SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
(X) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 27, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file numbers 333-83637
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
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 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 26, 2000, 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
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AMERICAN MEDIA OPERATIONS, INC.
FORM 10-K
FOR THE YEAR ENDED MARCH 27, 2000
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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 Stockholder Matters
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 Party Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
Signatures.
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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 600 East Coast Avenue, Lantana, Florida
33464-0002 and the telephone numbers are (561) 997-7733 and (561) 540-1000,
respectively.
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 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.
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 Cracked,
Detective Series and 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.
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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 and National Examiner relative to other
magazines are based on weekly single copy circulation and of Country Weekly in
its category based on 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, 1999 (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 six months ended December 27, 1999. All references to
"circulation" are to single copy and subscription circulation, unless otherwise
specified. All information regarding multiple readers per copy of our
publications and the core demographic profile of our readers is based on
National Enquirer and Star magazine audience estimates prepared at our request
for Spring 2000 by Mediamark Research Inc. (which information has not been
independently verified by us). Information regarding multiple readers per copy
for the Globe and National Examiner is based on the publishers' best 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 and other smaller monthly publications with a current
aggregate weekly newsstand circulation of approximately 5.2 million copies.
National Enquirer, Star, Globe and National Examiner, our premier titles, have
the second, fourth, sixth and seventh 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 34% of total U.S. and Canadian circulation for weekly
publications. We 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 155,000 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.
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Our tabloid publications are among the most well-known and widely
distributed titles in the publishing industry. While our publications have a
current aggregate weekly newsstand circulation of approximately 5.1 million
copies, they enjoy a weekly readership of over 25 million people due to multiple
readers per copy sold. 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:
o National Enquirer is a weekly general interest periodical with an
editorial content devoted to celebrity features, human interest
stories and articles covering lifestyle topics such as health,
food and household affairs. National Enquirer is the second
highest selling weekly periodical in the United States and Canada
based on single copy circulation, selling on average 1,786,000
copies per week. National Enquirer has a total average weekly
circulation of 2,137,000 copies, including subscriptions, with an
average of approximately 7 readers per copy. National Enquirer
has a core demographic profile of women aged 18-49. National
Enquirer's cover price is $1.69 in the United States. In fiscal
2000, 6 issues of the National Enquirer were 72 page expanded
issues (versus a regular issue of 48 pages) and are priced at
$2.69. Excluding these six expanded issues, average single copy
and total average weekly circulation was 1,818,000 and 2,168,000
respectively.
o Star is a weekly celebrity news-based periodical with a strong
emphasis on television, music and movie stars, and the lives of
the rich and famous. Star complements this focus with human
interest stories about ordinary people in unusual circumstances.
Every issue also includes a variety of features on topics such as
food, fashion, health, fitness and parenting. Star is the fourth
highest selling weekly periodical in the United States and Canada
based on single copy circulation, selling on average 1,477,000
copies per week. Star has a total average weekly circulation of
1,753,000 copies, including subscriptions, with an average of
approximately 4 readers per copy. Star has a core demographic
profile of women aged 18-49. Star's cover price is $1.69 in the
United States. In fiscal 2000, 6 issues of the Star were 72 page
expanded issues (versus a regular issue of 48 pages) and are
priced at $2.69. Excluding these 6 expanded issues, average
single copy and total average weekly circulation was 1,511,000
and 1,787,000 respectively.
o Globe is generally similar to that of National Enquirer and Star,
but with a greater emphasis on investigative stories related to
current events and celebrities. Globe is the sixth highest
selling weekly periodical in the United States and Canada based
on single copy circulation, selling on average 781,000 copies per
week. Globe has a total average weekly circulation of 822,000
copies, including subscriptions, with an average of approximately
6 readers per copy. Globe's cover price is $1.69 in the United
States.
o National Examiner's editorial content consists of celebrity and
human-interest stories. National Examiner is the seventh highest
selling weekly periodical in the United States and Canada based
on single copy circulation, selling on average 401,000 copies per
week. National Examiner has a total average weekly circulation of
415,000 copies, including subscriptions, with an average of
approximately 4 readers per copy. National Examiner's cover price
is $1.69 in the United States.
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o Weekly World News is a tabloid devoted to the publication of
entertaining and unusual stories. The editorial content is
derived principally from rewritten stories and photographs
purchased from agencies and periodicals around the world. Weekly
World News has an average weekly single copy circulation of
306,000 copies, with a total average weekly circulation of
328,000 copies, including subscriptions. Weekly World News' cover
price is $1.59 in the United States.
o Sun's editorial content is focused on health and religious
themes. Like our Weekly World News publication, Sun includes
entertaining and unusual articles derived primarily from stories
found in newspapers and periodicals throughout the world. Sun has
a current single copy circulation of approximately 207,000 and a
cover price of $1.59 in the United States.
o 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.
Additionally, management named a new editor and publisher during
the Company's fiscal year 2000 second quarter. 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 183,000 copies, with a total average weekly
circulation of 366,000 copies, including subscriptions.
o Micro Mags. We publish pocket-sized books under the name of Micro
Mags covering such topics as diets, horoscopes, health and
psychic phenomena. Twelve releases are published annually, each
with 4 titles, at a current price of $1.59. In fiscal 2000,
revenues for Micro Mags were approximately $5.4 million.
o 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 $1.19 to $2.39 and covering such topics as
diets, health, astrology and pets. Mini-Mags and Digests are
similar to our Micro Mags publications. For the last twelve
months on a pro forma basis, the Mini-Mags and Digest business
generated approximately 85 million booklets and approximately $20
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.
o Other Publications. We also added titles such as Detective and
Cracked in the Globe Acquisition. As a group, these titles
represent approximately 4% of Globe's revenue.
o New Media. We currently have separate web sites for the National
Enquirer (Nationalenquirer.com), Star (Starmagazine.com) and
Country Weekly (Countryweekly.com). We will re-launch all new web
sites by September 2000, including our new properties.
Additionally, we have over 70 years of content. We believe that
this content will allow us to develop new revenue streams by
developing partnerships with third party Internet sites in need
of entertainment related content.
In addition to the aforementioned publications, we are launching a
bi-weekly Latino tabloid called Mira as well as a bi-weekly auto enthusiast
magazine called AMI Auto World Weekly. The magazines launch during late June
2000.
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Circulation
Our tabloid publications have an aggregate weekly newsstand circulation
of approximately 5.1 million copies and a weekly readership of over 25 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 87% 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.
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 1998, 1999 and 2000.
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Average Weekly Single Copy Circulation and U.S. Cover Price
For Fiscal Year Ended
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March 30, March 29, March 27,
1998 1999 2000
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(circulation data in thousands)
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National Enquirer
Single Copy Circulation 1,932 1,766 (2) 1,743 (3)(5)
Cover Price $1.39 $1.49 (1) (2) $1.69 (1)
Star
Single Copy Circulation 1,618 1,445 (2) 1,407 (3)
Cover Price $1.39 $1.49 (1) (2) $1.69 (1)
Globe
Single Copy Circulation 918 759 (2) 741
Cover Price $1.39 $1.49 (1) $1.69
National Examiner
Single Copy Circulation 484 430 (2) 401
Cover Price $1.39 $1.49 (1) $1.69
Weekly World News
Single Copy Circulation 356 350 (2) 306
Cover Price $1.25 $1.39 (1) (2) $1.59 (1)
Sun
Single Copy Circulation 235 219 (2) 207
Cover Price $1.25 $1.39 (1) $1.59
Country Weekly
Single Copy Circulation 202 169 (2) 175 (4)
Cover Price $1.69 $1.99 (1) (2) $2.49 (1)
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(1) We increased the U.S. cover price on each of National Enquirer and Star
from $1.39 to $1.49 on July 7, 1998, to 1.59 on July 27, 1999 and then to
$1.69 on February 8, 2000. The Globe and National Examiner cover price
increases were identical to the above titles. We increased the U.S. cover
price on Weekly World News on April 15, 1997 from $1.09 to $1.25 to $1.39
on September 1, 1998, to $1.49 on July 7, 1998, and then to $1.59 on
February 8, 2000. Sun price increases were identical to the Weekly World
News. 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.
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(2) We believe that the principal factor in the decline in circulation in
fiscal 1999 from fiscal 1998 was the adverse publicity against celebrity
news-based magazines following the death of Princess Diana in August 1997.
(3) We believe that the circulation declines have stabilized as a result of our
multi-tiered national advertising campaign, as well as certain editorial
and format changes made to the National Enquirer and Star magazines.
(4) Bi-weekly average circulation from October 5, 1999 through March 27, 2000
was 205,000.
(5) 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, single copy circulation was 1,767 and
1,428 for the National Enquirer and Star, respectively.
Single copy circulation of each of our publications has experienced
declines. We believe that a significant portion of the decline in circulation
since fiscal 1998 is primarily due to two factors. First, the death of Princess
Diana in August 1997 resulted in a significant amount of adverse publicity
against celebrity news-based magazines. While single copy circulation of
National Enquirer and Star have improved from the low levels experienced in the
months immediately after Princess Diana's death, they have not returned to their
prior levels. In addition, single copy circulation declines of our publications
can be attributed to (a) increased competition from other publications and forms
of media, such as certain newspapers, television and radio programs
concentrating on celebrity news and (b) a general industry-wide decline in
single copy circulation of individual publications due to an increasing number
of publications in the industry. We have developed a multi-tiered national
advertising campaign, which includes television, print and outdoor advertising
for the National Enquirer and Star that commenced in the fall of 1999 and
continued throughout fiscal year 2000. These campaigns emphasized each
publication's strong journalistic content and investigative nature. Total
spending for these campaigns for the year ended March 27, 2000 was approximately
$10 million. We believe that as a result of these advertising campaigns, as well
as certain editorial and format changes made to the National Enquirer and Star,
we have stabilized singly copy circulation.
Historically, we have offset declines in single copy circulation, in
part, through increases in cover prices. We believe that we will be able to
continue to implement prudent increases in our cover prices over time without
causing a decline in circulation. Since July 1999, we have instituted four cover
price increases in the United States for National Enquirer and Star, consisting
of two cover price increases for each publication. The average weekly single
copy circulation of National Enquirer and Star for the three-month periods
following these cover price increases was approximately equal to or greater than
the average weekly single copy circulation for the applicable three-month
periods prior to such increases. After the cover price increases of $0.10 for
each of National Enquirer and Star on July 27, 1999, average weekly single copy
circulation increased approximately 4.8% and was flat, respectively, for the
three-month period following such increases over the average weekly single copy
circulation for each publication for the three-month period prior to such
increases. For the most recent seven issues since the cover price increase of
$.10 on February 8, 2000, for the National Enquirer, Star and Globe, average
weekly circulation has increased by 4.6%, 6.0% and was flat, respectively, from
the average number of comparable issues immediately prior to February 8, 2000.
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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 2000, approximately 13% (or $36.2
million) of our total revenues from circulation were from subscription sales.
Average weekly subscription circulation for fiscal 2000 were 351,000 copies for
National Enquirer, 276,000 copies for Star, 41,000 copies for Globe, 14,000
copies for National Examiner, 22,000 copies for Weekly World News, 4,000 copies
for Sun and 212,000 copies for Country Weekly as a bi-weekly publication.
Subscription renewal rates for our publications (exclusive of
subscriptions sold by direct mail agents) were 75% for National Enquirer, 76%
for Star, 79% for the Globe, 76% for the National Examiner, 65% for the Sun, 62%
for Weekly World News and 67% for Country Weekly for subscriptions which expired
during the 1999 calendar year. In calendar 1999, 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 $25.2 million in advertising revenues in fiscal
2000. National Enquirer, Star, Weekly World News and Country Weekly generated
approximately $11.8 million, $6.6 million, $1.1 million and $2.6 million,
respectively, in advertising revenues during fiscal 2000. For the twenty-one
weeks since the Globe Acquisition, advertising revenues for the Globe and
National Examiner were $1.3 million and $0.7 million, respectively. Also during
fiscal 2000, new management decided not to accept certain mail order and
fractional advertising to correspond with the new design of the publications.
Our advertising revenues are generated by national advertisers,
including consumer product and broadcasting companies, mail order advertisers
and classified advertisers. In fiscal 2000 national advertising, mail order
advertising and classified advertising represented 45%, 47% and 8%, respectively
of total advertising revenues.
We employ 24 advertising sales people and maintain advertising sales
offices in New York City, Chicago, Los Angeles, Detroit, Nashville, Miami and
Lantana.
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. National
Enquirer, Globe and Star also have a Los Angeles, California bureau. Country
Weekly editorial headquarters is located in Nashville, Tennessee.
National Enquirer's editorial operation consists of approximately 81
full-time employees. The editorial news gathering operation of National Enquirer
is directed by the editor-in-chief and executive editor who supervise 8 article
editors, including the Los Angeles bureau chief. The article editors are
responsible for developing and gathering news stories and story ideas. The
article editors have 22 staff reporters. The article editors work with 4 photo
editors, 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. The National Enquirer has a library staff that
assists in both story researching and fact checking.
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Star's total editorial staff consists of approximately 37 full-time
employees. Star's editorial news gathering operation is similar to National
Enquirer's. There is an editor-in-chief, 2 executive editors, 6 story editors
and 9 reporters. Their photo department has 4 staff persons under the direction
of a chief photo editor. Star has a library staff that assists in both story
researching and fact checking.
Globe's total editorial staff consists of approximately 35 full-time
employees. Globe's editorial news gathering operation is similar to National
Enquirer's. There is an editor in chief, an executive editor, 7 story editors
and 9 reporters. Their photo department has 6 staff persons under the direction
of a chief photo editor. Globe has a library staff that assists in both story
researching and fact checking.
In addition to their editorial staffs, National Enquirer, Globe and
Star pay outside news sources for story ideas, for information regarding
breaking stories and for exclusive stories regarding celebrities. They also pay
free-lance photographers and free-lance reporters for their investigative
journalism. National Enquirer, Globe and Star have networks of approximately 450
free-lance reporters 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 and
Country Weekly are comprised of 14, 16, 13 and 19 people, respectively, and are
each managed by an editor-in-chief.
Due to their high level of investigative reporting, both National
Enquirer, Globe and Star employ precautionary measures during the editorial
process to protect themselves from lawsuits. Each publication has a
long-standing practice of having outside legal counsel review the articles,
photographs and headlines under consideration for each issue. Such legal counsel
identify and evaluate the risk exposure presented by each article and photograph
and make recommendations so that the publications can make a business judgment
concerning publication of the articles and photographs. The management and
editorial teams at National Enquirer, Globe and Star consistently follow the
recommendations of legal counsel. 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 in the United States and Canada
who deliver the requisite number of copies to approximately 155,000 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.
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Our operating income may be significantly affected by the price of
paper used in our publications. For example, the price of paper rose
dramatically in 1995 and significantly affected operating income. In mid-1996
paper prices began to fall, then increased moderately in 1997 and 1998. 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. Currently,
we have locked in paper prices through September 30, 2000. We are currently
negotiating paper price agreements to extend past September 30, 2000. We have
currently committed our volume requirements with our major suppliers through
March 2001. We do not believe that any changes to paper prices after September
30, 2000 would have a material adverse effect on our operations.
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 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 and other information services to consumer product companies
outside the publishing industry. DSI's field representatives visit approximately
16,000 locations weekly, representing 80% 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 for approximately 45%
(based on our estimates) 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 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 consists of approximately 180 full-time
employees and, at times, more than 1,500 part-time field representatives, who
are 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, 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.
11
<PAGE>
DSI's contracts to provide marketing and merchandising services to
third-party clients in the publishing industry generated approximately $14.2
million in revenues in fiscal 2000, as compared to $13.6 million and $14.5
million in fiscal 1999 and fiscal 1998, respectively.
Other Businesses
Through Frontline Marketing, we sell in-store advertising space to
various product manufacturers and other national advertisers. Frontline 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. Frontline is responsible for maintaining the
signage and pays retailers commissions on advertising sales. In fiscal 2000,
revenues from Frontline were $7.2 million or approximately 2% of total operating
revenues.
We also had ancillary sales (primarily licensing and syndication sales)
of $1.1 million in fiscal 2000.
Competition
National Enquirer, Globe, Star, National Examiner, Weekly World News
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 660 full-time employees and 1,295
part-time employees. Approximately 1,424 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.
12
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ITEM 2. PROPERTIES
We own our headquarters building, which was acquired as part of the
Globe Acquisition in Boca Raton, Florida. This premise, which is currently under
renovation, is a three story, 70,000 square foot free standing building. This
building will house the editorial staffs of the National Enquirer, Star, Globe,
National Examiner, Weekly World News, Sun, Mini-Mags, as well as our corporate
office.
We also own three separate buildings in Lantana, Florida with an
aggregate of 33,700 square feet, which we are currently utilizing for the above
editorial and corporate staffs until renovations at the Boca Raton Facility are
completed.
We also lease 8,200 square feet in New York, New York for advertising,
editorial, and new media personnel, 12,500 square feet in West Palm Beach,
Florida for DSI and 3,000 square feet for Country Weekly 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 27, 2000, we paid approximately $21.1 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, we retain special libel counsel
for National Enquirer, Globe, Star and National Examiner to review, prior to
publication, all sensitive stories and celebrity news and photos. We also have
five full time in-house attorneys who participate in prepublication review.
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 2000.
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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 27, 2000 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 (the "Inception Period") will be referred to as the "Company". A solid
black vertical line has been inserted in tables where financial information may
not be comparable across periods.
<TABLE>
<CAPTION>
Predecessor Company
---------------------------------------------------------- The
Fiscal Years Ended Company
---------------------------------------------------------- ---------------
Six Weeks Forty-Six
from Weeks from
March 30, May 7, 1999
March 25, March 31, March 30, March 29, through through
1996 1997 (1) 1998 1999 May 6, 1999 March 27,2000
---------- ---------- ---------- ----------- ------------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Operating Revenues $295,050 $315,988 $307,684 $293,459 $31,163 $294,046
Operating Expenses (2) 228,714 228,817 237,104 228,060 24,399 254,274
---------- ---------- ---------- ----------- ------------- --------------
Operating Income 66,336 87,171 70,580 65,399 6,764 39,772
Interest Expense (56,715) (56,284) (50,486) (46,897) (4,837) (57,466)
Other Income (Expense), Net (3) (1,195) (1,705) (1,641) 2,943 25 125
---------- ---------- ---------- ----------- ------------- --------------
Income before Income Taxes and
Extraordinary Charge 8,426 29,182 18,453 21,445 1,952 (17,569)
Income Taxes 8,985 16,716 12,437 13,559 1,365 1,361
---------- ---------- ---------- ----------- ------------- --------------
Income (Loss) before Extraordinary (559) 12,466 6,016 7,886 587 (18,930)
Charge
Extraordinary Charge, net of
Income Taxes (4) -- -- -- (2,161) -- (2,581)
---------- ---------- ---------- ----------- ------------- --------------
Net Income (Loss) $(559) $12,466 $6,016 $5,725 $ 587 $(21,511)
========== ========== ========== =========== ============= ==============
Balance Sheet Data:
Total Assets $687,434 $670,850 $647,930 $616,838 N/M $1,166,964
Total Debt 558,906 528,662 497,535 471,134 N/M 680,874
Total Stockholder's Equity 36,242 48,457 54,473 60,198 N/M 201,698
Other Data:
EBITDA (5) $ 95,315 $114,593 $99,926 $96,347 $10,467 $96,982
Depreciation 7,303 8,145 9,252 11,035 1,272 10,281
Amortization of Intangibles 23,075 21,075 21,075 21,075 2,431 46,928
Capital Expenditures 9,072 8,526 11,018 15,019 717 13,330
</TABLE>
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<PAGE>
(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 $4,400 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.
(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 $1,399, $1.8 million, $1.7 million and $1.2
million respectively, for fiscal 1996, 1997, 1998 and 1999. For fiscal
2000, a new monitoring fee of $750,000 per annum, of which $663,000 for
fiscal 2000 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 27, 2000. 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 27, 2000 and March 29, 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, 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.
15
<PAGE>
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 year ended 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, Country Weekly 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 2000 and 1999, approximately 85% of our total operating
revenues were from circulation. Single copy sales accounted for approximately
87% and 83% of such circulation revenues in fiscal years 2000 and 1999,
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.
In addition to circulation, approximately 15% of our total operating
revenues in fiscal 2000 and 1999 were from advertising and other revenues
(consisting primarily of DSI and Frontline revenues).
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 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 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.
16
<PAGE>
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. 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 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.
17
<PAGE>
Comparison of Fiscal Year Ended March 29, 1999 to Fiscal Year Ended March 30,
1998
Total operating revenues were $293,459,000 for fiscal 1999, a decrease
of $14,225,000 or 4.6% from total operating revenues of $307,684,000 for the
prior fiscal year. This decline in total operating revenues was primarily a
result of a decline in circulation revenues from single copy sales of our
publications and, to a lesser extent, the decrease in total revenues due to the
sale of the Soap Properties.
Circulation revenues (which include all single copy and subscription
sales) of $248,630,000 decreased $13,619,000, or 5.2%, for fiscal 1999 compared
to the prior fiscal year. Substantially all of the decrease in circulation
revenues for fiscal 1999 was related to declines in single copy circulation of
National Enquirer and Star, which was partially offset by a $0.10 increase in
the cover prices of these publications on July 7, 1998 in the United States and
a corresponding increase in Canada. For fiscal 1999, average weekly single copy
circulation for both National Enquirer and Star decreased by 8.6% and 10.7%,
respectively, as compared to the prior fiscal year. We believe that the
principal factor causing such declines was the adverse publicity against
celebrity news-based magazines after the death of Princess Diana in August 1997.
While single copy circulation for these two publications have improved from the
low levels experienced in the months immediately after Princess Diana's death,
they have not returned to their prior levels.
Country Weekly's average weekly circulation decreased 12.3% for fiscal
1999 as compared to the prior fiscal year. The decline in circulation revenues
caused by such decreases in circulation was partially offset by $.10 and $.20
increases in the cover price of Country Weekly on April 7, 1998 and March 2,
1999, respectively.
Subscription revenues of $41,802,000 decreased $638,000, or 1.5%, for
fiscal 1999 compared to the prior fiscal year. 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
fiscal year remained relatively flat, at least in part, because of recent
adverse publicity from litigation initiated by several states against certain
agents, which we believe has resulted in weaker responses than we typically
expect from discounted subscription offers. However, because discounted
subscriptions are not profitable until they are renewed at full price, a lower
response rate should have no immediate adverse effect on our results of
operations. It is unknown what the potential long-term impact will be on
subscription levels and profitability should response rates remain weak.
For the fiscal year 1999, advertising revenues of $23,460,000 remained
approximately flat as compared to the advertising revenues of $23,643,000 for
the same prior year period. Declines in mail order and classified advertising
were primarily offset by an increase in national advertising in National
Enquirer and Star.
Other revenues of $21,369,000 for fiscal year 1999 decreased by
$423,000, or 1.9%, as compared to the prior fiscal year primarily due to
declines in ancillary sales (primarily licensing and syndication sales) and DSI
revenues, which were not completely offset by increases in Frontline revenues.
Total operating expenses (excluding the gain on the sale of the Soap
Opera Assets) for fiscal 1999 decreased by $2,545,000 when compared to the prior
fiscal year. Editorial costs for fiscal 1999, decreased by $1,591,000 when
compared to the prior fiscal year reflecting cost control efforts of the
editorial departments at National Enquirer and Star. Production costs decreased
18
<PAGE>
by $2,605,000 for fiscal 1999 as compared to fiscal 1998 resulting from reduced
press runs of Soap Opera News and the impact of five fewer issues of both Soap
Opera Magazine and Soap Opera News in the current fiscal year. This decrease
partially offset an increase in distribution, circulation and other cost of
sales of $757,000 related to higher in-store display expenses, of which Soap
Opera News represented a majority of the increase. Depreciation and amortization
expense increased for fiscal 1999 by $1,783,000 compared to the prior fiscal
year reflecting depreciation related to additional Soap Opera News display
pockets and replacement and upgrades of our information systems.
Interest expense decreased for fiscal year 1999 by $3,589,000 to
$46,897,000 compared to the prior fiscal year. This decrease was the result of
reduced average balances of outstanding indebtedness and lower amounts of
amortization of deferred debt issuance costs as a result of refinancing of
indebtedness.
Other income was $2,943,000 for fiscal 1999 compared to other expense
of $1,641,000 for the prior fiscal year. This difference is primarily due to a
net gain of $4.4 million from the favorable settlement of certain litigation,
which was recorded in the first fiscal quarter of fiscal 1999.
Our effective income tax rates were 63.2% and 67.4% for fiscal years
1999 and 1998, respectively, as compared to the federal statutory income tax
rate of 35%. The higher effective tax rates when compared to the federal income
tax rate result primarily from goodwill amortization, which is not deductible
for income tax reporting purposes. The lower effective tax rate in fiscal 1999
over fiscal 1998 resulted primarily from changes in the ratio of nondeductible
goodwill as a percentage of income before income taxes.
During fiscal 1999, we recorded an extraordinary charge totaling
approximately $3.4 million ($2.2 million net of income taxes) for 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 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 March 27, 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, 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.
19
<PAGE>
At March 27, 2000, we had cash and cash equivalents of $23.4 million
and a working capital deficit of $65.0 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 $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.
We made capital expenditures in the fiscal years ended March 27, 2000
and March 29, 1999 totaling $14.0 million and $15.0 million, respectively. The
higher levels of capital spending for the prior year reflected increased capital
spending on Soap Opera News display pockets and upgrades of our computer
information systems.
At March 27, 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
2 to the Consolidated Financial Statements, we expanded our New Credit Agreement
by $90 million. The effective rate for borrowings under the New Credit Agreement
averaged 9.1% 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 7.7% for the fiscal year ended March 27, 2000. 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.
20
<PAGE>
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. In that regard, we have received a
no-action letter from the SEC concurring with our position on this issue.
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.
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 June 26, 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.
At the present time, the cost of the Year 2000 compliance project has
totaled approximately $500,000 and was funded through cash flows from
operations. Approximately $250,000 of the estimated Year 2000 costs related to
hardware and software purchases and has been capitalized with the remainder
being expensed as incurred. We do not expect any further material expenditures
relating to Year 2000.
Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA")
The following table and discussion summarizes EBITDA for the fiscal
years ended March 27, 2000 and March 29, 1999. Fiscal year 1999 EBITDA amounts
presented below exclude the operations of Soap Opera Magazine and Soap Opera
News, which were sold in February, 1999.
(dollars in thousands)
----------------------
Predecessor Company The Company
------------------------------------------------- -------------------------
Fiscal Year March 30, 1999 May 7, 1999
Ended Mar. 29, Through Through
1999 May 6, 1999 Mar. 27, 2000
-------------------------- ---------------------- -------------------------
$95,391 $10,467 $96,982
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
21
<PAGE>
therefore was included as a reduction of EBITDA in 1999. For the current year
ended March 27, 2000, a $663,000 management fee is included in selling general
and administrative expense and therefore is included in the calculation of
EBITDA. Included in the fiscal year ended March 27, 2000 is $7,018,000 of EBITDA
derived from the Globe Acquisition. 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.
22
<PAGE>
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:
<TABLE>
<S> <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>
23
<PAGE>
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 $100 million of interest rate swap
agreements on our term loan and revolving loan. The interest rate swap
agreements effectively convert a portion of our variable rate debt to fixed-rate
debt. The interest rate swap agreement, which expires in November 2000, has a
fixed interest rate of 5.95%.
The following table presents the future principal payment obligations
and weighted average interest rates associated with our existing long-term
instruments assuming our actual level of long-term indebtedness (dollars 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 (9.10% for the Fiscal
Year Ended March 27, 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 (6.16%)
</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 have resulted in a change of $3.3 million in our interest
expense for the year ended March 27, 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.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS: Page(s)
-------
<S> <C>
Report of Independent Public Accountants .................................. 26
Consolidated Balance Sheets as of March 29, 1999 and March 27, 2000 ....... 27
Consolidated Statements of Income (Loss) for the Three Fiscal
Periods Ended March 27, 2000 ............................................ 28
Consolidated Statements of Stockholder's Equity for the Three Fiscal
Periods Ended March 27, 2000 ............................................ 29
Consolidated Statements of Cash Flows for the Three Fiscal
Periods Ended March 27, 2000 ............................................ 30
Notes to Consolidated Financial Statements ................................ 31 - 43
</TABLE>
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
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of
American Media Operations, Inc.:
We have audited the accompanying consolidated balance sheet of American
Media Operations, Inc. (a Delaware corporation) and subsidiaries as of March 27,
2000 (the "Company") and the related consolidated statements of income (loss),
stockholder's equity and cash flows for the period from May 7, 1999 through
March 27, 2000. We have also audited the accompanying consolidated balance sheet
of American Media Operations, Inc. (the "Predecessor Company") as of March 29,
1999, and the related consolidated statements of income (loss), stockholder's
equity and cash flows of the Predecessor Company for the period from March 30,
1999 through May 6, 1999, and for the years ended March 29, 1999 and March 30,
1998. 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 27, 2000, and the results of their
operations and their cash flows for the period from May 7, 1999 through March
27, 2000 and the financial position of the Predecessor Company as of March 29,
1999 and the results of their operations and their cash flows for the period
from March 30, 1999 through May 6, 1999 and for the years ended March 29, 1999
and March 30, 1998 in conformity with accounting standards generally accepted in
the United States.
ARTHUR ANDERSEN LLP
New York, New York
June 2, 2000
26
<PAGE>
AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 29, 1999 and March 27, 2000
(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>
The Company
Predecessor -----------
Company
-------
March 29, March 27,
1999 2000
------------ --------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $3,823 $ 23,404
Receivables, net 7,977 16,862
Inventories 9,830 12,974
Prepaid expenses and other 2,650 6,405
------------ --------------
Total current assets 24,280 59,645
------------ --------------
PROPERTY AND EQUIPMENT, at cost:
Land and buildings 4,039 5,735
Machinery, fixtures and equipment 22,040 17,258
Display racks 19,543 27,474
------------ --------------
45,622 50,467
Less - accumulated depreciation (18,762) (9,353)
------------ --------------
26,860 41,114
------------ --------------
DEFERRED DEBT COSTS, net 5,728 22,153
------------ --------------
GOODWILL, net of accumulated amortization of $141,595 and $22,299 463,656 536,369
------------ --------------
OTHER INTANGIBLES, net of accumulated amortization of $51,686 and $24,629 96,314 507,683
------------ --------------
$616,838 $1,166,964
============ ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of term loan $25,000 $ --
Accounts payable 11,618 25,262
Accrued expenses 34,801 66,358
Deferred revenues 27,987 33,054
------------ --------------
Total current liabilities 99,406 124,674
------------ --------------
PAYABLE TO PARENT COMPANY 3,404 1,307
------------ --------------
LONG TERM DEBT:
Term Loan and Revolving Credit Commitment, net of current portion 246,000 430,000
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
------------ --------------
446,134 680,874
------------ --------------
DEFERRED INCOME TAXES 7,696 158,411
------------ --------------
CONTINGENCIES (NOTE 8)
STOCKHOLDER'S EQUITY:
Common stock, $.20 par value; 7,507 shares issued and outstanding 2 2
Additional paid-in capital 26,039 223,207
Retained earnings (deficit) 34,157 (21,511)
------------ --------------
TOTAL STOCKHOLDER'S EQUITY 60,198 201,698
------------
--------------
$616,838 $1,166,964
============ ==============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.
27
<PAGE>
AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(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
-------------------------------------------------------- -----------------
Six Weeks From Forty-Six Weeks
Fiscal Year Fiscal Year March 30 From May 7, 1999
Ended Ended Through Through
March 30, 1998 March 29, 1999 May 6, 1999 March 27, 2000
---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Circulation $262,249 $248,630 $26,215 $251,338
Advertising 23,643 23,460 2,640 22,521
Other 21,792 21,369 2,308 20,187
---------------- ---------------- ---------------- -----------------
307,684 293,459 31,163 294,046
---------------- ---------------- ---------------- -----------------
OPERATING EXPENSES:
Editorial 30,497 28,906 3,040 29,567
Production 82,296 79,691 7,784 71,465
Distribution, circulation and other cost 66,883 67,640 6,624 58,168
Selling, general and administrative 27,101 26,212 3,248 37,865
Gain on sale of Soap Opera Properties -- (6,499) -- --
Depreciation and amortization 30,327 32,110 3,703 57,209
---------------- ---------------- ---------------- -----------------
237,104 228,060 24,399 254,274
---------------- ---------------- ---------------- -----------------
Operating Income 70,580 65,399 6,764 39,772
INTEREST EXPENSE (50,486) (46,897) (4,837) (57,466)
OTHER INCOME (EXPENSE), net (1,641) 2,943 25 125
---------------- ---------------- ---------------- -----------------
Income (loss) before provision for
income taxes and extraordinary charge 18,453 21,445 1,952 (17,569)
PROVISION FOR INCOME TAXES 12,437 13,559 1,365 1,361
---------------- ---------------- ---------------- -----------------
Income (loss) before extraordinary charge 6,016 7,886 587 (18,930)
EXTRAORDINARY CHARGE, net of income
taxes of $1,269 and $1,517, respectively
(Note 7) -- (2,161) -- (2,581)
---------------- ---------------- ---------------- -----------------
Net income (loss) $ 6,016 $ 5,725 $ 587 $(21,511)
================ ================ ================ =================
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
28
<PAGE>
AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
For the Three Fiscal Years Ended March 27, 2000
(in 000's, except share information)
<TABLE>
<CAPTION>
Common Stock Additional Retained
------------ Paid-In Earnings
Shares Amount Capital (Deficit) Total
---------- ----------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1997 7,507 $ 2 $ 26,039 $22,416 $ 48,457
Net income -- -- -- 6,016 6,016
---------- ----------- -------------- ------------ -------------
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
========== =========== ============== ============ =============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
29
<PAGE>
AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in 000's)
<TABLE>
<CAPTION>
Predecessor Company The Company
------------------------------------------------ ------------
Forty-Six
Weeks From
Fiscal Year Fiscal Year Six Weeks May 7,
Ended Ended From March 1999
March 30, March 29, 30 Through Through
1998 1999 May 6, 1999 March 27, 2000
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income (loss) $ 6,016 $ 5,725 $ 587 $ (21,511)
--------- --------- --------- ---------
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 taxes -- 2,161 -- 2,581
Depreciation and amortization 30,327 32,110 3,703 57,209
Deferred debt cost amortization 2,623 1,506 147 2,807
Senior subordinated discount note accretion 190 -- -- --
Deferred income tax provision (credit) 186 (3,592) (207) 3,906
Decrease (increase) in - net of acquisition -
Receivables, net 339 (125) (369) (7,675)
Due from Parent Company 1,048 -- -- --
Inventories 3,001 560 1,163 (3,826)
Prepaid income taxes (2,612) 2,612 -- --
Prepaid expenses and other (1,313) 1,289 1,793 (7,846)
Increase (decrease) in - net of acquisition
Accounts payable 1,420 (5,203) (2,184) 10,407
Accrued expenses (3,204) (1,486) (164) (14,322)
Payable to Parent Company 3,728 (324) -- 1,307
Accrued interest 2,212 (1,010) -- 6,023
Accrued and current deferred income taxes (1,552) 4,658 1,474 6,823
Deferred revenues (599) (2,580) (3,159) 5,999
--------- ---------
--------- ---------
Total adjustments 35,794 24,077 2,197 63,393
---------
--------- --------- ---------
Net cash provided from operating activities 41,810 29,802 2,784 41,882
--------- --------- --------- ---------
Cash Flows from Investing Activities:
Capital expenditures (11,018) (15,019) (717) (13,330)
Acquisition of business -- -- -- (435,214)
Cash proceeds from sale of Soap Opera Assets -- 10,000 -- --
--------- --------- --------- ---------
Net cash used in investing activities (11,018) (5,019) (717) (448,544)
--------- --------- --------- ---------
Cash Flows from Financing Activities:
Issuance of Common Stock -- -- -- 240,000
Term loan and revolving credit commitment
principal repayments (133,855) (382,401) (10,000) (299,000)
Proceeds from term loan and revolving credit facility 118,500 356,000 6,000 --
Repayment of senior subordinated indebtedness (15,962) -- -- (199,260)
Proceeds from new term loan and credit -- -- -- 462,000
Proceeds from new senior subordinated indebtedness -- -- -- 250,000
Payment of deferred debt costs (300) (1,964) -- (23,674)
--------- --------- --------- ---------
Net cash provided by (used in) financing
activities (31,617) (28,365) (4,000) 430,066
--------- --------- --------- ---------
Net Increase (Decrease) in Cash & Cash Equivalents (825) (3,582) (1,933) 23,404
Cash & Cash Equivalents at Beginning of Period 8,230 7,405 3,823 --
--------- --------- --------- ---------
Cash & Cash Equivalents at End of Period $ 7,405 $ 3,823 $ 1,890 $ 23,404
========= ========= ========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for -
Income taxes $ 15,422 $ 9,570 $ 80 $ 3,435
Interest 45,462 46,389 3,142 52,602
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
30
<PAGE>
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). We publish six weekly
publications: National Enquirer, Globe, Star, National Examiner, Weekly World
News, Sun, one bi-weekly publication, Country Weekly and other monthly
magazines. 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 (the "Inception Period") will be referred to as the "Company". A
solid black vertical line has been inserted in tables where financial
information may not be comparable across periods.
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
<PAGE>
Deferred revenues were comprised of the following:
1999 2000
----------- ------------
Single Copy $5,367 $9,578
Subscriptions 22,334 22,895
Advertising 286 581
----------- ------------
$27,987 $33,054
=========== ============
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 provide 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.
Property and Equipment-
We use straight-line and accelerated depreciation methods for financial
reporting and Federal income tax purposes, respectively. The estimated lives
used in computing depreciation for financial reporting purposes are 22 years for
buildings, 3 years for display racks and 5 to 10 years for all other depreciable
fixed assets.
Capitalized Software Costs-
Pursuant to American Institute of Certified Public Accountants
Statement of Position No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use", once the preliminary project stage has
been completed, the Company capitalizes certain direct costs related to
strategic systems development projects during the application development stage.
Software development costs incurred during the preliminary project stage are
charged to expense as incurred.
Capitalized software development costs are reported at the lower of
unamortized costs or net realizable value and are included as a component of
property and equipment. Once the software reaches the stage for its intended
general use for each significant release of each software applications,
applicable costs are amortized based on the straight-line method over the
estimated useful life. Adoption of this statement has not had a material impact
on the Company's consolidated financial position, results of operations or cash
flows.
32
<PAGE>
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:
<TABLE>
<CAPTION>
1999 2000
----------- -----------
<S> <C> <C>
Raw materials - paper $6,931 $7,958
Finished product - paper, production
and distribution costs of future issues 2,899 5,016
----------- -----------
$9,830 $12,974
=========== ===========
</TABLE>
Accrued Expenses-
A summary of accrued expenses consists of the following:
<TABLE>
<CAPTION>
1999 2000
----------- -----------
<S> <C> <C>
Personnel and related costs $1,874 $19,231
Retail display allowance 4,993 10,275
Profit sharing - 590
Interest 11,251 14,853
Accrued taxes 9,795 3,438
Other 6,888 17,971
----------- -----------
$34,801 $66,358
=========== ===========
</TABLE>
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
purchased with an original maturity of three months or less.
Long Lived Assets-
Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of " requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS No. 121 also requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell. We consider certain events and
circumstances including, among others, the historical and projected operating
results of acquired businesses, industry trends and general economic conditions
33
<PAGE>
to assess whether the remaining estimated useful life of intangible assets may
warrant revision or that the remaining balance of intangible assets may not be
recoverable. When such assessment indicates that an intangible asset should be
evaluated for possible impairment, we use an estimate of undiscounted cash flow
over the remaining life of the intangible asset in measuring the recoverability.
The Company measures an asset impairment loss at the amount by which the
carrying amount exceeds the fair market value of the asset. No such event has
occurred to our knowledge and we have determined there to be no impairment.
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 the period from March 30, 1999 through May 6, 1999, the
inception period and fiscal 1999 and 1998 were approximately $0 million, $10
million, $1 million and $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 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
<PAGE>
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" (`SFAS No. 133"). SFAS No. 133, as amended
by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000,
although earlier adoption is allowed. The Company will be required to adopt SFAS
No. 133 for fiscal year 2001. 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:
<TABLE>
<S> <C>
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
================
</TABLE>
35
<PAGE>
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. The preliminary estimates of the fair values of other
assets and liabilities may be revised at a later date, which may result in a
change to the value of goodwill or other assets and liabilities. 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 Cracked,
Detective Series and 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.
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. The preliminary
estimates of the fair values of assets and liabilities including the allocation
of a portion of the goodwill to other identified intangibles may be revised at a
later date, which may result in a change to the value of goodwill or other
assets and liabilities.
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, as if each had occurred as of the beginning of each period presented:
36
<PAGE>
<TABLE>
<CAPTION>
Predecessor Company The Company
------------------- -----------
Fiscal Year Ended Fiscal Year Ended
March 29, 1999 March 27, 2000
-------------- ---------------
<S> <C> <C>
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
Income (loss) before
extraordinary charge $(34,920) $(27,344)
</TABLE>
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:
<TABLE>
<CAPTION>
1999 2000
----------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Term loan and revolving credit
facility, including current portion $271,000 $271,000 $430,000 $430,000
Subordinated indebtedness $200,134 $215,152 $250,000 $242,500
Interest rate swap agreement
liability (receivable) $147 $1,193 $(13) $(364)
</TABLE>
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 have 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. The interest rate swap agreement, which expires in
November 2000, has a fixed interest rate of 5.95%. The carrying amounts for the
37
<PAGE>
interest rate swap agreement represents net interest payable (receivable) as of
period end. Net interest expense related to the interest rate swap agreement and
another swap agreement which expired in May 1998, totaled $655,000, $584,000 and
$434,000 for the fiscal years 1998, 1999 and 2000, 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 (benefit) provision for
income taxes consists of the following:
<TABLE>
<CAPTION>
Predecessor Company The Company
---------------------------------------------- -------------------
Forty-six
Six weeks weeks from
from March May 7, 1999
30, 1999 through
through March 27,
1998 1999 May 6, 1999 2000
--------------- ------------ ---------------- -------------------
<S> <C> <C> <C> <C>
Current:
Federal $11,232 $15,693 $ 1,441 $(2,333)
State 1,019 1,458 131 (212)
--------------- ------------ ---------------- -------------------
Total current 12,251 17,151 1,572 (2,545)
--------------- ------------ ---------------- -------------------
Deferred:
Federal 169 (3,287) (190) 3,580
State 17 (305) (17) 326
--------------- ------------ ---------------- -------------------
Total deferred 186 (3,592) (207) 3,906
--------------- ------------ ---------------- -------------------
$12,437 $13,559 $1,365 $1,361
=============== ============ ================ ===================
</TABLE>
A reconciliation of the expected income tax provision at the statutory
Federal income tax rate of 35% to the reported income tax provision is as
follows:
<TABLE>
<CAPTION>
Predecessor Company The Company
--------------------------------------------- ------------------
Forty-six
Six weeks weeks from
from March May 7, 1999
30, 1999 through
through March 27,
1998 1999 May 6, 1999 2000
-------------- ------------ ---------------- ------------------
<S> <C> <C> <C> <C>
Expected income tax
provision (benefit) at
statutory rate $ 6,459 $ 7,506 $ 683 $(6,149)
Nondeductible goodwill 5,304 5,304 612 7,432
State income taxes,
net of Federal benefit 652 749 70 78
Other, net 22 -- -- --
-------------- ------------ ---------------- ------------------
$12,437 $13,559 $ 1,365 $1,361
============== ============ ================ ==================
</TABLE>
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:
38
<PAGE>
<TABLE>
<CAPTION>
1999 2000
--------------- ---------------
<S> <C> <C>
Gross non-current deferred income tax assets $ 451 $ 5,151
--------------- ---------------
Intangibles (5,345) (155,070)
Expense recognition differences (1,425) (1,440)
Subscription acquisition costs (909) (454)
Accelerated depreciation (1,912) (2,901)
Book over tax basis of non-depreciable assets (439) (439)
Inventory capitalization (554) (89)
--------------- ---------------
Gross non-current deferred tax liabilities (10,584) (160,393)
--------------- ---------------
Net non-current deferred tax liabilities $(10,133) $(155,242)
=============== ===============
</TABLE>
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 accrued and current deferred income taxes in
the accompanying consolidated balance sheet for fiscal year 1999 is net current
deferred taxes payable of $2.4 million. Included in prepaid expenses in the
accompanying consolidated balance sheet for fiscal year 2000 are net current
deferred tax assets of $3.2 million.
(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, as
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) and 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%.
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.
(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
39
<PAGE>
repaid from time to time with permanent reductions in the revolving
credit commitment permitted at our option. As of March 27, 2000, 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
$292,000 for fiscal 2000, and $246,000 and $338,000 under the Prior
Credit Agreement for fiscal years 1999 and 1998.
(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 $663,000 for the
Inception Period, $0 for the period from March 30, 1999 to May 6, 1999, $1.2
million and $1.7 million for the fiscal years 1999 and 1998, respectively. These
fees were included in selling, general and administrative expense for the
Inception Period and in other (income) expense, net for the period from March
30, 1999 to May 6, 1999, and fiscal 1999 and 1998.
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 27, 2000, and for the fiscal years
1998, 1999 and 2000 were 9.6%, 7.8%, 7.7% and 9.1%, 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 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.
40
<PAGE>
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 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) 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 the period from March 30, 1999 through May 6,
2000, the Inception Period and for fiscal years 1999 and 1998, amortization of
deferred debt costs which is included in interest expense in the accompanying
consolidated statements of income totaled approximately $.1 million, $2.8
million, $1.5 million, and $2.6 million, respectively.
In fiscal 1999, 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 and Merger, 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.
41
<PAGE>
(8) 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 $304 million over its remaining life as follows:
Fiscal Year
-----------
2001 $ 27,905,639
2002 27,905,639
2003 27,905,639
2004 27,905,639
2005 27,668,663
Thereafter 164,996,361
------------
$304,287,580
============
Operating Leases -
Minimum annual commitments under operating leases at March 27, 2000 are
as follows:
Fiscal Year
-----------
2000 $1,641,189
2001 1,308,830
2002 1,202,184
2003 915,019
2004 569,837
Thereafter 450,612
----------
$6,087,671
==========
42
<PAGE>
(9) VALUATIONS AND QUALIFYING ACCOUNT:
The table below summarizes the activity in the valuation account,
allowance for possible uncollectible accounts receivable for the periods
<TABLE>
<CAPTION>
indicated:
Balance, Charges Purchase Deductions, Balance,
Beginning to Accounting Write-Offs, End of
of Period Expense Additions Net Period
------------- ----------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Trade Accounts Receivable
Valuation Account:
For the fiscal year ended
March 30, 1998 $384,720 $ - $ - $(119,086) $ 265,634
For the fiscal year ended
March 29, 1999 265,634 3,280 - - 268,913
For the six weeks from
March 30 through
May 6, 1999 268,913 - - - 268,913
For the forty-six weeks from
May 7, 1999 through
March 27, 2000 $268,913 $528,000 $367,436 $ - $1,164,349
</TABLE>
43
<PAGE>
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.
<TABLE>
<CAPTION>
Name Age Position (s)
---- --- ------------
<S> <C> <C>
David J. Pecker ......................... 48 Chairman, Chief Executive Officer, President
And Director of Media and the Company
Austin M. Beutner ....................... 40 Director of Media and the Company
Neeraj Mital ............................ 33 Director of Media and the Company
Saul D. Goodman ......................... 32 Director of Media and the Company
Robert V. Seminara ...................... 28 Director of Media and the Company
Paul G. Yovovich ........................ 46 Director of Media and the Company
Helene Belanger ......................... 45 Director of Media and the Company
Brian J. Richmand ....................... 46 Director of Media and the Company
J. William Grimes ....................... 59 Director of Media and the Company
John A. Miley ........................... 44 Executive Vice President and Chief
Financial Officer of Media and the Company
Jeffrey A. Gelfand ...................... 34 Director of Media
Sandra Koo .............................. 46 Director of Media
Mike Rosenbloom ......................... 70 Director of Media
Barry Rosenbloom ........................ 36 Director of Media
</TABLE>
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.
44
<PAGE>
Austin M. Beutner is a founding partner of Evercore. 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. and Big Flower Press Holdings, Inc.
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 a Vice President 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 private investor and an Operating Executive at
Evercore. 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, Comarco, Inc., APAC TeleServices, Inc., the Van
Kampen open-end funds and several other private companies.
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 is a General Partner at Chase Capital Partners
("Chase Capital "). Prior to joining Chase Capital, Mr. Richmand was a Partner
at the law firm of Kirkland & Ellis from 1985 to 1993 where he primarily
represented leveraged buyout and venture capital funds. Mr. Richmand currently
serves on the boards of Riverwood International Corp., La Petite Academy,
Transtar Metals and Reiman Publishing.
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.
45
<PAGE>
Jeffrey A. Gelfand is Vice President and Chief Financial and
Administrative Officer of Evercore. Before joining Evercore, Mr. Gelfand was a
Senior Manager in the Financial Services division of Ernst & Young LLP.
Sandra Koo is an Assistant Controller at Evercore. Prior to joining
Evercore, Ms. Koo was an accounting manager with the
Blackstone Group.
Mike Rosenbloom is Non-Executive Chairman of the Company after the sale
of Globe Communications Corp. Prior to the sale to American Media, Mr.
Rosenbloom was the President of Globe Communications Corp. for the last thirty
years. Mr. Rosenbloom has over forty years of experience in the publishing
industry, mostly in tabloid related products.
Barry Rosenbloom, Director of Media, is currently the President of RFP
LLC. RFP LLC is the publisher of one of the country's leading bridal magazines.
Prior to becoming president of RFP LLC, Mr. Rosenbloom was Executive Vice
President of Globe Communications Corp., a leading consumer magazine publishing
company.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by us to our chief
executive officer and our four most highly compensated executive officers at
March 27, 2000 for services rendered during the fiscal years 2000, 1999, and
1998.
46
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Options
-----------------------------------------------------------------
Other Annual Shares All Other
Fiscal Salary Bonus Compensation Underlying Compensation
Year ($) ($) ($) Options ($)
----------- ------- ------- ------------ ----------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Name and Principal
------------------
Position
--------
Peter Callahan (1) 2000 40,384 0 0 0 92,258 (6)
Chairman, President 1999 350,000 (2) 650,000 (2) 0 (2) 0 40,630 (2)(3)
Chief Executive Officer 1998 350,000 (2) 848,500 (2) 0 (2) 0 9,271
David J. Pecker 2000 1,500,000 250,000 (8) 0 0 1,955,152 (7)
Chairman, President 1999 0 (4) 0 (4) 0 (4) 0 0 (4)
Chief Executive Officer 1998 0 (4) 0 (4) 0 (4) 0 0 (4)
John A. Miley 2000 110,577 213,500 (8) 0 0 0
Executive Vice President, 1999 0 (4) 0 (4) 0 (4) 0 0 (4)
Chief Financial Officer 1998 0 (4) 0 (4) 0 (4) 0 0 (4)
Michael R. Roscoe 2000 322,115 130,000 (8) 0 0 168,009 (5)
Chief Executive Officer 1999 296,193 37,000 0 50,000 (5) 18,472 (3)
and President of DSI 1998 250,000 0 0 25,000 (5) 58,095
</TABLE>
1) Upon consummation of the Transactions on May 7, 1999, Mr. Callahan
resigned from his executive position with the Company and Media.
2) Includes management fees ("Management Fees") as a component of compensation
for service as an executive officer of the Company and Media. Under the
terms of the former compensation plan, Mr. Callahan received a base salary
of $350,000 and the Management Fee. The Management Fee, which was in
addition to the base salary, was divided into two components. The first
component consisted of a payment of $650,000. The second component was
based upon the Company's operating results.
3) Includes for fiscal 1999 the following: profit sharing contributions
allocated under our employee profit sharing plan of $3,530 each for Messrs.
Callahan and Roscoe; payments for life insurance of $2,700 for Mr. Callahan
and $1,246 for Mr. Roscoe; reimbursements of country club memberships in
the amount of $34,400 for Mr. Callahan and $11,937 for the exercise of
common stock options by Mr. Roscoe.
4) Messrs. Pecker and Miley were all first employed by the Company and Media
during fiscal 2000.
5) 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.
6) Includes severance payments made to Mr. Callahan upon consummation of the
Transaction on May 7, 1999.
7) The amount 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.
47
<PAGE>
8) Includes annual bonus for fiscal 2000 for Messrs. Miley and Roscoe. The
amount received 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.
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 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 $4.0 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 $325,000, respectively, (ii)
annual bonus opportunities of $250,000 and $150,000, respectively and (iii)
certain other customary employee benefits. The contract for Mr. Roscoe expires
on June 9, 2001.
Upon termination by Media without cause, Mr. Roscoe shall be entitled
to the following subject to certain restrictions: (a) continued payment of base
salary through the end of the contract term; and (b) a pro rata portion of his
annual bonus for the year of termination.
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
<PAGE>
The following table presents, as of June 26, 2000, 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.
<TABLE>
<CAPTION>
Name and Address of Number Percent
Beneficial Owner Title of Class of Units Of Class
---------------- -------------- -------- --------
<S> <C> <C> <C>
Evercore Partners LLC (1), (2) Class A 92,000 39.2%
65 East 55th Street Class A-1 --- ---
New York, New York 10022 Class B --- ---
Austin M. Beutner (1), (2) Class C --- ---
Class D --- ---
Class E --- ---
Peter Callahan Class A --- ---
Class A-1 --- ---
Class B --- ---
Class C --- ---
Class D --- ---
Class E --- ---
B.G. Media Investors LLC (3) Class A 25,000 10.6%
399 Park Avenue Class A-1 --- ---
19th 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 --- ---
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 .15%
Class C 25 .5%
Class D --- ---
Class E --- ---
Michael Rosenbloom Class A --- ---
Class A-1 5,000 100.0%
Class B --- ---
Class C --- ---
Class D --- ---
Class E --- ---
49
<PAGE>
All executive officers and Class A 122,000 51.9%
directors as a group Class A-1 5,000 100.0%
(15 persons) Class B 27,944 86.8%
Class C 250 5.0%
Class D 2,716 100.0%
Class E 1,343 100.0%
</TABLE>
(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 26, 2000.
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,
Barry Rosenbloom, Robert V. Seminara, Paul Yovovich (all of whom are directors
of Media and the Company) do not beneficial 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
50
<PAGE>
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 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. In addition, pursuant to the Management Agreement,
Evercore Advisors received upon the consummation of the Merger, a financial
advisory fee of 1% of the aggregate funds required to consummate the
Transactions. Pursuant to the LLC Agreement, we have reimbursed Evercore for all
costs and expenses incurred by Evercore and its affiliates in connection with
the Transactions, which costs and expenses totaled $413,000.
51
<PAGE>
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.
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 Operations 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.
52
<PAGE>
*4.3 -- Credit Agreement dated as of May 7, 1999, among American Media
Inc., American Media Operations, Inc., the Lenders party hereto,
and The Chase Manhattan Bank, as Administrative Agent.
*4.4 -- Guarantee Agreement dated as of May 7, 1999, among American Media,
Inc., each of the subsidiaries listed on Schedule I thereto and The
Chase Manhattan Bank, as collateral agent for the Secured Parties
(as defined in the Security Agreement).
*4.5 -- 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).
*4.6 -- 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.
*4.7 -- 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).
**4.8 -- 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.
53
<PAGE>
**21 -- Subsidiaries of American Media Operations, Inc.
**27 -- Financial Data Schedule.
------------------------------------------
(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).
** Filed herewith.
*** Incorporated by reference to the March 29, 1999 Form 10-K of Media dated
June 28, 1999.
54
<PAGE>
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 2000.
55
<PAGE>
<TABLE>
<CAPTION>
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 26, 2000.
<S> <C>
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 26, 2000.
Signature Title
--------- -----
/s/ DAVID J. PECKER Chairman of the Board, President,
----------------------------------------------------------- Chief Executive Officer and Director
David J. Pecker (Principal Executive Officer)
/s/ JOHN A. MILEY Executive Vice President and Chief
----------------------------------------------------------- Financial Officer (Principal Financial and
John A. Miley 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
</TABLE>
56
