-----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, RP8ozgDUfQ9o9h80pnlGhxWjXuZTBqWbGutU/FOf0nnOzUTM2pLzJkK0OiBGPBAY nNfd0a+AlhNpK197gBXMVg== 0000950144-99-012962.txt : 19991115 0000950144-99-012962.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950144-99-012962 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990927 FILED AS OF DATE: 19991112 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: SEC FILE NUMBER: 001-11112 FILM NUMBER: 99750781 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 AMERICAN MEDIA OPERATIONS FORM 10-Q DATED 09/27/99 1 ============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 27, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number(s) - 333-83637 and 333-83637 01-13 AMERICAN MEDIA OPERATIONS, INC. (EXACT NAME OF THE REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 59-2094424 (State or other jurisdiction of (IRS Employee Identification No.) incorporation or organization) 600 East Coast Avenue, Lantana, Florida 33464-0002 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (561) 540-1000 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 November 11, 1999 there were 7,507 shares of common stock outstanding. ============================================================================== 2 TABLE OF ADDITIONAL REGISTRANT GUARANTORS
ADDRESS INCLUDING ZIP CODE STATE OR OTHER I.R.S. AND TELEPHONE NUMBER EXACT NAME JURISDICTION OF EMPLOYER INCLUDING AREA CODE OF REGISTRANT GUARANTOR INCORPORATION OR IDENTIFICATION OF REGISTRANT GUARANTOR'S COMMISSION AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES FILE NUMBERS - -------------------------------- ----------------- ---------------- -------------------------------- ------------- American Media Marketing, Inc. Florida 65-0757297 600 East Coast Avenue 333-83637-08 Lantana, FL 33484 (561) 540-1000 Biocide, Inc. Delaware 58-2286482 600 East Coast Avenue 333-83637-09 Lantana, FL 33484 (561) 540-1000 Country Weekly, Inc. Delaware 65-0462019 600 East Coast Avenue 333-83637-10 Lantana, FL 33484 (561) 540-1000 Distribution Services, Inc. Delaware 59-1641185 600 East Coast Avenue 333-83637-03 Lantana, FL 33484 (561) 540-1000 Fairview Printing, Inc. Florida 59-2521785 600 East Coast Avenue 333-83637-04 Lantana, FL 33484 (561) 540-1000 Health Xtra, Inc. Florida 65-0886419 600 East Coast Avenue 333-83637-11 Lantana, FL 33484 (561) 540-1000 Marketing Services, Inc. Delaware 65-0228937 600 East Coast Avenue 333-83637-13 Lantana, FL 33484 (561) 540-1000 National Enquirer, Inc. Florida 59-2764097 600 East Coast Avenue 333-83637-01 Lantana, FL 33484 (561) 540-1000 NDSI, Inc. Delaware 59-2632066 600 East Coast Avenue 333-83637-06 Lantana, FL 33484 (561) 540-1000 Retail Marketing Network, Inc. Delaware 65-0503059 600 East Coast Avenue 333-83637-12 Lantana, FL 33484 (561) 540-1000 Star Editorial, Inc. Delaware 59-2719233 600 East Coast Avenue 333-83637-07 Lantana, FL 33484 (561) 540-1000 SOM Publishing, Inc. Florida 59-2429187 600 East Coast Avenue 333-83637-05 Lantana, FL 33484 (561) 540-1000 Weekly World News, Inc. Florida 59-1896614 600 East Coast Avenue 333-83637-02 Lantana, FL 33484 (561) 540-1000
2 3 AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES INDEX TO FORM 10-Q SEPTEMBER 27, 1999
Page(s) ------- PART I. FINANCIAL INFORMATION Item 1. Company and Predecessor Financial Statements -- Consolidated Balance Sheets.............................................................. 4 Consolidated Statements of Income........................................................ 5-6 Consolidated Statements of Cash Flows.................................................... 7 Notes to Consolidated Financial Statements............................................... 8-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................... 12-17 Item 3. Quantitative and Qualitative Disclosures about Market Risk .......................................................................... 18 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................................................. 19 Signature................................................................................ 20
3 4 AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 27 AND MARCH 29, 1999 (IN 000'S, EXCEPT SHARE INFORMATION) THE FINANCIAL STATEMENTS OF THE COMPANY AND THE PREDECESSOR COMPANY ARE NOT COMPARABLE IN CERTAIN RESPECTS (SEE NOTE 1).
Predecessor Company The Company March 29, September 17, ------------ ------------ (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 3,823 $ 8,108 Receivables, net 7,977 11,809 Inventories 9,830 8,119 Prepaid expenses and other 2,650 8,679 ----------- ----------- Total current assets 24,280 36,715 ----------- ----------- PROPERTY AND EQUIPMENT, at cost: Land and buildings 4,039 1,670 Machinery, fixtures and equipment 22,040 11,811 Display racks 19,543 12,274 ----------- ----------- 45,622 25,755 Less - accumulated depreciation (18,762) (3,658) ----------- ----------- 26,860 22,097 ----------- ----------- DEFERRED DEBT COSTS, net 5,728 20,505 ----------- ----------- GOODWILL, net of accumulated amortization of $141,595 and $8,846 463,656 450,260 ----------- ----------- OTHER INTANGIBLES, net of accumulated amortization of $51,686 and $10,488 96,314 509,324 ----------- ----------- $ 616,838 $ 1,038,901 =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Current portion of term loan $ 25,000 $-- Accounts payable 11,618 10,132 Accrued expenses 34,801 42,551 Deferred revenues 27,987 24,479 ----------- ----------- Total current liabilities 99,406 77,162 ----------- ----------- PAYABLE TO PARENT COMPANY 3,404 1,010 ----------- ----------- LONG TERM DEBT: Term Loan and Revolving Credit Commitment, net of current portion 246,000 340,000 10.25% Senior Subordinated Notes Due 2009 -- 250,000 11.63% Senior Subordinated Notes Due 2004 200,000 740 10.38% Senior Subordinated Notes Due 2002 134 134 ----------- ----------- 446,134 590,874 ----------- ----------- DEFERRED INCOME TAXES (NOTE 4) 7,696 161,394 ----------- ----------- CONTINGENCIES (NOTE 7) STOCKHOLDER'S EQUITY: Common stock, $.20 par value; 7,507 shares issued and outstanding 2 2 Additional paid-in capital 26,039 218,279 Retained earnings (deficit) 34,157 (9,820) ----------- ----------- TOTAL STOCKHOLDER'S EQUITY 60,198 208,461 ----------- ----------- $ 616,838 $ 1,038,901 =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. 4 5 AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (IN 000'S) THE FINANCIAL STATEMENTS OF THE COMPANY AND THE PREDECESSOR COMPANY ARE NOT COMPARABLE IN CERTAIN RESPECTS (SEE NOTE 1).
Predecessor Company The Company --------------------- -------------------- Fiscal Quarter Fiscal Quarter Ended September 28, Ended September 27, 1998 1999 --------------------- -------------------- OPERATING REVENUES: Circulation $ 62,153 $ 62,090 Advertising 5,138 4,897 Other 5,247 5,740 -------- -------- 72,538 72,727 -------- -------- OPERATING EXPENSES: Editorial 7,284 6,841 Production 19,586 17,086 Distribution, circulation and other cost of sales 17,064 14,246 Selling, general and administrative expenses 6,187 7,656 Depreciation and amortization 7,966 15,039 -------- -------- 58,087 60,868 -------- -------- Operating income 14,451 11,859 INTEREST EXPENSE (11,742) (14,770) OTHER INCOME (EXPENSE), net (42) 33 -------- -------- Income (loss) before provision for income taxes 2,667 (2,878) PROVISION FOR INCOME TAXES (2,321) (1,072) -------- -------- Net income (loss) $ 346 $ (3,950) ======== ========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 5 6 AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (IN 000'S) THE FINANCIAL STATEMENTS OF THE COMPANY AND THE PREDECESSOR COMPANY ARE NOT COMPARABLE IN CERTAIN RESPECTS (SEE NOTE 1).
Predecessor Company The Company ------------------------------------- ------------------ Twenty Weeks Two Fiscal Six Weeks From From May 7 Quarters March 30 Through Ended Through September 27, September 28, 1998 May 6, 1999 1999 ------------------- ----------------- ------------------ OPERATING REVENUES: Circulation $124,951 $26,215 $93,010 Advertising 10,692 2,640 8,043 Other 10,271 2,308 8,349 ----------------- ----------------- ------------------ 145,914 31,163 109,402 ----------------- ----------------- ------------------ OPERATING EXPENSES: Editorial 14,666 3,040 10,376 Production 40,522 7,784 25,759 Distribution, circulation and other cost of sales 35,266 6,624 21,964 Selling, general and administrative expenses 12,762 3,248 11,209 Depreciation and amortization 15,808 3,703 23,072 ----------------- ----------------- ------------------ 119,024 24,399 92,380 ----------------- ----------------- ------------------ Operating income 26,890 6,764 17,022 INTEREST EXPENSE (23,937) (4,837) (23,335) OTHER INCOME, net 4,151 25 26 ----------------- ----------------- ------------------ Income (loss) before provision for income taxes and extraordinary 1,952 charge 7,104 (6,287) PROVISION FOR INCOME TAXES (5,364) (1,365) (952) ----------------- ----------------- ------------------ Income (loss) before extraordinary charge 1,740 587 (7,239) EXTRAORDINARY CHARGE, net of income taxes of $1,269 and $1,517, respectively (Note 5) (2,161) -- (2,581) ----------------- ----------------- ------------------ Net income (loss) $(421) $587 $(9,820) ================= ================= ==================
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 6 7 AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN 000'S) THE FINANCIAL STATEMENTS OF THE COMPANY AND THE PREDECESSOR COMPANY ARE NOT COMPARABLE IN CERTAIN RESPECTS (SEE NOTE 1).
Predecessor Company The Company ------------------------------------ ------------------- Twenty Weeks Two Fiscal Six Weeks From May 7 Quarters Ended From March 30 Through September 28, Through September 27, 1998 May 6, 1999 1999 ------------------ ----------------- ------------------- Cash Flows from Operating Activities: Net income (loss) $ (421) $ 587 (9,820) --------- -------- --------- Adjustments to reconcile net income (loss) to net cash provided by operating activities - Extraordinary charge, net of income taxes 2,161 -- 2,581 Depreciation and amortization 15,808 3,703 23,072 Deferred debt cost amortization 831 147 1,151 Decrease (increase) in - Receivables, net (1,808) (369) (3,463) Inventories 403 1,163 548 Prepaid expenses and other 3,629 1,793 (8,392) Increase (decrease) in - Accounts payable (3,340) (2,184) 697 Accrued expenses (2,180) (164) (2,596) Accrued and current deferred income taxes (2,540) 1,267 3,890 Deferred revenues (4,645) (3,159) (349) --------- -------- --------- Total adjustments 8,319 2,197 17,139 --------- -------- --------- Net cash provided by operating activities 7,898 2,784 7,319 --------- -------- --------- Cash flows from investing activities: Capital expenditures (7,689) (717) (3,615) Acquisition of business, net of cash acquired -- -- (332,679) --------- -------- --------- Net cash used in investing activities (7,689) (717) (336,294) --------- -------- --------- Cash Flows from Financing Activities: Issuance of common stock -- -- 235,000 Term loan and revolving credit commitment principal repayments (334,401) (10,000) (279,000) Proceeds from revolving credit commitment 334,000 6,000 -- Repayment of subordinated senior subordinated indebtedness -- -- (199,260) Proceeds from new term loan and credit facility -- -- 352,000 Proceeds from new senior subordinated indebtedness -- -- 250,000 Payment of deferred debt costs (1,964) -- (21,657) --------- -------- --------- Net cash (used in) provided by financing activities (2,365) (4,000) 337,083 --------- -------- --------- Net (Decrease) Increase in Cash and Cash Equivalents (2,156) (1,933) 8,108 Cash and Cash Equivalents at Beginning of Period 7,405 3,823 -- ========= ======== ========= Cash and Cash Equivalents at End of Period $ 5,249 $ 1,890 8,108 ========= ======== ========= Supplemental Disclosures of Cash Flow Information: Cash paid during the period for - Income taxes $ 5,118 $ 80 $ 3,261 Interest 25,331 3,142 20,429
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 7 8 AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 27, 1999 (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. Except as disclosed herein, 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 29, 1999. As discussed below, American Media Operations, Inc. was purchased on May 7, 1999 resulting in a change in the historical cost basis of various assets and liabilities, accordingly, the historical financial information provided herein, for periods prior to May 7, 1999 is not comparable to post acquisition financial information. For purposes of presentation, all historical financial information for periods prior to May 7, 1999 will be referred to as the "Predecessor Company" and all periods subsequent to May 6, 1999 (the "Inception Period") will be referred to as the "Company". A solid black vertical line has been inserted in tables where financial information may not be comparable across periods. In the opinion of management, all adjustments considered necessary for a fair presentation have been included herein. Operating results for the fiscal periods ended September 27, 1999 are not necessarily indicative of the results that may be expected for future periods. (2) 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 Acquisition Corp. ("EMP") a company controlled by Evercore Capital Partners L.P., a private equity firm ("Evercore") for $837 million (the "Acquisition"). Proceeds to finance the acquisition included (a) a cash equity investment of $235 million by Evercore and certain other investors, (b) borrowings of $352 million under a new $400 million senior bank facility (the "New Credit Facility") 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, (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 Transactions are summarized as follows: 8 9 Proceeds from: Equity contribution $ 235,000 New credit facility 352,000 Notes 250,000 --------- $ 837,000 ========= Proceeds used to repay: Existing credit facility $(267,000) Existing subordinated notes (199,300) Existing equity (299,400) --------- $(765,700) ========= Balance used to pay debt issuance costs, debt tender offer premium, accrued interest and other costs $ (71,300) ========= Preliminary allocation of purchase price is as follows: Net cash proceeds $ 837,000 Less repayment of existing debt (466,300) Less cash assumed (1,900) --------- Net cash paid 368,800 Fair value of liabilities (78,094) Fair value of tangible assets acquired 41,973 --------- $ 332,679 ========= The Acquisition has been accounted for under the purchase method of accounting. 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. The preliminary estimates of the fair values of other assets and liabilities may be revised at a later date which may result in a change to the value of goodwill or other assets and liabilities. These intangible assets are being amortized on a straight-line basis over 20 years for tradenames and goodwill and 9-15 years for subscription lists. The following unaudited pro forma financial information gives effect to the Transactions and excludes the results of Soap Opera Magazine and Soap Opera News (collectively, the "Soap Opera Properties") which were sold in February 1999 for $10 million cash and possible additional consideration based upon the future performance of certain of the buyer's titles, as if each had occurred as of the beginning of each period presented:
Predecessor Company -------------------------------------------------- Two Fiscal Six Weeks From Quarters Ended March 30 Through September 28, 1998 May 6, 1999 ------------------------- ------------------------ Operating revenues $133,645 $31,163 ========= ========= Operating expenses $(86,865) $(26,863) ========= ========= Depreciation and amortization $(27,026) $(6,167) ========= ========= Operating income $19,754 $4,300 ========= ========= Interest expense $(29,526) $(6,190) ========= ========= Net loss $(9,768) $(2,700) ========= =========
9 10 Included as a reduction to selling, general and administrative expenses in the fiscal quarter ended September 27, 1999 is an additional gain of $370,000 resulting from settlement of certain liabilities in connection with the sale of the Soap Opera Properties. (3) INVENTORIES Inventories are generally stated at the lower of cost or market. The Company uses the last-in, first-out (LIFO) cost method of valuing its inventories, which approximates the first-in, first-out (FIFO) cost method for the periods presented. Inventories are comprised of the following:
March 29, September 27, 1999 1999 ------------------- ------------------ Raw materials - paper $6,931 $5,209 Finished product - paper, production and distribution costs of future issues 2,899 2,910 ------------------- ------------------ $9,830 $8,119 =================== ==================
(4) 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, a deferred tax liability of approximately $162 million has been recorded with a corresponding increase in goodwill. (5) CREDIT AGREEMENT As of September 27, 1999 the Company's effective interest rate on borrowings under the New Credit Agreement was 8.7%. The effective rate for borrowings under the New Credit Agreement averaged 8.7% for the fiscal quarter ended September 27, 1999 as compared to 7.4% on borrowings under the prior credit agreement for the fiscal quarter ended September 28, 1998. The effective rate for borrowings under the New Credit Agreement averaged 8.6% for the Inception Period and under the prior credit agreement averaged 7.1% for the period from March 30 through May 6, 1999, as compared to 7.5% for the two fiscal quarters ended September 28, 1998. In the fiscal quarter ended June 29, 1998, approximately $3.4 million, ($2.2 million net of income taxes) was charged to extraordinary loss related to the write-off of deferred debt costs as a result of the refinancing of the prior credit facility. In connection with the Transactions, a fee related to an unused bridge loan commitment totaling approximately $4.1 million ($2.6 million net of income taxes) was charged to extraordinary loss in the Inception Period. 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 material 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 wholly-owned subsidiaries. At present, the note guarantors comprise all of the Company's direct and indirect subsidiaries, other than one inconsequential subsidiary. Note guarantees are subordinated in right of payment to all existing and future senior debt of the note guarantors, including the New 10 11 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 believes that 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. In that regard, the Company will request a no-action letter from the SEC concurring with the Company's position on this issue. While there can be no assurance, the Company expects to receive a favorable response to our no-action letter request. (6) OTHER INCOME (EXPENSE), NET Included in Other Income (Expense), net in the accompanying consolidated statement of income for the two fiscal quarters ended September 28, 1998 is a net gain of $4.4 million from the settlement of certain litigation. (7) 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 legal counsel, the liability resulting from litigation, if any, will not have a material effect on the Company's consolidated financial statements. (8) SUBSEQUENT EVENT 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 $105 million, including $100 million in cash and $5 million in equity of the Company. The Globe Properties consist of several tabloid style magazines, including Globe, National Examiner and Sun as well as other titles including Cracked, Lifestyle Specials, Detective Series and Mini Mags, which together generate approximately $108 million in revenue annually. 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 Company. These proceeds were used to acquire the Globe Properties and to pay transaction costs. The transaction will be accounted for under the purchase method of accounting, and accordingly, results of operations will be included in the financial statements from the date of acquisition, and the assets and liabilities will be recorded based upon their fair values at the date of acquisition. 11 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW In connection with the Transactions and Merger, which were accounted for under the purchase method of accounting, we reflected a new basis of accounting for various assets and liabilities. Accordingly, the historical financial information provided herein, for periods prior to May 7, 1999 is not comparable to post acquisition financial information. To facilitate a meaningful discussion of the comparative operating performance for the fiscal quarter and two fiscal quarters ended September 27, 1999 and September 28, 1998, the financial information in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" is presented on a traditional comparative basis unless otherwise indicated. We believe the traditional comparative presentation provides the best financial information as the only material change in the historical operations for periods before and after May 6, 1999, other than the sale of certain properties as discussed below, is an increase in interest expense related to higher levels of indebtedness and increased amortization expense resulting from a substantial increase in intangible assets. In February 1999, we ceased publication of Soap Opera News and Soap Opera Magazine (collectively, the "Soap Opera Assets") and sold certain of the trademarks and other soap opera publishing assets relating to these magazines to Primedia, Inc. Accordingly, operations of the Soap Opera Assets are included in operations for the fiscal quarter and the two fiscal quarters ended September 28, 1998, but are not included in operations for the fiscal quarter or the two fiscal quarters ended September 27, 1999. RESULTS OF OPERATIONS Fiscal Quarter Ended September 27, 1999 vs Fiscal Quarter Ended September 28, 1998 Total operating revenues were $72,727,000 for the current fiscal quarter, which remained relatively flat compared to operating revenues of the same prior fiscal year quarter. Excluding revenues related to the Soap Opera Assets, operating revenues increased by $6,698,000, primarily due to an increase in single copy revenues. Circulation revenues (which include all single copy and subscription sales) of $62,090,000 remained relatively flat for the current fiscal quarter compared to the same prior year quarter. Excluding the Soap Opera Assets, circulation revenues increased $6,162,000 or 11.0% when compared to the same prior year period, due in part, to higher circulation revenues generated from three additional special issues of the Star. Single copy unit sales for the National Enquirer and Star remained flat when compared to the same prior year quarter. Circulation revenues were favorably impacted by $.10 cover price increases effective with the July 27, 1999 issues for National Enquirer, Star and Weekly World News. Country Weekly's average weekly circulation decreased 5.8% for the current fiscal quarter as compared to the same prior year quarter. The decline in circulation revenues caused by such decreases in circulation was offset by a $.20 cover price increase in March of 1999. New management has addressed this softness by redesigning and relaunching Country Weekly effective with the October 6, 1999 issue. In addition, a new editor and publisher have been named. Subscription revenues of $9,247,000 decreased $993,000 or 9.7% for the current fiscal quarter compared to the same prior year quarter. Excluding the Soap Opera Assets, subscription revenues decreased $205,000 or 2.2% compared to the same prior year quarter, reflecting a decrease in National Enquirer and Star unit sales of 4.6% and 5.8%, respectively, which was partially offset by an increase in Weekly World News. One method of increasing the subscription bases of our publications has been to offer discounted subscriptions through an agent; however, management's new direction is to be more newsstand driven. 12 13 For the current fiscal quarter, advertising revenues of $4,897,000 decreased $241,000 or 4.7% from $5,138,000 in the same prior year quarter. Excluding revenues related to the Soap Opera Assets, advertising revenues remained flat. Although national advertising increased by $761,000 or 47% it was offset by a decrease in mail order and classified advertising due to management's decision not to accept certain mail order and fractional advertising to correspond with the new design of the publications. Total operating expenses for the current fiscal quarter increased by $2,781,000 when compared to the same prior year quarter. Excluding expenses related to the Soap Opera Assets and depreciation and amortization expense, operating expenses increased by $4,051,000. This increase primarily relates to increased editorial, production and distribution expenses related to the publication of three Star specials (which were more than offset by increased revenues as mentioned above) as well as TV advertising. Amortization expense increased by $7,323,000 due to the increase in intangible asset balances as well as a reduction in the related amortizable lives, primarily goodwill, from 40 years to 20 years. This increase in amortization expense solely relates to the period subsequent to the Transactions. Interest expense increased for the current fiscal quarter by $3,028,000 to $14,770,000 compared to the same prior year quarter. This increase in interest expense solely relates to the period subsequent to the Transactions as a result of a higher average effective interest rate and higher levels of indebtedness. 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. Two Fiscal Quarters Ended September 27, 1999 vs Two Fiscal Quarters Ended September 28, 1998 Total operating revenues were $140,565,000 for the current two fiscal quarters, a decrease of $5,349,000 or 3.7% from total operating revenues of $145,914,000 for the same prior year period. Excluding revenues related to the Soap Opera Assets, operating revenues increased $6,921,000, primarily due to an increase in single copy revenue. Circulation revenues (which include all single copy and subscription sales) of $119,225,000 decreased $5,726,000 or 4.6% for the current two fiscal quarters compared to the same prior year quarters. Excluding the Soap Opera Assets, circulation revenues increased $6,039,000 or 5.3% when compared to the same prior year period, due in part, to higher circulation revenues generated from three additional special issues of the Star. Single copy unit sales for the National Enquirer and Star remained flat when compared to the same prior year period. Circulation revenues were favorably impacted by $.10 cover price increases effective with the July 27, 1999 issues for National Enquirer, Star and Weekly World News. Country Weekly's average weekly circulation decreased 10.0% for the current two fiscal quarters as compared to the same prior year quarters. The decline in circulation revenues caused by such decreases in circulation was partially offset by a $.20 cover price increase in March of 1999. New management has addressed this softness by redesigning and relaunching Country Weekly effective with the October 6, 1999 issue. In addition, a new editor and publisher have been named. Subscription revenues of $18,892,000 decreased $2,496,000 for the current two fiscal quarters as compared to the same prior year period. Excluding the Soap Opera Assets, subscription revenues have decreased $841,000 or 4.3% compared to the same prior year quarters, reflecting a decrease in National Enquirer and Star unit sales of 13.7% and 16.8%, respectively. One method of increasing the subscription bases of our publications has been to offer discounted subscriptions through an agent; however, management's new direction is to be more newsstand driven. 13 14 For the current two fiscal quarters, advertising revenues of $10,683,000 remained flat over the same prior year quarters. Excluding revenue from the Soap Opera Assets, advertising revenues increased by $467,000 or 4.6% primarily as a result of increased national advertising in National Enquirer, Star and Country Weekly, offset by lower direct and classified advertising at the National Enquirer and Star due to management's decision not to accept certain mail order and fractional advertising to correspond with the new design of the publications. Total operating expenses for the current two fiscal quarters decreased by $2,245,000 when compared to the same prior year period. Excluding expenses related to the Soap Opera Assets and depreciation and amortization expense, operating expenses increased by $3,702,000 or 4.3%. This increase primarily relates to increased editorial, production and distribution expenses related to the publication of three Star specials (which were more than offset by increased revenues as mentioned above) as well as TV advertising. Amortization expense increased by $11,228,000 due to the increase in intangible asset balances as well as a reduction in the related amortizable lives, primarily goodwill, from 40 years to 20 years. This increase in amortization expense solely relates to the period subsequent to the Transactions. Interest expense increased for the current two fiscal quarters by $4,235,000 to $28,172,000 compared to the same prior year quarters. This increase in interest expense solely relates to the period subsequent to the Transactions as a result of a higher average effective interest rate and higher levels of indebtedness. Other income was $51,000 for the current two fiscal quarters compared to income of $4,151,000 for the same prior year period which had a net gain of $4.4 million from the favorable settlement of certain litigation. 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. In connection with the Transactions, a fee related to an unused bridge loan commitment totaling approximately $4.1 million ($2.6 million net of income taxes) was charged to extraordinary loss in the Inception Period. During the fiscal quarter ended June 29, 1998, we recorded an extraordinary charge totaling approximately $3.4 million ($2.2 million net of income taxes) related to the write-off of deferred debt issuance costs and other charges relating to the refinancing of indebtedness. LIQUIDITY AND CAPITAL RESOURCES We have substantially increased our indebtedness in connection with the Transactions and the acquisition of Globe Communications Corporation and certain publishing assets and liabilities of Globe International, Inc. As a result of the New Credit Agreement and the Notes, our liquidity requirements will be 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, will commence 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 September 27, 1999, there were no amounts outstanding on the revolving credit facility. As of November 10, 1999, $17 million has been drawn from the Company's revolving credit facility primarily to fund the acquisition of the Globe Properties as discussed in Note 8. to the consolidated financial statements. 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. 14 15 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 September 27, 1999, we had cash and cash equivalents of $8.1 million and a working capital deficit of $40.4 million. We do not consider our working capital deficit as a true measure of our liquidity position as our working capital needs typically are met by cash generated by our business. Our working capital deficits result principally from: o 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; o 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 o 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. For the Inception Period, cash provided by financing activities totaling $337.1 million was primarily used to fund the Transactions. Cash from operations of $10.1 million generated from operations for the two fiscal quarters ended September 27, 1999, together with cash on hand on March 30, 1999 of $3.8 million, was used to fund capital expenditures as well as pay down the revolving credit facility. For the two fiscal quarters ended September 28, 1998, cash provided by operating activities totaling $7.9 million was used primarily to fund capital expenditures totaling $7.7 million. We made capital expenditures in the two fiscal quarters ended September 27, 1999 and September 28, 1998 totaling $4.3 million and $7.7 million, respectively. The relatively high levels of capital spending for the prior year fiscal quarter reflected increased capital spending on Soap Opera News display pockets and upgrades of our computer information systems. At September 27, 1999 our outstanding indebtedness totaled $590.9 million, of which $340.0 million represented borrowings under the New Credit Agreement. In connection with the acquisition of the Globe Properties as discussed in Note 8. to the Consolidated Financial Statements, we expanded our New Credit Agreement by $90 million. The effective rate for borrowings under the New Credit Agreement averaged 8.6% for the Inception Period and under the prior credit agreement averaged 7.1% for the period from March 30, 1999 through May 6, 1999 as compared to 7.5% for the two fiscal quarters ended September 28, 1998. In order to reduce our exposure to interest rate risk, we have entered into a $100.0 million interest rate swap agreement expiring in November 2000 under which we pay a fixed rate of 5.95%. 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 material 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 wholly-owned subsidiaries. At present, the note guarantors comprise all of our direct and indirect 15 16 subsidiaries, other than one inconsequential subsidiary. 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. In that regard, we will request a no-action letter from the SEC concurring with our position on this issue. While there can be no assurance, we expect to receive a favorable response to our no-action letter request. EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION ("EBITDA") The following table and discussion summarizes EBITDA for the current fiscal quarter and six months ended September 27, 1999 and September 28, 1998. Fiscal year 1998 EBITDA amounts presented below exclude the operations of Soap Opera Magazine and Soap Opera News which were sold in February, 1999.
Predecessor Company The Company Predecessor Company The Company - ------------------------- ------------------------ ------------------------------------------------------ ----------------------- Fiscal Quarter Fiscal Quarter Two Fiscal Quarters March 30, 1999 May 7, 1999 Ended Sept. 28, Ended Sept. 27, Ended Sept. 28, Through Through 1998 1999 1998 May 6, 1999 Sept. 27, 1999 - ------------------------- ------------------------ --------------------------- -------------------------- ----------------------- $23,951 $26,898 $46,780 $10,467 $40,094
The Company defines EBITDA as net income (loss) before extraordinary charges, interest expense, income taxes, depreciation and amortization and other income (expense). For the fiscal quarter and six months ended September 28, 1998 a management fee of $300,000 and $562,000 was included in other income (expense) and therefore must be included as a reduction of EBITDA in 1998. For the current fiscal quarter and six month period ended September 27, 1999 a $188,000 and $376,000 management fee is included in selling, general and administrative and therefore is included in the calculation of EBITDA. 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"). YEAR 2000 RISK The Year 2000 issue is the result of computer programs that were written using only two digits, rather than four, to represent a year. Date-sensitive software or hardware may not be able to distinguish between the years 1900 and 2000 and programs that perform arithmetic operations; comparisons or sorting of date fields may begin yielding incorrect results. This could potentially cause a system failure or miscalculations that could disrupt operations. To address the impact of the Year 2000 issue on our computer programs, embedded chips and significant third-party suppliers of goods and services we have formed a task force led by our information services department. This task force has completed its inventory of the potential Year 2000 issues that may exist. Certain key systems (e.g. financial applications) have already been identified as Year 2000 compliant; in addition, because of the recent replacement of a majority of the Company's computer hardware, we believe there is little likelihood that this equipment is not Year 2000 compliant. We believe the largest areas of internal 16 17 risk for Year 2000 noncompliance are internally developed software applications and the handheld communications devices used in merchandising by our subsidiary, Distribution Services, Inc. We have purchased specialized software that will allow us to identify and correct Year 2000 problems within our software applications. We have modified and tested the major business applications and plan to address the secondary business systems by November 1999. Our information services department, working with the handheld communication devices, has determined that remediation of the existing handhelds is the appropriate cause of action. We expect to complete this remediation work by December 1999. At the present time, the Y2K project is estimated to cost approximately $500,000 and will be funded through cash flows from operations. Approximately $250,000 of the estimated Year 2000 costs will relate to hardware and software purchases and will be capitalized with the remainder being expensed as incurred. At present, we believe our technology systems will be Year 2000 compliant and that the Year 2000 issue will not present a materially adverse risk to our future results of operations, financial position or cash flow. However, there can be no assurance that our systems will be Year 2000 compliant prior to December 31, 1999 or that the costs incurred will not materially exceed the amounts budgeted. If there are incidences of noncompliance, we plan to allocate internal resources and retain dedicated consultants to address such incidences. In the event that our computers are not Year 2000 compliant by December 31, 1999, and as a result of that noncompliance business interruptions occur, we could incur significant losses in revenues due to such business interruptions, which could have a material adverse effect on our future results of operations, financial position or cash flow. In addition, there is a risk that a significant supplier of goods or services may not be Year 2000 compliant. We are communicating with our significant suppliers of goods and services to obtain reasonable assurance that their products and business systems will be Year 2000 compliant. We rely on certain suppliers to deliver a broad range of goods and services, including prepress operations, printing services, paper, wholesale distribution, mailings and banking services. Although we have taken, and will continue to take, reasonable efforts to gather information to determine and verify the readiness of products and dependencies, there can be no assurance that reliable information will be offered or otherwise available. In order to mitigate the effects of a significant supplier's potential failure to remediate the Year 2000 issue in a timely manner, we would take appropriate actions including arranging for alternate suppliers, re-running processes if errors occur and using manual intervention to ensure the continuation of operations where necessary. Should this happen, it may result in significant delays in business operations including, but not limited to, delays in delivery of products resulting in loss of revenues, increased operating costs, loss of customers or suppliers, or other significant disruptions to our business which could have a material adverse effect on our future results of operations, financial position or cash flow. INFORMATION RELATED TO FORWARD-LOOKING STATEMENTS Certain matters discussed in this Form 10-Q may include forward-looking statements which reflect our Company's views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties which could cause actual results to differ materially from both historical or anticipated results and readers are cautioned not to place undue reliance upon them. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Factors that, among others, could cause actual results to differ materially from historical results or those anticipated include: 1) our high degree of leverage and significant debt service obligations 2) market conditions for our publications 3) competition 4) market prices for the paper used in printing our publications 5) our ability to develop new publications and services 6) changes in economic climate, including interest rate risk 7) outcome of pending and future litigation and 8) potential adverse effects of unresolved Year 2000 problems including external key suppliers. 17 18 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 $100 million of interest rate swap agreements on our term loan and revolving 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 expires in November 2000 has a fixed interest rate of 5.95%. The following table presents the future principal payment obligations and weighted average interest rates associated with our existing long-term instruments assuming our actual level of long-term indebtedness (in 000's):
2000 2001 2002 2003 Thereafter ---- ---- ---- ---- ---------- Liabilities: Long-Term Debt $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 (8.7% for the period Ended September 27, 1999) -- -- $9,300 $16,150 $314,550 Interest Rate Derivatives: Interest Rate Swaps: Variable to Fixed $ 100,000 -- -- -- -- Average Pay Rate (5.95%) Average Receive Rate (5.34%)
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 $600,000 in our interest expense for the three months ended September 27, 1999. 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. 18 19 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K During the fiscal quarter ended September 27, 1999, the Company filed no reports on Form 8-K. 19 20 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: September 12, 1999 By /s/ JOHN A. MILEY ------------------ ------------------------------- John A. Miley Executive Vice President Chief Financial Officer By /s/ LAWRENCE A. BORNSTEIN ------------------------------- Lawrence A. Bornstein Vice President of Finance Chief Accounting Officer 20 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF AMERICAN MEDIA OPERATIONS, INC. FOR THE FISCAL QUARTER ENDED SEPTEMBER 27, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS MAR-27-2000 MAR-30-1999 SEP-27-1999 8,108 0 11,809 469 8,119 36,715 25,755 3,658 1,038,901 77,162 590,874 0 0 2 208,459 1,038,901 140,565 140,565 116,779 116,779 51 0 28,172 (4,335) 2,317 (6,652) 0 (2,581) 0 (9,233) 0 0
-----END PRIVACY-ENHANCED MESSAGE-----