the Second Lien PIK Notes through and including December 15, 2016. See the notes to consolidated financial statements in this Annual Report, specifically Note 4, "Revolving Credit Facility" and Note 5, "Senior Secured Notes," for further discussion. (3) See notes to consolidated financial statements in this Annual Report, specifically Note 9, "Investments in Affiliates and Redeemable Noncontrolling Interests," for a further discussion of the put option and the license fee as it relates to Mr. Olympia, LLC. (4) See notes to consolidated financial statements in this Annual Report, specifically Note 11, "Commitments and Contingencies," for a further discussion of the long-term agreements related to the circulation of publications. Certain contracts require pricing adjustments based on the Consumer Price Index. (5) See notes to consolidated financial statements in this Annual Report, specifically Note 11, "Commitments and Contingencies," for a further discussion of the consulting agreements with unrelated third parties to assist with the marketing of our brands. (6) The timing of future cash flows related to tax liabilities of $1.3 million cannot be reasonably estimated. SEASONALITY AND QUARTERLY FLUCTUATIONS Our business can experience fluctuations in quarterly performance due to variations in the publication schedule from year to year and variability of audience and traffic on our websites as well as other factors. Not all of our publications are published on a regular schedule throughout the year. Additionally, the publication schedule for our special interest publications can vary and lead to quarterly fluctuations in our operating results. Advertising revenue in our magazines and on our websites is typically highest in the fourth fiscal quarter due to higher consumer spending activity and corresponding increased advertiser demand to reach our readers. Certain newsstand costs vary from quarter to quarter, particularly newsstand marketing costs associated with the distribution of our magazines. These costs typically have a three-year life cycle but can vary significantly throughout the term. OFF-BALANCE SHEET FINANCING We do not have any off-balance sheet financing arrangements. 52-------------------------------------------------------------------------------- Table of Contents APPLICATION OF CRITICAL ACCOUNTING ESTIMATES Our discussion and analysis of financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP). Preparing financial statements requires management to make estimates, judgments and assumptions regarding uncertainties that may affect the reported amounts of assets, liabilities, revenue and expenses. We evaluate our estimates on an on-going basis, including those related to revenue, trade receivables and allowance for doubtful accounts, goodwill and other intangible assets, income taxes and contingent liabilities. We base our estimates, judgments and assumptions on historical experience and other relevant factors that are believed to be reasonable under the circumstances. In any given reporting period, our actual results may differ from the estimates, judgments and assumptions used in preparing our consolidated financial statements. Critical accounting policies are those that are both most important to the portrayal of a company's financial position and results of operations, and require management's most difficult, subjective or complex judgments. The following accounting policies and estimates are those that management deems most critical. For a complete listing of our significant accounting policies, see Note 2, "Summary of Significant Account Policies" to the Consolidated Financial Statements included in Item 8 of this Annual Report. Revenue Recognition The Company recognizes revenue when persuasive evidence of an arrangement exits, delivery has occurred, the sales price if fixed or determinable and collection is reasonably assured. Revenues and associated accounts receivable are recorded net of provisions for estimated future returns, doubtful accounts and other allowances. Allowances for uncollectible receivables are estimated based upon a combination of write-off history, aging analysis and any specifically identified troubled accounts. Newsstand revenues are recognized based on the on-sale dates of magazines and are initially recorded based upon estimates of sales, net of brokerage, returns and estimates of newsstand related fees. Estimated returns are recorded based upon historical experience. Print advertising revenues are recorded based on the on-sale dates of magazines when the advertisement appears in the magazine and are stated net of agency commissions and cash and sales discounts. Digital advertising revenues on the Company's websites are generally based on the sale of impression-based advertisements, which are recorded in the period in which the advertisements are served. Other revenues, primarily from licensing opportunities and strategic partnerships for our branded products as well as marketing services performed for third parties by DSI, are recognized when the service is performed. Goodwill and Intangible Assets The Company's goodwill and related indefinite-lived intangible assets are tested for impairment on an annual basis, on the first day of the fourth fiscal quarter or more often if an event occurs or circumstances change that would indicate a potential impairment exists. Impairment losses, if any, are reflected in operating income or loss in the consolidated financial statements. The Company's reporting units consist of each of its publications and other consolidated subsidiaries. The Company reviews finite-lived intangible assets for impairment whenever an event occurs or circumstances change to indicate that the carrying amount of such assets may not be fully recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss is based on the fair value of the asset compared to its carrying value. Impairment losses, if any, are reflected in operating income or loss in the consolidated financial statements. In assessing goodwill and intangible assets for impairment, the Company makes estimates of fair value that are based on its projection 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 or operational strategies. The valuations employ a combination of income and market approaches to measure fair value. 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. For a detailed description of impairment charges, see Note 3, "Goodwill and Other Identified Intangible Assets." 53-------------------------------------------------------------------------------- Table of Contents During an evaluation of goodwill and other identified intangible assets at December 31, 2013, 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 December 31, 2013 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 tradenames for certain reporting units to exceed the estimated fair value. As a result, the Company recorded a pre-tax non-cash impairment charge of $9.2 million to reduce the carrying value of tradenames during the third quarter of fiscal 2014. As of March 31, 2014, we identified four reporting units with an excess fair value over carrying value of less than 25%. As of March 31, 2014, National Enquirer, Flex, Muscle & Fitness and OK! reporting units had goodwill balances of $59.0 million, $7.2 million, $20.5 million and $3.4 million, respectively. For all other reporting units, the fair value is substantially in excess of carrying value as of March 31, 2014. While historical performance and current expectations have resulted in fair values of goodwill in excess of carrying values, if our assumptions are not realized, it is possible that in the future an additional impairment charge may need to be recorded. However, it is not possible at this time to determine if an impairment charge would result or if such a charge would be material. The Company will continue to monitor the recoverability of its remaining goodwill. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of interim or annual goodwill impairment tests will prove to be accurate predictions of the future. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of the aforementioned reporting units may include such items as follows: • A prolonged downturn in the business environment in which the reporting units operate (i.e. circulation and advertising decreases) especially in the markets we serve; • An economic recovery that significantly differs from our assumptions in timing or degree; • Volatility in debt markets resulting in higher discount rates; and • Unexpected regulatory changes for our advertisers. If our assumptions are not realized, it is possible that in the future an impairment charge may need to be recorded. However, it is not possible at this time to determine if an impairment charge would result or if such a charge would be material. Long-Lived Assets The Company reviews long-lived assets for impairment whenever an event occurs or circumstances change to indicate that the carrying amount of such assets may not be fully recoverable. When such factors, events or circumstances indicate that long-lived assets should be evaluated for possible impairment, the Company uses an estimate of undiscounted future cash flows over the remaining lives of the assets to measure recoverability. If the estimated undiscounted cash flows are less than the carrying value of the asset, the loss is measured as the amount by which the carrying value of the asset exceeds fair value computed on a discounted cash flow basis. For fiscal 2014, 2013 and 2012, no impairment charges for long-lived tangible and intangible assets were deemed necessary. 54-------------------------------------------------------------------------------- Table of Contents Income Taxes Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The asset and liability method of accounting for deferred income taxes requires a valuation against deferred tax assets if based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The effect on any changes in deferred tax assets and liabilities as a result of a change in tax rates is recognized in income. RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Recently Adopted Accounting Pronouncements In July 2012, the Financial Accounting Standards Board ("FASB") issued ASU 2012-02, Intangibles - Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment ("ASU 2012-02"), which amended ASC 350, Intangibles - Goodwill and Other ("ASC 350"). This amendment is intended to simplify how an entity tests indefinite-lived intangible assets for impairment and allows an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. An entity no longer is required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines, based on a qualitative assessment, that it is more-likely-than-not that the indefinite-lived intangible asset is impaired. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. ASU 2012-02 was effective for the Company beginning on April 1, 2013. The adoption of ASU 2012-02 did not have an impact on the Company's consolidated financial position, results of operations or cash flows. In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02") which supersedes and replaces the presentation requirements for reclassifications out of accumulated other comprehensive income in ASUs 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income and 2011-12 Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 for all public organizations. ASU 2013-02 requires an entity to provide additional information about reclassifications out of accumulated other comprehensive income. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. ASU 2013-02 was effective for the Company beginning on April 1, 2013. The adoption of ASU 2013-02 did not have an impact on the Company's consolidated financial position, results of operations or cash flows, since this ASU concerns disclosure only. Recently Issued 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 is effective for the Company on April 1, 2014. While the adoption of ASU 2013-11 will not have an impact on the Company's results of operations or cash flows, we are currently evaluating the impact of presenting unrecognized tax benefits net of our deferred tax assets where applicable on the Company's consolidated financial position. 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. 55-------------------------------------------------------------------------------- Table of Contents 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. |