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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 24, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number(s) - 1-11112
AMERICAN MEDIA OPERATIONS, INC.
(Exact name of the registrant as specified in its charter)
----------------------------------------------------------
Delaware 59-2094424
(State or other jurisdiction (IRS Employee
of incorporation or organization) Identification No.)
190 Congress Park Drive, Suite 200,
Delray Beach, Florida 33445
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (561) 997-7733
American Media Operations, Inc. (1) HAS FILED all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) HAS BEEN subject to such filing requirements for
the past 90 days.
As of August 8, 2002 there were 7,507 shares of common stock outstanding.
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AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
JUNE 24, 2002
Page(s)
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements-
Condensed Consolidated Balance Sheets .............................. 3
Condensed Consolidated Statements of Income (Loss) ................. 4
Condensed Consolidated Statements of Comprehensive Income (Loss) ... 5
Condensed Consolidated Statements of Cash Flows .................... 6
Notes to Condensed Consolidated Financial Statements ............... 7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................. 12-15
Item 3. Quantitative and Qualitative Disclosures about
Market Risk ...................................................... 15-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .......................................... 17
Item 5. Other Information .......................................... 17
Item 6. Exhibits and Reports on Form 8-K ........................... 17
Signature .......................................................... 18
2
AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in 000's, except share information)
March 25, 2002 June 24, 2002
-------------- -----------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 18,676 $ 24,530
Receivables, net 28,453 26,990
Inventories 18,014 18,108
Prepaid expenses and other 5,444 8,495
--------------- -----------------
Total current assets 70,587 78,123
--------------- -----------------
PROPERTY AND EQUIPMENT, at cost:
Land and buildings 6,611 2,448
Machinery, fixtures and equipment 23,923 24,841
Display racks 44,931 44,485
--------------- -----------------
75,465 71,774
Less - accumulated depreciation (31,667) (34,730)
--------------- -----------------
43,798 37,044
--------------- -----------------
LONG TERM NOTE RECEIVABLE, net 759 759
--------------- -----------------
DEFERRED DEBT COSTS, net 22,827 23,006
--------------- -----------------
GOODWILL, net of accumulated amortization of $74,757 and $74,757, respectively 455,731 455,731
--------------- -----------------
OTHER INTANGIBLES, net of accumulated amortization of $87,022
and $87,335, respectively 489,790 489,477
--------------- -----------------
$1,083,492 $1,084,140
=============== =================
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of term loan $ 9,914 $ 18,565
10.38% Senior Subordinated Notes Due 2002 134 -
Accounts payable 19,358 15,777
Accrued expenses 33,821 32,126
Deferred revenues 31,301 27,395
--------------- -----------------
Total current liabilities 94,528 93,863
--------------- -----------------
PAYABLE TO PARENT COMPANY 2,227 2,090
--------------- -----------------
TERM LOAN AND REVOVLING CREDIT COMMITMENT, net of current portion 337,671 327,624
--------------- -----------------
SUBORDINATED INDEBTEDNESS:
10.25% Senior Subordinated Notes Due 2009 400,000 400,000
Bond Premium on 10.25% Senior Subordinated Notes Due 2009 750 713
11.63% Senior Subordinated Notes Due 2004 740 740
--------------- -----------------
401,490 401,453
--------------- -----------------
DEFERRED INCOME TAXES 158,208 161,308
--------------- -----------------
STOCKHOLDER'S EQUITY:
Common stock, $.20 par value; 7,507 shares issued and outstanding 2 2
Additional paid-in capital 223,389 223,412
Other comprehensive loss (359) -
Accumulated deficit (133,664) (125,612)
--------------- -----------------
TOTAL STOCKHOLDER'S EQUITY 89,368 97,802
--------------- -----------------
$1,083,492 $1,084,140
=============== =================
The accompanying notes to condensed consolidated financial statements are
an integral part of these condensed consolidated balance sheets.
3
AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(IN 000's)
Fiscal Quarter Fiscal Quarter
Ended Ended
June 25, 2001 June 24, 2002
----------------- ------------------
OPERATING REVENUES:
Circulation $ 78,417 $ 73,550
Advertising 8,851 9,895
Other 4,436 5,378
----------------- ------------------
91,704 88,823
----------------- ------------------
OPERATING EXPENSES:
Editorial 10,252 8,567
Production 25,605 25,318
Distribution, circulation and other cost of sales 13,495 11,809
Selling, general and administrative expenses 10,498 11,238
Loss on insurance settlement -- 96
Depreciation and amortization 19,311 6,831
----------------- ------------------
79,161 63,859
----------------- ------------------
OPERATING INCOME 12,543 24,964
INTEREST EXPENSE, net (15,935) (13,466)
OTHER INCOME, net 27 50
----------------- ------------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (3,365) 11,548
PROVISION FOR INCOME TAXES (1,220) (3,496)
----------------- ------------------
NET INCOME (LOSS) $ (4,585) $ 8,052
================= ==================
The accompanying notes to condensed consolidated financial statements are an
integral part of these condensed consolidated statements.
4
AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
(IN 000's)
Fiscal Quarter Fiscal Quarter
Ended Ended
June 25, 2001 June 24, 2002
----------------- ------------------
Net income (loss) $ (4,585) $ 8,052
Other comprehensive income (loss)
Interest rate swap adjustment (2,307) 359
----------------- ------------------
Other comprehensive income (loss) (2,307) 359
----------------- ------------------
Comprehensive income (loss) $ (6,892) $ 8,411
================= ==================
The accompanying notes to condensed consolidated financial statements are an
integral part of these condensed consolidated statements.
5
AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN 000's)
Fiscal Quarter Fiscal Quarter
Ended Ended
June 25, 2001 June 24, 2002
--------------- -----------------
Cash Flows from Operating Activities:
Net income (loss) $ (4,585) $ 8,052
--------------- -----------------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities -
Reduction of allowance for doubtful accounts (500) --
(Gain) loss on disposition of assets (8) --
Bond premium amortization -- (37)
Depreciation of property & equipment and amortization of intangible assets 19,311 6,831
Deferred debt cost amortization 654 1,110
Non-cash compensation charge 22 23
Decrease (increase) in -
Receivables 1,041 1,463
Inventories (6,063) (94)
Prepaid expenses and other (106) (3,051)
Increase (decrease) in -
Accounts payable (10,847) (3,581)
Accrued expenses (6,002) 8,315
Accrued interest (7,008) (5,263)
Payable to Parent Company (65) (137)
Accrued and current deferred income taxes (3,321) (1,384)
Deferred revenues (3,489) (3,906)
--------------- -----------------
Total adjustments (16,381) 289
--------------- -----------------
Net cash provided by (used in) operating activities (20,966) 8,341
--------------- -----------------
Cash Flows from Investing Activities:
Capital expenditures (6,614) (3,549)
Acquisition of business, net of cash acquired (892) --
Loss on insurance settlement -- 96
Allocable insurance proceeds for carrying value of Boca facility -- 3,785
--------------- -----------------
Net cash provided by (used in) investing activities (7,506) 332
--------------- -----------------
Cash Flows from Financing Activities:
Term loan and revolving credit commitment principal repayments (4,306) (1,530)
Proceeds from revolving credit commitment 15,000 --
Payment of deferred debt costs -- (1,289)
--------------- -----------------
Net cash provided by (used in) financing activities 10,694 (2,819)
--------------- -----------------
Net Increase (Decrease) in Cash and Cash Equivalents (17,778) 5,854
Cash and Cash Equivalents at Beginning of Period 20,999 18,676
--------------- -----------------
Cash and Cash Equivalents at End of Period $ 3,221 $ 24,530
=============== =================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for -
Income taxes $ 4,309 $ 1,752
Interest 22,230 21,012
The accompanying notes to condensed consolidated financial statements are
an integral part of these condensed consolidated statements.
6
AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 24, 2002
(000's omitted in all tables)
(unaudited)
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with GAAP (accounting principles generally accepted in
the United States of America) for interim financial information and with the
instructions to Form 10-Q. There has been no material change in the information
disclosed in the notes to condensed consolidated financial statements included
in the Annual Report on Form 10-K of American Media Operations, Inc. (a
wholly-owned subsidiary of American Media, Inc.) and subsidiaries (the
"Company") for the fiscal year ended March 25, 2002. The Company made certain
reclassifications to the fiscal 2002 condensed consolidated financial statements
to conform to the 2003 presentation.
In the opinion of management, all adjustments considered necessary for a fair
presentation have been included herein. Operating results for the fiscal period
ended June 24, 2002 are not necessarily indicative of the results that may be
expected for future periods.
(2) REVENUE RECOGNITION
Substantially all publication sales, except subscriptions, are made through
unrelated distributors. Issues, other than special topic issues, are placed on
sale approximately one week prior to the issue date; however, circulation
revenues and related expenses are recognized for financial statement purposes on
an issue date basis (i.e., off sale date). Special topic and monthly issues
revenue and related expenses are recognized at the on sale date. On the date
each issue is placed on sale, the Company receives 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 GAAP after considering such
factors as sales history and available market information. The Company
continually monitors the adequacy of the reserves and makes adjustments when
necessary.
Subscriptions received in advance of the issue date are recognized as income
over the term of the subscriptions as served. Advertising revenues are
recognized in the period in which the related advertising appears in the
publications.
Deferred revenues were comprised of the following:
March 25, June 24,
2002 2002
---------------- ----------------
Single Copy $ 8,103 $ 4,175
Subscriptions 22,666 22,626
Advertising 532 594
---------------- ----------------
$31,301 $27,395
================ ================
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Other revenues, primarily from marketing services performed for third parties by
Distribution Services, Inc. ("DSI"), a wholly-owned subsidiary, are recognized
when the service is performed.
(3) INVENTORIES
Inventories are stated at the lower of cost or market. We use the first-in,
first-out (FIFO) cost method of valuation. Inventories are comprised of the
following:
March 25, June 24,
2002 2002
---------------- ----------------
Raw materials - paper $12,260 $12,658
Finished product - paper, production
and distribution costs of future issues 5,754 5,450
---------------- ----------------
$18,014 $18,108
================ ================
(4) GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 142 requires goodwill and intangibles with
indefinite lives to be tested for impairment and written down when impaired,
rather than being amortized over useful lives, as previous standards required.
This standard became effective for the Company commencing with its 2003 fiscal
year. As a result of adopting SFAS No. 142, approximately $14.0 million of
goodwill and other intangible assets amortization recognized in fiscal quarter
ended June 25, 2001 was not recognized in the fiscal quarter ended June 24,
2002. The Company is still in the process of performing the transitional
goodwill impairment test. This will be completed by the end of the second
quarter within the six-month period allowed.
Amortization expense of other intangible assets for the three months ended June
24, 2002 was $313,000. Amortization expense for the fiscal year ended March 31,
2003 and the succeeding five fiscal years by year is expected to be as follows:
2003: $1.25 million; 2004: $1.25 million; 2005: $1.25 million; 2006: $1.25
million; 2007: $1.25 million; 2008: $1.25 million.
(5) INCOME TAXES
The Company files a consolidated Federal income tax return with its parent,
American Media, Inc. ("Media"), and calculates its income taxes on a separate
return basis. Income taxes have been provided based upon the Company's
anticipated effective annual income tax rate. In accordance with SFAS No. 109,
"Accounting for Income Taxes", deferred taxes are provided for items reported in
different periods for income tax and financial statement purposes. The Company's
deferred tax liability primarily represents temporary differences resulting from
the differences between the financial statement carrying amounts for tradenames
and subscription lists and their historical tax bases. For the fiscal quarter
ended June 24, 2002, the federal statutory income tax rate of 35% exceeds our
effective income tax rate because of the effect of goodwill which is deductible
for tax purposes.
(6) ACCRUED LIABILITIES
Included in accrued liabilities in the accompanying condensed consolidated
balance sheet as of June 24, 2002 is a $9 million reserve recorded during the
quarter for the estimated clean-up and demolition costs of the quarantined
facility in Boca.
8
(7) CREDIT AGREEMENT
As of June 24, 2002, the Company's effective interest rate on borrowings under
the credit agreement was 5.2%. The effective rate for borrowings under the
credit agreement averaged 6.4% for the fiscal quarter ended June 24, 2002. The
effective rate for borrowings under the credit agreement averaged 8.2% for the
fiscal quarter ended June 25, 2001. In November 2000, the Company entered into a
$90.0 million interest rate swap agreement which expired in May 2002 under which
the Company paid a fixed rate of 6.53%.
Effective March 26, 2002, the Company entered into two interest rate swap
agreements, which effectively converted a portion of fixed-rate debt to variable
rate debt. The first agreement, which was originally scheduled to expire in May
2004, had a notional amount of $125 million. Under this agreement, the Company
was to receive a fixed rate of 10.25% and pay LIBOR in arrears plus a spread of
5.265%. The second agreement, which was to expire in May 2005, had a notional
amount of $25 million. Under this agreement, the Company was to receive a fixed
rate of 10.25% and pay LIBOR in arrears plus a spread of 4.885%. On June 29,
2002, the Company received $3,277,000 to terminate these two interest rate swap
agreements. This amount received was recognized as a reduction of interest
expense for the quarter ended June 24, 2002.
Effective March 26, 2002, the Company entered into an interest rate cap
transaction, which capped LIBOR at 5% through May 7, 2002 on $50 million of
variable rate debt. This cap expired without any financial impact on the
Company.
Additionally, effective June 28, 2002, the Company entered into two new interest
rate swap agreements, which effectively converted a portion of fixed-rate debt
to variable rate debt. The first agreement, which expires in May 2004, has a
notional amount of $125 million. Under this agreement, the Company receives a
fixed rate of 10.25% and pays LIBOR in arrears plus a spread of 6.49%. The
second agreement, which expires in May 2005, has a notional amount of $25
million. Under this agreement, the Company receives a fixed rate of 10.25% and
pays LIBOR in arrears plus a spread of 5.99%.
American Media Operations, Inc. has no material assets or operations other than
investments in its subsidiaries. The Company's senior subordinated notes are
unconditionally guaranteed, on a senior subordinated basis, by all of its
subsidiaries. Each domestic subsidiary that will be organized in the future by
the Company, unless such subsidiary is designated as an unrestricted subsidiary,
will jointly, severally, fully and unconditionally guarantee the Notes on a
senior subordinated basis. Note guarantees are joint and several, full and
unconditional and general unsecured obligations of the note guarantors. The note
guarantors are the Company's subsidiaries. At present, the note guarantors
comprise all of the Company's direct and indirect subsidiaries. Note guarantees
are subordinated in right of payment to all existing and future senior debt of
the note guarantors, including the Company's credit facility, and are also
effectively subordinated to all secured obligations of the note guarantors to
the extent of the assets securing such obligations, including the credit
facility. Furthermore, the Notes indenture permits note guarantors to incur
additional indebtedness, including senior debt, subject to certain limitations.
The Company has not presented separate financial statements and other
disclosures concerning each of the note guarantors as these disclosures are not
applicable under SEC rules and regulations. So long as the factors set forth in
the paragraph immediately above remain true and correct, under applicable SEC
rules and regulations, the Company's note guarantors will not need to
individually comply with the reporting requirements of the Securities Exchange
Act of 1934 ("Exchange Act"), nor will the Company have to include separate
financial statements and other disclosures concerning each of the note
guarantors in its Exchange Act reports.
(8) LONG-TERM NOTE RECEIVABLE
On November 27, 2000 the Company sold its 80% owned subsidiary, FMI, to the
minority shareholder for a $2.5 million note receivable ("The Note"). The Note
initially had a short-term component of $500,000,
9
which amount has been paid in full, and a long-term component of $2,000,000
which is payable to the Company based on defined cash flow of FMI. The Note
bears interest at 9%. Due to the uncertainty of FMI's ability to generate
defined cash flow for the repayment of The Note, the Company initially reserved
$1.6 million of The Note. No gain or loss was initially recognized on this
transaction. During the quarter ended June 25, 2001, the Company reversed
$500,000 of the original $1.6 million reserve based on management's belief that
FMI will generate the cash flow to make future payments on this amount. This
amount is included in selling, general and administrative expenses for the
quarter ended June 25, 2001.
(9) OTHER EVENTS
The Company's Boca Raton headquarters, which housed substantially all editorial
operations (including its photo, clipping and research libraries), executive
offices and certain administrative functions, was closed on October 7, 2001 by
the Palm Beach County Department of Health when traces of anthrax were found on
a computer keyboard following the death of a photo editor of the Sun from
inhalation anthrax. The Company has entered into a two-year lease for a 53,000
square foot facility two blocks from its current Boca Raton headquarters. The
Company will remain in this leased facility until the Palm Beach County Health
Department, OSHA (Occupational Safety and Health Administration) and NIOSH
(National Institute for Occupational Safety and Health) deem the Boca Raton
facility is safe to return to, or if the Company is unable to return, the
Company will extend the lease term on this new facility or seek an alternative
location. In February 2002, the Palm Beach County of Health quarantined the
building for an additional 18 months.
In May 2002, the Company and its insurance carrier reached a final compromise
regarding its insurance claim and the Company received a compromised payment.
The insurance proceeds resulted in a net loss on the insurance settlement of
$96,000 for the quarter ended June 24, 2002. During the quarter ended June 24,
2002, the Company incurred costs for maintaining the Boca facility such as
security and utilities of $76,000 and rent of our temporary Boca Raton
headquarters of $188,000, which were included in the loss on insurance
settlement. The Company will continue to incur these costs in the future and
accordingly, the ultimate amount of gain or loss on the insurance compromise
cannot be determined at this time.
(10) LITIGATION
There may be other various suits and claims arising in the ordinary course of
business have been instituted against the Company. The Company has various
insurance policies available to recover the related legal costs incurred. The
Company periodically evaluates and assesses the risks and uncertainties
associated with litigation independent from those associated with its potential
claim for recovery from third party insurance carriers. At present, in the
opinion of management, after consultation with outside legal counsel, the
liability resulting from litigation, if any, will not have a material effect on
the Company's financial position and results of operations.
(11) CREDIT AGREEMENT AMENDMENT
On May 22, 2002, the Company amended the credit agreement. This amendment
restructured the marginal interest rate on the Tranche B and B-1 term loans for
a fee of $1,050,000. As a result of this amendment, Tranche B and B-1 loans'
interest was reduced from the LIBO rate plus 3 3/4% to the LIBO rate plus 2
3/4%.
(12) SUBORDINATED INDEBTEDNESS
On February 14, 2002, the Company issued $150,000,000 in aggregate principal
amount of 10 1/4% Series B Senior Subordinated Notes due 2009 through a private
placement, for a total of $400 million outstanding ("The "Notes"). The gross
proceeds from the offering were $150,750,000 including the premium on the notes.
The Company used the gross proceeds of the offering to (a) make a $75,375,000
distribution to EMP Group
10
LLC, who owns 100% of the common stock of American Media, Inc., (b) to prepay
$68,375,000 of the term loans under the credit facility and (c) pay transaction
costs in the estimated amount of $7,000,000. The notes are unsecured and
subordinated in right of payment to all our existing and future senior
indebtedness. The notes rank equally with all our existing and future senior
subordinated indebtedness. The notes are guaranteed on a senior subordinated
basis of all our current subsidiaries.
(13) EXCHANGE OFFER
On June 7, 2002, the Company closed an exchange offer for all of the outstanding
subordinated notes. All the outstanding notes were exchanged for 10 1/4% Series
B Senior Subordinated Notes due 2009 (the "Exchange Notes"). The terms of the
Exchange Notes are substantially identical to the original subordinated notes,
except for certain transfer restrictions and registration rights that related to
the subordinated notes issued in February 2002.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Fiscal Quarter Ended June 24, 2002 vs Fiscal Quarter Ended June 25, 2001
Total operating revenues were $88,823,000 for the current fiscal quarter.
Operating revenues decreased by $2,881,000, or 3.1%, from the prior year's
comparable fiscal quarter. Circulation revenue decreased $4.9 million, primarily
due to decreased single copy sales from our tabloids, which were down 6.3% in
terms of units we believe, in part, due to the anthrax incident last October.
The overall newsstand circulation for the industry in terms of units is down
approximately 8% compared to the prior year. The circulation revenue decline was
partially offset by strong advertising revenues, which increased 11.8%, from
$8.9 million to $9.9 million, despite a weak industry-wide advertising climate,
and an increase in other revenue of $0.9 million or 21.2% due to an increase in
DSI's marketing revenue.
Circulation revenues (which include all single copy and subscription sales) were
$73,550,000 for the current fiscal quarter. Circulation revenues decreased by
$4,867,000, or 6.2%, when compared to the prior year's comparable fiscal
quarter. The circulation decline is primarily related to a decrease in unit
sales for the tabloids of 6.3% from the prior quarter and an increase in our
discount paid to our wholesalers as a result of our new agreements entered into
in January 2002. These new wholesale agreements ensure that we will have
complete distribution of our entire product line. These declines were partially
offset by a twenty cent cover price increase for the National Enquirer and Star
and a ten cent cover price increase for the Globe, National Examiner, Weekly
World News and Sun.
Advertising revenues were $9,895,000 for the current fiscal quarter. Advertising
revenues increased by $1,044,000, or 11.8%, when compared to the prior year's
comparable fiscal quarter. This increase is primarily due to additional
advertising revenues from our tabloids (primarily National Enquirer and Star
magazines). For the six months ended June 2002, the National Enquirer and Star
are up 27% in pages, while the industry is down 14%.
Total operating expenses for the current fiscal quarter decreased by $16,163,000
when compared to the prior year's comparable fiscal quarter. This decrease was
due to the elimination of the amortization of goodwill and certain other
intangibles due to our adoption of SFAS No. 142 during the current fiscal
quarter. The prior year's comparable fiscal quarter included $14.0 million of
amortization for goodwill and intangibles that will no longer be amortized as a
result of adopting SFAS No. 142. This decrease was also due to management's
initiative to reduce editorial and distribution operating expenses when compared
to the prior year's comparable fiscal quarter.
Interest expense decreased for the current fiscal quarter by $2,469,000 to
$13,466,000 compared to the prior year's comparable fiscal quarter. This
decrease in interest expense relates to a lower average effective interest rate,
offset by a higher amount of debt outstanding for the current fiscal quarter.
Additionally, on June 29, 2002, we received $3,277,000 to terminate our interest
rate swap agreements. This amount received was recognized as a reduction to
interest expense for the current quarter.
The federal statutory income tax rate of 35% exceeds our effective income tax
rate because of the effect of goodwill which is deductible for tax purposes.
12
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity requirements have been significantly increased, primarily due to
increased interest and principal payment obligations under the credit agreement
which, other than certain excess cash flow payment obligations, commenced in
fiscal 2002. We believe that the net cash generated from operating activities
and amounts available under the $60.0 million revolving credit facility will be
sufficient to fund our debt service requirements under the credit agreement and
the Notes, to make capital expenditures and to cover working capital
requirements. As of August 8, 2002, there were no amounts outstanding on our $60
million revolving credit facility. We believe, however, that based upon our
current level of operations and anticipated growth, it will be necessary to
refinance the Notes upon their maturity. To the extent we make future
acquisitions, we may require new sources of funding, including additional debt,
or equity financing or some combination thereof. There can be no assurances that
such additional sources of funding will be available to us on acceptable terms.
Our ability to make scheduled payments of principal and interest under the
credit agreement and the Notes, as well as our other obligations and
liabilities, is subject to our future operating performance which is dependent
upon general economic, financial, competitive, legislative, regulatory, business
and other factors beyond our control.
At June 24, 2002, we had cash and cash equivalents of $24.5 million and a
working capital deficit of $15.7 million. We do not consider our working capital
deficiency to be a true measure of our liquidity position as our working capital
needs typically are met by cash generated by our business. Our working capital
deficiency resulted 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 our credit agreements, which have been
used to fund shortfalls in available cash. Cash on hand on March 25, 2002 of
$18.7 million was used to fund working capital requirements as well as to fund
capital expenditures.
We made capital expenditures in the fiscal quarters ended June 24, 2002 and June
25, 2001 totaling $3.5 million and $6.6 million, respectively.
At June 24, 2002, our outstanding indebtedness totaled $747.6 million, of which
$346.2 million represented borrowings under the credit agreement and $0.7
million represents unamortized bond premium. At August 8, 2002, our outstanding
indebtedness totaled $734.1 million, of which $332.7 million represented
borrowings under the credit agreement. As of June 24, 2002, the Company's
effective interest rate on borrowings under the credit agreement was 5.2%. The
effective rate for borrowings under the credit agreement averaged 6.4% for the
fiscal quarter ended June 24, 2002. The effective rate for borrowings under the
credit agreement averaged 8.2% for the fiscal quarter ended June 25, 2001.
We have no material assets or operations other than the investments in our
subsidiaries. The Notes are unconditionally guaranteed, on a senior subordinated
basis, by all of our subsidiaries. Each subsidiary that will
13
be organized in the future by us, unless such subsidiary is designated as an
unrestricted subsidiary, will jointly, severally, fully and unconditionally
guarantee the Notes on a senior subordinated basis. Note guarantees are joint
and several, full and unconditional and general unsecured obligations of the
note guarantors. The note guarantors are our subsidiaries. At present, the note
guarantors comprise all of our direct and indirect subsidiaries. Note guarantees
are subordinated in right of payment to all existing and future senior debt of
the note guarantors, including the credit facility, and are also effectively
subordinated to all secured obligations of note guarantors to the extent of the
assets securing such obligations, including the credit facility. Furthermore,
the Notes indenture permits note guarantors to incur additional indebtedness,
including senior debt, subject to certain limitations.
So long as the factors set forth in the paragraph immediately above remain true
and correct, under applicable SEC rules and regulations, we believe that note
guarantors will not need to individually comply with the reporting requirements
of the Exchange Act, nor will we have to include separate financial statements
and other disclosures concerning each of the note guarantors in its Exchange Act
reports.
Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA")
The following table and discussion summarizes EBITDA for the three months ended
June 24, 2002 and June 25, 2001.
Fiscal Quarter Fiscal Quarter
Ended Ended
June 25, 2001 June 24, 2002
------------------ ------------------
$31,854,000 $31,891,000
The Company defines EBITDA as net income (loss) before extraordinary charges,
interest expense, income taxes, depreciation and amortization, other income
(expense) and loss on insurance settlement. EBITDA is presented and discussed
because the Company considers EBITDA an important indicator of the operational
strength and performance of its business including the ability to provide cash
flows to service debt and fund capital expenditures. EBITDA, however, should not
be considered an alternative to operating or net income (loss), as an indicator
of the performance of the Company, or as an alternative to cash flows from
operating activities as a measure of liquidity, in each case determined in
accordance with GAAP.
New Accounting Pronouncements
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS No. 144")". SFAS No. 144 provides guidance
on the accounting for the impairment or disposal of long-lived assets. The
objectives of SFAS No. 144 are to address issues relating to the implementation
of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", and to develop a model for long-lived
assets to be disposed of by sale, whether previously held and used or newly
acquired. SFAS No. 144 was effective for us commencing with our 2003 fiscal
year. Upon adoption, this accounting pronouncement did not have a significant
impact on our financial position or results of operations.
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements 4, 44 and
64, Amendment to FASB Statement 13, and Technical Corrections. One of the major
changes of this statement is to change the accounting for the classification of
gains and losses from the extinguishment of debt. Upon adoption, the Company
will follow APB 30, Reporting the Results of Operations--Reporting the Effects
of Disposal of a
14
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions in determining whether such extinguishment of debt may
be classified as extraordinary. The provisions of this statement related to the
rescission of FASB Statement 4 shall be applied in fiscal years beginning after
May 15, 2002 with early application encouraged. The Company is currently
evaluating the impact of this Statement.
In June 2002, the FASB issued Statement No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This Statement requires recording costs
associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit plan, which is generally before
an actual liability has been incurred. Adoption of this Statement is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002. We have not yet completed our evaluation of the impact of adopting
this Statement.
Forward-Looking Statements
Some of the information presented in this Form 10-Q constitutes forward-looking
statements, including, in particular, the statements about our plans, strategies
and prospects under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations." We have based these
forward-looking statements on our current assumptions, expectations and
projections about future events. We caution you that a variety of factors could
cause business conditions and results to differ materially from what is
contained in the forward-looking statements. These forward-looking statements
are subject to risks, uncertainties and assumptions about us, including, among
other things:
. our high degree of leverage and significant debt . the effects of terrorism, including bio-
service obligations, terrorism, on our business,
. our ability to increase circulation and . increasing competition by domestic and
advertising revenues, foreign media companies,
. the effect that our wholesaler agreements will . changes in the costs of paper used by us,
have on circulation,
. market conditions for our publications . any future changes in management and
. our ability to develop new publications and . general risks associated with the publishing
services, industry.
. outcomes of pending and future litigation,
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks that are inherent in our financial
statements. We are subject to interest risk on our credit facilities and any
future financing requirements. Our fixed rate debt consists primarily of Senior
Subordinated Notes. In November 2000, we entered into a $90 million interest
rate swap agreement which expired in May 2002, under which we paid a fixed rate
of 6.53%. This interest rate swap agreement effectively converted a portion of
our variable-rate debt to fixed-rate debt.
Effective March 26, 2002, we entered into two interest rate swap
agreements, which effectively
15
converted a portion of our fixed-rate debt to variable rate debt. The first
agreement, which was originally scheduled to expire in May 2004, had a notional
amount of $125 million. Under this agreement, we were to receive a fixed rate of
10.25% and were to pay LIBOR in arrears plus a spread of 5.265%. The second
agreement, which was originally scheduled to expire in May 2005, had a notional
amount of $25 million. Under this agreement, we were to receive a fixed rate of
10.25% and we were to pay LIBOR in arrears plus a spread of 4.885%. On June 29,
2002, the Company received $3,277,000 to terminate these two interest rate swap
agreements. This amount received was recognized as a reduction of interest
expense for the quarter ended June 24, 2002.
Additionally, effective June 28, 2002, we entered into two new interest
rate swap agreements, which effectively converted a portion of fixed-rate debt
to variable rate debt. The first agreement, which expires in May 2004, has a
notional amount of $125 million. Under this agreement, we receive a fixed rate
of 10.25% and pay LIBOR in arrears plus a spread of 6.49%. The second agreement,
which expires in May 2005, has a notional amount of $25 million. Under this
agreement, we receive a fixed rate of 10.25% and pay LIBOR in arrears plus a
spread of 5.99%.
The following table presents the future principal payment obligations and
weighted average interest rates associated with our existing credit instruments
assuming our actual level of indebtedness (in 000's):
Fiscal Year Ended
---------------------------------------------------------------------------
2003 2004 2005 2006 Thereafter Fair Value
---- ---- ---- ----- ---------- ----------
Liabilities:
$400,000 Fixed Rate (10.25%) - - - - $400,000 $424,000
$740 Fixed Rate (11.63%) - - 740 - - 740
Term Loan and Revolving Loan
Variable Rate (6.4% for the
quarter ended June 24, 2002) $17,379 $ 5,114 $ 5,607 $ 6,099 $311,990 $346,189
Interest Rate Swap Agreement
Liability (Receivable) $(3,277) - - - - $ (3,277)
Interest rate changes result in increases or decreases in our income before
taxes and cash provided from operating activities. A 1% change in our weighted
interest rate on our variable debt net of the effect of our interest rate swap
would result in a change of $1,240,000 in our interest expense for the three
months ended June 24, 2002.
Our primary market risk exposures relate to (1) the interest rate risk on
long-term and short-term borrowings, (2) our ability to refinance our Senior
Subordinated Notes at maturity at market rates, (3) the impact of interest rate
movements on our ability to meet interest expense requirements and comply with
financial covenants and (4) the impact of interest rate movements on our ability
to obtain adequate financing to fund acquisitions. We manage the interest rate
risk on our outstanding long-term and short-term debt through our use of fixed
and variable rate debt. While we cannot predict or manage our ability to
refinance existing debt or the impact interest rate movements will have on our
ability to refinance existing debt or the impact interest rate movements will
have on our existing debt, we continue to evaluate our financial position on an
ongoing basis.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See footnote 10 of Part I, Item I.
Item 5. Other Information
On June 12, 2002, Lucie Salhany was appointed to the Board of Directors of
American Media, Inc.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 99.1 Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
b. Reports on Form 8-K during the quarter ended June 24, 2002
On July 12, 2002, a report on Form 8-K and subsequently amended on July 26,
2002, was filed, reporting under "Item 4. Changes in Registrant's Certifying
Accountant" that the Registrant dismissed Arthur Andersen LLP as the Company's
auditor and named Deloitte & Touche LLP as the Company's independent public
auditor for the fiscal year ending March 31, 2003.
17
SIGNATURE
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed by the
undersigned, thereto duly authorized.
AMERICAN MEDIA OPERATIONS, INC.
Registrant
Date: August 8, 2002 By /s/ JOHN A. MILEY
--------------------
John A. Miley
Executive Vice President
Chief Financial Officer
18
Exhibit Index
Exhibit
Number Description
- ------ -----------
99.1 Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002