<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 28, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number(s) - see attached
AMERICAN MEDIA OPERATIONS, INC.
----------------------------------------------------------
(Exact name of the registrant as specified in its charter)
Delaware 59-2094424
(State or other jurisdiction of (IRS Employee Identification No.)
incorporation or organization)
600 East Coast Avenue, Lantana, Florida 33464-0002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (561) 540-1000
American Media Operations, Inc. (1) HAS FILED all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) HAS BEEN subject to such filing requirements for
the past 90 days.
As of August 11, 1999 there were 7,507 shares of common stock outstanding.
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TABLE OF ADDITIONAL REGISTRANT
GUARANTORS
<TABLE>
<CAPTION>
Address Including Zip Code
State or Other I.R.S. and Telephone Number
Exact Name Jurisdiction of Employer Including Area Code,
of Registrant Guarantor Incorporation or Identification of Registrant Guarantor's
as Specified in Its Charter Organization Number Principal Executive Offices
- -------------------------------- ------------------ ------------------ ----------------------------------
<S> <C> <C> <C>
American Media Marketing, Inc. Florida 65-0757297 600 East Coast Avenue
Lantana, FL 33464 (561) 540-1000
Biocide, Inc. Delaware 58-2286482 600 East Coast Avenue
Lantana, FL 33464 (561) 540-1000
Country Weekly, Inc. Delaware 65-0462019 600 East Coast Avenue
Lantana, FL 33464 (561) 540-1000
Distribution Services, Inc. Delaware 59-1641185 600 East Coast Avenue
Lantana, FL 33464 (561) 540-1000
Fairview Printing, Inc. Florida 59-2521785 600 East Coast Avenue
Lantana, FL 33464 (561) 540-1000
Health Xtra, Inc. Florida 65-0886419 600 East Coast Avenue
Lantana, FL 33464 (561) 540-1000
Marketing Services, Inc. Delaware 65-0228937 600 East Coast Avenue
Lantana, FL 33464 (561) 540-1000
National Enquirer, Inc. Florida 59-2764097 600 East Coast Avenue
Lantana, FL 33464 (561) 540-1000
NDSI, Inc. Delaware 59-2632066 600 East Coast Avenue
Lantana, FL 33464 (561) 540-1000
Retail Marketing Network, Inc. Delaware 65-0503059 600 East Coast Avenue
Lantana, FL 33464 (561) 540-1000
Star Editorial, Inc. Delaware 59-2719233 600 East Coast Avenue
Lantana, FL 33464 (561) 540-1000
SOM Publishing, Inc. Florida 59-2429187 600 East Coast Avenue
Lantana, FL 33464 (561) 540-1000
Weekly World News, Inc. Florida 59-1896614 600 East Coast Avenue
Lantana, FL 33464 (561) 540-1000
</TABLE>
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AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
JUNE 28, 1999
Page(s)
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PART I. FINANCIAL INFORMATION
Item 1. Company and Predecessor Financial Statements-
Consolidated Balance Sheets.............................................. 4
Consolidated Statements of Income........................................ 5
Consolidated Statements of Cash Flows.................................... 6
Notes to Consolidated Financial Statements............................... 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................11-15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................. 16
Signature..................................................................17
3
<PAGE> 4
AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of June 28 and March 29, 1999
(in 000's, except share information)
The financial statements of the Company and the Predecessor Company
are not comparable in certain respects (see Note 1).
<TABLE>
<CAPTION>
Predecessor
Company The Company
March 29, June 28,
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $3,823 $1,638
Receivables, net 7,977 10,005
Inventories 9,830 7,231
Prepaid expenses and other 2,650 6,912
------------- -------------
Total current assets 24,280 25,786
------------- -------------
PROPERTY AND EQUIPMENT, at cost:
Land and buildings 4,039 1,670
Machinery, fixtures and equipment 22,040 10,743
Display racks 19,543 11,228
------------- -------------
45,622 23,641
Less - accumulated depreciation (18,762) (1,278)
------------- -------------
26,860 22,363
------------- -------------
DEFERRED DEBT COSTS, net 5,728 20,914
------------- -------------
GOODWILL, net of accumulated amortization of $141,595 and $3,071 463,656 456,076
------------- -------------
OTHER INTANGIBLES, net of accumulated amortization of $51,686 and $3,671 96,314 516,141
------------- -------------
$616,838 $1,041,280
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of term loan $25,000 $ --
Accounts payable 11,618 8,928
Accrued expenses 34,801 32,556
Deferred revenues 27,987 24,461
------------- -------------
Total current liabilities 99,406 65,945
------------- -------------
PAYABLE TO PARENT COMPANY 3,404 177
------------- -------------
LONG TERM DEBT:
Term Loan and Revolving Credit Commitment, net of current portion 246,000 348,000
10.25% Senior Subordinated Notes Due 2009 -- 250,000
11.63% Senior Subordinated Notes Due 2004 200,000 740
10.38% Senior Subordinated Notes Due 2002 134 134
------------- -------------
446,134 598,874
------------- -------------
DEFERRED INCOME TAXES (NOTE 3) 7,696 163,872
------------- -------------
CONTINGENCIES (NOTE 6)
STOCKHOLDER'S EQUITY:
Common stock, $.20 par value; 7,507 shares issued and outstanding 2 2
Additional paid-in capital 26,039 218,279
Retained earnings (deficit) 34,157 (5,869)
------------- -------------
TOTAL STOCKHOLDER'S EQUITY 60,198 212,412
------------- ------------
$616,838 $1,041,280
============= ============
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these consolidated balance sheets.
4
<PAGE> 5
AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(IN 000'S)
The financial statements of the Company and the Predecessor Company
are not comparable in certain respects (see Note 1).
<TABLE>
<CAPTION>
Predecessor Company The Company
------------------------------------- --------------
Fiscal Quarter March 30, 1999 May 7, 1999
Ended June 29, Through Through
1998 May 6, 1999 June 28, 1999
-------------- -------------- --------------
<S> <C> <C> <C>
OPERATING REVENUES:
Circulation $62,798 $26,215 $30,920
Advertising 5,554 2,640 3,146
Other 5,024 2,308 2,609
----------------- ----------------- ----------------
73,376 31,163 36,675
----------------- ----------------- ----------------
OPERATING EXPENSES:
Editorial 7,382 3,040 3,535
Production 20,936 7,784 8,673
Distribution, circulation and other cost of sales 18,202 6,624 7,718
Selling, general and administrative expenses 6,575 3,248 3,553
Depreciation and amortization 7,842 3,703 8,033
---------------- ----------------- ----------------
60,937 24,399 31,512
----------------- ----------------- ----------------
Operating income 12,439 6,764 5,163
INTEREST EXPENSE (12,195) (4,837) (8,565)
OTHER INCOME (EXPENSE), net 4,193 25 (7)
----------------- ----------------- ----------------
Income (loss) before benefit (provision) for
income taxes and extraordinary charge 4,437 1,952 (3,409)
BENEFIT (PROVISION) FOR INCOME TAXES (3,043) (1,365) 121
----------------- ----------------- ----------------
Income (loss) before extraordinary charge 1,394 587 (3,288)
EXTRAORDINARY CHARGE, net of income
taxes of $1,269 and $1,517, respectively (Note 4) (2,161) -- (2,581)
----------------- ----------------- ----------------
Net income (loss) $(767) $587 $(5,869)
================= ================= ================
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
5
<PAGE> 6
AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN 000'S)
The financial statements of the Company and the Predecessor Company
are not comparable in certain respects (see Note 1).
<TABLE>
<CAPTION>
Predecessor Company The Company
------------------------------------ ------------------
Fiscal Quarter March 30, 1999 May 7, 1999
Ended June 29, Through Through
1998 May 6, 1999 June 28, 1999
------------------ ----------------- ------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $(767) $587 $(5,869)
------------------ ----------------- ------------------
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities -
Extraordinary charge, net of income taxes 2,161 -- 2,581
Depreciation and amortization 7,842 3,703 8,033
Deferred debt cost amortization 494 147 414
Decrease (increase) in -
Receivables, net (5,150) (369) (1,658)
Inventories 18 1,163 1,436
Prepaid expenses and other 3,624 1,793 (6,056)
Increase (decrease) in -
Accounts payable (1,480) (2,184) (506)
Accrued expenses (9,295) (164) (11,002)
Accrued and current deferred income taxes 135 1,267 3,151
Deferred revenues (5,323) (3,159) (367)
------------------ ----------------- ------------------
Total adjustments (6,974) 2,197 (3,974)
------------------ ----------------- ------------------
Net cash (used in) provided by operating activities (7,741) 2,784 (9,843)
------------------ ----------------- ------------------
Cash flows from investing activities:
Capital expenditures (4,243) (717) (1,434)
Acquisition of business, net of cash acquired -- -- (332,498)
------------------ ----------------- ------------------
Net cash used in investing activities (4,243) (717) (333,932)
------------------ ----------------- ------------------
Cash Flows from Financing Activities:
Issuance of common stock -- -- 235,000
Term loan and revolving credit commitment principal repayments (318,401) (10,000) (271,000)
Proceeds from revolving credit commitment 326,000 6,000 --
Repayment of subordinated senior subordinated indebtedness -- -- (199,260)
Proceeds from new term loan and credit facility -- -- 352,000
Proceeds from new senior subordinated indebtedness -- -- 250,000
Payment of deferred debt costs (1,964) -- (21,327)
------------------ ----------------- ------------------
Net cash provided by (used in) financing activities 5,635 (4,000) 345,413
------------------ ----------------- ------------------
Net (Decrease) Increase in Cash and Cash Equivalents (6,349) (1,933) 1,638
Cash and Cash Equivalents at Beginning of Period 7,405 3,823 --
================== ================= ==================
Cash and Cash Equivalents at End of Period $1,056 $1,890 $1,638
================== ================= ==================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for -
Income taxes $194 $80 $3,158
Interest 19,589 3,142 12,788
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
6
<PAGE> 7
AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 28, 1999
(000'S omitted in all tables)
(unaudited)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Except as
disclosed herein, there has been no material change in the information
disclosed in the notes to consolidated financial statements included in the
Annual Report on Form 10-K of American Media Operations, Inc., and subsidiaries
for the fiscal year ended March 29, 1999. As discussed below, American Media
Operations, Inc. was purchased on May 7, 1999 resulting in a change in the
historical cost basis of various assets and liabilities, accordingly, the
historical financial information provided herein, for periods prior to May 7,
1999 is not comparable to post acquisition financial information. For purposes
of presentation, all historical financial information for periods prior to May
7, 1999 will be referred to as the "Predecessor Company" and all periods
subsequent to May 6, 1999 (the "Inception Period") will be referred to as the
"Company". A solid black line has been inserted in tables where financial
information may not be comparable across periods.
In the opinion of management, all adjustments considered necessary for a fair
presentation have been included herein. Operating results for the fiscal period
ended June 28, 1999 are not necessarily indicative of the results that may be
expected for the fiscal year ending March 27, 2000.
(2) CERTAIN TRANSACTIONS AND MERGER
On May 7, 1999, all of the common stock of the Company's parent, American
Media, Inc. ("Media") was purchased by EMP Acquisition Corp. ("EMP") a company
controlled by Evercore Capital Partners L.P., a private equity firm
("Evercore") for $837 million (the "Acquisition"). Proceeds to finance the
acquisition included (a) a cash equity investment of $235 million by Evercore
and certain other investors, (b) borrowings of $352 million under a new $400
million senior bank facility (the "New Credit Facility") and (c) borrowings of
$250 million in the form of senior subordinated notes (the "Notes"). These
proceeds were used to (d) acquire all of the outstanding common stock of Media
for $299.4 million, (e) repay $267 million then outstanding under the existing
credit agreement with our banks, (f) retire approximately $199.3 million of
Senior Subordinated Notes due 2004 and (g) pay transaction costs (collectively
(a) through (g), the "Transactions"). Upon consummation of the Transactions,
EMP was merged with and into Media (the "Merger") resulting in a change in
ownership control of both Media and the Company. The Transactions are
summarized as follows:
7
<PAGE> 8
Proceeds from:
Equity contribution $ 235,000
New credit facility 352,000
Notes 250,000
---------
837,000
Proceeds used to repay:
Existing credit facility (267,000)
Existing subordinated notes (199,300)
Existing equity (299,400)
---------
(765,700)
Balance used to pay debt issuance
costs, debt tender offer premium,
accrued interest, and other costs $ (71,300)
---------
Preliminary allocation of purchase price is as follows:
Net cash proceeds $ 837,000
Less repayment of existing debt (466,300)
Less cash assumed (1,900)
---------
Net cash paid 368,800
Fair value of liabilities assumed (78,275)
Fair value of tangible assets acquired 41,973
---------
$ 332,498
=========
The Acquisition has been accounted for under the purchase method of accounting.
The excess of purchase price over the fair value of net tangible assets
acquired has been allocated between identified intangible assets including the
value of the tradenames and subscription lists of the Company's publications,
as determined through an independent appraisal, with the remainder allocated to
goodwill. The preliminary estimates of the fair values of other assets and
liabilities may be revised at a later date which may result in a change to the
value of goodwill. These intangible assets are being amortized on a
straight-line basis over 20 years for tradenames and goodwill and 9-15 years
for subscription lists.
The following pro forma financial information gives effect to the Transactions
and excludes the results of Soap Opera Magazine and Soap Opera News, which were
sold in February 1999 for $10 million cash and possible additional
consideration based upon the future performance of certain of the buyer's
titles, as if each had occurred as of the beginning of each period presented
(unaudited):
Predecessor Company
-------------------------------
Fiscal Quarter March 30,1999
Ended Through
June 29, 1998 May 6, 1999
-------------- -------------
Operating revenues $ 67,615 $ 31,163
======== ========
Operating expenses $(60,848) $(26,863)
======== ========
Depreciation and amortization $(15,088) $ (6,087)
======== ========
Operating income $ 6,767 $ 4,300
======== ========
Interest expense $(14,423) $ (6,190)
======== ========
Net loss $ (5,947) $ (2,700)
======== ========
8
<PAGE> 9
(3) INVENTORIES
Inventories are generally stated at the lower of cost or market. The Company
uses the last-in, first-out (LIFO) cost method of valuing its inventories,
which approximates the first-in, first-out (FIFO) cost method for the periods
presented. Inventories are comprised of the following:
March 29, June 28,
--------- --------
Raw materials - paper $6,931 $4,474
Finished product - paper, production
and distribution costs of future issues 2,899 2,757
------ ------
$9,830 $7,231
====== ======
(4) INCOME TAXES
The Company files a consolidated Federal income tax return with Media, and
calculates its income taxes on a separate return basis. Income taxes have been
provided based upon the Company's anticipated effective annual income tax rate.
In accordance with the Statement of Financial Accounting Standards ("SFAS") NO.
109, "Accounting for Income Taxes", deferred taxes are recognized for temporary
differences related to identified intangible assets other than goodwill. The
temporary difference is calculated based on the difference between the new book
bases of the amounts allocated to tradenames and subscription lists and their
original tax bases. Accordingly, as of May 7, 1999, a deferred tax liability of
approximately $162 million has been recorded with a corresponding increase in
goodwill.
(5) CREDIT AGREEMENT
As of June 28, 1999 the Company's effective interest rate on borrowings under
the New Credit Agreement was 8.4%. The effective rate for borrowings under the
New Credit Agreement averaged 8.7% for the Inception Period and under the prior
credit agreement averaged 7.1% for the period from March 30, 1999 through May
6, as compared to 7.5% for the fiscal quarter ended June 29, 1998.
In the fiscal quarter ended June 29, 1998, approximately $3.4 million, ($2.2
million net of income taxes) was charged to extraordinary loss related to the
write-off of deferred debt costs as a result of the refinancing of the prior
credit facility. In connection with the Transactions, a fee related to an
unused bridge loan commitment totaling approximately $4.1 million ($2.6 million
net of income taxes) was charged to extraordinary loss in the Inception Period.
American Media Operations, Inc. has no material assets or operations other than
investments in its subsidiaries. The Notes are unconditionally guaranteed, on a
senior subordinated basis, by all of its material subsidiaries. Each subsidiary
that will be organized in the future by the Company, unless such subsidiary is
designated as an unrestricted subsidiary, will jointly, severally, fully and
unconditionally guarantee the Notes on a senior subordinated basis. Note
guarantees are joint and several, full and unconditional and general unsecured
obligations of the note guarantors. The note guarantors are the Company's
wholly-owned subsidiaries. At present, the note guarantors comprise all of the
Company's direct and indirect subsidiaries, other than one inconsequential
subsidiary. Note guarantees are subordinated in right of payment to all
existing and future senior debt of the note guarantors, including the New
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.
9
<PAGE> 10
So long as the factors set forth in the paragraph immediately above remain true
and correct, under applicable SEC rules and regulations, the Company believes
that note guarantors will not need to individually comply with the reporting
requirements of the Securities Exchange Act of 1934 ("Exchange Act"), nor will
the Company have to include separate financial statements and other disclosures
concerning each of the note guarantors in its Exchange Act reports. In that
regard, the Company will request a no-action letter from the SEC concurring
with the Company's position on this issue. While there can be no assurance, the
Company expects to receive a favorable response to our no-action letter
request.
(6) OTHER INCOME (EXPENSE), NET
Included in Other Income (Expense), net in the accompanying consolidated
statement of income for the fiscal quarter ended June 29, 1998 is a net gain of
$4.4 million from the settlement of certain litigation.
(7) LITIGATION
Various suits and claims arising in the ordinary course of business have been
instituted against the Company. The Company has various insurance policies
available to recover potential legal costs incurred by it. The Company
periodically evaluates and assesses the risks and uncertainties associated with
litigation independent from those associated with its potential claim for
recovery from third party insurance carriers. At present, in the opinion of
management, after consultation with legal counsel, the liability resulting from
litigation, if any, will not have a material effect on the Company's
consolidated financial statements.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
In connection with the Transactions and Merger, which were accounted for under
the purchase method of accounting, we reflected a new basis of accounting for
various assets and liabilities. Accordingly the historical financial
information provided herein, for periods prior to May 7, 1999 is not comparable
to post acquisition financial information. To facilitate a meaningful
discussion of the comparative operating performance for the fiscal quarters
ended June 28, 1999 and June 29, 1998, the financial information in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is presented on a traditional comparative basis unless otherwise
indicated. We believe the traditional comparative presentation provides the
best financial information as the only material change in the historical
operations for periods before and after May 6, 1999, other than the sale of
certain properties as discussed below, is an increase in interest expense
related to higher levels of indebtedness and increased amortization expense
resulting from a substantial increase in intangible assets.
In February 1999, we ceased publication of Soap Opera News and Soap Opera
Magazine (collectively, the "Soap Opera Assets") and sold certain of the
trademarks and other soap opera publishing assets relating to these magazines
to Primedia, Inc. Accordingly, operations of the Soap Opera Assets are included
in operations for the fiscal quarter ended June 29, 1998, but are not included
in operations for the fiscal quarter ended June 28, 1999.
RESULTS OF OPERATIONS
Fiscal Quarter Ended June 28, 1999 vs Fiscal Quarter Ended June 29, 1998
Total operating revenues were $67,838,000 for the current fiscal quarter, a
decrease of $5,538,000 or 7.5% from total operating revenues of $73,376,000 for
the same prior year quarter. Excluding revenues related to the Soap Opera
Assets, operating revenues remained flat.
Circulation revenues (which include all single copy and subscription sales) of
$57,135,000 decreased $5,663,000 or 9.0% for the current fiscal quarter
compared to the same prior year quarter. Excluding the Soap Opera Assets,
circulation revenues were flat when compared to the same prior year period, as
higher single copy revenues offset decreases in subscription revenues. Single
copy unit sales for the National Enquirer increased 3.2% when compared to the
same prior year quarter, while the Star's remained flat. Circulation revenues
were favorably impacted by $.10 cover price increases in July 1998 for both
National Enquirer and Star.
Country Weekly's average weekly circulation decreased 13.7% for the current
fiscal quarter as compared to the same prior year quarter, reflecting an
overall weakness in the country music and lifestyle category. The decline in
circulation revenues caused by such decreases in circulation was partially
offset by a $.20 cover price increase in March of 1999.
Subscription revenues of $9,645,000 decreased $1,503,000 or 13.5% for the
current fiscal quarter compared to the same prior year quarter. Excluding the
Soap Opera Assets, subscription revenues have decreased $636,000 or 6.2%
compared to the same prior year quarter, reflecting a decrease in National
Enquirer and Star unit sales of 19.8% and 23.9%, respectively. One method of
increasing the subscription bases of our publications has been to offer
discounted subscriptions through an agent. We believe that subscription
revenues for the current year quarter has decreased, at least in part, because
of industry wide weaknesses in responses from discounted subscription offers.
However, because discounted subscriptions are not profitable until they are
renewed at full price, a lower response rate has had no material effect on our
current period results of operations.
11
<PAGE> 12
For the current fiscal quarter, advertising revenues of $5,786,000 increased
$232,000 or 4.2% from $5,554,000 in the same prior year quarter. Excluding
revenue from the Soap Opera Assets, advertising revenues increased by $439,000
or 8.2% primarily as a result of increased national advertising in National
Enquirer, Star and Country Weekly, offset by lower direct and classified
advertising at the National Enquirer and Star.
Total operating expenses for the current fiscal quarter decreased by $5,026,000
when compared to the same prior year quarter. Excluding expenses related to the
Soap Opera Assets and depreciation and amortization expense, operating expenses
decreased by $1,349,000 or 3.0% related to lower subscription acquisition,
fulfillment and postage costs as a result lower subscription unit sales as
discussed above. Amortization expense increased by $3,904,000 due to the
increase in intangible asset balances as well as a reduction in the related
amortizable lives, primarily goodwill, from 40 years to 20 years. This increase
in amortization expense solely relates to the Inception Period.
Interest expense increased for the current fiscal quarter by $1,207,000 to
$13,402,000 compared to the same prior year quarter. This increase in interest
expense solely relates to the Inception Period as a result of a higher average
effective interest rate and higher levels of indebtedness as a result of the
Transactions.
Other income was $18,000 for the current fiscal quarter compared to income of
$4,193,000 for the same prior year quarter which had a net gain of $4.4 million
from the favorable settlement of certain litigation.
Our effective income tax rates exceed the federal statutory income tax rate of
35% because of the effect of goodwill amortization which is not deductible for
income tax reporting purposes.
In connection with the Transactions, a fee related to an unused bridge loan
commitment totaling approximately $4.1 million ($2.6 million net of income
taxes) was charged to extraordinary loss in the Inception Period. During the
fiscal quarter ended June 29, 1998, we recorded an extraordinary charge
totaling approximately $3.4 million ($2.2 million net of income taxes) related
to the write-off of deferred debt issuance costs and other charges relating to
the refinancing of indebtedness.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
We have substantially increased our indebtedness in connection with the
Transactions. As a result of the New Credit Agreement and the Notes, our
liquidity requirements will be significantly increased, primarily due to
increased interest and principal payment obligations under the New Credit
Agreement which, other than certain excess cash flow payment obligations, will
commence in fiscal 2002. We believe that the net cash generated from operating
activities and amounts available under the $60.0 million revolving credit
facility will be sufficient to fund our debt service requirements under the New
Credit Agreement and the Notes, to make capital expenditures and to cover
working capital requirements. We believe, however, that based upon our current
level of operations and anticipated growth, it will be necessary to refinance
the Notes upon their maturity. To the extent we make future acquisitions, we
may require new sources of funding, including additional debt, or equity
financing or some combination thereof. There can be no assurances that such
additional sources of funding will be available to us on acceptable terms.
Our ability to make scheduled payments of principal and interest under the New
Credit Agreement and the Notes, as well as our other obligations and
liabilities, is subject to our future operating performance which is dependent
upon general economic, financial, competitive, legislative, regulatory,
business and other factors beyond our control.
At June 28, 1999, we had cash and cash equivalents of $1.6 million and a
working capital deficit of $40.5 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:
o our policy of using available cash to reduce borrowings which are recorded
as noncurrent liabilities, thereby reducing current assets without a
corresponding reduction in current liabilities;
o our minimal accounts receivable level relative to revenues, as most of our
sales revenues are received from national distributors as advances based
on estimated single copy circulation; and
o accounting for deferred revenues as a current liability. Deferred revenues
are comprised of deferred subscriptions, advertising and single copy
revenues and represent payments received in advance of the period in which
the related revenues will be recognized.
Historically, our primary sources of liquidity have been cash generated from
operations and amounts available under our credit agreements, which have been
used to fund shortfalls in available cash. For the Inception Period, cash
provided by financing activities totaling $345.4 million was primarily used to
fund the Transactions. Cash from operations of $2.8 million generated during
the period from March 30, 1999 through May 6, 1999, together with cash on hand
on March 30, 1999 of $3.8 million, was used to fund capital expenditures as
well as pay down the revolving credit facility. For the fiscal quarter ended
June 29, 1998, cash provided by financing activities totaling $5.6 million,
together with cash on hand on March 30, 1998 of $7.4 million, was used to fund
operating activities of $7.7 million and to make capital expenditures of $4.2
million.
We made capital expenditures in the fiscal quarters ended June 28, 1999 and
June 29, 1998 totaling $2.2 and $4.2 million, respectively. The relatively high
levels of capital spending for the prior year fiscal quarter reflected
increased capital spending on Soap Opera News display pockets and upgrades of
our computer information systems.
13
<PAGE> 14
At June 28, 1999 our outstanding indebtedness totaled $598.9 million, of which
$348.0 million, represented borrowings under the New Credit Agreement. The
effective rate for borrowings under the New Credit Agreement averaged 8.7% for
the Inception Period and under the prior credit agreement averaged 7.1% for the
period from March 30, 1999 through May 6, 1999 as compared to 7.5% for the
fiscal quarter ended June 29, 1998. In order to reduce our exposure to interest
rate risk, we have entered into a $100.0 million interest rate swap agreement
expiring in November 2000 under which we pay a fixed rate of 5.95%.
We have no material assets or operations other than the investments in our
subsidiaries. The Notes are unconditionally guaranteed, on a senior
subordinated basis, by all of our material subsidiaries. Each subsidiary that
will be organized in the future by us, unless such subsidiary is designated as
an unrestricted subsidiary, will jointly, severally, fully and unconditionally
guarantee the Notes on a senior subordinated basis. Note guarantees are joint
and several, full and unconditional and general unsecured obligations of the
note guarantors. The note guarantors are our wholly-owned subsidiaries. At
present, the note guarantors comprise all of our direct and indirect
subsidiaries, other than one inconsequential subsidiary. Note guarantees are
subordinated in right of payment to all existing and future senior debt of the
note guarantors, including the New Credit Facility, and are also effectively
subordinated to all secured obligations of note guarantors to the extent of the
assets securing such obligations, including the New Credit Facility.
Furthermore, the Notes indenture permits note guarantors to incur additional
indebtedness, including senior debt, subject to certain limitations. We have
not presented separate financial statements and other disclosures concerning
each of the note guarantors because management has determined that such
information is not material to investors.
So long as the factors set forth in the paragraph immediately above remain true
and correct, under applicable SEC rules and regulations, we believe that note
guarantors will not need to individually comply with the reporting requirements
of the Exchange Act, nor will we have to include separate financial statements
and other disclosures concerning each of the note guarantors in its Exchange
Act reports. In that regard, we will request a no-action letter from the SEC
concurring with our position on this issue. While there can be no assurance, we
expect to receive a favorable response to our no-action letter request.
YEAR 2000 RISK
The Year 2000 issue is the result of computer programs that were written using
only two digits, rather than four, to represent a year. Date-sensitive software
or hardware may not be able to distinguish between the years 1900 and 2000 and
programs that perform arithmetic operations; comparisons or sorting of date
fields may begin yielding incorrect results. This could potentially cause a
system failure or miscalculations that could disrupt operations. To address the
impact of the Year 2000 issue on our computer programs, embedded chips and
significant third-party suppliers of goods and services we have formed a task
force led by our information services department. This task force has completed
its inventory of the potential Year 2000 issues that may exist. Certain of our
key systems (e.g. financial applications) have already been identified as Year
2000 compliant; in addition, because of the recent replacement of a majority of
our computer hardware, we believe there is little likelihood that this
equipment is not Year 2000 compliant. We believe the largest areas of internal
risk for Year 2000 noncompliance are internally developed software applications
and the handheld communications devices used in merchandising by our
subsidiary, Distribution Services, Inc. We have purchased specialized software
that will allow us to identify and correct Year 2000 problems within our
software applications and expect to have key applications modified and tested
by September 1999. Our information services department, working with the
handheld communication devices, has determined that remediation of the existing
handhelds is the appropriate cause of action. We expect to complete this
remediation work by November 1999.
14
<PAGE> 15
At the present time, the Year 2000 project is estimated to cost approximately
$500,000 and will be funded through cash flows from operations. Approximately
$290,000 of the estimated Year 2000 costs will relate to hardware and software
purchases and will be capitalized with the remainder being expensed as
incurred.
At present, we believe our technology systems will be Year 2000 compliant and
that the Year 2000 issue will not present a materially adverse risk to our
future results of operations, financial position or cash flow. However, there
can be no assurance that our systems will be Year 2000 compliant prior to
December 31, 1999 or that the costs incurred will not materially exceed the
amounts budgeted. If there are incidences of noncompliance, we plan to allocate
internal resources and retain dedicated consultants to address such incidences.
In the event that our computers are not Year 2000 compliant by December 31,
1999, and as a result of that noncompliance business interruptions occur, we
could incur significant losses in revenues due to such business interruptions,
which could have a material adverse effect on our future results of operations,
financial position or cash flow.
In addition, there is a risk that a significant supplier of goods or services
may not be Year 2000 compliant. We are communicating with our significant
suppliers of goods and services to obtain reasonable assurance that their
products and business systems will be Year 2000 compliant. We rely on certain
suppliers to deliver a broad range of goods and services, including prepress
operations, printing services, paper, wholesale distribution, mailings and
banking services. Although we have taken, and will continue to take, reasonable
efforts to gather information to determine and verify the readiness of products
and dependencies, there can be no assurance that reliable information will be
offered or otherwise available. In order to mitigate the effects of a
significant supplier's potential failure to remediate the Year 2000 issue in a
timely manner, we would take appropriate actions including arranging for
alternate suppliers, re-running processes if errors occur and using manual
intervention to ensure the continuation of operations where necessary. Should
this happen, it may result in significant delays in business operations
including, but not limited to, delays in delivery of products resulting in loss
of revenues, increased operating costs, loss of customers or suppliers, or
other significant disruptions to our business which could have a material
adverse effect on our future results of operations, financial position or cash
flow.
INFORMATION RELATED TO FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Form 10-Q may include forward-looking
statements which reflect our Company's views with respect to future events and
financial performance. These forward-looking statements are subject to certain
risks and uncertainties which could cause actual results to differ materially
from both historical or anticipated results and readers are cautioned not to
place undue reliance upon them. We undertake no obligation to publicly update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. Factors that, among others, could
cause actual results to differ materially from historical results or those
anticipated include: 1) our high degree of leverage and significant debt
service obligations 2) market conditions for our publications 3) competition 4)
market prices for the paper used in printing our publications 5) our ability to
develop new publications and services 6) changes in economic climate, including
interest rate risk 7) outcome of pending and future litigation and 8) potential
adverse effects of unresolved Year 2000 problems including external key
suppliers.
15
<PAGE> 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
During the fiscal quarter ended June 28, 1999, the Company filed no reports on
Form 8-K.
16
<PAGE> 17
SIGNATURE
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed by the
undersigned, thereto duly authorized.
AMERICAN MEDIA OPERATIONS, INC.
Registrant
Date: August 11, 1999 By /s/ PETER A. NELSON
---------------------------------
Peter A. Nelson
Executive Vice President
Chief Financial Officer
17
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AMERICAN MEDIA OPERATIONS, INC. FOR THE FISCAL QUARTER
ENDED JUNE 28, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
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