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AMERICAN MEDIA INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) ORGANIZATION OF INFORMATION
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) was prepared to provide the reader with a view and
perspective of our business through the eyes of management and should be read in
conjunction with our Exchange Offer Registration Statement and the unaudited
condensed consolidated financial statements and the accompanying notes included
elsewhere in this Quarterly Report. In addition to historical data, this
discussion contains forward-looking statements about our business, operations
and financial performance based on current expectations that involve risks,
uncertainties and assumptions. Our actual results may differ materially from
those discussed in the forward-looking statements as a result of various
factors, including but not limited to those discussed in "Cautionary Statements
Regarding Forward-Looking Information" and "Risk Factors" included in this
Quarterly Report and the Exchange Offer Registration Statement. Our MD&A is
presented in the following sections:
• Executive Summary
• Current Developments and Management Action Plans
• Results of Operations
• Operating Segment Results
• Liquidity and Capital Resources
• Contractual Obligations
• Off-Balance Sheet Financing
• Application of Critical Accounting Estimates
• Recently Adopted and Recently Issued Accounting Pronouncements
EXECUTIVE SUMMARY
We are a leading content centric media company specializing in the fields of
celebrity journalism and active life style. Our well known brands include, but
are not limited to, National Enquirer, Star, OK! Weekly, Globe, National
Examiner, Shape, Fit Pregnancy, Natural Health, Men's Fitness, Muscle & Fitness
and Flex. We distribute our content across multiple platforms including print,
digital, mobile, tablets and video. We circulate our print publications
utilizing single copy and subscription sales using the U.S. Postal Service,
national distributors, wholesalers and retailers. Total circulation of our print
publications with a frequency of six or more times per year, were approximately
6.0 million copies per issue during the nine months ended December 31, 2012.
Our operating revenue is derived from the sale of our media content through
print and digital platforms (including websites, mobile websites, tablets and
video), as well as from advertisements placed within those platforms. Our print
circulation revenue represented approximately 62% of our operating revenue for
the nine months ended December 31, 2012 and single copy sales accounted for
approximately 78% of the print circulation revenue with the remaining 22% coming
from subscription sales. Our print and digital advertising revenue, generated by
national advertisers represented approximately 27% and 1%, respectively, of our
operating revenue for the nine months ended December 31, 2012.
Our primary operating expenses consist of production, distribution, circulation
and editorial as well as selling, general and administrative. The largest
components of our operating expenses are for production of our printed
magazines, which includes costs for printing and paper. Distribution and
circulation expenses primarily consist of postage and other costs associated
with fulfilling subscriptions and newsstand transportation. Editorial expenses
represent costs associated with manuscripts, photographs and related salaries.
Our financial performance depends, in large part, on varying conditions in the
markets we serve. Demand in these markets tends to fluctuate in response to
overall economic conditions and current events. Economic downturns in the
markets we serve generally result in reductions in revenue as a result of lower
consumer spending which can lead to a reduction in advertising revenue.
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References to our third fiscal quarter (e.g. "third fiscal quarter of 2013")
refer to our fiscal quarter ended December 31st of the applicable fiscal year.
Each fiscal year ends on March 31st.
CURRENT DEVELOPMENTS AND MANAGEMENT ACTION PLANS
Current Developments
During the nine months ended December 31, 2012, we continued our transformation
into a content centric media group by expanding the availability of our print
content through a number of different digital platforms (e.g. websites, mobile
websites, digital applications and social media).
We continue to develop our Shape.com website, our tablet editions of Shape
magazine and the Shape wireless application protocol ("WAP") site for all mobile
platforms. We are partnering with other websites such as Yahoo's Shine and She
Knows and leveraging social media such as Facebook, Twitter and Pinterest to
further promote the Shape brand and distribute our content. During the nine
months ended December 31, 2012, digital advertising revenue for Shape increased
40% over the nine months ended December 31, 2011 and currently represents 15% of
Shape's total revenue. Accordingly, we believe the audiences' continued response
to the digital distribution of Shape content has been very positive.
We are continuing our innovation of single-subject, single-sponsored digital
magazines or "digi-mags" for both Apple and Android operating systems. With the
continued successes achieved in the digital distribution of Shape's content, we
are continuing to expand our digital distribution platform across our other
well-known brands with the launch of "digi-mags" for Men's Fitness, an
e-commerce website for Muscle & Fitness and building out our other websites, as
well as launching digital editions for all our brands on the Apple Newsstand,
Zinio, Amazon Kindle, Barnes & Noble's Nook and Google Newsstand. As of
December 31, 2012, approximately 351,300, or 11% of our total paid subscription
base is delivered digitally. Our digital delivery of 11% is estimated to be
twice that of the anticipated industry level of 5%.
In August 2012, the Company filed a Registration Statement with the Securities
and Exchange Commission (the "SEC") to offer to exchange (the "Exchange Offer")
up to $365.0 million of the 11.5% senior notes due December 2017 (the "Exchange
Notes"), which were registered under the Securities Act of 1933, as amended (the
"Securities Act"), for up to $365.0 million of our 11.5% first lien notes due
December 2017 (the "First Lien Notes"), which we issued in December 2010. On
October 19, 2012, the Registration Statement, as amended (the "Exchange Offer
Registration Statement"), was declared effective by the SEC and the Company
commenced the Exchange Offer for the First Lien Notes. The Company had been in
registration default since February 2012 and the interest on the First Lien
Notes increased 0.25% per annum for each 90 day period until the registration
default was cured. The registration default was cured upon the completion of the
Exchange Offer on November 20, 2012 and the Company incurred approximately $1.3
million in additional interest due to the registration default. See Liquidity
and Capital Resources for further discussion regarding the First Lien Notes, the
registration rights agreement and the registration default.
In late October 2012, Superstorm Sandy (the "Storm") impacted the Mid-Atlantic
and Northeast regions of the United States, causing extensive property damage
and power outages. We sustained property losses, incurred extra expenses and
realized some modest business interruption and are in the process of filing a
claim with our insurance carriers.
During the fiscal quarter ended December 31, 2012, we recorded an estimated
pre-tax non-cash impairment charge of $54.5 million to reduce the carrying value
of goodwill and tradenames in certain reporting units. We are currently
finalizing the second step of the goodwill impairment test. As a result, the
impairment charge related to goodwill is an estimate and was recorded since the
amount of the impairment charge was both probable and reasonably estimable as of
December 31, 2012. We will adjust the amount of the goodwill impairment charge,
as necessary, based upon finalizing the valuation during the fourth fiscal
quarter of 2013.
In January 2013, we entered into a partnership with USA Today to collaborate on
the development, publication and distribution of certain special interest
publications (the "Publications") that will be published under the USA Today
brand. We will have a non-exclusive right to use and display the USA Today
trademarks in connection with the publication, distribution and promotion of the
Publications.
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Management Action Plans for Revenue Enhancement and Cost Savings
During the nine months ended December 31, 2012, we developed and implemented
management action plans that we expect to result in revenue enhancements of $7.9
million and operating income of $2.8 million from the publishing of 26
additional pop iconic special issues in the Celebrity Brands segment. In
addition to the revenue enhancements, we developed and implemented management
action plans that we expect to result in $13.2 million of cost savings in fiscal
year ended March 31, 2013 (the "2013 Management Action Plans"). The expense
improvements were primarily in the manufacturing area related to the
renegotiation and extension of our RR Donnelly printing contract, print order
efficiency plan, paper rate savings based on our in-house purchasing strategy,
reduced book sizes and reduced employee related expenses.
During fiscal year 2012, we developed and implemented management action plans
totaling $31.7 million of cost savings in fiscal year 2012 (the "2012 Management
Action Plans"). The expense reductions were primarily in the production area
related to the renegotiation and extension of our RR Donnelly printing contract,
print order reductions to increase efficiencies for all of our publications,
reduced book sizes to be comparable to our competitive set, reduced general and
administrative and employee related expenses, as well as paper rate savings
based on our in-house purchasing strategy. We will continue to receive cost
savings from the 2012 Management Action Plans throughout fiscal year 2013 and
beyond.
Reference to Management Action Plans refers to the 2013 Management Action Plans
and the 2012 Management Action Plans, collectively.
RESULTS OF OPERATIONS
Three Months Ended December 31, 2012 compared to the Three Months Ended
December 31, 2011
Operating Revenue
Our circulation revenue represented approximately 66% and 64% of our operating
revenue during the three months ended December 31, 2012 and 2011, respectively.
Single copy sales accounted for approximately 78% and 77% of such circulation
revenue during the three months ended December 31, 2012 and 2011, respectively.
The remainder of circulation revenues was from subscription sales.
Our advertising revenues are generated by national advertisers, including
packaged goods, sports nutrition products, automotive, entertainment,
pharmaceutical, sports apparel, beauty, cosmetics, fashion and direct response.
Our print advertising revenues accounted for approximately 24% and 26% of our
total operating revenues during the three months ended December 31, 2012 and
2011, respectively. Our digital advertising revenues accounted for approximately
2% of our total operating revenue during the three months ended December 31,
2012 and 2011.
Total operating revenue decreased $2.5 million, or 3%, primarily due to a $2.2
million, or 9%, decrease in advertising revenue. This decrease is a direct
result of the impact of the Storm which caused ad agencies to close for several
weeks, which delayed media planning and cancellation of many print media
commitments.
Operating Expenses
Total operating expenses, before the $54.5 million non-cash charge for
impairment of goodwill and tradenames, decreased $3.2 million, or 4%, due to
planned expense reductions pursuant to the 2013 Management Action Plans in the
following areas: $3.2 million in production, $2.4 million in distribution and
circulation expenses and $0.1 million in editorial expenses. These reductions
have been partially offset by an increase of $2.0 million in selling, general
and administrative expenses, primarily attributable to our investment in our
digital plan, coupled with duplicative expenses incurred due to the Storm, and
the $0.4 million increase in depreciation and amortization.
Interest Expense
Interest expense increased $0.8 million, or 6%, primarily due to the higher
interest rates on the First Lien Notes resulting from the registration default
during the three months ended December 31, 2012.
Amortization of Deferred Debt Costs
Amortization of deferred debt costs increased during the three months ended
December 31, 2012 as compared to the same period of our prior fiscal year due to
higher amortization costs resulting from the use of the effective interest
method.
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Income Taxes
We recorded an income tax benefit of $0.1 million and $0.7 million during the
three months ended December 31, 2012 and 2011, respectively. The decrease in
income tax benefit is primarily due to a lower effective tax rate which is a
direct result of the non-cash charge for impairment of goodwill and tradenames
during the three months ended December 31, 2012.
Net Loss
The $55.0 million increase in net loss is primarily attributable to the $53.7
million decrease in operating income. Operating income decreased due to the
$51.3 million increase in operating expenses, partially offset by the $2.5
million decrease in operating revenue, each as discussed above. Operating
expenses increased due to the $54.5 million non-cash charge for impairment of
goodwill and tradenames.
Nine Months Ended December 31, 2012 compared to the Nine Months Ended
December 31, 2011
Operating Revenue
Our circulation revenue represented approximately 62% and 59% of our operating
revenue during the nine months ended December 31, 2012 and 2011, respectively.
Single copy sales accounted for approximately 78% and 77% of such circulation
revenue during the nine months ended December 31, 2012 and 2011, respectively.
The remainder of circulation revenues was from subscription sales.
Our advertising revenues are generated by national advertisers, including
packaged goods, sports nutrition products, automotive, entertainment,
pharmaceutical, sports apparel, beauty, cosmetics, fashion and direct response.
Our print advertising revenues accounted for approximately 27% and 31% of our
total operating revenues during the nine months ended December 31, 2012 and
2011, respectively. Our digital advertising revenues accounted for approximately
1% of our total operating revenue during the nine months ended December 31, 2012
and 2011.
Total operating revenue decreased $23.5 million, or 8%, primarily due to a $15.7
million, or 17%, reduction in advertising revenue. In addition, circulation
revenue declined $4.5 million, or 3%, and other revenues decreased $3.3 million,
or 13%.
Advertising revenue declined due to reduced ad spending by beauty, packaged
goods and pharmaceutical advertisers, primarily in Shape and Star magazines.
During the nine months ended December 31, 2012, these print advertisers shifted
their advertising dollars from print to broadcast for the 2012 Summer Olympics.
These advertisers' ad agencies were impacted by the Storm, which caused media
planning delays and cancellation of print media commitments. We are currently
experiencing the return of these advertisers in Shape and Star for the fourth
fiscal quarter of 2013.
Circulation revenue declined primarily due to the continued newsstand decline in
the celebrity sector and continued softness in the U.S. economy, which impacts
demand from our customers, coupled with the discontinuance of certain titles.
Operating Expenses
Total operating expenses, before the $54.5 million non-cash charge for
impairment of goodwill and tradenames, decreased $16.6 million, or (7)%, due to
planned expense reductions pursuant to the 2013 Management Action Plans in the
following areas: $11.5 million in production, $8.5 million in distribution and
circulation and $1.0 million in editorial expenses. These decreases have been
partially offset by an increase of $2.9 million in selling, general and
administrative expenses, primarily attributable to a $1.3 million bad debt
expense related to a single advertiser, our continued investment in our digital
strategy and the $1.5 million increase in depreciation and amortization.
Interest Expense
Interest expense increased $1.2 million, or 3%, primarily due to the higher
interest rates on the First Lien Notes resulting from the registration default
during the nine months ended December 31, 2012.
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Amortization of Deferred Debt Costs
Amortization of deferred debt costs declined due to a lower amortization costs
during the nine months ended December 31, 2012 as a result of the redemption of
senior secured notes during fiscal year 2012.
Income Taxes
We recorded an income tax benefit of $1.6 million and $0.3 million during the
nine months ended December 31, 2012 and 2011, respectively. The increase is due
to a $61.3 million increase in net loss before income taxes.
Net Loss
The $60.0 million increase in net loss is primarily attributable to reduced
operating income of $61.4 million partially offset by the $0.2 million decrease
in other expenses and the $1.3 million increase in income tax benefit. Operating
income decreased due to the $23.5 million reduction in operating revenue coupled
with the $38.0 million increase in operating expenses, as discussed above.
Operating expenses increased due to the $54.5 million non-cash charge for
impairment of goodwill and tradenames.
OPERATING SEGMENT RESULTS
Our reportable operating segments consist of the following: Celebrity Brands,
Women's Active Lifestyle, Men's Active Lifestyle, Publishing Services and
Corporate and Other. This reporting structure is organized according to the
markets each segment serves and allows management to focus its efforts on
providing the best content to a wide range of consumers. The Celebrity Brands
segments consists of a group of media content platforms primarily dedicated to
news covering celebrities, musicians, movie and television stars and editorial
content such as crime, health, fashion, beauty and accessories. The Women's
Active Lifestyle segment consists of a group of media content platforms that
provide information to women on the latest exercise techniques, health and
nutrition, as well as the latest beauty and fashion trends. The Men's Active
Lifestyle segment consists of a group of media content platforms that provide
information to men on the latest exercise, physique training and professional
body building techniques, health and nutrition. This segment also includes the
Mr. Olympia event. The Publishing Services segment includes services provided to
publishing and non-publishing clients such as placement and monitoring of
supermarket racks, marketing and merchandising of magazines and strategic
management services for publishers including back office financial functions.
The Corporate and Other segment primarily includes the international licensing
of certain health and fitness publications, photo syndication for all our
magazines as well as corporate overhead.
We use operating income (loss) as a primary basis for the chief operating
decision maker to evaluate the performance of each of our operating segments and
present operating income (loss) before impairment of goodwill and intangible
assets to provide a consistent and comparable measure of our performance between
periods. Management uses operating income (loss) before impairment of goodwill
and intangible assets when communicating financial results to the board of
directors, stockholders, debt holders and investors as well as when determining
performance goals for executive compensation. Management believes this non-GAAP
measure, although not a substitute for GAAP, improves comparability. Management
also believes our stockholders, debt holders and investors use this measure as a
gauge to assess the performance of their investment in the Company. We prepared
the financial results of our operating segments on a basis that is consistent
with the manner in which we internally disaggregate financial information to
assist in making internal operating decisions. Our calculations of operating
income (loss) herein may be different from the calculations used by other
companies, therefore comparability may be limited. The accounting policies of
our operating segments are the same as those applied in our consolidated
financial statements included in the Exchange Offer Registration Statement.
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Three Months Ended December 31, 2012 compared to the Three Months Ended
December 31, 2011
The following information has been derived from the accompanying financial
statements for three months ended December 31, 2012 and 2011:
Percent change for the
three months ended
Three Months Ended December 31,
December 31, 2012 December 31, 2011 2012 vs. 2011
Operating Income Operating
Operating (Loss) before Operating Operating Income
in thousands Revenues Percent of Total Impairment Revenues Percent of Total Income (Loss) Operating Revenues (Loss)
Celebrity Brands $ 57,653 68 % $ 21,124 $ 56,631 65 % $ 16,285 2 % 30 %
Women's Active
Lifestyle 8,707 10 % (2,134 ) 11,485 13 % (533 ) (24 )% 300 %
Men's Active
Lifestyle 14,227 17 % 3,895 13,707 16 % 4,457 4 % (13 )%
Publishing Services 6,503 8 % 1,184 7,148 8 % 1,048 (9 )% 13 %
Corporate and other 135 - % (11,784 ) 420 - % (9,750 ) (68 )% 21 %
Intersegment
eliminations (1,906 ) (2 )% - (1,615 ) (2 )% - 18 % - %
Total $ 85,319 100 % $ 12,285 $ 87,776 100 % $ 11,507 (3 )% 7 %
Total operating revenue decreased $2.5 million, or 3%, primarily due to reduced
advertising investment in the Women's Active Lifestyle segment which was
partially offset by higher advertising revenue in the Men's Active Lifestyle
segment and increased newsstand sales in the Celebrity Brands segment.
Operating income (loss) before impairment excludes the pre-tax non-cash
impairment charge of $42.8 million, $3.9 million and $7.8 million for the
Celebrity Brands segment goodwill, Women's Active Lifestyle segment tradenames
and Men's Active Lifestyle segment goodwill and tradenames, respectively. We are
currently finalizing the second step of the goodwill impairment test. As a
result, the impairment charge related to goodwill is an estimate and was
recorded since the amount of the impairment charge was both probable and
reasonably estimable as of December 31, 2012. We will adjust the amount of the
impairment charge, as necessary, based upon finalizing the valuation during the
fourth fiscal quarter of 2013.
Celebrity Brands Segment
The Celebrity Brands segment comprised approximately 68% and 65% of our
consolidated operating revenue for the three months ended December 31, 2012 and
2011, respectively, and consists of a group of media content platforms primarily
dedicated to news covering celebrities, musicians, movie and television stars
and editorial content such as crime, health, fashion, beauty and accessories.
This segment consists of the following brands in print and digital:
• National Enquirer, a weekly, hard news, general interest publication
dedicated to celebrities, investigative reporting, human interest and
other lifestyle topics such as crime, health, fashion and beauty;
• Star, a weekly, celebrity breaking, news-based, glossy magazine dedicated
to covering the younger stars of movies, television and music. Star's
editorial content also incorporates fashion, beauty and accessories;
• OK! Weekly, a weekly, celebrity friendly, news-based, glossy magazine
dedicated to covering the stars of movies, television and music. OK!'s
editorial content also incorporates fashion, beauty and accessories;
OKMagazine.com is a digital site with a design modeled after the
successful Pinterest.com. In addition to celebrity news and gossip, this
site differentiates itself through its use of on-line communities and
social media to encourage a dialog between users, including their
editorial point of view;
• Globe, a weekly tabloid which 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;
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• National Examiner, a weekly tabloid that presents editorial content
consisting of celebrity and human-interest stories, differentiating it
from the other titles through its upbeat positioning as the source for "gossip, contests, women's service and good news" for an older tabloid
audience.
• Soap Opera Digest, a weekly magazine that provides behind the scenes scoop
and breaking news to passionate soap fans every week;
• Country Weekly, a weekly magazine that for over 17 years has been the
authority on the music and lifestyle of country's biggest stars; CountryWeekly.com is a companion site that focuses on music and news.
The reporting and efforts of the editorial staffs of each of the brands included
in the Celebrity Brands segment are aggregated and leveraged by Radaronline.com,
a joint venture owned 50% by us, but not included in our consolidated results.
Operating Revenue
Total operating revenue in the Celebrity Brands segment was $57.7 million for
the three months ended December 31, 2012, representing an increase of $1.0
million, or 2%. Circulation revenue increased $1.5 million during three months
ended December 31, 2012, of which $3.2 million was attributable to our 2013
Management Action Plans to publish iconic special issues, partially offset by
certain discontinued titles ($1.7 million). In addition, the consumer ad market
was down 8%, compounded by the Storm, resulting in an advertising revenue
decline of $0.6 million.
Operating Income
Operating income before impairment in the Celebrity Brands segment increased
during the three months ended December 31, 2012 from prior year by $4.8 million,
or 30%, to $21.1 million, primarily attributable to the revenue increase as
described above and planned expense reductions resulting from the implementation
of our Management Action Plans.
Women's Active Lifestyle Segment
The Women's Active Lifestyle segment represented 10% and 13% of our consolidated
operating revenue for the three months ended December 31, 2012 and 2011,
respectively. This group of media content platforms provide information to women
on the latest exercise techniques, health and nutrition, as well as the latest
beauty and fashion trends. This segment consists of the production and sale of
the following brands in print and digital:
• Shape, a publication that provides women's services information on the
cutting edge of physical fitness, nutrition, health, psychology and other
inspirational topics to help women lead a healthier lifestyle, and also
offers extensive beauty and fashion coverage; Shape.com mirrors the
magazine's editorial point of view but features daily coverage of what
today's women need to "shape their lives;"
• Fit Pregnancy, a bi-monthly publication that delivers authoritative
information on health, fashion, food and fitness to women during pregnancy
and the two-year postpartum period; FitPregnancy.com contains daily news
and updates on everything expectant mothers need to know and
• Natural Health, a leading wellness magazine offering readers practical
information to benefit from the latest scientific knowledge and
advancements in the fields of natural health, food, beauty, pets, exercise
and advice to improve fitness and the environment; NaturalHealthMag.com is
a companion site to the magazine with a focus on the latest news and
updates in the wellness category.
Operating Revenue
Total operating revenue in the Women's Active Lifestyle segment was $8.7 million
during the three months ended December 31, 2012, a decrease of $2.8 million, or
24%, from prior year. This decrease was primarily due to the consumer ad market
being down 8% caused by a shift of advertisers, such as Procter & Gamble, Coca
Cola and Kraft Foods, from print to broadcast for the 2012 Summer Olympics and
the Storm, which impacted Shape magazine negatively by $2.9 million in the third
fiscal quarter of 2013.
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Operating Loss
Operating loss before impairment in the Women's Active Lifestyle segment
increased during the three months ended December 31, 2012 from prior year by
$1.6 million to $2.1 million. This increase in operating loss was primarily
attributable to Shape magazine as described above. This decline was partially
offset by the implementation of our Management Action Plans, which reduced total
operating expenses by approximately $1.2 million.
Men's Active Lifestyle Segment
The Men's Active Lifestyle segment represents 17% and 16% of our consolidated
operating revenue for the three months ended December 31, 2012 and 2011,
respectively. This group of media content platforms provide information to men,
18 to 34 years old, on the latest exercise, physique training and professional
body building techniques, health and nutrition. This segment also includes the
Mr. Olympia event and consists of the production and sale of the following
brands in print and digital:
• Men's Fitness, a health and fitness magazine for men 18-34 years old with
active lifestyles that promotes a multi-training approach towards exercise
and nutrition, while offering educational information and advice in the
areas of career, relationships, fashion and sports; Men'sFitness.com
provides everything for every man in terms of a healthy and fit lifestyle;
• Muscle & Fitness, a monthly 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, as well as hosting an on-line store for users to buy the products
they see on the website;
• Flex, a monthly 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 on-line coverage of all the major
bodybuilding competitions, as well as training videos with today's top
bodybuilders.
• Muscle & Fitness e-commerce, a store selling nutritional supplements
supported by Muscle & Fitness magazine;
• Mr. Olympia, a four-day event held in September in Las Vegas, Nevada that
appeals to bodybuilding and fitness enthusiasts from around the world;
includes a health and fitness expo with numerous activities, merchandising
opportunities and culminates with the most prestigious and largest event
in bodybuilding and fitness, the Mr. Olympia contest.
• Weider UK, a wholly owned subsidiary, publishes Muscle & Fitness and Flex
in 17 markets such as the United Kingdom, France, Italy, Germany, Holland
and Australia. Each market edition is in a local language with local
content and some information from the U.S. editions. Each market also
operates websites for these brands.
Operating Revenue
Total operating revenue in the Men's Active Lifestyle segment was $14.2 million
for the three months ended December 31, 2012, an increase of $0.5 million, or
4%, from prior year. This increase was attributable to our integrated
advertising initiatives, in both print and digital resulting in an increase in
operating revenue of $0.9 million. This was partially offset by a shortfall in
newsstand sales of $0.2 million due to a 10% decline in total newsstand sales
for the publishing industry.
Operating Income
Operating income before impairment in the Men's Active Lifestyle segment
decreased during the three months ended December 31, 2012 from prior year by
$0.6 million, or 13%, to $3.9 million. This decrease was attributable to the
$1.1 million increase in operating expenses primarily due to our investment in
digital as we continue to implement our digital strategy, which was partially
offset by the $0.5 million revenue increase as described above.
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Publishing Services Segment
The Publishing Services segment was 8% of our consolidated operating revenue for
the three months ended December 31, 2012 and 2011. These revenues represent
services provided to publishing and non-publishing clients such as placement and
monitoring of supermarket racks, marketing and merchandising of magazines and
strategic management services for publishers including back office financial
functions. This segment consists of the following services provided to
publishing and non-publishing clients:
• marketing, in-store merchandising and information gathering in Walmart,
Kroger and the other top six retailers;
• placement and monitoring of publications at the retail level, merchandising displays and reporting quantity of product in major retail
and supermarket chains to our publishing and non-publishing clients;
• print and digital advertising sales and strategic management direction in
the following areas: manufacturing, subscription circulation, logistics,
event marketing and full back office financial functions.
Operating Revenue
Total operating revenue in the Publishing Services segment was $4.6 million (net
of intersegment eliminations) for the three months ended December 31, 2012,
representing a decline of $0.9 million, or 17%, from prior year. This shortfall
was primarily attributable to a 10% decline in newsstand sales for the
publishing industry, which caused the revenue shortfall ($0.5 million).
Operating Income
Operating income in the Publishing Services segment increased during the three
months ended December 31, 2012 from prior year by $0.1 million to $1.2 million.
This increase was primarily due to the implementation of the Management Action
Plans, which reduced operating expenses approximately $0.8 million.
Corporate and Other Segment
The Corporate and Other segment does not represent a significant portion of our
consolidated operating revenue for the three months ended December 31, 2012 and
2011. This segment includes the international licensing of certain health and
fitness publications, photo syndication for all our media content platforms as
well as corporate overhead. Corporate overhead expenses are not allocated to
other segments. This includes corporate executives, production, circulation,
information technology, accounting, legal, human resources, business development
and administration department costs.
Operating Revenue
Total operating revenue in the Corporate and Other segment decreased $0.3
million, or 68%, during the three months ended December 31, 2012 when compared
to the prior year. This decrease is primarily due to the inclusion of special
issues published during the three months ended December 31, 2011 in the
Corporate and Other segment. During the three months ended December 31, 2012,
all special issues have been included in the operating segment of the parent
magazines.
Operating Loss
Total operating loss increased by $2.0 million, or 21%, to $11.8 million during
the three months ended December 31, 2012. This increase was attributable to the
$0.3 million decline in operating revenue coupled with a $1.8 million increase
in operating expenses. The increase in expenses were primarily due to severance
charges related to the reorganization of our digital operations of $0.4 million,
depreciation expense of $0.4 million and duplicative expenses incurred due to
the Storm of $0.8 million.
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Nine Months Ended December 31, 2012 compared to the Nine Months Ended
December 31, 2011
The following information has been derived from the accompanying financial
statements for nine months ended December 31, 2012 and 2011:
Percent change for the
nine months ended
Nine Months Ended December 31, 2012
December 31, 2012 December 31, 2011 2012 vs. 2011
Operating Income Operating
Operating (Loss) before Operating Operating Income
in thousands Revenues Percent of Total Impairment Revenues Percent of Total Income (Loss) Operating Revenues (Loss)
Celebrity Brands $ 167,283 64 % $ 58,105 $ 172,292 60 % $ 50,640 (3 )% 15 %
Women's Active
Lifestyle 35,594 14 % 956 47,978 17 % 8,509 (26 )% (89 )%
Men's Active
Lifestyle 45,294 17 % 12,994 45,980 16 % 14,453 (1 )% (10 )%
Publishing
Services 19,272 7 % 2,878 22,033 8 % 2,723 (13 )% 6 %
Corporate and
other 661 - % (36,805 ) 2,689 1 % (31,294 ) (75 )% 18 %
Intersegment
eliminations (5,675 ) (2 )% - (5,068 ) (2 )% - 12 % - %
Total $ 262,429 100 % $ 38,128 $ 285,904 100 % $ 45,031 (8 )% (15 )%
Total operating revenue decreased $23.5 million, or 8%, primarily due to reduced
advertising investment in the Women's Active Lifestyle segment, coupled with a
10% industry wide decline in newsstand sales, which impacted the Celebrity
Brands segment and Publishing Services segment.
Operating income (loss) before impairment excludes the pre-tax non-cash
impairment charge of $42.8 million, $3.9 million and $7.8 million for the
Celebrity Brands segment goodwill, Women's Active Lifestyle segment tradenames
and Men's Active Lifestyle segment goodwill and tradenames, respectively. We are
currently finalizing the second step of the goodwill impairment test. As a
result, the impairment charge related to goodwill is an estimate and was
recorded since the amount of the impairment charge was both probable and
reasonably estimable as of December 31, 2012. We will adjust the amount of the
impairment charge, as necessary, based upon finalizing the valuation during the
fourth fiscal quarter of 2013.
Celebrity Brands Segment
The Celebrity Brands segment comprises approximately 64% and 60% of our
consolidated operating revenue for the nine months ended December 31, 2012 and
2011, respectively.
Operating Revenue
Total operating revenue in the Celebrity Brands segment was $167.3 million for
the nine months ended December 31, 2012, representing a decrease of $5.0
million, or 3%. Circulation revenue decreased $7.6 million during the nine
months ended December 31, 2012 of which $4.7 million was due to the
discontinuation of certain titles and $3.0 million was due to the 10% decline in
overall newsstand sales for the publishing industry. Advertising revenue
declined $3.7 million due to the consumer magazine sector being down 8%, as well
as the impact of the Storm.
These decreases have been partially offset by an increase in operating revenue
of $6.3 million during the nine months ended December 31, 2012 as compared to
the same period of prior year due to the acquisition of OK! Weekly in June 2011.
Operating Income
Operating income before impairment in the Celebrity Brands segment increased
during the nine months ended December 31, 2012 from prior year by $7.5 million,
or 15%, to $58.1 million, primarily due to the acquisition of OK! Weekly and
planned expense reductions resulting from the implementation of our Management
Action Plans, partially offset by the revenue decline discussed above.
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Women's Active Lifestyle Segment
The Women's Active Lifestyle segment represented 14% and 17% of our consolidated
operating revenue for the nine months ended December 31, 2012 and 2011,
respectively.
Operating Revenue
Total operating revenue in the Women's Active Lifestyle segment was $35.6
million during the nine months ended December 31, 2012, a decrease of $12.4
million, or 26%, from prior year. We reduced the frequency of Shape magazine, to
match our competitors' schedules, from 12 time per year to 10 time per year,
resulting in one less issue, or $4.0 million, which was partially offset by a
200% growth in digital traffic for Shape.com, or $0.9 million. The remaining
decrease is due to the consumer ad market being down 8% caused by a shift of
advertisers, such as Procter & Gamble, Coca Cola and Kraft Foods, from print to
broadcast for the 2012 Summer Olympics and the Storm, which negatively impacted
advertising revenue by $9.5 million primarily for Shape magazine.
Operating Income
Operating income before impairment in the Women's Active Lifestyle segment
decreased during the nine months ended December 31, 2012 from prior year by $7.6
million, or 89%, to $1.0 million. This decline was primarily attributable to
Shape magazine as described above. This was partially offset by the
implementation of our Management Action Plans, which reduced total operating
expenses by approximately $4.8 million.
Men's Active Lifestyle Segment
The Men's Active Lifestyle segment represented 17% and 16% of our consolidated
operating revenue for the nine months ended December 31, 2012 and 2011,
respectively.
Operating Revenue
Total operating revenue in the Men's Active Lifestyle segment was $45.3 million
for the nine months ended December 31, 2012, a decrease of $0.7 million, or 1%,
from prior year. This shortfall was caused by the 8% decline in the ad market
for consumer magazines which negatively impacted advertising revenue by $1.6
million, coupled with a $0.8 million newsstand shortfall caused by the newsstand
industry decline of 10%. This was partially offset by our digital initiatives
and the success of the 2012 Mr. Olympia event which resulted in an increase in
operating revenue of $1.5 million.
Operating Income
Operating income before impairment in the Men's Active Lifestyle segment
decreased during the nine months ended December 31, 2012 from prior year by $1.5
million, or 10%, to $13.0 million. This shortfall was attributable to the
revenue declines as explained above coupled with an increase in operating
expenses of $0.8 million. Operating expenses increased primarily due to our
investment in digital as we continue to implement our digital strategy.
Publishing Services Segment
The Publishing Services segment was 7% and 8% of our consolidated operating
revenue for the nine months ended December 31, 2012 and 2011, respectively.
Operating Revenue
Total operating revenue in the Publishing Services segment was $13.6 million
(net of intersegment eliminations) for the nine months ended December 31, 2012,
representing a decrease of $3.4 million, or 20%, from prior year. This shortfall
was primarily attributable to the 10% industry wide decline causing a shortfall
of publishing services which negatively impacted revenue by approximately $2.8
million.
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Operating Income
Operating income in the Publishing Services segment increased during the nine
months ended December 31, 2012 from prior year by 6%, to $2.9 million. This
increase was primarily caused by reduced operating expenses as a result of the
implementation of our Management Action Plans, which more than offset the
revenue decline described above.
Corporate and Other Segment
The Corporate and Other segment does not represent a significant portion of our
consolidated operating revenue for the nine months ended December 31, 2012 and
2011, respectively.
Operating Revenue
Total operating revenue in the Corporate and Other segment was $0.7 million for
the nine months ended December 31, 2012, representing a decrease of $2.0
million, or 75%, from prior year. This decline was primarily due to the
non-recurring termination fee we received during the nine months ended December
31, 2011 of $1.4 million. In addition, operating revenue declined due to
discontinued titles ($0.4 million) and the inclusion of special issues published
during the nine months ended December 31, 2011 in the Corporate and Other
segment. During the nine months ended December 31, 2012, all special issues
published have been included in the operating segment of the parent magazine.
Operating Loss
Total operating loss increased by $5.5 million, or 18%, to $36.8 million during
the nine months ended December 31, 2012. This increase was attributable to the
$2.0 million decline in operating revenue coupled with a $3.2 million increase
in operating expenses. The increase in expenses were due to a $1.3 million bad
debt expense related to a single advertiser, severance charges related to the
reorganization of our digital operations and other one-time benefits reflected
in the nine months ended December 31, 2011.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2012, we had cash and cash equivalents of $9.5 million and a
working capital deficit of $14.9 million.
Cash Flow Summary
The following information has been derived from the accompanying financial
statements for the nine months ended December 31, 2012. Cash and cash
equivalents increased by $4.3 million during the nine months ended December 31,
2012. The change in cash and cash equivalents is as follows:
Nine Months Ended
December 31, Net
in thousands 2012 2011 Change
Net loss $ (61,153 ) $ (1,156 ) $ (59,997 )
Non-cash items 68,865 16,740 52,125
Net change in operating assets and liabilities 1,875 (10,602 ) 12,477
Operating activities 9,587 4,982 4,605
Investing activities (9,340 ) (31,169 ) 21,829
Financing activities 4,042 11,861 (7,819 )
Effects of exchange rates 14 (291 ) 305
Net increase (decrease) in cash and cash equivalents $ 4,303 $ (14,617 ) $ 18,920
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Operating Activities
Cash provided by operating activities is primarily driven by our non-cash items
and changes in working capital, partially offset by our net loss. Non-cash items
consist primarily of amortization of deferred rack costs, depreciation of
property and equipment, amortization of other identified intangible assets and
amortization of deferred debt costs.
Net cash provided by operating activities increased $4.6 million during the nine
months ended December 31, 2012 as compared to the same period in 2011, primarily
due to the $52.1 million net increase in non-cash items and the $12.5 million
net change in operating assets and liabilities, partially offset by the $60.0
million increase in net loss .
The net change in operating assets and liabilities is primarily due to the $17.5
million decrease in trade receivables and inventories, the $2.0 million decrease
in accrued interest and the $4.4 million decrease in deferred rack costs,
partially offset by the increase in accounts payable and accrued expenses of
$6.9 million and a $4.5 million change in other working capital items. Working
capital items have decreased due to the overall decline in operating revenue
from the continued softness in the U.S. economy and the decrease in consumer
discretionary spending.
Non-cash items increased due to the impairment charges of $54.5 million and the
increase in depreciation and amortization expense of $1.5 million, partially
offset by the increase in deferred tax benefits of $0.8 million, the decrease in
other non-cash items of $1.8 million and the decrease in amortization of
deferred rack and deferred debt costs of approximately $1.6 million.
Investing activities
Net cash used in investing activities for the nine months ended December 31,
2012 was $9.3 million, a decrease of $21.8 million, compared to $31.2 million
for the nine months ended December 31, 2012. The decrease is primarily
attributable to the acquisition of OK Magazine during the first fiscal quarter
of 2012 which used $23.0 million in cash.
Financing activities
Net cash provided by financing activities for the nine months ended December 31,
2012 was $4.0 million, a decrease of $7.8 million, compared to $11.9 million for
the same period in 2011. The decrease is primarily attributable to the $13.5
million decrease in proceeds in Odyssey from noncontrolling interest holders
during the nine months ended December 31, 2011 compared to the $7.8 million
increase in payments to noncontrolling interest holders of Odyssey during the
nine months ended December 31, 2012, as well as the $7.0 million decrease in net
proceeds from the revolving credit facility during the nine months ended
December 31, 2011.
These decreases have been partially offset by the net $20.6 million of
redemption payments on the senior secured notes during the first fiscal quarter
of fiscal 2012.
Credit Facility and Long Term Debt
Revolving Credit Facility
In December 2010, we entered into a revolving credit facility maturing in
December 2015 (the "2010 Revolving Credit Facility"). The agreement governing
the 2010 Revolving Credit Facility provides for borrowing up to $40.0 million,
less outstanding letters of credit.
During the nine months ended December 31, 2012, we borrowed $60.5 million and
repaid $47.5 million under the 2010 Revolving Credit Facility. At December 31,
2012, under the 2010 Revolving Credit Facility we had an outstanding balance of
$20.0 million and available borrowing capacity of $15.6 million after giving
effect to the $4.4 million of outstanding letters of credit. The outstanding
balance on December 31, 2012 of $20.0 million is reflected in non-current
liabilities on the accompanying financial statements as the outstanding balance
is not due until December 2015.
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Our 2010 Revolving Credit Facility requires mandatory prepayments of the loans
outstanding thereunder to the extent that total revolving exposures exceed total
revolving commitments. Our 2010 Revolving Credit Facility requires us to pay,
from December 22, 2010 until the commitments expire under our 2010 Revolving
Credit Facility, a commitment fee ranging from 0.50% to 0.75% of the unused
portion of the revolving commitment. We have the option to pay interest on
outstanding balances based on (i) a floating base rate option equal to the
greatest of (x) the prime rate in effect on such day (y) the federal funds
effective rate in effect on such day plus ½ of 1%, and (z) one month LIBOR (but
no less than 2%) plus 1%, or (ii) based on LIBOR, in each case plus a margin.
The effective weighted-average interest rate under our revolving credit facility
as of December 31, 2012 was 8.25%.
Our 2010 Revolving Credit Facility includes certain representations and
warranties, conditions precedent, affirmative covenants, negative covenants and
events of default customary for agreements of this type. The negative covenants
include a financial maintenance covenant comprised of a first lien leverage
ratio calculated using EBITDA as defined in the 2010 Revolving Credit Facility.
Our 2010 Revolving Credit Facility also contains certain covenants that, subject
to certain exceptions, restrict paying dividends, incurring additional
indebtedness, creating liens, making acquisitions or other investments, entering
into certain mergers or consolidations, prepaying junior debt and selling or
disposing of assets.
The indebtedness under our 2010 Revolving Credit Facility is guaranteed by
certain of our domestic subsidiaries and is secured by liens on substantially
all of our assets. In addition, our obligations are secured by a pledge of all
of the issued and outstanding shares of, or other equity interests in, certain
of our existing or subsequently acquired or organized domestic subsidiaries and
a percentage of the capital stock of, or other equity interests in, certain of
our existing or subsequently acquired or organized foreign subsidiaries. The
equity interests of American Media, Inc. have not been pledged to the lenders.
First Lien Notes
In December 2010, we issued $385.0 million aggregate principal amount of senior
secured notes, which bear interest at a rate of 11.5% per annum, payable
semi-annually and mature in December 2017 (the "First Lien Notes"). During the
first fiscal quarter of 2012, we redeemed $20.0 million in aggregate principal
amount of the First Lien Notes at a redemption price equal to 103.0% of the
aggregate principal amount thereof, plus accrued and unpaid interest. At
December 31, 2012, the First Lien Notes represented an aggregate of $365.0
million of our indebtedness.
The indenture governing the First Lien Notes contains certain affirmative
covenants, negative covenants and events of default customary for agreements of
this type. For example, the indenture governing the First Lien Notes contains
covenants that limit our ability and that of our restricted subsidiaries,
subject to important exceptions and qualifications, to: borrow money; guarantee
other indebtedness; use assets as security in other transactions; pay dividends
on stock, redeem stock or redeem subordinated debt; make investments; enter into
agreements that restrict the payment of dividends by subsidiaries; sell assets;
enter into affiliate transactions; sell capital stock of subsidiaries; enter
into new lines of business; and merge or consolidate. In addition, the indenture
governing the First Lien Notes imposes certain requirements as to future
subsidiary guarantors.
The First Lien Notes are guaranteed on a first lien senior secured basis by the
same subsidiaries of the Company that guarantee our 2010 Revolving Credit
Facility. The First Lien Notes and the guarantees thereof are secured by a
first-priority lien on substantially all of our assets (subject to certain
permitted liens and exceptions), pari passu with the liens granted under our
2010 Revolving Credit Facility, provided that in the event of a foreclosure on
the collateral or of insolvency proceedings, obligations under our 2010
Revolving Credit Facility will be repaid in full with proceeds from the
collateral prior to the obligations under the First Lien Notes.
Registration Rights Agreement
In connection with the issuance of the First Lien Notes, the Company entered
into a registration rights agreement (the "Registration Rights Agreement") with
the holders and the guarantors of the First Lien Notes, which, among other
things, required the Company to file an exchange offer registration statement
with the Securities and Exchange Commission (the "SEC"). Pursuant to the
Registration Rights Agreement, the Company was required to offer to exchange
(the "Exchange Offer") up to $365.0 million of the 11.5% senior notes due
December 2017 (the "Exchange Notes"), which were registered under the Securities
Act of 1933, as amended (the "Securities Act"), for up to $365.0 million of our
First Lien Notes, which we issued in December 2010.
The terms of the Exchange Notes are identical to the terms of the First Lien
Notes, except that the transfer restrictions, registration rights and additional
interest provisions relating to the First Lien Notes do not apply to the
Exchange Notes.
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The Company was required to commence the Exchange Offer once the exchange offer
registration statement was declared effective by the SEC and use commercially
reasonable efforts to complete the Exchange Offer no later than February 24,
2012. Since the Exchange Offer was not completed by February 24, 2012, a
registration default occurred (the "Registration Default") and the interest on
the First Lien Notes was subject to increase by (a) 0.25% per annum for the 90
days in the period from February 24, 2012 to May 24, 2012, (b) 0.50% per annum
for the 90 days in the period from May 25, 2012 to August 24, 2012 and (c) 0.75%
per annum for the period from August 25, 2012 to November 20, 2012, the date the
Registration Default was cured.
On August 22, 2012, the Company filed a Registration Statement with the SEC. On
October 19, 2012, the Registration Statement, as amended (the "Exchange Offer
Registration Statement"), was declared effective by the SEC and the Company
commenced the Exchange Offer for the First Lien Notes. The Registration Default
was cured on November 20, 2012 upon the completion of the Exchange Offer.
The Company incurred approximately $1.3 million in additional interest on the
First Lien Notes due to the Registration Default for the period from February
24, 2012 through the date the Registration Default was cured. The Registration
Default did not impact our compliance with the indentures governing the First
Lien Notes and the Second Lien Notes or the 2010 Revolving Credit Facility.
Second Lien Notes
In December 2010, we issued $104.9 million aggregate principal amount of senior
secured notes, which bear interest at a rate of 13.5% per annum, payable
semi-annually and mature in June 2018 (the "Second Lien Notes"). At December 31,
2012, the Second Lien Notes represented an aggregate of $104.9 million of our
indebtedness.
The indenture governing the Second Lien Notes contains certain affirmative
covenants, negative covenants and events of default customary for agreements of
this type. For example, the indenture governing the Second Lien Notes contains
covenants that limit our ability and that of our restricted subsidiaries,
subject to important exceptions and qualifications, to: borrow money; guarantee
other indebtedness; use assets as security in other transactions; pay dividends
on stock, redeem stock or redeem subordinated debt; make investments; enter into
agreements that restrict the payment of dividends by subsidiaries; sell assets;
enter into affiliate transactions; sell capital stock of subsidiaries; enter
into new lines of business; and merge or consolidate. In addition, the indenture
governing the Second Lien Notes imposes certain requirements as to future
subsidiary guarantors.
The Second Lien Notes are guaranteed on a second lien senior secured basis by
the same subsidiaries of the Company that guarantee our 2010 Revolving Credit
Facility and the First Lien Notes. The Second Lien Notes and the guarantees
thereof are secured by a second-priority lien on substantially all of our assets
(subject to certain permitted liens and exceptions).
Covenant Compliance
As discussed above, our 2010 Revolving Credit Facility and the indentures
governing the First Lien Notes and the Second Lien Notes contain various
restrictive covenants. Under our 2010 Revolving Credit Facility, the first lien
leverage ratio (Total First Lien Debt to EBITDA, each as defined in our 2010
Revolving Credit Facility) must be equal to or less than 4.75 to 1.00.
As of December 31, 2012, first lien leverage ratio was 3.75 to 1.00 and the
Company was in compliance with the first lien leverage ratio and the other
covenants under the 2010 Revolving Credit Facility and under the indentures
governing the First Lien Notes and the Second Lien Notes.
Although there can be no assurances, we anticipate that, based on current
projections (including projected borrowings and repayments under the 2010
Revolving Credit Facility), our operating results for the next twelve months
will be sufficient to satisfy the first lien leverage covenant under the 2010
Revolving Credit Facility. Our ability to satisfy such financial covenant is
dependent on our business performing in accordance with our projections. If the
performance of our business deviates from our projections, we may not be able to
satisfy such financial covenant. Our projections are subject to a number of
factors, many of which are events beyond our control, which could cause our
actual results to differ materially from our projections (see Risk Factors
included in the Exchange Offer Registration Statement). If we do not comply with
our financial covenant, we would be in default under the 2010 Revolving Credit
Facility, which could result in all of our debt being accelerated due to
cross-default provisions in the indentures governing the First Lien Notes and
the Second Lien Notes.
We have the ability to incur additional debt, subject to limitations imposed by
our 2010 Revolving Credit Facility and the indentures governing the First Lien
Notes and the Second Lien Notes. Under the indentures governing the First Lien
Notes and the Second Lien 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 (total consolidated indebtedness
to EBITDA, each as defined in the indentures) is less than 4.50 to 1.00.
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Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures
Adjusted EBITDA, a measure we use to gauge our operating performance, is defined
as net income (loss) attributable to the Company plus interest expense,
provision (benefit) for income taxes, depreciation of property and equipment,
amortization of intangible assets, deferred debt costs and deferred rack costs,
provision for impairment of intangible assets and goodwill, adjusted for gains
or costs related to closures, launching or re-launches of publications,
restructuring costs and severance and certain other costs. We believe that the
inclusion of Adjusted EBITDA is appropriate to evaluate our operating
performance compared to our operating plans and/or prior years and to value
prospective acquisitions. We also believe that Adjusted EBITDA is helpful in
highlighting trends because Adjusted EBITDA excludes the impact of certain items
that can differ significantly from company to company depending on long-term
strategic decisions regarding capital structure, the tax jurisdictions in which
companies operate and capital investments.
Management believes our investors use Adjusted EBITDA as a gauge to measure the
performance of their investment in the Company. Management compensates for
limitations of using non-GAAP financial measures by using them to supplement
GAAP results to provide a more complete understanding of the factors and trends
affecting our business than GAAP results alone. 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 you
should not consider it 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 the three months
and twelve months ended December 31, 2012 and 2011:
For the Three Months For the Twelve Months
Ended December 31, Ended December 31,
in thousands 2012 2011 2012 2011
Net loss attributable to American
Media, Inc. and subsidiaries $ (57,895 ) $ (2,489 ) $ (38,900 ) $ (2,870 )
Add (deduct):
Interest expense 15,231 14,397 59,601 58,808
(Benefit) provision for income taxes (140 ) (740 ) (18,777 ) 13,117
Depreciation and amortization 2,431 1,988 9,384 7,998
Impairment of goodwill and intangible
assets 54,523 - 54,523 -
Amortization of deferred debt costs 367 324 1,394 1,600
Amortization of deferred rack costs 1,919 2,934 9,124 9,668
Amortization of short-term racks 1,948 2,633 8,343 8,777
Restructuring costs and severance 758 1,480 3,833 5,241
Costs related to launches and closures
of publications 391 - 4,309 (5 )
Impact of Superstorm Sandy 3,999 - 3,999 -
Other 2,422 772 9,286 3,247
Adjusted EBITDA $ 25,954 $ 21,299 $ 106,119 $ 105,581
Management's Assessment of Liquidity
Our primary sources of liquidity are cash on hand and amounts available for
borrowing under the 2010 Revolving Credit Facility.
The 2010 Revolving Credit Facility provides for borrowing up to $40.0 million,
less outstanding letters of credit, and matures in December 2015. As of
December 31, 2012, under the 2010 Revolving Credit Facility we had an
outstanding balance of $20.0 million and available borrowing capacity of $15.6
million after giving effect to the $4.4 million of outstanding letters of
credit.
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As of December 31, 2012, in addition to outstanding borrowings under the 2010
Revolving Credit Facility, there was $469.9 million principal amount of
outstanding senior secured debt, consisting of $365.0 million principal amount
of the First Lien Notes and $104.9 million principal amount of the Second Lien
Notes.
We believe we have access to sufficient capital to continue our planned
operations for the 12 months following the balance sheet date of December 31,
2012. We believe that available cash at December 31, 2012 and amounts available
under our 2010 Revolving Credit Facility will mitigate future possible cash flow
requirements. To the extent we make future acquisitions, we may require new
sources of funding, including additional debt, equity financing or some
combination thereof. There can be no assurances that we will be able to secure
additional sources of funding or that such additional sources of funding will be
available to us on acceptable terms.
CONTRACTUAL OBLIGATIONS
There have been no material changes in our contractual obligations since
March 31, 2012.
OFF-BALANCE SHEET FINANCING
We do not have any off-balance sheet financing arrangements.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (US GAAP).
Preparing financial statements requires management to make estimates, judgments
and assumptions regarding uncertainties that may affect the reported amounts of
assets, liabilities, revenue and expenses. These estimates, judgments and
assumptions are affected by management's application of accounting policies. We
base our estimates, judgments and assumptions on historical experience and other
relevant factors that are believed to be reasonable under the circumstances. In
any given reporting period, our actual results may differ from the estimates,
judgments and assumptions used in preparing our consolidated financial
statements.
Goodwill and Intangible Assets
During an evaluation of goodwill and other identified intangible assets at
December 31, 2012, we determined that indicators were presents in certain
reporting units which would suggest the fair value of the reporting unit may
have declined below the carrying value. This decline was primarily due to the
continuing softness in the U.S. economy, which impacts consumer spending,
including further declines in the advertising market, resulting in lowered
future cash flow projections.
As a result, an interim impairment test of goodwill and other indefinite lived
intangible assets was performed as of December 31, 2012 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, we
recorded an estimated pre-tax non-cash impairment charge of $47.3 million and
$7.2 million to reduce the carrying value of goodwill and tradenames,
respectively, during the fiscal quarter ended December 31, 2012. We are
currently finalizing the second step of the goodwill impairment test. As a
result, the impairment charge related to goodwill is an estimate and was
recorded since the amount of the impairment charge was both probable and
reasonably estimable as of December 31, 2012. We will adjust the amount of the
impairment charge, as necessary, based upon finalizing the valuation during the
fourth fiscal quarter of 2013.
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As of December 31, 2012 we identified three remaining reporting units, after the
impairment charge as described above, with an excess fair value over carrying
value of less than 25%. As of December 31, 2012, National Enquirer, Globe and
Flex reporting units had goodwill balances of $59.0 million, $31.1 million and
$7.2 million, respectively. For all other reporting units, the fair value is
substantially in excess of carrying value as of December 31, 2012. While
historical performance and current expectations have resulted in fair values of
goodwill in excess of carrying values, if our assumptions are not realized, it
is possible that in the future an additional impairment charge may need to be
recorded. However, it is not possible at this time to determine if an impairment
charge would result or if such a charge would be material. The Company will
continue to monitor the recoverability of its remaining goodwill.
Refer to Management's Discussion and Analysis of Financial Condition and Results
of Operations in our Exchange Offer Registration Statement for a discussion of
our critical accounting estimates.
RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Refer to Part I, Item 1, Note 2, New Accounting Pronouncements, in the notes to
unaudited condensed consolidated financial statements in this Quarterly Report
for a discussion regarding new accounting standards.
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