10-K405 1 d10k405.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (X) For the Fiscal Year Ended March 26, 2001 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-11112 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) 5401 N.W. Broken Sound Blvd., Boca Raton, Florida 33487 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (561) 997-7733 Securities registered pursuant to Section 12(b) and 12(g) of the Act: None Indicate by check mark whether the registrant: (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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No __ - Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K./x/ As of June 25, 2001, 7,507.6 shares of registrant's common stock were outstanding. The common stock is privately held and, to the knowledge of registrant, no shares have been sold in the past 60 days. Documents Incorporated by Reference None 1 AMERICAN MEDIA OPERATIONS, INC. FORM 10-K FOR THE YEAR ENDED MARCH 26, 2001 PART I Item 1. Business Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders PART II Item 5. Market for Registrant's Common Equity and Related Security Holders Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K Signatures 2 PART I ITEM 1. BUSINESS Unless the context otherwise requires, references in this Form 10-K to the "Company" or "us", "we" or "our" are to American Media Operations, Inc. and its subsidiaries. All references to a particular fiscal year are to the four fiscal quarters ended the last Monday in March of the fiscal year specified. We were incorporated under the laws of Delaware in February 1981 and are a wholly-owned subsidiary of American Media, Inc. ("Media"). We conduct all of Media's operations and represent substantially all of Media's assets. Our headquarters and principal executive offices are located at 5401 N.W. Broken Sound Blvd, Boca Raton, FL 33487 and the telephone number is (561) 997-7733. In February 1999, we ceased publication of Soap Opera News and Soap Opera Magazine and sold certain of the trademarks and other soap opera publishing assets relating to these magazines (collectively, the "Soap Opera Assets") to Primedia, Inc. for $10 million in cash. In addition, we may receive future consideration through February 2002 based upon increased financial performance above certain levels of Primedia, Inc.'s Soap Opera Digest and Soap Opera Weekly publications. There can be no assurance however that we will receive any such future consideration. As of June 25, 2001, we have not received any such consideration. On May 7, 1999 all of the common stock of Media was purchased by EMP Group LLC (the "LLC"), a Delaware limited liability company, pursuant to a merger of Media and EMP Acquisition Corp. ("EMP"), a wholly owned subsidiary of the LLC. Proceeds to finance the acquisition included (a) a cash equity investment of $235 million by the LLC, (b) borrowings of approximately $350 million under a new $400 million senior bank facility (the "New Credit Agreement") and (c) borrowings of $250 million in the form of senior subordinated notes (the "New Subordinated 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 (the "Credit Agreement") with our banks, (f) retire approximately $199 million of our $200 million Senior Subordinated Notes due 2004 and (g) pay transaction costs (all such transactions in (a) through (g) are collectively referred to as 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. As a result of this change in control, as of the Merger date we reflected a new basis of accounting that included the elimination of historical amounts of certain assets and liabilities and the revaluation of certain of our tangible and intangible assets. 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 New Credit Agreement by $90 million, approximately $14 million from the Company's existing revolving line of credit, which has since been repaid in full, and the issuance to the sellers of $5 million of equity in the LLC. These proceeds were used to acquire the Globe Properties and to pay transaction costs. 3 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 American 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. On August 1, 2000, the Company acquired certain publishing assets and liabilities of Country Music Magazine for total cash consideration of $600,000. Country Music Magazine is a bi-monthly special interest magazine presenting various aspects of country music, lifestyles, events and personalities. Industry Data and Circulation Information Unless otherwise specifically indicated, all statements presented in this Form 10-K regarding (a) circulation rankings in the United States and Canada of National Enquirer, Star, Globe, National Examiner, Weekly World News and Sun relative to other magazines are based on weekly single copy circulation and of Country Weekly in its category based on bi-weekly circulation, (b) rankings in the United States and Canada of National Enquirer, Star, Globe and National Examiner relative to other magazines based on total magazine retail dollars generated, (c) our publications' share of total weekly single copy circulation in the United States and Canada and (d) the percentage that average weekly single copy circulation of our publications in the United States, Canada or outside of North America represents of total average weekly single copy circulation of our publications are based upon statistical data obtained from the report of the Audit Bureau of Circulations for the six months ended December 31, 2000 (which information has not been independently verified by us). Unless otherwise indicated, all average weekly circulation information for our publications is an average of actual weekly circulation for the twelve months ended March 26, 2001. All references to "circulation" are to single copy and subscription circulation, unless otherwise specified. All information regarding National Enquirer, Star, Country Weekly, and Country Music is based on Spring 2001 Mediamark Research Inc. syndicated research data (which information has not been independently verified by us). Information regarding magazine audience estimates (i.e. multiple readers per copy) and reader demographics for all other AMI titles are based on research conducted by outside independent research companies and the individual publishers' estimates. The Company Overview We are a leading publisher in the field of general interest magazines, publishing National Enquirer, Star, Globe, National Examiner, Weekly World News, Sun, Country Weekly, Country Music Magazine, MIRA!, Auto World Monthly and other smaller monthly publications with a current aggregate weekly newsstand circulation of approximately 4.6 million copies. National Enquirer, Star, and Globe, our premier titles, have the first, fifth and sixth highest weekly single copy circulation, respectively, of any weekly periodical in the United States. We are the leader in total weekly single copy circulation of magazines in the United States and Canada with approximately 36% of total U.S. and Canadian circulation for audited weekly publications. We 4 derive approximately 85% of our revenues from circulation, predominantly single copy sales in retail outlets, and the remainder from advertising and other sources. National Enquirer, Star, Globe and National Examiner are distributed in approximately 165,000 retail outlets in the United States and Canada, representing, in the opinion of management, substantially complete coverage of periodical outlets in these countries. Distribution Services, Inc. ("DSI"), our subsidiary, arranges for the placement and merchandising of our publications and third-party publications at retail outlets throughout the United States and Canada. In addition, DSI provides marketing, merchandising and information- gathering services for third parties. Our tabloid publications are among the most well-known and widely distributed titles in the publishing industry. While our tabloid publications have a current aggregate weekly newsstand circulation of approximately 4.6 million copies, they enjoy a weekly readership of over 30 million people due to multiple readers per copy sold. Our other titles (including the Mini Mags, Micro Mags and Digests) contribute an additional readership of over 20 million, giving AMI titles a total readership in excess of 50 million. As a result, we believe our publications enjoy strong consumer brand awareness with a large and loyal readership base. Our publications include the following titles: . National Enquirer is a weekly general interest periodical with a editorial content devoted to investigative reporting, celebrity gossip & features, human interest stories and articles covering lifestyle topics such as health, food and household affairs. National Enquirer is the highest selling weekly periodical in the United States and Canada based on single copy circulation, selling on average 1,657,000 copies per week. National Enquirer has a total average weekly circulation of 2,041,000 copies, including subscriptions, with a total readership in the U.S. and Canada of 14.1 million. The median age of the National Enquirer's readership is 41 and almost 70% of the readers are women. National Enquirer's cover price is $1.89 in the United States and the 72 page expanded issues (versus a regular issue of 48 pages) are priced at $2.89. In Fiscal 2001, there were nine such issues. Excluding these nine expanded issues, average single copy and total average weekly circulation was 1,680,000 and 2,064,000 respectively. . Star is a weekly celebrity news-based periodical dedicated to covering the stars of television, movies and music, as well as the lives of the rich and famous from politics, business, royalty and other areas. Star's editorial also incorporates fashion, health, fitness, diet, all with a celebrity spin. Star is the fifth highest selling weekly periodical in the United States and Canada based on single copy circulation, selling on average 1,301,000 copies per week. Star has a total average weekly circulation of 1,612,000 copies, including subscriptions, with a total readership in the U.S. and Canada of 7.8 million. The median age of the Star's readership is 40 and over 70% of the readers are women. Star's cover price is $1.89 in the United States and the 72 page expanded issues (versus a regular issue of 48 pages) are priced at $2.89. In fiscal 2001, there were nine such issues. Excluding these nine expanded issues, average single copy and total average weekly circulation was 1,321,000 and 1,632,000, respectively. . Globe is a weekly tabloid with content that is much edgier than the National Enquirer and Star, with a greater emphasis on investigative crime stories. Globe is the sixth highest selling weekly periodical in the United States and Canada based on single copy circulation, selling on average 663,000 copies per week. Globe has a total average weekly circulation of 730,000 copies, including subscriptions, with an estimated readership of over 4.2 million. Over 70% of the readers are women, with an estimated median age of 47. Globe's cover price is $1.89 in the United States and the 5 72 page expanded issues (versus a regular issue of 48 pages) were priced at $2.89. In fiscal 2001, there were seven such issues. Excluding these seven expanded issues, average single copy and total average weekly circulation was 671,000 and 738,000, respectively. . National Examiner's editorial content consists of celebrity and human- interest stories, differentiating itself from the other titles through its upbeat positioning as the "gossip, games and good news" tabloid. The National Examiner sells an average 335,000 copies per week, with a average weekly circulation of 358,000 copies, including subscriptions. Total readership is estimated at 1 million, 85% female, with an estimated median age in their early 50s. National Examiner's cover price is $1.89 in the United States. . Weekly World News is a tabloid devoted to the publication of entertaining, bizarre and strange but true stories. There is much humorous original content and the paper has created several characters that have become staples of pop culture. Weekly World News has an average weekly single copy circulation of 254,000 copies, with a total average weekly circulation of 275,000 copies, including subscriptions. Readership is estimated at 1.5 million. The young (40% of the readership is under 30) and old (45% is over 60) are drawn to the funny and unusual mix of stories found in Weekly World News. Weekly World News' cover price is $1.69 in the United States. . Sun's editorial content is skewed to an older target audience and focuses on religion, health, holistic remedies, predictions and prophecies. Sun also includes entertaining and unusual articles from around the world. Sun has an average weekly single copy circulation of approximately 167,000 copies, with a total readership estimated at 550,000. 80% of Sun's readers are women, with a median age approaching 60. The Sun has a cover price of $1.69 in the United States. . Country Weekly is a special interest magazine presenting various aspects of country music, lifestyles, events and personalities, and has the highest weekly circulation of any such magazine in its category. On October 5, 1999 a newly re-designed and expanded Country Weekly was re-launched as a biweekly publication. Concurrent with the change to a biweekly format the cover price was raised from $1.99 to $2.49. Country Weekly has an average single copy circulation of 224,000 copies, with a total average bi-weekly circulation of 447,000 copies, including subscriptions. Total readership is 2.8 million, and 67% of the readers are women. The median age is 40. . Country Music Magazine is a bi-monthly publication that is also a special interest magazine presenting various aspects of country music, lifestyles, events and personalities. The Company acquired Country Music Magazine on August 1, 2000. Since the acquisition date, Country Music Magazine had an average single copy circulation of approximately 18,000 copies with a total average circulation of 319,000 copies and a cover price of $2.99 in the United States. Country Music Magazine has a total readership of 4.8 million, and 64% of the readers are women. The median age is 43. . Micro Mags. We publish pocket-sized books under the name of Micro Mags covering such topics as diets, horoscopes, health and psychic phenomena. Thirteen releases are published annually, each with four titles, at a current price of $1.79. In fiscal 2001, revenues for Micro Mags were approximately $5.3 million. 6 . Mini-Mags and Digest. Our Mini-Mags and Digest business was added in the Globe Acquisition. The unit publishes a series of booklets ranging in price from $0.99 to $2.59 and covering such topics as diets, health, astrology and pets. Mini-Mags and Digests are similar to our Micro Mags publications. The Mini-Mags and Digest business produces approximately 81 million booklets and approximately $19.0 million in sales. The combination of Globe's former Mini-Mags unit and our Micro Mags has created the largest unit of its kind in the publishing business. The combined unit is expected to cover 616,000 pockets at supermarket checkouts. . Mira. Launched in June of 2000 as a bi-weekly, Mira is a Spanish language magazine that features exclusive news, gossip and goings-on about the hottest stars in the Latino community, along with interviews and in-depth stories spotlighting them at work and at play. It is distributed at checkout in supermarkets, bodegas and mass merchandisers in the top 43 Hispanic markets in the U.S. Based on single copy sales growth, Mira shifted to a weekly frequency in January 2001. The magazine has a cover price of $1.79 and a weekly circulation of 200,000. Total readership is estimated at 800,000. 74% of the readers are women and the median age is 37. . AMI Auto World Magazine. Launched as a biweekly in June 2000, Auto World targets the in-market buyer and is the only automotive magazine sold at checkout in supermarket and mass merchandisers. The readership is 33% female, giving Auto World by far the highest number of women readers of any automotive title. Articles focus on buying new and pre- owned cars, road tests, comparison tests, news, pricing, recalls and rebates. Auto World shifted to a monthly frequency in July 2001. The magazine has a cover price $3.95 and a projected monthly circulation of 100,000. . New Media. There are web sites for the National Enquirer (nationalenquirer.com), Star (starmagazine.com), Country Weekly (countryweekly.com), Weekly World News (weeklyworldnews.com) and Auto World Monthly (amiautoworld.com). The company is currently syndicating its content to Lycos, Iwon, Keen and E-universe, and is working on similar agreements with numerous other web sites. Syndication fees are based on shared subscription and advertising revenues. Circulation Our tabloid publications have an aggregate weekly newsstand circulation of approximately 4.6 million copies and a weekly readership of over 30 million people due to multiple readers per copy sold. We derive approximately 85% of our revenues from circulation and the remainder from advertising and other sources. Approximately 90% of our circulation revenues are generated by single copy circulation at retail outlets and the remainder by subscriptions. The United States, Canada and areas outside of North America represented approximately 87%, 10% and 3% of average weekly single copy circulation, respectively. 7 Single Copy Circulation. The following table sets forth average weekly single copy circulation and U.S. cover prices for our publications for the three fiscal years 1999, 2000 and 2001. Average Weekly Single Copy Circulation and U.S. Cover Price
For Fiscal Year Ended ---------------------------------------------------- March 29, March 27, March 26, 1999 2000 2001 --------- --------- --------- (circulation data in thousands) National Enquirer Single Copy Circulation 1,766 1,743 (3) 1,657 (4) Cover Price $ 1.49 (1) $ 1.69 (1) $ 1.89 (1) Star Single Copy Circulation 1,445 1,407 (3) 1,301 (4) Cover Price $ 1.49 (1) $ 1.69 (1) $ 1.89 (1) Globe Single Copy Circulation 759 741 663 (4) Cover Price $ 1.49 (1) $ 1.69 $ 1.89 (1) National Examiner Single Copy Circulation 430 401 335 Cover Price $ 1.49 (1) $ 1.69 $ 1.89 (1) Weekly World News Single Copy Circulation 350 306 254 Cover Price $ 1.39 (1) $ 1.59 (1) $ 1.69 (1) Sun Single Copy Circulation 219 207 167 Cover Price $ 1.39 (1) $ 1.59 (1) $ 1.69 (1) Country Weekly Single Copy Circulation 169 175 (2) 224 Cover Price $ 1.99 (1) $ 2.49 (1) $ 2.49 (1)
____________________________________ (1) We increased the U.S. cover price on each of the National Enquirer, Star, Globe and National Examiner from $1.49 to $1.59 on July 27, 1999, to $1.69 on February 8, 2000 and to $1.79 on October 3, 2000, and then to $1.89 on March 13, 2001. We increased the U.S. cover price on Weekly World News and Sun from $1.25 to $1.39 on September 1, 1998, to $1.49 on July 27, 1999, to $1.59 on January 4, 2000 and then to $1.69 on January 2, 2001. We increased the U.S. cover price on Country Weekly on April 7, 1998 from $1.69 to $1.79, to $1.99 on March 2, 1999 then to $2.49 on October 5, 1999 simultaneously with its re-launch as a bi-weekly publication. (2) Bi-weekly average circulation from October 5, 1999 through March 27, 2000 was 205,000. (3) Amount includes six expanded issues for both the National Enquirer and Star that include 72 pages versus a regular issue of 48 pages and are priced at $2.69. Excluding these six issues, 8 single copy circulation was 1,767,000 and 1,428,000 for both the National Enquirer and Star, respectively. (4) Amount includes nine expanded issues for both the National Enquirer and Star and seven expanded issues for the Globe that include 72 pages versus a regular issue of 48 pages and are priced at $2.89. Excluding these nine issues, single copy circulation was 1,680,000, 1,321,000 and 671,000 for the National Enquirer, Star, and Globe, respectively. For fiscal 2001, single copy circulation for each of our six tabloids experienced a decline. Overall our tabloid titles were down 8.9% in units while the overall magazine industry was down 11.1%. In what was called by industry experts the "worst year ever" for single copy sales (verified by the December 2000 ABC report), ten of the top twenty five newsstand titles suffered double digit declines in newsstand sales. Additionally, newsstand sales decreased for nearly two thirds of all ABC magazines. The root cause of these declines lies primarily with the wholesalers that physically distribute our magazines (i.e. deliver to the retailer, fill the pockets at checkout, etc.). There has been an industry wide consolidation in the wholesaler distribution industry that has resulted in four wholesalers representing 81% of the market today and 55 smaller wholesalers representing the remaining 19%. In an effort to gain further market share, these four wholesalers negotiated contracts with the major retailers that resulted in increased share, but lower margins. To economize, the wholesalers have had to cut expenses, which in turn resulted in very poor service levels. Minimal time spent in stores meant pockets were not properly stocked. Allotments were reduced to speed up returns processing and over 20 thousand retail outlets were dropped from delivery routes to save on time and expenses. For example, our research showed that an average of 14% of our pockets either did not have any copies of our publications or were occupied by a competitive title. These pocket violations are as high as 22% for our secondary titles such as the Weekly World News and Sun. We believe that these pocket violations and overall recent distribution issues are a major reason behind our circulation declines in the past year, and that correcting them could recapture lost retail sales for our titles. As we are the largest and most profitable publisher to both the retail and wholesale trade, we are in a unique position to lead the industry in further studying and resolving these issues. Currently, we are working with all the wholesalers, as well as other large publishers and retailers on improving service levels. After witnessing the decline in overall unit sales in calendar year 2000, the entire industry of publishers, wholesalers and retailers are now keenly focused on improving distribution to regain lost sales. Despite the unit circulation declines during fiscal 2001, we have been able to increase our total tabloid retail dollars (the total amount of gross revenue generated by retailers) by 5.7% through prudent increases in our cover prices. We continue to believe and our in-depth consumer research shows that increasing cover prices prudently over time does not have a material impact on circulation. In order to build our brand names and support our price increases we have continued our multi- tiered advertising campaign, which includes television, print and outdoor advertising for the National Enquirer and Star. These campaigns emphasize each publications strong journalistic content and investigative nature. For the fiscal years ended March 26, 2001 and March 27, 2000 we spent approximately $9.5 million and $9.6 million, respectively on our advertising campaigns. Mainstream recognition of the tabloids has never been higher. After the National Enquirer broke the Jessie Jackson mistress affair, the Washington Post called it "the hottest 9 paper in America". The Star was recently cited by Fox News for its revelations about Congressman Gary Condit and missing Washington intern Chandra Levy. This type of mass media advertising and PR exposure has significantly benefited the overall readership of both papers, which in turn has driven ad sales to unprecedented levels. According to the Spring MRI syndicate research, the National Enquirer readership increased by 16.6% and the Star by 9.2%. Ad pages for the period January-April 2001, as measured by the Publishers Information Bureau, have grown by 27% for National Enquirer and 26% for Star over prior year. These increases were the highest among ABC titles for that period. Subscription Sales. Our strategy with respect to subscriptions seeks to optimize subscription revenues and profitability as opposed to subscription circulation. We accomplish this strategy by focusing on direct sales of our titles by us through inserts and direct mailings. From time to time, however, we utilize agents, such as Publishers Clearing House, to maintain and expand our subscriber base subscription circulation. In fiscal 2001, approximately 10% (or $35.0 million) of our total revenues from circulation were from subscription sales. Average weekly subscription circulation for fiscal 2001 were 384,000 copies for National Enquirer, 311,000 copies for Star, 67,000 copies for Globe, 23,000 copies for National Examiner, 21,000 copies for Weekly World News, 5,000 copies for Sun and 223,000 copies for Country Weekly as a bi-weekly publication. Subscription renewal rates for our publications (exclusive of subscriptions sold by direct mail agents) were 85% for National Enquirer, 85% for Star, 73% for the Globe, 70% for the National Examiner, 62% for the Sun, 78% for Weekly World News and 70% for Country Weekly for subscriptions which expired during the 2000 calendar year. In calendar 2000, approximately two-thirds of our subscribers purchased their subscriptions directly from us. We believe that our core subscribers are those who do not purchase through direct mail agents due to the fact that renewals by people who subscribe through direct mail agents are low. Advertising Revenues We had approximately $37.1 million in advertising revenues in fiscal 2001. Our advertising revenues are generated by national advertisers, including consumer product and broadcasting companies, direct response and classified advertisers. We employ advertising sales people and maintain advertising sales offices in New York City, Chicago, Los Angeles, Detroit, Nashville, Miami and Boca Raton. Editorial The editorial departments of our publications operate independently. The editorial headquarters for National Enquirer, Star, Globe, National Examiner, Sun and Weekly World News are in Boca Raton, Florida. The tabloids also have editorial bureaus in Los Angeles and New York. MIRA's editorial headquarters is located in Miami, Florida. Country Weekly and Country Music Magazine's editorial headquarters are located in Nashville, Tennessee. Auto World Magazine's editorial headquarters is located in Pass Christian, Mississippi. The editorial news gathering operation of National Enquirer, Star and Globe are each directed by an editor-in-chief, an executive editor who supervises article editors, including a Los Angeles and New York bureau chief. The article editors are responsible for developing and 10 gathering news stories and story ideas. The article editors also have staff reporters, as well as photo editors who work under the direction of a head photo editor. Stories brought in for publication are processed through a skilled team of writers and a design layout department. Each story is checked during the process by a research department before actual publication. In addition to their editorial staffs, National Enquirer, Globe and Star pay outside sources for story leads. In addition to their editorial staffs the National Enquirer, Globe and Star have networks of free-lance reporters and free-lance photographers to whom they can assign stories. Because a significant amount of our editorial content is based on investigative reporting, our publications are "first source" or "breaking story" magazines for our readers . The editorial staffs of Weekly World News, National Examiner, Sun, Country Weekly, Country Music Magazine, MIRA! and Auto World are each managed by an editor-in-chief. Due to the nature of the investigative reporting, National Enquirer, Globe and Star have internal procedures of having legal counsel (outside and internal) review any articles, photographs and headlines before any story is published. We believe that this pre-publication "vetting" has been important in mitigating the risk and occurrence of libel-based suits against the publications. There are currently no claims pending that we believe would have a material adverse effect on our operations. Production and Distribution An unrelated third-party performs most of the pre-press operations for our publications and is responsible for transmitting them electronically to printing plants. We have a long-term printing agreement with an unrelated domestic printer to print National Enquirer, Star, Globe, National Examiner, Weekly World News, Sun and Country Weekly through December 2010 for sales in the United States, Canada and, to the extent applicable, outside of North America (except for the United Kingdom). This same printer also prints the majority of our other publications. National Enquirer has a special United Kingdom edition, which is printed by another unrelated printer. Once printed, the copies are distributed primarily by 4 regional wholesalers, who represent 81% of the market, as well as 55 smaller wholesalers who represent the remaining 19%, in the United States and Canada, who deliver the requisite number of copies to approximately 165,000 retail sales locations. We believe our relationships with our printing companies are adequate and that there are printing facilities available elsewhere, should the need arise. The principal raw materials utilized by our publications are paper and ink. Paper is purchased directly by us from several suppliers based upon pricing and, to a lesser extent, availability. Ink utilized by our publications is purchased by the printers from at least two different ink suppliers. Both paper and ink are commodity products with pricing affected by demand, capacity and economic conditions. We believe that adequate sources of supply are, and will continue to be, available to fulfill our requirements. Our operating income may be significantly affected by the price of paper used in our publications. If paper prices increase in the future and we cannot pass these costs on to our customers, such increases may have a material adverse effect on us. We have currently committed our volume requirements with our major suppliers through March 2002; however, we have not locked in prices beyond June of 2001 as we believe that the price of paper will be declining based on current market conditions. Marketing and Merchandising We have established, through DSI, our own marketing organization whose primary function is to coordinate the placement and merchandising of our publications and third-party 11 publications in retail outlets throughout the United States and Canada. In addition to the services DSI provides for our publications, DSI acts as a "quarterback" for approximately 45% (based on our estimates) of new front-end racking programs initiated annually in the United States and Canada by supermarkets and other retailers. Recently, DSI has begun to leverage its network of field representatives, which are regularly in retail outlets performing its services, by expanding its services to provide merchandising, resetting of rack programs and other information services to consumer product companies outside the publishing industry. DSI's field representatives visit approximately 17,000 locations weekly, representing 40% of AMI's volume. Approximately every three years, supermarkets and other retailers typically redesign their front-end racks, generally as part of store renovations or new store openings. As a "quarterback," DSI is selected by retailers to coordinate the design and installation of the front-end racks and the positioning of magazines for increased sales. Publishers, including the Company, which are allocated space on a rack enter into contracts directly with the retailer for the payment of fees (rack display payments) or other charges with respect to that space. DSI uses its role as quarterback of new front-end rack programs initiated annually by retailers in the United States to achieve better placement of our publications and of the publications of DSI's third-party publishing clients. DSI is not paid by the retailers for the services it renders as quarterback. DSI provides marketing services for the Company and third-party publishing clients to achieve favorable placement of their respective publications at supermarkets and other retail outlets. DSI also provides merchandising, resetting of rack programs and other information services such as checking retail stock displays and repositioning and restocking in-store inventories for the Company and its other clients. DSI's staff is equipped with handheld computers in order to enhance the timeliness and accuracy of its information- gathering services. Some of DSI's third-party clients include Hachette, which publishes Woman's Day, Woman's Day Specials and Elle; Gruner & Jahr USA/Publishing, which publishes Family Circle, Family Circle Specials, Rosie (formerly McCall's), Fitness, Parents and YM; Wenner Media, Inc., which publishes US Weekly Magazine, Rolling Stone Magazine and Men's Journal; Newsweek, Inc., which publishes Newsweek; and Rodale Press, Inc., which publishes Prevention and Prevention Guides. DSI's contracts to provide marketing and merchandising services to third- party clients generated approximately $15.6 million in revenues in fiscal 2001, as compared to $14.2 million and $13.6 million in fiscal 2000 and fiscal 1999, respectively. Other Businesses On November 27, 2000, the Company solid its 80% owned subsidiary, Frontline Marketing, ("FMI") to the minority shareholder for a $2.5 million note receivable (See Note 9 to the Consolidated Financial Statements). Through FMI, we sold in-store advertising space to various product manufacturers and other national advertisers. FMI owns signage consisting of elevated light displays at checkout counters in about 5,100 supermarkets and considers itself a premier advertising vehicle for new products and front-end brands. FMI is responsible for maintaining the signage and pays retailers commissions on advertising sales. In fiscal 2001, revenues from FMI were $2.1 million or approximately 0.5% of total operating revenues. We also had ancillary sales (primarily licensing and syndication sales) of $1.9 million in fiscal 2001. 12 Competition National Enquirer, Globe, Star, National Examiner, Weekly World News, Sun, MIRA!, Country Music Magazine and Country Weekly compete in varying degrees with other publications sold at retailers' checkout counters, as well as forms of media concentrating on celebrity news, such as certain newspapers, magazines and television and radio programs. We believe that historical declines in single copy circulation of National Enquirer, Globe, Star and National Examiner have resulted in part from increased competition from these publications and forms of media. Competition for circulation is largely based upon the content of the publication, its placement in retail outlets and, to a lesser extent, its price. Competition for advertising revenues is largely based upon circulation levels, readership, demographics, price and advertising results. We believe that currently our most significant direct competitors in the print media are Time Warner Inc. (which publishes People, In Style and Entertainment Weekly), Wenner Media, Inc. (which publishes US Weekly Magazine), and TV Guide, Inc. (which publishes TV Guide). DSI competes with many other companies providing marketing and distribution services, such as full-service national distributors, wholesalers and publishers with their own marketing organizations. Employee Relations We currently employ approximately 627 full-time employees and 1,407 part- time employees. Approximately 1,519 of our employees, including almost all of our part-time employees, work for DSI. None of our employees is represented by any union or other labor organization. We have had no strikes or work stoppages during the last five years. We believe that our relations with our employees are good. ITEM 2. PROPERTIES We own our headquarters building, which was acquired as part of the Globe Acquisition in Boca Raton, Florida. This premise is a three story, 70,000 square foot free standing building. This building houses the editorial staffs of the National Enquirer, Star, Globe, National Examiner, Weekly World News, Sun, and Mini-Mags, as well as our corporate office. We also lease 11,800 square feet in New York, New York for advertising, editorial, and new media personnel, 16,400 square feet in Delray Beach, Florida for certain back office functions, 12,500 square feet in West Palm Beach, Florida for DSI and 3,000 square feet for Country Weekly and Country Music Magazine in Nashville, Tennessee. Various other smaller properties are leased primarily in New York, Los Angeles, Detroit, Miami, and Pass Christian, Mississippi for certain of our other operations. We believe that all of our properties are in generally good condition and are adequate for current operations. ITEM 3. LEGAL PROCEEDINGS We are involved in a number of litigation matters, which have arisen, in the ordinary course of business. Because the focus of our publications often involves controversial celebrities or subjects, the risk of defamation or invasion of privacy litigation arises in the ordinary course of our business. Our experience suggests that the claims for damages made in such lawsuits are heavily inflated and, in any event, any reasonably foreseeable liability or settlement would be covered by insurance. During the five fiscal years ended March 26, 2001, we paid approximately 13 $21 million in the aggregate for legal fees (including prepublication review and litigation), litigation related insurance premiums and, to a lesser extent, litigation settlements, including amounts covered by insurance payments. We have not experienced any difficulty obtaining such insurance and do not expect to experience any material difficulty in the future. There are currently no claims pending that we believe would have a material adverse effect on our operations. Multiple sources as well as documentation are sought for all stories that are potentially controversial or subject to dispute. In addition, because of their high level of investigative reporting, prior to publication, we retain special libel counsel for National Enquirer and we utilize six full-time attorneys for the prepublication review of all sensitive stories and celebrity news and photos for the Globe, Star and National Examiner. Before publishing book excerpts, we generally obtain indemnification from the publisher, author and/or agent concerning publication rights and defamation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of our security holders during fiscal 2001. 14 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDERS All of the Company's common stock is owned by Media. Accordingly, there is no established public trading market for our common stock. ITEM 6. SELECTED FINANCIAL DATA The selected financial data for each of the five fiscal years in the period ended March 26, 2001 below have been derived from the consolidated financial statements of the Company, which have been audited by independent certified public accountants. The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", the Company's Consolidated Financial Statements and Notes thereto and other financial information appearing elsewhere in this Form 10-K. As discussed above, the parent of 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 will be referred to as the "Company". The period from May 7, 1999 through March 27, 2000 will be referred to as the "Inception Period". A solid black vertical line has been inserted in tables where financial information may not be comparable across periods.
Predecessor Company ----------------------------------------------------- Fiscal Years Ended The Company ---------------------------------------- ------------------------------ Six Weeks Forty-Six from March Weeks from Fiscal Year 30, May 7, 1999 Ended March 31, March 30, March 29, through through March 26, 1997 (1) 1998 1999 May 6, 1999 March 27, 2000 2001 --------- --------- --------- ----------- -------------- ----------- (dollars in thousands) Statement of Income Data: Operating Revenues $315,988 $307,684 $293,459 $ 31,163 $ 294,046 $ 397,783 Operating Expenses (2) 228,817 237,104 228,060 24,399 254,274 335,213 --------- --------- --------- ----------- ------------- ----------- Operating Income 87,171 70,580 65,399 6,764 39,772 62,570 Interest Expense (56,284) (50,486) (46,897) (4,837 (57,466) (71,742) Other Income (Expense), Net (3) (1,705) (1,641) 2,943 25 125 751 --------- --------- --------- ----------- ------------- ----------- Income before Income Taxes and Extraordinary Charge 29,182 18,453 21,445 1,952 (17,569) (8,421) Income Taxes 16,716 12,437 13,559 1,365 1,361 6,875 --------- --------- --------- ----------- ------------- ----------- Income (Loss) before Extraordinary Charge 12,466 6,016 7,886 587 (18,930) (15,296) Extraordinary Charge, net of Income Taxes (4) -- -- (2,161) -- (2,581) -- --------- --------- --------- ----------- ------------- ---------- Net Income (Loss) $ 12,466 $ 6,016 $ 5,725 $ 587 $ (21,511) $ ( 15,296) ========= ========= ========= =========== ============= ========== Balance Sheet Data: Total Assets $670,850 $647,930 $616,838 N/M $1,166,964 $1,134,990 Total Debt 528,662 497,535 471,134 N/M 680,874 680,874 Total Stockholder's Equity 48,457 54,473 60,198 N/M 201,698 186,493 Other Data: EBITDA (5) $114,593 $ 99,926 $ 96,347 $ 10,467 $ 96,982 139,303 Depreciation 8,145 9,252 11,035 1,272 10,281 19,154 Amortization of Intangibles 21,075 21,075 21,075 2,431 46,928 57,579 Capital Expenditures 8,526 11,018 15,019 717 13,330 27,875
15 (1) Fiscal 1997 includes 53 weeks as compared to 52 weeks for all other fiscal years presented. (2) Fiscal 1999 is net of a gain of $6.5 million from the sale of the Soap Opera Assets. (3) Other income (expense) for the periods from March 25, 1996 through March 29, 1999 is comprised of the management fee accrued during such period and miscellaneous nonrecurring items and includes for the period ended March 29, 1999, a net gain of $4.4 million from the favorable settlement of certain litigation. The fiscal year ended March 27, 2000 and the six weeks ended May 6, 1999 includes miscellaneous non-recurring items. The fiscal year ended March 26, 2001 includes minority interest income of $376,000 and interest income of $570,000. (4) 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 fiscal 1999, 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. (5) EBITDA is defined as net income (loss) before extraordinary charges, interest expense, income taxes, depreciation and amortization and other income (expense) (other than management fees). The management fees included in other income (expense) were $1.8 million, $1.7 million and $1.2 million respectively, for fiscal 1997, 1998 and 1999. Beginning in fiscal 2000, a new monitoring fee of $750,000 per annum, of which $663,000 and $750,000 were charged in fiscal 2000 and 2001, respectively, is included in selling, general and administrative operating expense and therefore is included in the calculation of EBITDA. EBITDA is not a measure of performance defined by GAAP. EBITDA should not be considered in isolation or as a substitute for net income or a statement of cash flows, which have been prepared in accordance with GAAP or as a measure of our operating performance, profitability or liquidity. We believe EBITDA provides useful information regarding our ability to service our debt, and we understand that such information is considered by certain investors to be an additional basis for evaluating a company's ability to pay interest and repay debt. EBITDA measures presented herein may not be comparable to similarly titled measures of other companies due to differences in methods of calculation. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of our financial condition and results of operations for the three fiscal years ended March 26, 2001. This discussion should be read in conjunction with our consolidated financial statements and the related notes thereto. 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 years ended March 26, 2001 and March 27, 2000, 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 16 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. The Globe Acquisition, which was consummated on November 1, 1999, was accounted for using the purchase method of accounting. Accordingly, the Company's financial statements for the fiscal year ended March 27, 2000, include twenty-one weeks of results attributable to the Globe Properties. 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 year ended March 29, 1999, but are not included in operations for the fiscal years ended March 26, 2001 and March 27, 2000. We are a leading publisher in the field of general interest magazines, publishing National Enquirer, Star, Globe, National Examiner, Weekly World News, Sun, MIRA, Country Weekly, Country Music Magazine and other monthly publications. We generate revenues from circulation, predominantly single copy sales in supermarkets and other retail outlets, as well as from advertising and other sources. In fiscal 2001 and 2000, approximately 85% of our total operating revenues were from circulation. Single copy sales accounted for approximately 90% and 87% of such circulation revenues in fiscal years 2001 and 2000, respectively, and the remainder was from subscription sales. Over the past five years, circulation revenues have been generally stable as circulation declines have been offset in part by increases in the cover prices of our publications. Our primary operating costs and expenses are comprised of editorial, production, distribution, circulation and other costs of sales and selling, general and administrative expenses. The largest components of our costs are related to production, which includes printing and paper expenses, and to distribution, circulation and other costs of sales. Distribution, circulation and other costs of sales primarily include the costs associated with operating DSI, rack display payments made to retailers for our publications and subscription postage. Results of Operations Comparison of Fiscal Year Ended March 26, 2001 to Fiscal Year Ended March 27, 2000 Total operating revenues were $397,783,000 for fiscal 2001. Operating revenues increased by $72,574,000, or 22.3%, from the prior fiscal year primarily due to circulation revenues from the Globe Properties and Country Music Magazine acquisitions, new circulation revenues from our start-up publications (Auto World Magazine and MIRA!), the impact of our October 3, 2000 cover price increase of $0.10 for the National Enquirer, Star, Globe and National Examiner and also the impact of three additional special expanded issues for the National Enquirer and Star magazines versus the prior year. Additionally, operating revenues increased due to an increase in advertising revenue primarily due to the Globe Properties and Country Music Magazine acquisitions, additional advertising revenues from our core tabloids (National Enquirer and Star) and new advertising revenues from our start-up publications (Auto World Magazine and MIRA!). Circulation revenues (which include all single copy and subscription sales) were $340,079,000 for the current fiscal year. Circulation revenues increased by $62,526,000 or 22.5%, when compared to the prior fiscal year, primarily due to circulation revenues from the 17 Globe Properties and Country Music Magazine acquisitions, new circulation revenues from our start-up publications (Auto World Magazine and MIRA!), the impact of our October 3, 2000 cover price increase of $0.10 for the National Enquirer, Star, Globe and National Examiner and also the impact of three additional special expanded issues for the National Enquirer and Star magazines versus the prior year. On October 5, 1999 a newly re-designed and expanded Country Weekly was re- launched as a biweekly publication. 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 38% for fiscal years 2000 and 2001 following the redesign as compared to the 26 issues in fiscal 2000 prior to the redesign. This increase in circulation units coupled with the price increase resulted in single copy revenues to be almost comparable to the prior year despite the biweekly format. Subscription revenues decreased by $1,191,000 (3.3%) primarily due to the change in Country Weekly's frequency from weekly to bi-weekly in October 1999 ($1.4 million), industry wide declines in agency production which affected the National Enquirer and Star ($2.3 million) which was offset by the full year impact of the Globe Properties ($1.6 million) and the August 2000 acquisition of Country Music Magazine ($0.9 million). Advertising revenues were $37,141,000 for the current fiscal year. Advertising revenues increased by $11,980,000 or 47.6%, when compared to the prior fiscal year of $25,161,000. This increase is primarily due to the Globe Properties and Country Music Magazine acquisitions, additional advertising revenues from our core tabloids (National Enquirer and Star magazines, which increased 15% and 24%, respectively) and new advertising revenues from our start-up publications (Auto World Magazine and MIRA!). Total operating expenses for the current fiscal year increased by $56,540,000 when compared to the prior fiscal year. This increase is primarily due to additional expenses related to the Globe Properties and Country Music Magazine acquisition costs related to the launches of Auto World Magazine and MIRA!, increased amortization expense and an asset impairment charge of $2.3 million recognized in October 2000 related to FMI (see Note 8 to the Consolidated Financial Statements). Included in selling, general and administrative is the reversal of $614,000 of excess and unnecessary purchase accounting reserves established in connection with the Transactions and Merger primarily related to pre-acquisition litigation and lease related costs. Amortization expense increased by $8,219,000 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. Interest expense increased for the current fiscal year by $9,439,000 to $71,742,000 compared to the same prior fiscal year. 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. Other income was $751,000 for fiscal 2001, compared to other income of $150,000 for fiscal 2000. Included in other income is minority interest income (expense) of $376,000 and $(120,000) related to FMI for fiscal 2001 and 2000, respectively. 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. 18 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 fiscal 1999, 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. Comparison of Fiscal Year Ended March 27, 2000 to Fiscal Year Ended March 29, 1999 Total operating revenues were $325,209,000 for fiscal 2000, which included $39,742,000 of revenues from the Globe Properties. Excluding revenues related to the Soap Opera Assets and to the Globe Properties, operating revenues increased by $13,284,000, or 4.9%, from fiscal 1999, primarily due to an increase in single copy revenues. Circulation revenues (which include all single copy and subscription sales) were $277,553,000 for fiscal 2000, which included $36,926,000 of circulation revenues from the Globe Properties. Excluding circulation revenues related to the Soap Opera Assets and the Globe Properties, circulation revenues in fiscal 2000 increased $12,384,000, or 5.4%, when compared to the prior year period. This increase is primarily due to two $.10 cover price increase effective as of the July 27, 1999 and February 8, 2000 issues, respectively, for National Enquirer, and in part due to the release of twelve special expanded issues. Single-copy unit sales for the National Enquirer and Star for fiscal 2000 remained relatively flat when compared to the same prior year period. 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 of Country Weekly during the Company's second quarter. At the time of 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 31%. 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 despite having published 25% fewer issues ($9,607,000 in fiscal 2000 versus $10,202,000 in fiscal 1999). Subscription revenues were $36,172,000 for fiscal 2000, which included $955,000 of subscription revenues from the Globe Properties. Excluding subscription revenues related to the Soap Opera Assets and the Globe Properties, subscription revenues decreased $3,611,000 compared to the same prior year period primarily the 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 has been to offer discounted subscriptions through an agent; however, management's new direction is to be more newsstand driven. Advertising revenues were $25,161,000 for fiscal 2000, which included $2,586,000 of advertising revenues from the Globe Properties. Excluding revenues related to the Soap Opera Assets and the Globe Properties advertising revenues were flat compared to the previous fiscal year. National advertising, excluding the Globe Properties, increased by $1.2 million from fiscal 1999 to fiscal 2000. However, this increase was offset by a decrease in mail order 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 fiscal 2000 increased by $50,613,000 when compared to the same prior year period. Excluding expenses related to the Soap Opera Assets, Globe Properties, depreciation and amortization expense, operating expenses increased by $9,486,000. This increase relates primarily to increased TV advertising and is in line with management's plan to 19 increase brand awareness of its two flagship publications, the National Enquirer and Star. Amortization expense increased by $28,285,000 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. Interest expense increased for fiscal 2000 by $15,406,000 to $62,303,000 compared to the same prior year period. 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. Other income was $150,000 for fiscal 2000, compared to other income of $2,943,000 for fiscal 1999. Other income in fiscal 1999 included 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 fiscal 1999, 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 Globe Acquisition. As a result of the New Credit Agreement and the Notes, our liquidity requirements have been significantly increased, primarily due to increased interest and principal payment obligations under the New Credit Agreement, which, other than certain excess cash flow payment obligations, will commence in fiscal 2002 (see Note 5 to the Consolidated Financial Statements). 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 March 26, 2001, 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, 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 March 26, 2001, we had cash and cash equivalents of $21.0 million and a working capital deficit of $48.5 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: 20 . 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. For the Inception Period, cash provided by financing activities totaling $430 million was primarily used to fund the Transactions and the Globe Acquisition. Cash from operations of $41.9 million generated from operations for the Inception Period was used to fund capital expenditures as well as pay down the revolving credit facility. For the fiscal year ended March 29, 1999, cash provided by operating activities totaling $29.8 million was used primarily to fund capital expenditures totaling $15.0 million and reduce borrowings under the credit agreements. Cash generated from operations for the fiscal year ended March 26, 2001 was used to fund capital expenditures and to fund the buy out of the remaining term of the former owner of the Globe Properties' five year employment agreement. We made capital expenditures in the fiscal years ended March 26, 2001 and March 27, 2000 totaling $27.9 million and $14.0 million, respectively. The higher levels of capital spending for the current year are primarily related to the Globe Acquisition. At March 26, 2001, 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 2 to the Consolidated Financial Statements, we expanded our New Credit Agreement by $90 million. The effective interest rates under the Credit Agreement and Prior Credit Agreement, including amounts borrowed under the term loan commitments and revolving credit commitment, as of March 26, 2001, and for the fiscal years 1999, 2000 and 2001 were 9.3%, 7.7%, 9.1% and 10.0%, respectively. In order to reduce our exposure to interest rate risk, we entered into a three-year $100 million notional amount interest rate swap agreement which effectively converts a portion of our variable-rate debt to fixed-rate debt. This interest rate swap agreement, which expired in November 2000, had a fixed interest rate of 5.95%. In November 2000, we entered into a new $90 million interest rate swap agreement expiring in May 2002 under which we pay a fixed rate of 6.53%. The carrying amounts for the interest rate swap agreement represents net interest payable (receivable) as of period end. Net interest expense (income) related to the interest rate swap agreement totaled $584,000, $434,000 and $(344,000) for the fiscal years 1999, 2000 and 2001, respectively. 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 21 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, the Company's note guarantors will not need to individually comply with the reporting requirements of the Exchange Act, nor will we have to include separate financial statements and other disclosures concerning each of the note guarantors in its Exchange Act reports. Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA") The following table and discussion summarizes EBITDA for the fiscal years ended March 26, 2001, March 27, 2000 and March 29, 1999. (dollars in thousands) -------------------------------------------------------------- Predecessor Company The Company ---------------------------- --------------------------- Fiscal March 30, May 7, Fiscal Year 1999 1999 Year Ended through through Ended March 29, May 6, March 27, March 26, 1999 1999 2000 2001 ------------ ------------- ------------- ------------ $95,391 $10,467 $96,982 $139,303 The Company defines EBITDA as net income (loss) before extraordinary charges, interest expense, income taxes, depreciation and amortization and other income (expense) (other than management fees). For the fiscal year ended March 29, 1999, a management fee of $1,162,000 was included in other income (expense) and therefore was included as a reduction of EBITDA in 1999. For fiscal years 2001 and 2000, a $750,000 and $663,000 management fee, respectively, is included in selling general and administrative expense 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"). New Accounting Pronouncements In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities-an amendment of SFAS 133. SFAS 138 amends the accounting and reporting standards for certain derivative instruments and hedging activities. The Company will be required to adopt SFAS No. 133 for fiscal year 2002. This statement 22 establishes a new model for accounting for derivatives and hedging activities. Under SFAS No. 133, all derivative instruments must be recognized as either an asset or liability measured at its fair value. Management believes the impact of adopting this statement will not have a material effect upon the Company's results of operations or financial position. 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. Forward-Looking Statements Some of the information presented in this Form 10-K 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 significant debt service obligations, domestic and foreign media companies, . our ability to increase circulation . changes in the costs of paper and advertising revenues, used by us, . market conditions for our . any future changes in publications, management and . our ability to develop new . general risks associated with publications and services, the publishing industry. . outcomes of pending and future litigation 23 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS 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 an interest rate swap agreement 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 expired in November 2000, had a fixed interest rate of 5.95%. In November 2000, we entered into a new $90 million interest rate swap agreement expiring in May 2002 under which we pay a fixed rate of 6.53%. The following table presents the future principal payment obligations and weighted average interest rates (excluding any amounts that may be borrowed under the credit commitment or required to be prepaid under the excess cash flow provision) associated with our existing long-term instruments assuming our actual level of long-term indebtedness (dollars in 000's):
2001 2002 2003 2004 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 (9.95% for the Fiscal Year Ended March 26, 2001) - $9,975 $17,050 $22,050 $380,925 Interest Rate Derivatives: Interest Rate Swaps: Variable to Fixed $90,000 Average Pay Rate (6.53%) Average Receive Rate (6.17%)
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 have resulted in a change of $3.4 million in our interest expense for the year ended March 26, 2001. Our primary market risk exposures relate to (1) the interest rate risk on long-term and short-term borrowings, (2) our ability to refinance our Senior Subordinated Notes at maturity at market rates, (3) the impact of interest rate movements on our ability to meet interest expense requirements and comply with financial covenants and (4) the impact of interest rate movements on our ability to obtain adequate financing to fund acquisitions. We manage the interest rate risk on our outstanding long-term and short-term debt through our use of fixed and variable rate debt. While we cannot predict or manage our ability to refinance existing debt or the impact interest rate movements will have on our ability to refinance existing debt or the impact interest rate movements will have on our existing debt, we continue to evaluate our financial position on an ongoing basis. 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS: Page(s) ------- Report of Independent Public Accountants.......................................... 26 Consolidated Balance Sheets as of March 27, 2000 and March 26, 2001 .............. 27 Consolidated Statements of Income (Loss) for the Three Fiscal Periods Ended March 26, 2001.................................................... 28 Consolidated Statements of Stockholder's Equity for the Three Fiscal Periods Ended March 26, 2001.................................................... 29 Consolidated Statements of Cash Flows for the Three Fiscal Periods Ended March 26, 2001.................................................... 30 Notes to Consolidated Financial Statements........................................ 31 - 44
Schedules have been omitted since the information is not applicable, not required or because the required information is included in the Consolidated Financial Statements or Notes thereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE 25 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholder of American Media Operations, Inc.: We have audited the accompanying consolidated balance sheets of American Media Operations, Inc. (a Delaware corporation) and subsidiaries (the "Company") as of March 26, 2001 and March 27, 2000 and the related consolidated statements of income (loss), stockholder's equity and cash flows for the year ended March 26, 2001 and for the period from May 7, 1999 through March 27, 2000. We have also audited the accompanying consolidated statements of income (loss), stockholder's equity and cash flows of the Predecessor Company of American Media Operations, Inc. (the "Predecessor Company") for the period from March 30, 1999 through May 6, 1999 and for the year ended March 29, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Media Operations, Inc. and subsidiaries as of March 26, 2001 and March 27, 2000, and the results of their operations and their cash flows for the year ended March 26, 2001 and for the period from May 7, 1999 through March 27, 2000 and the results of the Predecessor Company's operations and cash flows for the period from March 30, 1999 through May 6, 1999 and for the year ended March 29, 1999 in conformity with accounting standards generally accepted in the United States. ARTHUR ANDERSEN LLP New York, New York May 9, 2001 26 AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of March 27, 2000 and March 26, 2001 (in 000's, except share information)
March 27, March 26, 2000 2001 ------------ ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 23,404 $ 20,999 Receivables, net 16,862 25,412 Inventories 12,974 14,101 Short term note receivable - 322 Prepaid expenses and other 8,748 5,015 ------------ ---------- Total current assets 61,988 65,849 ------------ ---------- PROPERTY AND EQUIPMENT, at cost: Land and buildings 5,735 10,076 Machinery, fixtures and equipment 17,258 19,990 Display racks 27,474 35,380 ------------ ---------- 50,467 65,446 Less - accumulated depreciation (9,353) (18,651) ------------ ---------- 41,114 46,795 ------------ ---------- LONG TERM NOTE RECEIVABLE, net - 427 ------------ ---------- DEFERRED DEBT COSTS, net 22,153 19,126 ------------ ---------- GOODWILL, net of accumulated amortization of $22,299 and $48,232 536,369 482,256 ------------ ---------- OTHER INTANGIBLES, net of accumulated amortization of $24,629 and $56,275 507,683 520,537 ------------ ---------- $1,169,307 $1,134,990 ============ ========== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Current portion of term loan $ -- $ 14,281 Accounts payable 25,262 30,157 Accrued expenses 62,920 36,035 Deferred revenues 33,054 33,842 ------------ ---------- Total current liabilities 121,236 114,315 ------------ ---------- PAYABLE TO PARENT COMPANY 1,307 2,110 ------------ ---------- LONG TERM DEBT: Term Loan, net of current portion 430,000 415,719 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 ------------ ---------- 680,874 666,593 ------------ ---------- DEFERRED INCOME TAXES 164,192 165,479 ------------ ---------- COMMITMENTS AND CONTINGENCIES STOCKHOLDER'S EQUITY: Common stock, $.20 par value; 7,507 shares issued and outstanding 2 2 Additional paid-in capital 223,207 223,298 Retained deficit (21,511) (36,807) ------------ ---------- Total stockholder's equity 201,698 186,493 ------------ ---------- $1,169,307 $1,134,990 ============ ==========
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. 27 AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (LOSS) For the Three Fiscal Periods Ended March 26, 2001 (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 Forty-Six From Weeks From Fiscal Year March 30, May 7, 1999 Fiscal Year Ended Through Through Ended March 29, May 6, March 27, March 26, 1999 1999 2000 2001 ---------------- -------------- --------------- --------------- OPERATING REVENUES: Circulation $248,630 $26,215 $251,338 $340,079 Advertising 23,460 2,640 22,521 37,141 Other 21,369 2,308 20,187 20,563 ---------------- -------------- --------------- --------------- 293,459 31,163 294,046 397,783 ---------------- -------------- --------------- --------------- OPERATING EXPENSES: Editorial 28,906 3,040 29,567 39,286 Production 79,691 7,784 71,465 103,132 Distribution, circulation and other cost of sales 67,640 6,624 58,168 75,012 Selling, general and administrative expenses 26,212 3,248 37,865 41,050 Gain on sale of Soap Opera Properties (6,499) -- -- -- Depreciation and amortization 32,110 3,703 57,209 76,733 ---------------- -------------- --------------- --------------- 228,060 24,399 254,274 335,213 ---------------- -------------- --------------- --------------- Operating income 65,399 6,764 39,772 62,570 INTEREST EXPENSE (46,897) (4,837) (57,466) (71,742) OTHER INCOME (EXPENSE), net 2,943 25 125 751 ---------------- -------------- --------------- --------------- Income (loss) before provision for income taxes and extraordinary charge 21,445 1,952 (17,569) (8,421) PROVISION FOR INCOME TAXES 13,559 1,365 1,361 6,875 ---------------- -------------- --------------- --------------- Income (loss) before extraordinary charge 7,886 587 (18,930) (15,296) EXTRAORDINARY CHARGE, net of income tax benefit of $1,269 and $1,517, respectively (Note 7) (2,161) -- (2,581) -- ---------------- -------------- --------------- --------------- Net income (loss) $ 5,725 $ 587 $(21,511) $(15,296) ================ ============== =============== ===============
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 28 AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY For the Three Fiscal Periods Ended March 26, 2001 (in 000's, except share information)
Common Stock Additional Retained -------------------------------- Paid-In Earnings Shares Amount Capital (Deficit) Total ------------- -------------- --------------- ----------------- -------------- Balance, March 30, 1998 7,507 $2 $ 26,039 $ 28,432 $ 54,473 Net income -- -- -- 5,725 5,725 ------------- -------------- --------------- ----------------- -------------- Balance, March 29, 1999 7,507 2 26,039 34,157 60,198 Net income (for the period from March 30, 1999 through May 6, 1999) -- -- -- 587 587 Recapitalization on May 7, 1999 -- -- 192,218 (34,744) 157,474 Issuance of equity in connection with Globe Acquisition, net of issuance costs -- -- 4,950 -- 4,950 Net loss (for the period from May 7, 1999 through March 27, 2000) -- -- -- (21,511) (21,511) ------------- -------------- --------------- ----------------- -------------- Balance, March 27, 2000 7,507 2 223,207 (21,511) 201,698 Net loss -- -- -- (15,296) (15,296) Non-cash compensation charge -- -- 91 -- 91 ------------- -------------- --------------- ----------------- -------------- Balance, March 26, 2001 7,507 $2 $223,298 $(36,807) $186,493 ============= ============== =============== ================= ==============
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 29 AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Fiscal Periods Ended March 26, 2001 (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 -------------------------------- --------------------------------- Forty-Six Fiscal Year Six Weeks Weeks From Ended From March May 7, 1999 Fiscal Year March 29, 30 Through Through Ended 1999 May 6, 1999 March 27, 2000 March 26, 2001 -------------- ----------------- ------------------ ---------------- Cash Flows from Operating Activities: Net income (loss) $ 5,725 $ 587 $ (21,511) $(15,296) -------------- ----------------- ------------------ ---------------- Adjustments to reconcile net income to net cash provided from operating activities: Gain on sale of Soap Opera Properties (6,499) -- -- -- Extraordinary charge, net of income tax benefit 2,161 -- 2,581 -- Depreciation and amortization 32,110 3,703 57,209 76,733 Non-cash compensation charge -- -- -- 91 Deferred debt cost amortization 1,506 147 2,807 3,027 Deferred income tax provision (benefit) (3,592) (207) 3,906 (1,517) Decrease (increase) in - net of acquisition - Receivables, net (125) (369) (7,675) (15,851) Inventories 560 1,163 (3,826) (1,127) Prepaid income taxes 2,612 -- -- -- Prepaid expenses and other 1,289 1,793 (7,846) 2,947 Increase (decrease) in - net of acquisition - Accounts payable (5,203) (2,184) 10,407 4,949 Accrued expenses (1,486) (164) (14,322) (15,445) Payable to Parent Company (324) -- 1,307 803 Accrued interest (1,010) -- 6,023 (3,015) Accrued and current deferred income taxes 4,658 1,474 6,823 (1,567) Deferred revenues (2,580) (3,159) 5,999 788 -------------- ----------------- ------------------ ---------------- Total adjustments 24,077 2,197 63,393 50,816 -------------- ----------------- ------------------ ---------------- Net cash provided from operating activities 29,802 2,784 41,882 35,520 -------------- ----------------- ------------------ ---------------- Cash Flows from Investing Activities: Capital expenditures (15,019) (717) (13,330) (27,875) Acquisition of business, net of cash acquired -- -- (435,214) (10,050) Cash proceeds from sale of Soap Opera Assets 10,000 -- -- -- -------------- ----------------- ------------------ ---------------- Net cash used in investing activities (5,019) (717) (448,544) (37,925) -------------- ----------------- ------------------ ---------------- Cash Flows from Financing Activities: Issuance of common stock -- -- 240,000 -- Term loan and revolving credit facility principal repayments (382,401) (10,000) (299,000) (12,000) Proceeds from term loan and revolving credit facility 356,000 6,000 -- -- Repayment of senior subordinated indebtedness -- -- (199,260) -- Proceeds from new term loan and credit facility -- -- 462,000 12,000 Proceeds from new senior subordinated indebtedness -- -- 250,000 -- Payment of deferred debt costs (1,964) -- (23,674) -- -------------- ----------------- ------------------ ---------------- Net cash provided by (used in) financing activities (28,365) (4,000) 430,066 -- -------------- ----------------- ------------------ ---------------- Net Increase (Decrease) in Cash and Cash Equivalents (3,582) (1,933) 23,404 (2,405) Cash and Cash Equivalents, Beginning of Period 7,405 3,823 -- 23,404 -------------- ----------------- ------------------ ---------------- Cash and Cash Equivalents, End of Period $ 3,823 $ 1,890 $ 23,404 $ 20,999 ============== ================= ================== ================ Supplemental Disclosures of Cash Flow Information: Cash paid during the period for - Income taxes $ 9,570 $ 80 $ 3,435 $ 288 Interest $ 46,389 $ 3,142 $ 52,602 $ 71,530
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 30 AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands in all tables) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Consolidation - The consolidated financial statements include the accounts of the American Media Operations, Inc. ("the Company"), a wholly-owned subsidiary of American Media, Inc., ("Media") and its subsidiaries (National Enquirer, Inc., Star Editorial, Inc., Weekly World News, Inc., Country Weekly, Inc., Globe Communications Corp., DSI and Frontline, among others). The Company publishes seven weekly publications: National Enquirer, Globe, Star, National Examiner, Weekly World News, Sun, MIRA, one bi-weekly publication, Country Weekly and other monthly magazines, including Auto World Magazine. Distribution Services, Inc. ("DSI") arranges for the placement and merchandising of our publications and third party publications at retail outlets throughout the United States and Canada. All significant intercompany transactions and balances have been eliminated in consolidation. Basis of Presentation - Media 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 financial information after that date. 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 will be referred to as the "Company". The period from May 7, 1999 through March 27, 2000 is defined as the "Inception Period". A solid black vertical line has been inserted in tables where financial information may not be comparable across periods. Certain prior year amounts have been reclassified to conform with the fiscal 2001 presentation. 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 subscription on a straight-line basis. Advertising revenues are recognized in the period in which the related advertising appears in the publications. 31 Deferred revenues were comprised of the following: 2000 2001 ------- ------- Single copy $ 9,578 $10,139 Subscriptions 22,895 23,176 Advertising 581 527 ------- ------- $33,054 $33,842 ======= ======= Other revenues, primarily from marketing services performed for third parties by DSI, 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 provide guidance for disclosure related to revenue recognition policies. The accounting and disclosures prescribed by SAB 101 were effective for the fiscal year ended March 26, 2001 and did not have a significant impact on the Company's financial position or results of operations. Property and Equipment- We use the straight-line depreciation method for financial reporting. The estimated lives used in computing depreciation for financial reporting purposes are 22 years for buildings, 3 years for display racks and 3 to 10 years for all other depreciable fixed assets. Maintenance and repair costs are charged to expense as incurred; significant renewals and betterments are capitalized. Internal-Use Software In compliance with American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," the Company expenses costs incurred in the preliminary project stage and, thereafter, capitalizes costs incurred in the developing or obtaining of internal use software and includes them in property and equipment. Certain costs, such as maintenance and training, are expensed as incurred. Capitalized costs are amortized over a period of not more than five years using the straight-line method. In addition, in compliance with SOP No. 98-1 and Emerging Issues Task Force ("EITF") No. 00- 2, "Accounting for Web Site Development Costs," direct internal and external costs associated with the development of the features and functionality of the Company's web sites, incurred during the application and infrastructure development phase, have been capitalized, and are included in property and equipment. Capitalized software costs are subject to impairment evaluation in accordance with the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Total capitalized costs as a result of adoption of these statements have not had a material impact on the Company's consolidated financial position, results of operations or cash flows for the fiscal years 2000 and 2001. 32 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: 2000 2001 -------- -------- Raw materials - paper $ 7,958 $ 8,559 Finished product - paper, production and distribution costs of future issues 5,016 5,542 -------- -------- $12,974 $14,101 ======== ======== Accrued Expenses- A summary of accrued expenses consists of the following: 2000 2001 -------- -------- Personnel and related costs $19,231 $ 3,113 Retail display allowance 10,275 8,133 Profit sharing 590 17 Interest 14,853 11,838 Accrued taxes - 6,442 Other 17,971 6,492 -------- -------- $62,920 $36,035 ======== ======== Use of Estimates- The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Consolidated Statements of Cash Flows- For purposes of the accompanying consolidated statements of cash flows, we consider cash and cash equivalents to be cash on hand or deposited in demand deposit accounts with financial institutions and highly liquid investments with a maturity of three months or less. Impairment of Long-Lived Assets We review long-lived assets, including goodwill, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset. If an impairment is indicated, the asset is written down to its estimated fair value on a discounted cash flow basis. 33 Income Taxes - The Company accounts for income taxes under the liability method in accordance with SFAS No. 109, "Accounting for Income Taxes". The provision for income taxes includes deferred income taxes resulting from items reported in different periods for income tax and financial statement purposes. Deferred tax assets and liabilities represent the expected future tax consequences of the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The effects of changes in tax rates on deferred tax assets and liabilities are recognized in the period that includes the enactment date. Advertising Costs - Media advertising costs included in selling, general and administrative expense are expensed as incurred. The amounts charged to operations for media advertising during fiscal 2001, the period from March 30, 1999 through May 6, 1999, the Inception Period and fiscal 1999 were approximately $9.5 million, $0 million, $9.6 million and $1.0 million, respectively. Deferred Debt Costs - Costs incurred in connection with obtaining financing are deferred and amortized as a charge to interest expense over the terms of the related borrowings using the interest rate method. Comprehensive Income - In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income" (SFAS No. 130"). SFAS No. 130 established standards for the reporting and display of comprehensive income and its components in the financial statements. The following types of items are to be considered in computing comprehensive income: foreign currency translation adjustments, pension liability adjustments and unrealized gain/loss on securities available for sale. For all periods presented herein, there were no differences between net income and comprehensive income. Segment Information - In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". This statement establishes standards for the way that public enterprises report information about operating segments in annual financial statements and interim financial stockholders' reports. The statement requires information to be reported by operating segment on the same basis, which we use to evaluate performance internally. We have determined that we have only one operating segment. 34 In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities-an amendment of SFAS 133". SFAS 138 amends the accounting and reporting standards for certain derivative instruments and hedging activities. The Company will be required to adopt SFAS No. 133 for fiscal year 2002. This statement establishes a new model for accounting for derivatives and hedging activities. Under SFAS No. 133, all derivative instruments must be recognized as either an asset or liability measured at its fair value. Management believes the impact of adopting this statement will not have a material effect upon the Company's results of operations or financial position. (2) CERTAIN TRANSACTIONS AND MERGER: On May 7, 1999, all of the common stock of 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 Transactions are summarized as follows: 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: 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 (77,796) Fair value of tangible assets acquired 41,973 ---------- Goodwill and other intangible assets acquired $ 332,977 ========== 35 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 ("Goodwill") 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 period ended March 26, 2001 and for the Inception Period, 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 fiscal 1999 and 1998 and for the period from March 30, 1999 to May 6, 1999, was amortized on a straight-line basis over 40 years. Other intangible assets for these periods were 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. 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 to goodwill and is being amortized on a straight-line basis over 20 years. During the quarter ended December 25, 2000, the Company finalized the fair values of the assets and liabilities acquired. Goodwill and tradenames related to the Globe Acquisition are being amortized over 20 years on a straight-line basis. The following unaudited pro forma financial information gives effect to the Transactions, the Globe Acquisition 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 (of which no additional consideration has been received through March 26, 2001), as if each had occurred as of the beginning of each period presented: 36
Predecessor Company The Company ------------------- ----------- Fiscal Year Ended Fiscal Year Ended March 29, 1999 March 27, 2000 -------------- -------------- Operating revenues $379,959 $389,460 Operating expenses $272,558 $277,057 Depreciation and amortization $ 71,680 $ 71,902 Operating income $ 35,721 $ 40,501 Interest expense $ 67,600 $ 67,600 Loss before $(34,920) $(27,344) extraordinary charge
Included as a reduction to selling, general and administrative expenses in the fiscal year ended March 27, 2000 is an additional gain of $450,000 resulting from settlement of certain liabilities in connection with the sale of the Soap Opera Properties. (3) FAIR VALUE OF FINANCIAL INSTRUMENTS: The estimated fair value of our financial instruments as of year-end is as follows:
2000 2001 ------------------------------ ----------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------- ------------- ------------- ------------- Term loan and revolving credit facility, including current portion $430,000 $430,000 $430,000 $430,000 Subordinated indebtedness $250,000 $242,500 $250,000 $244,851 Interest rate swap agreement liability (receivable) $ (13) $ (364) $ 102 $ 2,065
The fair value of our financial instruments is estimated based on the quoted market prices for the same or similar issues or on the current rate offered to us for financial instruments of the same remaining maturities. The carrying amount for cash equivalents approximates fair value because of the short maturity of those instruments. On occasion we enter into interest rate swap agreements to reduce the interest rate exposure associated with a portion of our variable rate indebtedness. Interest rate swap agreements modify the interest characteristics of our variable rate indebtedness by synthetically converting a portion of the indebtedness to fixed rate. Interest earned (payable) under the interest rate swap is credited (charged) to interest expense using the accrual method. The related accrued receivable or payable is included in accrued interest payable. The fair market value of the interest rate swap agreement is not reflected in the accompanying consolidated financial statements. We do not utilize derivative financial instruments for trading or other speculative purposes. We entered into a three-year $100 million notional amount interest rate swap agreement which effectively converts a portion of our variable-rate debt to fixed-rate debt. This interest rate swap agreement, which expired in November 2000, had a fixed interest rate of 5.95%. In 37 November 2000, we entered into a new $90 million interest rate swap agreement expiring in May 2002 under which we pay a fixed rate of 6.53%. The carrying amounts for the interest rate swap agreement represents net interest payable (receivable) as of period end. Net interest expense (income) related to the interest rate swap agreement totaled $584,000, $434,000 and $(344,000) for the fiscal years 1999, 2000 and 2001, respectively. (4) INCOME TAXES: We file a consolidated Federal income tax return with Media and calculate our income tax on a separate return basis. The provision for income taxes consists of the following:
Predecessor Company The Company ------------------------------------- ---------------------------------- Forty-six Six weeks weeks from from March May 7, 1999 30, 1999 through through March 27, 1999 May 6, 1999 2000 2001 --------------- ----------------- --------------- -------------- Current: Federal $15,693 $ 1,441 $(2,333) $ 7,694 State 1,458 131 (212) 698 --------------- ----------------- --------------- -------------- Total current 17,151 1,572 (2,545) 8,392 --------------- ----------------- --------------- -------------- Deferred: Federal (3,287) (190) 3,580 (1,394) State (305) (17) 326 (123) --------------- ----------------- --------------- -------------- Total deferred (3,592) (207) 3,906 (1,517) --------------- ----------------- --------------- -------------- $13,559 $ 1,365 $ 1,361 $ 6,875 =============== ================= =============== ==============
A reconciliation of the expected income tax provision (benefit) at the statutory Federal income tax rate of 35% to the reported income tax provision is as follows:
Predecessor Company The Company ------------------------------------ ---------------------------------- Forty-six Six weeks weeks from from March May 7, 1999 30, 1999 through through March 27, 1999 May 6, 1999 2000 2001 --------------- ----------------- ---------------- ------------- Expected income tax provision (benefit) at statutory rate $ 7,506 $ 683 $(6,149) $(2,947) Nondeductible goodwill 5,304 612 7,432 9,254 State income taxes, net of Federal benefit 749 70 78 373 Other, net -- -- -- 195 --------------- ----------------- ---------------- ------------- $13,559 $ 1,365 $ 1,361 $ 6,875 =============== ================= ================ =============
38 Deferred taxes reflect the impact of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. The net deferred tax assets and liabilities are comprised of the following: 2000 2001 -------------- ----------------- Gross non-current deferred income tax assets $ 1,983 $ 77 -------------- ----------------- Intangibles (155,070) (147,181) Expense recognition differences (1,440) (402) Subscription acquisition costs (454) -- Accelerated depreciation (2,901) (3,149) Book over tax basis of non-depreciable assets (439) (439) Other deferred tax liabilities (5,782) (14,385) Inventory capitalization (89) -- -------------- ----------------- Gross non-current deferred tax liabilities (166,175) (165,556) -------------- ----------------- Net non-current deferred tax liabilities $(164,192) $(165,479) ============== =================
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. Included in prepaid expenses in the accompanying consolidated balance sheet for fiscal year 2000 are net current deferred tax assets of $3.2 million. Included in accrued expenses in the accompanying consolidated balance sheet for fiscal 2001 are net current deferred tax liabilities of $508,000 and current taxes payable of $5,934,000. (5) CREDIT AGREEMENTS: In connection with the Transactions and Merger, on May 7, 1999 we repaid all amounts outstanding under the Prior Credit Agreement and entered into a New Credit Facility with a bank syndicate whose agent bank is the Chase Manhattan Corporation (the "Agent Bank" and, collectively, the "Banks"). The New Credit Agreement, which was comprised of a $340 million term loan commitment, was amended on November 1, 1999 in connection with the Globe Acquisition to increase the amount to $430 million and a $60 million revolving credit commitment, includes the following: (a) Term Loan Commitments -- The term loans consist of a $100 million (original amount) commitment (the "Tranche A" loans), a $240 million (original amount) commitment (the "Tranche B" loans) and a $90 million (original amount) commitment (the "Tranche B-1 loans). Amounts borrowed under the Tranche A commitment bear interest at rates based upon either the Alternate Base Rate plus 3/4% to 2% or the LIBO Rate plus 1-3/4% to 3%, predicated upon satisfaction of certain Credit Agreement covenants related to operating results. Tranche B and B-1 loans bear interest at either the Alternate Base Rate plus 2-1/2% or the LIBO Rate plus 3-1/2%. 39 Borrowings under the term loan commitments are payable in varying quarterly installments from July 2001 through April 2007. Beginning as of the fiscal year ending March 2001 and for each fiscal year thereafter we will be required to make Excess Cash Flow payments (as defined), which will be applied ratably to the then outstanding term loans. Included in the current portion of term loan in the accompanying consolidated balance sheet for fiscal 2001 is $4,306,000 of required Excess Cash Flow relating to fiscal 2001. (b) Revolving Credit Commitment -- The New Credit Agreement also provides for additional borrowings up to a maximum of $60 million, bearing interest at the Tranche A rates described above. This commitment, which expires in April 2006, allows funds to be borrowed and repaid from time to time with permanent reductions in the revolving credit commitment permitted at our option. As of March 26, 2001, no amounts were outstanding under the revolving credit facility. (c) Commitment Fees - We are required to pay a commitment fee ranging from 3/8% to 1/2% of the unused portion of the revolving commitment. Commitment fees under the New Credit Agreement totaled $303,000 and $292,000 for fiscal 2001 and 2000, and $246,000 under the Prior Credit Agreement for fiscal year 1999. (d) Guarantees, Collateral and Financial Covenants - The Company's obligations under the New Credit Agreement are guaranteed by all of its subsidiaries and Media. The obligations and such guarantees are secured by (i) a pledge by the Company of all of the capital stock of its subsidiaries, (ii) a pledge of all of the capital stock of the Company and (iii) a security interest in substantially all of the assets of the Company's subsidiaries. In addition to the above, the New Credit Agreement also contains certain covenants that, among others, restrict paying cash dividends, incurring additional indebtedness, entering into certain mergers or consolidations, making capital expenditures and selling or otherwise disposing of assets. We are also required to satisfy certain financial tests relating to operating cash flow and debt coverage ratios. We plan to pay no cash dividends on our common stock in the foreseeable future, instead using cash generated from operating results principally to make principal and interest payments on its indebtedness. As permitted under the covenants of the New Credit Agreement and the Prior Credit Agreement, management fees to affiliates totaled $750,000 for fiscal year 2001, $663,000 for the Inception Period, $0 for the period from March 30, 1999 to May 6, 1999 and $1.2 million for fiscal year 1999. These fees were included in selling, general and administrative expense for fiscal 2001 and the Inception Period and in other (income) expense, net for the period from March 30, 1999 to May 6, 1999, and fiscal 1999. The effective interest rates under the Credit Agreement and Prior Credit Agreement, including amounts borrowed under the term loan commitments and revolving credit commitment, as of March 26, 2001, and for the fiscal years 1999, 2000 and 2001 were 9.3%, 7.7%, 9.1% and 10.0%, respectively. (6) SUBORDINATED INDEBTEDNESS: In connection with the Transactions and Merger, on May 7, 1999 we repaid approximately $199.3 million in face amount of the 11.63% Senior Subordinated Notes due 2004; including the tender premium and consent fee the total amount paid was approximately $214.2 million. Our 40 New Subordinated Notes (the "Notes"), which mature on May 1, 2009, bear interest at 10-1/4% per annum payable in semi-annual installments on May 1st and November 1st of each year. These notes are redeemable at our option at prices ranging from 105.1% to 100% of their face amount after April 2004. The indenture under which the Notes were issued includes certain restrictive covenants that limit, among other things, our ability to incur indebtedness, give guarantees, pay dividends, make investments, sell assets and merge or consolidate. Payments of principal due under the New Credit Agreement (excluding any amounts that may be borrowed under the credit commitment or required to be prepaid under the excess cash flow provision), the New Subordinated Notes and other long-term indebtedness follows: Fiscal Year ----------- 2002 $ 9,975 2003 17,184 2004 22,050 2005 27,790 2006 32,050 Thereafter 571,825 --------- $ 680,874 ========= The Company has no material assets or operations other than investments in its subsidiaries. The Notes are unconditionally guaranteed, on a senior subordinated basis, by all of its subsidiaries. Each subsidiary that will be organized in the future by the Company, unless such subsidiary is designated as an unrestricted subsidiary, will jointly, severally, fully and unconditionally guarantee the Notes on a senior subordinated basis. Note guarantees are joint and several, full and unconditional and general unsecured obligations of the note guarantors. The note guarantors are the Company's wholly owned subsidiaries. At present, the note guarantors comprise all of the Company's direct and indirect subsidiaries. Note guarantees are subordinated in right of payment to all existing and future senior debt of the note guarantors, including the New Credit Facility, and are also effectively subordinated to all secured obligations of note guarantors to the extent of the assets securing such obligations, including the New Credit Facility. Furthermore, the Notes indenture permits note guarantors to incur additional indebtedness, including senior debt, subject to certain limitations. We have not presented separate financial statements and other disclosures concerning each of the note guarantors because management has determined that such information is not material to investors. So long as the factors set forth in the paragraph immediately above remain true and correct, under applicable SEC rules and regulations, the Company's note guarantors will not need to individually comply with the reporting requirements of the Securities Exchange Act of 1934 ("Exchange Act"), nor will the Company have to include separate financial statements and other disclosures concerning each of the note guarantors in its Exchange Act reports. (7) DEFERRED DEBT COSTS: Certain costs incurred in connection with the issuance of our long-term debt have been deferred and are amortized as part of interest expense over periods from 7 to 10 years. For fiscal year 2001, the period from March 30, 1999 through May 6, 2000, the Inception Period and for fiscal year 1999 , amortization of deferred debt costs which is included in interest expense in the accompanying consolidated statements of income (loss) totaled approximately $3.0 million, $0.1 million, $2.8 million, and $1.5 million, respectively. 41 In fiscal 1999, approximately $3.4 million ($2.2 million net of income tax benefit) 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 and Merger, a fee related to an unused bridge loan commitment totaling approximately $4.1 million ($2.6 million net of income tax benefit) was charged to extraordinary loss in the Inception Period. (8) ASSET IMPAIRMENT CHARGE: During October 2000 the Company reviewed the long-lived assets of its 80% owned subsidiary, Frontline Marketing, Inc. ("FMI"), for impairment due to changes in circumstances indicating that the carrying amount of these long-lived assets may not be recoverable. Management determined that as a result of significant deterioration in the operations of FMI that certain long-lived assets were not properly valued. Accordingly, an asset impairment charge of $2.3 million recognized in October 2000 related to these long-lived assets. Fair value of these assets was based on the Company's estimate of expected future cash flows of FMI as supported by reasonable and supportable assumptions and projections. The asset impairment loss is included in depreciation expense for fiscal year 2001. (9) SALE OF SUBSIDIARY: On November 27, 2000 the Company sold its 80% owned subsidiary, FMI, to the minority shareholder for a $2.5 million note receivable ("The Note"). The Note has a short-term component of $500,000 and a long-term component of $2.0 million which is payable to the Company based on defined cash flow of FMI. Additionally, The Note bears interest at 9%. Due to the uncertainty of FMI's ability to generate defined cash flow for the repayment of The Note, the Company has reserved approximately $1.6 million of The Note until collectiblity has been assured. No gain or loss has been recognized on this transaction. Management intends to periodically review the collectiblity of The Note and may record a gain or loss in future periods. Included in Other Income (Expense), net is minority interest income related to FMI of $376,000 for fiscal 2001. (10) NON-CASH COMPENSATION CHARGE The Company's common stock is owned by Media and all of Media's common stock is owned by the LLC. The interests in the LLC are represented by units of various classes. The units of the LLC are exchangeable for the common stock of Media under certain circumstances and with restrictions. Certain members of management purchased non-voting units in the LLC at an amount below appraised fair market value. Additionally, certain members of managements were granted another non-voting class of units in the LLC, which vest over a five-year period, at below appraised fair market value. Included in selling, general and administrative expense in the accompanying consolidated statement of income (loss) for the year ended March 26, 2001 is a non-cash compensation charge of $91,000 which represents the vested portion of the appraised fair value of these units over the amount paid. 42 (11) COMMITMENTS AND CONTINGENCIES: Litigation- Various suits and claims arising in the ordinary course of business have been instituted against us. We have insurance policies available to recover potential legal costs. We periodically evaluate and assess the risks and uncertainties associated with litigation independent from those associated with our 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 our consolidated financial statements. Printing agreement- We have entered into a 15-year printing agreement expiring in fiscal 2011 with an unrelated printer to print National Enquirer and Star. In connection with the Globe Acquisition, this agreement was amended to include the Globe, National Examiner, Weekly World News, Sun and Country Weekly. Based on current pricing and production levels this contract, which requires pricing adjustments based on changes in the Consumer Price Index, is estimated to cost approximately $276 million over its remaining life as follows: Fiscal Year ----------- 2002 $ 27,906 2003 27,906 2004 27,906 2005 27,669 2006 27,499 Thereafter 137,497 --------- $ 276,383 ========= Operating Leases - Minimum annual commitments under operating leases at March 26, 2001 are as follows: Fiscal Year ----------- 2002 $ 2,195 2003 1,991 2004 1,642 2005 1,256 2006 878 Thereafter 444 --------- $ 8,406 ========= 43 (12) VALUATIONS AND QUALIFYING ACCOUNT: The table below summarizes the activity in the valuation account, allowance for possible uncollectible accounts receivable for the periods indicated:
Purchase Accounting Balance, Charges Additions, Deductions, Balance, Beginning to (Utilization), Write-Offs, End of of Period Expense Net Net Period ------------- ----------- ---------------- ------------- -------------- Trade Accounts Receivable Valuation Account: For the fiscal year ended March 29, 1999 $ 266 $ 3 $ - $ - $ 269 For the six weeks from March 30 through May 6, 1999 269 - - - 269 For the forty-six weeks from May 7, 1999 through March 27, 2000 269 528 367 - 1,164 For the fiscal year ended March 26, 2001 $1,164 $178 $(302) $(674) $ 366
44 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS Upon consummation of the Transactions, the following individuals became the directors and executive officers of Media and the Company. All officers serve at the pleasure of the applicable Board of Directors.
Name Age Position (s) ---- --- ------------ David J. Pecker.......................... 49 Chairman, Chief Executive Officer, President And Director of Media and the Company Austin M. Beutner........................ 41 Director of Media and the Company Neeraj Mital............................. 34 Director of Media and the Company Saul D. Goodman.......................... 33 Director of Media and the Company Robert V. Seminara....................... 29 Director of Media and the Company Paul G. Yovovich......................... 47 Director of Media and the Company Helene Belanger.......................... 46 Director of Media and the Company Brian J. Richmand ....................... 47 Director of Media and the Company J. William Grimes ....................... 60 Director of Media and the Company John A. Miley............................ 45 Executive Vice President and Chief Financial Officer of Media and the Company Sandra Koo............................... 47 Director of Media
David J. Pecker became Chairman, Chief Executive Officer, President and a Director of Media and the Company upon consummation of the Transactions on May 7, 1999. Prior to that, Mr. Pecker had been the Chief Executive Officer since 1992, and President since 1991, of Hachette Filipacchi Magazines, Inc.. Prior to 1991, he was Executive Vice President/Publishing and Chief Operating and Chief Financial Officer of Hachette. Mr. Pecker has over 20 years of publishing industry experience having worked as the Director of Financial Reporting at CBS, Inc. Magazine Group and as the Vice President and Controller of Diamandis Communications Inc. Austin M. Beutner is co-chairman of Evercore Capital Partners, President of Evercore and Chairman and CEO of Evercore Ventures. From 1994 to 1996, Mr. Beutner was Chief Executive Officer and President of the U.S. Russia Investment Fund, and in January 1997, Mr. Beutner was named Vice Chairman of its Board of Directors. Before his affiliation with the U.S. Russia Investment Fund, he was a General Partner of The Blackstone Group. Mr. Beutner is currently a director of Energy Partners, Ltd., Business.com, Continental Energy Services, Inc., eCompanies L.L.C., Earthlink, Encoda Systems, Telenet Holdings N.V. and Vertis, Inc. and an observer to the Board of Callahan Associates International L.L.C. 45 Neeraj Mital is a Partner of Evercore. Prior to joining Evercore, Mr. Mital was at The Blackstone Group from 1992 to 1998, most recently as a Managing Director. Prior to joining The Blackstone Group, he was at Salomon Brothers Inc. Saul D. Goodman is Managing Director of Evercore. Prior to joining Evercore, Mr. Goodman was an investment banker at Lehman Brothers, Inc. from 1994 to 1998, most recently as a Vice President. Prior to that, Mr. Goodman was at Ark Asset Management. Robert V. Seminara is a Vice President of Evercore. Prior to joining Evercore, Mr. Seminara was a Financial Analyst at Lazard Freres & Co. LLC from 1994 to 1996. Paul G. Yovovich is a principal of Lake Capital, a private investment company. From 1993 to 1996 he was President of Advance Ross Corporation, whose business was international transactions services. Prior to 1993, Mr. Yovovich held a variety of executive positions at Centel Corporation, most recently as President of its Central Telephone Company unit. Mr. Yovovich is currently a Director of 3Com Corporation, Focal Communications Corporation, APAC Customer Services, Inc. and Lante Corporation. Helene Belanger is a Vice-President in the Private Investments Group of Capital Communications CDPQ ("Capital Communications''). Ms. Belanger has been affiliated with Capital Communications since 1990 holding various positions including the position of Director. Prior to her affiliation with Capital Communications, Ms. Belanger was with the Royal Bank of Canada, occupying various positions in the commercial loans sector, and at the Federal Business Development Bank. Ms. Belanger is a corporate director sitting on the Board of Directors of NetStar Communications, CFCF-12 and Groupe Coscient. Brian J. Richmand has served as a Special Partner of JP Morgan Partners (formerly Chase Capital Partners) ("JPMP") since January 2000 and as a General Partner of JPMP from August 1993 through December 1999. Prior to joining JPMP, Mr. Richmand headed the Corporate Group of the Washington, D.C. office of the law firm of Kirkland & Ellis. Mr. Richmand received a B.S. degree in 1976 from The Wharton School of Finance and Commerce and a J.D. degree in 1979 from Stanford Law School. Mr. Richmand currently serves on the Boards of Directors of LaPetite Academies, Inc., Reiman Publishing, LLC, Riverwood International Corporation and Transtar Metals, LLC and on the Executive Committee of Falcon Mezzanine Partners, L.P. J. William Grimes is a General Partner at BG Media Investors. Prior to joining BG Media Investors, Mr. Grimes served from 1994 to 1997 as a media and communications consultant to several high-tech new media companies and is a principal of Incontext, Inc., a Washington, D.C.-based information database company. From 1994 to September 1996, Mr. Grimes was Chief Executive Officer and President of Zenith Media, USA. Before 1994, Mr. Grimes served in senior positions at several media companies including Chief Executive Officer and President of Multimedia, Inc. and Chief Executive Officer and President of Univision Holdings, Inc. and Chief Executive Officer and President of ESPN. John A. Miley joined the Company in October 1999 as Executive Vice President and Chief Financial Officer. Prior to joining the Company, Mr. Miley held the position of Vice President Controller at Hachette Filipacchi Magazines, Inc. Mr. Miley has over 20 years of publishing industry experience. Sandra Koo is an Assistant Controller at Evercore. Prior to joining Evercore, Ms, Koo was an accounting manager with the Blackstone Group. 46 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the compensation paid by us to our chief executive officer and our three most highly compensated executive officers at March 26, 2001 for services rendered during the fiscal years 2001, 2000, and 1999.
SUMMARY COMPENSATION TABLE Long-Term Annual Compensation Options ---------------------------------------------------------------------- Other Annual Shares All Other Fiscal Salary Bonus Compensation Underlying Compensation Year ($) ($) ($) Options ($) ---- --- --- --- ------- --- Name and Principal ------------------ Position -------- David J. Pecker 2001 1,500,000 0 0 0 2,864,000 (4) Chairman, President & 2000 1,500,000 250,000 (5) 0 0 1,955,152 (4) Chief Executive Officer 1999 0 (2) 0 (2) 0 (2) 0 0 (2) John A. Miley 2001 250,000 250,000 (5) 0 0 14,781 (1) Executive VP & 2000 110,577 213,500 (5) 0 0 0 Chief Financial Officer 1999 0 (2) 0 (2) 0 (2) 0 0 (2) Michael R. Roscoe (6) 2001 298,558 101,320 (5) 0 0 3,196 (1) Chairman of DSI 2000 322,115 130,000 (5) 0 0 168,009 (1)(3) 1999 296,193 37,000 0 50,000 (3) 18,472 (1) Michael Porche (6) 2001 219,615 75,070 (5) 0 0 3,883 (1) Chief Executive Officer & President of DSI
1) Amounts related to Mr. Miley, Mr. Roscoe and Mr. Porche for all periods presented relate to certain other taxable employment benefits. 2) Messrs. Pecker and Miley were all first employed by the Company and Media during fiscal 2000. 3) Upon consummation of the Transaction on May 7, 1999, Mr. Roscoe received $7 for each underlying share of common stock represented by his options. After deducting for the exercise price of the underlying stock options, Mr. Roscoe received net proceeds of $167,709. 4) The amount for fiscal 2000 includes the first portion of the make-whole payment to Mr. Pecker in the amount of $1,857,167, discussed below as well as certain other taxable employment benefits in the amount of $97,985. The amount for fiscal 2001 includes the final portion of the make-whole payment to Mr. Pecker in the amount of $2,332,818, discussed below, as well as certain other taxable employment benefits in the amount of $241,242. 5) Includes annual bonus for Messrs. Pecker, Miley, Roscoe and Porche. The amount received in fiscal 2000 by Mr. Pecker and a portion of the bonus received by Mr. Miley relate to a signing bonus paid upon the consummation of the Transaction. 6) Mr. Roscoe was Chief Executive Officer & President of DSI during fiscal 1999, 2000 and until January 1, 2001. Effective January 1, 2001, Mr. Roscoe became Chairman of DSI and Mr. Porche became the President & CEO of DSI. 47 All of our common stock is owned by Media and all of Media's common stock is owned by EMP Group LLC (the "LLC"). Equity interests in the LLC are owned by Evercore and certain investors, including Mr. Pecker and certain members of management. For a discussion of the distributions Mr. Pecker and the other Executive Officers listed above may receive as the owners of certain units in the LLC as compensation for their employment, see "Item 13. Certain Relationships and Related Transactions". Our executive officers are elected by our Board of Directors and serve at the discretion of our Board of Directors or pursuant to an employment agreement. Media is party to an employment agreement with Mr. Pecker that has a five-year term expiring May 6, 2004 and, after the initial term, will be automatically extended each year for successive one-year periods, unless either party provides 60 days' prior written notice before the next extension date. The employment agreement also provided that, upon Mr. Pecker's termination of employment with Hachette, the LLC was obligated to make payments related to compensation forfeited upon such termination (the "Make-Whole Payments"). The Make-Whole Payments, in the aggregate, equal approximately $4.2 million, a portion of which was paid upon Mr. Pecker's termination of employment with Hachette on March 13, 1999, and the remainder of which was paid on April 15, 2000. During his term of employment, Mr. Pecker shall be entitled to a base salary equal to $1,500,000 and certain other customary employee benefits. Upon termination of employment by Media without cause or by Mr. Pecker for good reason, Mr. Pecker shall be entitled to the following subject to certain restrictions: (a) continued payment of base salary and continued health, life insurance and disability benefits; (b) immediate vesting of plan benefits; (c) outplacement services for 12 months following such termination; (d) a golden parachute excise tax gross-up payment, if applicable, in connection with a "change in control" (as defined in the employment agreement); and (e) such employee benefits as to which Mr. Pecker may be entitled under the employee benefit plans and arrangements of Media. Media is party to employment agreements with Messrs. Miley and Roscoe which call for (i) base salaries of $250,000 and $200,000, respectively, (ii) annual bonus opportunities of $250,000 and $-0-, respectively and (iii) certain other customary employee benefits. The contract for Mr. Roscoe expires on December 31, 2001. Media is party to an employment agreement with Mr. Porche which calls for (i) base salary of $225,000, (ii) annual bonus opportunity of $75,000 and (iii) certain other customary employee benefits. The term of Mr. Porche's contract expires on September 29, 2004. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT All of our common stock is owned by Media and all of Media's common stock is owned by the LLC. Equity interests in the LLC are owned by Evercore and certain investors, including Mr. Pecker, as well as certain members of management. Pursuant to the LLC Agreement (as defined herein), Evercore has control over the LLC, Media and the Company by virtue of its right to appoint a majority of the Board of Managers of the LLC and a majority of the Board of Directors of Media, irrespective of the amount of Evercore's equity interests in the LLC. See "Item 13. Certain Relationships and Related Transactions." 48 The following table presents, as of June 25, 2001, information relating to the beneficial ownership of the LLC (the parent of Company and Media), held by each director of the Company, by each executive officer of the Company named in the Summary Compensation Table above and by all of the executive officers and directors of the Company as a group.
Name and Address of Number Percent Beneficial Owner Title of Class of Units Of Class ---------------- -------------- -------- -------- Evercore Partners LLC (1), (2) Class A 92,000 39.2% 65 East 55/th/ Street Class A-1 2,663 53.3% New York, New York 10022 Class B --- --- Austin M. Beutner (1), (2) Class C --- --- Class D --- --- Class E --- --- B.G. Media Investors LLC (3) Class A 25,000 10.6% 399 Park Avenue Class A-1 531 10.6% 19/th/ Floor Class B --- --- New York, New York 10026 Class C --- --- J. William Grimes (3) Class D --- --- Class E --- --- David J. Pecker Class A 5,000 2.1% Class A-1 106 2.1% Class B 26,854 83.4% Class C --- --- Class D 2,716 100.0% Class E 1,343 100.0% John A. Miley Class A --- --- Class A-1 --- --- Class B 1,039 3.2% Class C 225 4.5% Class D --- --- Class E --- --- Michael R. Roscoe Class A --- --- Class A-1 --- --- Class B 51 0.2% Class C 25 0.5% Class D --- --- Class E --- --- Michael J. Porche Class A --- --- Class A-1 --- --- Class B 166 .5% Class C 100 2.0% Class D --- --- Class E --- --- All executive officers and Class A 122,000 51.9% directors as a group Class A-1 3,300 66.0% (15 persons) Class B 28,110 87.3% Class C 350 7.0% Class D 2,716 100.0% Class E 1,343 100.0%
49 (1) Class A Units shown as beneficially owned by Evercore Partners LLC are held by Evercore Capital Partners, Evercore Capital Partners (NQ) L.P. and Evercore Co-Investment Partnership L.P. Evercore Partners LLC is the general partner of Evercore Capital Partners L.P., the general partner of Evercore Capital Partners (NQ) L.P., the investment general partner of Evercore Capital Offshore Partners L.P. and the managing member of Evercore Co-Investment Partnership G.P., LLC (which in turn is the general partner of Evercore Co-Investment Partnership L.P.). The managing members of Evercore Partners LLC include Mr. Beutner, who also is a director of Media and the Company. Mr. Beutner may be deemed to share beneficial ownership of the Class A Units shown as beneficially owned by Evercore Partners LLC Mr. Beutner disclaims beneficial ownership of such units. (2) The LLC Agreement provides that the LLC will be managed by a Board of Managers, a majority of which will be appointed by Evercore, irrespective of Evercore's ownership interest. All action by such Board of Managers are made by majority vote except for transactions involving the transfer of LLC assets to Evercore or its affiliates and certain other specified corporate transactions. In addition, Evercore has the right to appoint a majority of the Board of Directors of Media. (3) Class A Units shown as beneficially owned by BG Media Investors LLC are held by BG Media Investors L.P. BG Media Investors LLC is the general partner of BG Media Investors LLC The managing members of BG Media Investors LLC include Mr. Grimes, who also is a director of Media and the Company. Mr. Grimes may be deemed to share beneficial ownership of the Class A Units shown as beneficially owned by Evercore Partners LLC Mr. Grimes disclaims beneficial ownership of such units. The Class C Units represent 2% of the aggregate number of Class A Units, Class A-1 Units and Class C Units outstanding as of June 25, 2001. Unless otherwise indicated, beneficial owners listed above may be contacted at the Company's corporate address 5401 N.W. Broken Sound Blvd., Boca Raton, FL 33487. Under the rules of the SEC, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to vote or to direct the voting of such security, or investment power, which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be the beneficial owner of any securities of which that person has the right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed to be a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which that person has no beneficial interest. Helene Belanger, Saul Goodman, Sandra Koo, Neeraj Mital, Brian Richmand, Robert V. Seminara, Paul Yovovich (all of whom are directors of Media and the Company) do not beneficially own any shares of the Company. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS As part of their investment in the LLC, Evercore and the other investors and Media, have entered into the LLC Agreement (the "LLC Agreement"). Interests in the LLC are represented by units of various classes. Evercore and the other investors, including Mr. Pecker, own Class A Units or Class A-1 Units. Class A Units and Class A-1 Units are the only units with voting power. Certain members of management own Class C Units, which are similar to the Class A Units except that, among other things, the Class C Units have no voting rights. Other classes of units, one class of which has been issued to Mr. Pecker (Class E Units) and one class was issued to Mr. Pecker and other members of management (Class B Units), are eligible to share in the profits of the LLC, pro rata, only after all the holders of the Class A Units, Class A-1 Units and Class C Units have received the return of their aggregate investment in such classes of units. Mr. Pecker also has been issued a class of units (Class D Units) that will vest and share in the profits of the LLC, pro rata, only in certain circumstances and only after all the holdings of the Class A 50 Units, Class A-1 Units and Class C Units have received the return of their aggregate investment in such classes of units. The units of the LLC are exchangeable for the common stock of Media under certain circumstances, including pursuant to demand and piggyback registration rights granted to Evercore and certain other investors, including Mr. Pecker, under the LLC Agreement. The LLC Agreement grants each investor certain demand registration rights with respect to common stock of Media, the exercise of which, in general, is controlled by Evercore and grants unlimited piggyback registration rights. In general, the investors, including Mr. Pecker, may not transfer their interests in the LLC without the consent of Evercore. Below a certain ownership percentage, if Evercore transfers its units, all the other investors are required to transfer a pro rata number of securities on the same terms as the Evercore transfer. Pursuant to a management agreement, dated as of May 7, 1999 (the "Management Agreement"), among Evercore Advisors Inc. ("Evercore Advisors"), an affiliate of Evercore, and Media, Evercore Advisors will be paid an annual monitoring fee of $750,000 if the financial performance of Media meets certain predetermined targets. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The following documents are filed with, or incorporated by reference in, and as part of, this Annual Report on Form 10-K. 1. Financial Statements For a complete list of the Financial Statements filed with this Annual Report on Form 10-K, see the Index to Consolidated Financial Statements on Page 25. 51 Exhibit Number Description of Exhibit ------- *2.1 -- Agreement and Plan of Merger dated as of February 16, 1999, by and between EMP Acquisition Corp., a Delaware corporation, and American Media, Inc., a Delaware corporation. *2.2 -- Certificate of Merger of EMP Acquisition Corp. with and into American Media, Inc. (Under Section 251 of the General Corporation Law of the State of Delaware). **2.3 -- Stock and Asset Purchase Agreement, dated as of November 1, 1999, among Mike Rosenbloom, Globe International Publishing, Inc., Globe International, Inc., EMP Group LLC and American Media Operations, Inc. 3.1 -- Certificate of Incorporation of Enquirer/Star, Inc and amendments thereto (incorporated by reference to Operation's Registration Statement on Form S-1, Registration No. 33-46676, Part II, Item 16, Exhibit 3.5, as filed on March 25, 1992). (1) 3.2 -- Amended By-laws of Enquirer/Star, Inc. (incorporated by reference to Operation's Registration Statement on Form S-1, Registration No. 33-46676, Part II, Item 16, Exhibit 3.6, as filed on March 25, 1992). (1) 3.3 -- Amendment of Certificate of Incorporation of Operations dated November 7, 1994 changing its name to American Media Operations, Inc. from Enquirer/Star, Inc. (incorporated by reference from Operation's Annual Report on Form 10-K for the year ended March 27, 1995, filed as Exhibit 3.3, File No. 1-11112). ***4.1 -- Purchase Agreement, dated as of April 30, 1999, among American Media Operations, Inc., National Enquirer, Inc., Star Editorial, Inc., SOM Publishing, Inc., Weekly World News, Inc., Country Weekly, Inc., Distribution Services, Inc., Fairview Printing, Inc., NDSI, Inc., Biocide, Inc., American Media Marketing, Inc. and Marketing Services, Inc. *4.2 -- Indenture dated as of May 7, 1999, among American Media Operations, Inc., National Enquirer, Inc., Star Editorial, Inc., SOM Publishing, Inc., Weekly World News, Inc., Country Weekly, Inc., Distribution Services, Inc., Fairview Printing, Inc., NDSI, Inc., Biocide, Inc., American Media Marketing, Inc., and Marketing Services, Inc., and The Chase Manhattan Bank, a New York banking corporation, as trustee. *4.3 -- Indemnity, Subrogation and Contribution Agreement dated as of May 7, 1999, among American Media Operations, Inc., each subsidiary of American Media, Inc. listed on Schedule I thereto and The Chase Manhattan Bank, as collateral agent for the Secured Parties (as defined in the Security Agreement). 52 *4.4 -- Pledge Agreement dated as of May 7, 1999, among American Media Operations, Inc., American Media, Inc., each subsidiary of Holdings listed on Schedule I thereto and The Chase Manhattan Bank, as collateral agent for the Secured Parties *4.5 -- Security Agreement dated as of May 7, 1999, among American Media Operations, Inc., American Media, Inc., each subsidiary of Holdings listed on Schedule I thereto and The Chase Manhattan Bank, as collateral agent for the Secured Parties (as defined herein). **4.6 -- Credit Agreement dated as of May 7, 1999, as Amended and Restated as of November 1, 1999, among American Media, Inc., American Media Operations, Inc., the Lenders party hereto and The Chase Manhattan Bank, as Administrative Agent. 10.1 -- Tax Sharing Agreement dated as of March 31, 1992, among Group and its subsidiaries (incorporated by reference from Media's Annual Report on Form 10-K for the year ended March 30, 1992, filed as Exhibit 10.15, File No. 1-10784).(1) ***10.2 -- Management Agreement dated as of May 7, 1999, between American Media, Inc., a Delaware Corporation and Evercore Advisors, Inc., a Delaware limited liability company. **10.3 -- David J. Pecker Employment Agreement, dated as of February 16, 1999. ***10.4 -- Side Letter regarding David J. Pecker Employment Agreement to David Pecker from EMP Group LLC, dated as of April 13, 1999 **10.5 -- Mike Rosenbloom Employment Agreement, dated as of November 1, 1999. 21 -- Subsidiaries of American Media Operations, Inc -------------------------------------- (1) Enquirer/Star, Inc. is now named American Media Operations, Inc. ("Operations"); Enquirer/Star Group, Inc. ("Group") is now named American Media, Inc. ("Media"). * Incorporated by reference to our Registration Statement on Form S-4, dated August 3, 2000. Filed with the U.S. Securities and Exchange Commission (Registration Statement No. 333-83637). ** Incorporated by reference to the March 27, 2000 Form 10-K of Media dated June 26, 2000. *** Incorporated by reference to the March 29, 1999 Form 10-K of Media dated June 28, 1999. 53 3. Form 8-K SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15 (d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT. No annual report or proxy material has been sent to security holders in fiscal year 2001. 54 SIGNATURES 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 on it's behalf by the undersigned, thereto duly authorized on June 25, 2001. AMERICAN MEDIA OPERATIONS, INC. By: /s/ DAVID J. PECKER --------------------------------- David J. Pecker Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on behalf of the registrant and in the capacities indicated on June 25, 2001. Signature Title --------- ----- /s/ DAVID J. PECKER Chairman of the Board, President, ----------------------------- David J. Pecker Chief Executive Officer and Director (Principal Executive Officer) /s/ JOHN A. MILEY Executive Vice President and Chief ----------------------------- John A. Miley Financial Officer (Principal Financial and Accounting Officer) /s/ AUSTIN M. BEUTNER Director ----------------------------- Austin M. Beutner /s/ NEERAJ MITAL Director ----------------------------- Neeraj Mital /s/ SAUL D. GOODMAN Director ----------------------------- Saul D. Goodman /s/ ROBERT V. SEMINARA Director ----------------------------- Robert V. Seminara 55 Exhibit Index Exhibit 21 - Subsidiaries of American Media Operations, Inc.