-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Po2/sgqiU8VjsmSExDA4MWO7q/jngrmFdLpiVfi+ytfV2OUoDOBN66ER+MfpoUCP FOXCk3mrjOTXzWFi7z6rtg== 0000950123-02-000921.txt : 20020414 0000950123-02-000921.hdr.sgml : 20020414 ACCESSION NUMBER: 0000950123-02-000921 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011224 FILED AS OF DATE: 20020205 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN MEDIA OPERATIONS INC CENTRAL INDEX KEY: 0000853927 STANDARD INDUSTRIAL CLASSIFICATION: PERIODICALS: PUBLISHING OR PUBLISHING AND PRINTING [2721] IRS NUMBER: 650203383 STATE OF INCORPORATION: DE FISCAL YEAR END: 0329 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11112 FILM NUMBER: 02526773 BUSINESS ADDRESS: STREET 1: 600 SOUTHEAST COAST AVE CITY: LANTANA STATE: FL ZIP: 33462 BUSINESS PHONE: 5615401000 MAIL ADDRESS: STREET 1: 600 SOUTH EAST COAST AVE CITY: LANTANA STATE: FL ZIP: 33462 FORMER COMPANY: FORMER CONFORMED NAME: ENQUIRER STAR INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: GP GROUP INC DATE OF NAME CHANGE: 19910815 10-Q 1 y57170e10-q.txt AMERICAN MEDIA OPERATIONS, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE [X] SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended December 24, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number(s) - 333-83637 AMERICAN MEDIA OPERATIONS, INC. (EXACT NAME OF THE REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 59-2094424 (State or other jurisdiction of incorporation (IRS Employee or organization) Identification No.) 190 Congress Park Drive, Suite 200, Delray Beach, Florida 33445 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (561) 997-7733 American Media Operations, Inc. (1) HAS FILED all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) HAS BEEN subject to such filing requirements for the past 90 days. As of February 5, 2002 there were 7,507 shares of common stock outstanding. AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES INDEX TO FORM 10-Q DECEMBER 24, 2001
Page(s) PART I. FINANCIAL INFORMATION Item 1. Financial Statements- Consolidated Balance Sheets ................................................................... 3 Consolidated Statements of Income (Loss) ...................................................... 4-5 Consolidated Statements of Comprehensive Income (Loss) ........................................ 6-7 Consolidated Statements of Cash Flows 8 Notes to Consolidated Financial Statements .................................................... 9-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ......................................................... 14-18 Item 3. Quantitative and Qualitative Disclosures about Market Risk ................................................................................ 18-19 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K ...................................................... 20 Signature. .................................................................................... 21
AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 24 AND MARCH 26, 2001 (IN 000'S, EXCEPT SHARE INFORMATION)
March 26, 2001 Dec. 24, 2001 -------------- ------------- ASSETS (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 20,999 $ 8,547 Receivables, net 25,412 28,055 Inventories 14,101 17,989 Short term note receivable 322 -- Prepaid expenses and other 5,015 6,050 ----------- ----------- Total current assets 65,849 60,641 ----------- ----------- PROPERTY AND EQUIPMENT, at cost: Land and buildings 10,076 11,384 Machinery, fixtures and equipment 19,990 25,568 Display racks 35,380 43,997 ----------- ----------- 65,446 80,949 Less - accumulated depreciation (18,651) (30,413) ----------- ----------- 46,795 50,536 ----------- ----------- LONG TERM NOTE RECEIVABLE, net 427 800 ----------- ----------- DEFERRED DEBT COSTS, net 19,126 16,778 ----------- ----------- GOODWILL, net of accumulated amortization of $48,232 and $68,126 482,256 462,362 ----------- ----------- OTHER INTANGIBLES, net of accumulated amortization of $56,275 and $79,335 520,537 497,476 ----------- ----------- $ 1,134,990 $ 1,088,593 =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Current portion of term loan $ 14,281 $ 15,400 10.38% Senior Subordinated Notes Due 2002 -- 134 Accounts payable 30,157 21,877 Accrued expenses 36,035 21,499 Deferred revenues 33,842 37,107 ----------- ----------- Total current liabilities 114,315 96,017 PAYABLE TO PARENT COMPANY 2,110 1,926 ----------- ----------- LONG TERM DEBT: Term Loan and Revolving Credit Commitment, net of current portion 415,719 403,805 10.25% Senior Subordinated Notes Due 2009 250,000 250,000 11.63% Senior Subordinated Notes Due 2004 740 740 10.38% Senior Subordinated Notes Due 2002 134 -- ----------- ----------- 666,593 654,545 ----------- ----------- DEFERRED INCOME TAXES 165,479 163,802 ----------- ----------- CONTINGENCIES STOCKHOLDER'S EQUITY: Common stock, $.20 par value; 7,507 shares issued and outstanding 2 2 Additional paid-in capital 223,298 223,367 Retained deficit (36,807) (49,965) Accumulated other comprehensive income (loss) -- (1,101) ----------- ----------- Total stockholder's equity 186,493 172,303 ----------- ----------- $ 1,134,990 $ 1,088,593 =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (In 000's)
Three Fiscal Three Fiscal Quarters Quarters ended ended Dec. 25, 2000 Dec. 24, 2001 ------------- ------------- OPERATING REVENUES: Circulation $ 253,682 $ 250,517 Advertising 26,004 29,182 Other 15,554 14,881 --------- --------- 295,240 294,580 --------- --------- OPERATING EXPENSES: Editorial 29,384 29,033 Production 75,346 78,590 Distribution, circulation and other cost of sales 56,583 57,980 Selling, general and administrative expenses 31,972 31,050 Depreciation and amortization 57,768 58,641 --------- --------- 251,053 255,294 --------- --------- Operating income 44,187 39,286 INTEREST EXPENSE (54,084) (48,581) OTHER INCOME, net 806 127 --------- --------- Loss before provision for income taxes (9,091) (9,168) PROVISION FOR INCOME TAXES (4,133) (3,990) --------- --------- Net loss $ (13,224) $ (13,158) ========= =========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (IN 000's)
Fiscal Quarter Fiscal Quarter Ended Ended Dec. 25, 2000 Dec. 24, 2001 ------------- ------------- OPERATING REVENUES: Circulation $ 82,498 $ 77,819 Advertising 10,427 10,944 Other 5,453 5,789 -------- -------- 98,378 94,552 -------- -------- OPERATING EXPENSES: Editorial 9,670 9,081 Production 25,226 25,601 Distribution, circulation and other cost of sales 16,836 18,454 Selling, general and administrative expenses 10,308 9,346 Depreciation and amortization 21,022 19,704 -------- -------- 83,062 82,186 -------- -------- Operating Income 15,316 12,366 INTEREST EXPENSE (18,273) (15,611) OTHER INCOME, net 387 46 -------- -------- Loss before provision for income taxes (2,570) (3,199) PROVISION FOR INCOME TAXES (1,549) (854) -------- -------- Net loss $ (4,119) $ (4,053) ======== ========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (IN 000's)
Three Fiscal Three Fiscal Quarters Quarters Ended Ended Dec. 25, 2000 Dec. 24, 2001 ------------- ------------- Net loss $(13,224) $(13,158) Other comprehensive loss Interest rate swap adjustment (See Footnote 9) -- (1,101) -------- -------- Other comprehensive loss -- (1,101) -------- -------- Comprehensive loss $(13,224) $(14,259) ======== ========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (IN 000's)
Fiscal Fiscal Quarter Quarter Ended Ended Dec. 25, 2000 Dec. 24, 2001 ------------- ------------- Net loss $(4,119) $(4,053) Other comprehensive income Interest rate swap adjustment (See Footnote 9) -- 890 ------------- ------------- Other comprehensive income -- 890 ------------- ------------- Comprehensive loss $(4,119) $(3,163) ============= =============
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN 000's)
Three Fiscal Three Fiscal Quarters Quarters Ended Ended Dec. 25, 2000 Dec. 24, 2001 ------------- ------------- Cash Flows from Operating Activities: Net loss $(13,224) $(13,158) -------- -------- Adjustments to reconcile net loss to net cash used in operating activities - Reduction of allowance for long term note receivable -- (500) Gain on sale of assets -- (11) Depreciation and amortization 57,768 58,641 Deferred debt cost amortization 2,349 2,348 Non-cash compensation charge 69 68 Decrease (increase) in - Receivables, net (5,839) (2,321) Inventories 3,780 (3,888) Prepaid expenses and other 439 (908) Increase (decrease) in - Accounts payable (9,513) (8,280) Accrued expenses (21,115) (2,587) Accrued interest (9,265) (7,107) Payable to Parent Company 841 (184) Accrued and current deferred income taxes 4,133 (5,811) Deferred revenues (4,441) 3,265 -------- -------- Total adjustments 19,206 32,725 -------- -------- Net cash provided by operating activities 5,982 19,567 -------- -------- Cash Flows from Investing Activities: Capital expenditures (17,682) (19,417) Acquisition of business, net of cash acquired (8,199) (1,807) -------- -------- Net cash used in investing activities (25,881) (21,224) -------- -------- Cash Flows from Financing Activities: Term loan and revolving credit commitment principal repayments (12,000) (38,795) Proceeds from revolving credit commitment 12,000 28,000 -------- -------- Net cash used in financing activities -- (10,795) -------- -------- Net Decrease in Cash and Cash Equivalents (19,899) (12,452) Cash and Cash Equivalents at Beginning of Period 23,404 20,999 -------- -------- Cash and Cash Equivalents at End of Period $ 3,505 $ 8,547 ======== ======== Supplemental Disclosures of Cash Flow Information: Cash paid during the period for - Income taxes $ 91 $ 11,709 Interest 60,801 52,207
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 24, 2001 (000'S OMITTED IN ALL TABLES) (UNAUDITED) (1) BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. There has been no material change in the information disclosed in the notes to consolidated financial statements included in the Annual Report on Form 10-K of American Media Operations, Inc. and subsidiaries for the fiscal year ended March 26, 2001. In the opinion of management, all adjustments considered necessary for a fair presentation have been included herein. Operating results for the fiscal period ended December 24, 2001 are not necessarily indicative of the results that may be expected for future periods. (2) REVENUE RECOGNITION Substantially all publication sales, except subscriptions, are made through unrelated distributors. Issues, other than special topic issues, are placed on sale approximately one week prior to the issue date; however, circulation revenues and related expenses are recognized for financial statement purposes on an issue date basis (i.e., off sale date). Special topic and monthly issues revenue and related expenses are recognized at the on sale date. On the date each issue is placed on sale, we receive a percentage of the issue's estimated sales proceeds for our publications as an advance from the distributors. All of our publications are sold with full return privileges. Revenues from copy sales are net of reserves provided for expected sales returns, which are established in accordance with generally accepted accounting principles after considering such factors as sales history and available market information. We continually monitor the adequacy of the reserves and make adjustments when necessary. Subscriptions received in advance of the issue date are recognized as income over the term of the subscriptions as served. Advertising revenues are recognized in the period in which the related advertising appears in the publications. Deferred revenues were comprised of the following:
MARCH 26, DEC. 24, 2001 2001 --------- -------- Single Copy $10,139 $ 9,032 Subscriptions 23,176 27,612 Advertising 527 463 ------- ------- $33,842 $37,107 ======= =======
Other revenues, primarily from marketing services performed for third parties by Distribution Services, Inc. ("DSI") and Frontline Marketing, Inc. ("FMI"), are recognized when the service is performed. On November 27, 2000 the Company sold its 80% owned subsidiary, FMI (see Note 7). (3) CERTAIN TRANSACTIONS AND MERGER On May 7, 1999, all of the common stock of the Company's parent, American Media, Inc. ("Media") was purchased by EMP Group LLC (the "LLC"), a Delaware limited liability company, for $837 million pursuant to a merger of Media and EMP Acquisition Corp. ("EMP"), a wholly owned subsidiary of the LLC (the "Acquisition"). Proceeds to finance the Acquisition included (a) a cash equity investment of $235 million by the LLC, (b) borrowings of $352 million under a new $400 million senior bank facility (the "New Credit Agreement") and (c) borrowings of $250 million in the form of senior subordinated notes (the "Notes"). These proceeds were used to (d) acquire all of the outstanding common stock of Media for $299.4 million, (e) repay $267 million then outstanding under the existing credit agreement with our banks (the "Prior Credit Agreement"), (f) retire approximately $199.3 million of Senior Subordinated Notes due 2004 and (g) pay transaction costs (collectively (a) through (g), the "Transactions"). Upon consummation of the Transactions, EMP was merged with and into Media (the "Merger") resulting in a change in ownership control of both Media and the Company. The Acquisition has been accounted for under the purchase method of accounting in accordance with Accounting Principles Board No. 16 ("APB No. 16"). The excess of purchase price over the fair value of net tangible assets acquired has been allocated between identified intangible assets including the value of the tradenames and subscription lists of the Company's publications, as determined through an independent appraisal, with the remainder allocated to goodwill. For the Inception Period and thereafter, intangible assets, including goodwill, are being amortized on a straight-line basis over 20 years for tradenames and goodwill and 9-15 years for subscription lists. Goodwill for the period from March 30, 1999 to May 6, 1999, was amortized on a straight-line basis over 40 years and intangible assets for the period was amortized on a straight-line basis over 25 years. On November 1, 1999, the Company acquired all of the common stock of Globe Communications Corp. and certain of the publishing assets and liabilities of Globe International, Inc. (collectively, the "Globe Properties") for total consideration of approximately $105 million, including approximately $100 million in cash and $5 million in equity of the LLC (the "Globe Acquisition"). The Globe Properties consist of several tabloid style magazines, including Globe, National Examiner and Sun as well as other titles including Mini Mags. Proceeds to finance the acquisition of the Globe Properties included an expansion of our existing senior bank facility of $90 million, approximately $14 million from the Company's existing revolving line of credit and the issuance of $5 million of equity in the LLC. These proceeds were used to acquire the Globe Properties and to pay transaction costs. On July 11, 2000, the Company and the former owner of the Globe Properties signed an agreement whereby the existing voting shareholders of the LLC repurchased the $5 million of equity in the LLC originally issued to the former owner. Concurrent with this purchase, the former owner and his son resigned their positions as directors of the board of Media. Additionally, in July 2000, the Company bought out the remaining term of the former owner's five year employment agreement and collected the amount due per the net asset calculation as required in the initial purchase agreement. The net amount paid to the former owner for these items and miscellaneous other items was approximately $3.2 million. This adjustment was a part of the Globe Acquisition and was therefore accounted for as an increase in goodwill. The Globe Acquisition has been accounted for under the purchase method of accounting in accordance with APB No. 16, and accordingly, results of operations are included in the financial statements from the date of acquisition, and the assets and liabilities have been recorded based upon their fair values at the date of acquisition. The excess of purchase price over the fair value of net tangible assets acquired has been allocated between identified intangible assets including the value of the tradenames of the Company's publications, as determined through an independent appraisal, with the remainder allocated to goodwill. During the quarter ended December 25, 2000, the Company finalized the fair values of the assets and liabilities acquired. Goodwill and tradenames related to the Globe Acquisition are being amortized over 20 years on a straight-line basis. (4) INVENTORIES Inventories are stated at the lower of cost or market. We use the first-in, first-out (FIFO) cost method of valuation, which approximates market value. Inventories are comprised of the following:
March 26, Dec. 24, 2001 2001 --------- -------- Raw materials - paper $ 8,559 $12,130 Finished product - paper, production and distribution costs of future issues 5,542 5,859 ------- ------- $14,101 $17,989 ======= =======
(5) INCOME TAXES The Company files a consolidated Federal income tax return with Media, and calculates its income taxes on a separate return basis. Income taxes have been provided based upon the Company's anticipated effective annual income tax rate. In accordance with the Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", deferred taxes are recognized for temporary differences related to identified intangible assets other than goodwill. The temporary difference is calculated based on the difference between the new book bases of the amounts allocated to tradenames and subscription lists and their historical tax bases. Accordingly, as of May 7, 1999, in connection with the Acquisition, a deferred tax liability of approximately $162 million was recorded with a corresponding increase in goodwill. Our effective income tax rate exceeds the federal statutory income tax rate of 35% because of the effect of goodwill amortization which is not deductible for income tax reporting purposes. (6) CREDIT AGREEMENT As of December 24, 2001, the Company's effective interest rate on borrowings under the New Credit Agreement was 6.7%. The effective rate for borrowings under the New Credit Agreement averaged 7.6% for the three fiscal quarters ended December 24, 2001. The effective rate for borrowings under the new Credit Agreement averaged 10.1% for the three fiscal quarters ended December 25, 2000. In order to reduce our exposure to interest rate risk, we entered into a $100.0 million interest rate swap agreement which expired in November 2000 under which we paid a fixed rate of 5.95%. In November 2000, we entered into a new $90.0 million interest rate swap agreement expiring in May 2002 under which we pay a fixed rate of 6.53%. American Media Operations, Inc. has no material assets or operations other than investments in its subsidiaries. The Notes are unconditionally guaranteed, on a senior subordinated basis, by all of its subsidiaries. Each subsidiary that will be organized in the future by the Company, unless such subsidiary is designated as an unrestricted subsidiary, will jointly, severally, fully and unconditionally guarantee the Notes on a senior subordinated basis. Note guarantees are joint and several, full and unconditional and general unsecured obligations of the note guarantors. The note guarantors are the Company's subsidiaries. At present, the note guarantors comprise all of the Company's direct and indirect subsidiaries. Note guarantees are subordinated in right of payment to all existing and future senior debt of the note guarantors, including the New Credit Facility, and are also effectively subordinated to all secured obligations of note guarantors to the extent of the assets securing such obligations, including the New Credit Facility. Furthermore, the Notes indenture permits note guarantors to incur additional indebtedness, including senior debt, subject to certain limitations. We have not presented separate financial statements and other disclosures concerning each of the note guarantors because management has determined that such information is not material to investors. So long as the factors set forth in the paragraph immediately above remain true and correct, under applicable SEC rules and regulations, the Company's note guarantors will not need to individually comply with the reporting requirements of the Securities Exchange Act of 1934 ("Exchange Act"), nor will the Company have to include separate financial statements and other disclosures concerning each of the note guarantors in its Exchange Act reports. (7) SALE OF SUBSIDIARY On November 27, 2000 the Company sold its 80% owned subsidiary, FMI, to the minority shareholder for a $2.5 million note receivable ("The Note"). The Note initially had a short-term component of $500,000 and a long-term component of $2,000,000 which is payable to the Company based on defined cash flow of FMI. The Note bears interest at 9%. Due to the uncertainty of FMI's ability to generate defined cash flow for the repayment of The Note, the Company initially reserved $1.6 million of The Note. No gain or loss was recognized on this transaction. As of December 24, 2001, The Note's short-term and long-term balances were $0 and $1,873,000, respectively, due to payments received from FMI. During the quarter ended June 25, 2001, the Company reversed $500,000 of the original $1.6 million reserve based on management's belief that FMI will generate the cash flow to make future payments on this amount. This amount is included in selling, general and administrative expenses for the three quarters ended December 24, 2001. (8) INVESTMENT IN UNCONSOLIDATED SUBSIDIARY In June 2001, the Company formed a joint venture ("The Joint Venture") with Fashion Wire Daily, Inc. ("FWD") to publish and distribute a fashion magazine titled "Style 24/7" for a four issue test period. As of December 24, 2001, the four issues have been completed. The Company and FWD each have a 50 percent ownership interest in The Joint Venture. Pursuant to the terms of the joint venture agreement, the Company and FWD each contributed $669,000 to The Joint Venture. The Company accounts for its investment under the equity method of accounting since it has no controlling influence over The Joint Venture. The Joint Venture had a net loss of $1,082,000 for the three quarters ended December 24, 2001 of which 50 percent is included in selling, general and administrative expenses for the three quarters ended December 24, 2001. Accordingly, the Company reduced its investment by 50 percent of the net loss of The Joint Venture. In addition, The Joint Venture returned $125,000 of originally invested capital to each of the partners and as such the Company's investment in The Joint Venture is $3,000 as of December 24, 2001. (9) DERIVATIVES AND HEDGING - ADOPTION OF SFAS NOS. 133 AND 138 The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities (an amendment of FASB Statement No. 133)" on March 27, 2001. The Company reports all derivative instruments on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in earnings or comprehensive income, depending on the designation of the derivative. Changes in the fair value of derivatives that are not designated as a hedge are reported immediately in earnings. As a result of adopting SFAS No. 133, the Company recorded the fair market value of the liability of $2,065,000 on March 27, 2001 as a charge to other comprehensive income. The change in the fair market value of this liability and the amortization of other comprehensive income during the three quarters ended December 24, 2001 has been recorded as a charge to interest expense. (10) LITIGATION Various suits and claims arising in the ordinary course of business have been instituted against the Company. The Company has various insurance policies available to recover potential legal costs incurred by it. The Company periodically evaluates and assesses the risks and uncertainties associated with litigation independent from those associated with its potential claim for recovery from third party insurance carriers. At present, in the opinion of management, after consultation with outside legal counsel, the liability resulting from litigation, if any, will not have a material effect on the Company's financial position and results of operations. (11) OTHER EVENTS The Company's Boca Raton headquarters, which housed substantially all editorial operations (including its photo, clipping and research libraries), executive offices and certain administrative functions, was closed on October 7, 2001 by the Palm Beach County Department of Health when traces of anthrax were found on a computer keyboard following the death of a photo editor of the Sun from inhalation anthrax. In response to the closure of the Boca facility, the Company immediately implemented its hurricane disaster plan to produce all the weekly publications as originally scheduled. The Company temporarily moved its editorial operations into a facility being leased on a short-term basis, which expires in February 2002. As a result of the uncertainty on the timing of being able to return to the Boca Raton headquarters, we have entered into a two year lease for a 53,000 square foot facility two blocks from the Company's current Boca Raton headquarters. The Company will remain in this leased facility until the Palm Beach County Health Department, OSHA (Occupational Safety and Health Administration) and NIOSH (National Institute for Occupational Safety and Health) deem the Boca Raton facility is safe to return to, or if the Company is unable to return, the Company will extend the lease term on this new facility or seek an alternative location. The Company has property insurance on its Boca Raton headquarters and on the building's contents and also has business interruption insurance. The amount of any potential loss and related insurance recovery is indeterminable at this time. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Fiscal Quarter Ended December 24, 2001 vs Fiscal Quarter Ended December 25, 2000 Total operating revenues were $94,552,000 for the current fiscal quarter. Operating revenues decreased by $3,826,000, or 3.9%, from the prior year's comparable fiscal quarter. Results in the current fiscal quarter reflect a loss of revenue from discontinued/sold operations of $1.1 million. Circulation revenue for continuing publications decreased $4.4 million primarily due to the cancellation of several expanded issues and decreased newsstand copies sold, we believe primarily due to the anthrax incident. Advertising revenues increased 5.0%, from $10.4 million to $10.9 million, despite a weak industry-wide advertising climate. Circulation revenues (which include all single copy and subscription sales) were $77,819,000 for the current fiscal quarter. Circulation revenues decreased by $4,679,000, or 5.7%, when compared to the prior year's comparable fiscal quarter. Subscription revenues were $9,134,000 for the current fiscal quarter. Subscription revenues increased by $393,000, or 4.5%, when compared to the prior year's comparable fiscal quarter. Advertising revenues were $10,944,000 for the current fiscal quarter. Advertising revenues increased by $517,000, or 5.0%, when compared to the prior year's comparable fiscal quarter. Total operating expenses for the current fiscal quarter decreased by $876,000 when compared to the prior year's comparable fiscal quarter. Results in the quarter reflect a decrease in depreciation expense of $1.2 million in the current fiscal quarter versus the prior year's comparable fiscal quarter. Interest expense decreased for the current fiscal quarter by $2,662,000 to $15,611,000 compared to the prior year's comparable fiscal quarter. This decrease in interest expense relates to a lower average effective interest rate, as well as an overall reduction in the amount of the term loan outstanding. Our effective income tax rates exceed the federal statutory income tax rate of 35% because of the effect of goodwill amortization which is not deductible for income tax reporting purposes Three Fiscal Quarters Ended December 24, 2001 vs Three Fiscal Quarters Ended December 25, 2000 Total operating revenues were $294,580,000 for the three current fiscal quarters. Operating revenues decreased by $660,000, or 0.2%, from the prior year's comparable fiscal quarters. Results in the three current fiscal quarters reflect a loss of revenue from discontinued/sold operations which totaled $4.6 million in the prior year. Circulation revenue for continuing publications decreased $1.5 million primarily due to decreased newsstand sales as a result of the anthrax incident. This decline in circulation revenue was partially offset by the increased cover prices as compared to the prior year period. Advertising revenues increased 12.2%, from $26.0 million to $29.2 million, despite a weak industry-wide advertising climate. Circulation revenues (which include all single copy and subscription sales) were $250,517,000 for the three current fiscal quarters. Circulation revenues decreased by $3,165,000, or 1.2%, when compared to the three prior year's comparable fiscal quarters. Circulation revenue for continuing publications decreased $1.5 million primarily due to the circulation decline noted above. This decline in circulation revenue was partially offset by the increased cover prices as compared to the prior year period. Subscription revenues were $27,254,000 for the three current fiscal quarters. Subscription revenues increased by $1,012,000, or 3.9%, when compared to the prior year's comparable three fiscal quarters. Advertising revenues were $29,182,000 for the three current fiscal quarters. Advertising revenues increased by $3,178,000, or 12.2%, when compared to the three prior year's comparable fiscal quarters. This increase is primarily due to additional advertising revenues from our tabloids (National Enquirer and Star magazines -- $1.5 million), increased advertising revenues from MIRA! ($1.1 million), and increased advertising from our Custom Publishing Group ($0.7 million). Total operating expenses for the three current fiscal quarters increased by $4,241,000 when compared to the prior year's comparable three fiscal quarters. Results in the three quarters reflect an increase in depreciation expense of $1.1 million and increased production expenses of $3.2 million in the current fiscal quarters versus the prior year's comparable three fiscal quarters, primarily due to increased paper prices. Interest expense decreased for the three current fiscal quarters by $5,503,000 to $48,581,000 compared to the prior year's comparable three fiscal quarters. This decrease in interest expense relates to a lower average effective interest rate, as well as an overall reduction in the amount of the term loan outstanding. Our effective income tax rates exceed the federal statutory income tax rate of 35% because of the effect of goodwill amortization which is not deductible for income tax reporting purposes. Our Boca Raton headquarters, which housed substantially all editorial operations (including its photo, clipping and research libraries), executive offices and certain administrative functions, was closed on October 7, 2001 by the Palm Beach County Department of Health when traces of anthrax were found on a computer keyboard following the death of a photo editor of the Sun from inhalation anthrax. In response to the closure of the Boca facility, we immediately implemented our hurricane disaster plan to produce all the weekly publications as originally scheduled. We temporarily moved our editorial operations into a facility being leased on a short-term basis, which expires in February 2002. As a result of the uncertainty on the timing of being able to return to the Boca Raton headquarters, we have entered into a two-year lease for a 53,000 square foot facility two blocks from our current Boca Raton headquarters. We will remain in this leased facility until the Palm Beach County Health Department, OSHA (Occupational Safety and Health Administration) and NIOSH (National Institute for Occupational Safety and Health) deem the Boca Raton facility is safe to return to, or if we are unable to return, we will extend the lease term on this new facility or seek an alternative location. We have property insurance on our Boca Raton headquarters and on the building's contents and we also have business interruption insurance. The amount of any potential loss and related insurance recovery is indeterminable at this time. We believe as a result of the anthrax incident, we have experienced a decline in circulation. When the incident first occurred, there were specific concerns and consumer discomfort and lack of knowledge with respect to the safety of our magazines. We quickly responded to safety concerns with an extensive public relations effort to educate consumers that there was no health risk in buying our magazines. Since the first issues following the anthrax incident, we have witnessed a steady improvement in unit sales, although they remain below normalized levels. In January 2002, the Company successfully negotiated multi-year contracts with all of its major United States wholesalers for the complete distribution of the Company's entire product line. Effective January 12, 2002, the Company consolidated its national distributor functions with Curtis Circulation Company. LIQUIDITY AND CAPITAL RESOURCES We have substantially increased our indebtedness in connection with the Transactions and the Globe Acquisition (see Note 3). As a result of the New Credit Agreement and the Notes, our liquidity requirements have been significantly increased, primarily due to increased interest and principal payment obligations under the New Credit Agreement which, other than certain excess cash flow payment obligations, commenced in fiscal 2002. We believe that the net cash generated from operating activities and amounts available under the $60.0 million revolving credit facility will be sufficient to fund our debt service requirements under the New Credit Agreement and the Notes, to make capital expenditures and to cover working capital requirements. As of February 5, 2002, there were no amounts outstanding on the revolving credit facility. We believe, however, that based upon our current level of operations and anticipated growth, it will be necessary to refinance the Notes upon their maturity. To the extent we make future acquisitions, we may require new sources of funding, including additional debt, or equity financing or some combination thereof. There can be no assurances that such additional sources of funding will be available to us on acceptable terms. Our ability to make scheduled payments of principal and interest under the New Credit Agreement and the Notes, as well as our other obligations and liabilities, is subject to our future operating performance which is dependent upon general economic, financial, competitive, legislative, regulatory, business and other factors beyond our control. At December 24, 2001, we had cash and cash equivalents of $8.5 million and a working capital deficit of $35.4 million. We do not consider our working capital deficit to be a true measure of our liquidity position as our working capital needs typically are met by cash generated by our business. Our working capital deficit results principally from: - - our policy of using available cash to reduce borrowings which are recorded as noncurrent liabilities, thereby reducing current assets without a corresponding reduction in current liabilities; - - our minimal accounts receivable level relative to revenues, as most of our sales revenues are received from national distributors as advances based on estimated single copy circulation; and - - accounting for deferred revenues as a current liability. Deferred revenues are comprised of deferred subscriptions, advertising and single copy revenues and represent payments received in advance of the period in which the related revenues will be recognized. Historically, our primary sources of liquidity have been cash generated from operations and amounts available under our credit agreements, which have been used to fund shortfalls in available cash. Cash on hand on March 26, 2001 of $21.0 million was used to fund working capital requirements (including interest and tax payments of $63.9 million) as well as to fund capital expenditures. We made capital expenditures in the three fiscal quarters ended December 24, 2001 and December 25, 2000 totaling $19.4 million and $17.7 million, respectively. At December 24, 2001, our outstanding indebtedness totaled $670.1 million, of which $419.2 represented borrowings under the New Credit Agreement. In connection with the acquisition of the Globe Properties as discussed in Note 3. to the Consolidated Financial Statements, we expanded our New Credit Agreement by $90 million. As of December 24, 2001, the Company's effective interest rate on borrowings under the New Credit Agreement was 6.7%. The effective rate for borrowings under the New Credit Agreement averaged 7.6% for the three fiscal quarters ended December 24, 2001. The effective rate for borrowings under the New Credit Agreement averaged 10.1% for the three fiscal quarters ended December 25, 2000. In order to reduce our exposure to interest rate risk, we entered into a $100.0 million interest rate swap agreement which expired in November 2000 under which we paid a fixed rate of 5.95%. In November 2000, we entered into a new $90.0 million interest rate swap agreement expiring in May 2002 under which we pay a fixed rate of 6.53%. We have no material assets or operations other than the investments in our subsidiaries. The Notes are unconditionally guaranteed, on a senior subordinated basis, by all of our subsidiaries. Each subsidiary that will be organized in the future by us, unless such subsidiary is designated as an unrestricted subsidiary, will jointly, severally, fully and unconditionally guarantee the Notes on a senior subordinated basis. Note guarantees are joint and several, full and unconditional and general unsecured obligations of the note guarantors. The note guarantors are our subsidiaries. At present, the note guarantors comprise all of our direct and indirect subsidiaries. Note guarantees are subordinated in right of payment to all existing and future senior debt of the note guarantors, including the New Credit Facility, and are also effectively subordinated to all secured obligations of note guarantors to the extent of the assets securing such obligations, including the New Credit Facility. Furthermore, the Notes indenture permits note guarantors to incur additional indebtedness, including senior debt, subject to certain limitations. We have not presented separate financial statements and other disclosures concerning each of the note guarantors because management has determined that such information is not material to investors. So long as the factors set forth in the paragraph immediately above remain true and correct, under applicable SEC rules and regulations, we believe that note guarantors will not need to individually comply with the reporting requirements of the Exchange Act, nor will we have to include separate financial statements and other disclosures concerning each of the note guarantors in its Exchange Act reports. EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION ("EBITDA") The following table and discussion summarizes EBITDA for the three and nine months ended December 24, 2001 and December 25, 2000.
Three Three Fiscal Quarter Fiscal Quarter Fiscal Quarters Fiscal Quarters Ended Ended Ended Ended December 25, December 24, December 25, December 24, 2000 2001 2000 2001 -------------- -------------- --------------- --------------- $36,338,000 $32,070,000 $101,955,000 $97,927,000
The Company defines EBITDA as net income (loss) before extraordinary charges, interest expense, income taxes, depreciation and amortization and other income (expense). EBITDA is presented and discussed because the Company considers EBITDA an important indicator of the operational strength and performance of its business including the ability to provide cash flows to service debt and fund capital expenditures. EBITDA, however, should not be considered an alternative to operating or net income (loss), as an indicator of the performance of the Company, or as an alternative to cash flows from operating activities as a measure of liquidity, in each case determined in accordance with generally accepted accounting principles ("GAAP"). NEW ACCOUNTING PRONOUNCEMENT In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). Under SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill is subject to an annual assessment for impairment by applying a fair-value based test. The standard is effective for fiscal years beginning after December 15, 2001. The Company has yet to determine the impact of the standard on its financial position and results of operations. FORWARD-LOOKING STATEMENTS Some of the information presented in this Form 10-Q constitutes forward-looking statements, including, in particular, the statements about our plans, strategies and prospects under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." We have based these forward-looking statements on our current assumptions, expectations and projections about future events. We caution you that a variety of factors could cause business conditions and results to differ materially from what is contained in the forward-looking statements. These forward-looking statements are subject to risks, uncertainties and assumptions about us, including, among other things:
- our high degree of leverage and - the effects of terrorism, including significant debt service obligations, bio-terrorism, on our business, - our ability to increase circulation and - increasing competition by domestic advertising revenues, and foreign media companies, - market conditions for our publications, - changes in the cost of paper used by us, - our ability to develop new publications - any future changes in management and services, and - outcomes of pending and future litigation, - general risks associated with the publishing industry.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to certain market risks that are inherent in our financial statements. We are subject to interest risk on our credit facilities and any future financing requirements. Our fixed rate debt consists primarily of Senior Subordinated Notes, as well as $90 million of interest rate swap agreements on our term loan. The interest rate swap agreements effectively convert a portion of our variable rate debt to fixed-rate debt. The interest rate swap agreement which expired in November 2000 had a fixed interest rate of 5.95%. In November 2000, we entered into a new $90.0 million swap agreement expiring in May 2002 under which we pay a fixed rate of 6.53%. The following table presents the future principal payment obligations and weighted average interest rates associated with our existing credit instruments assuming our actual level of indebtedness (in 000's):
Fiscal Year Ended ----------------------------------------------------------------- 2002 2003 2004 Thereafter ---- ---- ---- ---------- Liabilities: $250,000 Fixed Rate (10.25%) -- -- -- $250,000 $740 Fixed Rate (11.63%) -- -- -- $ 740 $134 Fixed Rate (10.38%) -- $ 134 -- -- Term Loan and Revolving Loan Variable Rate (7.6 % for the three quarters ended December 24, 2001) $ 3,244 $ 16,611 $ 21,456 $377,894 Interest Rate Derivatives: Interest Rate Swaps: Variable to Fixed $ 90,000 -- -- -- Average Pay Rate (6.53%) Average Receive Rate (4.81%)
Interest rate changes result in increases or decreases in our income before taxes and cash provided from operating activities. A 1% change in our weighted interest rate on our variable debt net of the effect of our interest rate swap would result in a change of $823,000 in our interest expense for the three months ended December 24, 2001. Our primary market risk exposures relate to (1) the interest rate risk on long-term and short-term borrowings, (2) our ability to refinance our Senior Subordinated Notes at maturity at market rates, (3) the impact of interest rate movements on our ability to meet interest expense requirements and comply with financial covenants and (4) the impact of interest rate movements on our ability to obtain adequate financing to fund acquisitions. We manage the interest rate risk on our outstanding long-term and short-term debt through our use of fixed and variable rate debt. While we cannot predict or manage our ability to refinance existing debt or the impact interest rate movements will have on our ability to refinance existing debt or the impact interest rate movements will have on our existing debt, we continue to evaluate our financial position on an ongoing basis. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K During the fiscal quarter ended December 24, 2001, the Company filed no reports on Form 8-K. SIGNATURE Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed by the undersigned, thereto duly authorized. AMERICAN MEDIA OPERATIONS, INC. ------------------------------- Registrant Date: February 5, 2002 By /s/ JOHN A. MILEY ------------------------ John A. Miley Executive Vice President Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----