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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 27, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number(s) - 333-83637 and 333-83637 01-13
AMERICAN MEDIA OPERATIONS, INC.
(Exact name of the registrant as specified in its charter)
----------------------------------------------------------
Delaware 59-2094424
(State or other jurisdiction of (IRS Identification No.)
incorporation or organization)
600 East Coast Avenue, Lantana , Florida 33464-0002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (561) 540-1000
American Media Operations, Inc. (1) HAS FILED all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) HAS BEEN subject to such filing requirements for
the past 90 days.
As of February 10, 2000 there were 7,507 shares of common stock outstanding.
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<PAGE>
TABLE OF ADDITIONAL REGISTRANT
GUARANTORS
<TABLE>
<CAPTION>
Address Including Zip Code
State or Other I.R.S. and Telephone Number
Exact Name Jurisdiction of Employer including Area Code
of Registrant Guarantor Incorporation or Identification of Registrant Guarantor's Commission
as Specified in its Charter Organization Number Principal Executive Offices File Numbers
- ------------------------------- ------------------ ------------------ --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
American Media Marketing, Inc. Florida 65-0757297 600 East Coast Avenue 333-83637-08
Lantana, FL 33464 (561) 540-1000
Biocide, Inc. Delaware 58-2286482 600 East Coast Avenue 333-83637-09
Lantana, FL 33464 (561) 540-1000
Country Weekly, Inc. Delaware 65-0462019 600 East Coast Avenue 333-83637-10
Lantana, FL 33464 (561) 540-1000
Distribution Services, Inc. Delaware 59-1641185 600 East Coast Avenue 333-83637-03
Lantana, FL 33464 (561) 540-1000
Fairview Printing, Inc. Florida 59-2521785 600 East Coast Avenue 333-83637-04
Lantana, FL 33464 (561) 540-1000
Health Xtra, Inc. Florida 65-0886419 600 East Coast Avenue 333-83637-11
Lantana, FL 33464 (561) 540-1000
Marketing Services, Inc. Delaware 65-0228937 600 East Coast Avenue 333-83637-13
Lantana, FL 33464 (561) 540-1000
National Enquirer, Inc. Florida 59-2764097 600 East Coast Avenue 333-83637-01
Lantana, FL 33464 (561) 540-1000
NDSI, Inc. Delaware 59-2632066 600 East Coast Avenue 333-83637-06
Lantana, FL 33464 (561) 540-1000
Retail Marketing Network, Inc. Delaware 65-0503059 600 East Coast Avenue 333-83637-12
Lantana, FL 33464 (561) 540-1000
Star Editorial, Inc. Delaware 59-2719233 600 East Coast Avenue 333-83637-07
Lantana, FL 33464 (561) 540-1000
SOM Publishing, Inc. Florida 59-2429187 600 East Coast Avenue 333-83637-05
Lantana, FL 33464 (561) 540-1000
Weekly World News, Inc. Florida 59-1896614 600 East Coast Avenue 333-83637-02
Lantana, FL 33464 (561) 540-1000
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
DECEMBER 27, 1999
<S> <C>
Page(s)
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PART I. FINANCIAL INFORMATION
Item 1. Company and Predecessor Financial Statements-
Consolidated Balance Sheets..................................................... 4
Consolidated Statements of Income............................................... 5-6
Consolidated Statements of Cash Flows........................................... 7
Notes to Consolidated Financial Statements...................................... 8-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................... 13-18
Item 3. Quantitative and Qualitative Disclosures about
Market Risk ................................................................. 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................ 20
Signature....................................................................... 21
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 27 and March 29, 1999
(in 000's, except share information)
The financial statements of the Company and the Predecessor Company
are not comparable in certain respects (see Note 1).
Predecessor The Company
Company December 27,
March 29,
---------------- -----------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,823 $ 6,138
Receivables, net 7,977 11,273
Inventories 9,830 9,829
Prepaid expenses and other 2,650 8,794
----------- -----------
Total current assets 24,280 36,034
----------- -----------
PROPERTY AND EQUIPMENT, at cost:
Land and buildings 4,039 5,735
Machinery, fixtures and equipment 22,040 14,615
Display racks 19,543 24,227
----------- -----------
45,622 44,577
Less - accumulated depreciation (18,762) (6,385)
----------- -----------
26,860 38,192
----------- -----------
DEFERRED DEBT COSTS, net 5,728 22,923
----------- -----------
GOODWILL, net of accumulated amortization of $141,595 and $15,756 463,656 540,385
----------- -----------
OTHER INTANGIBLES, net of accumulated amortization of $51,686 and $17,458 96,314 514,854
----------- -----------
$ 616,838 $ 1,152,388
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of term loan $ 25,000 --
Accounts payable 11,618 15,864
Accrued expenses 34,801 59,408
Deferred revenues 27,987 27,903
----------- -----------
Total current liabilities 99,406 103,175
----------- -----------
PAYABLE TO PARENT COMPANY 3,404 1,408
----------- -----------
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 (NOTE 4) 7,696 159,384
----------- -----------
CONTINGENCIES (NOTE 8)
STOCKHOLDERS' EQUITY:
Common stock, $.20 par value; 7,507 shares issued and outstanding 2 2
Additional paid-in capital 26,039 223,208
Retained earnings (deficit) 34,157 (15,663)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 60,198 207,547
-----------
===========
$ 616,838 $ 1,152,388
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
4
<PAGE>
AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in 000's)
The financial statements of the Company and the Predecessor Company
are not comparable in certain respects (see Note 1).
<TABLE>
<CAPTION>
Predecessor Company The Company
----------------------- -----------------------
Fiscal Quarter Fiscal Quarter
Ended December 28, Ended December 27,
1998 1999
----------------------- -----------------------
<S> <C> <C>
OPERATING REVENUES:
Circulation $ 64,572 $ 76,848
Advertising 6,190 6,536
Other 5,507 6,240
-------- --------
76,269 89,624
-------- --------
OPERATING EXPENSES:
Editorial 7,174 9,037
Production 20,250 21,591
Distribution, circulation and other cost of sales 16,881 17,469
Selling, general and administrative expenses 7,020 13,408
Depreciation and amortization 8,186 16,978
-------- --------
59,511 78,483
-------- --------
Operating income 16,758 11,141
INTEREST EXPENSE (11,638) (16,589)
OTHER INCOME (EXPENSE), net (651) (46)
-------- --------
Income (loss) before provision for income taxes 4,469 (5,494)
PROVISION FOR INCOME TAXES (3,144) (349)
-------- --------
Net income (loss) $ 1,325 $ (5,843)
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
5
<PAGE>
AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in 000's)
The financial statements of the Company and the Predecessor Company
are not comparable in certain respects (see Note 1).
<TABLE>
<CAPTION>
Predecessor Company The Company
------------------------------------- ------------------
Three Fiscal Six Weeks From Thirty-Three
Quarters March 30 Weeks From May 7
Ended December Through Through
28, 1998 May 6, 1999 December 27, 1999
----------------- ----------------- ------------------
<S> <C> <C> <C>
OPERATING REVENUES:
Circulation $ 189,523 $ 26,215 $ 169,858
Advertising 16,882 2,640 14,579
Other 15,778 2,308 14,589
--------- --------- ---------
222,183 31,163 199,026
--------- --------- ---------
OPERATING EXPENSES:
Editorial 21,840 3,040 19,415
Production 60,772 7,784 47,351
Distribution, circulation and other cost of sales 52,147 6,624 39,433
Selling, general and administrative expenses 19,782 3,248 24,617
Depreciation and amortization 23,994 3,703 40,048
--------- --------- ---------
178,535 24,399 170,864
--------- --------- ---------
Operating income 43,648 6,764 28,162
INTEREST EXPENSE (35,575) (4,837) (39,924)
OTHER INCOME (EXPENSE), net 3,500 25 (20)
--------- --------- ---------
Income (loss) before provision for
income taxes and extraordinary charge 11,573 1,952 (11,782)
PROVISION FOR INCOME TAXES (8,508) (1,365) (1,300)
--------- --------- ---------
Income (loss) before extraordinary charge 3,065 587 (13,082)
EXTRAORDINARY CHARGE, net of income taxes of
$1,269 and $1,517, respectively (Note 5) (2,161) -- (2,581)
--------- --------- ---------
Net income (loss) $ 904 $ 587 $ (15,663)
========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
6
<PAGE>
AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in 000's)
The financial statements of the Company and the Predecessor Company
are not comparable in certain respects (see Note 1).
<TABLE>
<CAPTION>
Predecessor Company The Company
------------------------------------ -------------------
Three Fiscal Six Weeks Thirty-Three Weeks
Quarters Ended From March 30 From May 7
December 28, Through Through
1998 May 6, 1999 December 27, 1999
------------------ ----------------- -------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 904 $ 587 (15,663)
--------- --------- ---------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities -
Extraordinary charge, net of income taxes 2,161 -- 2,581
Depreciation and amortization 23,994 3,703 40,048
Deferred debt cost amortization 1,169 147 1,954
Decrease (increase) in -
Receivables, net (2,521) (369) (8,464)
Inventories (655) 1,163 (672)
Prepaid expenses and other 3,669 1,793 (3,643)
Increase (decrease) in -
Accounts payable 3,846 (2,184) 1,101
Accrued expenses (7,580) (164) (5,885)
Accrued and current deferred income taxes (931) 1,267 5,245
Deferred revenues (4,932) (3,159) 1,420
--------- --------- ---------
Total adjustments 18,220 2,197 33,685
--------- --------- ---------
Net cash provided by operating activities 19,124 2,784 18,022
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (11,662) (717) (6,736)
Acquisition of business, net of cash acquired -- -- (435,214)
--------- --------- ---------
Net cash used in investing activities (11,662) (717) (441,950)
--------- --------- ---------
Cash Flows from Financing Activities:
Issuance of common stock -- -- 240,000
Term loan and revolving credit commitment principal repayments (353,401) (10,000) (299,000)
Proceeds from revolving credit commitment 348,000 6,000 --
Repayment of subordinated senior subordinated indebtedness -- -- (199,260)
Proceeds from new term loan and credit facility -- -- 462,000
Proceeds from new senior subordinated indebtedness -- -- 250,000
Payment of deferred debt costs (1,964) -- (23,674)
--------- --------- ---------
Net cash (used in) provided by financing activities (7,365) (4,000) 430,066
--------- --------- ---------
Net (Decrease) Increase in Cash and Cash Equivalents 97 (1,933) 6,138
Cash and Cash Equivalents at Beginning of Period 7,405 3,823 --
========= ========= =========
Cash and Cash Equivalents at End of Period $ 7,502 $ 1,890 $ 6,138
========= ========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for -
Income taxes $ 6,588 $ 80 $ 3,435
Interest 41,970 3,142 41,854
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
7
<PAGE>
AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 27, 1999
(000's omitted in all tables)
(unaudited)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Except as
disclosed herein, there has been no material change in the information disclosed
in the notes to consolidated financial statements included in the Annual Report
on Form 10-K of American Media Operations, Inc., and subsidiaries for the fiscal
year ended March 29, 1999. As discussed below, American Media Operations, Inc.
was purchased on May 7, 1999 resulting in a change in the historical cost basis
of various assets and liabilities, accordingly, the historical financial
information provided herein, for periods prior to May 7, 1999 is not comparable
to post acquisition financial information. For purposes of presentation, all
historical financial information for periods prior to May 7, 1999 will be
referred to as the "Predecessor Company" and all periods subsequent to May 6,
1999 (the "Inception Period") will be referred to as the "Company". A solid
black vertical line has been inserted in tables where financial information may
not be comparable across periods.
In the opinion of management, all adjustments considered necessary for a fair
presentation have been included herein. Operating results for the fiscal periods
ended December 27, 1999 are not necessarily indicative of the results that may
be expected for future periods.
(2) CERTAIN TRANSACTIONS AND MERGER
On May 7, 1999, all of the common stock of the Company's parent, American Media,
Inc. ("Media") was purchased by EMP Acquisition Corp. ("EMP") a company
controlled by Evercore Capital Partners L.P., a private equity firm ("Evercore")
for $837 million (the "Acquisition"). Proceeds to finance the acquisition
included (a) a cash equity investment of $235 million by Evercore and certain
other investors, (b) borrowings of $352 million under a new $400 million senior
bank facility (the "New Credit Facility") and (c) borrowings of $250 million in
the form of senior subordinated notes (the "Notes"). These proceeds were used to
(d) acquire all of the outstanding common stock of Media for $299.4 million, (e)
repay $267 million then outstanding under the existing credit agreement with our
banks, (f) retire approximately $199.3 million of Senior Subordinated Notes due
2004 and (g) pay transaction costs (collectively (a) through (g), the
"Transactions"). Upon consummation of the Transactions, EMP was merged with and
into Media (the "Merger") resulting in a change in ownership control of both
Media and the Company. The Transactions are summarized as follows:
8
<PAGE>
Proceeds from:
Equity contribution $235,000
New credit facility 352,000
Notes 250,000
---------
$837,000
=========
Proceeds used to repay:
Existing credit facility $(267,000)
Existing subordinated notes (199,300)
Existing equity (299,400)
---------
$(765,700)
=========
Balance used to pay debt issuance costs,
debt tender offer premium, accrued interest
and other costs $(71,300)
========
Preliminary allocation of purchase price is as follows:
Net cash proceeds $837,000
Less repayment of existing debt (466,300)
Less cash assumed (1,900)
---------
Net cash paid 368,800
Fair value of liabilities (77,796)
Fair value of tangible assets acquired 41,973
---------
$ 332,977
=========
The Acquisition has been accounted for under the purchase method of accounting.
The excess of purchase price over the fair value of net tangible assets acquired
has been allocated between identified intangible assets including the value of
the tradenames and subscription lists of the Company's publications, as
determined through an independent appraisal, with the remainder allocated to
goodwill. The preliminary estimates of the fair values of other assets and
liabilities may be revised at a later date which may result in a change to the
value of goodwill or other assets and liabilities. These intangible assets are
being amortized on a straight-line basis over 20 years for tradenames and
goodwill and 9-15 years for subscription lists.
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 Company (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 Company. 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, 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 will be 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.
9
<PAGE>
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:
<TABLE>
<CAPTION>
Predecessor Company
-------------------
Three Fiscal Three Fiscal
Quarters Ended Quarters Ended
December 28, 1998 December 27, 1999
-------------------- -------------------
<S> <C> <C>
Operating revenues $ 285,215 $ 294,439
========= ==========
Operating expenses $(205,079) $ (210,809)
========= ==========
Depreciation and amortization $ (53,815) $ (56,048)
========= ==========
Operating income $ 26,321 $ 27,582
========= ==========
Interest expense $ (52,584) $ (52,584)
========= ==========
Net loss $ (24,967) $ (23,911)
========= ==========
</TABLE>
Included as a reduction to selling, general and administrative expenses in the
nine months ended December 27, 1999 is an additional gain of $370,000 resulting
from settlement of certain liabilities in connection with the sale of the Soap
Opera Properties.
(3) INVENTORIES
Inventories are generally stated at the lower of cost or market. The Company
uses the last-in, first-out (LIFO) cost method of valuing its inventories, which
approximates the first-in, first-out (FIFO) cost method for the periods
presented. Inventories are comprised of the following:
March 29, December 27,
1999 1999
------ ------
Raw materials - paper $6,931 $5,432
Finished product - paper, production
and distribution costs of future issues 2,899 4,397
------ ------
$9,830 $9,829
====== ======
(4) INCOME TAXES
The Company files a consolidated Federal income tax return with Media, and
calculates its income taxes on a separate return basis. Income taxes have been
provided based upon the Company's anticipated effective annual income tax rate.
In accordance with the Statement of Financial Accounting Standards ("SFAS") NO.
109, "Accounting for Income Taxes", deferred taxes are recognized for temporary
differences related to identified intangible assets other than goodwill. The
temporary difference is calculated based on the difference between the new book
bases of the amounts allocated to tradenames and subscription lists and their
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. 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.
10
<PAGE>
(5) CREDIT AGREEMENT
As of December 27, 1999 the Company's effective interest rate on borrowings
under the New Credit Agreement was 9.4%. The effective rate for borrowings under
the New Credit Agreement averaged 9.3% for the fiscal quarter ended December 27,
1999 as compared to 7.2% on borrowings under the prior credit agreement for the
fiscal quarter ended December 28, 1998. The effective rate for borrowings under
the New Credit Agreement averaged 8.8% for the Inception Period and under the
prior credit agreement averaged 7.1% for the period from March 30 through May 6,
1999, as compared to 7.6% for the three fiscal quarters ended December 28, 1998.
In the fiscal quarter ended June 29, 1998, approximately $3.4 million, ($2.2
million net of income taxes) was charged to extraordinary loss related to the
write-off of deferred debt costs as a result of the refinancing of the prior
credit facility. In connection with the Transactions, a fee related to an unused
bridge loan commitment totaling approximately $4.1 million ($2.6 million net of
income taxes) was charged to extraordinary loss in the Inception Period.
American Media Operations, Inc. has no material assets or operations other than
investments in its subsidiaries. The Notes are unconditionally guaranteed, on a
senior subordinated basis, by all of its material subsidiaries. Each subsidiary
that will be organized in the future by the Company, unless such subsidiary is
designated as an unrestricted subsidiary, will jointly, severally, fully and
unconditionally guarantee the Notes on a senior subordinated basis. Note
guarantees are joint and several, full and unconditional and general unsecured
obligations of the note guarantors. The note guarantors are the Company's
wholly-owned subsidiaries. At present, the note guarantors comprise all of the
Company's direct and indirect subsidiaries, other than one inconsequential
subsidiary. Note guarantees are subordinated in right of payment to all existing
and future senior debt of the note guarantors, including the New Credit
Facility, and are also effectively subordinated to all secured obligations of
note guarantors to the extent of the assets securing such obligations, including
the New Credit Facility. Furthermore, the Notes indenture permits note
guarantors to incur additional indebtedness, including senior debt, subject to
certain limitations. We have not presented separate financial statements and
other disclosures concerning each of the note guarantors because management has
determined that such information is not material to investors.
So long as the factors set forth in the paragraph immediately above remain true
and correct, under applicable SEC rules and regulations, the Company believes
that note guarantors will not need to individually comply with the reporting
requirements of the Securities Exchange Act of 1934 ("Exchange Act"), nor will
the Company have to include separate financial statements and other disclosures
concerning each of the note guarantors in its Exchange Act reports. In that
regard, the Company will request a no-action letter from the SEC concurring with
the Company's position on this issue. While there can be no assurance, the
Company expects to receive a favorable response to our no-action letter request.
(6) OTHER INCOME (EXPENSE), net
Included in Other Income (Expense), net in the accompanying consolidated
statement of income for the three fiscal quarters ended December 28, 1998 is a
net gain of $4.4 million from the settlement of certain litigation.
(7) NEW ACCOUNTING STANDARDS
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 30, 1999. Adoption of this statement has not had a material impact on the
Company's consolidated financial position, results of operations, or cash flows.
11
<PAGE>
(8) LITIGATION
Various suits and claims arising in the ordinary course of business have been
instituted against the Company. The Company has various insurance policies
available to recover potential legal costs incurred by it. The Company
periodically evaluates and assesses the risks and uncertainties associated with
litigation independent from those associated with its potential claim for
recovery from third party insurance carriers. At present, in the opinion of
management, after consultation with outside legal counsel, the liability
resulting from litigation, if any, will not have a material effect on the
Company's financial position and results of operations.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
In connection with the Transactions and Merger, which were accounted for under
the purchase method of accounting, we reflected a new basis of accounting for
various assets and liabilities. Accordingly, the historical financial
information provided herein, for periods prior to May 7, 1999 is not comparable
to post acquisition financial information. To facilitate a meaningful discussion
of the comparative operating performance for the fiscal quarter and three fiscal
quarters ended December 27, 1999 and December 28, 1998, the financial
information in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations" is presented on a traditional comparative basis
unless otherwise indicated. We believe the traditional comparative presentation
provides the best financial information as the only material change in the
historical operations for periods before and after May 6, 1999, other than the
sale of certain properties as discussed below, is an increase in interest
expense related to higher levels of indebtedness and increased amortization
expense resulting from a substantial increase in intangible assets. The fiscal
quarter and the three fiscal quarters ended December 27, 1999 gives effect to
the Globe Acquisition on November 1, 1999, accordingly the Company's financial
statements include eight 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 quarter and the three fiscal quarters ended December
28, 1998, but are not included in operations for the fiscal quarter or the three
fiscal quarters ended December 27, 1999.
Results of Operations
Fiscal Quarter Ended December 27, 1999 vs Fiscal Quarter Ended December 28, 1998
Total operating revenues were $89,624,000 for the current fiscal quarter which
included $16,925,000 of revenues from the Globe Properties. Excluding revenues
related to the Soap Opera Assets and the Globe Properties, operating revenues
increased by $1,960,000, primarily due to an increase in single copy revenues.
Circulation revenues (which include all single copy and subscription sales) were
$76,848,000 for the current fiscal quarter which included $15,783,000 of
circulation revenues from the Globe Properties. Excluding circulation revenues
related to the Soap Opera Assets and the Globe Properties, circulation revenues
increased $1,816,000 or 3.1%, when compared to the same prior year period,
primarily due to a $.10 cover price increase effective with the July 27, 1999
issues for National Enquirer, Star and Weekly World News, offset by a reduction
in subscription revenues. Single copy unit sales for the National Enquirer and
Star remained flat when compared to the same prior year quarter. However, issues
which were supported by television advertising reflected a 7% increase over the
average copy sale for the quarter ended December 28, 1999.
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. Concurrent with the
change to a biweekly format the cover price was raised from $1.99 to $2.49. The
new frequency and format has resulted in an increase in average single copy unit
sales of 31%. This increase in circulation units coupled with the price increase
resulted in single copy revenues to be almost comparable to the prior year in
light of the biweekly format ($2,185,000 in this fiscal quarter versus
$2,375,000 in the same prior year quarter).
13
<PAGE>
Subscription revenues were $8,593,000 for the current fiscal quarter, which
included $425,000 of subscription revenues from the Globe Properties. Excluding
subscription revenues related to the Soap Opera Assets and the Globe Properties,
subscription revenues decreased $1,317,000 compared to the same prior year
quarter primarily as a result of the reduction in the frequency of Country
Weekly.
Advertising revenues were $6,536,000 for the current fiscal quarter which
included $993,000 of advertising revenues from the Globe Properties. Excluding
revenues related to the Soap Opera Assets and the Globe Properties advertising
revenues decreased by $453,000. The decrease was primarily the result of 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 the current fiscal quarter increased by $18,972,000
when compared to the same prior year quarter. Excluding expenses related to the
Soap Opera Assets, Globe Properties, depreciation and amortization expense,
operating expenses increased by $3,689,000. This increase is primarily due 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 $8,611,000 due to the increase in intangible
asset balances from the Transactions and the Globe Acquisition as well as a
reduction in the related amortizable lives, primarily goodwill, from 40 years to
20 years. This increase in amortization expense solely relates to the period
subsequent to the Transactions.
Interest expense increased for the current fiscal quarter by $4,951,000 to
$16,589,000 compared to the same prior year quarter. This increase in interest
expense solely relates to the period subsequent to the Transactions as a result
of a higher average effective interest rate and higher levels of indebtedness as
a result of the Transactions and the Globe Acquisition.
Our effective income tax rates exceed the federal statutory income tax rate of
35% because of the effect of goodwill amortization which is not deductible for
income tax reporting purposes.
Three Fiscal Quarters Ended December 27, 1999 vs Three Fiscal Quarters Ended
December 28, 1998
Total operating revenues were $230,189,000 for the current three fiscal quarters
which included $16,925,000 of revenues from the Globe Properties. Excluding
revenues related to the Soap Opera Assets and to the Globe Properties, operating
revenues increased by $8,881,000, primarily due to an increase in single copy
revenues.
Circulation revenues (which include all single copy and subscription sales) were
$196,073,000 for the three fiscal quarters which included $15,783,000 of
circulation revenues from the Globe Properties. Excluding circulation revenues
related to the Soap Opera Assets and the Globe Properties, circulation revenues
increased $7,855,000 or 4.6% when compared to the same prior year period
primarily due to a $.10 cover price increase effective with the July 27, 1999
issues for National Enquirer, Star and Weekly World News and in part due to the
release of seven special issues. Single copy unit sales for the National
Enquirer and Star remained flat when compared to the same prior year period.
Subscription revenues were $27,486,000 for the three fiscal quarters, which
included $425,000 of subscription revenues from the Globe Properties. Excluding
subscription revenues related to the Soap Opera Assets and the Globe Properties,
subscription revenues decreased $2,156,000 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.
14
<PAGE>
Advertising revenues were $17,218,000 for the three fiscal quarters which
included $993,000 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 year period. National advertising,
excluding the Globe Properties, increased by $1,645,000. However, this 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 the current three fiscal quarters increased by
$16,728,000 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 $5,389,000. 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. Additionally operating expenses increased in part due to
increased editorial, production and distribution expenses related to the
publication of seven Special issues (which were more than offset by increased
revenues as mentioned above). Amortization expense increased by $19,839,000 due
to the increase in intangible asset balances from the Transactions and the Globe
Acquisition as well as a reduction in the related amortizable lives, primarily
goodwill, from 40 years to 20 years. This increase in amortization expense
solely relates to the period subsequent to the Transactions.
Interest expense increased for the current three fiscal quarters by $9,186,000
to $44,761,000 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 $5,000 for the current three fiscal quarters compared to income
of $3,500,000 for the same prior year period which had a net gain of $4.4
million from the favorable settlement of certain litigation.
Our effective income tax rates exceed the federal statutory income tax rate of
35% because of the effect of goodwill amortization which is not deductible for
income tax reporting purposes.
In connection with the Transactions, a fee related to an unused bridge loan
commitment totaling approximately $4.1 million ($2.6 million net of income
taxes) was charged to extraordinary loss in the Inception Period. During the
fiscal quarter ended June 29, 1998, we recorded an extraordinary charge totaling
approximately $3.4 million ($2.2 million net of income taxes) related to the
write-off of deferred debt issuance costs and other charges relating to the
refinancing of indebtedness.
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 December 27, 1999,
there were no amounts outstanding on the revolving credit facility. The amounts
drawn from the Company's revolving credit facility to fund the acquisition as
discussed in Note 2. to the Consolidated Financial Statements has been repaid
from cash generated from operations during the quarter. We believe, however,
that based upon our current level of operations and anticipated growth, it will
be necessary to refinance the Notes upon their maturity. To the extent we make
future acquisitions, we may require new sources of funding, including additional
debt, or equity
15
<PAGE>
financing or some combination thereof. There can be no assurances that such
additional sources of funding will be available to us on acceptable terms.
Our ability to make scheduled payments of principal and interest under the New
Credit Agreement and the Notes, as well as our other obligations and
liabilities, is subject to our future operating performance which is dependent
upon general economic, financial, competitive, legislative, regulatory, business
and other factors beyond our control.
At December 27, 1999, we had cash and cash equivalents of $6.1 million and a
working capital deficit of $67.1 million. We do not consider our working capital
deficit as a true measure of our liquidity position as our working capital needs
typically are met by cash generated by our business. Our working capital
deficits result principally from:
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 $20.8
million generated from operations for the three fiscal quarters ended December
27, 1999, together with cash on hand on March 30, 1999 of $3.8 million, was used
to fund capital expenditures as well as pay down the revolving credit facility.
For the three fiscal quarters ended December 28, 1998, cash provided by
operating activities totaling $19.1 million was used primarily to fund capital
expenditures totaling $11.7 million and reduce borrowings under the credit
agreements totaling $5.4 million.
We made capital expenditures in the three fiscal quarters ended December 27,
1999 and December 28, 1998 totaling $7.5 million and $11.7 million,
respectively. The relatively high levels of capital spending for the prior year
fiscal quarters reflected increased capital spending on Soap Opera News display
pockets and upgrades of our computer information systems.
At December 27, 1999, 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 8.8% 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 7.6% for the three fiscal quarters ended December 28, 1998. In order to
reduce our exposure to interest rate risk, we have entered into a $100.0 million
interest rate swap agreement expiring in November 2000 under which we pay a
fixed rate of 5.95%.
We have no material assets or operations other than the investments in our
subsidiaries. The Notes are unconditionally guaranteed, on a senior subordinated
basis, by all of our material subsidiaries. Each subsidiary that will be
organized in the future by us, unless such subsidiary is designated as an
unrestricted subsidiary, will jointly, severally, fully and unconditionally
guarantee the Notes on a senior subordinated basis. Note guarantees
16
<PAGE>
are joint and several, full and unconditional and general unsecured obligations
of the note guarantors. The note guarantors are our wholly-owned subsidiaries.
At present, the note guarantors comprise all of our direct and indirect
subsidiaries, other than one inconsequential subsidiary. Note guarantees are
subordinated in right of payment to all existing and future senior debt of the
note guarantors, including the New Credit Facility, and are also effectively
subordinated to all secured obligations of note guarantors to the extent of the
assets securing such obligations, including the New Credit Facility.
Furthermore, the Notes indenture permits note guarantors to incur additional
indebtedness, including senior debt, subject to certain limitations. We have not
presented separate financial statements and other disclosures concerning each of
the note guarantors because management has determined that such information is
not material to investors.
So long as the factors set forth in the paragraph immediately above remain true
and correct, under applicable SEC rules and regulations, we believe that note
guarantors will not need to individually comply with the reporting requirements
of the Exchange Act, nor will we have to include separate financial statements
and other disclosures concerning each of the note guarantors in its Exchange Act
reports. In that regard, we will request a no-action letter from the SEC
concurring with our position on this issue. While there can be no assurance, we
expect to receive a favorable response to our no-action letter request.
Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA")
The following table and discussion summarizes EBITDA for the current fiscal
quarter and nine months ended December 27, 1999 and December 28, 1998. Fiscal
year 1998 EBITDA amounts presented below exclude the operations of Soap Opera
Magazine and Soap Opera News which were sold in February, 1999.
<TABLE>
<CAPTION>
Predecessor
Company The Company Predecessor Company The Company
- ----------------------------- -------------------------- ------------------------------------------------------ ------------------
Fiscal Quarter Fiscal Quarter Three Fiscal Quarters March 30, 1999 May 7, 1999
Ended Dec. 28, Ended Dec. 27, Ended Dec. 28, Through Through
1998 1999 1998 May 6, 1999 Dec. 27, 1999
- ----------------------------- -------------------------- --------------------------- -------------------------- ------------------
<S> <C> <C> <C> <C>
$26,737 $28,119 $71,428 $10,467 $68,210
</TABLE>
The Company defines EBITDA as net income (loss) before extraordinary charges,
interest expense, income taxes, depreciation and amortization and other income
(expense). For the fiscal quarter and nine months ended December 28, 1998 a
management fee of $300,000 and $862,000 was included in other income (expense)
and therefore must be included as a reduction of EBITDA in 1998. For the current
fiscal quarter and nine month period ended December 27, 1999 a $188,000 and
$564,000 management fee is included in selling general and administrative and
therefore is included in the calculation of EBITDA. Included in the fiscal
quarter and nine months ended December 27, 1999 is $2,799,000 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").
17
<PAGE>
Year 2000 Risk
The Year 2000 issue is the result of computer programs that were written using
only two digits, rather than four, to represent a year. Date-sensitive software
or hardware may not be able to distinguish between the years 1900 and 2000 and
programs that perform arithmetic operations; comparisons or sorting of date
fields may begin yielding incorrect results. This could potentially cause a
system failure or miscalculations that could disrupt operations. 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 February 10, 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 February 10, 2000, we have not experienced any Year
2000 problems with our significant suppliers of goods and services. We will
continue to take reasonable efforts to monitor Year 2000 issues relating to our
material vendors.
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.
Information Related to Forward-Looking Statements
Certain matters discussed in this Form 10-Q may include forward-looking
statements which reflect our Company's views with respect to future events and
financial performance. These forward-looking statements are subject to certain
risks and uncertainties which could cause actual results to differ materially
from both historical or anticipated results and readers are cautioned not to
place undue reliance upon them. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise. Factors that, among others, could cause actual
results to differ materially from historical results or those anticipated
include: 1) our high degree of leverage and significant debt service obligations
2) market conditions for our publications 3) competition 4) market prices for
the paper used in printing our publications 5) our ability to develop new
publications and services 6) changes in economic climate, including interest
rate risk 7) outcome of pending and future litigation (8) our ability to
successfully integrate the operations of the Globe, our ability to achieve
synergies and cost savings relating to our acquisition of the Globe and 9)
potential adverse effects of potential unresolved Year 2000 problems including
external key suppliers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks that are inherent in our financial
statements. We are subject to interest risk on our credit facilities and any
future financing requirements. Our fixed rate debt consists primarily of Senior
Subordinated Notes, as well as $100 million of interest rate swap agreements on
our term loan and revolving loan. The interest rate swap agreements effectively
convert a portion of our variable rate debt to fixed-rate debt. The interest
rate swap agreement which expires in November 2000 has a fixed interest rate of
5.95%.
18
<PAGE>
The following table presents the future principal payment obligations and
weighted average interest rates associated with our existing long-term
instruments assuming our actual level of long-term indebtedness (in 000's):
<TABLE>
<CAPTION>
2000 2001 2002 2003 Thereafter
---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <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 (8.8% for the period
Ended December 27, 1999) -- -- $ 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 result in a change of $750,000 in our interest expense for the three
months ended December 27, 1999.
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.
19
<PAGE>
PART II. OTHER INFORMATION
- --------------------------
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
During the fiscal quarter ended December 27, 1999, the Company filed no reports
on Form 8-K.
20
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed by the
undersigned, thereto duly authorized.
AMERICAN MEDIA OPERATIONS, INC.
Registrant
----------
Date: By /s/ JOHN A. MILEY
----------------- --------------------
John A. Miley
Executive Vice President
Chief Financial Officer
By /s/ LAWRENCE A. BORNSTEIN
----------------------------
Lawrence A. Bornstein
Vice President of Finance
Chief Accounting Officer
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from (a) the
Financial Statements of American Media Operations Inc. For the fiscal quarter
ended December 27, 1999 and is qualified in its entirety by reference to such
(b) Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-27-2000
<PERIOD-START> MAR-30-1999
<PERIOD-END> DEC-27-1999
<CASH> 6,138
<SECURITIES> 0
<RECEIVABLES> 11,273
<ALLOWANCES> 1,036
<INVENTORY> 9,829
<CURRENT-ASSETS> 36,034
<PP&E> 38,192
<DEPRECIATION> 6,385
<TOTAL-ASSETS> 1,152,388
<CURRENT-LIABILITIES> 103,175
<BONDS> 680,874
0
0
<COMMON> 2
<OTHER-SE> 207,545
<TOTAL-LIABILITY-AND-EQUITY> 1,152,388
<SALES> 230,189
<TOTAL-REVENUES> 230,189
<CGS> 195,263
<TOTAL-COSTS> 195,263
<OTHER-EXPENSES> 5
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,761
<INCOME-PRETAX> (9,830)
<INCOME-TAX> (2,665)
<INCOME-CONTINUING> (12,495)
<DISCONTINUED> 0
<EXTRAORDINARY> (2,581)
<CHANGES> 0
<NET-INCOME> (15,076)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
