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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. 29-------------------------------------------------------------------------------- Table of Contents 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. 30-------------------------------------------------------------------------------- Table of Contents 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. 31-------------------------------------------------------------------------------- Table of Contents 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. 32-------------------------------------------------------------------------------- Table of Contents 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. 33-------------------------------------------------------------------------------- Table of Contents 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; 34-------------------------------------------------------------------------------- Table of Contents • 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. 35-------------------------------------------------------------------------------- Table of Contents 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. 36-------------------------------------------------------------------------------- Table of Contents 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. 37-------------------------------------------------------------------------------- Table of Contents 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. 38-------------------------------------------------------------------------------- Table of Contents 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. 39-------------------------------------------------------------------------------- Table of Contents 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 40 -------------------------------------------------------------------------------- Table of Contents 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. 41-------------------------------------------------------------------------------- Table of Contents 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. 42-------------------------------------------------------------------------------- Table of Contents 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. 43-------------------------------------------------------------------------------- Table of Contents Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures Adjusted EBITDA, a measure we use to gauge our operating performance, is defined as net income (loss) attributable to the Company plus interest expense, provision (benefit) for income taxes, depreciation of property and equipment, amortization of intangible assets, deferred debt costs and deferred rack costs, provision for impairment of intangible assets and goodwill, adjusted for gains or costs related to closures, 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. 44-------------------------------------------------------------------------------- Table of Contents 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. 45-------------------------------------------------------------------------------- Table of Contents 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. |