10-Q 1 ami-2012930x10q.htm 10-Q AMI-2012.9.30-10Q

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

FORM 10-Q

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

For the quarterly period ended September 30, 2012

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

For the transition period from ____________ to ____________

Commission File Number 001-10784

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

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

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

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

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


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).      Yes ¨ No x
 
The number of shares outstanding of the registrant's common stock, $0.0001 par value, as of October 31, 2012 was 11,111,111.




AMERICAN MEDIA, INC.
 
Form 10-Q for the Quarter Ended September 30, 2012
 
INDEX
 
 
  Page(s)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





2


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

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
 
Readers of this quarterly report for the quarterly period ended September 30, 2012 (this “Quarterly Report”) are advised that this Quarterly Report contains both statements of historical fact and forward-looking statements. Forward-looking statements are subject to certain risks and uncertainties, which could cause our actual results to differ materially from those indicated by the forward-looking statements. Examples of forward-looking statements include, but are not limited to (i) projections of revenues, income or loss, capital expenditures, capital structure and other financial items; (ii) statements regarding our plans and objectives, including planned introductions of new publications or other products, or estimates or predictions of actions by customers, consumers, advertisers, suppliers, competitors or regulatory authorities; (iii) statements of future economic performance; (iv) outcomes of contingencies such as legal or any regulatory proceedings; and (v) statements of assumptions underlying other statements and statements about our business.

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

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

The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report. We do not intend, and do not assume any obligations, to update these forward looking statements, except as required by law.

3


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN MEDIA, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
 
September 30,
2012
 
March 31,
2012
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents ($2,039 and $3,365 related to VIEs, respectively)
$
6,549

 
$
5,226

Trade receivables, net of allowance for doubtful accounts of $6,330 and $4,795, respectively ($0 and $3,382 related to VIEs, respectively net of allowance for doubtful accounts of $0 and $779, respectively)
36,711

 
51,538

Inventories ($0 and $2,117 related to VIEs, respectively)
12,100

 
17,033

Prepaid expenses and other current assets ($948 and $1,508 related to VIEs, respectively)
20,270

 
19,651

Total current assets
75,630

 
93,448

PROPERTY AND EQUIPMENT, NET:
 
 
 
Leasehold improvements
4,008

 
3,991

Furniture, fixtures and equipment
40,368

 
36,625

Less – accumulated depreciation
(27,579
)
 
(24,695
)
Total property and equipment, net
16,797

 
15,921

OTHER ASSETS:
 
 
 
Deferred debt costs, net
10,526

 
11,222

Deferred rack costs, net ($0 and $2,194 related to VIEs, respectively)
7,741

 
9,966

Other long-term assets
1,632

 
1,622

Total other assets
19,899

 
22,810

GOODWILL AND OTHER IDENTIFIED INTANGIBLE ASSETS:
 
 
 
Goodwill ($0 and $3,358 related to VIEs, respectively)
234,244

 
234,244

Other identified intangibles, net of accumulated amortization of $112,528 and $110,770, respectively ($6,000 and $24,295 related to VIEs, respectively)
286,235

 
285,225

Total goodwill and other identified intangible assets
520,479

 
519,469

TOTAL ASSETS
$
632,805

 
$
651,648

LIABILITIES AND STOCKHOLDERS' DEFICIT
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable ($3 and $3,719 related to VIEs, respectively)
$
17,454

 
$
16,160

Accrued expenses and other liabilities ($1,711 and $3,056 related to VIEs, respectively)
24,705

 
29,539

Accrued interest
17,529

 
17,254

Redeemable financial instrument (see Note 9)
3,752

 

Deferred revenues ($0 and $2,264 related to VIEs, respectively)
34,725

 
37,474

Total current liabilities
98,165

 
100,427

NON-CURRENT LIABILITIES:
 
 
 
Senior secured notes
469,889

 
469,889

Revolving credit facility
7,000

 
7,000

Redeemable financial instrument, less current portion (see Note 9)
1,650

 

Other non-current liabilities
4,191

 
4,367

Deferred income taxes
73,545

 
75,694

Total liabilities
654,440

 
657,377

COMMITMENTS AND CONTINGENCIES (See Note 10)


 

Redeemable noncontrolling interest (see Note 9)
3,781

 
15,620

STOCKHOLDERS' DEFICIT:
 
 
 
Common stock, $0.0001 par value; 14,000,000 shares authorized; 10,000,000 shares issued and outstanding as of September 30, 2012 and March 31, 2012
1

 
1

Additional paid-in capital
822,723

 
822,773

Accumulated deficit
(847,905
)
 
(843,908
)
Accumulated other comprehensive loss
(235
)
 
(215
)
Total stockholders' deficit
(25,416
)
 
(21,349
)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
$
632,805

 
$
651,648


The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these Unaudited Condensed Consolidated Financial Statements.

4


AMERICAN MEDIA, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
 
Three Months Ended
 
Six Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
OPERATING REVENUES:
 
 
 
 
 
 
 
Circulation
$
54,759

 
$
59,047

 
$
107,387

 
$
112,417

Advertising
25,051

 
33,689

 
53,637

 
67,175

Other
10,076

 
12,198

 
16,086

 
18,536

Total operating revenues
89,886

 
104,934

 
177,110

 
198,128

OPERATING EXPENSES:
 
 
 
 
 
 
 
Editorial
9,977

 
11,166

 
21,106

 
21,981

Production
25,135

 
31,350

 
49,582

 
57,928

Distribution, circulation and other cost of sales
16,915

 
21,608

 
34,228

 
40,341

Selling, general and administrative
22,319

 
20,231

 
41,563

 
40,627

Depreciation and amortization
2,487

 
1,997

 
4,788

 
3,727

Total operating expenses
76,833

 
86,352

 
151,267

 
164,604

OPERATING INCOME
13,053

 
18,582

 
25,843

 
33,524

OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
Interest expense
(15,142
)
 
(14,640
)
 
(29,783
)
 
(29,439
)
Amortization of deferred debt costs
(355
)
 
(396
)
 
(696
)
 
(929
)
Other income (expenses), net
20

 
(378
)
 
(10
)
 
(941
)
Total other expense, net
(15,477
)
 
(15,414
)
 
(30,489
)
 
(31,309
)
(LOSS) INCOME BEFORE (BENEFIT) PROVISION FOR INCOME TAXES
(2,424
)
 
3,168

 
(4,646
)
 
2,215

(BENEFIT) PROVISION FOR INCOME TAXES
(462
)
 
649

 
(1,430
)
 
438

NET (LOSS) INCOME
(1,962
)
 
2,519

 
(3,216
)
 
1,777

LESS: NET INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
(781
)
 
(51
)
 
(781
)
 
(51
)
NET (LOSS) INCOME ATTRIBUTABLE TO AMERICAN MEDIA, INC. AND SUBSIDIARIES
$
(2,743
)
 
$
2,468

 
$
(3,997
)
 
$
1,726

 
 
 
 
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
NET (LOSS) INCOME
$
(1,962
)
 
$
2,519

 
$
(3,216
)
 
$
1,777

Foreign currency translation adjustment
27

 
71

 
(20
)
 
73

Comprehensive (loss) income
(1,935
)
 
2,590

 
(3,236
)
 
1,850

Less: comprehensive income attributable to the noncontrolling interest
(781
)
 
(51
)
 
(781
)
 
(51
)
COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO AMERICAN MEDIA, INC. AND SUBSIDIARIES
$
(2,716
)
 
$
2,539

 
$
(4,017
)
 
$
1,799


The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these Unaudited Condensed Consolidated Financial Statements.



5


AMERICAN MEDIA, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Six Months Ended
 
September 30,
 
2012
 
2011
Operating Activities:
 
 
 
Net (loss) income
$
(3,216
)
 
$
1,777

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation of property and equipment
3,030

 
2,275

Amortization of other identified intangibles
1,758

 
1,452

Provision for bad debts
771

 
777

Amortization of deferred debt costs
696

 
929

Amortization of deferred rack costs
4,565

 
4,986

Deferred income tax benefit
(1,524
)
 
(134
)
Other
(228
)
 
1,610

Decrease (increase) in operating assets:
 
 
 
Trade receivables
14,056

 
(6,234
)
Inventories
5,056

 
(3,905
)
Prepaid expenses and other current assets
(1,245
)
 
(776
)
Deferred rack costs
(2,340
)
 
(5,940
)
Other long-term assets
(10
)
 
(385
)
Increase (decrease) in operating liabilities:
 
 
 
Accounts payable
1,388

 
9,377

Accrued expenses and other liabilities
(4,614
)
 
8,618

Accrued interest
275

 
(2,299
)
Other non-current liabilities
(176
)
 
(1,439
)
Deferred revenues
(4,316
)
 
(1,720
)
Total adjustments and changes in operating assets and liabilities
17,142

 
7,192

Net cash provided by operating activities
13,926

 
8,969

 
 
 
 
Investing Activities:
 
 
 
Purchases of property and equipment
(4,034
)
 
(5,059
)
Purchases of intangible assets
(1,120
)
 

Proceeds from sale of assets
56

 
63

Investment in Radar
(100
)
 
(850
)
Acquisition of OK! Magazine

 
(23,000
)
Other
(300
)
 
(300
)
Net cash used in investing activities
(5,498
)
 
(29,146
)
 
 
 
 
Financing Activities:
 
 
 
Proceeds from revolving credit facility
32,500

 
42,500

Repayment to revolving credit facility
(32,500
)
 
(30,000
)
Senior secured notes redemption

 
(20,000
)
Redemption premium payment

 
(600
)
Proceeds in Odyssey from noncontrolling interest holders

 
13,500

Payments to noncontrolling interest holders of Odyssey
(7,215
)
 

Net cash (used in) provided by financing activities
(7,215
)
 
5,400

 
 
 
 
Effect of exchange rate changes on cash
110

 
(220
)
Net Increase (Decrease) in Cash and Cash Equivalents
1,323

 
(14,997
)
Cash and Cash Equivalents, Beginning of Period
5,226

 
21,285

Cash and Cash Equivalents, End of Period
$
6,549

 
$
6,288

 
 
 
 
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
 
 
 
Non-cash property and equipment (incurred but not paid)
$
98

 
$
41


The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these Unaudited Condensed Consolidated Financial Statements.

6


AMERICAN MEDIA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012


(1) Description of Business and Basis of Presentation


DESCRIPTION OF BUSINESS

We are a leading content centric media company specializing in the fields of celebrity journalism and active lifestyle. Our well known brands include, but are not limited to, National Enquirer, Star, OK! Weekly, Globe, National Examiner, Shape, Fit Pregnancy, Natural Health, Men's Fitness, Muscle & Fitness and Flex. We distribute our content across multiple platforms including print, Internet, mobile, tablets and video. We circulate our print publications utilizing single copy and subscription sales using the U.S. Postal Service, national distributors, wholesalers and retailers. Total circulation of our print publications with a frequency of six or more times per year, were approximately 6.0 million copies per issue during the six months ended September 30, 2012.

As of September 30, 2012, the Company published seven weekly publications: National Enquirer, Star, Globe, National Examiner, Country Weekly, OK! Weekly and Soap Opera Digest; two monthly publications: Muscle & Fitness and Flex; three bi-monthly publications: Fit Pregnancy, Natural Health and Muscle & Fitness Hers; and two publications that are published 10 times per year: Shape and Men's Fitness.

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

References to our second fiscal quarter (e.g. "second fiscal quarter of 2013") refer to our fiscal quarters ended September 30th of the applicable fiscal year. Each fiscal year ends on March 31st.


BASIS OF PRESENTATION
 
Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the Company’s statement of financial position, results of operations, and cash flows. The information included in this Quarterly Report should be read in conjunction with the consolidated financial statements and the accompanying notes included in our Exchange Offer Registration Statement. The fiscal year end consolidated balance sheet data presented for comparative purposes was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America ("US GAAP"). The results of operations for the six months ended September 30, 2012 are not necessarily indicative of the operating results for the full fiscal year or for any other subsequent interim period.

Principles of Consolidation

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


7


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

Use of Estimates

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

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

Concentrations

As of September 30, 2012, single copy revenues consisted of copies distributed to retailers primarily by three major wholesalers. In the second fiscal quarter of 2013 and in 2012, one of these wholesalers ("Wholesaler A") accounted for approximately 29% and 26%, respectively, of our total operating revenue and the other wholesaler ("Wholesaler B") accounted for approximately 16% and 15% , respectively, of our total operating revenue. During the six months ended September 30, 2012 and 2011, Wholesaler A accounted for approximately 27% and 25%, respectively, of our total operating revenue and Wholesaler B accounted for approximately 15% and 14%, respectively, of our total operating revenue. We have multi-year service arrangements with our wholesalers, which provide incentives to maintain certain levels of service.

 
(2) New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

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

Recently Issued Accounting Pronouncements

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




8


(3) Inventories

Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out (“FIFO”) method. The Company writes down inventory for estimated obsolescence and/or excess or damaged inventory. Inventory write-downs during the six months ended September 30, 2012 and 2011 were insignificant. Inventories are comprised of the following (in thousands):

 
September 30, 2012
 
March 31, 2012
Raw materials – paper
$
8,374

 
$
13,106

Finished product — paper, production and distribution costs of future issues
3,726

 
3,927

Total inventory
$
12,100

 
$
17,033



(4) Goodwill and Other Identified Intangible Assets

As of September 30, 2012 and March 31, 2012, the Company had goodwill with a carrying value of $234.2 million and other identified intangible assets not subject to amortization with carrying values of $273.3 million and $271.6 million, respectively. Other identified intangible assets not subject to amortization consist of tradenames with indefinite lives.

Identified intangible assets with finite lives subject to amortization consist of the following at September 30, 2012 and March 31, 2012 (in thousands):

 
 
 
September 30, 2012
 
March 31, 2012
 
Range of Lives
(in years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
Tradenames
8 - 27
 
$
10,610

 
$
(4,299
)
 
$
6,311

 
$
10,610

 
$
(4,078
)
 
$
6,532

Subscriber lists
3 - 15
 
32,702

 
(29,237
)
 
3,465

 
32,702

 
(28,146
)
 
4,556

Customer relationships
5 - 10
 
2,300

 
(606
)
 
1,694

 
2,300

 
(420
)
 
1,880

Other intangible assets
3
 
2,074

 
(578
)
 
1,496

 
954

 
(318
)
 
636

 
 
 
$
47,686

 
$
(34,720
)
 
$
12,966

 
$
46,566

 
$
(32,962
)
 
$
13,604


Amortization expense of intangible assets was $1.8 million and $1.5 million during the six months ended September 30, 2012 and 2011, respectively. Based on the carrying value of identified intangible assets recorded at September 30, 2012, and assuming no subsequent impairment of the underlying assets, the amortization expense is expected to be as follows (in thousands):

Fiscal Year
 
Amortization Expense
2013
 
$
2,119

2014
 
3,827

2015
 
1,361

2016
 
807

2017
 
534

  Thereafter
 
4,318

 
 
$
12,966




9


The gross carrying amount and accumulated impairment losses of goodwill, as of September 30, 2012 and March 31, 2012, by reportable segment are as follows (in thousands):
 
Celebrity Brands
 
Women's Active Lifestyle Group
 
Men's Active Lifestyle Group
 
Corporate and Other
 
Total
Goodwill
$
428,518

 
$
84,905

 
$
112,296

 
$
20,136

 
$
645,855

Accumulated impairment losses
(261,794
)
 
(62,841
)
 
(75,901
)
 
(11,075
)
 
(411,611
)
Goodwill, net of impairment losses
$
166,724

 
$
22,064

 
$
36,395

 
$
9,061

 
$
234,244


The Company did not record an impairment charge during the six months ended September 30, 2012 or 2011. The Company will continue to evaluate goodwill and other identified intangible assets for impairment. Goodwill and other identified intangible assets are material components of the Company’s unaudited condensed consolidated balance sheet and impairment charges to the Company’s goodwill or other identified intangible assets in future periods could be material to the Company’s unaudited condensed consolidated statement of income (loss).


(5) Fair Value of Financial Instruments

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

The estimated fair value of the Company’s financial instruments is as follows (in thousands):
 
 
 
September 30, 2012
 
March 31, 2012
 
 
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
First Lien Notes
Level 2
 
$
365,000

 
$
346,750

 
$
365,000

 
$
326,675

Second Lien Notes
Level 2
 
104,889

 
97,023

 
104,889

 
79,191

Revolving Credit Facility
Level 2
 
7,000

 
6,563

 
7,000

 
5,810

Redeemable Financial Instrument
Level 3
 
5,402

 
5,064

 

 


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

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

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

As of September 30, 2012 and March 31, 2012, the Company did not have financial assets or liabilities that would require measurement on a recurring basis, based on the guidance in ASC 820. The carrying amount for cash and cash equivalents, trade receivable, accounts payable and accrued expenses approximates fair value, due to the short nature of these items.

In addition, the Company may be required to record non-financial assets and liabilities at fair value on a nonrecurring basis. The Company was not required to record any non-financial assets and liabilities at fair value during the six months ended September 30, 2012.


10


(6) Revolving Credit Facility

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

The Company has the option to pay interest based on (i) a floating base rate option equal to the greatest of (x) the prime rate in effect on such day; (y) the federal funds effective rate in effect on such day plus ½ of 1%, and (z) one month LIBOR (but no less than 2%) plus 1%, or (ii) based on LIBOR, in each case plus a margin. The weighted-average effective interest rate under the 2010 Revolving Credit Facility was 8.25% as of September 30, 2012 and March 31, 2012.

In addition, the Company is required to pay a commitment fee ranging from 0.50% to 0.75% on the unused portion of the revolving commitment. Commitment fees paid during the six months ended September 30, 2012 and 2011 were insignificant.

During the six months ended September 30, 2012, the Company borrowed $32.5 million and repaid $32.5 million under the 2010 Revolving Credit Facility. At September 30, 2012, we have available borrowing capacity of $28.6 million after considering the $7.0 million outstanding balance and the $4.4 million outstanding letter of credit. The outstanding balance of the 2010 Revolving Credit Facility of $7.0 million on September 30, 2012 is included in non-current liabilities in the unaudited condensed consolidated balance sheets, as the outstanding balance is not due until December 2015.

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

As of September 30, 2012, the Company was in compliance with its covenants under the 2010 Revolving Credit Facility.

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

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


(7) Senior Secured Notes

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

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


11


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

Under the First Lien Notes Indenture, the Company has the option to redeem the First Lien Notes as follows: (a) at any time prior to December 15, 2013, the Company is permitted to redeem up to 35% of the original principal amount of the First Lien Notes with the net cash proceeds of one or more equity offerings (as defined) at a redemption price of 111.5%, plus accrued and unpaid interest through the redemption date; (b) at any time prior to December 15, 2013, the Company may redeem all or part of the First Lien Notes, at a redemption price equal to 100%, plus an applicable premium (as defined) and accrued and unpaid interest through redemption date; (c) during any 12-month period prior to December 15, 2013, the Company is entitled to redeem up to 10% of the aggregate principal amount of the First Lien Notes at a redemption price equal to 103.0%, plus accrued and unpaid interest through the redemption date; (d) on or after December 15, 2013, the Company may redeem the First Lien Notes, in whole or in part, at the redemption prices set forth below, plus accrued and unpaid interest and additional interest thereon, if any, through the redemption date, if redeemed during the 12-month period beginning on December 15th of each of the years indicated below:
Year
 
Percentage
2013
 
108.625%
2014
 
105.75%
2015
 
102.875%
2016 and thereafter
 
100%

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

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

As of September 30, 2012, the Company’s total principal amount of senior secured notes was approximately $469.9 million, consisting of $365.0 million principal amount of First Lien Notes and $104.9 million principal amount of Second Lien Notes.

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

As of September 30, 2012, the Company was in compliance with all of the covenants under the indentures governing the Senior Secured Notes.

12



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, requires the Company to file an exchange offer registration statement with the Securities and Exchange Commission (the “SEC”). Pursuant to the exchange offer registration statement, the Company is 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 will be registered under the Securities Act of 1933, as amended (the “Securities Act”), for up to $365.0 million of our First Lien Notes, which we issued in December 2010.

The terms of the Exchange Notes will be 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 will not apply to the Exchange Notes.

The Company is required to commence the Exchange Offer once the exchange offer registration statement is declared effective by the SEC and use commercially reasonable efforts to complete the Exchange Offer no later than February 24, 2012. Since the Exchange Offer was not completed by February 24, 2012, a registration default has occurred and is continuing (the “Registration Default”) and the interest on the First Lien Notes is subject to increase by (a) 0.25% per annum for the 90 days in the period from February 24, 2012 to May 24, 2012, (b) 0.50% per annum for the 90 days in the period from May 25, 2012 to August 24, 2012, (c) 0.75% per annum for the 90 days in the period from August 25, 2012 to November 24, 2012 and (d) 1.0% per annum from November 25, 2012 until the date the Registration Default is cured. The Registration Default does not impact our compliance with the indentures governing the First Lien Notes and the Second Lien Notes or the 2010 Revolving Credit Facility.

On August 22, 2012, the Company filed a Registration Statement with the SEC. On October 19, 2012, the Registration Statement, as amended, (the "Exchange Offer Registration Statement") was declared effective by the SEC and the Company commenced the Exchange Offer for the First Lien Notes. The Registration Default will be cured upon the completion of the Exchange Offer, which is currently scheduled to expire at 5:00 p.m., New York time, on November 19, 2012, unless extended by the Company. As of September 30, 2012, the Company has incurred approximately $1.0 million in additional interest on the First Lien Notes due to the Registration Default for the period from February 24, 2012 through September 30, 2012. Assuming the exchange offer is completed by November 20, 2012, the Company will have incurred approximately $1.3 million in total additional interest due to the Registration Default.


(8) Related Party Transactions

Certain of the Company’s stockholders hold significant equity interests in Vertis, Inc. (“Vertis”). Vertis performed significant portions of the Company’s Celebrity Brands pre-press operations until November 2011. Purchases of these services from Vertis totaled $1.2 million during the six months ended September 30, 2011. Vertis has not performed services to the Company during the six months ended September 30, 2012 and has no outstanding payables to Vertis at September 30, 2012.


(9) Investments in Joint Ventures and Redeemable Noncontrolling Interest

Mr. Olympia, LLC

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

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


13


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

The License Fee has been recorded as other identified intangibles and the remaining payable of $0.3 million, as of September 30, 2012, is reflected in accrued expenses and other liabilities in the accompanying unaudited condensed consolidated balance sheet.

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

Olympia’s net income during the three and six months ended September 30, 2012 and 2011 was $0.8 million and $0.5 million, respectively.

Radar Online, LLC

In October 2008, the Company entered into a limited liability company agreement to form Radar Online, LLC, a joint venture ("Radar"), to manage RadarOnline.com, a website focusing on celebrity and entertainment news. Though the Company owns 50% of Radar and can exercise significant influence, it does not control the activities that most significantly impact the economic performance of this joint venture. As a result, the Company accounts for the investment in Radar using the equity method. The operating results of Radar were insignificant to the Company’s unaudited condensed consolidated financial statements for the three and six months ended September 30, 2012 and 2011. The management fees receivable from Radar totaled $2.2 million as of September 30, 2012 and March 31, 2012. The management fees are fully reserved due to Radar's inability to pay the management fees at this time and revenues have not been recognized during the six months ended September 30, 2012 and 2011 related to those management fees.

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

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

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

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

14



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

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

In connection with the Conversion, the Company and the LLC Member entered into a preferred stock purchase agreement (the “Preferred Stock Purchase Agreement”) wherein the Company will purchase the LLC Member’s shares of Series A Preferred Stock in Odyssey Corporation for approximately $7.2 million, payable on a quarterly basis through March 31, 2014. In accordance with the Preferred Stock Purchase Agreement, the Membership Interest Purchase Agreement and the limited liability company agreement, including any amendments thereto, were terminated. All other terms of the Preferred Stock Purchase Agreement are substantially the same as the Membership Interest Purchase Agreement. In September 2012, the Company paid approximately $1.1 million and the remaining discounted obligation under the Preferred Stock Purchase Agreement is reflected as redeemable financial instrument on the unaudited condensed consolidated balance sheet. The remaining undiscounted obligation of $6.1 million will be paid as follows: $4.1 million during the remainder of fiscal 2013 and $1.9 million during fiscal 2014.


(10) Litigation

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

On April 3, 2012, the Second Circuit issued a decision reversing the dismissal of the lawsuit and reinstating the antitrust and state law claims (except the defamation claim, which Anderson withdrew). The Company, DSI and the other defendants filed a petition with the Second Circuit asking that the panel that issued the April 3rd decision reconsider that decision or, alternatively, that the appeal be reheard en banc by the entire Second Circuit. That petition was denied, as was a request to stay further proceedings pending the filing of and a decision on a petition for certiorari with the United States Supreme Court. On October 9, 2012, a petition for certiorari was filed by the Company, DSI and the other defendants seeking review of the Second Circuit's decision by the United States Supreme Court. The case will still proceed in the District Court, which has entered a case management plan and scheduling order on October 12, 2012 that calls for all fact discovery to be completed by July 12, 2013 and expert discovery to be completed by November 4, 2013.

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

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


15


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

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


(11) Acquisitions

Soap Opera Digest

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

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

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

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

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

OK! Weekly

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

For the three and six months ended September 30, 2011, the reported revenue was $8.1 million and $8.9 million, respectively, and the operating loss was $1.0 million and $0.9 million, respectively, which is included in the accompanying financial statements.



16


Supplemental Pro Forma Data

The following unaudited pro forma information gives effect to the OK! Weekly acquisition that was completed in June 2011 as if it had occurred on April 1, 2011. This pro forma data is presented for informational purposes only and does not purport to be indicative of the results of future operations or of the results that would have occurred had the acquisition taken place on April 1, 2011. Such information for the six months ended September 30, 2011 is based on historical financial information with respect to the acquisition and does not include operations or other changes which might have been effected by the Company.
 
Six Months Ended
(in thousands)
September 30, 2011
Operating Revenues
$
202,720

Net Income
$
1,834



(12) Business Segment Information

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

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

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

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

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

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

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

Segment Data

The following table presents the operating results in the Company’s five reporting segments for the three and six months ended September 30, 2012 and 2011, respectively, and the assets employed as of September 30, 2012 and March 31, 2012. The information includes certain intersegment transactions and is, therefore, not necessarily indicative of the results had the operations existed as stand-alone businesses. Intersegment transactions represent intercompany services, which are billed at what management believes are prevailing market rates. These intersegment transactions, which represent transactions between operating units in different business segments, are eliminated in consolidation.

17


 
Three Months Ended
 
Six Months Ended
 
September 30,
 
September 30,
(in thousands)
2012
 
2011
 
2012
 
2011
Operating revenues
 
 
 
 
 
 
 
Celebrity Brands
$
55,595

 
$
62,492

 
$
109,630

 
$
115,661

Women's Active Lifestyle Group
12,696

 
17,034

 
26,887

 
36,493

Men's Active Lifestyle Group
17,069

 
17,731

 
31,067

 
32,273

Publishing Services
6,499

 
7,879

 
12,769

 
14,885

Corporate and Other (1)

 
1,526

 
526

 
2,269

Unallocated corporate (eliminations) (2)
(1,973
)
 
(1,728
)
 
(3,769
)
 
(3,453
)
Total operating revenue
$
89,886

 
$
104,934

 
$
177,110

 
$
198,128

 
 
 
 
 
 
 
 
Operating income (loss)
 
 
 
 
 
 
 
Celebrity Brands
$
20,180

 
$
17,975

 
$
36,981

 
$
34,355

Women's Active Lifestyle Group
786

 
4,063

 
3,090

 
9,042

Men's Active Lifestyle Group
5,193

 
5,637

 
9,099

 
9,996

Publishing Services
985

 
1,120

 
1,694

 
1,675

Corporate and Other (1)
(14,091
)
 
(10,213
)
 
(25,021
)
 
(21,544
)
Total operating income
$
13,053

 
$
18,582

 
$
25,843

 
$
33,524

 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
 
Celebrity Brands
$
759

 
$
811

 
$
1,546

 
$
1,467

Women's Active Lifestyle Group
76

 

 
129

 

Men's Active Lifestyle Group
79

 
12

 
137

 
24

Publishing Services
167

 
343

 
390

 
683

Corporate and Other (1)
1,406

 
831

 
2,586

 
1,553

Total depreciation and amortization
$
2,487

 
$
1,997

 
$
4,788

 
$
3,727

 
 
 
 
 
 
 
 
Amortization of deferred rack costs
 
 
 
 
 
 
 
Celebrity Brands
$
1,936

 
$
2,647

 
$
4,389

 
$
4,823

Women's Active Lifestyle Group
83

 
50

 
159

 
156

Men's Active Lifestyle Group
7

 
4

 
17

 
7

Publishing Services

 

 

 

Corporate and Other (1)
(7
)
 

 

 

Total amortization of deferred rack costs
$
2,019

 
$
2,701

 
$
4,565

 
$
4,986

Total Assets
September 30,
2012
 
March 31,
2012
Celebrity Brands
$
385,115

 
$
395,215

Women's Active Lifestyle Group
73,205

 
76,192

Men's Active Lifestyle Group
117,937

 
115,788

Publishing Services
8,154

 
7,223

Corporate and Other (3)
48,394

 
57,230

Total assets
$
632,805

 
$
651,648


(1)
For the three months ended September 30, 2012 and 2011, the Corporate and Other segment includes income tax (benefit) and provision of $0.5 million and $0.6 million, interest expense of $15.1 million and $14.6 million and amortization of deferred debt costs of $0.4 million and $0.4 million, respectively. For the six months ended September 30, 2012 and 2011, the Corporate and Other segment includes income tax (benefit) and provision of $1.4 million and $0.4 million, interest expenses of $29.8 million and $29.4 million and amortization of deferred debt costs of $0.7 million and $0.9 million, respectively.


18


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

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


Geographic Data

The Company operates principally in two geographic areas, the United States of America and Europe (primarily the United Kingdom). There were no significant transfers between geographic areas during these periods. The following table presents revenue by geographical area for the three and six months ended September 30, 2012 and 2011 and all identifiable assets related to the operations in each geographic area as of September 30, 2012 and March 31, 2012:

 
Three Months Ended
 
Six Months Ended
 
September 30,
 
September 30,
(in thousands)
2012
 
2011
 
2012
 
2011
Operating revenues:
 
 
 
 
 
 
 
United States of America
$
86,916

 
$
101,755

 
$
170,668

 
$
191,307

Europe
2,970

 
3,179

 
6,442

 
6,821

Total operating revenues
$
89,886

 
$
104,934

 
$
177,110

 
$
198,128


(in thousands)
September 30,
2012
 
March 31,
2012
Assets:
 
 
 
United States of America
$
623,840

 
$
641,754

Europe
8,965

 
9,894

Total assets
$
632,805

 
$
651,648


(13) Supplemental Condensed Consolidating Financial Information

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



19


SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2012
(in thousands)
    ASSETS
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
3,496

 
$
3,053

 
$

 
$
6,549

Trade receivables, net

 
34,703

 
2,008

 

 
36,711

Inventories

 
11,554

 
546

 

 
12,100

Prepaid expenses and other current assets

 
23,989

 
1,768

 
(5,487
)
 
20,270

Total current assets

 
73,742

 
7,375

 
(5,487
)
 
75,630

PROPERTY AND EQUIPMENT, NET:
 
 
 
 
 
 
 
 
 
Leasehold improvements

 
4,008

 

 

 
4,008

Furniture, fixtures and equipment

 
39,683

 
685

 

 
40,368

Less – accumulated depreciation

 
(27,074
)
 
(505
)
 

 
(27,579
)
Total property and equipment, net

 
16,617

 
180

 

 
16,797

OTHER ASSETS:
 
 
 
 
 
 
 
 
 
Deferred debt costs, net
10,526

 

 

 

 
10,526

Deferred rack costs, net

 
7,741

 

 

 
7,741

Other long-term assets

 
1,632

 

 

 
1,632

Investment in subsidiaries
555,451

 
(180
)
 

 
(555,271
)
 

Total other assets
565,977

 
9,193

 

 
(555,271
)
 
19,899

GOODWILL AND OTHER IDENTIFIED INTANGIBLE ASSETS:
 
 
 
 
 
 
 
 
Goodwill

 
229,734

 
4,510

 

 
234,244

Other identified intangibles, net

 
280,235

 
6,000

 

 
286,235

Total goodwill and other identified intangible assets

 
509,969

 
10,510

 

 
520,479

TOTAL ASSETS
$
565,977

 
$
609,521

 
$
18,065

 
$
(560,758
)
 
$
632,805

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

 
$
16,717

 
$
737

 
$

 
$
17,454

Accrued expenses and other liabilities

 
(2,929
)
 
6,646

 
20,988

 
24,705

Accrued interest
17,529

 

 

 

 
17,529

Redeemable financial instruments
3,752

 

 

 

 
3,752

Deferred revenues

 
34,296

 
429

 

 
34,725

Total current liabilities
21,281

 
48,084

 
7,812

 
20,988

 
98,165

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

 

 

 

 
469,889

Revolving credit facility
7,000

 

 

 

 
7,000

Redeemable financial instruments, less current portion
1,650

 

 

 

 
1,650

Other non-current liabilities

 
4,191

 

 

 
4,191

Deferred income taxes

 
99,974

 
46

 
(26,475
)
 
73,545

Due (from) to affiliates
91,573

 
(95,705
)
 
4,132

 

 

Total liabilities
591,393

 
56,544

 
11,990

 
(5,487
)
 
654,440

Redeemable noncontrolling interest

 

 
3,781

 

 
3,781

STOCKHOLDER'S (DEFICIT) EQUITY:
 
 
 
 
 
 
 
 
 
Total stockholder's (deficit) equity
(25,416
)
 
552,977

 
2,294

 
(555,271
)
 
(25,416
)
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
$
565,977

 
$
609,521

 
$
18,065

 
$
(560,758
)
 
$
632,805




20


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

 
$
3,185

 
$
2,041

 
$

 
$
5,226

Trade receivables, net

 
49,293

 
2,245

 

 
51,538

Inventories

 
16,527

 
506

 

 
17,033

Prepaid expenses and other current assets

 
24,287

 
848

 
(5,484
)
 
19,651

Total current assets

 
93,292

 
5,640

 
(5,484
)
 
93,448

PROPERTY AND EQUIPMENT, NET:
 
 
 
 
 
 
 
 
 
Leasehold improvements

 
3,991

 

 

 
3,991

Furniture, fixtures and equipment

 
36,012

 
613

 

 
36,625

Less – accumulated depreciation

 
(24,232
)
 
(463
)
 

 
(24,695
)
Total property and equipment, net

 
15,771

 
150

 

 
15,921

OTHER ASSETS:
 
 
 
 
 
 
 
 
 
Deferred debt costs, net
11,222

 

 

 

 
11,222

Deferred rack costs, net

 
9,966

 

 

 
9,966

Other long-term assets

 
1,622

 

 

 
1,622

Investment in subsidiaries
535,305

 
(79
)
 

 
(535,226
)
 

Total other assets
546,527

 
11,509

 

 
(535,226
)
 
22,810

GOODWILL AND OTHER IDENTIFIED INTANGIBLE ASSETS:
Goodwill

 
229,734

 
4,510

 

 
234,244

Other identified intangibles, net

 
279,225

 
6,000

 

 
285,225

Total goodwill and other identified intangible assets

 
508,959

 
10,510

 

 
519,469

TOTAL ASSETS
$
546,527

 
$
629,531

 
$
16,300

 
$
(540,710
)
 
$
651,648

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

 
$
15,237

 
$
923

 
$

 
$
16,160

Accrued expenses and other liabilities

 
13,610

 
5,776

 
10,153

 
29,539

Accrued interest
17,254

 

 

 

 
17,254

Redeemable financial instruments

 

 

 

 

Deferred revenues

 
36,740

 
734

 

 
37,474

Total current liabilities
17,254

 
65,587

 
7,433

 
10,153

 
100,427

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

 

 

 

 
469,889

Revolving credit facility
7,000

 

 

 

 
7,000

Redeemable financial instruments, less current portion

 

 

 

 

Other non-current liabilities

 
4,367

 

 

 
4,367

Deferred income taxes

 
91,408

 
(75
)
 
(15,639
)
 
75,694

Due (from) to affiliates
73,733

 
(77,987
)
 
4,254

 

 

Total liabilities
567,876

 
83,375

 
11,612

 
(5,486
)
 
657,377

Redeemable noncontrolling interest

 
12,620

 
3,000

 

 
15,620

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

 
1,688

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

 
$
629,531

 
$
16,300

 
$
(540,710
)
 
$
651,648




21


SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012
(in thousands)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
OPERATING REVENUES:
 
 
 
 
 
 
 
 
 
Circulation
$

 
$
53,523

 
$
1,236

 
$

 
$
54,759

Advertising

 
23,511

 
1,540

 

 
25,051

Other

 
5,931

 
4,145

 

 
10,076

Total operating revenues

 
82,965

 
6,921

 

 
89,886

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
Editorial

 
9,554

 
423

 

 
9,977

Production

 
22,432

 
2,703

 

 
25,135

Distribution, circulation and other cost of sales

 
16,336

 
579

 

 
16,915

Selling, general and administrative

 
21,043

 
1,276

 

 
22,319

Depreciation and amortization

 
2,467

 
20

 

 
2,487

Total operating expenses

 
71,832

 
5,001

 

 
76,833

OPERATING INCOME

 
11,133

 
1,920

 

 
13,053

OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
 
 
Interest expense
(15,142
)
 

 

 

 
(15,142
)
Amortization of deferred debt costs
(355
)
 

 

 

 
(355
)
Other income (expense), net

 
20

 

 

 
20

Total other expense, net
(15,497
)
 
20

 

 

 
(15,477
)
LOSS (INCOME) BEFORE (BENEFIT) PROVISION FOR INCOME TAXES, AND EQUITY IN EARNINGS OF CONSOLIDATED SUBSIDIARIES
(15,497
)
 
11,153

 
1,920

 

 
(2,424
)
(BENEFIT) PROVISION FOR INCOME TAXES
(6,335
)
 
5,793

 
80

 

 
(462
)
EQUITY IN EARNINGS OF CONSOLIDATED SUBSIDIARIES
6,419

 
290

 

 
(6,709
)
 

NET (LOSS) INCOME
(2,743
)
 
5,650

 
1,840

 
(6,709
)
 
(1,962
)
LESS: NET INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST

 

 
(781
)
 

 
(781
)
NET (LOSS) INCOME ATTRIBUTABLE TO AMERICAN MEDIA, INC AND SUBSIDIARIES
$
(2,743
)
 
$
5,650

 
$
1,059

 
$
(6,709
)
 
$
(2,743
)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
NET (LOSS) INCOME
$
(2,743
)
 
$
5,650

 
$
1,840

 
$
(6,709
)
 
$
(1,962
)
Foreign currency translation adjustment

 

 
27

 

 
27

Comprehensive (loss) income
(2,743
)
 
5,650

 
1,867

 
(6,709
)
 
(1,935
)
Less: comprehensive income attributable to the noncontrolling interest

 

 
(781
)
 

 
(781
)
COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO AMERICAN MEDIA, INC. AND SUBSIDIARIES
$
(2,743
)
 
$
5,650

 
$
1,086

 
$
(6,709
)
 
$
(2,716
)



22


SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2012
(in thousands)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
OPERATING REVENUES:
 
 
 
 
 
 
 
 
 
Circulation
$

 
$
104,825

 
$
2,562

 
$

 
$
107,387

Advertising

 
50,242

 
3,395

 

 
53,637

Other

 
11,586

 
4,500