American Media May Print Going-Concern Warning

NEW YORK (The Deal) -- Three-and-a-half years after emerging from bankruptcy protection, American Media, which publishes magazines including the National Enquirer, Shape and Star, appears to be hitting another shoal of financial difficulties.

The Boca Raton, Fla.-based company said in a Tuesday filing with the Securities and Exchange Commission that its 2013 annual financial report may include qualifying language about its ability to continue as a going concern, which would violate one of its debt covenants.

The privately-held publisher is still working on its 2013 annual report. In the meantime, it's negotiating with its lenders in hopes of securing a covenant waiver through July 15, the date on which it hopes to release the year-end report.

"At this time, there can be no assurance that the report of its independent registered public accounting firm to be included in such Form 10-K will not contain an explanatory paragraph regarding the company's ability to continue as a going concern," American Media said in the July 1 filing.

The company's $40 million revolver led by JPMorgan Chase Bank NA, which matures on Dec. 22, 2015 and bears interest at Libor plus 600 basis points, contains a covenant that requires the company to file its audited annual financial statements within 90 days of the end of its fiscal year. The due date for the annual report was June 30.

Under that covenant, the audited financial report must not contain qualifications about the company's ability to continue as a going concern.

A violation of the covenant would result in a default after five business days' notice from the administrative agent under the revolving credit agreement.

American Media is feeling the ripple effect of the bankruptcy of one of its wholesalers, which has put the distribution process for its magazines in limbo.

Source Interlink Distribution LLC filed for Chapter 11 on June 23 in the U.S. Bankruptcy Court for the District of Delaware in Wilmington after previously reorganizing in the 2009 bankruptcy of its former parent Source Interlink Cos.

Source Interlink Distribution, the second-largest magazine wholesaler in the country, filed for bankruptcy protection after its biggest customer, Time Inc. terminated its contract with the company.

The wholesaler, which was responsible for transporting magazines from warehouses to stores, accounted for 18% of American Media's revenues during the quarter ended Dec. 31.

The company's national distributor is currently trying to replace the lost business from Source Interlink Distribution, but American Media estimated on July 1 that the transition period could result in a $10 million to $20 million hit to its revenues. This is an increase from the company's June 3 estimate of a $5 million to $10 million revenue cut.

American Media also warned on June 3 that it has exposure to $5 million to $7 million of bad debt related to Source Interlink.

That is all bad news for American Media, which has seen its revenues narrow and losses rack up.

During the quarter ended Dec. 31, revenues were down to $74.65 million, compared to $85.32 million during the same quarter last year. The net loss attributable to American Media during the fourth quarter was $50.38 million, compared to a net loss of $57.9 million during fourth quarter of 2012.

American Media has already taken a step to revamp its debt structure in the last year.

In October, 90% of the publisher's second-lien noteholders swapped 13.5% second-lien notes for $94.3 million in new 10% second-lien pay-in-kind notes.

The exchange was designed to save American Media $12 million in cash interest payments per year over the next three years, which it plans to use to pay down its first-lien notes. The company has $365 million in 11.5% in first-lien notes due in Dec. 15, 2017.

The new notes bear 10% PIK interest until the earliest of Dec. 15, 2016; the refinancing of its first-lien notes; or upon the occurrence of a default, at which point the new notes would be priced at 13.5% in cash until the debt matures on June 15, 2018. Wilmington Trust NA is the indenture trustee.

At the time of the swap, a major holder of second lien notes was New Jersey hedge fund Chatham Asset Management.

Officials at Chatham could not be reached for comment Wednesday.

Besides the PIK notes, the company's debt was issued as part of a Nov. 17, 2010, prepackaged Chapter 11 filing in the U.S. Bankruptcy Court for the Southern District of New York in Manhattan. American Media exited on Dec. 22, 2010, after just 35 days in Chapter 11.

The bankruptcy filing came after an out-of-court debt exchange offer fell through. The company had been in restructuring talks for two years and blamed cuts in discretionary spending for decreased single-copy circulation and ultimately a liquidity crunch that had made it difficult to pay its debts.

American Media's prepack carried out two note offerings for first-lien and second-lien debt and used the proceeds to pay its prepetition term loan lenders. Hedge funds Avenue Capital Group and Angelo, Gordon & Co. agreed to backstop the second-lien notes issued in the plan.

In addition to its notes and revolver, American Media has $4.4 million in outstanding letters of credit.

As of the quarter ended Dec. 31, the company had $565.84 million in consolidated assets and $692.81 million in consolidated liabilities.

Moody's Investors Service Inc. affirmed its B3 rating on American Media on June 5. Standard & Poor's last rated the company at CCC+ in November.

An American Media spokesman didn't return calls requesting comment on Wednesday.

--Jamie Mason contributed to this report

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