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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 PERIOD ENDED SEPTEMBER 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 333-18017
PETERSEN PUBLISHING COMPANY, L.L.C.
(Exact name of Registrant as specified in its charter)
DELAWARE 95-4597937
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6420 WILSHIRE BOULEVARD 90048
LOS ANGELES, CALIFORNIA (Zip Code)
(Address of principal executive offices)
Registrant's Telephone Number, Including Area Code: (213) 782-2000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_].
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PETERSEN PUBLISHING COMPANY, L.L.C.
INDEX TO FORM 10-Q
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed balance sheets as of December 31, 1996
and September 30, 1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Unaudited condensed statements of operations for the three
and nine months ended September 30, 1996 and 1997 . . . . . . . . . . . . . . . . . . . . . 4
Unaudited condensed statements of cash flows for the
nine months ended September 30, 1996 and 1997 . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to unaudited condensed financial statements . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
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PETERSEN PUBLISHING COMPANY, L.L.C.
CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
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DECEMBER 31, SEPTEMBER 30,
1996 1997
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ASSETS
Current assets:
Cash and cash equivalents $ 7,761 $ 15,920
Accounts receivable, less allowance for doubtful accounts
of $1,604 (1996) and $1,988 (1997) 20,141 20,406
Inventories 4,408 3,814
Current portion of deferred subscription acquisition costs 43,835 36,493
Deferred direct mail advertising costs, net of
accumulated amortization of $1,007 (1997) -- 3,535
Other prepaid expenses and current assets 730 1,222
-------- --------
Total current assets 76,875 81,390
Deferred subscription acquisition costs 41,168 44,008
Property and equipment, net of accumulated depreciation
of $560 (1996) and $1,943 (1997) 4,152 3,358
Goodwill, net of accumulated amortization of
$5,992 (1996) and $24,096 (1997) 353,556 335,351
Subscriber list and established work force, net of
accumulated amortization of $3,000 (1996) and $12,000 (1997) 117,000 108,000
Deferred financing costs, net of accumulated
amortization of $3,276 (1996) and $11,286 (1997) 10,735 2,725
Other assets 587 639
-------- --------
TOTAL ASSETS $604,073 $575,471
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LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 13,288 $ 11,318
Accrued payroll and related costs 1,963 4,875
Accrued interest on long-term debt 2,041 4,454
Customer incentives payable 5,785 6,965
Current portion of unearned subscription revenues 71,163 66,874
Current portion of long-term debt 1,000 8,250
Other accrued expenses and current liabilities 119 524
-------- --------
Total current liabilities 95,359 103,260
Unearned subscription revenues 47,608 51,061
Long-term debt 299,000 269,250
Other noncurrent liabilities 7,652 6,941
Commitments and contingencies
Members' equity 154,454 144,959
-------- --------
TOTAL LIABILITIES AND MEMBERS' EQUITY $604,073 $575,471
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See accompanying notes.
<PAGE>
PETERSEN PUBLISHING COMPANY, L.L.C.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
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Petersen Petersen
Publishing Publishing
Company, Company,
Predecessor LLC Predecessor LLC
----------- ----------- ----------- -----------
Three Months Nine Months
Ended Sept 30, Ended Sept 30,
-------------- ---------------
1996 1997 1996 1997
---------- ---------- ---------- ----------
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Net revenues:
Advertising $ 36,212 $ 38,421 $103,609 $111,860
Newsstand 10,717 11,746 31,998 32,995
Subscriptions (net of agency commissions of $14,261 and
$41,201 for the three and nine months ended September 30,
1996 and $13,604 and $41,327 for the three and nine
months ended September 30, 1997, respectively.) 11,010 11,814 32,838 33,551
Other 956 1,704 5,490 5,423
-------- -------- -------- --------
Total net revenues 58,895 63,685 173,935 183,829
Production, selling and other direct costs (including
rent paid to a related party of $1,149, and $3,347 for the
three and nine months ended Sept 30, 1996, and $1,093 and
$3,280 for the three and nine months ended Sept 30, 1997,
respectively) 45,362 43,530 137,334 125,970
-------- -------- -------- --------
Gross profit 13,533 20,155 36,601 57,859
General and administrative expenses 9,536 3,475 22,439 12,427
Compensation expense -- 12,182 -- 12,182
Amortization of goodwill and other intangible assets 110 9,012 306 27,163
-------- -------- -------- --------
Income (loss) from operations 3,887 (4,514) 13,856 6,087
Other income (expense):
Interest income 234 173 472 528
Interest expense -- (7,211) (153) (23,064)
Gain (loss) on sale of assets -- 14 1,554 (26)
-------- -------- -------- --------
Income (loss) before provision for taxes 4,121 (11,538) 15,729 (16,475)
Provision for taxes 71 -- 270 --
-------- -------- -------- ---------
Net income (loss) before extraordinary items 4,050 (11,538) 15,459 (16,475)
Extraordinary Items
Loss on early extinguishment of debt -- (6,307) -- (6,307)
-------- -------- -------- ---------
Net Income(Loss) $ 4,050 $(17,845) $ 15,459 $ (22,782)
======== ======== ======== =========
</TABLE>
See accompanying notes.
<PAGE>
PETERSEN PUBLISHING COMPANY, L.L.C.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
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PETERSEN
PUBLISHING
PREDECESSOR COMPANY, L.L.C.
----------- ---------------
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPT 30, 1996 SEPT 30, 1997
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OPERATING ACTIVITIES
Net income (loss) $ 15,459 $ (22,782)
Adjustment to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 2,424 36,578
Allowance for doubtful accounts 426 1,110
(Gain) loss on sale of assets (1,554) 26
Deferred state income taxes (101) --
Non-cash, non-recurring compensation expense -- 12,182
Changes in operating assets and liabilities:
Accounts receivable (3,722) (1,375)
Inventories 12,146 594
Deferred direct mail advertising costs -- (3,535)
Deferred subscription acquisition costs (6,996) 4,502
Accounts payable and accrued liabilities 5,116 (4,246)
Accrued payroll and related costs 308 2,912
Accrued interest on long-term debt -- 2,413
Customer incentives payable 415 1,180
Unearned subscription revenues, net 9,678 (836)
Other current assets, net 495 (603)
Other noncurrent liabilities (163) (306)
-------- ---------
Total adjustments 18,472 50,596
-------- ---------
Net cash provided by operating activities 33,931 27,814
INVESTING ACTIVITIES
Purchases of property and equipment (643) (669)
Purchases of magazines -- (122)
Purchases of investments (333) --
Proceeds from sale of assets 2,501 31
Acquisition of assets of publishing division of Petersen Publishing Company,
including liabilities assumed and net of costs associated with the acquisition -- 2,500
-------- ---------
Net cash provided by investing activities 1,525 1,740
-------- ---------
FINANCING ACTIVITIES
Repayment of bank borrowings -- (22,500)
Proceeds from issuance of members units -- 905
Reduction in notes receivable, related party -- 200
Distribution of S corporation earnings (3,969) --
Net change in advances of other divisions of the Company (5,312) --
-------- ---------
Net cash used in financing activities (9,281) (21,395)
-------- ---------
Increase (decrease) in cash and cash equivalents 26,175 8,159
Cash and cash equivalents at beginning of period (13,663) 7,761
-------- ---------
Cash and cash equivalents at end of period $ 12,512 $ 15,920
======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during period for:
Interest $ 152 $ 18,845
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Taxes $ 101 $ 43
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SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the nine months ended September 30, 1997, the Company increased goodwill
and accrued liabilities by $2,276,000 representing adjustments to the
allocation of the purchase price of the Acquisition. Additionally, the Company
recorded a non-recurring non-cash compensation charge of $12,182,000 in
September 1997.
See accompanying notes.
<PAGE>
PETERSEN PUBLISHING COMPANY, L.L.C.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Petersen Publishing Company, L.L.C. ("the Company") is a Delaware
limited liability company. The Company is owned 99.9% by Petersen Holdings,
L.L.C. ("Holdings"). The remaining 0.1% of the Company is owned by The Petersen
Companies Inc. ("Petersen"), previously known as BrightView Communications
Group, Inc. ("BrightView"). The Company was organized in 1996 for the principal
purpose of completing the acquisition (the "Acquisition") of substantially all
of the assets and assuming certain liabilities of the Publishing Division of
Petersen Publishing Company (the "Predecessor") (see Note 2). The Company is
engaged in the publishing business with revenues generated primarily from the
publication of various special interest magazines and the sale of related
advertising, principally within the United States, and is the operating
subsidiary of Petersen.
The Company and Holdings are each limited liability companies
organized under the Delaware Limited Liability Company Act (the "LLC Act").
Holdings is the Company's managing member and as such controls the policies and
operations of the Company. Holdings is governed by a limited liability company
agreement (the "LLC Agreement") among Willis Stein & Partners, L.P. (through
Petersen Investment Corp.), the Predecessor, certain members of the Company's
management and other investors (collectively the "Members"). As a limited
liability company organized under Delaware law, members of Holdings are not
liable for debts or other obligations of Holdings. The LLC Agreement governs the
relative rights and duties of the Members. Petersen is Holdings' managing member
and as such controls the policies and operations of Holdings and of the Company
through Holdings. (See note 6)
During the nine months ended September 30, 1997, Holdings received
$905,000 in exchange for the issuance of additional Preferred Units and Common
Units. Such funds were contributed by Holdings to the Company.
In July 1997, Holdings' limited liability company agreement was
amended to create new classes of equity securities. The new units (collectively,
the "Class D Common Units") were issued to the holders of the Class B Common
Units and Class C Common Units pro rata according to ownership of the Class B
Common Units and Class C Common Units. In connection with the issuance of the
Class D Common Units in such exchange, the Company recognized a non-recurring,
non-cash compensation charge of approximately $12.2 million.
Additionally, in July 1997, Holdings established the Petersen
Holdings, L.L.C. 1997 Long-Term Equity Incentive Plan (the "Incentive Plan")
pursuant to which Holdings granted, to certain of the Company's employees,
options to purchase Class A Common Units. Such options vest on the fifth year
after the date of issuance. Should certain events occur (including an initial
public offering of the Petersen's common stock pursuant to a registration
statement filed with the Securities and Exchange Commission), the vesting period
would accelerate to an approximate three year vesting period. The exercise price
for each option is $320.685 per Class A Common Unit, which is equal to the fair
market value of each Class A Common Unit as determined by the Board of Directors
of BrightView, acting as Holdings' managing member, at the date of grant of the
options. Holdings is authorized to issue up to 10,000 Class A Common Units under
the Incentive Plan and in July 1997 granted to Company employees, options to
purchase an aggregate of 8,867 Class A Common Units. See Note 6 for a discussion
of other transactions concerning Members' Equity.
Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required to generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments consisting
of normal recurring accruals considered necessary for a fair presentation have
been included. Operating results for the three-month and nine-month period ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997. For further information, refer
to the financial statements and notes thereto included in the Company's special
financial report on Form 10-K for the three months ended December 31, 1996.
Upon completion of the Acquisition, the Company changed its year-end
to December 31. The financial statements reflect the activity of the Company at
September 1997 and the three and nine months then ended. The unaudited statement
of operations for the three and nine months ended September 30, 1996 reflect the
activity of the Predecessor. All references to the three and nine months ended
September 30, 1996 relate to activity of the Predecessor.
Certain reclassifications have been made to the balance sheet at
December 31, 1996, and statements of operations for the three and nine months
ended September 30, 1996 to conform to the presentation for the three and nine
months ended September 30, 1997.
Income Tax
As a limited liability company, the Company is not subject to U.S.
federal income taxes or state income taxes.
Advertising Expenses
The Company began a new mailing program in 1997. The Company accounts
for its direct response advertising costs in accordance with the American
Institute of Certified Public Accountants' Statement of Position 93-7 "Reporting
on Advertising Costs", pursuant to which qualified direct response advertising
is capitalized and amortized over its expected period of future benefit. Such
capitalized costs include primarily printing and postage to current and
potential subscribers and totaled $3,535,000 at September 30, 1997 and will be
amortized over twelve months (the estimated period of future benefit), beginning
two months after mailing. No direct mail advertising costs were capitalized at
December 31, 1996. Amortization of direct response advertising costs was
$700,000 and $1,007,000 for the three and nine months ended September 30, 1997,
respectively and is included in production, selling and other direct costs.
The Company expenses all other costs of advertising as incurred.
Advertising expense was $39,000 and $985,000 for the three and nine months ended
September 30, 1997, respectively.
<PAGE>
PETERSEN PUBLISHING COMPANY, L.L.C.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
2. ACQUISITION OF THE PUBLISHING DIVISION OF PETERSEN PUBLISHING COMPANY
In August 1996, Petersen entered into an Asset Purchase Agreement to
purchase substantially all of the assets of the publishing division of the
Predecessor. Petersen assigned its rights under such agreement to the Company
and the Company assumed all of Petersen's obligations thereunder. The aggregate
purchase price (including expenses) was $462,800,000 (including costs associated
with the Acquisition), plus the assumption of unearned subscription revenues and
other certain liabilities totaling approximately $49,000,000. The Asset Purchase
Agreement provided for a final settlement of the purchase price related to
changes in working capital of Petersen between June 30, 1996 and September 30,
1996. During the nine months ended September 30, 1997, the Company received
$2,276,000 related to such changes and increased goodwill and accrued
liabilities accordingly. The Acquisition was completed on September 30, 1996. In
connection with the Acquisition, the Company recorded goodwill of approximately
$360,000,000 and other intangible assets of approximately $120,000,000. Goodwill
amortization expense for the three months and nine months ended September 30,
1997 was $5,995,000 and $18,104,000, respectively. Amortization of other
intangible assets was $3,000,000 and $9,000,000 for the three and nine months
ended September 30, 1997, respectively.
In order to finance the Acquisition, the Company entered into a Senior
Credit Facility for up to 260,000,000, issued 11 1/8% Senior Subordinated Notes
for $100,000,000 and Holdings issued equity securities for $165,000,000. See
Notes 4 and 5 for a more comprehensive discussion of the debt and equity
issuances.
3. INVENTORIES
Inventories consist of (in thousands):
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DECEMBER 31, SEPT 30,
1996 1997
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Paper $ 611 $1,265
Magazines in process 3,797 2,549
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$4,408 $3,814
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4. LONG-TERM DEBT
Senior Credit Facility:
On September 30, 1996, the Company entered into a Senior Credit
Facility with First Union National Bank of North Carolina and CIBC Inc. (the
"Lenders") pursuant to which the Lenders agreed to loan the Company up to
$260,000,000. Such amount was allocated among a revolving credit facility for up
to $60,000,000 (the "Revolver"), of which up to $10,000,000 can be in the form
of letters of credit; a tranche A term loan for up to $100,000,000 (the "Tranche
A Loan"); and a tranche B term loan for up to $100,000,000 (the "Tranche B
Loan").
On October 6, 1997, the Company entered into a Senior Revolving Credit
Facility with First Union National Bank of North Carolina and CIBC, Inc. (the
"Lenders") pursuant to which the Lenders agreed to loan the Company up to
$175,000,000. Such amount is allocated to a revolving credit facility for up to
$175,000,000 (the "1997 Revolver"), of which up to $10,000,000 can be in the
form of letters of credit.
The 1997 Revolver bears interest at either LIBOR, plus 0.625% based on
borrowings or the prime rate of the agent bank based on borrowings.
The 1997 Revolver matures on September 30, 2002.
The 1997 Revolver contains certain restrictive covenants including,
but not limited to, restrictions on capital expenditures, payments of dividends,
liens, investments and disposals of assets, as well as financial covenants
including a maximum leverage ratio, minimum interest coverage ratio and minimum
fixed charge coverage ratio, all as defined in the Senior Revolving Credit
Facility.
As a result of refinancing the Senior Credit Facility the Company
recorded additional amortization of deferred financing costs of approximately
$5,399,000.
The Revolver and the Tranche A Loan bear interest at either LIBOR
(5.656% at September 30, 1997), plus 1.375% to 2.750%, based on borrowings or
the prime rate of the agent bank (8.5% at September 30, 1997), plus .125% to
1.5%, based on borrowings. As of December 31, 1996 and September 30, 1997, the
Company had no borrowings outstanding under the Revolver. However, a letter of
credit for $1,600,000 issued in January 1997 reduces the amount available under
the Revolver. The letter of credit expires in January 1998. As of September 30,
1997, the Company had $89,000,000 outstanding under the Tranche A Loan at a
weighted average interest rate of 8.264%.
The Tranche B Loan bears interest at either LIBOR (5.656% at September
30, 1997), plus 2.625% to 3.250%, based on borrowings or the prime rate of the
agent bank (8.5% at September 30, 1997), plus 1.375% to 2.0% based on
borrowings. As of September 30, 1997, the Company had $88,500,000 outstanding
under the Tranche B Loan at a weighted average interest rate of 8.764%.
The Revolver and Tranche A Loan mature on December 31, 2002 and
Tranche B Loan matures on September 30, 2004.
The Senior Credit Facility contains certain restrictive covenants
including but not limited to restrictions on capital expenditures, payments of
dividends, liens, investments and disposals of assets, as well as financial
covenants including a maximum leverage ratio, minimum interest coverage ratio
and minimum fixed charge coverage ratio, all as defined in the Senior Credit
Facility. As of September 30, 1997, the Company was in compliance with the
covenants of the Senior Credit Facility.
The Senior Credit Facility is guaranteed by Holdings and Petersen.
The Company estimates that the book value of the Senior Credit
Facility approximates its fair value.
<PAGE>
PETERSEN PUBLISHING COMPANY, L.L.C.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
11 1/8% Senior Subordinated Notes due 2006:
Holdings, the Company and its wholly-owned subsidiary, Petersen
Capital Corp. (together, the "Issuers"), issued $100,000,000 in 11 1/8% Senior
Subordinated Notes due 2006 (the "Notes") pursuant to an Offering Memorandum
dated November 20, 1996. The Notes bear interest at 11 1/8% per annum, payable
semi-annually on November 15 and May 15, commencing May 15, 1997. The Notes will
mature on November 15, 2006 and will not be subject to any sinking fund
requirement. The Notes are redeemable at the option of the Issuers, in whole or
in part, at any time on or after November 15, 2001, at the redemption prices set
forth in the Notes Purchase Agreement, plus accrued and unpaid interest to the
date of redemption. Under certain circumstances, prior to November 15, 1999, the
Issuers, at their option, may redeem in the aggregate up to 25% of the original
principal amount of the Notes at 111.125% of the aggregate principal amount so
redeemed, plus accrued and unpaid interest.
On November 6, 1997, the Company redeemed $25.0 million of the Notes.
As a result of the redemption, the Company recorded additional amortization of
deferred financing costs of approximately $908,000.
The Notes are general unsecured obligations of the Issuers and are
subordinated in right of payment to all existing and future senior indebtedness
of the Issuers. The Notes are guaranteed by Holdings.
The Indenture governing the Notes (the "Indenture") contains certain
restrictive covenants, including but not limited to, restrictions on incurrence
of debt, dividend payments, certain asset sales, transactions with affiliates,
liens and investments. As of September 30, 1997, the Company was in compliance
with the covenants contained in the Indenture.
The Company incurred costs of approximately $4,000,000 in connection
with the issuance of the Notes. These costs have been included in Deferred
Financing Costs and are being amortized over the term of the Notes. During the
three months and nine months ended September 30, 1997 the Company amortized
approximately $1,008,000 and $1,208,000, respectively, of such deferred
financing costs.
On March 11, 1997, the Company exchanged all of the outstanding Notes
for substantially identical notes that were registered pursuant to a
registration statement on Form S-4 under the Securities Act of 1933.
The Company estimates that the book value of the Senior Subordinated
Notes approximates their fair value.
<PAGE>
5. RELATED PARTY TRANSACTIONS
In connection with the Acquisition, the Company entered into
employment agreements with three officers of the Company. Pursuant to these
employment agreements, the officers purchased Common Units and Preferred Units
with promissory notes aggregating approximately $1,950,000. Of this amount,
$200,000 was paid on March 1, 1997 and the balance of each promissory note will
be due and payable on the earlier to occur of: (i) December 31, 2001; (ii) the
termination of the employment with the Company of the officers or (iii) a sale
of the Company. Such promissory notes bear interest at a rate equal to the
Company's weighted average cost of borrowings. In addition, Holdings issued to
each of the officers additional Common Units without additional consideration.
Such Common Units vest ratably over a period of five years. See Note 1 for
additional information concerning Related Party transactions.
<PAGE>
PETERSEN PUBLISHING COMPANY, L.L.C.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
6. EVENTS SUBSEQUENT TO SEPTEMBER 30, 1997
On October 7, 1997, Petersen issued 8,050,000 shares of Class A
Common Stock at $17.50/share pursuant to the Securities and Exchange
Registration Statement. Net proceeds to Petersen in connection with the
Offering was $131,376,000. Petersen used $114,240,000 to repay a portion of
the indebtedness incurred under the Senior Credit Facility and $17,136,000
towards redemption of $25.0 million aggregate principal amount of the Notes and
redemption premium and accrued and unpaid interest.
Upon completion of the Offering, Petersen has 34,909,264 shares of
Common Stock outstanding.
All of the existing securityholders of Petersen and Holdings have
entered into a Contribution and Recapitalization Agreement (the
"Recapitalization Agreement") pursuant to which, among other things, each
existing securityholder of Petersen and Holdings will contribute directly or
indirectly all of its existing shares of common stock of Petersen and Preferred
Units and Common Units of Holdings to Petersen in exchange for newly-issued
shares of Common Stock. Pursuant to the Recapitalization Agreement: (i) all of
the Preferred Units of Holdings will be exchanged for an aggregate of 10,727,176
shares of Common Stock and (ii) all of the Class A and Class D Common Units of
Holdings and all of the common stock of Petersen will be exchanged for an
aggregate of 16,132,088 shares of Common Stock. The number of shares of Common
Stock that will be issued under the Recapitalization Agreement to the existing
securityholders of Petersen and Holdings has been determined according to the
relative preference rankings of such securities and is based upon the initial
public offering price of the Class A Common Stock. Following the transactions
contemplated by the Recapitalization Agreement, Holdings will be merged into
Publishing.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a leading publisher of special-interest magazines with
a diverse portfolio of 78 publications, including 25 monthly, 11 bi-monthly and
42 single issue or annual publications. The Company operates primarily within
the expanding special-interest segment of the consumer magazine publishing
market. According to a survey by VSA of 111 general-interest and 115 special-
interest magazines, special-interest magazine publishing is the fastest growing
sector of the consumer magazine industry. The Company had net revenues of $183.8
million for the nine months ended September 30, 1997.
The Company's principal sources of revenues from the publication of
its magazines are derived from advertising and circulation. Circulation revenues
are generated from subscription, newsstand and list rental sales. Advertising
revenues of the Company, as well as those of the consumer magazine industry in
general, are cyclical and dependent upon general economic conditions. As
compared to general-interest magazines publishers, however, the Company believes
that its advertising revenues are less susceptible to changes in general
economic conditions due to the diversity of its publications and the endemic
nature of its advertiser base. The Company's revenues are generated
predominantly from U.S. sources.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO PREDECESSOR THREE MONTHS ENDED
SEPTEMBER 30, 1996
Net revenues increased $4.8 million, or 8.1%, to $63.7 million for the
three months ended September 30, 1997 from $58.9 million for the three months
ended September 30, 1996. This increase is primarily the result of a $2.2
million, or 6.1%, increase in advertising revenues. The increase in advertising
revenues was due principally to (i) an overall increase in the Company's
advertising rates, (ii) higher advertising revenues by Motor Trend, Teen and Hot
Rod and (iii) additional revenues from relatively new and start-up publications.
In December 1996 and June 1997, the Company discontinued the publication of
Sassy and Petersen's Golfing, respectively. Net revenues for the three-month
period ended September 30, 1996 for those two publications were $2.5 million
(comprised of $1.5 million in advertising and $1.0 million in circulation.). Net
revenues, excluding these two discontinued publications, increased $7.3 million,
or 12.9%, to $63.7 million for the three months ended September 30, 1997 from
$56.4 million for the three months ended September 30, 1996.
Production, selling and other direct costs decreased $1.8 million, or
4.0%, to $43.5 million for the three months ended September 30, 1997 from $45.3
million for the three months ended September 30, 1996. Production, selling and
other direct costs decreased as a percentage of net revenues to 68.4% from 77.0%
for the same periods. The successful implementation of the Company's operating
improvements significantly contributed to the decrease in production, selling
and other direct costs. This decrease is primarily comprised of a $2.7 million,
or 23.0%, decrease in paper costs, a $.8 million, or 6.8%, decrease in editorial
and advertising sales expenses offset by an increase of $1.7 million, or 50.3%
in subscription promotion expenses.
General and administrative expenses decreased $6.0 million, or 63.6%,
to $3.5 million for the three months ended September 30, 1997 from $9.5 million
for the three months ended September 30, 1996. General and administrative
expenses decreased as a percentage of net revenues to 5.5% from 16.2% for the
same periods. The successful implementation of the Company's operating
improvements, including personnel and other operating expense reductions,
contributed to the decrease in general and administrative expenses. The Company
recorded a non-recurring non-cash compensation charge of $12.2 million in
connection with the exchange of Class B and Class C Common Units for Class D
Common Units. Amortization of goodwill and other intangible assets increased to
$9.0 million for the three months ended September 30, 1997 from $.1 million for
the three months ended September 30, 1996. This expense represents amortization
of goodwill and the subscribers list purchased in the Acquisition.
<PAGE>
Operating income decreased $8.4 million, or 216.1%, to a net operating
loss of $4.5 million for the three months ended September 30, 1997 from $3.9
million for the three months ended September 30, 1996, for the reasons stated
above. Operating income decreased as a percentage of net revenues to (7.1%) from
6.6% for the same periods. Operating income excluding the non-recurring non-cash
compensation charge increased $3.8 million. or 97.3%, to $7.7 million for the
three months ended September 30, 1997 from 3.9 million for the three months
ended September 30, 1996.
The increase in interest expense to $7.2 million for the three months
ended September 30, 1997 is the result of indebtedness incurred under the Senior
Credit Facility and the Notes in connection with the Acquisition.
The net loss was $17.8 million for the three months ended September
30, 1997 as compared to net income of $4.1 million for the three months ended
September 30, 1996. This decrease is primarily the result of the increases in
interest and amortization expenses, loss on the early extinguishment of debt and
recording the non-recurring non-cash compensation charge as stated above.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO PREDECESSOR NINE MONTHS ENDED
SEPTEMBER 30, 1996
Net revenues increased $9.9 million, or 5.7%, to $183.8 million for
the nine months ended September 30, 1997 from $173.9 million for the nine months
ended September 30, 1996. This increase is primarily the result of a $8.3
million, or 8.0%, increase in advertising revenues, and a $1.7 million or 2.6%
increase in circulation revenues. The increase in advertising revenues was due
principally to (i) an overall increase in the Company's advertising rates, (ii)
higher advertising revenues by Motor Trend, Teen and Hot Rod and (iii)
additional revenues from relatively new and start-up publications. In December
1996 and June 1997, the Company discontinued the publication of Sassy and
Petersen's Golfing, respectively. Net revenues for the period ended September
30, 1996 for those two publications were $7.2 million (comprised of $4.4 million
in advertising, $2.7 million in subscription, and $.1 million other). Net
revenues, excluding these two discontinued publications, increased $17.1
million, or 10.2%, to $183.8 million for the nine months ended September 30,
1997 from $166.7 million for the nine months ended September 30, 1996.
Production, selling and other direct costs decreased $11.3 million, or
8.3%, to $126.0 million for the nine months ended September 30, 1997 from $137.3
million for the nine months ended September 30, 1996. Production, selling and
other direct costs decreased as a percentage of net revenues to 68.5% from 78.9%
for the same periods. The successful implementation of the Company's operating
improvements significantly contributed to the decrease in production, selling
and other direct costs. This decrease is primarily comprised of a $9.4 million,
or 36.0%, decrease in paper costs, a $2.2 million, or 13.8%, decrease in
printing expenses and a $4.2 million, or 11.3%, decrease in editorial and
advertising sales expenses.
General and administrative expenses decreased $10.0 million, or 44.6%,
to $12.4 million for the nine months ended September 30, 1997 from $22.4 million
for the nine months ended September 30, 1996. General and administrative
expenses decreased as a percentage of net revenues to 6.8% from 12.9% for the
same periods. The successful implementation of the Company's operating
improvements, including personnel and other operating expense reductions,
contributed to the decrease in general and administrative expenses. The Company
recorded a non-recurring non-cash compensation charge of $12.2 million in
connection with the exchange of Class B and Class C Common Units for Class D
Common Units. Amortization of goodwill and other intangible assets increased to
$27.2 million for the nine months ended September 30, 1997 from $.3 million for
the nine months ended September 30, 1996. This expense represents amortization
of goodwill and the subscribers list purchased in the Acquisition.
Operating income decreased $7.8 million, or 56.1%, to $6.1 million for
the nine months ended September 30, 1997 from $13.9 million for the nine months
ended September 30, 1996, for the reasons stated above. Operating income
decreased as a percentage of net revenues to 3.3% from 8.0% for the same
periods. Operating income excluding the non-recurring non-cash compensation
charge increased $4.4 million, or 31.8%, to $18.3 million for the nine months
ended September 30, 1997 from $13.9 for the nine months ended September 30,
1996.
<PAGE>
Interest expense increased $22.9 million to $23.1 million for the nine
months ended September 30, 1997 from $.2 million for the nine months ended
September 30, 1996.
The net loss was $22.8 million for the nine months ended September 30,
1997 as compared to net income of $15.5 million for the nine months ended
September 30, 1996. This decrease is primarily the result of the increase in
interest and amortization expenses, loss on the early extinguishment of debt and
recording the non-recurring non-cash compensation charge as stated above.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $15.9 million and working capital
(excluding the current portion of unearned subscription revenue) totaled $8.5
million at September 30, 1997. At December 31, 1996, cash and cash equivalents
totaled $7.8 million and working capital (excluding the current portion of
unearned subscription revenue) totaled $8.8 million.
The Company's net cash provided by operations was $27.8 million for
the nine months ended September 30, 1997 compared to $33.9 million for the nine
months ended September 30, 1996. Of this difference, $11.6 million relates to
changes in inventories and $38.2 million relates to decreased net income, offset
by a $34.2 million increase in depreciation and amortization and a non-cash non-
recurring compensation charge of 12.2 million.
The Company's net cash provided by investing activities was $1.7
million for the nine months ended September 30, 1997, as compared to $1.5
million for the nine months ended September 30, 1996, which included $2.5
million in proceeds from the sale of its Viking Color pre-press operations. The
Company's operations are not capital intensive. The Company's capital
expenditures were $.7 million and $.6 million in the nine months ended September
30, 1997 and 1996, respectively.
The Company's net cash used in financing activities for the nine
months ended September 30, 1997 was comprised of $22.5 million of repayments of
borrowings under the Senior Credit Facility. Of this amount, $21.8 million
represented an early repayment.
EARNINGS BEFORE INTEREST TAXES DEPRECIATION AND AMORTIZATION
Earnings before interest expense, taxes, depreciation and amortization
("EBITDA") is a widely used and commonly reported standard measure utilized by
analysts and investors in the analysis of the media industry. The following
EBITDA information can provide additional information for determining the
ability of the Company to meet its debt service requirements and for other
comparative analyses of the Company's operating performance relative to other
publishing companies.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ----------------
1996 1997 1996 1997
-------- ------- ------- ------
(unaudited)
(000's)
<S> <C> <C> <C> <C>
Total net $58,895 $ 63,685 $173,935 $183,829
Production, selling & other direct costs (excluding
depreciation of $647, $442, $2,119 and $1,406 for the
three months ended Sept. 30, 1996 and 1997, and nine
months ended Sept. 30, 1996 and 1997, respectively) 44,715 43,088 135,215 124,564
------- -------- -------- --------
Gross 14,180 20,597 38,720 59,265
General & administrative expenses (9,536) (15,657) (22,439) (24,609)
Other adjustments 234 187 2,026 502
------- -------- -------- --------
EBITDA 4,878 5,127 18,307 35,158
Extraordinary items
Non-cash Non-Recurring Compensation --- 12,182 --- 12,182
Sale of Digital Services PrePress Facility --- --- (1,554) ---
------- -------- -------- --------
Adjusted EBITDA $ 4,878 $ 17,309 $ 16,753 $ 47,340
======= ======== ======== ========
</TABLE>
The Company's Adjusted EBITDA increased $30.6 million, or 182.6%, to
$47.3 million for the nine months ended September 30, 1997 from $16.7 million
for the nine months ended September 30, 1996. Adjusted EBITDA as a percentage of
net revenues increased to 25.6% from 9.6% for the same periods.
The Company's Adjusted EBITDA increased $12.4 million to $17.3 million
for the three months ended September 30, 1997 from $4.9 million for the three
months ended September 30, 1996. Adjusted EBITDA as a percentage of net revenues
increased to 27.2% from 8.3% for the same periods. The successful implementation
of the Company's operating improvements contributed to these increases in
EBITDA.
<PAGE>
PETERSEN PUBLISHING COMPANY, L.L.C.
September 30, 1997
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27. Financial Data Schedule
(b) Reports on Form 8-K:
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Petersen Publishing Company, L.L.C.
Date: November 14, 1997 By: /s/ Richard S Willis
----------------- -------------------------
Richard S Willis
Executive Vice President and Chief
Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q FOR
PERIOD ENDED 9/30/97 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 15,920
<SECURITIES> 0
<RECEIVABLES> 22,394
<ALLOWANCES> 1,988
<INVENTORY> 3,814
<CURRENT-ASSETS> 81,390
<PP&E> 5,301
<DEPRECIATION> 1,943
<TOTAL-ASSETS> 575,471
<CURRENT-LIABILITIES> 103,260
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 144,959
<TOTAL-LIABILITY-AND-EQUITY> 575,471
<SALES> 183,829
<TOTAL-REVENUES> 183,829
<CGS> 125,970
<TOTAL-COSTS> 125,970
<OTHER-EXPENSES> 51,772
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,064
<INCOME-PRETAX> (16,475)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,475)
<DISCONTINUED> 0
<EXTRAORDINARY> (6,307)
<CHANGES> 0
<NET-INCOME> (22,782)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
