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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 29, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-11112
AMERICAN MEDIA OPERATIONS, INC.
(Exact name of the registrant as specified in its charter)
Delaware 59-2094424
(State or other jurisdiction of incorporation or organization) (IRS Employee Identification No.)
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
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 NOT BEEN subject to such filing Requirements
for the past 90 days.
The aggregate market value of the voting stock held by non-affiliates as of June
25, 1999 was $0.
As of June 25, 1999 there were issued and outstanding 7,507.6 shares of the
registrant's common stock, $.20 par value, all of which were held, beneficially
and of record, by American Media, Inc.
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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 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 600 East Coast
Avenue, Lantana, Florida 33464-0002 and the telephone number is (561) 540-1000.
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
Acquisition Corp. ("EMP") a company controlled by Evercore Capital Partners
L.P., a private equity firm ("Evercore"). Proceeds to finance the acquisition
included (a) a cash equity investment of $235 million by Evercore and certain
other investors, (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 will reflect a new basis of
accounting that will include the elimination of historical amounts of certain
assets and liabilities and the revaluation of certain of our tangible and
intangible assets.
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 and Star relative to other magazines 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
and Star 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
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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, 1998 (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 28, 1998. 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 fall 1998 by Mediamark
Research Inc. (which information has not been independently verified by us).
THE COMPANY
OVERVIEW
We are a leading publisher in the field of general interest magazines,
publishing National Enquirer, Star, Weekly World News and Country Weekly, with a
current aggregate weekly circulation of approximately 4.7 million copies.
National Enquirer and Star, our premier titles, have the second and fourth
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
and Star are distributed in approximately 165,000 retail outlets in the United
States and Canada, representing, in the opinion of management, substantially
complete coverage of periodical outlets in these countries. Distribution
Services, Inc. ("DSI"), our subsidiary, arranges for the placement and
merchandising of our publications and third-party publications at retail outlets
throughout the United States and Canada. In addition, DSI provides marketing,
merchandising and information-gathering services for third parties.
Our publications are among the most well-known and widely distributed
titles in the publishing industry. While our publications have a current
aggregate weekly circulation of approximately 4.7 million copies, they enjoy a
weekly readership of over 20 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:
- 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 1,814,000
copies per week. National Enquirer has a total average weekly
circulation of 2,201,000 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 $1.49 in the United States.
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- Star is a weekly celebrity news-based periodical with a strong
emphasis on television and movie performers 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 1,487,000
copies per week. Star has a total average weekly circulation of
1,776,000 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 $1.49 in the
United States.
- 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
355,000 copies, with a total average weekly circulation of
379,000 copies, including subscriptions. Weekly World News' cover
price is $1.39 in the United States.
- Country Weekly is a special interest magazine presenting various
aspects of country music, lifestyles, events and personalities,
and has the highest weekly circulation of any such magazine in
its category. Country Weekly has an average weekly single copy
circulation of 171,000 copies, with a total average weekly
circulation of 363,000 copies, including subscriptions. Country
Weekly's cover price is $1.99 in the United States.
CIRCULATION
Our publications have an aggregate weekly circulation of approximately
4.7 million copies and a weekly readership of over 20 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
84% 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 86%, 10% and 4% 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 1997, 1998 and 1999.
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AVERAGE WEEKLY SINGLE COPY CIRCULATION AND U.S. COVER PRICE
FOR FISCAL YEAR ENDED
-----------------------------------------------------------
MARCH 31, MARCH 30, MARCH 29,
1997 1998 1999
-------------- -------------- ----------------
(CIRCULATION DATA IN THOUSANDS)
National Enquirer
Single Copy Circulation 2,104 1,932 (2) 1,766
Cover Price $1.39 (1) $1.39 $1.49 (1)
Star
Single Copy Circulation 1,858 1,618 (2) 1,445
Cover Price $1.39 (1) $1.39 $1.49 (1)
Weekly World News
Single Copy Circulation 409 356 350
Cover Price $1.09 $1.25 (1) $1.39 (1)
Country Weekly
Single Copy Circulation 219 202 169
Cover Price $1.69 $1.69 $1.99 (1)
- ----------------------------------------------------
(1) We increased the U.S. cover price on each of National Enquirer and Star on
July 23, 1996 from $1.29 to $1.39 and then to $1.49 on July 7, 1998. We
increased the U.S. cover price on Weekly World News on April 15, 1997 from
$1.09 to $1.25 and then to $1.39 on September 1, 1998. We increased the
U.S. cover price on Country Weekly on April 7, 1998 from $1.69 to $1.79 and
then to $1.99 on March 2, 1999.
(2) We believe that the principal factor in the decline in circulation in
fiscal 1998 from fiscal 1997 was adverse publicity against celebrity
news-based magazines following the death of Princess Diana in August 1997.
Single copy circulation of each of our publications has experienced
declines. We believe that a significant portion of the decline in circulation
since fiscal 1994 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. We believe the second principal factor contributing to lower
circulation since fiscal 1994 has been a significant reduction in advertising
expenditures by us to promote our publications. Total advertising expenditures
for National Enquirer and Star decreased from $16.1 million in fiscal 1994 to
$0.3 in fiscal 1999. We believe that this reduction in advertising was a
significant factor in the decrease in average weekly single copy circulation of
National Enquirer and Star from approximately 2.8 million copies and 2.5 million
copies, respectively, in fiscal 1994 to approximately 1.8 million copies and 1.4
million copies, respectively, in fiscal 1999. 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.
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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 May 1993, we have instituted eight cover
price increases in the United States for National Enquirer and Star, consisting
of four cover price increases for each publication, ranging from $0.04 to $0.26
per copy. The average weekly single copy circulation of National Enquirer and
Star for the three-month periods following seven of 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 most recent cover price increase of $0.10 for each of National
Enquirer and Star on July 7, 1998, average weekly single copy circulation
increased approximately 12% and 8%, 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.
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 1999, approximately 14% (or $41.8
million) of our total revenues from circulation were from subscription sales.
Average weekly subscription circulation for fiscal 1999 were 452,000 copies for
National Enquirer, 347,000 copies for Star, 23,000 copies for Weekly World News
and 196,000 copies for Country Weekly.
Subscription renewal rates for our publications (exclusive of
subscriptions sold by direct mail agents) were 82% for National Enquirer, 80%
for Star, 77% for Weekly World News and 71% for Country Weekly for subscriptions
which expired during the 1998 calendar year. In calendar 1998, 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 $22.6 million in advertising revenues in fiscal
1999, excluding advertising generated by the Soap Opera Assets. National
Enquirer, Star, Weekly World News and Country Weekly generated approximately
$12.3 million, $6.9 million, $1.1 million and $2.3 million, respectively, in
advertising revenues during fiscal 1999.
Our advertising revenues are generated by national advertisers,
including consumer product and broadcasting companies, mail order advertisers
and classified advertisers. Excluding advertising revenues for the Soap Opera
Assets, in fiscal 1999 national advertising, mail order advertising and
classified advertising represented 45%, 47% and 8%, respectively of total
advertising revenues.
We employ 20 advertising sales people and maintain advertising sales
offices in New York City, Chicago, Los Angeles, Nashville and Lantana.
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EDITORIAL
The editorial departments of our publications operate independently.
The editorial headquarters for National Enquirer, Weekly World News and Country
Weekly are in Lantana, Florida. National Enquirer also has a Los Angeles,
California bureau and Country Weekly has a bureau in Nashville, Tennessee. Star
has its editorial headquarters in Tarrytown, New York and also has a bureau in
Los Angeles, California.
National Enquirer's editorial operation consists of approximately 80
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 21 staff reporters. The article editors work with four
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.
Star's total editorial staff consists of approximately 70 full-time
employees and 6 part-time employees. Star's editorial news gathering operation
is similar to National Enquirer's. There is an editor in chief, an executive
editor, 8 story editors and 20 reporters. Their photo department has 7 staff
persons under the direction of a chief photo editor. Star has a library staff
that assists in both story researching and fact checking.
In addition to their editorial staffs, National Enquirer 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 and Star have networks of approximately 300 and 150 free-lance
reporters, respectively, 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 and Country Weekly are
comprised of 14 and 25 people, respectively, and are each managed by an editor.
Due to their high level of investigative reporting, both National
Enquirer 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 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.
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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 and Star 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 all
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 5 regional wholesalers in the United States and
Canada who deliver the requisite number of copies to approximately 165,000
retail sales locations. We believe our relationships with our printing companies
are favorable and that there are printing facilities available elsewhere, should
the need arise. The principal raw materials utilized by our publications are
paper and ink. Paper is purchased directly by us from several suppliers based
upon pricing and, to a lesser extent, availability. Ink utilized by our
publications is purchased by the printers from at least two different ink
suppliers. Both paper and ink are commodity products with pricing affected by
demand, capacity and economic conditions. We believe that adequate sources of
supply are, and will continue to be, available to fulfill our requirements.
Our operating income may be significantly affected by the price of
paper used in our publications. 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 do not hedge against increases in paper costs.
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 40% (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, comprising of the highest volume retailers.
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 40%
(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.
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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 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, Elle and Mirabella; Gruner & Jahr
USA/Publishing, which publishes Family Circle, Family Circle Specials, McCall's,
Fitness, Parents and YM; Wenner Media, Inc., which publishes US Magazine,
Rolling Stone Magazine and Men's Journal; Newsweek, Inc., which publishes
Newsweek; and Rodale Press, Inc., which publishes Prevention and Prevention
Guides.
DSI's third-party contracts to provide marketing and merchandising
services to third-party clients in the publishing industry generated
approximately $13.6 million in revenues in fiscal 1999, as compared to $14.5
million and $12.5 million in fiscal 1998 and fiscal 1997, respectively.
OTHER BUSINESSES
Through Frontline, 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 1999, revenues from
Frontline were $6.3 million or approximately 2.1% of total operating revenues.
We also publish pocket-sized books under the name Micro Mags covering
such topics as diets, horoscopes, health and psychic phenomena. Twelve releases
are published annually, each with 4 titles, at a current cover price of $1.49.
In fiscal 1999, revenues from Micro Mags were approximately $3.7 million, which
amount was included in circulation revenues.
We also had ancillary sales (primarily licensing and syndication sales)
of $1.4 million in fiscal 1999.
COMPETITION
National Enquirer, Star, 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 and Star
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.
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Many of our competitors have substantially larger operating staffs and greater
capital resources. In this respect, we may be at a competitive disadvantage with
such entities. 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 Magazine), TV
Guide, Inc. (which publishes TV Guide) and Globe Communications Corp. (which
publishes Globe, Sun and National Examiner). As use of the Internet and new
on-line ventures focusing on celebrity news increase, we may face new sources of
competition.
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. Certain of DSI's
competitors have substantially larger operating staffs and greater capital
resources. In this respect, DSI may be at a competitive disadvantage with such
entities.
EMPLOYEE RELATIONS
We employ approximately 500 full-time employees and 1,550 part-time
employees. Approximately 1,680 of our employees, including almost all of our
part-time employees, work for DSI. None of our employees is represented by any
union or other labor organization. We have had no strikes or work stoppages
during the last five years. We believe that our relations with our employees are
good.
ITEM 2. PROPERTIES
We own our headquarters buildings which are located in Lantana,
Florida. The premises, which also houses the editorial staffs of National
Enquirer, Weekly World News and Country Weekly, consist of three one-story
buildings with an aggregate of 33,700 square feet located on approximately 7.6
acres.
We also lease 18,800 square feet in Tarrytown, New York for the
editorial staffs of Star, 8,200 square feet in New York, New York for
advertising personnel and 12,500 square feet in West Palm Beach, Florida for
DSI. Various other smaller properties are leased primarily in New York and
California 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 29, 1999, we paid approximately $20 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.
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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 and Star to review, prior to publication, all sensitive
stories and celebrity news and photos. 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 1999.
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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 29, 1999 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.
FISCAL YEARS ENDED
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MARCH 27, MARCH 25, MARCH 31, MARCH 30, MARCH 29,
1995 1996 1997(1) 1998 1999
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
STATEMENT OF INCOME DATA:
Operating Revenues $ 315,299 $ 295,050 $ 315,988 $ 307,684 $ 293,459
Operating Expenses(2) 230,401 228,714 228,817 237,104 228,060
--------- --------- --------- --------- ---------
Operating Income 84,898 66,336 87,171 70,580 65,399
Interest Expense (35,885) (56,715) (56,284) (50,486) (46,897)
Other Income (Expense), Net(3) (1,409) (1,195) (1,705) (1,641) 2,943
--------- --------- --------- --------- ---------
Income before Income Taxes and
Extraordinary Charge 47,604 8,426 29,182 18,453 21,445
Income Taxes 23,755 8,985 16,716 12,437 13,559
--------- --------- --------- --------- ---------
Income (Loss) before Extraordinary Charge 23,849 (559) 12,466 6,016 7,886
Extraordinary Charge(4) (11,635) -- -- -- (2,161)
========= ========= ========= ========= =========
Net Income (Loss) $ 12,214 $ (559) $ 12,466 $ 6,016 $ 5,725
========= ========= ========= ========= =========
BALANCE SHEET DATA:
Total Assets $ 711,486 $ 687,434 $ 670,850 $ 647,930 $ 616,838
Total Debt 579,844 558,906 528,662 497,535 471,134
Total Stockholder's Equity 36,801 36,242 48,457 54,473 60,198
OTHER DATA:
Depreciation $ 6,546 $ 7,303 $ 8,145 $ 9,252 $ 11,035
Amortization of Intangibles 28,504 23,075 21,075 21,075 21,075
Capital Expenditures 8,307 9,072 8,526 11,018 15,019
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(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 $6,499 from the sale of the Soap Opera
Assets.
(3) Other income, net for any period 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.
(4) Consists primarily of the write-off of deferred debt issuance costs and
charges relating to refinancing of indebtedness.
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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 29, 1999. This discussion
should be read in conjunction with our consolidated financial statements and the
related notes thereto.
OVERVIEW
We are a leading publisher in the field of general interest magazines,
publishing National Enquirer, Star, Weekly World News and Country Weekly. We
generate revenues from circulation, predominantly single copy sales in
supermarkets and other retail outlets, and from advertising and other sources.
In fiscal 1999 and 1998, approximately 85% of our total operating
revenues were from circulation. Single copy sales accounted for approximately
84% of such circulation revenues in such periods 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.
We believe that circulation has been affected by a number of factors
over the last several years. Most recently, we believe the adverse publicity
against celebrity news-based magazines after the death of Princess Diana in
August 1997 was the principal factor for National Enquirer and Star average
weekly single copy circulation declines by 8.6% and 10.7%, respectively. While
single copy circulation has improved for these two publications from the low
levels experienced in the months immediately after Princess Diana's death, they
have not returned to their prior levels.
We also believe that a significant portion of the declines in single
copy circulation of National Enquirer and Star since fiscal 1994 is attributable
to a significant reduction in advertising expenditures for these publications.
Total advertising expenditures for National Enquirer and Star decreased from
$16.1 million in fiscal 1994 to $0.3 in fiscal 1999. We believe that this
reduction in advertising was a significant factor in the decrease in average
weekly single copy circulation of National Enquirer and Star from approximately
2.8 million copies and 2.5 million copies, respectively, in fiscal 1994 to
approximately 1.8 million copies and 1.4 million copies, respectively, in fiscal
1999. In addition, single copy circulation declines of all 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.
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 May 1993, we have instituted eight cover
price increases in the United States for National Enquirer and Star, consisting
of four cover price increases for each publication, ranging from $0.04 to $0.26
per copy. The average weekly single copy circulation of National Enquirer and
Star for the three-month periods following seven of these cover price increases
was approximately equal to or
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greater than the average weekly single copy circulation for the applicable
three-month periods prior to such increases. After the most recent cover price
increase of $0.10 for each of National Enquirer and Star on July 7, 1998,
average weekly single copy circulation increased approximately 12% and 8%,
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.
In addition to circulation, approximately 8% and 7%, respectively, of
our total operating revenues in fiscal 1999 and 1998 were from advertising and
other revenues (consisting primarily of DSI and Frontline revenues),
respectively.
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.
In connection with the Transactions and Merger, which will be accounted
for under the purchase method of accounting, as of May 7, 1999 we will reflect a
new basis of accounting that will result in a substantial increase in the amount
of intangible assets. It is estimated that intangible assets will total
approximately $814.2 million with annual amortization expense of $40.7 million
based upon amortizable lives of 20 years. We are currently in the process of
appraising the value of our assets and liabilities, therefore the allocation of
the actual purchase price may differ significantly from this estimate.
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 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.
RESULTS OF OPERATIONS
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
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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, reflecting an overall weakness in its
category which has resulted in the recent folding of a competitive publication.
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
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
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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 expenses of
$1,641,000 for the prior fiscal year because of a net gain of $4.4 million from
the favorable settlement of certain litigation which was recorded in the first
fiscal quarter.
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 the fiscal quarter ended June 29, 1998, 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.
Comparison of Fiscal Year Ended March 30, 1998 to Fiscal Year Ended
March 31, 1997
Total operating revenues were $307,684,000 for fiscal 1998 (which
includes 52 weeks as compared to 53 weeks in fiscal 1997), a decrease of
$8,304,000 or 2.6% from total operating revenues of $315,988,000 in the prior
fiscal year. On an equivalent number of weeks basis, fiscal 1998 total operating
revenues decreased by approximately $2,342,000 or 0.8% from 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 other
than Soap Opera News (which published only one issue in fiscal 1997) and, to a
lesser extent, a decline in advertising revenues. These declines in single copy
circulation revenues and advertising revenues were partially offset by increases
in subscription revenues and other revenues.
Circulation revenues (which include all single copy and subscription
sales) of $262,249,000 in fiscal 1998 decreased $11,318,000 or 4.1% from the
prior fiscal year. On an equivalent number of weeks basis, fiscal 1998 single
copy circulation revenues fell by approximately $6,156,000 or 2.3% from the
prior fiscal year as revenues generated by Soap Opera News, which published only
one issue in the prior fiscal year, were unable to offset single copy
circulation revenue declines for National Enquirer and Star.
In fiscal 1998, primarily as a result of adverse publicity resulting
from the August 1997 death of Princess Diana, National Enquirer and Star average
weekly single copy circulation declined by 8.2% and 12.9%, respectively, when
compared to the prior fiscal year. We believe that Star, which is more celebrity
focused than National Enquirer, and, to a lesser extent, National Enquirer, also
were impacted by competition from other forms of media covering celebrity news.
Revenues from per copy cover price increases of $0.10 on July 23, 1996 helped to
offset a portion of the circulation declines for these publications. Soap Opera
Magazine's average weekly single copy circulation in fiscal 1998 declined 18.8%,
reflecting the impact of increased competition in the soap opera category. As
compared to fiscal 1997, Country Weekly's average weekly circulation increased
6.9% as higher subscription levels more than offset a decline in average weekly
single copy circulation of 7.5%. A Weekly World News cover price
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increase of $0.16 in April 1997 helped to reduce the impact on circulation
revenues of a 13.0% decline in average weekly single copy circulation.
Subscription revenues of $42,440,000 in fiscal 1998 increased
$2,570,000 or 6.4% over fiscal 1997. Expressed on an equivalent number of weeks
basis, subscription revenues increased by approximately $3,322,000 or 8.5% due
largely to increases in average weekly subscription circulation of 25.8%, 4.7%
and 38.9% for Country Weekly, National Enquirer and Soap Opera Magazine,
respectively, as well as subscriptions generated by the launch of Soap Opera
News.
Advertising revenues of $23,643,000 in fiscal 1998 declined $637,000 or
2.6% compared to fiscal 1997; on an equivalent number of weeks basis,
advertising revenues were approximately flat. During fiscal 1998 lower levels of
national advertising in National Enquirer and Star were offset by higher
national advertising revenues generated by Country Weekly. National advertising,
particularly in National Enquirer and Star, was adversely affected by the loss
of tobacco-related product advertising as the tobacco industry, as a whole, has
curtailed its print media based advertising because of a lack of clear
legislative guidelines that will address the future of tobacco products
advertising in the United States. Advertising revenues in fiscal 1998 were also
negatively impacted by reductions in the average revenues per page generated by
direct mail order and classified advertising.
Other revenues of $21,792,000 in fiscal 1998 increased $3,651,000 or
20.1% over fiscal 1997 reflecting revenues generated by Frontline, acquired in
September 1996, which sells in-store advertising to various product
manufacturers and service providers and, to a lesser extent, DSI, due to
expansion of its marketing, merchandising and information-gathering services for
various third-party clients.
Operating expenses of $237,104,000 in fiscal 1998 increased $8,287,000
or 3.6% over fiscal 1997; on an equivalent number of weeks basis (excluding
depreciation and amortization) increased by $10,946,000 or 5.6% over fiscal 1997
primarily reflecting the editorial, production and distribution expenses
associated with Soap Opera News and expenses related to Frontline, each of which
were included for only a portion of the prior year. Distribution related
expenses were higher due to increased subscription fulfillment and DSI's
expanded marketing, merchandising and information-gathering services as well as
Soap Opera News. Excluding production costs associated with Soap Opera News, on
an equivalent number of issues basis overall production costs declined
reflecting the benefit of lower paper and ink costs.
Interest expense declined $5,798,000 in fiscal 1998 over fiscal 1997 to
$50,486,000 reflecting one less week of interest and decreases in the average
balance of outstanding indebtedness.
Our effective income tax rates were 67.4% and 57.3% for fiscal years
1998 and 1997, respectively, as compared to the statutory federal 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 higher effective tax rate in fiscal 1998 over
fiscal 1997 resulted primarily from changes in the ratio of nondeductible
goodwill as a percentage of income before taxes.
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LIQUIDITY AND CAPITAL RESOURCES
At March 29, 1999, we had cash and cash equivalents of $3.8 million and
a working capital deficit of $75.1 million compared to cash and cash equivalents
of $7.4 million and a working capital deficit of $52.1 million as of March 30,
1998. Our working capital deficit increased in fiscal 1999 because of the
reclassification of $25.0 million in long-term debt under the Credit Agreement
to current debt. 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:
- our policy of using available cash to reduce borrowings which are
recorded as noncurrent liabilities, thereby reducing current
assets without a corresponding reduction in current liabilities;
- our minimal accounts receivable level relative to revenues, as
most of our sales revenues are received from national
distributors as advances based on estimated single copy
circulation; and
- accounting for deferred revenues as a current liability. Deferred
revenues are comprised of deferred subscriptions, advertising and
single copy revenues and represent payments received in advance
of the period in which the related revenues will be recognized.
Historically, our primary sources of liquidity have been cash generated
from operations and amounts available under the Credit Agreement which have been
used to fund shortfalls in available cash. For the fiscal year ended March 29,
1999 and the fiscal year ended March 30, 1998, we generated net cash from
operating activities totaling $29.8 million and $41.8 million, respectively,
that was used primarily to fund capital expenditures and to make payments of
principal on our outstanding indebtedness.
We made capital expenditures in fiscal 1999 and 1998 totaling $15.0 and
$11.0 million, respectively. We plan to invest $14.0 million in fiscal 2000. Our
capital expenditures are made principally to purchase display pockets for our
publications and computer equipment for our businesses.
At March 29, 1999 and March 30, 1998 our outstanding indebtedness
totaled $471.1 million and $497.5 million, respectively, of which $271.0 million
and $297.4 million, respectively, represented borrowings under the Credit
Agreement. The Credit Agreement charges variable rates of interest which
averaged 7.7% and 7.8%, respectively, for the fiscal year ended March 29, 1999
and March 30, 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%.
The New Credit Agreement, which matures in April 2007, provides senior
secured financing of up to $400.0 million, consisting of a $340.0 million term
loan facility and a $60.0 million revolving credit facility. The $250.0 million
in New Subordinated Notes bear interest at 10-1/4% per annum payable
semiannually and mature in May 2009.
We have substantially increased our indebtedness in connection with the
Transactions. If the Transactions had been completed on March 29, 1999, our pro
forma outstanding
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indebtedness would have totaled $600.9 million as compared to our actual
historical outstanding indebtedness at such date of $471.1 million. As a result
of the New Credit Agreement and the New Subordinated Notes, our liquidity
requirements will be significantly increased, primarily due to increased
interest expense obligations and principal payment obligations under the New
Credit Agreement which, other than certain excess cash flow payment obligations,
will commence in 2002. In addition, the business strategy to be implemented upon
consummation of the Transactions will result in increased operating expenses. 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 New
Subordinated Notes, to make capital expenditures, to cover working capital
requirements and to fund the implementation of our business strategy to be
implemented upon consummation of the Transactions. We believe, however, that
based upon our current level of operations and anticipated growth, it will be
necessary to refinance the New Subordinated Notes upon their maturity. To the
extent we make future acquisitions, we may require new sources of funding,
including additional debt, or equity financing or some combination thereof.
There can be no assurances that such additional sources of funding will be
available to us on acceptable terms.
Our ability to make scheduled payments of principal and interest under
the New Credit Agreement and the New Subordinated 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.
YEAR 2000 RISK
The Year 2000 issue is the result of computer programs that were
written using only two digits, rather than four, to represent a year.
Date-sensitive software or hardware may not be able to distinguish between the
years 1900 and 2000 and programs that perform arithmetic operations, comparisons
or sorting of date fields may begin yielding incorrect results. This could
potentially cause a system failure or miscalculations that could disrupt
operations. To address the impact of the Year 2000 issue on our computer
programs, embedded chips and significant third-party suppliers of goods and
services we have formed a task force led by our information services department.
This task force has taken an inventory of the potential Year 2000 issues that
may exist and is in the process of completing its assessment of their impact.
Certain of our key systems (e.g. financial applications) have already been
identified as Year 2000 compliant; in addition, because of the recent
replacement of a majority of our computer hardware, we believe there is little
likelihood that this equipment is not Year 2000 compliant. We believe the
largest areas of internal risk for Year 2000 noncompliance are internally
developed software applications and the handheld communications devices used in
merchandising by DSI. We have purchased specialized software that will allow us
to identify and correct Year 2000 problems within our software applications and
expect to have key applications modified and tested by July 1999. Our
information services department, working with the handheld communication
devices, has determined that remediation of the existing handhelds is the
appropriate cause of action. We expect to complete this remediation work by
August 1999.
At the present time, the Year 2000 project is estimated to cost
approximately $500,000 and will be funded through cash flows from operations.
Approximately $290,000 of the estimated Year 2000 costs will relate to hardware
and software purchases and will be capitalized with the remainder being expensed
as incurred.
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At present, we believe our technology systems will be Year 2000
compliant and that the Year 2000 issue will not present a materially adverse
risk to our future results of operations, financial position or cash flow.
However, there can be no assurance that our systems will be Year 2000 compliant
prior to December 31, 1999 or that the costs incurred will not materially exceed
the amounts budgeted. If there are incidences of noncompliance, we plan to
allocate internal resources and retain dedicated consultants to address such
incidences. In the event that our computers are not Year 2000 compliant by
December 31, 1999, and as a result of that noncompliance business interruptions
occur, we could incur significant losses in revenues due to such business
interruptions, which could have a material adverse effect on our future results
of operations, financial position or cash flow.
In addition, there is a risk that a significant supplier of goods or
services may not be Year 2000 compliant. We are communicating with our
significant suppliers of goods and services to obtain reasonable assurance that
their products and business systems will be Year 2000 compliant. We rely on
certain suppliers to deliver a broad range of goods and services, including
prepress operations, printing services, paper, wholesale distribution, mailings
and banking services. Although we have taken, and will continue to take,
reasonable efforts to gather information to determine and verify the readiness
of products and dependencies, there can be no assurance that reliable
information will be offered or otherwise available. In order to mitigate the
effects of a significant supplier's potential failure to remediate the Year 2000
issue in a timely manner, we would take appropriate actions including arranging
for alternate suppliers, re-running processes if errors occur and using manual
intervention to ensure the continuation of operations where necessary. Should
this happen, it may result in significant delays in business operations
including, but not limited to, delays in delivery of products resulting in loss
of revenues, increased operating costs, loss of customers or suppliers, or other
significant disruptions to our business which could have a material adverse
effect on our future results of operations, financial position or cash flow.
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 June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
standardizes the accounting for derivatives, requiring recognition as either
assets or liabilities on the balance sheet and measurement at fair value. We
plan to adopt SFAS No. 133 in fiscal 2002. We have not yet
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determined the effect adoption of SFAS No. 133 will have on our consolidated
financial statements.
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 headings "Business Strategy" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." We have based these forward-looking statements on our current
assumptions, expectations and projections about future events. We caution you
that a variety of factors could cause business conditions and results to differ
materially from what is contained in the forward-looking statements. These
forward-looking statements are subject to risks, uncertainties and assumptions
about us, including, among other things:
- our high degree of leverage and - increasing competition by domestic
significant debt service obligations, and foreign media companies,
- our ability to increase circulation and - changes in the costs of paper used
advertising revenues, by us,
- market conditions for our publications, - any future changes in management,
- our ability to develop new publications - general risks associated with the
and services, publishing industry and
- outcomes of pending and future - the potential effect of year 2000
litigation, computer issues.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The sensitivity of our financial instruments to changes in the general
level of interest rates represents one of our inherent market risks. In order to
mitigate the potential loss arising from adverse changes in interest rates, we
have a strategy that includes managing a balance of fixed and variable-rate debt
instruments. As part of this strategy, we maintain interest rate swap agreements
that effectively convert a portion of our variable rate indebtedness exposure to
fixed rate indebtedness thereby reducing our exposure to the uncertainty of
floating interest rates. We do not enter into financial instruments for
speculative purposes.
Interest rate changes result in increases or decreases in the market
value of our fixed rate indebtedness because of differences between the current
market interest rate and the rates governing the indebtedness. With respect to
our variable rate indebtedness at March 29, 1999, a 10% increase in interest
rates would result in a $0.9 million annual decrease in our income before income
taxes and cash provided from operating activities.
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In addition, we have risk relative to changes in the market price of
the paper used by our publications. Currently, we do not hedge against increases
in paper costs and historically we have managed this risk through a combination
of cover price increases and paper usage reductions. We can predict neither the
prices of the paper we use nor our ability to manage the risk of higher paper
costs. It is possible that an increase in paper costs could have a material
adverse effect on us.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page(s)
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FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants.............................. 24
Consolidated Balance Sheets as of March 30, 1998 and March 29, 1999............. 25
Consolidated Statements of Income for the Three Fiscal
Years Ended March 29, 1999.................................................... 26
Consolidated Statements of Stockholder's Equity for the Three Fiscal
Years Ended March 29, 1999.................................................... 27
Consolidated Statements of Cash Flows for the Three Fiscal
Years Ended March 29, 1999.................................................... 28
Notes to Consolidated Financial Statements...................................... 29 - 38
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
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholder of
American Media Operations, Inc.:
We have audited the accompanying consolidated balance sheets of American
Media Operations, Inc. (a Delaware corporation) and subsidiaries as of March 30,
1998 and March 29, 1999, and the related consolidated statements of income,
stockholder's equity and cash flows for each of the three fiscal years in the
period ended March 29, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 30, 1998 and March 29, 1999, and
the results of their operations and their cash flows for each of the three
fiscal years in the period ended March 29, 1999, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
West Palm Beach, Florida,
May 7, 1999.
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AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 30, 1998 AND MARCH 29, 1999
(IN 000'S, EXCEPT PER SHARE INFORMATION)
1998 1999
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,405 $ 3,823
Receivables, net 7,852 7,977
Inventories 10,390 9,830
Prepaid income taxes 2,612 --
Prepaid expenses and other 3,939 2,650
--------- ---------
Total current assets 32,198 24,280
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PROPERTY AND EQUIPMENT, at cost:
Land and buildings 4,039 4,039
Machinery, fixtures and equipment 18,447 22,040
Display racks 21,662 19,543
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44,148 45,622
Less - accumulated depreciation (18,149) (18,762)
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25,999 26,860
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DEFERRED DEBT COSTS, net 8,688 5,728
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GOODWILL, net of accumulated amortization
of $126,440 and $141,595 478,811 463,656
--------- ---------
OTHER INTANGIBLES, net of accumulated
amortization of $45,766 and $51,686 102,234 96,314
--------- ---------
$ 647,930 $ 616,838
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of term loan $ -- $ 25,000
Accounts payable 15,587 11,618
Accrued expenses 14,915 13,755
Accrued interest 12,249 11,251
Accrued and current deferred income taxes 9,775 9,795
Deferred revenues 31,749 27,987
--------- ---------
Total current liabilities 84,275 99,406
--------- ---------
PAYABLE TO PARENT COMPANY 3,728 3,404
--------- ---------
TERM LOAN AND REVOLVING CREDIT
COMMITMENT, net of current portion 297,401 246,000
--------- ---------
SUBORDINATED INDEBTEDNESS:
11.63% Senior Subordinated Notes Due 2004 200,000 200,000
10.38% Senior Subordinated Notes Due 2002 134 134
--------- ---------
200,134 200,134
--------- ---------
DEFERRED INCOME TAXES 7,919 7,696
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTES 2 and 9)
STOCKHOLDER'S EQUITY:
Common stock, $.20 par value; 10,000 shares authorized,
7,507.6 shares issued and outstanding
shares issued and outstanding 2 2
Additional paid-in capital 26,039 26,039
Retained earnings 28,432 34,157
--------- ---------
TOTAL STOCKHOLDER'S EQUITY 54,473 60,198
========= =========
$ 647,930 $ 616,838
========= =========
The accompanying notes to consolidated financial statements are an integral
part of these consolidated balance sheets.
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AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE FISCAL YEARS ENDED MARCH 29, 1999
(IN 000'S)
FISCAL YEAR ENDED
----------------------------------------
MARCH 31, MARCH 30, MARCH 29,
1997 1998 1999
---------- --------- ---------
OPERATING REVENUES:
Circulation $ 273,567 $ 262,249 $ 248,630
Advertising 24,280 23,643 23,460
Other 18,141 21,792 21,369
--------- --------- ---------
315,988 307,684 293,459
--------- --------- ---------
OPERATING EXPENSES:
Editorial 28,369 30,497 28,906
Production 80,286 82,296 79,691
Distribution, circulation and other cost of sales 60,514 66,883 67,640
Selling, general and administrative expenses 30,428 27,101 26,212
Gain on sale of Soap Opera Assets -- -- (6,499)
Depreciation and amortization 29,220 30,327 32,110
--------- --------- ---------
228,817 237,104 228,060
--------- --------- ---------
Operating income 87,171 70,580 65,399
INTEREST EXPENSE (56,284) (50,486) (46,897)
OTHER INCOME (EXPENSE), net (1,705) (1,641) 2,943
--------- --------- ---------
Income before provision for income taxes and
extraordinary charge 29,182 18,453 21,445
PROVISION FOR INCOME TAXES 16,716 12,437 13,559
--------- --------- ---------
Income before extraordinary charge 12,466 6,016 7,886
EXTRAORDINARY CHARGE, net of income taxes of $1,269,
related to early extinguishment of debt (Note 8) -- -- (2,161)
--------- --------- ---------
Net income $ 12,466 $ 6,016 $ 5,725
========= ========= =========
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
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AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE THREE FISCAL YEARS ENDED MARCH 29, 1999
(IN 000'S, EXCEPT SHARE INFORMATION)
COMMON STOCK ADDITIONAL
---------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
--------- --------- ---------- ---------
Balance, March 25, 1996 7,507.6 $ 2 $ 26,290 $ 9,950
Other -- -- (251) --
Net income -- -- -- 12,466
------- --- -------- -------
Balance, March 31, 1997 7,507.6 2 26,039 22,416
Net income -- -- -- 6,016
------- --- -------- -------
Balance, March 30, 1998 7,507.6 2 26,039 28,432
Net income -- -- -- 5,725
------- --- -------- -------
Balance, March 29, 1999 7,507.6 $ 2 $ 26,039 $34,157
======= === ======== =======
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
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AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE FISCAL YEARS ENDED MARCH 29, 1999
(IN 000'S)
FISCAL YEAR ENDED
-----------------------------------------
MARCH 31, MARCH 30, MARCH 29,
1997 1998 1999
--------- --------- ---------
Cash Flows from Operating Activities:
Net income $ 12,466 $ 6,016 $ 5,725
-------- --------- ---------
Adjustments to reconcile net income to net cash
provided from operating activities -
Gain on sale of Soap Opera Assets -- -- (6,499)
Extraordinary charge, net of income taxes -- -- 2,161
Depreciation and amortization 29,220 30,327 32,110
Deferred debt cost amortization 3,144 2,623 1,506
Senior subordinated discount note accretion 1,500 190 --
Deferred income tax provision (credit) 1,180 186 (3,592)
Decrease (increase) in -
Receivables, net (2,540) 339 (125)
Due from Parent Company (431) 1,048 --
Inventories 1,135 3,001 560
Prepaid income taxes 1,184 (2,612) 2,612
Prepaid expenses and other 283 (1,313) 1,289
Increase (decrease) in -
Accounts payable (3,912) 1,420 (5,203)
Accrued expenses 2,894 (3,204) (1,486)
Payable to Parent Company -- 3,728 (324)
Accrued interest (2,141) 2,212 (1,010)
Accrued and current deferred income taxes 864 (1,552) 4,658
Deferred revenues 1,842 (599) (2,580)
-------- --------- ---------
Total adjustments 34,222 35,794 24,077
-------- --------- ---------
Net cash provided from operating activities 46,688 41,810 29,802
-------- --------- ---------
Cash Flows from Investing Activities:
Capital expenditures (8,526) (11,018) (15,019)
Acquisition of business (2,236) -- --
Cash proceeds from sale of Soap Opera Assets -- -- 10,000
-------- --------- ---------
Net cash used in investing activities (10,762) (11,018) (5,019)
-------- --------- ---------
Cash Flows from Financing Activities:
Term loan and revolving credit commitment principal repayments (85,744) (133,855) (382,401)
Proceeds from term loan and revolving credit commitment 54,000 118,500 356,000
Repayment of senior subordinated indebtedness -- (15,962) --
Payment of deferred debt costs (344) (300) (1,964)
Other (251) -- --
-------- --------- ---------
Net cash used in financing activities (32,339) (31,617) (28,365)
-------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 3,587 (825) (3,582)
Cash and Cash Equivalents at Beginning of Year 4,643 8,230 7,405
-------- --------- ---------
Cash and Cash Equivalents at End of Year $ 8,230 $ 7,405 $ 3,823
======== ========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for -
Income taxes $ 13,203 $ 15,422 $ 9,570
Interest 53,763 45,462 46,389
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
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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
Company ("Operations", 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., DSI and Frontline, among others).
We publish four weekly publications: National Enquirer, Star, Weekly World News
and Country Weekly. All significant intercompany transactions and balances have
been eliminated in consolidation. Our fiscal year, which ends on the last Monday
in March, includes 52 weeks for the fiscal years 1998 and 1999 compared to 53
weeks for the fiscal year 1997.
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 issue
revenues and related expenses are recognized at the on sale date. On the date
each issue is placed on sale, we receive a percentage of the issue's estimated
sales proceeds for our publications as an advance from the distributors. All of
our publications are sold with full return privileges.
Revenues from copy sales are net of reserves provided for expected sales
returns which are established in accordance with generally accepted accounting
principles after considering such factors as sales history and available market
information. We continually monitor the adequacy of the reserves and make
adjustments when necessary.
Subscriptions received in advance of the issue date are recognized as
income over the term of the subscription on a straight-line basis. Advertising
revenues are recognized in the period in which the related advertising appears
in the publications.
Deferred revenues were comprised of the following:
1998 1999
-------- --------
Single Copy $ 6,887 $ 5,367
Subscriptions 24,578 22,334
Advertising 284 286
-------- --------
$ 31,749 $ 27,987
======== ========
Other revenues, primarily from marketing services performed for third
parties by DSI and Frontline, are recognized when the service is performed.
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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.
INVENTORIES-
Inventories are generally stated at the lower of cost or market. We use
the last-in, first-out (LIFO) cost method of valuing our inventories. If the
first-in, first-out (FIFO) cost method of valuation, which approximates market
value, had been used, inventories would have been approximately $170,000 and
$430,000 higher than the amounts reported in the accompanying consolidated
balance sheets for 1998 and 1999, respectively. Inventories are comprised of the
following:
1998 1999
------- -------
Raw materials - paper $ 6,573 $6,931
Finished product - paper, production
and distribution costs of future issues 3,817 2,899
------- ------
$10,390 $9,830
======= ======
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.
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
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use to evaluate performance internally. We have determined that we have only one
operating segment.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
standardizes the accounting for derivatives, requiring recognition as either
assets or liabilities on the balance sheet and measurement at fair value. We
plan to adopt SFAS No. 133 in fiscal 2002. We have not yet determined the effect
adoption of SFAS No. 133 will have on our consolidated financial statements.
(2) SALE OF ASSETS, CERTAIN TRANSACTIONS AND MERGER:
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
Acquisition Corp. ("EMP") a company controlled by Evercore Capital Partners
L.P., a private equity firm ("Evercore"). Proceeds to finance the acquisition
included (a) a cash equity investment of $235 million by Evercore and certain
other investors, (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, including a financial advisory fee of 1%
of the aggregate funds required to finance the acquisition paid to an affiliate
of Evercore, (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 will reflect a new basis of accounting that will include the
elimination of historical amounts of certain assets and liabilities and the
revaluation of certain of our tangible and intangible assets.
The following pro forma financial information reflects the sale of the
Soap Opera Assets, the Transactions and the Merger as if each had occurred as of
the beginning of fiscal 1999 (unaudited):
Operating revenues $ 272,184
=========
Operating expenses $ 226,688
=========
Depreciation and
amortization $ (50,307)
=========
Operating income $ 45,496
=========
Interest expense ($58,241)
========
Net loss ($18,332)
========
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The above pro forma financial information excludes certain non-recurring
items including bridge loan commitment and ticking fees related to the New
Credit Agreement and the New Subordinated Notes totaling approximately $4.1
million which will be recorded in fiscal 2000. Additional items excluded from
the above pro forma financial information includes the pretax gain recorded in
connection with the sale of the Soap Opera Assets in the amount of $6.5 million
and an extraordinary charge, net of income taxes, totaling approximately $2.2
million, related to the early extinguishment of debt, which were recorded in
fiscal 1999.
(3) INTANGIBLE ASSETS:
Purchase price allocations for acquisitions have been made in accordance
with Accounting Principles Board Opinion No. 16. The excess of the purchase
price, including liabilities assumed, over tangible net assets acquired has been
allocated to either specifically identified intangibles or goodwill.
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
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.
No such event has occurred to our knowledge and we have determined there to be
no impairment.
Goodwill is amortized on a straight-line basis over 40 years. For each
of the fiscal years 1997, 1998 and 1999, amortization of goodwill charged to
depreciation and amortization in the accompanying consolidated statements of
income totaled approximately $15.2 million.
An intangible asset recorded in connection with the acquisition of Star
is amortized on a straight-line basis over its estimated useful life of 25
years. Amortization expense relating to this intangible asset for each of the
fiscal years 1997, 1998 and 1999, totaling approximately $5.9 million, is
included in depreciation and amortization in the accompanying consolidated
statements of income.
In connection with the Transactions and Merger, which will be accounted
for under the purchase method of accounting, as of May 7, 1999 we will reflect a
new basis of accounting that will result in a substantial increase in the amount
of intangible assets. It is estimated that intangible assets will total
approximately $814.2 million with annual amortization expense of $40.7 million
based upon amortizable lives of 20 years. We are currently in the process of
appraising the value of our assets and liabilities, therefore the allocation of
the actual purchase price may differ significantly from this estimate.
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(4) FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair value of our financial instruments as of year end is
as follows:
1998 1999
----------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- --------
Term loan and revolving credit
facility, including current portion $297,401 $297,401 $271,000 $271,000
Subordinated indebtedness 200,134 217,134 200,134 215,152
Interest rate swap agreement liability 122 299 147 1,193
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 accounts receivable or
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.
Derivative financial instruments terminated at a gain (loss) prior to
maturity are credited (charged) to interest expense over the remaining original
life of the derivative financial instrument.
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
interest rate swap agreement represents net interest payable as of period end.
Net interest expense related to the interest rate swap agreement and another
swap agreement which expired in May 1998, totaled $793,000, $655,000 and
$584,000 for the fiscal years 1997, 1998 and 1999, respectively.
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(5) INCOME TAXES:
We file a consolidated Federal income tax return with Media and
calculate our income on a separate return basis. The provision for income taxes
consists of the following:
1997 1998 1999
-------- ------- --------
Current:
Federal $13,824 $11,232 $ 15,693
State 1,712 1,019 1,458
------- ------- --------
Total current 15,536 12,251 17,151
------- ------- --------
Deferred:
Federal 1,050 169 (3,287)
State 130 17 (305)
------- ------- --------
Total deferred 1,180 186 (3,592)
------- ------- --------
$16,716 $12,437 $ 13,559
======= ======= ========
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:
1997 1998 1999
------- ------- -------
Expected income tax provision at
statutory rate $10,214 $ 6,459 $ 7,506
Nondeductible goodwill 5,304 5,304 5,304
State income taxes, net of Federal
benefit 1,198 652 749
Other, net -- 22 --
------- ------- -------
$16,716 $12,437 $13,559
======= ======= =======
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 liability
is comprised of the following:
1998 1999
-------- --------
Gross deferred tax assets $ 444 $ 451
-------- --------
Intangibles amortization (5,674) (5,345)
Expense recognition differences (3,719) (1,425)
Subscription acquisition costs (1,861) (909)
Accelerated depreciation (1,806) (1,912)
Book over tax basis of non-depreciable assets (439) (439)
Inventory capitalization (670) (554)
-------- --------
Gross deferred tax liabilities (14,169) (10,584)
-------- --------
Net deferred tax liabilities $(13,725) $(10,133)
======== ========
Included in accrued and current deferred income taxes in the
accompanying consolidated balance sheets for fiscal years 1998 and 1999 are net
current deferred taxes payable of $5.8 million and $2.4 million, respectively.
(6) CREDIT AGREEMENTS:
On June 5, 1998, we entered into our Credit Agreement with a bank
syndicate whose agent bank is The Chase Manhattan Corporation ( the "Agent Bank"
and, collectively, the "Banks" ) The Credit Agreement is comprised of a $250
million term loan commitment and a $120 million revolving credit commitment.
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(a) Term Loan Commitment -- Amounts borrowed under the Credit
Agreement's term loan commitment bear interest at rates based upon
either the Alternate Base Rate (as defined) plus 0% to .75% or the LIBO
Rate (as defined) plus .75% to 1.75%, predicated upon satisfaction of
certain covenants related to our operating cash flow levels. Amounts due
under the term loan commitment are payable in varying quarterly
installments through March 2004. As of March 29, 1999, $250 million was
outstanding under the term loan commitment.
(b) Revolving Credit Commitment - The Credit Agreement also
provides for additional borrowings up to a maximum of $120 million,
bearing interest at the term loan commitment rates described above. This
commitment, which expires in March 2004, allows funds to be borrowed and
repaid from time to time with permanent reductions in the revolving
credit commitment permitted at the Company's option. As of March 29,
1999, borrowings of $21 million were outstanding under the Prior Credit
Agreement's revolving credit commitment.
(c) Commitment Fees -- The Company is required to pay a
commitment fee ranging from .25% to .50% of the unused portion of the
Credit Agreement's revolving credit commitment. Commitment fees under
the Prior Credit Agreement totaled approximately $330,000, $246,000 and
$338,000 for fiscal years 1997, 1998 and 1999, respectively.
(d) Guarantee, Collateral and Financial Covenants -- The
Company's obligations under the 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 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 prior credit agreement,
management fees to affiliates totaling $1.8 million, $1.7 million and $1.2
million are included in other expense, net in the accompanying consolidated
statements of income for the fiscal years 1997, 1998 and 1999, respectively.
The effective interest rates under the Credit Agreement and prior credit
agreements, including amounts borrowed under the term loan commitments and
revolving credit commitment, as of March 29, 1999, and for the fiscal years
1997, 1998 and 1999 were 6.9%, 7.9%, 7.8% and 7.7%, respectively.
In connection with the Transactions and Merger, on May 7, 1999 we repaid
all amounts outstanding under the Credit Agreement and borrowed approximately
$350 million under the
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New Credit Agreement. Our New Credit Agreement, which consists of $340 million
in term loan commitments 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). 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 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
repaid from time to time with permanent reductions in the revolving
credit commitment permitted at our option.
(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.
(d) Guarantees, Collateral and Financial Covenants - The New
Credit Agreement contains certain guarantees, collateral pledges and
financial covenant requirements similar to those required under the
Credit Agreement as described above.
As of May 7, 1999 the effective interest rate under the New Credit
Agreement, including amounts borrowed under the term loan commitments and
revolving credit commitment, was 8.5%.
(7) SUBORDINATED INDEBTEDNESS:
Our 11.63% Senior Subordinated Notes due 2004 (the "Senior Subordinated
Notes due 2004"), which mature on November 15, 2004, pay interest semi-annually
on May 15 and November 15 and are redeemable at our option after November 14,
1999 at prices ranging from 104.4% to 100.0% of their face amount.
In connection with the Transactions and Merger, on May 7, 1999 we repaid
approximately $199 million in face amount of the 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, 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.
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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 $ 9,300
2003 16,284
2004 21,150
Thereafter 544,140
--------
$590,874
========
(8) 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 8 to 10 years. For fiscal years 1997, 1998 and 1999, amortization
of deferred debt costs which is included in interest expense in the accompanying
consolidated statements of income totaled approximately $3.1 million, $2.6
million, and $1.5 million, respectively. In connection with the amendment and
restatement of our senior bank indebtedness (see Note 6) certain unamortized
deferred debt costs related to the prior credit agreement totaling approximately
$3.4 million were charged to extraordinary loss in fiscal 1999. Costs related to
the Credit Agreement are being amortized to interest expense through March 2004.
In connection with the Transactions and Merger, we repaid all amounts
outstanding under the Credit Agreement and approximately $199 million in face
amount of the Senior Subordinated Notes due 2004. Net unamortized deferred debt
costs related to the Credit Agreement and Senior Subordinated Notes Due 2004
totaling approximately $5.6 million will be written off in connection with the
Transactions and Merger.
(9) 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 legal counsel,
the liability resulting from litigation, if any, will not have a material effect
on our consolidated financial statements.
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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. 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 $172 million over its remaining life as follows:
Fiscal Year
-----------
2000 $ 14,965
2001 14,929
2002 14,929
2003 15,216
2004 14,929
Thereafter 97,024
--------
$171,992
========
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Upon consummation of the Transactions, the following individuals became
the directors and executive officers of Media and the Company. All officers
serve at the pleasure of the applicable Board of Directors.
NAME AGE POSITION (S)
- ---- --- ------------
David J. Pecker............... 47 Chairman, Chief Executive Officer, President
And Director of Media and the Company
Austin M. Beutner............. 39 Director of Media and the Company
Neeraj Mital.................. 32 Director of Media and the Company
Saul D. Goodman............... 31 Director of Media and the Company
Robert V. Seminara............ 27 Director of Media and the Company
Paul G. Yovovich.............. 45 Director of Media and the Company
Helene Belanger............... 44 Director of Media and the Company
Brian J. Richmand............. 45 Director of Media and the Company
J. William Grimes............. 58 Director of Media and the Company
Peter A. Nelson............... 43 Executive Vice President and Chief
Financial Officer of Media and the Company
Michael R. Roscoe............. 52 Chief Executive Officer and President of DSI
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 time, Mr. Pecker had been the Chief Executive Officer
since 1992, and President since 1991, of Hachette Filipacchi Magazines, Inc.
Prior to 1991, he was Executive Vice President/Publishing and Chief Operating
and Chief Financial Officer of Hachette. Mr. Pecker has over 20 years of
publishing industry experience having worked as the Director of Financial
Reporting at CBS, Inc. Magazine Group and as the Vice President and Controller
of Diamandis Communications Inc.
Austin M. Beutner is 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.
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Neeraj Mital is a Managing Director 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 an Associate 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.
Peter A. Nelson joined the Company in 1989 and was promoted to his current
position as Executive Vice President and Chief Financial Officer in January
1999. Prior to his promotion, Mr. Nelson held the position of Vice President,
Controller and Chief Accounting Officer.
Michael R. Roscoe joined the Company in 1984 and was promoted to President
of DSI in 1986. In December 1995, Mr. Roscoe was promoted to his current
position as President and Chief Executive Officer of DSI.
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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 29, 1999 for services rendered during the fiscal years 1999, 1998 and
1997:
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------ ---------------
OTHER ANNUAL SHARES ALL OTHER
FISCAL SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) COMPENSATION ($)
- --------------------------- ---- --- --- --- ------------ ---
Peter J. Callahan (1)............ 1999 350,000 (2) -0- (2) -0- -- 690,630 (2)(3)
Chairman, President, Chief 1998 350,000 (2) 198,500 (2) -0- -- 659,271
Executive Officer 1997 350,000 (2) 341,000 (2) -0- -- 657,967
Michael Boylan (1)............... 1999 300,000 (2) -0- (2) -0- -- 279,970 (2)(3)
Vice Chairman, Publishing 1998 300,000 (2) 99,250 (2) -0- -- 283,011
Operations 1997 300,000 (2) 170,500 (2) -0- -- 282,679
Maynard Rabinowitz (1)........... 1999 300,000 (2) -0- (2) -0- -- 312,817 (2)(3)
Vice Chairman, Finance, 1998 300,000 (2) 99,250 (2) -0- -- 283,821
Administration and Legal 1997 300,000 (2) 170,500 (2) -0- -- 290,154
Affairs, and Secretary
Anthony S. Hoyt (1).............. 1999 500,000 -0- -0- -- 40,444 (3)
Senior Vice President and 1998 500,000 -0- -0- -- 29,721
Publisher, National Enmquirer 1997 500,000 -0- -0- 25,000(4) 21,389
and Star
Michael R. Roscoe................ 1999 296,193 37,000 -0- 50,000(4) 18,472 (3)
Chief Executive Officer and 1998 250,000 -0- -0- 25,000(4) 58,095
President of DSI 1997 230,289 46,000 -0- 25,000(4) 10,413
(1) Upon consummation of the Transactions on May 7, 1999, Messrs. Callahan,
Boylan and Rabinowitz resigned from their respective executive positions
with the Company and Media. Mr. Hoyt resigned from his executive position
as of May 17, 1999.
(2) Includes management fees ("Management Fees") as a component of compensation
for serving as executive officers of the Company and Media. Under the terms
of a former compensation plan Messrs. Callahan, Boylan and Rabinowitz
received a base salary and the Management Fee. The base salaries were
$350,000, $300,000 and $300,000, respectively, for Messrs. Callahan, Boylan
and Rabinowitz. The Management Fees, which were in addition to the base
salary, were divided into two components. The first component consisted of
cash payments of $650,000 to Mr. Callahan and $275,000 to each of Messrs.
Boylan and Rabinowitz. The second component was based upon the Company's
operating results and was distributed 50% to Mr. Callahan and 25% to each
of Messrs. Boylan and Rabinowitz.
(3) Includes for fiscal 1999 the following: profit sharing contributions
allocated under our employee profit sharing plan of $3,530 for each of
Messrs. Callahan, Boylan, Rabinowitz, Hoyt and Roscoe; payments for life
insurance of $2,700 for Mr. Callahan, $1,440 for Mr. Boylan, $2,250 for Mr.
Rabinowitz, $4,915 for Mr. Hoyt and $1,246 for Mr. Roscoe; reimbursements
of country club memberships in the amount of $34,400 and $20,000,
respectively, for Messrs. Callahan and Rabinowitz and proceeds form the
exercise of common stock options totaling $11,937 by Mr. Roscoe.
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(4) Upon consummation of the Transaction on May 7, 1999, Messrs. Hoyt and Roscoe
received $7 for each underlying share of common stock represented by their
options. After deducting for the exercise price of the underlying stock options,
Messrs. Hoyt and Roscoe received net proceeds of $106,250 and $167,709,
respectively.
Compensation for our executive officers subsequent to the consummation
of the Transactions is not materially different from its historical compensation
levels, other than Mr. Pecker's compensation, which is described below.
All of our common stock is owned by Media and all of Media's common
stock is owned by EMP Group L.L.C. (the "LLC"). Equity interests in the LLC are
owned by Evercore and certain investors, including Mr. Pecker. Other members of
management are expected to acquire equity interests in the LLC. For a discussion
of the distributions Mr. Pecker and other members of management 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 which 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 termination of 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 31, 1999, and the remaining portion of which shall be payable
on April 15, 2000. During his term of employment, Mr. Pecker shall be entitled
to a base salary equal to $1,500,000 per annum 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 twelve months following such termination; (d) a
golden parachute excise tax gross-up payment, if applicable, in connection with
a "change of control" (as defined in the employment agreement); (e) any unpaid
portion of the Make-Whole Payments; and (f) such employee benefits as to which
Mr. Pecker may be entitled under the employee benefit plans and arrangements of
Media.
During fiscal 1999, the Company's outside directors received an annual
retainer of $25,000, plus $2,500 for each Board meeting and committee meeting
(held other than on the date of a Board meeting) attended. In addition, the
Company reimbursed all directors for travel and out-of-pocket expenses incurred
in connection with Board or committee meetings and otherwise with respect to
their duties as directors.
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
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Mr. Pecker. Other members of management are expected to acquire equity interests
in the LLC. 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." Mr.
Austin Beutner, a director of Media and the Company, is a member of the general
partner of Evercore but disclaims the existence of a group and disclaims
beneficial ownership of our common stock. Certain other investors each have the
right to appoint one member of the Board of Managers of the LLC and the Board of
Directors of Media, subject to certain conditions such as ownership of units in
the LLC.
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. Class A Units are the only
units with voting power. Other classes of units, one class of which has been
issued to Mr. Pecker and other classes of which may be issued to other members
of management, are eligible to share in the profits of the LLC, pro rata, after
all the holders of the Class A Units have received the return of their aggregate
investment in the Class A Units. Mr. Pecker also has been issued units which
will vest and share in the profits of the LLC, pro rata, only in certain
circumstances.
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 the 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.
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 actions 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.
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
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incurred by Evercore and its affiliates in connection with the Transactions,
which costs and expenses totaled $413,000.
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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
23.
2. EXHIBITS
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 -- Management Agreement dated as of May 7, 1999, between American Media,
Inc., a Delaware Corporation and Evercore Advisors, Inc., a Delaware
limited liability company.
*3.1 -- Certificate of Incorporation of Enquirer/Star, Inc and amendments
thereto (incorporated by reference to Operation's Registration
Statement on Form S-1, Registration No. 33-46676, Part II, Item 16,
Exhibit 3.5, as filed on March 25, 1992). (1)
*3.2 -- Amended By-Laws of Enquirer/Star, Inc. (incorporated by reference to
Operation's Registration Statement on Form S-1, Registration No.
33-46676, Part II, Item 16, Exhibit 3.6, as filed on March 25,
1992).(1)
*3.3 -- Amendment of Certificate of Incorporation of Operations dated November
7, 1994 changing its name to American Media Operations, Inc. from
Enquirer/Star, Inc. (incorporated by reference from Operation's Annual
Report on Form 10-K for the year ended March 27, 1995, filed as
Exhibit 3.3, File No. 1-11112).
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4.1 -- Purchase Agreement, dated as of April 30, 1999, among American
Media Operations, Inc., National Enquirer, Inc., Star Editorial,
Inc., SOM Publishing, Inc., Weekly World News, Inc., Country
Weekly, Inc., Distribution Services, Inc., Fairview Printing,
Inc., NDSI, Inc., Biocide, Inc., American Media Marketing, Inc.
and Marketing Services, Inc.
4.2 -- Indenture dated as of May 7, 1999, among American Media Operations,
Inc., National Enquirer, Inc., Star Editorial, Inc., SOM Publishing,
Inc., Weekly World News, Inc., Country Weekly, Inc., Distribution
Services, Inc., Fairview Printing, Inc., NDSI, Inc., Biocide, Inc.,
American Media Marketing, Inc., and Marketing Services, Inc., and The
Chase Manhattan Bank, a New York banking corporation, as trustee.
4.3 -- Exchange and Registration Rights Agreement, 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.
4.4 -- 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.
4.5 -- 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).
4.6 -- 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).
4.7 -- 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 (as defined in the Security
Agreement).
4.8 -- 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).
*10 -- 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)
21 -- Subsidiaries of American Media Operations, Inc.
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99.1 -- David J. Pecker Employment Agreement, dated as of February 16, 1999.
99.2 -- Side Letter regarding David J. Pecker Employment Agreement to David
Pecker from EMP Group L.L.C., dated as of April 13, 1999.
27 -- Financial Data Schedule (for SEC use only).
- --------------------
(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 herein by reference as indicated.
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3. FORM 8-K
On February 17, 1999, we filed Form 8-K reporting the sale of our Soap
Opera Assets as of February 3, 1999. Included in this filing were the following
financial statements: unaudited Pro Forma Consolidated Balance Sheet as of
December 28, 1998 and unaudited Pro Forma Consolidated Statements of Income for
the fiscal year ended March 30, 1998 and the three fiscal quarters ended
December 28, 1998.
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 1999.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
it's behalf by the undersigned, thereto duly authorized on June 25, 1999.
AMERICAN MEDIA OPERATIONS, INC.
By: /s/ DAVID J. PECKER
----------------------------------------
David J. Pecker
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the registrant and in the capacities
indicated on June 25, 1999.
SIGNATURE TITLE
--------- -----
/s/ DAVID J. PECKER Chairman of the Board, President,
- -------------------------------------- Chief Executive Officer and Director
David J. Pecker (Principal Executive Officer)
/s/ PETER A. NELSON Executive Vice President and Chief
- -------------------------------------- Financial Officer (Principal Financial
Peter A. Nelson and Accounting Officer)
/s/ AUSTIN M. BEUTNER Director
- --------------------------------------
Austin M. Beutner
/s/ NEERAJ MITAL Director
- --------------------------------------
Neeraj Mital
/s/ SAUL D. GOODMAN Director
- --------------------------------------
Saul D. Goodman
/s/ ROBERT V. SEMINARA Director
- --------------------------------------
Robert V. Seminara
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