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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 26, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number(s) - 333-83637
AMERICAN MEDIA OPERATIONS, INC.
(Exact name of the registrant as specified in its charter)
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Delaware 59-2094424
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(State or other jurisdiction of incorporation or organization) (IRS Employee Identification No.)
600 East Coast Avenue, Lantana , Florida 33464-0002
(Address of principal executive offices) (Zip Code)
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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
As of August 10, 2000 there were 7,507 shares of common stock outstanding.
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AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
JUNE 26, 2000
Page(s)
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PART I. FINANCIAL INFORMATION
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Item 1. Company and Predecessor Company Financial Statements-
Consolidated Balance Sheets.............................................................. 3
Consolidated Statements of Income........................................................ 4
Consolidated Statements of Cash Flows.................................................... 5
Notes to Consolidated Financial Statements............................................... 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................... 10-14
Item 3. Quantitative and Qualitative Disclosures about
Market Risk........................................................................... 14-15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................. 16
Signature................................................................................ 17
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2
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AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 26 and March 29, 2000
(in 000's, except share information)
March 29, 2000 June 26, 2000
---------------- ----------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 23,404 $ 2,663
Receivables, net 16,862 10,902
Inventories 12,974 15,483
Prepaid expenses and other 6,405 4,479
---------------- ----------------
Total current assets 59,645 33,527
---------------- ----------------
RECEIVABLE FROM PARENT -- 425
PROPERTY AND EQUIPMENT, at cost:
Land and buildings 5,735 5,040
Machinery, fixtures and equipment 17,258 17,877
Display racks 27,474 29,201
---------------- ----------------
50,467 52,118
Less - accumulated depreciation (9,353) (12,684)
---------------- ----------------
41,114 39,434
DEFERRED DEBT COSTS, net 22,153 21,507
---------------- ----------------
GOODWILL, net of accumulated amortization of $22,299 and $28,216 536,369 495,028
---------------- ----------------
OTHER INTANGIBLES, net of accumulated amortization of $24,629 and $33,214 507,683 543,598
---------------- ----------------
$1,166,964 $1,133,519
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LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 25,262 $ 25,163
Accrued expenses 66,358 46,618
Deferred revenues 33,054 27,934
---------------- ----------------
Total current liabilities 124,674 99,715
PAYABLE TO PARENT COMPANY 1,307 --
---------------- ----------------
LONG TERM DEBT:
Term Loan and Revolving Credit Commitment, net of current portion 430,000 430,000
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
---------------- ----------------
680,874 680,874
---------------- ----------------
DEFERRED INCOME TAXES (NOTE 5) 158,411 156,234
---------------- ----------------
CONTINGENCIES (NOTE 7)
STOCKHOLDER'S EQUITY:
Common stock, $.20 par value; 7,507 shares issued and outstanding 2 2
Additional paid-in capital 223,207 223,207
Retained deficit (21,511) (26,513)
---------------- ----------------
TOTAL STOCKHOLDER'S EQUITY 201,698 196,696
----------------
----------------
$1,166,964 $1,133,519
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</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.
3
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AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(IN 000's)
The financial statements of the company and the
Predecessor Company are not comparable in certain
respects (see Note 1).
Predecessor
Company The Company
------------------ -----------------------------------------
March 30, 1999 May 7, 1999 Fiscal Quarter
through through ended
May 6, 1999 June 28, 1999 June 26, 2000
------------------ ------------------- ------------------
<S> <C> <C> <C>
OPERATING REVENUES:
Circulation $26,215 $30,920 $84,672
Advertising 2,640 3,146 7,048
Other 2,308 2,609 5,656
------------------ ------------------- ------------------
31,163 36,675 97,376
------------------ ------------------- ------------------
OPERATING EXPENSES:
Editorial 3,040 3,535 10,046
Production 7,784 8,673 24,865
Distribution, circulation and other cost of sales 6,624 7,718 19,916
Selling, general and administrative expenses 3,248 3,553 10,683
Depreciation and amortization 3,703 8,033 18,342
------------------ ------------------- ------------------
24,399 31,512 83,852
------------------ ------------------- ------------------
Operating income 6,764 5,163 13,524
INTEREST EXPENSE (4,837) (8,565) (17,822)
OTHER INCOME (EXPENSE), net 25 (7) 187
------------------ ------------------- ------------------
Income (loss) before provision for
income taxes and extraordinary charge 1,952 (3,409) (4,111)
PROVISION FOR INCOME TAXES (1,365) 121 (891)
------------------ ------------------- ------------------
Income (loss) before extraordinary charge 587 (3,288) (5,002)
EXTRAORDINARY CHARGE, net of income
taxes of $1,517 (Note 6) -- (2,581) --
------------------ ------------------- ------------------
Net income (loss) $ 587 $(5,869) $(5,002)
================== =================== ==================
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The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
4
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AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN 000's)
The financial statements of the company and the
Predecessor Company are not comparable in certain
respects (see Note 1).
Predecessor
Company The Company
------------------ --------------------------------------
March 30, 1999 May 7, 1999 Fiscal Quarter
through through ended
May 6, 1999 June 28, 1999 June 26, 2000
------------------ ------------------ ------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 587 $(5,869) $(5,002)
------------------ ------------------ ------------------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities -
Extraordinary charge, net of income taxes -- 2,581 --
Depreciation and amortization 3,703 8,033 18,342
Deferred debt cost amortization 147 414 496
Decrease (increase) in -
Receivables, net (369) (1,658) (823)
Inventories 1,163 1,436 (2,509)
Prepaid expenses and other 1,793 (6,056) 2,077
Increase (decrease) in -
Accounts payable (2,184) (506) (98)
Accrued expenses (164) (11,002) (19,078)
Accrued and current deferred income taxes 1,267 3,151 891
Deferred revenues (3,159) (367) (5,120)
------------------ ------------------ ------------------
Total adjustments 2,197 (3,974) (5,822)
------------------ ------------------ ------------------
Net cash provided by (used in) operating activities 2,784 (9,843) (10,824)
------------------ ------------------ ------------------
Cash Flows from Investing Activities:
Capital expenditures (717) (1,434) (3,790)
Acquisition of business, net of cash acquired -- (332,498) (6,127)
------------------ ------------------ ------------------
Net cash used in investing activities (717) (333,932) (9,917)
------------------ ------------------ ------------------
Cash Flows from Financing Activities:
Issuance of common stock -- 235,000 --
Term loan and revolving credit commitment principal repayments (10,000) (271,000) --
Proceeds from revolving credit commitment 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 -- (21,327) --
------------------ ------------------ ------------------
Net cash (used in) provided by financing activities (4,000) 345,413 --
------------------ ------------------ ------------------
Net (Decrease) Increase in Cash and Cash Equivalents (1,933) 1,638 (20,741)
Cash and Cash Equivalents at Beginning of Period 3,823 -- 23,404
------------------ ------------------ ------------------
Cash and Cash Equivalents at End of Period $1,890 $1,638 $ 2,663
================== ================== ==================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for -
Income taxes $ 80 $3,158 $ --
Interest 3,142 12,788 22,122
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.
5
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AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 26, 2000
(000's omitted in all tables)
(unaudited)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Except as
disclosed herein, there has been no material change in the information disclosed
in the notes to consolidated financial statements included in the Annual Report
on Form 10-K of American Media Operations, Inc., and subsidiaries for the fiscal
year ended March 27, 2000. As discussed below, American Media Operations, Inc.
was purchased on May 7, 1999 resulting in a change in the historical cost basis
of various assets and liabilities, accordingly, the historical financial
information provided herein, for periods prior to May 7, 1999 is not comparable
to post acquisition financial information. For purposes of presentation, all
historical financial information for periods prior to May 7, 1999 will be
referred to as the "Predecessor Company" and the period from May 7, 1999 through
June 28, 1999 (the "Inception Period") and the fiscal quarter ended June 26,
2000 will be referred to as the "Company". A solid black vertical line has been
inserted in tables where financial information may not be comparable across
periods.
In the opinion of management, all adjustments considered necessary for a fair
presentation have been included herein. Operating results for the fiscal periods
ended June 26, 2000 are not necessarily indicative of the results that may be
expected for future periods.
(2) REVENUE RECOGNITION
Substantially all publication sales, except subscriptions, are made through
unrelated distributors. Issues, other than special topic issues, are placed on
sale approximately one week prior to the issue date; however, circulation
revenues and related expenses are recognized for financial statement purposes on
an issue date basis (i.e., off sale date). Special topic and monthly issues
revenue and related expenses are recognized at the on sale date. On the date
each issue is placed on sale, we receive a percentage of the issue's estimated
sales proceeds for our publications as an advance from the distributors. All of
our publications are sold with full return privileges.
Revenues from copy sales are net of reserves provided for expected sales
returns, which are established in accordance with generally accepted accounting
principles after considering such factors as sales history and available market
information. We continually monitor the adequacy of the reserves and make
adjustments when necessary.
Subscriptions received in advance of the issue date are recognized as income
over the term of the subscription on a straight-line basis. Advertising revenues
are recognized in the period in which the related advertising appears in the
publications.
Deferred revenues were comprised of the following:
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March 27, June 26,
2000 2000
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Single Copy $ 9,578 $ 5,686
Subscriptions 22,895 21,652
Advertising 581 596
---------------- ------------------
$ 33,054 $27,934
================ ==================
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6
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Other revenues, primarily from marketing services performed for third parties by
DSI and Frontline, are recognized when the service is performed.
In December 1999, the U.S. Securities and Exchange Commission (`SEC") issued
Staff Accounting Bulletin 101, "Revenue Recognition" ("SAB 101"), which provides
guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosure
related to revenue recognition policies. The Company believes its revenue
recognition practices are in conformity with the guidelines prescribed in SAB
101.
(3) CERTAIN TRANSACTIONS AND MERGER
On May 7, 1999, all of the common stock of the Company's parent, American Media,
Inc. ("Media") was purchased by EMP Group LLC (the "LLC"), a Delaware limited
liability company, for $837 million pursuant to a merger of Media and EMP
Acquisition Corp. ("EMP"), a wholly owned subsidiary of the LLC (the
"Acquisition"). Proceeds to finance the Acquisition included (a) a cash equity
investment of $235 million by the LLC, (b) borrowings of $352 million under a
new $400 million senior bank facility (the "New Credit Facility") and (c)
borrowings of $250 million in the form of senior subordinated notes (the
"Notes"). These proceeds were used to (d) acquire all of the outstanding common
stock of Media for $299.4 million, (e) repay $267 million then outstanding under
the existing credit agreement with our banks (the "Prior Credit Agreement"), (f)
retire approximately $199.3 million of Senior Subordinated Notes due 2004 and
(g) pay transaction costs (collectively (a) through (g), the "Transactions").
Upon consummation of the Transactions, EMP was merged with and into Media (the
"Merger") resulting in a change in ownership control of both Media and the
Company.
The Acquisition has been accounted for under the purchase method of accounting
in accordance with Accounting Principles Board No. 16 ("APB No. 16"). The excess
of purchase price over the fair value of net tangible assets acquired has been
allocated between identified intangible assets including the value of the
tradenames and subscription lists of the Company's publications, as determined
through an independent appraisal, with the remainder allocated to goodwill. For
the Inception Period and thereafter, intangible assets, including goodwill, are
being amortized on a straight-line basis over 20 years for tradenames and
goodwill and 9-15 years for subscription lists. Goodwill for the period from
March 30, 1999 to May 6, 1999, was amortized on a straight-line basis over 40
years and intangible assets for the period was amortized on a straight-line
basis over 25 years.
On November 1, 1999, the Company acquired all of the common stock of Globe
Communications Corp. and certain of the publishing assets and liabilities of
Globe International, Inc. (collectively, the "Globe Properties") for total
consideration of approximately $105 million, including approximately $100
million in cash and $5 million in equity of the LLC (the "Globe Acquisition").
The Globe Properties consist of several tabloid style magazines, including
Globe, National Examiner and Sun as well as other titles including Mini Mags.
Proceeds to finance the acquisition of the Globe Properties included an
expansion of our existing senior bank facility of $90 million, approximately $14
million from the Company's existing revolving line of credit and the issuance of
$5 million of equity in the LLC. These proceeds were used to acquire the Globe
Properties and to pay transaction costs. On July 11, 2000, the existing voting
shareholders of the LLC repurchased the $5 million equity in the LLC, discussed
above, from the former owner of the Globe Properties. (See Note 8 "Subsequent
Event".)
The Globe Acquisition has been accounted for under the purchase method of
accounting in accordance with APB No. 16, and accordingly, results of operations
are included in the financial statements from the date of acquisition, and the
assets and liabilities have been recorded based upon their fair values at the
date of acquisition. The excess of purchase price over the fair value of net
tangible assets acquired has been allocated between identified intangible assets
including the value of the tradenames of the Company's publications, as
determined through an independent appraisal, with the remainder allocated to
7
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goodwill. The preliminary estimates of the fair values of assets and liabilities
may be revised at a later date, which may result in a change to the value of
goodwill or other assets and liabilities. Goodwill and tradenames related to the
Globe Acquisition are being amortized over 20 years on a straight-line basis.
The following unaudited pro forma financial information gives effect to the
Transactions and the Globe Acquisition as if each had occurred as of the
beginning of the period presented:
Predecessor Company
-------------------
Fiscal Quarter Ended
June 6, 1999
------------
Operating revenues $ 94,782
Operating expenses $ 68,219
Depreciation and amortization $ 18,342
Operating income $ 8,221
Interest expense $ 17,822
Income (loss) before
extraordinary charge $ (9,214)
(4) INVENTORIES
Inventories are stated at the lower of cost or market. We use the first-in,
first-out (FIFO) cost method of valuation, which approximates market value.
Inventories are comprised of the following:
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March 27, June 26,
2000 2000
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Raw materials - paper $ 7,958 $10,402
Finished product - paper, production
and distribution costs of future issues 5,016 5,081
------------------- -----------------
$12,974 $15,483
=================== =================
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(5) INCOME TAXES
The Company files a consolidated Federal income tax return with Media, and
calculates its income taxes on a separate return basis. Income taxes have been
provided based upon the Company's anticipated effective annual income tax rate.
In accordance with the Statement of Financial Accounting Standards ("SFAS") NO.
109, "Accounting for Income Taxes", deferred taxes are recognized for temporary
differences related to identified intangible assets other than goodwill. The
temporary difference is calculated based on the difference between the new book
bases of the amounts allocated to tradenames and subscription lists and their
historical tax bases. Accordingly, as of May 7, 1999, in connection with the
Acquisition, a deferred tax liability of approximately $162 million was recorded
with a corresponding increase in goodwill. Our effective income tax 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.
8
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(6) CREDIT AGREEMENT
As of June 26, 2000 the Company's effective interest rate on borrowings under
the New Credit Agreement was 10.0%. The effective rate for borrowings under the
New Credit Agreement averaged 9.8% for the fiscal quarter ended June 26, 2000.
The effective rate for borrowings under the new Credit Agreement averaged 8.7%
for the period from May 7, 1999 through June 28, 1999 and under the prior Credit
Agreement averaged 7.1% for the period from March 30, 1999 through May 6, 1999.
In connection with the Transactions, a fee related to an unused bridge loan
commitment totaling approximately $4.1 million ($2.6 million net of income
taxes) was charged to extraordinary loss in the Inception Period.
American Media Operations, Inc. has no material assets or operations other than
investments in its subsidiaries. The Notes are unconditionally guaranteed, on a
senior subordinated basis, by all of its material subsidiaries. Each subsidiary
that will be organized in the future by the Company, unless such subsidiary is
designated as an unrestricted subsidiary, will jointly, severally, fully and
unconditionally guarantee the Notes on a senior subordinated basis. Note
guarantees are joint and several, full and unconditional and general unsecured
obligations of the note guarantors. The note guarantors are the Company's
wholly-owned subsidiaries. At present, the note guarantors comprise all of the
Company's direct and indirect subsidiaries, other than one inconsequential
subsidiary. Note guarantees are subordinated in right of payment to all existing
and future senior debt of the note guarantors, including the New Credit
Facility, and are also effectively subordinated to all secured obligations of
note guarantors to the extent of the assets securing such obligations, including
the New Credit Facility. Furthermore, the Notes indenture permits note
guarantors to incur additional indebtedness, including senior debt, subject to
certain limitations. We have not presented separate financial statements and
other disclosures concerning each of the note guarantors because management has
determined that such information is not material to investors.
So long as the factors set forth in the paragraph immediately above remain true
and correct, under applicable SEC rules and regulations, the Company's note
guarantors will not need to individually comply with the reporting requirements
of the Securities Exchange Act of 1934 ("Exchange Act"), nor will the Company
have to include separate financial statements and other disclosures concerning
each of the note guarantors in its Exchange Act reports. In that regard, the
Company has received a no-action letter from the SEC concurring with the
Company's position on this issue.
(7) LITIGATION
Various suits and claims arising in the ordinary course of business have been
instituted against the Company. The Company has various insurance policies
available to recover potential legal costs incurred by it. The Company
periodically evaluates and assesses the risks and uncertainties associated with
litigation independent from those associated with its potential claim for
recovery from third party insurance carriers. At present, in the opinion of
management, after consultation with outside legal counsel, the liability
resulting from litigation, if any, will not have a material effect on the
Company's financial position and results of operations.
(8) SUBSEQUENT EVENT
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.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
In connection with the Transactions and Merger, which were accounted for under
the purchase method of accounting, we reflected a new basis of accounting for
various assets and liabilities. Accordingly, the historical financial
information provided herein, for periods prior to May 7, 1999 is not comparable
to post acquisition financial information. To facilitate a meaningful discussion
of the comparative operating performance for the fiscal quarter ended June 26,
2000 and June 28, 1999, the financial information in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations" is
presented on a traditional comparative basis unless otherwise indicated. We
believe the traditional comparative presentation provides the best financial
information as the only material change in the historical operations for periods
before and after May 6, 1999 is an increase in interest expense related to
higher levels of indebtedness and increased amortization expense resulting from
a substantial increase in intangible assets.
Results of Operations
Fiscal Quarter Ended June 26, 2000 vs Fiscal Quarter Ended June 28, 1999
Total operating revenues were $97,376,000 for the current fiscal quarter.
Operating revenues increased by $29,538,000, or 43.5%, from the prior fiscal
quarter, primarily due to the Globe Acquisition, as well as an increase in
operating revenues in the core AMI properties driven by the positive impact of a
$.10 cover price in February 2000 for the National Enquirer and Star magazines.
Circulation revenues (which include all single copy and subscription sales) were
$84,672,000 for the current fiscal quarter. Circulation revenues increased by
$27,537,000 or 48.2%, when compared to the prior fiscal quarter, primarily due
to circulation revenues from the Globe Properties, as well as the increase in
the AMI core properties discussed above.
On October 5, 1999 a newly re-designed and expanded Country Weekly was
re-launched as a biweekly publication. Additionally, management named a new
editor and publisher during the Company's second quarter of fiscal 2000.
Concurrent with the change to a biweekly format the cover price was raised from
$1.99 to $2.49. The new frequency and format has resulted in an increase in
average single copy unit sales of 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.
Subscription revenues were $8,807,000 for the current fiscal quarter.
Subscription revenues decreased by $838,000, or 8.7%, when compared to the prior
fiscal quarter, primarily as a result of the reduction in the frequency of
Country Weekly from weekly to bi-weekly. One method of increasing the
subscription bases of our publications have been to offer discounted
subscriptions through an agent; however, management's new direction is to be
more newsstand driven.
Advertising revenues were $7,048,000 for the current fiscal quarter. Advertising
revenues increased by $1,262,000, or 21.8%, when compared to the prior fiscal
quarter, primarily due to the Globe Acquisition.
Total operating expenses for the current fiscal quarter increased by $27,941,000
when compared to the same prior year quarter. This increase is primarily due to
additional expenses related to the Globe Acquisition, costs related to the
launches of Auto World Weekly and Mira, additional expenses related to the Globe
Acquisition and increased amortization expense. Amortization expense increased
by $5,329,000 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.
10
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Interest expense increased for the current fiscal quarter by $4,420,000 to
$17,822,000 compared to the same prior year quarter. This increase in interest
expense solely relates to the period subsequent to the Transactions as a result
of a higher average effective interest rate and higher levels of indebtedness as
a result of the Transactions and the Globe Acquisition.
Our effective income tax rates exceed the federal statutory income tax rate of
35% because of the effect of goodwill amortization which is not deductible for
income tax reporting purposes.
In connection with the Transactions, a fee related to an unused bridge loan
commitment totaling approximately $4.1 million ($2.6 million net of income
taxes) was charged to extraordinary loss in the period from May 7, 1999 through
June 28, 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have substantially increased our indebtedness in connection with the
Transactions and the Globe Acquisition. As a result of the New Credit Agreement
and the Notes, our liquidity requirements will be significantly increased,
primarily due to increased interest and principal payment obligations under the
New Credit Agreement which, other than certain excess cash flow payment
obligations, will commence in fiscal 2002. We believe that the net cash
generated from operating activities and amounts available under the $60.0
million revolving credit facility will be sufficient to fund our debt service
requirements under the New Credit Agreement and the Notes, to make capital
expenditures and to cover working capital requirements. As of August 10, 2000,
there were no amounts outstanding on the revolving credit facility. We believe,
however, that based upon our current level of operations and anticipated growth,
it will be necessary to refinance the Notes upon their maturity. To the extent
we make future acquisitions, we may require new sources of funding, including
additional debt, or equity financing or some combination thereof. There can be
no assurances that such additional sources of funding will be available to us on
acceptable terms.
Our ability to make scheduled payments of principal and interest under the New
Credit Agreement and the Notes, as well as our other obligations and
liabilities, is subject to our future operating performance which is dependent
upon general economic, financial, competitive, legislative, regulatory, business
and other factors beyond our control.
At June 26, 2000, we had cash and cash equivalents of $2.7 million and a working
capital deficit of $66.2 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.
11
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Historically, our primary sources of liquidity have been cash generated from
operations and amounts available under our credit agreements, which have been
used to fund shortfalls in available cash. Cash on hand on March 27, 2000 of
$23.4 million was used to fund capital expenditures, as well as pay interest
payments on the revolving credit facility.
We made capital expenditures in the fiscal quarters ended June 26, 2000 and June
28, 1999 totaling $3.8 million and $2.2 million, respectively.
At June 26, 2000, our outstanding indebtedness totaled $680.9 million, of which
$430.0 million represented borrowings under the New Credit Agreement. In
connection with the acquisition of the Globe Properties as discussed in Note 3.
to the Consolidated Financial Statements, we expanded our New Credit Agreement
by $90 million. As of June 26, 2000 the Company's effective interest rate on
borrowings under the New Credit Agreement was 10.0%. The effective rate for
borrowings under the New Credit Agreement averaged 9.8% for the fiscal quarter
ended June 26, 2000. The effective rate for borrowings under the New Credit
Agreement averaged 8.7% for the period from May 7, 1999 through June 28, 1999
and under the prior credit agreement averaged 7.1% for the period from March 30,
1999 through May 6, 1999. In order to reduce our exposure to interest rate risk,
we have entered into a $100.0 million interest rate swap agreement expiring in
November 2000 under which we pay a fixed rate of 5.95%.
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, the Company has received a no-action letter from the
SEC concurring with our position on this issue.
12
<PAGE>
Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA")
The following table and discussion summarizes EBITDA for the current fiscal
quarter ended June 26, 2000 and June 28, 1999.
<TABLE>
<CAPTION>
Predecessor
Company The Company
-------------------------- --------------------------------------------------
March 30, 1999 May 7, 1999 Fiscal Quarter
through through ended
May 6, 1999 June 28, 1999 June 26, 2000
-------------------------- -------------------------- -----------------------
<S> <C> <C> <C>
$10,467,000 $13,196,000 $31,866,000
</TABLE>
The Company defines EBITDA as net income (loss) before extraordinary charges,
interest expense, income taxes, depreciation and amortization and other income
(expense). EBITDA is presented and discussed because the Company considers
EBITDA an important indicator of the operational strength and performance of its
business including the ability to provide cash flows to service debt and fund
capital expenditures. EBITDA, however, should not be considered an alternative
to operating or net income (loss), as an indicator of the performance of the
Company, or as an alternative to cash flows from operating activities as a
measure of liquidity, in each case determined in accordance with generally
accepted accounting principles ("GAAP").
New Accounting Pronouncements
We have adopted the Statement of Financial Accounting Standards ("SFAS") No. 130
"Reporting Comprehensive Income," effective fiscal 1999. SFAS No. 130 defines
comprehensive income as a measure of all changes in equity of an enterprise
during a period that result from transactions and other economic events during
the period other than transactions with owners. For all periods presented,
comprehensive income is the same as net income.
In June 1997, the Financial Accounting Standards Board 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.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 requires computer
software costs associated with internal use software to be expensed as incurred
until certain capitalization criteria are met. The Company adopted SOP 98-1 on
March 29, 1999. Adoption of this statement has not had a material impact on the
Company's consolidated financial position, results of operations, or cash flows.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133--"Accounting for Derivative Instruments and Hedging Activities", which
establishes standards of accounting for derivative instruments including
specific hedge accounting criteria. SFAS No. 133, as amended by SFAS No. 137, is
effective for fiscal years beginning after June 15, 2000 although earlier
adoption is allowed. We are continuing to evaluate the impact of adopting SFAS
No. 133. However, we do not expect SFAS No. 133 to have a material impact on us.
In December 1999, the U.S. Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101, "Revenue Recognition" ("SAB 101"), which provides
guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provide guidance for disclosure
related to revenue recognition policies. We believe our revenue recognition
practices are in conformity with the guidelines prescribed in SAB 101.
13
<PAGE>
Year 2000 Risk
The Year 2000 issue is the result of computer programs that were written using
only two digits, rather than four, to represent a year. Date-sensitive software
or hardware may not be able to distinguish between the years 1900 and 2000 and
programs that perform arithmetic operations; comparisons or sorting of date
fields may begin yielding incorrect results. This could potentially cause a
system failure or miscalculations that could disrupt operations.
As of June 26, 2000, we have experienced no material Year 2000 problems with the
aforementioned systems and applications nor do we expect any problems in the
future. Additionally, as of August 10, 2000, we have not experienced any Year
2000 problems with our significant suppliers of goods and services. We will
continue to take reasonable efforts to monitor Year 2000 issues relating to our
material vendors.
Forward-Looking Statements
Some of the information presented in this Form 10-Q constitutes forward-looking
statements, including, in particular, the statements about our plans, strategies
and prospects under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations." We have based these
forward-looking statements on our current assumptions, expectations and
projections about future events. We caution you that a variety of factors could
cause business conditions and results to differ materially from what is
contained in the forward-looking statements. These forward-looking statements
are subject to risks, uncertainties and assumptions about us, including, among
other things:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
o our high degree of leverage and o increasing competition by domestic
significant debt service obligations, and foreign media companies,
o our ability to increase circulation and o changes in the costs of paper used
advertising revenues, by us,
o market conditions for our publications, o any future changes in management,
o our ability to develop new publications o general risks associated with the
and services, publishing industry and
o outcomes of pending and future o potential adverse effects of potential
litigation unresolved Year 2000 problems
including external key suppliers
</TABLE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks that are inherent in our financial
statements. We are subject to interest risk on our credit facilities and any
future financing requirements. Our fixed rate debt consists primarily of Senior
Subordinated Notes, as well as $100 million of interest rate swap agreements on
our term loan and revolving loan. The interest rate swap agreements effectively
convert a portion of our variable rate debt to fixed-rate debt. The interest
rate swap agreement which expires in November 2000 has a fixed interest rate of
5.95%.
14
<PAGE>
The following table presents the future principal payment obligations and
weighted average interest rates associated with our existing long-term
instruments assuming our actual level of long-term indebtedness (in 000's):
<TABLE>
<CAPTION>
2000 2001 2002 2003 Thereafter
---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C>
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 (9.8% for the quarter
Ended June 26, 2000) - - $9,975 $17,050 $402,975
Interest Rate Derivatives:
Interest Rate Swaps:
Variable to Fixed $100,000 - - - -
Average Pay Rate (5.95%)
Average Receive Rate (6.50%)
</TABLE>
Interest rate changes result in increases or decreases in our income before
taxes and cash provided from operating activities. A 1% change in our weighted
interest rate on our variable debt net of the effect of our interest rate swap
would result in a change of $825,000 in our interest expense for the three
months ended June 26, 2000.
Our primary market risk exposures relate to (1) the interest rate risk on
long-term and short-term borrowings, (2) our ability to refinance our Senior
Subordinated Notes at maturity at market rates, (3) the impact of interest rate
movements on our ability to meet interest expense requirements and comply with
financial covenants and (4) the impact of interest rate movements on our ability
to obtain adequate financing to fund acquisitions. We manage the interest rate
risk on our outstanding long-term and short-term debt through our use of fixed
and variable rate debt. While we cannot predict or manage our ability to
refinance existing debt or the impact interest rate movements will have on our
ability to refinance existing debt or the impact interest rate movements will
have on our existing debt, we continue to evaluate our financial position on an
ongoing basis.
15
<PAGE>
PART II. OTHER INFORMATION
--------------------------
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
During the fiscal quarter ended June 26, 2000, the Company filed no reports on
Form 8-K.
16
<PAGE>
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 10, 2000 By /s/ JOHN A. MILEY
--------------------
John A. Miley
Executive Vice President
Chief Financial Officer
17
