10-K 1 ami-20160331x10k.htm 10-K Document

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

FORM 10-K

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

For the fiscal year ended March 31, 2016

¨ 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

Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
 
 
Yes o
No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
 
 
 
Yes þ
No o
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
 
 
Yes o
No þ
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
 
 
Yes þ
No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
 
 
 
 
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
 
Accelerated filer
o
Non-accelerated filer
þ
(Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
 
 
 
Yes o
No þ



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


DOCUMENTS INCORPORATED BY REFERENCE

Part III (Items 10, 11, 12, 13 and 14) of this Annual Report on Form 10-K is incorporated by reference from the registrant's definitive Proxy Statement for its 2016 Annual Meeting of Stockholders if filed with the Securities and Exchange Commission no later than 120 days after the end of the registrant's fiscal year covered by this report or, alternatively, by amendment to this Form 10-K under cover of Form 10-K/A no later than the end of such 120 day period.



AMERICAN MEDIA, INC.
 
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended March 31, 2016
 
TABLE OF CONTENTS
 
 
  Page(s)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





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

Our fiscal year ended on March 31, 2016 and is referred to herein as fiscal 2016. References to our fiscal year (e.g. "fiscal 2016") refer to our fiscal year ended March 31st of the applicable year.


CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

This Annual Report for the fiscal year ended March 31, 2016 contains certain "forward-looking statements," as such term is defined in the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Securities Exchange Act"). These forward-looking statements relate to our current beliefs regarding future events or our future operating or financial performance. By their nature, forward-looking statements involve risks, trends, and uncertainties that could cause actual results to differ materially from those anticipated in any forward-looking statements.

Such factors include, but are not limited to, those items described in "Risk Factors" in Item 1A of this Annual Report and those discussed in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7, as well as other factors.

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

We caution you not to place undue reliance on any forward-looking statement, which speaks only as of the date of this Annual Report. We undertake no obligation to publicly update or revise any forward-looking statement contained in this Annual Report, whether as a result of new information, future events or otherwise, except as required by law.

INDUSTRY DATA AND CIRCULATION INFORMATION

This Annual Report includes publishing industry data, rankings, circulation information, Internet user data, readership information and other industry and market information that we obtained from various third-party sources, internal company sources and public filings. Third-party sources include, but are not limited to, the Alliance for Audited Media ("AAM"), comScore Media Metrix ("comScore"), Publishers Information Bureau as provided by Kantar Media ("PIB"), GfK Mediamark Research & Intelligence ("MRI"), Google Analytics, BPA Circulation Statements and Statement of Ownership figures filed with the U.S. Postal Service.

While we are not aware of any misstatements regarding any industry data presented in this Annual Report and believe such data to be accurate, we have not independently verified any data obtained from third-party sources and cannot assure you of the accuracy or completeness of such data. Such data may involve risks and uncertainties and are subject to change based on various factors. See Item 1A, “Risk Factors.”

Unless otherwise stated herein, all average circulation information for our publications is a per issue average of actual single copy circulation and subscription copies for fiscal 2016. All references to "circulation" are to single copy newsstand sales and paid subscription circulation, unless otherwise specified. References to “verified non-paid subscriptions” are to non-paid subscription copies designated by publishers for readership in public places or intended for individual use by recipients who are likely to have a strong affinity for the content of the publication.


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PART I

Item 1. Business.

OVERVIEW

American Media, Inc. together with its subsidiaries (collectively, the "Company", "AMI", "we", "our" or "us") is one of the largest publishers of celebrity and health and active lifestyle magazines in the United States, with a diversified portfolio of 10 publications that have a combined monthly print and digital audience of more than 39 million readers and monthly on-line audience of approximately 49 million readers.

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

In January 2015, we sold our Shape, Fit Pregnancy and Natural Health publications, which comprised our Women's Active Lifestyle segment, for approximately $60 million in cash plus an earnout of up to $60 million. As a result, the operations of the Women's Active Lifestyle segment have been classified as discontinued operations in all periods presented. We also sold our Country Weekly publication, in November 2014, for approximately $3 million and we entered into long-term publishing services agreement for $1 million. The operations of Country Weekly did not meet the criteria for discontinued operations presentation. For additional information on these dispositions, see Note 10, "Dispositions" to our consolidated financial statements included elsewhere in this Annual Report.

After giving effect to the divestiture of our Women's Active Lifestyle segment, our remaining well-known publications cover two primary operating segments: Celebrity and Men's Active Lifestyle. Within our Celebrity segment, our portfolio of brands includes: National Enquirer, Star, OK!, Globe, National Examiner and Soap Opera Digest. Within our Men's Active Lifestyle segment, our portfolio of brands include: Men's Fitness, Muscle & Fitness, Muscle & Fitness Hers, Flex, Mr. Olympia and international editions of Muscle & Fitness and Flex.

Total circulation of our remaining print publications with a frequency of six or more times per year, were approximately 3.1 million copies per issue during fiscal 2016 and 3.2 million and 3.5 million copies per issue during fiscal 2015 and 2014, respectively. 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 men's titles have the highest market share of national magazine advertising pages in their competitive set in the United States.

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 consumers, 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 or enter the market.

The magazine publishing industry is transforming itself into media content providers with multiple revenue sources. The impact has been a decline in circulation and print advertising revenues, partially offset by the growth in digital revenues. Our brands go beyond the printed page. We engage an audience of more than 88 million men and women every month through not only magazines, but also social media, television, and on all digital platforms, from phones and tablets to laptops and desktops. We have transformed from being a leading media company to a lifestyle brand that informs and entertains while also creating consumer and trade events to sell products for our advertisers.


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DESCRIPTION OF BUSINESS

Our circulation revenue, representing the sale of magazines to consumers, generates more than half of our total revenues. The sale of advertising across our multiple platforms generates approximately one-third of our total revenues. The remaining operating revenues are generated by our other operations related to our brands. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations." The majority of our operating revenues are generated in the United States. See Note 13, "Business Segment Information" to our consolidated financial statements included elsewhere in this Annual Report for certain information by geographic area.

Operating Revenues

Circulation

Our circulation revenue, representing the sale of magazines to consumers, generates more than half of our total revenues. Circulation is an important component in determining our advertising revenues because advertising rates are dependent on circulation and audience. Single copy sales (also known as newsstand sales) are sold primarily through national distributors, wholesalers and retailers. Subscriptions are sold primarily through direct mail, or digitally via the Internet. Additionally, single-copy digital issues of our magazines and digital-only subscriptions are sold or distributed through various app stores and other digital storefronts. Our digital subscriptions represent 15% of our 2.0 million net subscriptions as of March 31, 2016, the highest percentage among our competitive set.

As of March 31, 2016, our print publications comprised approximately 24% of total U.S. and Canadian newsstand circulation for weekly publications that are audited by the Alliance for Audited Media.

Newsstand sales include sales through traditional newsstands as well as supermarkets, convenience stores, pharmacies and other retail outlets. Newsstand sales are highly sensitive to cover selection, retail placement and other factors. Through our relationships with national distributors, wholesalers and retailers, we market and arrange for the distribution of our magazines to retailers and the billing and the collection processes pursuant to multi-year arrangements.

We rely on wholesalers for the retail distribution of our magazines. A small number of wholesalers are responsible for a substantial percentage of the wholesale magazine distribution business. The decline in magazine sales at newsstands and other retail outlets have increased the financial instability of magazine wholesalers during 2014. Several of our wholesalers, including our former second-largest wholesaler, Source Interlink Companies ("Source"), ceased operation during 2014.

Advertising

The sale of advertising across our multiple platforms generates approximately one-third of our total revenues. We conduct our advertising sales through a combination of corporate and brand sales and marketing teams that sell advertising across multiple media platforms. Our salespeople are divided into specific brand teams, with each team focusing on selling marketing programs that integrate print, digital (such as mobile and desktop), social media and events for our clients. We are also the industry leader in creating sponsored content and native advertising. Combined, our sales teams cover all consumer advertising categories.

The rates at which we sell print advertising depend on each magazine's rate base, which is the circulation of the magazine that we guarantee to our advertisers, as well as our audience size. If we are not able to meet our committed rate base, the price paid by advertisers is generally subject to downward adjustments, including in the form of future credits or discounts. Our published rates for each of our magazines are subject to negotiation with each of our advertisers.

Print advertising revenue continues to be negatively impacted by the decline in the consumer magazine sector coupled with the transformation of advertising from print to digital. Our digital advertising revenue represented 20%, 15% and 11%, respectively, of our total advertising revenue for fiscal 2016, 2015 and 2014.

Advertising revenue is typically highest in the fourth quarter of our fiscal year due to seasonality. See "Seasonality" within this Item 1, "Business," for further information.


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Related Operations

Over the past year, we have developed several unique brand extensions across multiple platforms.

In February 2016, we announced a partnership with Dwayne "The Rock" Johnson's company, Seven Bucks Productions. Mr. Johnson is one of the world's biggest box office stars with over $1.4 billion in ticket sales in 2015 and Seven Bucks Productions has over 50 movie, television and digital projects in development. Our initial venture will be a live television broadcast of the Mr. Olympia event from Las Vegas in September 2016. Mr. Johnson will be one of the co-hosts and we are currently in negotiations with a leading broadcast network to air the live broadcast of the Mr. Olympia event.

We currently publish a custom magazine for GNC Holdings, Inc. ("GNC") on a quarterly basis, utilizing our Men's Fitness (and Shape pursuant to a license agreement) brands. The print version is distributed to approximately 500,000 customers through select GNC stores, with another 1 million digital copies distributed via email to GNC's database of customers. GNC leverages its vendors to advertise in the magazine and AMI retains 100% of the advertising revenues.

The REELZ Channel, available in over 68 million homes, recently premiered a new television series, National Enquirer Investigates and the Discovery Channel will launch a series called Enquiring Minds this fall. We are partnering with The Weinstein Company on both of these televisions series. There is also a feature film and documentary drama television series on The National Enquirer in development with IMG/WME.

Operating Expenses

Our primary operating expenses consist of costs related to the production of our printed magazines, as well as selling, general and administrative expenses.

Paper is the principal raw material utilized in our publications and we have a long-term paper supply and purchasing agreement with the largest paper supply broker in the United States. 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.

Printing is a significant component in the production of our printed magazines. The majority of our printing is with a single printer pursuant to a long-term printing contract.

Subscription copies of our magazines are distributed primarily through the United States Postal Service (USPS) as periodicals mail. We coordinate with our printers and local USPS distribution centers to achieve efficiencies in our production and distribution processes and to minimize mail processing costs and delays. However, we are subject to the postal rate increases that affect delivery costs associated with our magazines. Effective May 31, 2015, rates for all classes of mail were increased by approximately 2% by the Postal Regulation Commission. Increases in postal rates are factored into our pricing, however, there can be unexpected increases in postal rates or other delivery charges that would have a negative impact on our results of operations. See Item 1A, "Risk Factors - Our business and results of operations could be negatively affected by postal service changes, and our results of operations may be adversely affected by increases in postal rates."

RECENT DEVELOPMENTS

Debt Related Transactions

During the first quarter of fiscal 2016, AMI repurchased $2.0 million in 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"), plus accrued and unpaid interest in the open market, from the Investors.

In February 2016, we amended the revolving credit facility (the "Revolving Credit Facility") to, among other things, extend the maturity date to June 2017, modify the financial covenants in effect through the date of maturity and provide for certain other provisions.

In March 2016, AMI exchanged approximately $58.9 million in aggregate principal amount of First Lien Notes, plus accrued and unpaid interest, held by the Investors, for approximately $76.0 million aggregate principal amount of new second lien senior secured notes, which bear interest at a rate of 7.0% per annum and mature in July 2020 (the "New Second Lien Notes"), pursuant to an exchange agreement (the "New Second Lien Notes Exchange Agreement").


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In addition to the New Second Lien Notes Exchange Agreement, AMI also issued, in March 2016, approximately $76.2 million in aggregate principal amount of New Second Lien Notes in a distribution to certain holders of equity interests in the Parent, of which approximately $68.8 million was issued to the Investors and approximately $7.4 million was issued to AMI's Chief Executive Officer (the "Officer"), and approximately $7.3 million aggregate principal amount of New Second Lien Notes were issued to an affiliate of the Investors in exchange for cash.

In March 2016, AMI repurchased the remaining $2.2 million in 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"), plus accrued and unpaid interest in the open market. Upon the full satisfaction and cancellation of all outstanding Second Lien Notes, the collateral agreement securing the Second Lien Notes was terminated and AMI's obligations under the Indenture governing the Second Lien Notes were satisfied in full.

See Note 4, "Revolving Credit Facility" and Note 5, "Senior Secured Notes" to our consolidated financial statements included elsewhere in this Annual Report for further information regarding our debt agreements.

BUSINESS SEGMENTS

Our three business segments are described below. Additional financial information relating to these segments may be found in Note 13, "Business Segment Information" in our consolidated financial statements contained elsewhere in this Annual Report, which information is incorporated herein by reference.

Celebrity Brands

Our six celebrity magazines have a 36% share-of-market, selling approximately 0.8 million copies per week, or $3.9 million in retail dollars. In fiscal 2016, they accounted for 74% of our total operating revenues. Circulation revenues were 81% of this segment in fiscal 2016, with print and digital advertising revenue representing the balance.

This segment consists of the following brands in print and digital:

National Enquirer, a weekly, hard news, investigating tabloid covering all celebrities, politics, crime, human interest, health and fashion. We recently appointed Dick Morris as the chief political commentator and contributor to expand our political coverage;

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 stars and investigative crime stories that are less mainstream and more salacious than the National Enquirer;

National Examiner, a weekly tabloid (currently only available in print format) consisting of celebrity and human interest stories, differentiating it from the other titles through its upbeat positioning as the source for gossip, contests, women’s health service and good news for an older tabloid audience; and

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.


7


Certain information related to our Celebrity publications is as follows:

 
 
Frequency (per annum)
 
 
 
Website Unique Visitors (monthly average)
Brand
 
 
2016 Rate Base
 
National Enquirer
 
52 x
 
n/a
 
1,319,305
Star
 
52 x
 
750
 
1,194,216
OK!
 
52 x
 
475,000
 
9,695,688
Globe
 
52 x
 
n/a
 
25,382
National Examiner
 
52 x
 
n/a
 
n/a
Soap Opera Digest
 
52 x
 
135,000
 
396,205

The following table sets forth the average circulation (per issue) and U.S. cover prices for our Celebrity segment:

(in thousands, except cover price information)
 
March 31, 2016
 
March 31, 2015
 
March 31, 2014
National Enquirer
 
 
 
 
 
 
Total circulation
 
364

 
415

 
516

Subscription circulation
 
97

 
110

 
120

Single copy circulation
 
267

 
305

 
396

Cover price
 
$4.99
 
$4.99
 
$4.99
Star
 
 
 
 
 
 
Total circulation
 
754

 
826

 
803

Subscription circulation
 
553

 
608

 
501

Single copy circulation
 
201

 
218

 
302

Cover price
 
$4.99
 
$4.99
 
$4.99
OK!
 
 
 
 
 
 
Total circulation
 
504

 
432

 
507

Subscription circulation
 
383

 
313

 
352

Single copy circulation
 
121

 
119

 
155

Cover price
 
$4.99
 
$4.99
 
$4.99
Globe
 
 
 
 
 
 
Total circulation
 
176

 
201

 
246

Subscription circulation
 
25

 
27

 
28

Single copy circulation
 
151

 
174

 
218

Cover price
 
$4.99
 
$4.99
 
$3.99
National Examiner
 
 
 
 
 
 
Total circulation
 
77

 
82

 
104

Subscription circulation
 
8

 
9

 
10

Single copy circulation
 
69

 
73

 
94

Cover price
 
$4.99
 
$4.99
 
$3.99


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(in thousands, except cover price information)
 
March 31, 2016
 
March 31, 2015
 
March 31, 2014
Soap Opera Digest
 
 
 
 
 
 
Total circulation
 
123

 
138

 
154

Subscription circulation
 
77

 
85

 
93

Single copy circulation
 
46

 
53

 
61

Cover price
 
$4.99
 
$4.99
 
$3.99

The cover prices increased for Globe, National Examiner and Soap Opera Digest from $3.99 to $4.99 effective with the May 12, 2014 issue.

Men's Active Lifestyle

In fiscal 2016, our Men's Active Lifestyle segment accounted for 25% of our total operating revenues. The relaunch of Men's Fitness from a workout magazine to a men's lifestyle guide continues to attract new lifestyle advertisers including Ralph Lauren, FIJI Water, Louis Vuitton, Nautica, Energizer and SlimFast. During fiscal 2016, total advertising revenues increased 9% for Men's Fitness as compared to the prior year. Traffic has increased on-line as well. Mensfitness.com page views for fiscal 2016 were 844 million, up 17% year-over-year.

Men's Fitness is more than a magazine, it is a lifestyle. Events such as our Ultimate Athlete test both sports skills and strength, and bring the Men's Fitness reader to life for our advertisers, delivering millions of dollars in incremental ad revenue through sponsorship and increased print and digital advertising.

The growth story continues across other men's active lifestyle brands. Traffic continues to increase on-line for MuscleandFitness.com with 573 million page views during fiscal 2016, up 11% year-over-year. Each year we host the body building industry's biggest consumer health and fitness event built around our Mr. Olympia competition in Las Vegas.

Advertisers crave the audience for these brands: men age 18 to 34 years old. Revenues from print and digital advertising are 67% of the segment’s revenues in fiscal 2016, while circulation revenues are 17% and the Mr. Olympia event represents the balance. This segment consists of the following brands in print and digital:

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

Muscle & Fitness, a fitness physique training magazine appealing to exercise enthusiasts and athletes of all ages, especially those focused on resistance training, body fat control, sports nutrition and supplements; MuscleandFitness.com provides workout videos and nutritional advice;

Flex, a magazine devoted to professional bodybuilding featuring nutrition, supplement, and performance science content for bodybuilding enthusiasts and coverage of all professional and amateur bodybuilding contests; Flexonline.com features online coverage of all the major bodybuilding competitions, as well as training videos with today’s top bodybuilders;

Muscle & Fitness Hers, a fitness physique training magazine designed for the active woman who wants more out of fitness, especially those who work extra hard to achieve a "super-fit" lifestyle, which covers training, nutrition, health, beauty and fashion for today's women; muscleandfitnesshers.com provides expert fitness and lifestyle tips for women to improve strength, muscle growth, endurance, health and style;

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


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Weider UK, a wholly-owned subsidiary, publishes Muscle & Fitness and Flex in the United States and distributes in the United Kingdom, France and Germany and licenses the content in Holland and Australia, which are excluded from the table below. Each market edition is in a local language with local content and has its own website.

Certain information related to our Men's Active Lifestyle publications is as follows:

 
 
Frequency (per annum)
 
 
 
Website Unique Visitors (monthly average)
Brand
 
 
2016 Rate Base
 
Men's Fitness
 
10 x
 
600,000
 
12,841,339
Muscle & Fitness
 
10 x
 
n/a
 
7,280,187
Flex
 
10 x
 
n/a
 
1,002,834
Muscle & Fitness Hers
 
6x
 
n/a
 
354,179

The following table sets forth the average circulation (per issue) and U.S. cover prices for our Men's Active Lifestyle segment:

(in thousands, except cover price information)
 
March 31, 2016
 
March 31, 2015
 
March 31, 2014
Men's Fitness
 
 
 
 
 
 
Total circulation
 
667

 
671

 
598

Subscription circulation
 
565

 
558

 
494

Single copy circulation
 
102

 
113

 
104

Cover price
 
$4.99
 
$4.99
 
$4.99
Muscle & Fitness
 
 
 
 
 
 
Total circulation
 
271

 
315

 
327

Subscription circulation
 
225

 
260

 
256

Single copy circulation
 
46

 
55

 
71

Cover price
 
$6.99
 
$6.99
 
$6.99
Flex
 
 
 
 
 
 
Total circulation
 
63

 
75

 
79

Subscription circulation
 
50

 
59

 
57

Single copy circulation
 
13

 
16

 
22

Cover price
 
$6.99
 
$6.99
 
$6.99
Muscle & Fitness Hers
 
 
 
 
 
 
Total circulation
 
79

 
85

 
92

Subscription circulation
 
42

 
42

 
41

Single copy circulation
 
37

 
43

 
51

Cover price
 
$4.99
 
$4.99
 
$4.99

During fiscal 2015, we recorded a pre-tax non-cash impairment charge of $17.4 million for the Men's Active Lifestyle segment goodwill and tradenames. Additional information regarding impairments may be found in Note 3, "Goodwill and Other Identified Intangible Assets" in the consolidated financial statements included elsewhere in this Annual Report.

Corporate and Other

In fiscal 2016, our Corporate and Other segment accounted for 1% of our total operating revenues and 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.


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

COMPETITION

Publishing is a highly competitive business and we compete with other magazine publishers for advertising market share and for the time and attention of consumers of magazine media content. We also compete with digital publishers and other forms of media, including websites, digital magazines, social media and mobile apps.

Competition among print magazine and digital publishers for advertising is primarily based on the circulation and readership of magazines and the number of visitors to websites, in addition to, the demographic profile of the audience, advertising rates and the effectiveness of our advertising sales teams. The continuing shift in consumer preference from print media to digital media has introduced significant new competition for advertising.

Competition among print magazine publishers for magazine readership is based primarily on brand perception, magazine cover selection, content, quality and price. Competition for subscription-based readership is also based on subscriber acquisition and retention and competition for newsstand-based readership is also based on magazine cover selection as well as the placement and display of magazines in retail outlets. Technological advances and the growing popularity of digitally-delivered content and mobile consumer devices, such as smartphones and tablets, have introduced significant new competition for circulation in the form of readily available free or low-priced digital content.

Our magazine publishing and website operations compete with numerous other magazine and website publishers and other media for circulation and audience. The use of digital devices as distribution platforms for content has increased competition for our business. See the section titled “Risk Factors—We face significant competition from other magazine publishers and other forms of media, including digital media, which we expect will continue, and as a result we may not be able to maintain or improve our operating results and competitive position.” We believe our advertising sales team has the optimal structure to provide compelling integrated marketing solutions for our advertising clients.

Our Celebrity Brands segment competes for readership and advertising dollars with Time, Inc. (People Magazine), Bauer Publishing (In Touch, Life & Style and Closer) and Wenner Media (US Weekly). Our Men's Active Lifestyle segment competes for readership and advertising dollars with Rodale (Men's Health), Wenner Media (Men's Journal) and Conde Naste (GQ). Our special interest publications can compete with a variety of magazines, depending on the focus of the particular issue.

INTELLECTUAL PROPERTY

We use multiple trademarks to distinguish our various publications and brands. These trademarks are the subject of registrations and pending applications filed by us for use with a variety of products and other content, both domestically and internationally, and we continue to expand our worldwide usage and registration of related trademarks. As of March 31, 2016, we had 53 registered trademarks in the United States and 147 corresponding trademarks registered in foreign countries relating to our brand names.

We protect our copyrighted content by registering our publications with the United States Copyright Office.  Our extensive portfolio consists of approximately 3,815 copyrights including, but not limited to: National Enquirer, Star, OK!, Globe, National Examiner, Soap Opera Digest, Men's Fitness, Flex, Muscle & Fitness and Muscle & Fitness Hers. We also file copyright registrations for our special interest publications.

We regard our rights in and to our trademarks and copyrights as valuable assets. Accordingly, to protect our trademarks and copyrights against infringement and denigration by third parties, we control access to our proprietary technology and other confidential information through a combination of confidentiality and license agreements with our employees, consultants, and third parties with whom we have relationships. We also monitor the marketplace for third-party infringement and enforce our rights under trademark, copyright and other applicable laws. Despite our efforts to protect our proprietary rights through intellectual property rights, licenses, and confidentiality agreements, we may not be able to prevent unauthorized parties from using our brand names and content.


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GOVERNMENT REGULATIONS

Marketing Regulation

Advertising and promotional information and our other marketing activities are subject to federal and state consumer protection laws that regulate unfair and deceptive practices. In the United States, Congress has adopted legislation that regulates certain aspects of the Internet, including online content, user privacy, taxation, liability for third-party activities and jurisdiction. Federal, state, local and foreign governments are also considering other legislative and regulatory proposals that would regulate the Internet in more and different ways than exist today.

Postal Regulation

The distribution of our magazine subscriptions are affected by the laws and regulations relating to the USPS. The Governors of the USPS review prices for mailing services annually and adjust postage rates periodically. The financial condition of the USPS continues to decline. We continually seek the most economical and effective methods for mail delivery, including cost-saving strategies offered within the postal rate structure. If postal reform legislation is enacted, it could result in, among other things, increases in postal rates, local post office closures and the elimination of Saturday mail delivery. The elimination of current protections against significant and unpredictable rate increases or other changes to the USPS as a result of the enactment of postal reform legislation could have an adverse effect on our businesses.

For more information, see Item 1A, Risk Factors, "Our business and results of operations could be negatively affected by postal service changes, and our results of operations may be adversely affected by increases in postal rates."

SEASONALITY

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

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

EMPLOYEES

As of March 31, 2016, we employed approximately 333 full-time and 70 part-time employees. We believe our current relationships with our employees are generally good.

AVAILABLE INFORMATION AND WEBSITE

Our Registration Statement, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and any amendments to these documents, as well as certain other forms we file with or furnish to the SEC, can be viewed and downloaded free of charge as soon as reasonably practicable after they have been filed with the SEC by accessing www.sec.gov or visiting our website www.americanmediainc.com and clicking on "About Us" and "Investor Relations." We are providing the address to our website solely for the information of investors. We do not intend the address to be an active link or to incorporate any information included on or accessible through the website into this report.

Item 1A. Risk Factors.

Our business faces many risks. Any of the following risks could materially and adversely affect our business, financial condition, results of operations, prospects and cash flows and the actual outcome of matters as to which forward-looking statements are made in this Annual Report. While we believe we have identified and discussed below the material risks affecting our business, there may be additional risks and uncertainties that we do not presently know or that we do not currently believe to be material that may adversely affect our business, financial condition and results of operations in the future.


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Our substantial indebtedness and our ability to incur additional indebtedness could adversely affect our business, financial condition and results of operations.

Our future performance could be affected by our substantial indebtedness. As of March 31, 2016, our total outstanding indebtedness was approximately $393.9 million, consisting of $214.3 million principal amount of debt under the First Lien Notes and $164.4 million principal amount of debt under the New Second Lien Notes (the First Lien Notes and the New Second Lien Notes are collectively referred to herein as the "Senior Secured Notes") and $15.2 million amount of debt under the Revolving Credit Facility. Our total consolidated interest expense was $39.7 million for fiscal 2016, which consists primarily of interest under the Senior Secured Notes and the Revolving Credit Facility. In addition, the Revolving Credit Facility and the indentures governing the Senior Secured Notes contain certain covenants that, subject to certain exceptions, restrict us from paying dividends, incurring additional debt, creating liens, entering into certain mergers or consolidations, making acquisitions or other investments and selling or otherwise disposing of assets.

Our level of indebtedness could have important consequences for our business and operations, including the following:

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

place us at a potential disadvantage compared to our competitors that have less debt;

increase our vulnerability to general adverse economic and industry conditions;

limit our ability to make material acquisitions or take advantage of business opportunities that may arise;

limit our flexibility in planning for, or reacting to, changes in our business industry;

limit our ability to obtain additional financing to fund future working capital, capital expenditures and other general corporate requirements or to carry out other aspects of our business; and

expose us to fluctuations in interest rates as the Revolving Credit Facility has a variable rate of interest.

Under the Revolving Credit Facility, we have to comply with a maximum first lien leverage ratio, a consolidated leverage ratio and an interest coverage ratio. Our ability to satisfy these ratios 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 these ratios. If we do not comply with these or other covenants and restrictions, we would be in default under our Revolving Credit Facility unless we obtained a waiver from the required lenders thereunder. Our outstanding debt under our Revolving Credit Facility, together with accrued interest, could then be declared immediately due and payable and commitments thereunder could be terminated. Our ability to comply with such provisions may be affected by events beyond our control. Moreover, the instruments governing almost all our other debt contain cross-acceleration provisions so that acceleration under any of our debt may result in a default under our other debt instruments. If a cross-acceleration occurs, the maturity of almost all our debt could be accelerated and become immediately due and payable. If that happens, we would not be able to satisfy our debt obligations, which would have a substantial adverse effect on our ability to continue as a going concern.

Obligations under our Revolving Credit Facility are secured by liens on substantially all our assets and the assets of certain domestic subsidiaries. In addition, our obligations under our Revolving Credit Facility 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. If we, or one of our restricted subsidiaries, should be declared bankrupt or insolvent, or if we otherwise default under our Revolving Credit Facility, the lenders could declare all the funds borrowed thereunder, together with accrued interest, immediately due and payable and commitments thereunder could be terminated. If we were unable to repay such debt, the lenders could foreclose on the pledged stock of our subsidiaries and on the assets in which they have been granted a security interest.


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If our operations do not generate sufficient cash flow from operations to satisfy our debt service obligations, we may need to borrow additional funds to make these payments or undertake alternative financing plans, such as refinancing or restructuring our indebtedness, disposing of assets or reducing or delaying capital investments and acquisitions. We cannot guarantee that such additional funds or alternative financing will be available on favorable terms, if at all. Our inability to generate sufficient cash flow from operations or obtain additional funds or alternative financing on acceptable terms could have a material adverse effect on our business, financial condition and results of operations. We cannot assure you that our business will generate sufficient cash flows from operations or that we can obtain alternative financing proceeds in an amount sufficient to enable us to service our indebtedness, or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.

Changes in our credit ratings or macroeconomic conditions may affect our liquidity, increasing borrowing costs and limiting our financing options.
Our corporate credit rating is currently rated below investment grade by Standard & Poor’s. If our credit ratings are lowered further, borrowing costs for future long-term debt or short-term borrowing facilities may increase and our financing options would be limited. A reduction in our credit rating or the credit rating of our outstanding debt securities may also cause our future borrowings to be subject to additional restrictive covenants that would reduce our flexibility. In addition, macroeconomic conditions, such as continued or increased volatility or disruption in the credit markets, could adversely affect our ability to refinance existing debt or obtain additional financing to support operations or to fund new acquisitions or capital-intensive internal initiatives.
If we fail to implement our business strategy, our business will be adversely affected.

Our future financial performance and success are dependent in large part upon our ability to successfully implement our business strategy. We may not be able to successfully implement our business strategy or maintain or improve our operating results. In particular, we may not be able to maintain or increase circulation of our publications, obtain new sources of advertising revenues, generate additional revenues by building on the brand names of our publications or raise the cover prices of our publications without causing a decline in circulation.

Any failure to successfully implement our business strategy may adversely affect our ability to service our indebtedness, including our ability to make principal and interest payments on the debt. We may, in addition, decide to alter or discontinue certain aspects of our business strategy at any time.

We face significant competition from other magazine publishers and other forms of media, including digital media, which we expect will continue, and as a result we may not be able to maintain or improve our operating results and competitive position.

We compete in varying degrees with other magazine publishers for market share and for the time and attention of consumers of print magazine content. We believe the overall decline in consumer demand for print magazines has been negatively impacted by the multitude of choices available to consumers for information and entertainment which has intensified our competition with other magazine publishers for share of print magazine readership. Competition among print magazine publishers for magazine readership is based primarily on brand perception, magazine cover selection and content, quality and price as well as placement and display in retail outlets.

We also compete with digital publishers and other forms of media, including websites, digital magazines, tablet editions and mobile apps. The competition we face has intensified as a result of the growing popularity of mobile devices such as tablets and smartphones. Consumers are increasingly opting to consume publisher's content through these digital platforms and are shifting away from print media. These new platforms have reduced the cost of producing and distributing content on a wide scale, allowing new free or low-priced digital content providers to compete with us and other print magazine publishers. The ability of our paid print and digital content to compete successfully with free and low-priced digital content depends on several factors, including our ability to differentiate and distinguish our content from free or low-priced digital content, as well as our ability to increase the value of paid subscriptions to our customers by offering a different, deeper and richer digital experience. If we are unable to distinguish our content from that of our competitors or adapt to new distribution methods, our business, financial condition and results of operations may be adversely affected.

Competition among print magazine and digital publishers for advertising is primarily based on the circulation and readership of magazines and the number of visitors to websites, respectively, the demographic profile of the audience, advertising rates and the effectiveness of advertising sales teams. The continuing shift in consumer preference from print media to digital media has introduced significant new competition for advertising. We believe our advertising sales team has the optimal structure to provide integrated marketing solutions for combined print and digital advertising and we can compete successfully for advertising. If we are unable to convince advertisers of the continuing value of our combined print and digital advertising platforms or offer advertisers unique advertising programs tied to our brands, our business, financial condition and results of operations may be adversely affected.


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We are exposed to risk associated with weak domestic and global economic conditions.

We have been adversely affected by weak domestic and global economic conditions and have experienced declines in our circulation and to a lesser extent our advertising revenues. If these conditions persist, our business, financial condition and results of operations may continue to be adversely affected. Factors that affect economic conditions include the rate of unemployment, the level of consumer confidence and changes in consumer spending habits. Because magazines are generally discretionary purchases for consumers, our circulation revenues are sensitive to general economic conditions and economic cycles. Certain economic conditions such as general economic downturns, including periods of increased inflation, unemployment levels, tax rates, interest rates, gasoline and other energy prices or declining consumer confidence, negatively impact consumer spending. Reduced consumer spending or a shift in consumer spending patterns away from discretionary items will likely result in reduced demand for our magazines.

Historically, we have been able to offset some of the declines in circulation revenues, in part, through increases in cover prices and cost reductions. We may not be able to increase cover prices without decreasing circulation or be able to take other measures, such as increasing advertising rates or pages and reducing print orders of our titles, to offset such circulation revenue declines. In addition, we may not be able to reverse the circulation revenue declines described above, and such declines in circulation could have a material adverse effect on our business, financial condition and results of operations.

We also face risks associated with the impact of weak domestic and global economic conditions on third parties with which we do business, such as advertisers, suppliers, wholesale distributors, retailers and other parties. For example, if retailers file for reorganization under bankruptcy laws or otherwise experience negative effects on their businesses due to volatile or weak economic conditions, it could reduce the number of outlets for our magazines, which in turn could reduce the attractiveness of our magazines to advertisers. In addition, any financial instability of the wholesalers that distribute our print magazines to retailers could have various negative effects on us. See “We have experienced, and may in the future continue to face increased costs and business disruption from instability in our wholesaler distribution channels.”

We derive substantial revenues from the sale of advertising, and a decrease in overall advertising expenditures could lead to a reduction in the amount of advertising that companies are willing to purchase from us and the price at which they purchase it. Expenditures by advertisers tend to be cyclical, reflecting domestic and global economic conditions. If the economic prospects of advertisers or current economic conditions worsen, such conditions could alter current or prospective advertisers’ spending priorities. Declines in consumer spending on advertisers’ products due to weak economic conditions could also indirectly negatively impact our advertising revenues, as advertisers may not perceive as much value from advertising if consumers are purchasing fewer of their products or services.

We have experienced, and may in the future continue to face increased costs and business disruption from instability in our wholesaler distribution channels.

We operate a distribution network that relies on wholesalers to distribute our magazines to newsstands and other retail outlets. A small number of wholesalers are responsible for a substantial percentage of wholesale magazine distribution in the United States. We are experiencing significant declines in magazine sales at newsstands and other retail outlets. In light of these declines and the challenging general economic climate, there may be further consolidation among the wholesalers and one or more may become insolvent or unable to pay amounts due in a timely manner. Distribution channel disruptions can impede our ability to distribute magazines to the retail marketplace, which could, among other things, negatively affect the ability of certain magazines to meet the rate base established with advertisers. Disruption in the wholesaler channel, an increase in wholesaler costs or the failure of wholesalers to pay amounts due could adversely affect our business, financial condition and results of operations. See also “Our circulation revenue consists of single copy sales distributed to retailers primarily by two wholesalers and the loss of either of these wholesalers could materially adversely affect our business and results of operations.”

Our circulation revenue consists of single copy sales distributed to retailers primarily by two wholesalers and the loss of either of these wholesalers could materially adversely affect our business and results of operations.

During fiscal 2016 and 2015 single copy sales accounted for 78% of total circulation revenue and 79% during fiscal 2014 and consisted of copies distributed to retailers primarily by two wholesalers. During fiscal 2016, 2015 and 2014, The News Group accounted for approximately 48%, 36% and 29%, respectively, of our total operating revenue and Hudson Group accounted for approximately 11%, 9% and 8%, respectively. We have long-term service arrangements with our wholesalers, which provide incentives to maintain certain levels of service. When these arrangements expire, we may not be able to renew them on favorable terms, extend the terms of these arrangements or extend our relationship with the wholesalers at all. Our business, financial condition and results of operations could be adversely affected by disruption of the distribution of our magazines through these wholesalers.


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In May 2014, Source, our second-largest wholesaler at such time, notified us that they were ceasing substantially all distribution operations in the near term and filed for bankruptcy in June 2014.

Changes to U.S. or international regulation of our business or the businesses of our advertisers could cause us to incur additional costs or liabilities, negatively impact our revenues or disrupt our business practices.

Our digital businesses are subject to government regulation in the jurisdictions in which we operate, and our Web sites, which are available worldwide, may be subject to laws regulating the Internet even in jurisdictions where we do not do business. Advertising and promotional information presented to visitors on our websites and our other marketing activities are subject to federal and state consumer protection laws that regulate unfair and deceptive practices. In the United States, Congress has adopted legislation that regulates certain aspects of the Internet, including on-line content, user privacy, taxation, liability for third-party activities and jurisdiction. Federal, state, local and foreign governments are also considering other legislative and regulatory proposals that would regulate the Internet in more and different ways than exist today. We may incur increased costs necessary to comply with existing and newly adopted laws and regulations or penalties for any failure to comply. Revenues from our digital businesses could be adversely affected, directly or indirectly, by these existing or future laws and regulations.
Our business performance is also indirectly affected by the laws and regulations that govern the businesses of our advertisers. For example, the pharmaceutical industry, which accounts for a significant portion of our advertising revenues in our Men's Active Lifestyle segment, is subject to regulations of the Food and Drug Administration in the United States requiring pharmaceutical advertisers to communicate certain disclosures to consumers about advertised pharmaceutical products, typically through the purchase of print media advertising. We face the risk that the Food and Drug Administration could change pharmaceutical marketing regulations in a way that is detrimental to the sale of print advertising.

In addition, changes in laws and regulations that currently allow us to retain customer data and to engage in certain forms of consumer marketing, such as automatic renewal of subscriptions for our magazines and negative option offers via direct mail, email, on-line or telephone solicitation, could have a negative impact on our circulation revenues and adversely affect our financial condition and operating performance.

Our business and results of operations could be negatively affected by postal service changes, and our results of operations may be adversely affected by increases in postal rates.

The financial condition of the U.S. Postal Service (the “USPS”) continues to decline. In 2015, the USPS introduced new service standards that slowed the delivery of periodic mail and resulted in a portion of our weekly magazines being delivered a day later. Our subscribers expect our weekly magazines to be delivered in the same week that they are printed, and the elimination of Saturday mail delivery or slower delivery of periodicals, absent changes to our internal production schedules, could result in a certain percentage of our weekly magazines not reaching subscribers until the following week. We cannot predict how the USPS will address its fiscal condition in the future, and changes to delivery, reduction in staff or additional closings of processing centers may lead to changes in our internal production schedules or other changes in order to continue to meet our subscribers’ expectations.

Other measures taken to address the declining financial condition of the USPS could include increases in the rates for periodicals and local post office closures. We cannot predict with certainty the magnitude of future price changes in postage. In particular, postage represents a significant component of our total cost to distribute our printed products and represented approximately 8% of our total operating expense for fiscal 2016. If there are significant increases in postal rates and we are not able to offset such increases, our results of operations could be negatively impacted.

Our business and results of operations may be adversely affected by increases in fuel costs and the price of paper.

Many aspects of our business have been directly affected by increases in the cost of fuel and paper. Increased fuel costs have translated into increased costs for the products and services we receive from our third-party suppliers, including, but not limited to, increased production and distribution costs for our products. Paper represents a significant component of our total cost to produce our printed products and represented approximately 12% of our total operating expenses for fiscal 2016. Paper is a commodity and the price has been subject to significant volatility due to supply and demand in the marketplace as well as volatility in the raw material and other costs incurred by our paper suppliers. Although we have a long-term paper supply and purchasing agreement with the largest paper supply broker, we do not have any long-term pricing agreements with paper suppliers and suppliers may raise their prices for paper from time to time.


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We cannot predict with certainty the magnitude of future price changes in paper or how increases in fuel costs will affect our third-party suppliers and the rates they charge us. If fuel or paper prices increase and we are not able to offset such increases, our business, financial condition and results of operations would be adversely affected.

Our business may be adversely affected if we lose one or more of our vendors.

We rely on third-party vendors, including paper suppliers, printers, subscription fulfillment houses and subscription agents for the print portion of our business. The industries in which our print-related third-party vendors operate have experienced significant restructurings and consolidation in recent years, resulting in decreased availability of goods and services and competition. Further disruptions in these industries may make our third-party vendors unable or unwilling to provide us with goods and services on favorable terms and may lead to greater dependence on certain vendors, increased prices, and interruptions and delays in the services provided by these vendors, all of which would adversely affect our business.

We may suffer credit losses that could adversely affect our results of operations.

We extend unsecured credit to most of our customers. We recognize that extending credit and setting appropriate reserves for receivables is largely a subjective decision based on knowledge of the customer and the industry. Credit exposure also includes the amount of estimated unbilled sales. The level of credit is influenced by the customer’s credit history with us and other available information, including industry-specific data.

We maintain a reserve account for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to pay, additional allowances might be required, which could have a material adverse effect on our business, results of operations and financial condition.

Future acquisitions, partnerships, publishing services agreements and joint ventures may require significant resources.

In the future, we may seek to grow the Company and its businesses by making acquisitions or entering into partnerships, publishing services agreements or joint ventures. Any future acquisition, partnership, publishing services agreement or joint venture may require that we make significant cash investments, issue stock or incur substantial indebtedness. Such acquisitions and investments may require additional funding which may be provided in the form of additional indebtedness, equity financing or a combination thereof. We cannot assure that any such additional funding will be available to us on acceptable terms, or at all, or that we will be permitted under the terms of the Revolving Credit Facility (or any replacement thereof) or under the terms of the indentures governing our Senior Secured Notes to obtain such financing for such purpose.

We have incurred indebtedness in the past to finance acquisitions. We may finance future acquisitions with additional indebtedness, subject to limits in our debt agreements. As a result, we could face the financial risks associated with incurring additional indebtedness such as reducing our liquidity and access to financing markets and increasing the amount of cash flow required to service such indebtedness.

We may make acquisitions or enter into partnerships, publishing services agreements or joint ventures which could involve inherent risk and uncertainties.

We may make acquisitions or enter into partnerships, publishing services agreements or joint ventures which could involve inherent risks and uncertainties, including:

difficulty in integrating newly acquired businesses and operating in an efficient and effective manner;

the inability to maintain key pre-acquisition business relationships;

the potential diversion of senior management's attention from our operations;

the potential loss of key employees of the acquired businesses;

risks associated with integrating financial reporting and internal control systems;

exposure to unanticipated liabilities; and

challenges in achieving strategic objectives, cost savings and other anticipated benefits.


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If an acquired business fails to operate as anticipated, cannot be successfully integrated with our existing business or one or more of the other risk and uncertainties identified above occur, our business, results of operations and financial condition could be adversely affected.

We are expanding our merchandising and licensing programs into new areas and products, the failure of any of which could diminish the perceived value of our brand, impair our ability to grow and adversely affect our prospects.
Our growth depends to a significant degree upon our ability to develop new or expand existing retail merchandising programs. We have entered into several new merchandising and licensing agreements in the past few years. Some of these agreements include exclusivity provisions and have a duration of many years. While we require that our licensees maintain the quality of our respective brands through specific contractual provisions, we cannot be certain that our licensees, or their manufacturers and distributors, will honor their contractual obligations or that they will not take other actions that will diminish the value of our brands.
There is also a risk that our extension into new business areas will meet with disapproval from consumers. We cannot guarantee that these programs will be fully implemented, or, if implemented, that they will be successful. If the licensing or merchandising programs do not succeed, we may be prohibited from seeking different channels for our products due to the exclusivity provisions and multi-year terms of these agreements. Disputes with new or existing licensees may arise that could hinder our ability to grow or expand our product lines. Disputes also could prevent or delay our ability to collect the licensing revenue that we expect in connection with these products. If such developments occur or our merchandising programs are otherwise not successful, the value and recognition of our brands, as well as our business, financial condition and prospects, could be materially adversely affected.
Divestitures may affect our costs, revenues, profitability and financial position.
In January 2015, we sold our Shape, Fit Pregnancy and Natural Health publications, which comprised our Women's Active Lifestyle segment. We may decide to divest other segments or lines of business in the future. Divestitures have inherent risks, including possible delays in closing transactions, the risk of lower-than-expected sales proceeds for the divested businesses, unexpected costs associated with the separation of the business to be sold from our integrated information technology systems and other operating systems and potential post-closing claims for indemnification. Expected cost savings, which are offset by revenue losses from divested businesses, may also be difficult to achieve or maximize.
Electronically stored data is subject to the risk of unauthorized access and if our data is compromised in spite of our attempts at protecting this data, we may incur significant costs, lost opportunities and damage to our reputation.

We maintain information necessary to conduct our business, including confidential, proprietary and personal information in digital form. Data maintained in digital form is subject to the risk of intrusion, tampering and theft. We develop and maintain systems to prevent this from occurring, but the development and maintenance of these systems is costly and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated. Moreover, despite our efforts, the possibility of intrusion, tampering and theft cannot be eliminated entirely, and risks associated with each of these remain. If our data systems are compromised or if the proprietary information of our customers or employees is misappropriated, our ability to conduct our business may be impaired, our reputation with our customers and employees may be injured resulting in loss of business or morale and we could be exposed to a risk of loss due to business interruption, or litigation.

If we are unable to protect our intellectual property, the value of our intangible assets may be diminished and our competitive position and business may be adversely affected.

Our business relies on a combination of trade secrets, trademarks, tradenames, copyrights and other proprietary rights, as well as contractual arrangements, including licenses, to establish and protect our intellectual property and brand names. Our continued success and competitive position depends on our proprietary trademarks, copyrights and other intellectual property rights. See "Business - Intellectual Property" for a description of our intellectual property assets and the steps we take to protect them.


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Other parties may infringe on our intellectual property rights and may thereby dilute the value of our brands in the marketplace. Brand dilution or the introduction of competitive brands could cause confusion in the marketplace and adversely affect the value that consumers associate with our brands, thereby negatively impacting our sales. Any such infringement of our intellectual property rights would also likely result in a commitment of our time and resources, financial or otherwise, to protect these rights through litigation or other means. In addition, third parties may assert claims against our intellectual property rights and we may not be able to successfully resolve those claims causing us to lose our ability to use our intellectual property that is the subject of those claims. Such loss could have a material adverse effect on our business, financial condition and results from operations. Furthermore, from time to time, we may be involved in litigation in which we are enforcing or defending our intellectual property rights, which could require us to incur substantial fees and expenses and have a material adverse effect on our business, financial condition and results from operations.

Our performance could be adversely affected if we lose our key personnel.

We believe that our success is largely dependent on the abilities and experience of our senior management team. The loss of the services of one or more of these senior executives could adversely affect our ability to effectively manage our overall operations or successfully execute current or future business strategies. We do not maintain key man life insurance on the lives of our senior management. We have entered into employment agreements or arrangements with our senior management team, which may contain non-compete provisions. While we believe that we could find replacements for these key personnel, the loss of their services could disrupt our business and have a significant adverse effect on our results of operations and financial condition.

Our operating results are subject to seasonal variations.

Our business has experienced, and is expected to continue to experience, seasonality due to, among other things, seasonal advertising patterns and seasonal influences on consumer reading habits. Typically, our revenues from advertising are highest in the fourth quarter. The effects of such seasonality make it difficult to estimate future operating results based on the previous results of any specific quarter.

Pending and future litigation or regulatory proceedings could materially affect our operations.

Since the focus of some of our publications often involves celebrities or controversial subjects and because of our news gathering techniques, the risk of defamation or invasion of privacy litigation or the filing of criminal charges exists. While we have not historically experienced any difficulty obtaining insurance coverage, we cannot assure that we will be able to do so in the future at rates acceptable to us, or at all. In addition to the celebrity litigation in which we may be involved, from time to time we may be involved in commercial litigation. Any pending or future litigation or regulatory proceeding, if adversely determined, could have a material adverse effect on our business, results of operations and financial condition.

Terrorist attacks and other acts of violence or war may affect the financial markets and our business, results of operations and financial condition.
Terrorist attacks may negatively affect our operations and financial condition. There can be no assurance that there will not be further terrorist attacks against the United States or U.S. businesses. These attacks or armed conflicts may directly impact our physical facilities, such as those in New York City, or those of our retailers, suppliers and customers. These events could cause consumer confidence and their discretionary spending to decrease or result in increased volatility in the U.S. and world financial markets and economy. They could result in an economic recession in the United States or abroad. Any of these occurrences could have a material adverse impact on our business, results of operations and financial condition.
If our goodwill or other identifiable intangible assets become impaired, we may be required to record a significant charge to earnings.

Under U.S. generally accepted accounting principles, goodwill and indefinite-lived intangible assets are required to be tested for impairment annually or more often if an event occurs or circumstances change that would indicate a potential impairment exists, and long-lived assets, including finite-lived intangible assets, are required to be tested for impairment upon the occurrence of a triggering event. Factors that could lead to impairment of goodwill and indefinite-lived intangible assets include significant adverse changes in the business climate and declines in the value of our business.


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The Company did not record any impairment charges during fiscal 2016. During an evaluation of goodwill and other identified intangible assets during fiscal 2015, 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 consumer magazine sector, which impacts consumer and advertising spending, including further declines in certain advertising markets, resulting in lowered future cash flow projections. 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 $17.4 million to reduce the carrying value of tradenames and goodwill during fiscal 2015.

As of March 31, 2016, the net book value of our goodwill and other intangible assets was approximately $363.1 million. Changes in management's judgments and projections or assumptions used could result in a significantly different estimate of fair value and could materially change the impairment charge related to goodwill and tradenames.

Some provisions of Delaware law and our amended and restated certificate of incorporation may deter third parties from acquiring us.

Provisions contained in our amended and restated certificate of incorporation and the laws of Delaware, the state in which we are incorporated, could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders. Provisions of our amended and restated certificate of incorporation impose various procedural and other requirements, which could make it more difficult for stockholders to effect certain corporate actions. These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and cause us to take other corporate actions that our stockholders desire.

If we do not maintain an effective system of internal controls over financial reporting and disclosure controls, our operating results and reputation would be harmed.

Effective internal controls over financial reporting and disclosure controls are necessary for us to provide reliable financial reports, effectively prevent fraud and operate successfully. If we cannot provide reliable financial reports or prevent fraud, our operating results and reputation would be harmed. As part of our ongoing monitoring, we may discover material weaknesses or significant deficiencies in our internal control over financial reporting that require remediation.

We cannot assure that material weaknesses or significant deficiencies, to the extent they exist, in internal controls over financial reporting or disclosure controls would be identified in the future. Any failure to maintain effective controls or timely effect any necessary improvement of our internal controls over financial reporting and disclosure controls could, among other things, result in losses from fraud or error, cause us not to satisfy our reporting obligations, cause investors to lose confidence in our reported financial information or harm our reputation, all of which could have a material adverse effect on our business, results of operations and financial condition.

Our financial statements are subject to changes in accounting standards that could adversely impact our profitability or financial position.

Our financial statements are subject to the application of accounting principles generally accepted in the United States of America (“US GAAP”), which are periodically revised and/or expanded. Accordingly, from time to time we are required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the Financial Accounting Standards Board. The impact of accounting pronouncements that have been issued but not yet implemented is disclosed in our annual and quarterly reports. An assessment of proposed standards is not provided, as such proposals are subject to change through the exposure draft process and, therefore, their effects on our financial statements cannot be meaningfully assessed. It is possible that future accounting standards we are required to adopt could change the current accounting treatment that we apply to our consolidated financial statements and that such changes could have a material adverse effect on the reported results of operations and financial position.

Item 1B. Unresolved Staff Comments.

None.


20


Item 2. Properties.

The following table sets forth certain information concerning the location, use and approximate square footage of our principal locations as of March 31, 2016, all of which are leased:

Location
 
Principal Use
 
Approximate Area (in square feet)
Boca Raton, FL
 
Corporate headquarters and executive administrative offices
 
24,635

New York, NY
 
Editorial and sales offices for all of our segments and executive administrative offices
 
99,054

Los Angeles, CA
 
Editorial offices for our Celebrity Brands segment
 
10,509


The leases for our offices and facilities expire between 2017 and 2023, and some of these leases are subject to our renewal. We believe that our existing facilities are well maintained and in good operating condition.

Item 3.     Legal Proceedings.

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

On April 3, 2012, the Second Circuit issued a decision reversing the dismissal of the lawsuit and reinstating the antitrust and state law claims (except the defamation claim, which Anderson withdrew), and, on January 7, 2013, the United States Supreme Court declined to review the Second Circuit decision. Following the Second Circuit decision, the case was remanded to the District Court and the parties engaged in discovery. On February 14, 2014, American Media, Inc. filed an amended answer and counterclaim in the Anderson Action asserting an antitrust claim against Anderson News, L.L.C. and Charles Anderson, Jr. based on the same events as Anderson’s claims. Two other defendants also filed the same counterclaim. Fact discovery was completed in May 2014 and expert discovery was completed in October 2014. Anderson submitted an expert report calculating that damages are approximately $470 million, which would be subject to trebling should Anderson prevail against the defendants in the lawsuit. Defendants, including American Media, Inc. and DSI, also submitted an expert report on damages, which opines that, separate and apart from the question of liability, Anderson has suffered no damages.

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

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


21


In an order of the Delaware bankruptcy court, entered on November 14, 2011, American Media, Inc. and four other creditors (collectively, the “Creditors”), which also are defendants in the Anderson Action, were granted the right to file lawsuits against Anderson insiders asserting Anderson's claims identified by the examiner. The Creditors' retention of counsel to pursue the claims on a contingency fee basis was also approved. On November 14, 2011, pursuant to this order, a complaint was filed against 10 defendants. After a temporary stay of discovery pending conclusion of fact discovery in the Anderson Action, discovery in the bankruptcy action proceeded. On December 12, 2014, defendants in the adversary action moved for partial summary judgment seeking dismissal of certain of the Creditors’ claims. The motion was denied on June 11, 2015.

While it is not possible to predict the outcome of the Anderson Action or to estimate the impact on American Media, Inc. and DSI of a final judgment against American Media, Inc. and DSI (if that were to occur), American Media, Inc. and DSI believe that the claims asserted by Anderson, in the Anderson Action, are meritless. American Media, Inc. and DSI have antitrust claim insurance that covers defense costs. American Media, Inc. and DSI have filed a claim for insurance coverage with regard to the Anderson Action and certain of their defense costs are being paid by the insurer, and, in the event of a settlement or a damages award by the Court and subject to the applicable policy limits, American Media, Inc. and DSI anticipate seeking reimbursement from the insurer for payment of such settlement or damages. American Media, Inc. and DSI will continue to vigorously defend the case.

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

Item 4. Mine Safety Disclosures.

Not applicable.

PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

All of our outstanding shares of common stock are privately held and there is no established public market for our shares. As a result of the Merger, the Parent acquired 100% of the issued and outstanding shares of common stock of AMI in August 2014.

We did not make any dividend payments in fiscal 2016, 2015 or 2014, and we do not anticipate paying any dividends on our common stock in the foreseeable future. The terms of our Revolving Credit Facility restrict our ability to pay dividends, and any future indebtedness that we may incur could preclude us from paying dividends. With respect to the dividend restriction, the Revolving Credit Facility and the Indentures include a cap on the total amount of cash available for distribution to our common stockholders.

For information regarding our capital structure and former equity compensation plans, see Note 14, "Capital Structure" in the notes to consolidated financial statements contained elsewhere in this Annual Report.

Item 6.    Selected Financial Data.

The following table sets forth selected historical consolidated financial information of American Media, Inc. as of and for each year in the five-year period ended March 31, 2016. The selected historical consolidated financial data as of March 31, 2016 and 2015 and for each of the years in the three-year period ended March 31, 2016 are derived from our historical consolidated financial statements included elsewhere in this Annual Report. The selected historical consolidated financial data for all other periods presented were derived from our audited consolidated financial statements that are not included elsewhere in this Annual Report.

You should review the selected historical financial data presented below in conjunction with our consolidated financial statements and the accompanying notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this Annual Report. As a result of the sale of the Shape, Fit Pregnancy and Natural Health publications in January 2015, the operations of AMI's former Women's Actively Lifestyle segment have been classified as discontinued operations for all periods presented. The prior year amounts have been recast to reflect the sale of the Women's Actively Lifestyle segment as discontinued operations.

22


 
Fiscal Year Ended March 31,
(in millions)
2016
 
2015
 
2014
 
2013
 
2012
Results of Operations
 
 
 
 
 
 
 
 
 
     Circulation
$
142.8

 
$
166.2

 
$
187.6

 
$
203.0

 
$
217.9

     Advertising
68.2

 
67.3

 
73.0

 
65.2

 
72.1

     Other
12.0

 
11.7

 
26.8

 
28.5

 
31.5

          Total operating revenues
223.0

 
245.2

 
287.3

 
296.6

 
321.5

Operating expenses
197.3

 
251.0

 
253.6

 
297.6

 
268.2

Operating income (loss)
25.7

 
(5.8
)
 
33.8

 
(1.0
)
 
53.3

Other expenses, net
(43.7
)
 
(51.2
)
 
(60.1
)
 
(61.5
)
 
(61.5
)
Income tax provision (benefit)
(36.0
)
 
(15.7
)
 
30.7

 
(6.4
)
 
(22.5
)
Income (loss) from continuing operations
18.0

 
(41.2
)
 
(57.0
)
 
(56.0
)
 
14.2

Income from discontinued operations, net of income taxes

 
15.3

 
3.7

 
0.5

 
8.0

Net income (loss)
18.0

 
(25.9
)
 
(53.3
)
 
(55.5
)
 
22.3

Less: net income attributable to noncontrolling interests
(1.0
)
 
(1.2
)
 
(1.0
)
 
(0.7
)
 
(0.7
)
Net income (loss) attributable to American Media, Inc. and subsidiaries
$
17.0

 
$
(27.1
)
 
$
(54.3
)
 
$
(56.2
)
 
$
21.6


 
March 31,
(in millions)
2016
 
2015
 
2014
 
2013
 
2012
Cash and cash equivalents
$
1.4

 
$
3.5

 
$
3.0

 
$
2.4

 
$
5.2

Goodwill and other identified intangible assets, net
363.1

 
378.2

 
398.3

 
409.9

 
460.7

Total assets
421.7

 
466.0

 
572.6

 
506.5

 
575.5

Total debt, net of premium and discount
393.9

 
324.3

 
498.5

 
481.9

 
476.9

Total stockholders' deficit
(82.5
)
 
(36.9
)
 
(132.0
)
 
(77.8
)
 
(21.3
)

Notes to Selected Financial Data

Net income (loss) attributable to American Media, Inc. and subsidiaries for fiscal year

2016 includes non-cash amortization expenses of approximately $11.6 million related to the reclassification of certain tradenames from indefinite-lived intangibles to finite-lives of 15 years, effective April 1, 2015.

2015 includes non-cash goodwill and tradename impairment charges related to certain reporting units of approximately $17.4 million, AMI's share of bad debt and other expenses related to wholesaler shutdowns of approximately $8.4 million, costs related to restructuring and severance of approximately $7.1 million and Merger and related transaction costs of approximately $4.8 million.

2014 includes non-cash tradename impairment charges related to certain reporting units of approximately $9.2 million and AMI's share of bad debt related to Source and other wholesaler shutdowns of approximately $5.1 million.

2013 includes non-cash goodwill and tradename impairment charges related to certain reporting units of approximately $50.6 million.
    
Total stockholders' deficit includes an equity distribution for debt of approximately $62.5 million to certain holders of equity interests in the Parent during fiscal 2016 and approximately $121.5 million related to the exchange of debt for equity with the Parent and Investors during fiscal 2015.


23


Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

ORGANIZATION OF INFORMATION

Our discussion is presented in the following sections:

Executive Summary

Recent Developments and Management Action Plans

Results of Operations

Operating Segments

Liquidity and Capital Resources

Contractual Obligations and Other Commitments

Seasonality and Quarterly Fluctuations

Off-Balance Sheet Financing

Application of Critical Accounting Estimates

Recently Adopted and Recently Issued Accounting Pronouncements

EXECUTIVE SUMMARY

American Media, Inc. together with its subsidiaries (collectively, the "Company", "AMI", "we", "our" or "us") is one of the largest publishers of celebrity and health and active lifestyle magazines in the United States, with a diversified portfolio of 10 publications that have a combined monthly print and digital audience of more than 39 million readers and monthly on-line audience of approximately 49 million readers.

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

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


24


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

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

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

We are experiencing declines in our circulation revenue and print advertising as a result of market conditions in the magazine publishing industry. These declines are primarily caused by the disruption in our wholesaler distribution channel, the overall decline in the celebrity newsstand market and the decline in the consumer advertising market coupled with the shift in advertising dollars from print to digital. Our financial performance depends, in large part, on varying conditions in the markets we serve. Demand in these markets tends to fluctuate in response to overall economic conditions and current events. Since magazines are generally discretionary purchases for consumers, our circulation revenues are sensitive to economic downturns. Adverse changes 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, 2016 and is referred to herein as fiscal 2016. References to our fiscal year (e.g. "fiscal 2016") refer to our fiscal year ended March 31st of the applicable year.

RECENT DEVELOPMENTS AND MANAGEMENT ACTION PLANS

Recent Developments

Digital Initiatives

We conduct our advertising sales through a combination of corporate and brand sales and marketing teams that sell advertising across multiple media platforms. Our salespeople are divided into specific brand teams, with each team focusing on selling marketing programs that integrate print, digital (such as mobile and desktop), social media and events for our clients. We are also the industry leader in creating sponsored content and native advertising. Combined, our sales teams cover all consumer advertising categories.

We have launched digital editions for all our brands on the following platforms: Next Issue Media, Apple, Google newsstand, Zinio, Amazon Kindle and Barnes & Noble's Nook. During fiscal 2016, our digital advertising revenue increased 40% over the comparable prior year period.

Print Initiatives

The relaunch of Men's Fitness continues to attract new luxury goods advertisers including Ralph Lauren, FIJI Water, Louis Vuitton, Nautica, Energizer and SlimFast. During fiscal 2016, total advertising revenues increased 9% for Men's Fitness as compared to the prior period.


25


Related Operations

Over the past year, we have developed several unique brand extensions across multiple platforms.

In February 2016, we announced a partnership with Dwayne "The Rock" Johnson's company, Seven Bucks Productions. Mr. Johnson is one of the world's biggest box office stars with over $1.4 billion in ticket sales in 2015 and Seven Bucks Productions has over 50 movie, television and digital projects in development. Our initial venture will be a live television broadcast of the Mr. Olympia event from Las Vegas in September 2016. Mr. Johnson will be one of the co-hosts and we are currently in negotiations with a leading broadcast network to air the live broadcast of the Mr. Olympia event.

We currently publish a custom magazine for GNC Holdings, Inc. ("GNC") on a quarterly basis, utilizing our Men's Fitness (and Shape pursuant to a license agreement) brands. The print version is distributed to approximately 500,000 customers through select GNC stores, with another 1 million digital copies distributed via email to GNC's database of customers. GNC leverages its vendors to advertise in the magazine and AMI retains 100% of the advertising revenues.

The REELZ Channel, available in 68 million homes, recently premiered a new television series, National Enquirer Investigates and the Discovery Channel will launch a series called Enquiring Minds this fall. We are partnering with The Weinstein Company on both of these televisions series. There is also a feature film and documentary drama television series on The National Enquirer in development with IMG/WME.

Debt Related Transactions

During the first quarter of fiscal 2016, AMI repurchased $2.0 million in 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"), plus accrued and unpaid interest in the open market, from the Investors.

In February 2016, we amended the revolving credit facility (the "Revolving Credit Facility") to, among other things, extend the maturity date to June 2017, modify the financial covenants in effect through the date of maturity and provide for certain other provisions.

In March 2016, AMI exchanged approximately $58.9 million in aggregate principal amount of First Lien Notes, plus accrued and unpaid interest, held by the Investors, for approximately $76.0 million aggregate principal amount of new second lien senior secured notes, which bear interest at a rate of 7.0% per annum and mature in July 2020 (the "New Second Lien Notes"), pursuant to an exchange agreement (the "New Second Lien Notes Exchange Agreement").

In addition to the New Second Lien Notes Exchange Agreement, AMI also issued, in March 2016, approximately $76.2 million in aggregate principal amount of New Second Lien Notes in a distribution to holders of equity interests in the Parent, of which approximately $68.8 million was issued to the Investors and approximately $7.4 million was issued to AMI's Chief Executive Officer (the "Officer"), and approximately $7.3 million aggregate principal amount of New Second Lien Notes were issued to an affiliate of the Investors in exchange for cash.

In March 2016, AMI repurchased the remaining $2.2 million in 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"), plus accrued and unpaid interest in the open market. Upon the full satisfaction and cancellation of all outstanding Second Lien Notes, the collateral agreement securing the Second Lien Notes was terminated and AMI's obligations under the Indenture governing the Second Lien Notes were satisfied in full.

See "Liquidity and Capital Resources - Revolving Credit Facility and Senior Secured Notes" within this Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," for a further discussion regarding our debt agreements.

Wholesaler Transition

Several of our wholesalers, including our former second-largest wholesaler, Source Interlink Companies ("Source"), ceased operation during 2014. Since then we have transitioned the previous wholesalers' newsstand distribution (approximately 25% of the market) to the two remaining major wholesalers. This transition had an immediate adverse impact on single copy newsstand sales and liquidity during fiscal 2015 and into the first half of fiscal 2016.


26


Management Action Plans for Cost Savings

During fiscal 2016, we developed and implemented management action plans that resulted in $18.4 million of cost savings in fiscal 2016 and that we expect will result in approximately $6.8 million of cost savings in fiscal 2017 (the "2016 and 2017 Management Action Plans"). These expense reductions were primarily from outsourcing technology and operating functions, digital content re-negotiations, print order efficiencies and editorial and advertising sales staff consolidations. We will realize the benefits from the 2016 and 2017 Management Action Plans during fiscal 2016 and beyond.

During fiscal 2015, we developed and implemented management action plans that resulted in $6.6 million of cost savings in fiscal 2016 and $6.4 million of cost savings in fiscal 2015 (the "2016 and 2015 Management Action Plans"). These expense reductions were primarily from outsourcing technology and operating functions, digital content re-negotiations, and editorial and advertising sales expense reductions. We realized the benefits from the 2016 and 2015 Management Action Plans in fiscal 2016 and fiscal 2015 and certain of these costs savings may benefit fiscal 2017 and beyond.

Reference to Management Action Plans refers to the 2016 and 2017 Management Action Plans and the 2016 and 2015 Management Action Plans.

RESULTS OF OPERATIONS

The following table provides a summary of our operating results for the fiscal years ended March 31, 2016, 2015 and 2014:

 
Fiscal years ended March 31,
 
2016 vs. 2015
 
2015 vs. 2014
(dollars in millions)
2016
2015
2014
 
Amount
Percent
 
Amount
Percent
Operating revenues:
 
 
 
 
 
 
 
 
 
Circulation
$
142.8

$
166.2

$
187.6

 
$
(23.4
)
(14
)%
 
$
(21.4
)
(11
)%
Advertising
68.2

67.3

73.0

 
0.9

1
 %
 
(5.7
)
(8
)%
Other
12.0

11.7

26.8

 
0.3

3
 %
 
(15.1
)
(56
)%
Total operating revenues
223.0

245.2

287.3

 
(22.1
)
(9
)%
 
(42.2
)
(15
)%
Operating expenses
197.3

251.0

253.6

 
(53.6
)
(21
)%
 
(2.6
)
(1
)%
Operating income (loss)
25.7

(5.8
)
33.8

 
31.5

*

 
(39.6
)
*

Other expense, net
(43.7
)
(51.2
)
(60.1
)
 
7.5

(15
)%
 
8.9

(15
)%
Loss from continuing operations before income tax provision (benefit)
(18.0
)
(56.9
)
(26.3
)
 
38.9

(68
)%
 
(30.6
)
*

Income tax provision (benefit)
(36.0
)
(15.7
)
30.7

 
(20.3
)
*

 
(46.3
)
*

Net income (loss) from continuing operations
18.0

(41.2
)
(57.0
)
 
59.2

*

 
15.7

(28
)%
Income from discontinued operations, net of taxes

15.3

3.7

 
(15.3
)
*

 
11.6

*

Net income (loss)
18.0

(25.9
)
(53.3
)
 
43.9

*

 
27.4

(51
)%
Less: net income attributable to the noncontrolling interest
(1.0
)
(1.2
)
(1.0
)
 
0.2

*

 
(0.2
)
16
 %
Net income (loss) attributable to American Media, Inc. and subsidiaries
$
17.0

$
(27.1
)
$
(54.3
)
 
$
44.1

*

 
$
27.2

(50
)%
* - Represents an increase or decrease in excess of 100%.

Operating Revenues

During fiscal 2016, total operating revenues decreased $22.1 million compared to the prior year period primarily due to reduced circulation ($23.4 million), partially offset by increased advertising ($0.9 million) and other revenues ($0.3 million).


27


Circulation revenue has declined due to the overall decline in the celebrity newsstand magazine market, coupled with the planned discontinuance of our special interest publications ($2.5 million) and certain foreign editions of Muscle & Fitness and Flex ($1.9 million), and the sale of our Country Weekly publication ($2.8 million). The increase in advertising revenue was primarily due to digital. Other revenue increased primarily due to the elimination of joint venture losses recognized in prior years coupled with the increase in revenue from the Mr. Olympia event, partially offset by reduced publishing services revenue.

Total operating revenue decreased $42.2 million during fiscal 2015 primarily due to reduced circulation ($21.4 million), advertising ($5.7 million) and other revenues ($15.1 million).

Circulation revenue declined due to the industry-wide disruption in our wholesaler channel coupled with the decline in the celebrity newsstand magazine market. Advertising revenue declined due to the 11% decline in the consumer advertising market. The decline in other revenue was due to the divestiture of our distribution and merchandising business (DSI) in September 2013 ($5.2 million), coupled with an unfavorable timing of certain non-recurring revenue streams ($8.2 million), partially offset by higher revenue from the Mr. Olympia event ($1.3 million).

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

 
Fiscal years ended March 31,
 
2016
 
2015
 
2014
Circulation
64%
 
68%
 
65%
Advertising
31%
 
27%
 
25%
Other
5%
 
5%
 
10%
Total
100%
 
100%
 
100%

Circulation Revenue

Our circulation revenue was generated from the following components for the fiscal years ended March 31, 2016, 2015 and 2014:

 
Fiscal years ended March 31,
 
2016
 
2015
 
2014
Single Copy
78%
 
78%
 
79%
Subscription
22%
 
22%
 
21%
Total
100%
 
100%
 
100%

Our circulation revenue, representing the sale of magazines to consumers, generates more than half of our total revenues and is an important component in determining our advertising revenues because advertising rates are dependent on circulation and audience. Single copy sales (also known as newsstand sales) are sold primarily through national distributors, wholesalers and retailers. Subscriptions are sold primarily through direct mail, or digitally via the Internet. Additionally, digital-only subscriptions and single-copy digital issues of our magazines are sold or distributed through various app stores and other digital storefronts. Our digital subscriptions represent 15% of our 2.0 million net subscriptions as of March 31, 2016, the highest percentage among our competitive set.

Circulation revenue declined $23.4 million during fiscal 2016 due to the overall reduction in the celebrity magazine sector ($14.1 million) coupled with the planned discontinuance of our special interest publications ($2.5 million) and certain foreign editions of Muscle & Fitness and Flex ($1.9 million), and the sale of our Country Weekly publication ($2.8 million). During fiscal 2015, circulation revenue declined $21.4 million primarily due to the wholesaler transition ($16.6 million) coupled with the sale of our Country Weekly publication ($2.5 million).


28


Advertising Revenue

Our advertising revenue was generated from the following components for the fiscal years ended March 31, 2016, 2015 and 2014:

 
Fiscal years ended March 31,
 
2016
 
2015
 
2014
Print
80%
 
85%
 
89%
Digital
20%
 
15%
 
11%
Total
100%
 
100%
 
100%

The sale of advertising across our multiple platforms generates approximately one-third of our total revenues. Print advertising revenue continues to be negatively impacted by the decline in the consumer magazine sector coupled with the transformation of advertising from print to digital.

We conduct our advertising sales through a combination of corporate and brand sales and marketing teams that sell advertising across multiple media platforms. Our salespeople are divided into specific brand teams, with each team focusing on selling marketing programs that integrate print, digital (such as mobile and desktop), social media and events for our clients. We are also the industry leader in creating sponsored content and native advertising. Combined, our sales teams cover all consumer advertising categories.

The rates at which we sell print advertising depend on each magazine's rate base, which is the circulation of the magazine that we guarantee to our advertisers, as well as our audience size. If we are not able to meet our committed rate base, the price paid by advertisers is generally subject to downward adjustments, including in the form of future credits or discounts. Our published rates for each of our magazines are subject to negotiation with each of our advertisers.

Advertising revenue increased $0.9 million during fiscal 2016 due to higher digital advertising ($4.1 million), partially offset by the decline in print advertising ($0.4 million) and the planned discontinuance of certain foreign editions of Muscle & Fitness and Flex ($2.3 million) and the sale of Country Weekly ($0.5 million). During fiscal 2015, advertising revenue decreased $5.7 million due to lower print advertising revenue ($7.7 million), partially offset by higher digital advertising ($2.0 million).

Other Revenue

Our other revenue represented 5% of our operating revenues during fiscal 2016 and 2015 and10% during fiscal 2014.

During fiscal 2016, other revenue increased $0.3 million due to the timing of certain non-recurring streams, partially offset by the reduction in publishing services.

Other revenues decreased $15.1 million during fiscal 2015 primarily due to the divestiture of our distribution and merchandising company (DSI) in September 2013 ($5.2 million) coupled with an unfavorable timing of certain non-recurring revenue streams ($8.2 million), partially offset by the increased revenue from the Mr. Olympia event ($1.3 million).


29


Operating Expenses

Our operating expenses are comprised of the following for the fiscal years ended March 31, 2016, 2015 and 2014:

 
Fiscal years ended March 31,
 
2016 vs. 2015
 
2015 vs. 2014
(dollars in millions)
2016
2015
2014
 
Amount
Percent
 
Amount
Percent
Costs of revenues:
 
 
 
 
 
 
 
 
 
Production
$
54.3

$
66.1

$
75.7

 
$
(11.8
)
(18
)%
 
$
(9.6
)
(13
)%
Editorial
24.9

26.8

30.9

 
(1.9
)
(7
)%
 
(4.1
)
(13
)%
Distribution, circulation and other
36.2

39.0

46.0

 
(2.8
)
(7
)%
 
(7.0
)
(15
)%
Total costs of revenues:
115.4

131.9

152.6

 
(16.5
)
(13
)%
 
(20.7
)
(14
)%
Selling, general and administrative
55.5

86.6

78.3

 
(31.2
)
(36
)%
 
8.3

11
 %
Depreciation and amortization
26.5

14.0

13.4

 
12.5

90
 %
 
0.5

4
 %
Impairment of goodwill and intangible assets

18.5

9.2

 
(18.5
)
*

 
9.2

100
 %
Total operating expenses
$
197.3

$
251.0

$
253.6

 
$
(53.6
)
(21
)%
 
$
(2.6
)
(1
)%
* - Represents an increase or decrease in excess of 100%.

Costs of Revenues

Costs of revenues consist of costs related to the production of our printed magazines, editorial costs, as well as other expenses.

Our production costs, including paper and printing costs, accounted for approximately 28%, 26% and 30%, respectively, of our total operating expenses for fiscal 2016, 2015 and 2014. Paper is the principal raw material utilized in our publications and we have a long-term paper supply and purchasing agreement with the largest paper supply broker in the United States.

Editorial costs include costs associated with manuscripts, photographs and related salaries and accounted for approximately 13%, 11% and 12%, respectively for fiscal 2016, 2015 and 2014.

Our distribution, circulation and other expenses consist primarily of postage and freight for shipment to our wholesalers and fulfillment companies and accounted for approximately 18%, 16% and 18%, respectively, of our total operating expenses for fiscal 2016, 2015 and 2014. We are subject to postal rate increases that affect delivery costs and effective May 31, 2015, rates for all classes of mail were increased by approximately 2% by the Postal Regulation Commission.

Total costs of revenues decreased during fiscal 2016 and 2015 due to the Management Action Plans in the following areas: $11.8 million in production, $1.9 million in editorial and $2.8 million in distribution and circulation for fiscal 2016 and a reduction of $9.6 million in production, $4.1 million in editorial and $7.0 million in distribution and circulation for fiscal 2015.

Selling, General and Administrative

Selling, general and administrative costs decreased $31.2 million during fiscal 2016 compared to the prior year period primarily due to the Management Action Plans for employee-related expenses ($12.2 million), as well as reduced wholesaler-related bad debt expense ($8.4 million), accounting and legal fees ($1.6 million), other non-recurring expenses ($3.5 million) and costs associated with restructuring ($1.5 million).

During fiscal 2015, selling, general and administrative expenses increased $8.3 million as compared to the prior year periods primarily due the Merger and related transactions ($4.8 million), bad debt expense due to the wholesaler bankruptcy ($3.3 million), costs associated with restructuring ($1.5 million) and the timing of gains from insurance settlement recognized in the prior comparable period ($1.4 million), partially offset by the divestiture of our distribution and merchandising company (DSI) in September 2013 ($2.1 million).


30


Depreciation and Amortization

Depreciation and amortization expenses, which are non-cash, increased $12.5 million and $0.5 million during fiscal 2016 and 2015, respectively, as compared to the prior year periods, primarily due to the reclassification of certain tradenames from indefinite-lived to finite-lived.

Impairment of Goodwill and Intangible Assets

There were no impairment charges recorded during fiscal 2016.
During an evaluation of goodwill and other identified intangible assets during fiscal 2015 and 2014, we determined that indicators were present in certain reporting units that would suggest the fair value of the reporting unit may have declined below the carrying value. This decline was primarily the result of the near-term advertising revenue shortfall coupled with the continued softness in the print publication industry overall, which resulted in lowered future cash flow projections.
As a result, an impairment test of goodwill and identified intangible assets was performed for certain reporting units. The evaluation resulted in the carrying value of goodwill and tradenames for certain reporting units to exceed the fair value. As a result, the Company recorded pre-tax non-cash impairment charge totaling $18.5 million for goodwill and tradenames during fiscal 2015 and $9.2 million for tradenames during fiscal 2014, respectively.

Non-Operating Items

Interest Expense

Interest expense decreased $11.2 million and $7.5 million during fiscal 2016 and 2015, respectively, when compared to the prior year period due to the exchange, in March 2016 and January 2015, of certain senior secured notes.

Amortization of Deferred Financing Costs

Amortization of deferred financing costs remained consistent during fiscal 2016 and increased $2.3 million during fiscal 2015, when compared to the prior year period due to the exchange, in March 2016 and January 2015, of certain senior secured notes.

Income Taxes

We recorded an income tax benefit of $36.0 million and $15.7 million and during fiscal 2016 and 2015, respectively, primarily due to the release of the valuation allowance. This was a direct result of the reclassification of certain tradenames from indefinite lived to finite lived effective October 1, 2014 and April 1, 2015.

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

The $17.0 million of net income attributable to American Media, Inc. for fiscal 2016 represents a $44.1 million improvement from the comparable prior year period. This improvement is primarily attributable to the $31.5 million increase in operating income, the $20.3 million increase in benefit for income taxes coupled with the $11.2 million decrease in interest expense, partially offset by the $15.3 million decrease in income from discontinued operations, net of tax and the $3.7 million decrease in other income.

The $27.1 million of net loss attributable to American Media, Inc. for fiscal 2015 represents a $27.2 million improvement from the comparable prior year period. This improvement is primarily attributable to the $46.3 million decrease in provision for income taxes, the $11.6 million increase in income from discontinued operations, net of tax, and the $7.5 million decrease in interest expense, partially offset by the $39.6 million decrease in operating income.


31


OPERATING SEGMENTS

Our operating segments consist of: Celebrity Brands, Men’s Active Lifestyle and Corporate and Other. After the divestiture of our Women's Active Lifestyle segment, we report under a new segment structure beginning in the fourth quarter of fiscal 2015. Given this change, we have restated prior period segment information to correspond to the current reporting structure. This structure is organized according to the markets each segment serves and allows management to focus its efforts on providing the best content to a wide range of consumers.

Our operating segments consist of the following brands in print and digital, as of March 31, 2016:

Celebrity Brands Segment

National Enquirer, a weekly, hard news, investigating tabloid covering all celebrities, politics, crime, human interest, health and fashion. We recently appointed Dick Morris as the chief political commentator and contributor to expand our political coverage;

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

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

Globe, a weekly tabloid that focuses on older movie and television celebrities, the royal family, political scandals and investigative crime stories that are less mainstream and more salacious than the National Enquirer;

National Examiner, a weekly tabloid (currently available only in print format) consisting of celebrity and human interest stories, differentiating it from the other titles through its upbeat positioning as the source for gossip, contests, women’s service and good news for an older tabloid audience; and

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

Men’s Active Lifestyle Segment

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

Muscle & Fitness, a fitness physique training magazine appealing to exercise enthusiasts and athletes of all ages, especially those focused on resistance training, body fat control, sports nutrition and supplements; MuscleandFitness.com provides workout videos and nutritional advice;

Flex, a magazine devoted to professional bodybuilding featuring nutrition, supplement and performance science content for bodybuilding enthusiasts and coverage of all professional and amateur bodybuilding contests; Flexonline.com features online coverage of all the major bodybuilding competitions, as well as training videos with today’s top bodybuilders;

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

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


32


Weider UK, a wholly-owned subsidiary, publishes Muscle & Fitness and Flex in the United Kingdom, France and Germany and licenses the content in Holland and Australia. Each market edition is in a local language with local content and has its own website.

Corporate and Other Segment

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

Financial Information Regarding Our Operating Segments

We use operating income (loss) as a primary basis for the chief operating decision maker to evaluate the performance of each of our operating segments and present operating income (loss) before impairment of goodwill and intangible assets, if any, to provide a consistent and comparable measure of our performance between periods. Management uses operating income (loss) before impairment of goodwill and intangible assets, if any, when communicating financial results to the board of directors, stockholders, debt holders and investors as well as when determining performance goals for executive compensation. Management believes this non-GAAP measure, although not a substitute for GAAP, improves comparability. Management also believes our stockholders, debt holders and investors use this measure as a gauge to assess the performance of their investment in the Company.

We prepared the financial results of our operating segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist in making internal operating decisions. Our calculations of operating income (loss) herein may be different from the calculations used by other companies, therefore comparability may be limited. The accounting policies for the operating segments are the same as those described in the notes to the consolidated 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,
 
2016 vs. 2015
 
2015 vs. 2014
(dollars in millions)
2016
2015
2014
 
Amount
Percent
 
Amount
Percent
Segment operating revenues:
 
 
 
 
 
 
 
 
 
Celebrity Brands
$
164.4

$
179.8

$
202.6

 
$
(15.5
)
(9
)%
 
$
(22.8
)
(11
)%
Men's Active Lifestyle
55.6

59.2

66.7

 
(3.6
)
(6
)%
 
(7.5
)
(11
)%
Corporate and Other
3.1

6.1

18.1

 
(3.1
)
(50
)%
 
(11.9
)
(66
)%
Total operating revenues
$
223.0

$
245.2

$
287.3

 
$
(22.1
)
(9
)%
 
$
(42.2
)
(15
)%

Total operating revenues decreased $22.1 million during fiscal 2016 primarily due to reduced circulation ($23.4 million), partially offset by increased advertising ($0.9 million) and other revenues ($0.3 million). During fiscal 2015, total operating revenue decreased $42.2 million primarily due to reduced circulation ($21.4 million), advertising ($5.7 million) and other revenues ($15.1 million).

The following table summarizes the percentage of segment operating revenues:

 
Fiscal years ended March 31,
 
2016
 
2015
 
2014
Segment operating revenues:
 
 
 
 
 
Celebrity Brands
74%
 
73%
 
71%
Men's Active Lifestyle
25%
 
24%
 
23%
Corporate and Other
1%
 
3%
 
6%
Total
100%
 
100%
 
100%


33


The following table summarizes our segment operating income before impairment for goodwill and intangible assets:

 
Fiscal years ended March 31,
 
2016 vs. 2015
 
2015 vs. 2014
(dollars in millions)
2016
2015
2014
 
Amount
Percent
 
Amount
Percent
Operating income (loss) before impairment:
 
 
 
 
 
 
 
Celebrity Brands
$
54.1

$
67.9

$
73.3

 
$
(13.8
)
(20
)%
 
$
(5.4
)
(7
)%
Men's Active Lifestyle
13.1

11.6

21.0

 
1.6

13
 %
 
(9.4
)
(45
)%
Corporate and Other
(41.5
)
(66.8
)
(51.2
)
 
25.3

(38
)%
 
(15.6
)
30
 %
Total operating income before impairment
25.7

12.7

43.0

 
$
13.0

*

 
$
(30.3
)
(71
)%
Impairment of goodwill and intangible assets

18.5

9.2

 
(18.5
)
*

 
9.2

*

Total operating income (loss)
$
25.7

$
(5.8
)
$
33.8

 
$
31.5

*

 
$
(39.6
)
*

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

Total operating income before impairment increased $13.0 million during fiscal 2016 primarily due to the $35.2 million decrease in operating expenses due to the planned expense savings pursuant to the Management Action Plans, partially offset by the $22.1 million decline in operating revenues as mentioned above.

During fiscal 2015, total operating income before impairment decreased $30.3 million primarily due to the $42.2 million decrease in operating revenue previously mentioned, partially offset by the $11.8 million decrease in operating expenses related to the divestiture of our distribution and merchandising company and the planned expense savings pursuant to the Management Action Plans.

There were no impairment charges recorded during fiscal 2016. The pre-tax non-cash impairment charge for goodwill and intangible assets was $18.5 million and $9.2 million, respectively during fiscal 2015 and 2014, and impacted the Men's Active Lifestyle segment goodwill and tradenames. The pre-tax non-cash impairment charges were 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. 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 74%, 73% and 71% our total operating revenues for fiscal 2016, 2015 for fiscal 2014, respectively.

Operating Revenues

Total operating revenues in the Celebrity Brands segment were $164.4 million for fiscal 2016, representing a decrease of $15.5 million, or 9%, over the comparable prior year period. For our continuing publications, total operating revenues declined $10.1 million, or 6%. Circulation revenue declined $14.1 million, or 10%, due to a reduction in the celebrity newsstand market of 12%. This was partially offset by the 11% increase in advertising revenue ($3.0 million) from National Enquirer, OK! and Star, which is counterintuitive to the consumer advertising market, which was down 10%. Total operating revenues were further impacted by the planned discontinuance of our special interest publications ($2.5 million) and the sale of Country Weekly ($2.8 million).

During fiscal 2015, total operating revenues in the Celebrity Brands segment were $179.8 million, representing a decrease of $22.8 million, or 11%, over the comparable prior year period. For our continuing publications, total operating revenues declined $19.2 million, or 10%. Circulation revenue declined $16.6 million, or 10%, due to a reduction in the celebrity newsstand sales primarily due to the industry-wide newsstand distribution disruption, coupled with the 6% decline in advertising revenue ($1.7 million) due to the 11% decline in the consumer magazine sector. Total operating revenues were further impacted by the planned discontinuance of our special interest publications ($0.8 million) and the sale of Country Weekly ($2.5 million).


34


Operating Income

The Celebrity Brands segment operating income before impairment decreased $13.8 million, or 20%, to $54.1 million during fiscal 2016. This decline was due to the revenue declines previously discussed coupled with an increase in amortization expenses ($11.3 million) related to the reclassification of certain tradenames from indefinite-lived intangibles to finite-lives of 15 years, effective April 1, 2015. These declines are partially offset by the planned reduction in expenses ($13.1 million) pursuant to our Management Action Plans.

Operating income before impairment in the Celebrity Brands segment decreased during fiscal 2015 from prior year by $5.4 million, or 7%, to $67.9 million. This decline was due to the revenue declines mentioned above, partially offset by the planned reduction in expenses ($17.4 million) pursuant to our Management Action Plans.

Men’s Active Lifestyle Segment

The Men’s Active Lifestyle segment represented 25%, 24% and 23% of our consolidated operating revenues for fiscal 2016, 2015 and 2014, respectively.

Operating Revenues

Total operating revenues in the Men’s Active Lifestyle segment were $55.6 million during fiscal 2016, a decrease of $3.6 million, or 6%, over the comparable prior year period. This decline was due to the discontinuance of certain foreign editions of Muscle & Fitness and Flex ($4.9 million) coupled with the decline in print advertising ($1.1 million). These declines were partially offset by the increase in digital advertising revenue ($2.0 million), primarily from Men's Fitness ($1.1 million) and Muscle & Fitness ($0.9 million) due to a 17% and 11% increase in page views, respectively, coupled with the increase in revenue from the Mr. Olympia event ($0.8 million or 12%).

During fiscal 2015, total operating revenues in the Men’s Active Lifestyle segment were $59.2 million, a decrease $7.5 million, or 11%, over the comparable prior year period. The decline in circulation revenue ($2.6 million) and print advertising revenue ($7.1 million) was primarily due to the reduction in the publishing frequency of Muscle & Fitness and Flex, from twelve times per year to ten times per year (or two less issues) during fiscal 2015. Print advertising revenue has also been negatively impacted during fiscal 2015 by a major advertiser who shifted their entire advertising budget ($4.0 million) from print to digital and social advertising platform investments outside the Men's Active Lifestyle category. A portion of this advertising business did return to the Men's Active Lifestyle segment during fiscal 2016. These declines were partially offset by the increase in digital advertising revenue ($1.3 million), which is directly attributable to the relaunch and repositioning of Men's Fitness, and the increased revenues from the Mr. Olympia event ($1.3 million, or 26%).

Operating Income

The Men’s Active Lifestyle segment operating income before impairment increased $1.6 million, or 13% to $13.1 million during fiscal 2016. Our planned Management Action Plans reduced expenses by $6.5 million, which was partially offset by an increase in amortization expense ($1.4 million) related to certain tradenames as discussed above coupled with the revenue decline previously mentioned.

Operating income before impairment in the Men’s Active Lifestyle segment declined during fiscal 2015 from the prior year by $9.4 million, or 45%, to $11.6 million. This decline is due to the reasons mentioned above coupled with an increase in amortization expense related to the classification of certain tradenames ($1.5 million).


35


Corporate and Other Segment

The Corporate and Other segment was 1%, 3% and 6% of our consolidated operating revenues for fiscal 2016, 2015 and 2014, respectively.

Operating Revenues

Total operating revenues in the Corporate and Other segment were $3.1 million during fiscal 2016, a decline of $3.1 million, or 50%, compared to the prior year period, primarily due to the planned reduction in publishing services ($1.3 million) and books publishing ($0.3 million).

During fiscal 2015, total operating revenues in the Corporate and Other segment were $6.1 million, a decrease of $11.9 million, or 66%, from the prior year. This decline was attributable to the divestiture of our distribution and merchandising company in September 2013 ($5.2 million), the timing of the custom video projects for Microsoft ($4.7 million) and the cessation of certain publishing services ($2.3 million).

Operating Loss

Total operating loss before impairment decreased by $25.3 million, or 38%, to $41.5 million during fiscal 2016, compared to the prior year period. This improvement was attributable to the Management Action Plans for employee-related expenses ($11.3 million), as well as reduced wholesaler bad debt expenses ($7.3 million), accounting and legal fees ($1.3 million) and the other non-recurring expenses ($3.5 million), partially offset by the $3.1 million decline in operating revenue previously discussed.

During fiscal 2015, total operating loss before impairment increased by $15.6 million, or 30%, to $66.8 million. This increase was attributable to the $11.9 million decline in operating revenue coupled with a $3.6 million increase in operating expenses. Operating expenses increased primarily due to the bad debt expense related to the wholesaler shutdowns ($3.3 million) and the costs incurred for the Merger and other related transactions ($3.4 million), coupled with the timing of the gains on insurance settlement recognized in the prior comparable period ($1.4 million). These expense increases were partially offset by the $5.2 million decrease in operating expenses related to the divestiture of our distribution and merchandising business.

LIQUIDITY AND CAPITAL RESOURCES

Management’s Assessment of Liquidity

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

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

As of March 31, 2016, the Company had $1.4 million of cash, $15.4 million available pursuant to the Revolving Credit Facility and a working capital deficit of $32.7 million, of which approximately $26.6 million relates to deferred revenues. In February 2016, we amended our Revolving Credit Facility to, among other things, extend the maturity date to June 2017 and modify the financial covenants in effect through the date of maturity.

In addition to outstanding borrowings under the Revolving Credit Facility, as of March 31, 2016, there was $378.7 million principal amount of outstanding senior secured debt. Over the next year, the cash interest payments due under these debt agreements are approximately $40.2 million and there are no scheduled principal payments due.

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


36


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

Wholesaler Transition

Several of our wholesalers, including our former second-largest wholesaler, Source Interlink Companies ("Source"), ceased operation during 2014. Since then we have transitioned the previous wholesalers' newsstand distribution (approximately 25% of the market) to the two remaining major wholesalers. This transition had an immediate adverse impact on single copy newsstand sales and liquidity during fiscal 2015 and into the first half of fiscal 2016. We are beginning to see a stabilization in the newsstand sales, and the wholesale supply chain currently and primarily consists of two private companies, owned by billionaires, that have been in the business for decades.

There can be no assurances that our revenue will not be temporarily or permanently reduced if consumers at the impacted retailers do not resume purchasing our publications at the same rate or quantities previously purchased. See Item 1A, "Risk Factors" included in this Annual Report, specifically, "Our circulation revenue consists of single copy sales distributed to retailers primarily by two wholesalers and the loss of either of these wholesalers could materially adversely affect our business and results of operations."

Cash Flow Summary

The following information has been derived from the accompanying consolidated financial statements for fiscal 2016, 2015 and 2014. Cash and cash equivalents decreased by $2.1 million during fiscal 2016 and increased $0.4 million during fiscal 2015. The change in cash and cash equivalents is as follows:
 
 
Fiscal years ended March 31,
 
Net Change
(in millions)
 
2016
2015
2014
 
2016 vs. 2015
 
2015 vs. 2014
Net income (loss)
 
$
18.0

$
(25.9
)
$
(53.3
)
 
$
43.9

 
$
27.4

Non-cash items
 
1.0

32.0

72.4

 
(30.9
)
 
(40.5
)
Net change in operating assets and liabilities
 
(15.5
)
6.6

(9.4
)
 
(22.2
)
 
16.0

Operating activities
 
3.5

12.7

9.8

 
(9.2
)
 
2.9

Investing activities
 
(2.7
)
55.7

(18.8
)
 
(58.3
)
 
74.5

Financing activities
 
(2.6
)
(67.2
)
9.5

 
64.6

 
(76.7
)
Effects of exchange rates
 
(0.3
)
(0.8
)
0.2

 
0.5

 
(1.0
)
Net (decrease) increase in cash and cash equivalents
 
$
(2.1
)
$
0.4

$
0.7

 
$
(2.5
)
 
$
(0.3
)

Operating Activities

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

Net cash provided by operating activities was $3.5 million and $12.7 million during fiscal 2016 and 2015, respectively, a decline of $9.2 million, primarily due to the $30.9 million net decrease in non-cash items coupled with the $22.2 million net change in operating assets and liabilities, partially offset by the $43.9 million increase in our results of operations.

Non-cash items decreased primarily due to the decrease in impairment of goodwill and intangible assets of $18.5 million, the decrease in provision for doubtful accounts of $8.7 million, the decrease in non-cash payment-in-kind interest accretion of $4.8 million for certain senior secured notes, the increase in benefit for income taxes of $3.9 million and the decrease in the loss on sale of assets of $2.5 million, partially offset by the increase in depreciation and amortization of $11.6 million.

The net change in operating assets and liabilities is primarily due to the $35.6 million net change in accounts payable and accrued expenses,
the $10.3 million net change in inventories resulting from our agreement to outsource paper purchases and the $4.3 million net change in prepaid expenses, partially offset by the $20.6 million net change in trade receivables, the net change in deferred revenue of $3.8 million, the net change in accrued interest of $3.4 million and the net change in deferred rack costs of $2.7 million.


37


Net cash provided by operating activities increased $2.9 million during fiscal 2015 as compared to fiscal 2014, primarily due to the $27.4 million increase in our results of operations coupled with the $16.0 million net change in operating assets and liabilities, partially offset by the $40.5 million net increase in non-cash items.

Non-cash items decreased primarily due to the decrease in provision for income taxes of $64.7 million, partially offset by the impairment of goodwill and intangible assets of $9.2 million, the increase in provision for doubtful accounts of $3.4 million, the loss on sale of assets of $2.5 million, the increase in non-cash payment-in-kind interest accretion of $2.9 million for certain senior secured notes and the net decrease in amortization of deferred rack and deferred financing costs of $1.6 million.

The net change in operating assets and liabilities is primarily due to the $7.6 million net change in inventories resulting from our agreement to outsource paper purchases, the $6.7 million net change in prepaid expenses, the $3.6 million net change in accounts payable and accrued expenses, the $3.4 million net change in trade receivables, partially offset by the net change in deferred revenue of $2.7 million and the net change in accrued interest of $2.2 million.

Investing activities

Net cash used in investing activities was $2.7 million for fiscal 2016, a decrease of $58.3 million, compared to $55.7 million of net cash provided by investing activities for fiscal 2015. The decrease is primarily attributable to the $63.0 million decrease in proceeds from the sale of assets and the $2.6 million decrease in proceeds from affiliates, partially offset by the $7.2 million decrease in purchases of property and equipment and intangibles assets.

Net cash provided by investing activities was $55.7 million for fiscal 2015, an increase of $74.5 million compared to $18.8 million of net cash used in investing activities for fiscal 2014. The increase is primarily attributable to the $63.0 million in proceeds from the sale of assets and the $2.6 million in proceeds from affiliates coupled with the $2.5 million decrease in investment in affiliates plus the $6.2 million decrease in purchases of property and equipment and intangible assets.

Financing activities

Net cash used in financing activities for fiscal 2016 was $2.6 million, a decrease of $64.6 million, compared to $67.2 million of net cash used in financing activities for fiscal 2015. The decrease is primarily attributable to the $53.7 million decrease in repurchases of certain senior secured notes, the $14.8 million decrease in net borrowings under the Revolving Credit Facility and the $4.3 million decrease in costs incurred in the restructuring, partially offset by the $5.5 million decrease in proceeds from the issuance of certain senior secured notes and the $2.3 million increase in deferred financing costs.

Net cash used in financing activities for fiscal 2015 was $67.2 million, an increase of $76.7 million, compared to $9.5 million of net cash provided by financing activities for fiscal 2014. The increase is primarily attributable to the $55.8 million increase in repurchases of certain senior secured notes, the $31.3 million decrease in net borrowings under the Revolving Credit Facility, partially offset by the $12.5 million in proceeds from the issuance of certain senior secured notes and the $4.0 million decrease in payments for the redemption of Odyssey preferred stock.

Revolving Credit Facility and Senior Secured Notes

Revolving Credit Facility

We maintain a revolving credit facility that provides for borrowing up to $35.0 million, less outstanding letters of credit, which matures in June 2017 (the "Revolving Credit Facility"). The Investors became a lending party to the Revolving Credit Facility during fiscal 2015 and represent a commitment of approximately 42% of the Revolving Credit Facility. See "Revolving Credit Facility Amendments" below for additional historical information.

We have the option to pay interest based on (i) a floating base rate option equal to the greatest of (x) the prime rate in effect on such day; (y) the federal funds effective rate in effect on such day plus ½ of 1%; and (z) one month LIBOR (but no less than 2%) plus 1%, or (ii) LIBOR, in each case, plus a margin. The interest rate under the Revolving Credit Facility has ranged from 8.00% to 8.50% during the fiscal year ended March 31, 2016 and 2015. 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 fiscal 2016, 2015 and 2014 were insignificant.


38


During fiscal 2016, we borrowed $72.7 million and repaid $72.2 million under the Revolving Credit Facility. At March 31, 2016, the available borrowing capacity is $15.4 million, after considering the $15.2 million outstanding balance and the $4.4 million outstanding letter of credit. The Revolving Credit Facility is included in non-current liabilities in the accompanying consolidated financial statements based on the June 2017 maturity date.

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

Covenants

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

With regard to the financial maintenance covenants, the first lien leverage ratio covenant must be equal to or less than 3.50 to 1.00 from January 1, 2016 through June 2017. The consolidated leverage ratio covenant must be equal to or less than 5.50 to 1.00 from October 1, 2015 through June 2017. The interest coverage ratio must be equal to or greater than 1.50 to 1.00 from January 1, 2016 through June 2017.

As of March 31, 2016, the Company was in compliance with the covenants under the Revolving Credit Facility.

Although there can be no assurances, management believes that, based on current projections (including projected borrowings and repayments under the Revolving Credit Facility), its operating results for fiscal 2017 will be sufficient to satisfy the financial covenants under the Revolving Credit Facility. The Company’s ability to satisfy the financial covenants is dependent on the business performing in accordance with its projections.  If the performance of the Company’s business deviates significantly from its projections, the Company may not be able to satisfy such financial covenants.  The Company's projections are subject to a number of factors, many of which are events beyond its control, which could cause its actual results to differ materially from its projections. If the Company does not comply with its financial covenants, the Company will be in default under the Revolving Credit Facility.

Revolving Credit Facility Amendments

In December 2010, we entered into a revolving credit facility with an original maturity date of December 2015 with a commitment for borrowing up to $40.0 million, less outstanding letters of credit. In February 2015, we amended and restated the revolving credit facility to, among other things, extend the maturity date to December 2016, reduce the borrowing capacity from $40.0 million to $35.0 million and amend the first lien leverage ratio and certain other covenants and provisions.

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

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


39


In March 2016, the Company, the Administrative Agent and the lenders from time to time party to the Revolving Credit Facility, as amended, restated, modified or supplemented from time to time, entered into the second amendment to the Revolving Credit Facility with the Consenting Lenders constituting the Required Lenders to, among other things, allow for the issuance of additional indebtedness, modify the financial covenants in effect through the date of maturity, and provide for certain other provisions.

With regard to the financial covenants, the first lien leverage ratio covenant must be equal to or less than 3.50 to 1.00 from January 1, 2016 through June 2017 and the provision to lower the first lien leverage ratio based on the outstanding aggregate principal amount of the Company's first lien notes was removed in its entirety. The consolidated leverage ratio must be equal to or less than 5.50 to 1.00 from January 1, 2016 through June 2017 and the provision to lower the consolidated leverage ratio based on the outstanding aggregate principal amount of the Company's first lien notes was removed in its entirety. The interest coverage ratio was not amended and must be equal to or greater than 1.50 to 1.00 from January 1, 2016 through June 2017.

Senior Secured Notes

Our senior secured notes may be comprised of the first lien notes, the second lien notes, the new second lien notes and the second lien PIK notes and are collectively referred to herein as the "Senior Secured Notes." See "Supplemental Indentures" below for a discussion of the amendments to the indentures governing the Senior Secured Notes.

First Lien Notes

In December 2010, we issued $385.0 million aggregate principal amount of senior secured notes, which bear interest at a rate of 11.5% per annum, payable semi-annually, and mature in December 2017 (the "First Lien Notes").

During fiscal 2012, we redeemed $20.0 million in aggregate principal amount of First Lien Notes. During fiscal 2014, we repurchased approximately $2.3 million in aggregate principal amount of First Lien Notes in the open market, from the Investors. During fiscal 2015, we repurchased $55.5 million in aggregate principal amount of First Lien Notes in the open market, from the Investors. We also exchanged $32.0 million in aggregate principal amount of First Lien Notes held by the Investors, for approximately $39.0 million aggregate principal amount of new second lien senior secured notes, which bear interest at a rate of 7.0% per annum and mature in July 2020 (the "New Second Lien Notes"), pursuant to an exchange agreement.

During fiscal 2016, we repurchased $2.0 million in aggregate principal amount of First Lien Notes, at a price equal to 105.9% of the aggregate principal amount thereof, plus accrued and unpaid interest in the open market, from the Investors. In March 2016, we exchanged approximately $58.9 million in aggregate principal amount of First Lien Notes, plus accrued and unpaid interest, held by the Investors, for approximately $76.0 million in aggregate principal amount of New Second Lien Notes, pursuant to an exchange agreement (the "New Second Lien Notes Exchange Agreement"), as further described below.

At March 31, 2016, the First Lien Notes represented an aggregate of $214.3 million of our indebtedness.

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

Second Lien Notes

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


40


During fiscal 2014, we exchanged approximately $94.3 million aggregate principal amount of Second Lien Notes for an equal aggregate principal amount of new second lien senior secured notes, which bear interest at a rate of 10.0% per annum, are payable in kind, and mature in June 2018 (the “Second Lien PIK Notes”). See "Second Lien PIK Notes" below. During fiscal 2015, we repurchased approximately $0.6 million in aggregate principal amount of Second Lien Notes in the open market, from the Investors and exchanged approximately $7.8 million aggregate principal amount of Second Lien Notes for equity interests in the Parent pursuant to the debt for equity exchange agreement (as discussed below).
  
During fiscal 2016, we redeemed the remaining $2.2 million in aggregate principal amount of Second Lien Notes at a price equal to 103.4% of the aggregate principal amount thereof, plus accrued and unpaid interest. Upon the full satisfaction and cancellation of all outstanding Second Lien Notes, the collateral agreement securing the Second Lien Notes was terminated and the obligations of the Company under the Indenture governing the Second Lien Notes were satisfied in full.

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

New Second Lien Notes

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

The New Second Lien Notes were issued under a new indenture (the “New Second Lien Notes Indenture”), by and among American Media, Inc., certain of its subsidiaries listed as guarantors thereto (the "Guarantors") and Wilmington Trust, National Association, as trustee (the "Trustee"). The New Second Lien Notes were issued through a private offering exempt from the registration requirements of the Securities Act of 1933, as amended.

In March 2016, we issued approximately $159.6 million aggregate principal amount of additional New Second Lien Notes (the "Additional New Second Lien Notes"). Approximately $76.0 million in aggregate principal amount of Additional New Second Lien Notes were issued in exchange for approximately $58.9 million in aggregate principal amount of First Lien Notes pursuant to the New Second Lien Notes Exchange Agreement, as described above. Approximately $76.2 million in aggregate principal amount of Additional New Second Lien Notes were issued in a distribution to certain holders of equity interests in the Parent, of which approximately $68.8 million was issued to the Investors and approximately $7.4 million was issued to the Officer, and approximately $7.3 million aggregate principal amount of Additional New Second Lien Notes were issued to an affiliate of the Investors for cash.

The Additional New Second Lien Notes were issued under the existing New Second Lien Indenture through a private offering exempt from the registration requirements of the Securities Act of 1933, as amended.

At March 31, 2016, the New Second Lien Notes represented an aggregate of $164.4 million of our indebtedness.

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

Second Lien PIK Notes

During fiscal 2014, we issued approximately $94.3 million aggregate principal amount of Second Lien PIK Notes in exchange for an equal aggregate principal amount of Second Lien Notes, pursuant to an exchange agreement (the "Second Lien PIK Notes Exchange Agreement"). The Second Lien PIK Notes were issued under an indenture (the "Second Lien PIK Notes Indenture"), by and among American Media, Inc., the Guarantors and Trustee.


41


During fiscal 2015, in connection with the Merger Agreement, we issued approximately $12.3 million in aggregate principal amount of additional Second Lien PIK Notes (the "Additional Second Lien PIK Notes"). The Additional Second Lien PIK Notes were issued under the Second Lien PIK Notes Indenture, were assigned the same CUSIP number as the outstanding Second Lien PIK Notes and were issued through a private offering exempt from the registration requirements of the Securities Act of 1933, as amended.

The Second Lien PIK Notes were payable in kind at a rate of 10% per annum which totaled $4.8 million and $1.9 million, during fiscal 2015 and 2014, respectively, and was recorded as an increase to the aggregate principal amount of Second Lien PIK Notes outstanding.

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

Debt for Equity Conversion

In September 2014, AMI entered into the debt for equity exchange agreement with the Parent and the Investors, pursuant to which the Investors converted approximately $7.8 million aggregate principal amount of Second Lien Notes and all $113.3 million aggregate principal amount of Second Lien PIK Notes into equity interests in the Parent (the “Conversion”). The Conversion also included the accrued and unpaid interest since the last semi-annual interest payment on June 15, 2014, totaling approximately $2.9 million.

Supplemental Indentures

In August 2014, AMI received consents from the holders of (a) $218.2 million principal amount of the outstanding First Lien Notes to amend the indenture dated as of December 1, 2010 (as such agreement may be amended, restated or supplemented, the “First Lien Notes Indenture”), among 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, 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 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 notes then outstanding.

As a result of receiving the requisite consents, in August 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 including amending the definition of “Change of Control” and permitting the issuance of the Additional Second Lien PIK 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.

In January 2015, we entered into a supplemental indenture (the “2015 Supplemental Indenture”) by and between the Company and Wilmington Trust, National Association, as successor by merger to Wilmington Trust FSB, as trustee and collateral agent (collectively, the “Existing Second Lien Trustee”), to an indenture, dated as of December 22, 2010, by and among the Company, the guarantors party thereto and the Existing Second Lien Trustee (as amended, supplemented or otherwise modified through the date of amendment, the “Existing Second Lien Indenture”). The 2015 Supplemental Indenture contemplates, among other things, the exchange of First Lien Notes for the New Second Lien Notes.


42


In March 2016, the Company received consents from the holders of (a) $266.1 million principal amount of the outstanding First Lien Notes to amend the indenture dated as of December 1, 2010 (as such agreement may be amended, restated or supplemented, the “First Lien Notes Indenture”), among the Company, the Guarantors and the Trustee and (b) $39.0 million principal amount of the outstanding New Second Lien Notes to amend the indenture dated as of January 20, 2015 (as such agreement may be amended, restated or supplemented, the “New Second Lien Notes Indenture” and, together with the First Lien Notes Indenture, the “Indentures”), among the Company, the Guarantors and the Trustee, which in each case represented the requisite consents from holders of at least a majority of the aggregate principal amount of the Senior Secured Notes then outstanding.

As a result of receiving the requisite consents, in March 2016, the Company and the Trustee entered into (a) the Fifth Supplemental Indenture (the “First Lien Notes Supplemental Indenture”) to the First Lien Notes Indenture and (b) the First Supplemental Indenture (the “New Second Lien Notes Supplemental Indenture” and, together with the First Lien Notes Supplemental Indenture, the “Supplemental Indentures”). The Supplemental Indentures amend the First Lien Indenture and the New Second Lien Indenture, as applicable, to, among other things, permit the issuance of the Additional New 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 Indentures governing the Senior Secured Notes impose certain requirements as to future subsidiary guarantors.

As of March 31, 2016, the Company was in compliance with all of the covenants under the indentures governing the Senior Secured Notes.

Covenant Compliance

As discussed above, our Revolving Credit Facility and the indentures governing the Senior Secured Notes contain various restrictive covenants. With regard to our Revolving Credit Facility, the financial covenants are comprised of a first lien leverage ratio, a consolidated leverage rate and an interest coverage ratio.

The first lien leverage ratio covenant is calculated as the Total First Lien Debt to Consolidated EBITDA (each as defined in the Revolving Credit Facility) and must be equal to or less than 3.50 to 1.00 from January 1, 2016 through June 2017, the maturity date of the Revolving Credit Facility. The consolidated leverage ratio covenant is calculated as the Total Debt to Consolidated EBITDA (each as defined in the Revolving Credit Facility) and must be equal to or less than 5.50 to 1.00 from January 1, 2016 through June 2017, the maturity date of the Revolving Credit Facility. The interest coverage ratio covenant is calculated as the Consolidated EBITDA to Cash Interest Expense (each as defined in the Revolving Credit Facility) and must be equal to or greater than 1.50 to 1.00 from January 1, 2016 through June 2017, maturity date of the Revolving Credit Facility.

As of March 31, 2016, the first lien leverage ratio was 3.05 to 1.00, the consolidated leverage ratio was 5.23 to 1.00 and the interest coverage ratio was 2.06 to 1.00 and the Company was in compliance with the covenants under the Revolving Credit Facility and the indentures governing the Senior Second Notes.

Although there can be no assurances, management believes that, based on current expectations (including projected borrowings and repayments under the Revolving Credit Facility and our recent debt initiatives), our operating results for the next twelve months will be sufficient to satisfy the financial covenants under the Revolving Credit Facility. 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 covenants.  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 covenants, we would be in default under the Revolving Credit Facility, which could result in all our debt being accelerated due to cross-default provisions in the indentures governing the Senior Secured Notes.

We have the ability to incur additional debt, subject to limitations imposed by our Revolving Credit Facility and the indentures governing the Senior Secured Notes. Under our Revolving Credit Facility and the indentures governing the Senior Secured 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 5.50 to 1.00.


43


Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures

Adjusted EBITDA, a measure we use to gauge our operating performance, is defined as net income (loss) attributable to the Company plus interest expense, provision (benefit) for income taxes, depreciation and amortization, provision for impairment of intangible assets and goodwill, deferred financing costs and deferred rack costs, adjusted for merger and related transaction(s) costs, restructuring costs and severance, costs related to launches, re-launches or closures of publications and certain other costs. We believe that the inclusion of Adjusted EBITDA is appropriate to evaluate our operating performance compared to our operating plans and/or prior years and to value prospective acquisitions. We also believe that Adjusted EBITDA is helpful in highlighting trends because Adjusted EBITDA excludes the impact of certain items that can differ significantly from company to company, depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments.

Management believes our investors use Adjusted EBITDA as a gauge to measure the performance of their investment in the Company. Management compensates for limitations of using non-GAAP financial measures by using them to supplement GAAP results to provide a more complete understanding of the factors and trends affecting our business than GAAP results alone can provide. Adjusted EBITDA is not a recognized term under GAAP and does not purport to be an alternative to income from continuing operations as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Additionally, Adjusted EBITDA is not intended to be a measure of free cash flow available for management’s discretionary use as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. The presentation of Adjusted EBITDA has limitations as an analytical tool, and it should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Because not all companies use identical calculations, our presentation of Adjusted EBITDA may not be comparable to other similarly titled measures of other companies.

Set forth below is a reconciliation of net income (loss) attributable to American Media, Inc. and subsidiaries to Adjusted EBITDA for fiscal 2016, 2015 and 2014:

 
Fiscal years ended March 31,
(in millions)
2016
 
2015
 
2014
Net income (loss) attributable to American Media, Inc. and subsidiaries
$
17.0

 
$
(27.1
)
 
$
(54.3
)
Add (deduct):
 
 
 
 
 
Interest expense
39.7

 
50.8

 
58.4

Provision (benefit) for income taxes
(36.0
)
 
(31.3
)
 
33.3

Depreciation and amortization
26.5

 
14.9

 
14.2

Impairment of goodwill and intangible assets

 
18.5

 
9.2

Amortization of deferred financing costs
4.0

 
4.0

 
1.7

Amortization of deferred rack costs
5.0

 
5.9

 
6.6

Amortization of short-term racks
8.0

 
8.6

 
8.6

Imputed interest on national distributor advances
2.5

 

 

Merger and related transaction(s) costs

 
4.8

 

Restructuring costs and severance
5.8

 
7.1

 
2.8

Loss on sale of publications

 
2.5

 

Costs related to launches and closures of publications
0.8

 
1.3

 
2.7

Costs related to relaunch of publications

 

 
0.2

Restructuring costs related to divestiture of DSI

 

 
2.8

Adjustment for net losses of DSI

 

 
2.7

AMI share of bad debt related to wholesaler shutdowns
0.7

 
8.4

 
5.1

Investment in new digital strategy

 

 
4.0

Pro forma adjustment related to investment in affiliates

 
0.3

 
1.5

Impact of Superstorm Sandy

 

 
0.2

Other
5.0

 
5.9

 
5.1

Adjusted EBITDA
$
78.9

 
$
74.4

 
$
104.5



44


CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

The following table summarizes our principal contractual obligations as of March 31, 2016:

 
 
Payments due by period
 
 
Less than
1-3
4-5
After 5
(in millions)
Total
1 Year
Years
Years
Years
Long-term debt (1)
$
428.1

$

$
229.5

$
198.6

$

Debt interest (2)
103.7

40.2

45.6

18.0


Mr. Olympia, LLC put option (3)
3.0

3.0




Long-term agreements (4)
195.4

31.6

63.6

53.6

46.6

Operating lease obligations
21.0

2.9

6.2

6.2

5.6

Consulting agreements (5)
29.1

7.0

12.3

9.9


Total contractual cash obligations (6)
$
780.2

$
84.7

$
357.2

$
286.3

$
52.1


(1)
 
Includes principal payments on the Revolving Credit Facility and Senior Secured Notes. Excludes the original issue discount on the New Second Lien Notes totaling approximately $34.1 million. 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.
(2)
 
Includes interest payments on both fixed and variable rate obligations and the commitment fee on the unused portion of the Revolving Credit Facility. The interest to be paid on the variable rate obligation is affected by changes in our applicable borrowing rate. Excludes the interest expense related to the amortization of the original issue discount on the New Second Lien Notes. 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 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 $0.2 million cannot be reasonably estimated.

SEASONALITY AND QUARTERLY FLUCTUATIONS

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

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

OFF-BALANCE SHEET FINANCING

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


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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 Accounting 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 exists, delivery has occurred, the sales price is 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.”


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The Company did not record any impairment charges during fiscal 2016. The Company continues to evaluate goodwill and other identified intangible assets for impairment. Goodwill and other identified intangible assets are material components of the Company's financial statements and impairment charges to the Company's goodwill or other identified intangible assets in future periods could be material to the Company's results of operations.

During an evaluation of goodwill and other identified intangible assets during fiscal 2015 (at September 30, 2014), the Company determined that indicators were present in certain reporting units which would suggest the fair value of the reporting unit may have declined below the carrying value. This decline was primarily due to the continuing softness in the consumer magazine sector, which impacts consumer and advertising 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 during fiscal 2015 for certain reporting units in accordance with FASB Accounting Standards Codification (“ASC”) Topic No. 350, “Goodwill and Other Intangible Assets” (“ASC 350”). Impairment testing for goodwill is a two-step process. The first step compares the fair value of the reporting unit to its carrying value, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step of the test is performed to measure the amount of the impairment charge, if any. The second step compares the implied fair value of the reporting unit's goodwill with the carrying value of that goodwill and an impairment charge is recorded for the difference. Impairment testing for indefinite lived intangible assets, consisting of tradenames, compares the fair value of the tradename to the carrying value and an impairment charge is recorded for any excess carrying value over fair value.

The evaluation resulted in the carrying value of goodwill and tradenames for certain reporting units to exceed the estimated fair value. As a result, the Company recorded a pre-tax non-cash impairment charge of $8.9 million and $8.5 million to reduce the carrying value of goodwill and tradenames, respectively, during fiscal 2015.

As of March 31, 2016, we identified three reporting units with an excess fair value over carrying value of less than 25%. As of March 31, 2016, National Enquirer, Flex and Muscle & Fitness reporting units had goodwill balances of $59.0 million, $5.4 million and $13.4 million, respectively. For all other reporting units, the fair value is substantially in excess of carrying value as of March 31, 2016. While historical performance and current expectations have resulted in fair values of the reporting units in excess of carrying values, if our assumptions are not realized, it is possible that in the future additional impairment charges may 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.


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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.

The Company did not record any impairment charges for long-lived tangible and intangible assets during fiscal 2016, 2015 and 2014.

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

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

Recently Issued Accounting Pronouncements

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


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

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

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

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest, Simplifying the Presentation of Debt Issuance Costs (Subtopic 835-30) ("ASU 2015-03"), which requires the presentation of debt issuance costs to be reflected as a reduction from the face amount of the related debt, with amortization recorded as interest expense, rather than recording as a deferred asset. The guidance is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2015, and requires retrospective application. The Company does not expect the adoption of this guidance to have a significant impact on the consolidated financial position, results of operations or cash flows, although it will change the financial statement classification of the deferred financing cost. As of March 31, 2016 and 2015, the Company had $8.1 million and $6.4 million of net deferred financing costs, respectively, included on the consolidated balance sheets. Under the new guidance, the net deferred financing costs would offset the carrying amount of the respective debt on t