-----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, KjMbCdkmZzLrrTw/UKbTdxMHhFrdgbSrIuMFGxt5RM/5EXl8x7Whow6qNr7e1z6o UkqVjrI78h4xbhFgeBP5LA== 0001021408-01-502102.txt : 20010618 0001021408-01-502102.hdr.sgml : 20010618 ACCESSION NUMBER: 0001021408-01-502102 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000925 FILED AS OF DATE: 20010615 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: 1661407 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 d10q.txt QUARTERLY REPORT ================================================================================ 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 25, 2000 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 (IRS Employee Identification No.) of 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 9, 2000 there were 7,507 shares of common stock outstanding. ================================================================================ 1 AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES INDEX TO FORM 10-Q SEPTEMBER 25, 2000
Page(s) PART I. FINANCIAL INFORMATION Item 1. Company and Predecessor Company Financial Statements- Consolidated Balance Sheets.............................................. 3 Consolidated Statements of Income........................................ 4-5 Consolidated Statements of Cash Flows.................................... 6 Notes to Consolidated Financial Statements............................... 7-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 11-16 Item 3. Quantitative and Qualitative Disclosures about Market Risk........................................................... 16-17 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................................. 18 Signature................................................................ 19
2 AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of September 25 and March 27, 2000 (in 000's, except share information)
March 27, 2000 Sept. 25, 2000 -------------- -------------- ASSETS (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 23,404 $ 7,317 Receivables, net 16,862 16,974 Inventories 12,974 12,794 Prepaid expenses and other 6,405 4,343 ----------- ----------- Total current assets 59,645 41,428 ----------- ----------- PROPERTY AND EQUIPMENT, at cost: Land and buildings 5,735 7,121 Machinery, fixtures and equipment 17,258 19,640 Display racks 27,474 32,677 ----------- ----------- 50,467 59,438 Less - accumulated depreciation (9,353) (16,143) ----------- ----------- 41,114 43,295 DEFERRED DEBT COSTS, net 22,153 20,658 ----------- ----------- GOODWILL, net of accumulated amortization of $22,299 and $34,794 536,369 491,767 ----------- ----------- OTHER INTANGIBLES, net of accumulated amortization of $24,629 and $40,901 507,683 535,911 ----------- ----------- $ 1,166,964 $ 1,133,059 =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Current portion of term loan $ -- $ 3,325 Accounts payable 25,262 18,777 Accrued expenses 66,358 56,500 Deferred revenues 33,054 27,904 ----------- ----------- Total current liabilities 124,674 106,506 PAYABLE TO PARENT COMPANY 1,307 2,279 ----------- ----------- LONG TERM DEBT: Term Loan and Revolving Credit Commitment, net of current portion 430,000 426,675 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 134 134 ----------- ----------- 680,874 677,549 ----------- ----------- DEFERRED INCOME TAXES (NOTE 5) 158,411 154,132 ----------- ----------- CONTINGENCIES (NOTE 7) STOCKHOLDER'S EQUITY: Common stock, $.20 par value; 7,507 shares issued and outstanding 2 2 Additional paid-in capital 223,207 223,207 Retained deficit (21,511) (30,616) ----------- ----------- TOTAL STOCKHOLDER'S EQUITY 201,698 192,593 ----------- ----------- $ 1,166,964 $ 1,133,059 =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. 3 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 --------- --------------------------- Six Weeks from Twenty Weeks from Two Fiscal March 30, 1999 May 7, 1999 Quarters through through ended May 6, 1999 Sept. 27, 1999 Sept. 25, 2000 ----------- -------------- -------------- OPERATING REVENUES: Circulation $ 26,215 $ 93,010 $ 171,184 Advertising 2,640 8,043 15,577 Other 2,308 8,349 10,101 --------- --------- --------- 31,163 109,402 196,862 --------- --------- --------- OPERATING EXPENSES: Editorial 3,040 10,376 19,714 Production 7,784 25,759 50,120 Distribution, circulation and other cost of sales 6,624 21,964 39,747 Selling, general and administrative expenses 3,248 11,209 21,664 Depreciation and amortization 3,703 23,072 36,746 --------- --------- --------- 24,399 92,380 167,991 --------- --------- --------- Operating income 6,764 17,022 28,871 INTEREST EXPENSE (4,837) (23,335) (35,811) OTHER INCOME (EXPENSE), net 25 26 419 --------- --------- --------- Income (loss) before provision for income taxes and extraordinary charge 1,952 (6,287) (6,521) PROVISION FOR INCOME TAXES (1,365) (952) (2,584) --------- --------- --------- Income (loss) before extraordinary charge 587 (7,239) (9,105) EXTRAORDINARY CHARGE, net of income taxes of $1,517 (Note 6) -- (2,581) -- --------- --------- --------- Net income (loss) $ 587 $ (9,820) $ (9,105) ========= ========= =========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 4 AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (IN 000's)
Fiscal Quarter Fiscal Quarter ended ended September 27, September 25, 1999 2000 ------------- ------------- OPERATING REVENUES: Circulation $ 62,090 $ 86,512 Advertising 4,897 8,529 Other 5,740 4,445 -------- -------- 72,727 99,486 -------- -------- OPERATING EXPENSES: Editorial 6,841 9,668 Production 17,086 25,255 Distribution, circulation and other cost of sales 14,246 19,831 Selling, general and administrative expenses 7,656 10,981 Depreciation and amortization 15,039 18,404 -------- -------- 60,868 84,139 -------- -------- Operating Income 11,859 15,347 INTEREST EXPENSE (14,770) (17,989) OTHER INCOME (EXPENSE), net 33 232 -------- -------- Income (loss) before provision for income taxes (2,878) (2,410) PROVISION FOR INCOME TAXES (1,072) (1,693) -------- -------- Net income (loss) $ (3,950) $ (4,103) ======== ========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 5 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 ------- --------------------------- Six Weeks from Twenty Weeks from Two Fiscal March 30, 1999 May 7, 1999 Quarters through through ended May 6, 1999 Sept. 27, 1999 Sept. 25, 2000 ----------- -------------- -------------- Cash Flows from Operating Activities: Net income (loss) $ 587 $ (9,820) $ (9,105) --------- --------- --------- Adjustments to reconcile net income (loss) to net cash provided by operating activities - Extraordinary charge, net of income taxes -- 2,581 -- Depreciation and amortization 3,703 23,072 36,746 Deferred debt cost amortization 147 1,151 1,495 Decrease (increase) in - Receivables, net (369) (3,463) (6,895) Inventories 1,163 548 180 Prepaid expenses and other 1,793 (8,392) 2,062 Increase (decrease) in - Accounts payable (2,184) 697 (6,485) Accrued expenses (164) (2,596) (12,311) Accrued and current deferred income taxes 1,267 3,890 2,584 Deferred revenues (3,159) (349) (5,150) --------- --------- --------- Total adjustments 2,197 17,139 12,226 --------- --------- --------- Net cash provided by operating activities 2,784 7,319 3,121 --------- --------- --------- Cash Flows from Investing Activities: Capital expenditures (717) (3,615) (11,790) Acquisition of business, net of cash acquired -- (332,679) (7,418) --------- --------- --------- Net cash used in investing activities (717) (336,294) (19,208) --------- --------- --------- Cash Flows from Financing Activities: Issuance of common stock -- 235,000 -- Term loan and revolving credit commitment principal repayments (10,000) (279,000) (5,000) Proceeds from revolving credit commitment 6,000 -- 5,000 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 -- (21,657) --------- --------- --------- Net cash (used in) provided by financing activities (4,000) 337,083 -- --------- --------- --------- Net (Decrease) Increase in Cash and Cash Equivalents (1,933) 8,108 (16,087) Cash and Cash Equivalents at Beginning of Period 3,823 -- 23,404 --------- --------- --------- Cash and Cash Equivalents at End of Period $ 1,890 $ 8,108 $ 7,317 ========= ========= ========= Supplemental Disclosures of Cash Flow Information: Cash paid during the period for - Income taxes $ 80 $ 3,261 $ 77 Interest 3,142 20,429 34,069
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 6 AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 25, 2000 (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 27, 2000. 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 the period from May 7, 1999 through September 27, 1999 (the "Inception Period") and the two fiscal quarters ended September 25, 2000 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 25, 2000 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 27, Sept. 25, 2000 2000 ------- ------- Single Copy $ 9,578 $ 4,220 Subscriptions 22,895 23,030 Advertising 581 654 ------- ------- $33,054 $27,904 ======= ======= 7 Other revenues, primarily from marketing services performed for third parties by DSI and Frontline, are recognized when the service is performed. In December 1999, the U.S. Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin 101, "Revenue Recognition" ("SAB 101"), which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. The Company believes its revenue recognition practices are in conformity with the guidelines prescribed in SAB 101. (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 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 (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, 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. 8 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. The preliminary estimates of the fair values of 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. Goodwill and tradenames related to the Globe Acquisition are being amortized over 20 years on a straight-line basis. The following unaudited pro forma financial information gives effect to the Transactions and the Globe Acquisition as if each had occurred as of the beginning of the period presented: Predecessor Company ------------------- Two Fiscal Quarters ended September 27, 1999 ------------------ Operating revenues $ 192,531 Operating expenses (135,635) Depreciation and amortization (36,746) --------- Operating income 20,150 Interest expense (35,811) Other income 342 Provision for income taxes (114) --------- Income (loss) before extraordinary charge $ (15,433) ========= (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 27, Sept. 25, 2000 2000 -------- -------- Raw materials - paper $ 7,958 $ 7,641 Finished product - paper, production and distribution costs of future issues 5,016 5,153 ------- ------- $12,974 $12,794 ======= ======= (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. 9 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 September 25, 2000 the Company's effective interest rate on borrowings under the New Credit Agreement was 10.2%. The effective rate for borrowings under the New Credit Agreement averaged 10.0% for the two fiscal quarters ended September 25, 2000. The effective rate for borrowings under the new Credit Agreement averaged 8.6% for the period from May 7, 1999 through September 27, 1999 and under the prior Credit Agreement averaged 7.1% for the period from March 30, 1999 through May 6, 1999. 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 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) 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. 10 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 two fiscal quarters ended September 25, 2000 and September 27, 1999, 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 is an increase in interest expense related to higher levels of indebtedness and increased amortization expense resulting from a substantial increase in intangible assets. Results of Operations Fiscal Quarter Ended September 25, 2000 vs Fiscal Quarter Ended September 27, 1999 Total operating revenues were $99,486,000 for the current fiscal quarter. Operating revenues increased by $26,759,000, or 36.8%, from the prior fiscal quarter, primarily due to the Globe Acquisition, as well as an increase in operating revenues in the core AMI properties driven by the positive impact of a $.10 cover price in February 2000 for the National Enquirer and Star magazines. Circulation revenues (which include all single copy and subscription sales) were $86,512,000 for the current fiscal quarter. Circulation revenues increased by $24,422,000 or 39.3%, when compared to the prior fiscal quarter, primarily due to circulation revenues from the Globe Properties, as well as the increase in the AMI core properties discussed above. On October 5, 1999 a newly re-designed and expanded Country Weekly was re-launched as a biweekly publication. Additionally, management named a new editor and publisher during the Company's second quarter of fiscal 2000. Concurrent with the change to a biweekly format the cover price was raised from $1.99 to $2.49. The new frequency and format has resulted in an increase in average single copy unit sales of 46.1%. This increase in circulation units coupled with the price increase resulted in single copy revenues to be almost comparable to the prior year in light of the biweekly format. Subscription revenues were $8,694,000 for the current fiscal quarter. Subscription revenues decreased by $553,000, or 6.0%, when compared to the prior fiscal quarter, primarily as a result of the reduction in the frequency of Country Weekly from weekly to bi-weekly. One method of increasing the subscription bases of our publications have been to offer discounted subscriptions through an agent; however, management's new direction is to be more newsstand driven. Advertising revenues were $8,529,000 for the current fiscal quarter. Advertising revenues increased by $3,632,000, or 74.2%, when compared to the prior fiscal quarter. This increase is primarily due to the Globe and Country Music Magazine acquisitions, additional advertising revenues from our core tabloids (National Enquirer and Star magazines) and new advertising revenues from our start-up publications (Auto World Weekly and MIRA!). Total operating expenses for the current fiscal quarter increased by $23,271,000 when compared to the same prior year quarter. This increase is primarily due to additional expenses related to the Globe Acquisition, costs related to the launches of Auto World Weekly and MIRA! and increased amortization expense. Amortization expense increased by $1,673,000 due to the increase in intangible asset balances from the Transactions and the Globe 11 Acquisition 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 $3,219,000 to $17,989,000 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 as a result of the Transactions and the Globe Acquisition. 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. Results of Operations Two Fiscal Quarters Ended September 25, 2000 vs Two Fiscal Quarters Ended September 27, 1999 Total operating revenues were $196,862,000 for the two current fiscal quarters. Operating revenues increased by $56,297,000, or 40.1%, from the two prior fiscal quarters, primarily due to the Globe Acquisition, as well as an increase in operating revenues in the core AMI properties driven by the positive impact of a $.10 cover price in February 2000 for the National Enquirer and Star magazines. Circulation revenues (which include all single copy and subscription sales) were $171,184,000 for the two current fiscal quarters. Circulation revenues increased by $51,959,000 or 43.8%, when compared to the two prior fiscal quarters, primarily due to circulation revenues from the Globe Properties, as well as the increase in the AMI core properties discussed above. On October 5, 1999 a newly re-designed and expanded Country Weekly was re-launched as a biweekly publication. Additionally, management named a new editor and publisher during the Company's second quarter of fiscal 2000. Concurrent with the change to a biweekly format the cover price was raised from $1.99 to $2.49. The new frequency and format has resulted in an increase in average single copy unit sales of 46.5%. This increase in circulation units coupled with the price increase resulted in single copy revenues to be almost comparable to the prior year in light of the biweekly format. Subscription revenues were $17,501,000 for the two current fiscal quarters. Subscription revenues decreased by $1,391,000, or 7.4%, when compared to the two prior fiscal quarters, primarily as a result of the reduction in the frequency of Country Weekly from weekly to bi-weekly. One method of increasing the subscription bases of our publications have been to offer discounted subscriptions through an agent; however, management's new direction is to be more newsstand driven. Advertising revenues were $15,577,000 for the two current fiscal quarters. Advertising revenues increased by $4,895,000, or 45.8%, when compared to the two prior fiscal quarters. This increase is primarily due to the Globe and Country Music Magazine acquisitions, additional advertising revenues from our core tabloids (National Enquirer and Star magazines) and new advertising revenues from our start-up publications (Auto World Weekly and MIRA!). Total operating expenses for the two current fiscal quarters increased by $51,212,000 when compared to the same two prior year quarters. This increase is primarily due to additional expenses related to the Globe Acquisition, costs related to the launches of Auto World Weekly and MIRA! and increased amortization expense. Amortization expense increased by $7,001,000 due to the increase in intangible asset balances from the Transactions and the Globe Acquisition 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. 12 Interest expense increased for the two current fiscal quarters by $7,639,000 to $35,811,000 compared to the same two prior fiscal 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 as a result of the Transactions and the Globe Acquisition. 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 period from May 7, 1999 through September 27, 1999. LIQUIDITY AND CAPITAL RESOURCES We have substantially increased our indebtedness in connection with the Transactions and the Globe Acquisition. 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 November 9, 2000, 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 September 25, 2000, we had cash and cash equivalents of $7.3 million and a working capital deficit of $65.1 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: . 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 27, 2000 of $23.4 million was used to fund capital expenditures, as well as pay interest payments on the revolving credit facility. 13 We made capital expenditures in the two fiscal quarters ended September 25, 2000 and September 27, 1999 totaling $11.8 million and $4.3 million, respectively. At September 25, 2000, our outstanding indebtedness totaled $680.9 million, of which $430.0 million 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 September 25, 2000 the Company's effective interest rate on borrowings under the New Credit Agreement was 10.2%. The effective rate for borrowings under the New Credit Agreement averaged 10.0% for the two fiscal quarters ended September 25, 2000. The effective rate for borrowings under the New Credit Agreement averaged 8.6% for the period from May 7, 1999 through September 27, 1999 and under the prior credit agreement averaged 7.1% for the period from March 30, 1999 through May 6, 1999. 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%. 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 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 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. 14 Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA") The following table and discussion summarizes EBITDA for three and six months ended September 25, 2000 and September 27, 1999.
The Company Predecessor Company The Company - ------------------------------------------------- -------------------------------- ----------------------------------------------- Fiscal Fiscal Two Fiscal Quarter Quarter March 30, May 7, 1999 Quarters ended ended 1999 through ended Sept. 27, Sept. 25, through Sept. 27, Sept. 25, 1999 2000 May 6, 1999 1999 2000 - ------------------------ ------------------------ -------------------------------- ----------------------- ----------------------- $ 26,898,000 $33,751,000 $10,467,000 $40,094,000 $65,617,000
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 Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133--"Accounting for Derivative Instruments and Hedging Activities", which establishes standards of accounting for derivative instruments including specific hedge accounting criteria. SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000 although earlier adoption is allowed. We are continuing to evaluate the impact of adopting SFAS No. 133. However, we do not expect SFAS No. 133 to have a material impact on us. In December 1999, the U.S. Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin 101, "Revenue Recognition" ("SAB 101"), which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provide guidance for disclosure related to revenue recognition policies. We believe our revenue recognition practices are in conformity with the guidelines prescribed in SAB 101. 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. As of September 25, 2000, we have experienced no material Year 2000 problems with the aforementioned systems and applications nor do we expect any problems in the future. Additionally, as of November 9, 2000, we have not experienced any Year 2000 problems with our significant suppliers of goods and services. We will continue to take reasonable efforts to monitor Year 2000 issues relating to our material vendors. 15 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 . increasing competition by domestic significant debt service obligations, and foreign media companies, . our ability to increase circulation and . changes in the costs of paper used advertising revenues, by us, . market conditions for our publications, . any future changes in management, . our ability to develop new publications . general risks associated with the and services, publishing industry and . outcomes of pending and future . potential adverse effects of potential litigation unresolved Year 2000 problems including external key suppliers
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%. 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%. 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%. 16 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 (10.2% for the quarter Ended September 25, 2000) -- -- $9,975 $ 17,050 $402,975 Interest Rate Derivatives: Interest Rate Swaps: Variable to Fixed $ 100,000 -- -- -- -- Average Pay Rate (5.95%) Average Receive Rate (6.72%)
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 $825,000 in our interest expense for the three months ended September 25, 2000. 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. 17 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K NONE During the fiscal quarter ended September 25, 2000, the Company filed no reports on Form 8-K. 18 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: November 9, 2000 By: /s/ JOHN A. MILEY ---------------------------- John A. Miley Executive Vice President Chief Financial Officer 19 -----END PRIVACY-ENHANCED MESSAGE-----