<PAGE>
Filed Pursuant to Rule 424(b)(3).
Registration Nos. 333-18017
333-18017-1
333-18017-2
PROSPECTUS
FEBRUARY 10, 1997
PETERSEN PUBLISHING COMPANY, L.L.C.
PETERSEN CAPITAL CORP.
OFFER TO EXCHANGE ITS 11 1/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2006 FOR
ANY AND ALL OF ITS OUTSTANDING 11 1/8% SERIES A SENIOR SUBORDINATED NOTES DUE
2006
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MARCH 11,
1997, UNLESS EXTENDED.
Petersen Publishing Company, L.L.C., a Delaware limited liability company
(the "Company"), and Petersen Capital Corp., a Delaware corporation ("Capital"
and, together with the Company, the "Issuers"), hereby offer (the "Exchange
Offer"), upon the terms and conditions set forth in this Prospectus (the
"Prospectus") and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), to exchange $1,000 principal amount of their Series B 11 1/8%
Senior Subordinated Notes due 2006 (the "New Notes"), registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement of which this Prospectus is a part, for each $1,000
principal amount of their outstanding 11 1/8% Senior Subordinated Notes due
2006 (the "Old Notes"), of which $100,000,000 principal amount is outstanding.
The form and terms of the New Notes are the same as the form and term of the
Old Notes (which they replace), except that the New Notes will bear a Series B
designation and will have been registered under the Securities Act and,
therefore, will not bear legends restricting their transfer and will not
contain certain provisions relating to an increase in the interest rate which
were included in the terms of the Old Notes in certain circumstances relating
to the timing of the Exchange Offer. The New Notes will evidence the same debt
as the Old Notes (which they replace) and will be issued under and be entitled
to the benefits of the Indenture, dated as of November 15, 1996 (the
"Indenture"), between the Issuers and United States Trust Company of New York,
as trustee. The Old Notes and the New Notes are sometimes referred to herein
collectively as the "Notes." See "The Exchange Offer" and "Description of the
Notes."
The Issuers will be jointly and severally liable for all payments due under
the New Notes. Interest on the Notes will be paid semi-annually on November 15
and May 15 of each year, commencing on May 15, 1997. The Notes will mature on
November 15, 2006 and will not be subject to any sinking fund requirement. The
Notes will be redeemable by the Issuers, in whole or in part, at any time on
or after November 15, 2001, at the redemption prices set forth herein, plus
accrued and unpaid interest to the redemption date. 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 to the
redemption date with the Net Proceeds (as defined herein) of one or more
Public Equity Offerings (as defined herein), provided that at least $75.0
million of the principal amount of the Notes originally issued remains
outstanding immediately after the occurrence of any such redemption and that
any such redemption occurs within 90 days following the closing of any such
Public Equity Offering. See "Description of the Notes--Optional Redemption."
The Notes will be general unsecured obligations of the Issuers, subordinated
in right of payment to all existing and future Senior Indebtedness (as defined
herein) of the Issuers and senior in right of payment to any subordinated
indebtedness of the Issuers. The Indenture contains, among other things,
covenants restricting the Issuers' ability to incur Additional Indebtedness
(as defined herein), including additional Senior Indebtedness. See
"Description of the Notes--Certain Covenants." As of September 30, 1996, after
giving effect to the Transactions (as defined herein) and the Initial Offering
(as defined herein), the Company would have had $200.0 million aggregate
principal amount of Senior Indebtedness outstanding. In addition, the Company
would have had $60.0 million of additional borrowing availability under the
Senior Credit Facility (as defined herein). See "Capitalization" and
"Description of the Notes." The Company's pro forma earnings were insufficient
to cover pro forma fixed charges by $48.4 million for the year ended November
30, 1995 and $35.0 million for the ten
(Cover continued on following page)
----------------
SEE "RISK FACTORS," BEGINNING ON PAGE 18, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER THEIR OLD NOTES IN THE
EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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(Cover page continued)
months ended September 30, 1996. See "Unaudited Pro Forma Financial Data." The
Company's equity securities are held 99.9% by Petersen Holdings, L.L.C.
("Holdings") and 0.1% by BrightView Communications Group, Inc. ("BrightView").
Capital is a wholly owned subsidiary of the Company and will not have
substantial operations or assets of any kind and will not have any revenues.
The New Notes will be unconditionally guaranteed, on an unsecured senior
subordinated basis by Holdings and certain future Restricted Subsidiaries (as
defined herein), if any, of Holdings or the Company. The Company is a limited
life entity that will continue in existence until December 31, 2016 or
dissolution prior thereto as determined under the LLC Agreement (as defined
herein). See "Limited Liability Company Agreement."
In the event of a Change of Control (as defined herein), holders of the
Notes will have the right to require the Issuers to purchase their Notes at
101% of the aggregate principal amount thereof plus accrued and unpaid
interest to the purchase date. See "Description of the Notes--Change of
Control Offer." There can be no assurance that the Issuers will have the
financial resources necessary to repurchase the Notes upon a Change of
Control. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Description of
the Notes--Change of Control Offer." In addition, the Issuers are obligated in
certain instances to make offers to repurchase the Notes at a purchase price
in cash equal to 100% of the principal amount thereof plus accrued and unpaid
interest to the date of repurchase with the net cash proceeds of certain asset
sales. See "Description of the Notes--Certain Covenants--Limitation on Certain
Asset Sales."
The Issuers will accept for exchange any and all Old Notes validly tendered
and not withdrawn prior to 5:00 p.m., New York City time on March 11, 1997,
unless extended by the Issuers in their sole discretion (the "Expiration
Date"). Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m.
on the Expiration Date. The Exchange Offer is subject to certain customary
conditions. The Old Notes were sold by the Issuers on November 25, 1996 to
First Union Capital Markets Corp. and CIBC Wood Gundy Securities Corp. (the
"Initial Purchasers") in a transaction not registered under the Securities Act
in reliance upon an exemption under the Securities Act (the "Initial
Offering"). The Initial Purchasers subsequently placed the Old Notes with
qualified institutional buyers in reliance upon Rule 144A under the Securities
Act. Accordingly, the Old Notes may not be reoffered, resold or otherwise
transferred in the United States unless registered under the Securities Act or
unless an applicable exemption from the registration requirements of the
Securities Act is available. The New Notes are being offered hereunder in
order to satisfy the obligations of the Issuers under the Registration Rights
Agreement (as defined herein) entered into by the Issuers in connection with
the Initial Offering. See "The Exchange Offer."
Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission") to third parties, the Issuers believe
the New Notes issued pursuant to the Exchange Offer may be offered for resale,
resold and otherwise transferred by any holder thereof (other than any such
holder that is an "affiliate" of the Issuers within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business and such
holder has no arrangement or understanding with any person to participate in
the distribution of such New Notes. See "The Exchange Offer-Resale of the New
Notes." Each broker-dealer (a "Participating Broker-Dealer") that receives New
Notes for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes.
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a participating Broker-Dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. This Prospectus,
as it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of New Notes received
in exchange for Old Notes where such Old Notes were acquired by such
Participating Broker-Dealer as a result of marketmaking activities or other
trading activities. The Issuers have agreed that, for a period of 180 days
after the Expiration Date, they will make this Prospectus available to any
Participating Broker-Dealer for use in connection with any such resale;
provided, however, the Issuers and the Guarantor (as defined herein) have no
obligation to amend or supplement this Prospectus unless one of them has
received written notice from a Participating Broker-Dealer of their prospectus
delivery requirements under the Securities Act within five business days
following consummation of the Exchange Offer. See "Plan of Distribution."
ii
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(Cover page continued)
Holders of Old Notes not tendered and accepted in the Exchange Offer will
continue to hold such Old Notes and will be entitled to all the rights and
benefits and will be subject to the limitations applicable thereto under the
Indenture and with respect to transfer under the Securities Act. The Company
will pay all the expenses incurred by it incident to the Exchange Offer. See
"The Exchange Offer."
There has not previously been any public market for the Old Notes or the New
Notes. The Company does not intend to list the New Notes on any securities
exchange or to seek approval for quotation through any automated quotation
system. There can be no assurance that an active market for the New Notes will
develop. See "Risk Factors-Absence of a Public Market Could Adversely Affect
the Value of Notes." Moreover, to the extent that Old Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Old Notes could be adversely affected.
The New Notes will be available initially only in book-entry form and the
Issuers expect that the New Notes issued pursuant to this Exchange Offer will
be issued in the form of a Global Note (as defined herein), which will be
deposited with, or on behalf of, The Depository Trust Company ("DTC") and
registered in its name or in the name of Cede & Co., its nominee. Beneficial
interests in the Global Note representing the New Notes will be shown on, and
transfers thereof will be effected through, records maintained by the DTC and
its participants. After the initial issuance of the Global Note, New Notes in
certified form will be issued in exchange for the Global Note only under the
limited circumstances set forth in the Indenture. See "Description of the
Notes-Book-Entry; Delivery and Form."
All of the titles of the Company's publications referenced herein are
trademarks of the Company.
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AVAILABLE INFORMATION
The Issuers and Holdings have filed with the Commission a Registration
Statement on Form S-4 (the "Exchange Offer Registration Statement," which term
shall encompass all amendments, exhibits, annexes and schedules thereto)
pursuant to the Securities Act, and the rules and regulations promulgated
thereunder, covering the New Notes being offered hereby. This Prospectus does
not contain all the information set forth in the Exchange Offer Registration
Statement. For further information with respect to the Issuers and the
Exchange Offer, reference is made to the Exchange Offer Registration
Statement. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document
filed as an exhibit to the Exchange Offer Registration Statement, reference is
made to the exhibit for a more complete description of the document or matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. The Exchange Offer Registration Statement, including the
exhibits thereto, can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at the Regional Offices of the Commission at 7 World
Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials can be obtained from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission. The address of such site is
http://www.sec.gov.
As a result of the filing of the Exchange Offer Registration Statement with
the Commission, the Issuers and Holdings will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith will be required to file
periodic reports and other information with the Commission. The obligation of
the Issuers and Holdings to file periodic reports and other information with
the Commission will be suspended if the Notes are held of record by fewer than
300 holders as of the beginning of any fiscal year of the Issuers and Holdings
other than the fiscal year in which the Exchange Offer Registration Statement
is declared effective. The Issuers have agreed that, whether or not they are
required to do so by the rules and regulations of the Commission, for so long
as any of the Notes remain outstanding, they will furnish to the holders of
the Notes and file with the Commission (unless the Commission will not accept
such a filing) (i) all quarterly and annual financial information that would
be required to be contained in a filing with the Commission on Forms 10-Q and
10-K if the Issuers were required to file such forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report thereon
by the Issuers' certified independent accountants and (ii) all current reports
that would be required to be filed with the Commission on Form 8-K if the
Issuers were required to file such reports. In addition, for so long as any of
the Notes remain outstanding, the Issuers have agreed to furnish to the
holders of the Notes or any prospective transferee of any such holder, upon
their request the information required to be delivered by Rule 144A(d)(4)
under the Securities Act.
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. All references to fiscal years in this Prospectus
refer to years ended November 30. On September 30, 1996, the Company acquired
substantially all of the publishing assets and assumed certain liabilities of
Petersen Publishing Company (the "Acquisition"). Unless the context otherwise
requires: (i) the term "Petersen" refers to the historical operations of the
publishing division of Petersen Publishing Company prior to the Acquisition;
(ii) the term "Company" refers to Petersen Publishing Company, L.L.C. and its
predecessors and subsidiaries; (iii) the term "Issuers" collectively refers to
Petersen Publishing Company, L.L.C. and Petersen Capital Corp., a wholly owned
subsidiary of the Company; (iv) the term "Holdings" refers to Petersen
Holdings, L.L.C., which owns 99.9% of the Company's equity securities and (v)
the term "BrightView" refers to BrightView Communications Group, Inc., which
owns 0.1% of the Company's equity securities.
THE COMPANY
The Company is a leading publisher of special-interest magazines. The
Company's diverse portfolio currently contains a total of 73 publications,
including 22 monthly publications, 9 bi-monthly publications and 42 singe issue
or annual publications. According to Media Market Research Institute, the
Company's magazines reach over 40 million readers each month. The Company's
nationally-recognized magazines include (i) Motor Trend, which is recognized as
a leading authority on new domestic and foreign automobiles and has a current
monthly circulation of approximately 1.0 million, (ii) 'TEEN, which has the
largest circulation of any of the Company's magazines with a current monthly
circulation of over 1.3 million and (iii) Hot Rod, which is one of the largest
circulation automotive magazines in the world with a current monthly
circulation of over 810,000. The Company's other core publications are well-
known in their respective markets and include Guns & Ammo, Skin Diver, 4 Wheel
& Off-Road, Car Craft, Petersen's Hunting, Motorcyclist, Sport Truck, Circle
Track & Racing Technology ("Circle Track"), Photographic and Dirt Rider. Eight
of the Company's 13 core publications ranked first in their respective markets
based on annual circulation in 1995, including two magazines that were the only
national magazines published in their respective markets.
The Company's principal sources of revenues are from advertising and
circulation. The Company had net revenues of $213.6 million and $189.1 million
for fiscal 1995 and the ten months ended September 30, 1996, respectively.
Circulation revenues are generated from both subscription and newsstand sales.
For fiscal 1995, approximately 58% of the Company's revenues were from
advertising, 38% were from circulation (including 20% from subscription sales
and 18% from newsstand sales) and 4% were from other sources.
In fiscal 1995, the Company's 13 core publications each generated a minimum
of approximately $1.0 million of profit contribution and, in the aggregate,
generated over $55.2 million of the Company's profit contribution. During the
same period, no single publication accounted for more than 15% of the Company's
net revenues or 28% of profit contribution. As a result of such
diversification, the Company believes that it is not dependent on any single
publication and is less susceptible to shifts in advertising spending across
industry sectors. The Company's core publications collectively average over 30
years in publication and have developed nationally-recognized branded titles
within each of their respective markets. By using its core publications as a
platform for launching new spin-off publications, the Company has been able to
develop a portfolio of highly-specialized publications covering a wide variety
of interests. The Company believes that its reputation as a high-quality
publisher and its significant market presence have historically enabled its new
publications to gain market share more rapidly in their respective special-
interest segments.
Substantially all of the Company's magazines target special-interest
enthusiasts. By doing so, the Company is able to deliver a solid core audience
to its advertisers on a consistent basis and create an opportunity for its
advertisers to efficiently reach their target audience. Due to the special-
interest nature of the Company's
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magazines, readers not only value their specialized editorial content but also
rely on such magazines as a catalogue of products in the relevant topic area.
This catalogue aspect makes the Company's magazines an essential advertising
medium for many of the Company's advertisers. Certain of the Company's
advertisers rely on the Company's publications as their primary source of media
advertising. As compared to general-interest magazines, the Company believes
that its advertising revenues are less susceptible to changes in general
economic conditions due to the diversity of its publications, the special-
interest nature of its editorial content and the endemic nature of its
advertiser base. The endemic nature of the Company's advertiser base refers to
the fact that a significant portion of the Company's advertising revenues are
from advertisers that are manufacturers, marketers or distributors of products
that relate directly to the editorial content of the magazines in which they
advertise. In addition, the Company has a diverse advertiser base, with its top
25 advertisers accounting for only 32.6% and 32.8% of the Company's advertising
revenues during fiscal 1995 and the ten months ended September 30, 1996,
respectively.
In addition to offering its advertisers targeted advertising within
individual magazines, the Company can offer its advertisers the ability to
reach a large audience by advertising across the Company's large portfolio of
magazines. Management believes this capability was not fully developed by
Petersen's prior management. In particular, the Company believes that many of
its publications provide its advertisers with unique access to the adult male
(ages 18 to 34) and young female (ages 12 to 19) markets. The Company believes
that, in the aggregate, its publications reach more adult males than those of
any other magazine publisher and reach over one-third of all young females in
the United States. In 1995, the Company's magazines reached an aggregate of
approximately 36.5 million of the approximately 60.1 million adult males in the
United States, or 60.7% of the market. The circulation of the Company's
magazines targeting adult males and young females is dependent to a certain
extent on the number of persons in such demographic groups in the U.S.
population at any given time. The adult male market is particularly attractive
to advertisers due to its size and overall purchasing power, while the young
female market provides advertisers with the opportunity to establish brand
recognition during the formative stages of this important consumer group's
buying patterns.
The following table sets forth certain information regarding the Company's 13
core publications for its fiscal year ended November 30, 1995:
<TABLE>
<CAPTION>
NET TOTAL CIRCULATION
MAGAZINE TITLE REVENUES(A) CIRCULATION(B) RANK(B)(C)
-------------- --------------------- --------------------- -----------
(AMOUNTS IN MILLIONS) (COPIES IN THOUSANDS)
<S> <C> <C> <C>
Motor Trend......... $31.3 950.6 2 of 4
'TEEN............... 24.1 1,311.8 3 of 3
Hot Rod............. 19.7 810.2 1 of 2
Guns & Ammo......... 13.6 570.8 1 of 2
Skin Diver.......... 13.3 229.0 1 of 2
4 Wheel & Off-Road.. 12.0 367.7 1 of 2
Car Craft........... 9.8 389.7 1 of 1
Petersen's Hunting.. 7.3 331.2 1 of 1
Motorcyclist........ 6.8 239.6 2 of 2
Sport Truck......... 6.2 192.1 1 of 2
Circle Track........ 6.0 131.6 2 of 2
Photographic........ 5.7 217.5 3 of 3
Dirt Rider.......... 5.4 160.8 1 of 3
</TABLE>
- --------
(a) Includes advertising, circulation and other revenues for the year ended
November 30, 1995.
(b) Based on the average circulation for each publication for the year ended
December 31, 1995.
(c) Includes only national publications that are tracked by industry analysts
and does not include small regional publications and newsletters
The Company completed the Acquisition on September 30, 1996. The Company's
investors pursued the Acquisition because they believed it offered an
attractive opportunity to: (i) acquire a diverse portfolio of
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profitable magazines with significant growth potential; (ii) bring together a
skilled and experienced management team, consisting of the Company's new senior
managers and Petersen's existing publishers and editorial staff; (iii) apply
professional management techniques to the Company's portfolio and improve its
operating results by increasing circulation and advertising revenues and
reducing operating costs and (iv) further develop the Company's brand-name
franchises with limited additional capital investment. Management believes that
opportunities exist to achieve each of these results both in the near term and
on a going-forward basis.
BUSINESS AND OPERATING STRATEGY
The Company's core publications collectively average over 30 years in
publication and have developed nationally-recognized branded titles in each of
their respective markets. The Company believes that the enthusiast nature of
its readership provides it with a loyal subscriber base and enables it to
deliver a solid core audience to its advertisers on a consistent basis. As a
result, management believes that the Company maintains a number of significant
competitive advantages.
Historically, Petersen expanded primarily by introducing special-interest
magazines to serve niche audiences in areas in which its founder had a personal
interest. In pursuing such expansion, Petersen maintained a consistent focus on
the high-quality editorial content of its magazines. However, Petersen was
organized into six distinct publishing groups that essentially operated
independently from one another and were focused primarily on editorial
development and advertising revenue generation rather than overall
profitability. As a result, management believes that Petersen did not fully
realize all available operating synergies.
The Company's new management team has significant experience in the magazine
publishing industry. Based upon such experience, management has developed a
detailed business and operating strategy for the Company, primarily comprising
operating policies and procedures that have proven successful in their prior
experience and are widely practiced throughout the publishing industry. The
Company's business and operating strategy is primarily designed to leverage off
of its nationally-recognized brand names and improve the profitability of the
Company. The key elements of this strategy include:
REORGANIZE OPERATING STRUCTURE. Following the Acquisition, new management
reorganized several operating areas of the Company to facilitate a more
integrated and unified approach to circulation, production and advertising
sales, while retaining independent editorial direction of its magazines. The
Company's circulation operations, which include such functions as subscription
marketing and planning, fulfillment and newsstand distribution, were previously
organized by magazine group and managed by generalists focused on each magazine
group. Circulation operations have been reorganized on a functional basis
across all of the Company's publications and will be managed by specialists
within each function. Certain of these functions are being relocated to New
York in order to take advantage of expertise not readily available elsewhere.
In addition, the Company's production activities are being centralized across
all of its publications rather than by magazine group. The Company's national
advertising sales management is being relocated from Los Angeles to New York to
be in closer proximity to national advertising accounts. Similarly, management
of the young women's titles is being moved to New York to increase the
visibility of such magazines among advertisers in the fashion and cosmetic
industries.
IMPLEMENT OPERATING IMPROVEMENTS. Management has identified and has
substantially implemented operating improvements that are expected to result in
significant cost savings. These measures include the following:
. REDUCE OPERATING COSTS. At the time of the Acquisition, management
identified certain cost reduction measures, including: (i) savings in
personnel and related net lease costs; (ii) lower utilization of
temporary employees and services; (iii) the consolidation of one or more
of the Company's regional sales offices; (iv) tighter purchasing
procedures and controls and (v) reductions in the Company's travel and
entertainment expenditures. A substantial number of these cost reduction
measures have been completed, including personnel reductions expected to
result in annualized cost savings of approximately $4.9 million.
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. RESTRUCTURE VENDOR RELATIONSHIPS. Immediately following the Acquisition,
management commenced an extensive review of the Company's significant
vendor relationships, including its printing, paper supply, fulfillment
and newsstand distribution arrangements. Based on that review and
meetings with certain of such vendors, management believes that there
are opportunities to enhance these relationships and to improve the
economic terms of such arrangements for the Company. Although no
definitive agreements have been executed, the Company believes that it
will be successful in achieving more favorable terms with many of its
vendors.
. IMPROVE PERFORMANCE OF CERTAIN PUBLICATIONS. Management believes that it
can improve the Company's profitability by implementing changes designed
to eliminate or significantly reduce the losses currently being
generated by certain of the Company's publications. The Company has five
magazines (Sassy, Sport, Petersen's Golfing, Bicycle Guide and Mountain
Biker) that collectively accounted for negative profit contribution of
$7.6 million and $6.3 million for fiscal 1995 and the ten months ended
September 30, 1996, respectively. In December 1996, the Company
completed the process of merging Sassy into 'TEEN, thereby eliminating
the losses being generated by Sassy. Sassy generated negative profit
contribution of $4.7 million and $3.2 million for fiscal 1995 and the
ten months ended September 30, 1996, respectively. While the remaining
magazines collectively are expected to break even or be marginally
profitable in fiscal 1997, in the event such magazines continue to
generate losses, management expects to take one or more of the following
actions: (i) discontinue or sell such magazines; (ii) merge such
magazines with the Company's existing magazines or (iii) enter into
strategic partnerships with third parties. Management expects that a
final decision with respect to each magazine will be made by the end of
fiscal 1997.
INCREASE CIRCULATION AND ADVERTISING REVENUES. Management believes that there
are significant opportunities to increase circulation and advertising revenues.
The Company has historically focused on the newsstand distribution channel and
has relied heavily upon agency subscription sales in managing its circulation
operations. Management believes that it can increase subscription revenues by
instituting programs designed to increase the number of readers who buy
subscriptions directly from the Company. For example, the Company has begun to
develop a database of its over 32 million current or former subscribers that
will allow it to cross-sell its other publications to such subscribers. In
addition, management intends to increase the newsstand and subscription prices
on certain of its publications in order to bring such prices in line with
competitive publications.
Management believes that it can increase the Company's advertising revenues
by adopting a more unified approach to advertising sales, which will focus on
enhancing the ability of the Company's advertisers to purchase advertising
space across all of the Company's magazines that reach their target markets. In
addition, management intends to increase the Company's advertiser base by
targeting new advertisers and advertisers in other industry categories. Such
advertisers include, among others, manufacturers of men's apparel, footwear and
accessories and alcoholic beverages. The Company has also implemented a new
commission sales policy designed to provide more effective incentives to the
Company's advertising sales force. Prior management's policy did not provide
additional incentives to sales personnel once they had reached their annual
sales target, which often occurred prior to the conclusion of Petersen's fiscal
year. In addition, by designing the database described above with the
capability of identifying specific segments within each of its markets, the
Company believes it can offer its advertisers increased value and thus generate
additional advertising revenues.
ESTABLISH PERFORMANCE-BASED INCENTIVES. The significant equity interests held
by the Company's senior management provide such executives with an incentive to
maximize the Company's overall profitability. In addition, to provide
incentives to the Company's existing management and assist management in
implementing the new business strategy, the Company plans to adopt new
compensation arrangements designed to reward managers and other participating
employees based upon the Company's operating performance.
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Develop Ancillary Revenue Sources. The Company was historically operated as a
traditional consumer magazine company deriving substantially all of its
revenues from advertising and circulation sales. On an industry-wide basis,
management estimates, based upon its experience in the industry, that consumer
magazine publishers currently derive approximately 10% to 20% of their revenues
from ancillary revenue sources while the Company currently derives only about
4% of its revenues from such sources. In recent months, the Company has begun
to explore the ancillary revenue opportunities afforded by its well-established
brand names. For example, the Company has recently entered into licensing
agreements relating to the use of its Motor Trend and Hot Rod brand names for
weekly television shows on The Nashville Network (TNN) and its Guns & Ammo
brand name for a weekly television show on ESPN. In addition, because the
editorial content of many of its magazines would also appeal to readers outside
of the United States, management believes that significant opportunities exist
to establish international licensing agreements, particularly in Asia,
Australia, Great Britain and Western Europe. The Company believes that there
are significant opportunities to increase revenues by leveraging off the
editorial content and the nationally-recognized brand names of the Company's
existing publications through licensing arrangements, strategic joint ventures,
retail alliances, subscriber list rentals, affinity group marketing and
electronic publishing.
Establish New Titles. The Company has successfully expanded its magazine
portfolio by launching new publications to serve niche audiences in related
markets and by making selective acquisitions of existing magazine titles.
Thirteen of the Company's 31 current monthly and bimonthly titles were launched
or acquired by the Company since 1990. The Company plans to continue to develop
and launch new special-interest magazines and acquire existing magazines that
will complement and enhance its existing portfolio.
THE TRANSACTIONS
The Acquisition. The Company completed the Acquisition on September 30, 1996.
The aggregate purchase price of the Acquisition, which is subject to certain
working capital adjustments, was $450.0 million, plus the assumption of certain
ongoing liabilities incurred in the ordinary course of business. The Company
expects to receive at least $2.7 million from Petersen as a result of the
working capital adjustment.
The Financing Plan. The Initial Offering was part of a plan designed to
enable the Company to finance the Acquisition and to provide additional
liquidity. In connection with the Acquisition, the Company: (i) borrowed $200.0
million under a $260.0 million senior credit facility (the "Senior Credit
Facility"); (ii) borrowed $100.0 million under a bridge financing facility (the
"Bridge Financing Facility") and (iii) received equity contributions of $165.3
million from an investor group led by Willis Stein & Partners, L.P. ("Willis
Stein"). The Acquisition, the borrowings under the Senior Credit Facility and
the Bridge Financing Facility and the equity contributions are collectively
referred to herein as the "Transactions." The Company applied the net proceeds
of the Initial Offering to repay the Bridge Financing Facility.
The following table sets forth the sources and uses of funds in the
Acquisition (dollars in thousands):
<TABLE>
<S> <C>
SOURCES:
Senior Credit Facility(a)(b)(c).................................. $200,000
Bridge Financing Facility(b)..................................... 100,000
Equity contributions(b).......................................... 165,300
--------
Total sources.................................................. $465,300
========
USES:
Acquisition consideration(c)..................................... $450,000
Fees and expenses(d)............................................. 15,300
--------
Total uses..................................................... $465,300
========
</TABLE>
5
<PAGE>
- --------
(a) On a pro forma basis, as of September 30, 1996, the Company would have had
$60.0 million of additional borrowing availability under the Senior Credit
Facility.
(b) First Union National Bank of North Carolina ("FBNC") and Canadian Imperial
Bank of Commerce ("CIBC"), affiliates of the Initial Purchasers are the
agents and principal lenders under the Senior Credit Facility. First Union
Corporation and CIBC were the lenders under the Bridge Financing Facility.
First Union Investors, Inc. and CIBC WG Argosy Merchant Fund 2, L.L.C.,
both affiliates of the Initial Purchasers, provided a portion of the equity
financing in connection with the Acquisition.
(c) Does not reflect the working capital adjustment of at least $2.7 million
expected to be paid to the Company by Petersen in connection with the
Acquisition. The proceeds therefrom will be used to reduce borrowings under
the Senior Credit Facility.
(d) Includes estimated fees and expenses related to the Transactions and the
Initial Offering (including the Initial Purchasers' discount). To the
extent such fees are less than estimated, the remainder will be applied to
working capital.
THE INVESTORS
The Company's investors (the "Investors") include the following: Willis
Stein; First Union Investors, Inc.; CIBC WG Argosy Merchant Fund 2, L.L.C.;
Chase Equity Associates, L.P.; BankAmerica Investment Corporation; certain
other limited partners of Willis Stein; Robert E. Petersen, Petersen's founder
and the Company's Chairman Emeritus; and certain members of the Company's
senior management, including Messrs. D. Claeys Bahrenburg, Neal Vitale, James
D. Dunning, Jr., Laurence H. Bloch and Stuart Karu (the "Management
Investors"). The Management Investors have significant experience in managing
media-related companies and in managing leveraged acquisitions. The Company's
controlling investor, Willis Stein, is a private investment fund with committed
capital of approximately $343.0 million. The principals of Willis Stein were
formerly with Continental Illinois Venture Corporation ("CIVC"), where they
managed CIVC's investments in a number of media-related companies as well as
other investments.
THE ISSUERS
Petersen Publishing Company, L.L.C. is a Delaware limited liability company.
The Company's equity securities are held 99.9% by Holdings and 0.1% by
BrightView. BrightView is the managing member of Holdings and as such controls
the policies and operations of Holdings and of the Company. The Company was
organized in September 1996 for the principal purpose of completing the
Acquisition. Petersen's origins date back to 1948, when its founder, Robert E.
Petersen, first began publishing and selling a specialized newsletter entitled
Hot Rod. The Company's principal executive offices are located at 6420 Wilshire
Boulevard, Los Angeles, California 90048 and its telephone number is (213) 782-
2000.
Petersen Capital Corp., a wholly owned subsidiary of the Company, was
incorporated in Delaware for the purpose of serving as a co-issuer of the Notes
in order to facilitate the Initial Offering. Capital will not have substantial
operations or assets of any kind and will not have any revenues. As a result,
holders of the Notes should not expect Capital to participate in servicing the
interest or principal obligations of the Notes.
6
<PAGE>
THE INITIAL OFFERING
NOTES....................... The Old Notes were sold by the Issuers on
November 25, 1996 to the Initial Purchasers
pursuant to a Purchase Agreement, dated November
20, 1996 (the "Purchase Agreement"). The Initial
Purchasers subsequently resold the Old Notes to
qualified institutional buyers pursuant to Rule
144A under the Securities Act.
REGISTRATION RIGHTS Pursuant to the Purchase Agreement, the Issuers
AGREEMENT................... and the Initial Purchasers entered into a
Registration Rights Agreement, dated as of
November 25, 1996 (the "Registration Rights
Agreement"), which grants the holders of the Old
Notes certain exchange and registration rights.
The Exchange Offer is intended to satisfy such
exchange rights which terminate upon the
consummation of the Exchange Offer.
THE EXCHANGE OFFER
SECURITIES OFFERED.......... $100,000,000 aggregate principal amount of 11
1/8% Series B Senior Subordinated Notes due 2006
of the Issuers.
THE EXCHANGE OFFER.......... $1,000 principal amount of New Notes in exchange
for each $1,000 principal amount of Old Notes. As
of the date hereof, $100,000,000 aggregate
principal amount of Old Notes are outstanding.
The Issuers will issue the New Notes to holders
on or promptly after the Expiration Date.
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued
to third parties, the Issuers believe that New
Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale,
resold and otherwise transferred by any holder
thereof (other than any such holder which is an
"affiliate" of the Issuers within the meaning of
Rule 405 under the Securities Act) without
compliance with the registration and prospectus
delivery provisions of the Securities Act,
provided that such New Notes are acquired in the
ordinary course of such holder's business and
that such holder does not intend to participate
and has no arrangement or understanding with any
person to participate in the distribution of such
New Notes. Each holder accepting the Exchange
Offer is required to represent to the Issuers in
the Letter of Transmittal that, among other
things, the New Notes will be acquired by the
holder in the ordinary course of business and the
holder does not intend to participate and has no
arrangement or understanding with any person to
participate in the distribution of such New
Notes.
Any Participating Broker-Dealer that acquired Old
Notes for its own account as a result of market-
making activities or other trading activities may
be a statutory underwriter. Each Participating
Broker-Dealer that receives New Notes for its own
account pursuant to the
7
<PAGE>
Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any
resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and
by delivering a prospectus, a Participating
Broker-Dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be
amended or supplemented from time to time, may be
used by a Participating Broker-Dealer in
connection with resale of New Notes received in
exchange for Old Notes where such Old Notes were
acquired by such Participating Broker-Dealer as a
result of market-making activities or other
trading activities. The Issuers have agreed that,
for a period of 180 days after the Expiration
Date, they will make this Prospectus available to
any Participating Broker-Dealer for use in
connection with any such resale; provided,
however, the Issuers and the Guarantor (as
defined herein) have no obligation to amend or
supplement this Prospectus unless one of them has
received written notice from a Participating
Broker-Dealer of their prospectus delivery
requirements under the Securities Act within five
business days following consummation of the
Exchange Offer. See "Plan of Distribution."
Any holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose
of participating, in a distribution of the New
Notes could not rely on the position of the staff
of the Commission enunciated in no-action letters
and, in the absence of an exemption therefrom,
must comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with any resale transaction. Failure
to comply with such requirements in such instance
may result in such holder incurring liability
under the Securities Act for which the holder is
not indemnified by the Issuers.
EXPIRATION DATE............. 5:00 p.m., New York City time, on March 11, 1997
unless the Exchange Offer is extended, in which
case the term "Expiration Date" means the latest
date and time to which the Exchange Offer is
extended.
ACCRUED INTEREST ON THE NEW
NOTES AND THE OLD NOTES....
Each New Note will bear interest from its
issuance date. Holders of Old Notes that are
accepted for exchange will receive, in cash,
accrued interest thereon to, but not including,
the issuance date of the New Notes. Such interest
will be paid with the first interest payment on
the New Notes. Interest on the Old Notes accepted
for exchange will cease to accrue upon issuance
of the New Notes.
CONDITIONS TO THE EXCHANGE The Exchange Offer is subject to certain
OFFER....................... customary conditions, which may be waived by the
Issuers. See "The Exchange Offer--Conditions."
PROCEDURES FOR TENDERING Each holder of Old Notes wishing to accept the
OLD NOTES................... Exchange Offer must complete, sign and date the
accompanying Letter of
8
<PAGE>
Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, or an
Agent's Message in connection with a book entry
transfer, together with the Old Notes and any
other required documentation to the Exchange
Agent (as defined) at the address set forth
herein. By executing the Letter of Transmittal,
each holder will represent to the Issuers that,
among other things, the New Notes acquired
pursuant to the Exchange Offer are being obtained
in the ordinary course of business of the person
receiving such New Notes, whether or not such
person is the holder, that neither the holder nor
any such other person (i) has any arrangement or
understanding with any person to participate in
the distribution of such New Notes, (ii) is
engaging or intends to engage in the distribution
of such New Notes, or (iii) is an "affiliate," as
defined under Rule 405 of the Securities Act, of
the Issuers. See "The Exchange Offer--Purpose and
Effect of the Exchange Offer" and "--Procedures
for Tendering."
UNTENDERED OLD NOTES........ Following the consummation of the Exchange Offer,
holders of Old Notes eligible to participate but
who do not tender their Old Notes will not have
any further exchange rights and such Old Notes
will continue to be subject to certain
restrictions on transfer. Accordingly, the
liquidity of the market for such Old Notes could
be adversely affected.
CONSEQUENCES OF FAILURE TO
EXCHANGE...................
The Old Notes that are not exchanged pursuant to
the Exchange Offer will remain restricted
securities. Accordingly, such Old Notes may be
resold only (i) to the Issuers, (ii) pursuant to
Rule 144A or Rule 144 under the Securities Act or
pursuant to some other exemption under the
Securities Act, (iii) outside the United States
to a foreign person pursuant to the requirements
of Rule 904 under the Securities Act, or (iv)
pursuant to an effective registration statement
under the Securities Act. See "The Exchange
Offer--Consequences of Failure to Exchange."
SHELF REGISTRATION If any holder of the Old Notes (other than any
STATEMENT................... such holder which is an "affiliate" of the
Issuers within the meaning of Rule 405 under the
Securities Act) is not eligible under applicable
securities laws to participate in the Exchange
Offer, and such holder has provided information
regarding such holder and the distribution of
such holder's Old Notes to the Issuers for use
therein, the Issuers has agreed to register the
Old Notes on a shelf registration statement (the
"Shelf Registration Statement") and use its best
efforts to cause it to be declared effective by
the Commission as promptly as practical on or
after the consummation of the Exchange Offer. The
Issuers has agreed to maintain the effectiveness
of the Shelf Registration Statement for, under
certain circumstances, a maximum of three years,
to cover resales of the Old Notes held by any
such holders.
9
<PAGE>
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS..........
Any beneficial owner whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender should contact such
registered holder promptly and instruct such
registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes
to tender on such owner's own behalf, such owner
must, prior to completing and executing the
Letter of Transmittal and delivering its Old
Notes, either make appropriate arrangements to
register ownership of the Old Notes in such
owner's name or obtain a properly completed bond
power from the registered holder. The transfer of
registered ownership may take considerable time.
The Issuers will keep the Exchange Offer open for
not less than twenty days in order to provide for
the transfer of registered ownership.
GUARANTEED DELIVERY Holders of Old Notes who wish to tender their Old
PROCEDURES................. Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes,
the Letter of Transmittal or any other documents
required by the Letter of Transmittal to the
Exchange Agent (or comply with the procedures for
book-entry transfer) prior to the Expiration Date
must tender their Old Notes according to the
guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures."
WITHDRAWAL RIGHTS........... Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration
Date.
ACCEPTANCE OF OLD NOTES AND
DELIVERY OF NEW NOTES......
The Issuers will accept for exchange any and all
Old Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The New Notes
issued pursuant to the Exchange Offer will be
delivered promptly following the Expiration Date.
See "The Exchange Offer--Terms of the Exchange
Offer."
USE OF PROCEEDS............. There will be no cash proceeds to the Issuers
from the exchange pursuant to the Exchange Offer.
EXCHANGE AGENT.............. United States Trust Company of New York.
THE NEW NOTES
GENERAL..................... The form and terms of the New Notes are the same
as the form and terms of the Old Notes (which
they replace) except that (i) the New Notes bear
a Series B designation, (ii) the New Notes have
been registered under the Securities Act and,
therefore, will not bear legends restricting the
transfer thereof, and (iii) the holders of New
Notes will not be entitled to certain rights
under the Registration Rights Agreement,
including the provisions providing for an
increase in the interest rate on the Old Notes in
certain
10
<PAGE>
circumstances relating to the timing of the
Exchange Offer, which rights will terminate when
the Exchange Offer is consummated. See "The
Exchange Offer--Purpose and Effect of the
Exchange Offer." The New Notes will evidence the
same debt as the Old Notes and will be entitled
to the benefits of the Indenture. See
"Description of the Notes." The Old Notes and the
New Notes are referred to herein collectively as
the "Notes."
ISSUERS..................... The New Notes will be joint and several
obligations of Petersen Publishing Company,
L.L.C. and Petersen Capital Corp.
MATURITY DATE............... November 15, 2006.
INTEREST PAYMENT DATES...... Interest will accrue on the New Notes from the
date of issuance (the "Issue Date") and will be
payable semiannually on each November 15 and
commencing May 15, 1997.
OPTIONAL REDEMPTION......... The Notes will be 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 herein, plus accrued and unpaid
interest to the redemption date. Prior to
November 15, 1999, the Issuers, at their option,
may redeem in the aggregate up to 25% of the
original principal amount to the Notes at
111.125% of the aggregate principal amount so
redeemed plus accrued and unpaid interest to the
redemption date with the Net Proceeds of one or
more Public Equity Offerings, provided that at
least $75.0 million of the principal amount of
Notes originally issued remain outstanding
immediately after the occurrence of any
redemption and that any such redemption occurs
within 90 days following the closing of any such
Public Equity Offering.
RANKING..................... The Notes will be general unsecured obligations
of the Issuers, subordinated in right of payment
to all existing and future Senior Indebtedness of
the Issuers and senior in right of payment to any
subordinated indebtedness of the Issuers. As of
September 30, 1996, after giving effect to the
Transactions and the Initial Offering, the
Company would have had $200.0 million aggregate
principal amount of Senior Indebtedness
outstanding. In addition, the Company would have
had $60.0 million of additional borrowing
availability under the Senior Credit Facility.
GUARANTEES.................. The Notes will be unconditionally guaranteed, on
an unsecured senior subordinated basis, as to the
payment of principal, premium, if any, and
interest, jointly and severally (the
"Guarantees"), by Holdings and by all direct and
indirect domestic Restricted Subsidiaries of
Holdings and the Company having either assets or
stockholders' equity in excess of $5,000 (the
"Guarantors"). The Guarantees will be
subordinated to all Senior Indebtedness of the
11
<PAGE>
respective Guarantors. See "Description of the
Notes--Certain Covenants--Limitation on Creation
of Subsidiaries."
CHANGE OF CONTROL........... In the event of a Change of Control, holders of
the New Notes will have the right to require the
Issuers to purchase their New Notes at 101% of
the aggregate principal amount thereof plus
accrued and unpaid interest to the purchase date.
There can be no assurance that the Issuers will
have the financial resources necessary to
repurchase the Notes upon a Change of Control.
See "Risk Factors--Limitations on Change of
Control" and "Description of the Notes--Change of
Control Offer."
ASSET SALE PROCEEDS......... The Issuers will be obligated in certain
instances to make offers to repurchase the Notes
at a purchase price in cash equal to 100% of the
principal amount thereof plus accrued and unpaid
interest to the date of repurchase with the net
cash proceeds of certain asset sales. See
"Description of the Notes--Certain Covenants--
Limitation on Certain Asset Sales."
COVENANTS................... The Indenture contains covenants for the benefit
of the holders of the Notes that, among other
things, restrict the ability of the Company and
any Restricted Subsidiaries (as defined herein)
to: (i) incur additional Indebtedness; (ii) pay
dividends and make distributions; (iii) issue
stock of subsidiaries; (iv) make certain
investments; (v) repurchase stock; (vi) create
liens; (vii) enter into transactions with
affiliates; (viii) enter into sale-leaseback
transactions; (ix) merge or consolidate the
Company or any Guarantors and (x) transfer and
sell assets. The Indenture provides for
restrictions on the ability of BrightView and
Holdings to incur additional Indebtedness. These
covenants are subject to a number of important
exceptions, including the allowance of Permitted
Tax Distributions (as defined herein) as a result
of the Company's status as a limited liability
company. See "Description of the Notes-- Certain
Covenants."
RISK FACTORS
Prospective investors should carefully consider the specific matters set
forth under "Risk Factors" as well as the other information and data included
in this Prospectus before tendering the Old Notes in exchange for New Notes.
12
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
The following tables present summary historical financial data for each of
the five years in the period ended November 30, 1995 and for the ten-month
period ended September 30, 1996 that have been derived from the audited
financial statements of Petersen. The statements of income and divisional
equity and statements of cash flows for each of the three years in the period
ended November 30, 1995 and for the ten months ended September 30, 1996 and the
notes thereto appear elsewhere in this Prospectus. The summary historical
statement of operations data for the ten months ended September 30, 1995 of
Petersen have been derived from unaudited financial statements, which, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
unaudited interim periods. Results for the ten months ended September 30, 1996
are not necessarily indicative of results that may be expected for the entire
year.
<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEARS ENDED NOVEMBER 30, SEPTEMBER 30,
------------------------------------------------ --------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- ----------- ------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATING
DATA:
Net revenues............ $179,357 $180,503 $186,322 $201,967 $213,615 $178,650 $189,114
Production, selling and
other direct costs..... 144,280 135,250 141,562 149,182 171,112 140,436 148,713
-------- -------- -------- -------- -------- -------- --------
Gross Profit............ 35,077 45,253 44,760 52,785 42,503 38,214 40,401
General and
administrative
expenses............... 32,089 32,328 35,604 33,267 28,145 23,537 24,650
-------- -------- -------- -------- -------- -------- --------
Operating income........ 2,988 12,925 9,156 19,518 14,358 14,677 15,751
Interest income, net.... (1,429) (856) (317) (476) (549) (428) (352)
Gain on sale of assets.. -- -- -- -- -- -- (1,554)
-------- -------- -------- -------- -------- -------- --------
Income before provision
for income taxes....... 4,417 13,781 9,473 19,994 14,907 15,105 17,657
Provision for income
taxes(a)............... 125 267 251 698 549 458 331
-------- -------- -------- -------- -------- -------- --------
Net income.............. $ 4,292 $ 13,514 $ 9,222 $ 19,296 $ 14,358 $ 14,647 $ 17,326
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA (AT
PERIOD END):
Working capital
deficiency............. $ (2,791)
Total assets............ 50,541
Total debt.............. --
Total capital
deficiency............. (1,672)
OTHER DATA
Depreciation and
amortization........... $ 4,496 $ 3,381 $ 3,137 $ 3,118 $ 3,439 $ 2,704 $ 2,704
Capital expenditures.... 4,018 1,419 4,739 2,866 4,423 3,492 768
Cash provided by
operating activities... 5,254 2,479 10,680 27,059 9,593 5,530 24,719
Cash provided by (used
in) investing
activities............. 2,951 11,545 (30) (14,478) 2,254 3,185 5,421
Cash provided by (used
in) financing
activities............. 113 (14,013) (14,901) (17,382) (6,092) (5,377) (27,625)
EBITDA (b).............. 7,484 16,306 12,293 22,636 17,797 17,381 20,009
EBITDA margin........... 4.2% 9.0% 6.6% 11.2% 8.3% 9.7% 10.6%
Ratio of earnings to
fixed charges.......... 3.6x 9.2x 6.8x 12.8x 9.2x 11.9x 9.9x
Earnings available to
cover fixed
charges(c)............. $ 6,137 $ 15,457 $ 11,120 $ 21,684 $ 16,724 $ 16,548 $ 19,644
</TABLE>
- --------
(a) Consists of state and local income taxes. As a subchapter S corporation
under the Internal Revenue Code of 1986, as amended (the "Code"), Petersen
has not been subject to U.S. federal income taxes or most state income
taxes. Instead, such taxes have been paid by Petersen's stockholder.
Petersen has paid dividends to its stockholder in respect of such tax
liabilities.
(b) "EBITDA" is defined as income before interest, income taxes, depreciation
and amortization and gain on sale of assets. EBITDA is not a measure of
performance under generally accepted accounting principles ("GAAP"). Such
items excluded from income in calculating EBITDA are significant components
in understanding and evaluating the Company's financial performance. While
EBITDA should not be considered in isolation or as a substitute for net
income, cash flows from operating activities and other income or cash flow
statement data prepared in accordance GAAP or as a measure of profitability
or liquidity, management understands that EBITDA is customarily used in
evaluating magazine publishing companies. The EBITDA measures presented
herein may not be comparable to similarly titled measures of other
companies.
(c) Earnings used in computing the ratio of earnings to fixed charges consist
of income before provision for income taxes plus fixed charges. Fixed
charges consist of the implied interest element of rent expense for all
periods presented except for the ten months ended September 30, 1996 for
which fixed charges also included interest expense of $185,000.
13
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA
The following summary pro forma statement of operations data of the Company
give effect to, among other things, the Transactions and the Initial Offering,
as if they had occurred at the beginning of each of the periods presented. The
following unaudited pro forma condensed balance sheet data of the Company give
effect to, among other things, the Transactions and the Initial Offering, as if
they had occurred on September 30, 1996. Certain management assumptions and
adjustments relating to Transactions and the Initial Offering are described in
the accompanying notes hereto. The pro forma information should be read in
conjunction with the audited financial statements of Petersen and the notes
thereto, as of November 30, 1995 and September 30, 1996 and for each of the
three years in the period ended November 30, 1995, and for the ten months ended
September 30, 1996 appearing elsewhere in this Prospectus. This pro forma
information is not necessarily indicative of the results that would have
occurred had the Transactions and the Initial Offering been completed on the
dates indicated or the Company's actual or future results or financial
position. The summary pro forma statement of operations, balance sheet and
other data should be read in conjunction with the information contained in the
financial statements of Petersen and the notes thereto, "Unaudited Pro Forma
Financial Data," "Selected Historical Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED
NOVEMBER 30, 1995 SEPTEMBER 30, 1996
----------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATING DATA:
Net revenues............................. $213,615 $189,114
Production, selling and other direct
costs................................... 171,040 147,782
-------- --------
Gross profit............................. 42,575 41,332
General and administrative expenses...... 24,432 21,778
Amortization of goodwill................. 31,753 26,461
-------- --------
Operating loss........................... (13,610) (6,907)
Interest expense(a)...................... 34,814 29,691
Gain on sale of assets................... -- (1,554)
-------- --------
Loss before provision for income taxes... (48,424) (35,044)
Provision for income taxes(b)............ -- --
-------- --------
Net loss................................. $(48,424) $(35,044)
======== ========
BALANCE SHEET DATA (AT PERIOD END):
Working capital deficiency(c)............ $(23,030)
Total assets............................. 522,462
Total debt(d)............................ 300,000
Total equity............................. 162,082
OTHER DATA:
Depreciation and amortization............ $ 35,192 $ 29,165
Capital expenditures..................... 4,423 768
EBITDA(e)(f)............................. 21,582 23,812
EBITDA margin............................ 10.1% 12.6%
Pro forma ratio of earnings to fixed
charges................................. (g) (h)
</TABLE>
- --------
(a) Includes amortization of deferred financing costs related to the financing
of the Acquisition in the amount of $4.4 million for the year ended
November 30, 1995 and $4.1 million for the ten months ended September 30,
1996.
(footnotes continued on next page)
14
<PAGE>
(b) As a limited liability company under the Code, the Company is not subject
to U.S. federal income taxes or most state income taxes. Instead, such
taxes will be paid by the Company's equity holders. The Company is likely
to make distributions to its equity holders in respect of such tax
liabilities.
(c) The Company has a pro forma working capital deficiency of $23.0 million as
of September 30, 1996 as a result of Petersen retaining all cash and cash
equivalents pursuant to the terms of the Acquisition. Pro Forma current
liabilities used to calculate this amount include $26.4 million of unearned
subscription revenues, net.
(d) Does not give effect to the receipt by the Company of a working capital
adjustment of at least $2.7 million expected to be paid to the Company by
Petersen in connection with the Acquisition. Such proceeds will be used to
reduce borrowings under the Senior Credit Facility.
(e) "EBITDA" is defined as income before interest, income taxes, depreciation
and amortization and gain on sale of assets. EBITDA is not a measure of
performance under GAAP. Such items excluded from income in calculating
EBITDA are significant components in understanding and evaluating the
Company's financial performance. While EBITDA should not be considered in
isolation or as a substitute for net income, cash flows from operating
activities and other income or cash flow statement data prepared in
accordance with GAAP, or as a measure of profitability or liquidity,
management understands that EBITDA is customarily used in evaluating
magazine publishing companies. The EBITDA measures presented herein may not
be comparable to similarly titled measures of other companies.
(f) Pro forma EBITDA, as presented, reflects the following pro forma
adjustments and does not reflect additional anticipated cost savings
related to management's business and operating strategy, which is currently
being implemented:
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED
NOVEMBER 30, 1995 SEPTEMBER 30, 1996
----------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Historical EBITDA..................... $17,797 $20,009
Pro forma adjustments:
Replacement of executive
management(1)...................... 3,713 2,872
Lease modifications(2).............. 72 358
Cost of excess space(3)............. -- 573
------- -------
Pro forma EBITDA...................... $21,582 $23,812
======= =======
</TABLE>
(footnotes continued on next page)
15
<PAGE>
The Company's management believes the following additional adjustments are
relevant to evaluating the future operating performance of Company. The
following additional adjustments, which eliminate the impact of certain
nonrecurring charges and reflect the estimated impact of management's
business and operating strategy, are based on estimates and assumptions
made and believed to be reasonable by the Company and are inherently
uncertain and subject to change. The following calculation should not be
viewed as indicative of actual or future results. The following table
reflects the effects of these items:
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED
NOVEMBER 30, 1995 SEPTEMBER 30, 1996
----------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Pro forma EBITDA...................... $21,582 $23,812
Additional adjustments:
Consolidation of Sassy(4)........... 4,699 3,234
Reorganization of loss-producing
magazine titles(5)................. 2,947 3,085
Nonrecurring software development
costs(6)........................... 4,026 1,589
Prior personnel reductions(7)....... 3,689 1,539
Effect of increased paper
prices(8).......................... 1,417 4,226
Effect of December 1995 paper
purchases(9)....................... -- 1,098
Restructuring plan cost
savings(10)........................ 3,786 3,321
Other estimated cost savings(11).... 1,111 819
------- -------
Total pro forma adjustments....... 21,675 18,911
------- -------
Adjusted pro forma EBITDA............. $43,257 $42,723
======= =======
Ratio of total debt to adjusted
annualized pro forma EBITDA(12)...... 5.8x
Ratio of adjusted pro forma EBITDA to
pro forma cash interest expense(13).. 1.7x
</TABLE>
--------
(1) Represents: (i) compensation and benefits paid to Mr. Petersen,
Petersen's Chairman and founder, and Mr. Waingrow, Petersen's former
President, net of compensation to be paid to the Company's new
management team; (ii) travel and entertainment expenses attributable to
Messrs. Petersen and Waingrow and (iii) compensation and benefits paid
to certain support personnel and professional consultants working
primarily for Messrs. Petersen and Waingrow. See "Unaudited Pro Forma
Financial Data."
(2) Represents amounts paid in the periods presented for rent with respect
to certain properties owned by Mr. Petersen over amounts payable in
future periods pursuant to new leases negotiated in connection with the
Acquisition. See "Unaudited Pro Forma Financial Data."
(3) As a result of personnel reductions and certain other operational
consolidations, the Company will have excess space under lease. The
Company estimates that the rental costs allocable to such space were
$573,000 for the ten months ended September 30, 1996.
(4) In December 1996, the Company completed the process of merging Sassy
into 'TEEN, thereby eliminating the losses being generated by Sassy. In
addition to the cost savings related to the Sassy personnel who will be
part of the planned reduction in personnel (for which the costs are
included in Note (3) above), the Company expects that the remaining
costs of Sassy, net of related revenues, which are summarized below,
will be eliminated:
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED
NOVEMBER 30, 1995 SEPTEMBER 30, 1996
----------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Revenues.............................. $ 3,852 $ 5,348
Costs and expenses.................... 8,551 8,582
------- -------
Total................................. $(4,699) $(3,234)
======= =======
</TABLE>
(5) Represents losses incurred by Petersen's Golfing, Sport, Bicycle Guide
and Mountain Biker during the periods presented. While these magazines
collectively are expected to break even or be marginally profitable in
fiscal 1997, in the event such magazines continue to generate losses,
management expects to take one or more of the following actions: (i)
discontinue or sell such magazines; (ii) merge such magazines with the
Company's existing magazines or (iii) enter into strategic partnerships
with third parties. Management expects that a final decision with
respect to each magazine will be made by the end of fiscal 1997.
(6) In February 1992, Petersen engaged a consulting firm to design and
install systems and related software for use in its operations. The
systems and software principally related to an electronic magazine
layout system, an advertising rate and circulation modeling system and
an automated pre-press operating system. These systems were never fully
implemented by Petersen, were replaced by
(footnotes continued on next page)
16
<PAGE>
commercially available systems and were ultimately abandoned during
fiscal 1996. Petersen subsequently initiated litigation against the
consulting firm. Petersen incurred costs of $4.0 million during the year
ended November 30, 1995 and $1.6 million during the ten months ended
September 30, 1996 related to the consulting agreement, including an
accrual of $0.8 million during the ten months ended September 30, 1996
related to the resulting litigation, which remains the responsibility of
Petersen.
(7) Prior to the Acquisition, Petersen reduced its number of employees in
accordance with a plan to reduce costs. The costs of payroll, benefits
and severance related to these employee reductions that are estimated
to be not recurring were $3.7 million during the year ended November
30, 1995 and $1.5 million during the ten months ended September 30,
1996.
(8) The market price of the paper that Petersen uses in the production of
its magazines rose significantly during the latter part of 1995.
According to Resource Information Systems, Inc., the median price for a
comparable grade of paper to that used by Petersen was approximately
$0.50 per pound over the last 20 years (as adjusted for inflation).
Amounts shown reflect the excess of the increased paper prices in the
market over the median historical price of $0.50 per pound during the
relevant periods.
(9) In response to the increase in the market price of paper during the
latter part of 1995, in December 1995, Petersen purchased a large
supply of 32 lb. paper at prices ranging from $0.61 to $0.66 per pound
in anticipation of additional price increases and supply shortages
continuing through the remainder of 1995 and 1996. By May 1996, paper
prices had returned to their historical levels of $0.50 per pound.
Amounts shown reflect the excess of the price actually paid by Petersen
for paper used over the actual market price for such paper during the
relevant periods.
(10) In connection with the Acquisition, the Company developed and has
substantially implemented a restructuring plan, which included the
termination of certain employees in various corporate and operating
positions. The savings related to the elimination of these salaries
and related costs, as if such changes had occurred as of the beginning
of the periods presented, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED
NOVEMBER 30, 1995 SEPTEMBER 30, 1996
----------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Production, selling and other
direct costs...................... $3,135 $2,750
General and administrative......... 651 571
------ ------
Total.............................. $3,786 $3,321
====== ======
</TABLE>
(11) Represents the estimate of the reduced levels of travel and
entertainment expenses which will be incurred by the Company due to
fewer employees and new travel and entertainment policies to be
implemented by the Company.
(12) Reflects the receipt by the Company of an estimated working capital
adjustment of $2.7 million expected to be paid to the Company by
Petersen in connection with the Acquisition. Such proceeds will be
applied to reduce borrowings under the Senior Credit Facility.
(13) Excludes amortization of deferred financing costs related to the
financing of the Acquisition in the amount of $4.1 million for the ten
months ended September 30, 1996.
(g) Pro forma earnings were insufficient to cover pro forma fixed charges by
$48.4 million for the year ended November 30, 1995.
(h) Pro forma earnings were insufficient to cover pro forma fixed charges by
$35.0 million for the ten months ended September 30, 1996.
17
<PAGE>
RISK FACTORS
This Prospectus including the documents incorporated by reference herein,
contains certain forward-looking statements. While the Issuers believe these
statements are reasonable, prospective investors should be aware that actual
results could differ materially from those projected by such forward-looking
statements as a result of the risk factors set forth below or other factors.
Prospective investors should consider carefully the following factors as well
as the other information and data included in this Prospectus tendering Old
Notes in exchange for New Notes. The Issuers caution the reader, however, that
this list of factors may not be exhaustive and that these or other factors
could have an adverse effect on the Company's ability to service its
indebtedness, including principal and interest payments on the Notes.
SUBSTANTIAL LEVERAGE; PRO FORMA EARNINGS INSUFFICIENT TO COVER PRO FORMA FIXED
CHARGES
The Company incurred significant debt in connection with the Transactions.
As of September 30, 1996, after giving pro forma effect to the Transactions
and the Initial Offering, the Company would have had outstanding indebtedness
of $300.0 million. The Company's pro forma earnings were insufficient to cover
pro forma fixed charges by $48.4 million for the year ended November 30, 1995
and $35.0 million for the ten months ended September 30, 1996. The Company's
leveraged financial position poses substantial consequences to holders of the
Notes, including the risks that: (i) a substantial portion of the Company's
cash flow from operations will be dedicated to the payment of interest on the
Notes and the payment of principal and interest under the Senior Credit
Facility and other indebtedness; (ii) the Company's leveraged position may
impede its ability to obtain financing in the future for working capital,
capital expenditures and general corporate purposes and (iii) the Company's
highly leveraged financial position may make it more vulnerable to economic
downturns and may limit its ability to withstand competitive pressures. Based
upon the successful implementation of management's business and operating
strategy, the Company believes that it will have sufficient capital to carry
on its business and will be able to meet its scheduled debt service
requirements. However, there can be no assurance that the future cash flow of
the Company will be sufficient to meet the Company's obligations and
commitments. In addition, the Senior Credit Facility contemplates that all
borrowings thereunder will become due by 2004. If the Company is unable to
generate sufficient cash flow from operations in the future to service its
indebtedness and to meet its other commitments, the Company will be required
to adopt one or more alternatives, such as refinancing or restructuring its
indebtedness, selling material assets or operations or seeking to raise
additional debt or equity capital. There can be no assurance that any of these
actions could be effected on a timely basis or on satisfactory terms or that
these actions would enable the Company to continue to satisfy its capital
requirements. In addition, the terms of existing or future debt agreements,
including the Indenture and the Senior Credit Facility, may prohibit the
Company from adopting any of these alternatives. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources," "Description of Senior Credit Facility" and "Description
of the Notes."
FULL IMPLEMENTATION OF BUSINESS AND OPERATING STRATEGY
Following the Acquisition, the Company employed a new senior management team
and adopted a refined business and operating strategy. See "Business--Business
and Operating Strategy." This business and operating strategy includes the
implementation of certain operating improvements and the adoption of new
circulation and advertising strategies. There can be no assurance that the
Company will be able to fully implement this new business and operating
strategy or that the anticipated results of this strategy, including the
reduction of certain operating expenses, will be realized. In addition, after
gaining experience with the Company's operations under its new strategy, the
Company and the new senior management team may decide to alter or discontinue
certain aspects of this strategy. Implementation of this strategy could also
be affected by a number of factors beyond the Company's control, such as
operating difficulties, increased operating costs, regulatory developments,
general economic conditions or increased competition. Any such failure to
implement this strategy will have a material adverse effect on the Company's
ability to service its indebtedness, including principal and interest payments
on the Notes.
18
<PAGE>
The Company has reflected on a pro forma basis for the year ended November
30, 1995 and the ten months ended September 30, 1996 the anticipated benefits
from the operating improvements and cost reduction measures included in
management's business and operating strategy. These adjustments are based on a
number of estimates and assumptions that, while considered reasonable by the
Company, should not be viewed as indicative of the results that would have
occurred had the Company's business and operating strategy been implemented on
the dates indicated or the Company's actual or future results or financial
position. Prospective investors are cautioned not to place undue reliance on
these adjustments. See "Unaudited Pro Forma Financial Data."
SUBORDINATION OF NOTES
The Notes will be unsecured and subordinated to the prior right of payment
of all existing and future Senior Indebtedness of the Issuers, including
obligations under the Senior Credit Facility. The indebtedness under the
Senior Credit Facility will also become due prior to the time the principal
obligations under the Notes become due. Subject to certain limitations, the
Indenture will permit the Issuers to incur additional Senior Indebtedness. See
"Description of the Notes--Certain Covenants--Limitation on Additional
Indebtedness." As a result of the subordination provisions contained in the
Indenture, in the event of a liquidation or insolvency, the assets of the
Issuers will be available to pay obligations on the Notes only after all
Senior Indebtedness has been paid in full, and there may not be sufficient
assets remaining to pay amounts due on any or all of the Notes then
outstanding. The holders of any indebtedness of the Company's subsidiaries
(other than Capital and Restricted Subsidiaries guaranteeing the Notes, if
any) will be entitled to payment of their indebtedness from the assets of such
subsidiaries prior to the holders of any general unsecured obligations of the
Issuers, including the New Notes. In addition, substantially all of the assets
of the Issuers and their subsidiaries will or may in the future be pledged to
secure other indebtedness of the Issuers. See "Description of Senior Credit
Facility" and "Description of the Notes."
RESTRICTIONS IMPOSED BY THE SENIOR CREDIT FACILITY AND THE INDENTURE
The agreements governing the outstanding indebtedness of the Company impose
certain operating and financial restrictions on the Company. The Senior Credit
Facility requires the Company to maintain specified financial ratios and
tests, among other obligations, including a maximum leverage ratio, a minimum
interest coverage ratio and a minimum fixed charge coverage ratio, each as
defined in the Senior Credit Facility. In addition, the Senior Credit Facility
restricts, among other things, the Company's ability to: (i) declare dividends
or redeem or repurchase capital stock; (ii) prepay, redeem or purchase debt;
(iii) incur liens and engage in sale leaseback transactions; (iv) make loans
and investments; (v) issue more debt; (vi) amend or otherwise alter debt and
other material agreements; (vii) make capital expenditures; (viii) engage in
mergers, acquisitions and asset sales; (ix) transact with affiliates and (x)
alter its lines of business. A failure to comply with the restrictions
contained in the Senior Credit Facility could lead to an event of default
thereunder which could result in an acceleration of such indebtedness. Such an
acceleration would constitute an event of default under the Indenture relating
to the Notes. In addition, the Indenture restricts, among other things, the
Company's ability to: (i) incur additional indebtedness; (ii) pay dividends
and make distributions; (iii) issue stock of subsidiaries; (iv) make certain
investments; (v) repurchase stock; (vi) create liens; (vii) enter into
transactions with affiliates; (viii) enter into sale-leaseback transactions;
(ix) merge or consolidate the Company or any Guarantors and (x) transfer and
sell assets. A failure to comply with the restrictions in the Indenture could
result in an event of default under the Indenture. See "Description of Senior
Credit Facility" and "Description of the Notes."
RISKS ASSOCIATED WITH FLUCTUATIONS IN PAPER COSTS AND POSTAL RATES
The Company's principal raw material is paper. The Company used 69.6
million, 76.0 million and 84.4 million pounds of commodity grade paper in its
fiscal years ended November 30, 1993, 1994 and 1995, respectively, resulting
in a total cost of paper during such periods of $29.0 million, $30.5 million
and $39.3 million, respectively. While paper prices have increased by an
average of less than 1% annually since 1989, certain commodity grades have
shown considerable price volatility during that period, including the
commodity grade used by the Company. Paper prices rose sharply during the
latter part of 1995, and in response, Petersen
19
<PAGE>
purchased a large supply of 32 lb. paper in December 1995 at prices ranging
from $0.61 to $0.66 per pound in anticipation of additional price increases
and supply shortages continuing for the remainder of 1995 and 1996. Petersen
purchased enough paper to meet all of its production requirements through
September 1996. The price of such paper subsequently returned to historical
levels of approximately $0.50 per pound in May 1996. The increase in paper
prices in mid 1995 and Petersen's large purchase at such increased prices
materially adversely affected Petersen's production, selling and other direct
costs for year ended November 30, 1995 and the ten months ended September 30,
1996. The excess of the increased paper prices in the market during the fiscal
year ended November 30, 1995 and the ten months ended September 30, 1996 over
the median historical price of $0.50 per pound was $1.4 million and $4.2
million, respectively. The excess of the price actually paid by Petersen for
paper used during the ten months ended September 30, 1996 over the actual
market price for such paper during such periods was $1.1 million.
Following the Acquisition, the Company entered into an oral agreement with a
vendor to secure sufficient paper to meet its projected raw material needs
through the end of 1997 at or below current market prices. While there can be
no assurances, the Company expects that such agreement will be finalized by
the end of March 1997.
The profitability of the Company's magazine publishing operations is also
affected by the cost of postage and could be materially adversely affected if
there is an increase in postal rates and the increase is not passed through to
the consumer. The last postal rate increase occurred in February 1995. Future
fluctuations in paper prices or postal rates could have a material adverse
effect on the Company's ability to service its indebtedness, including
principal and interest payments on the Notes and could have an effect on
quarterly comparisons of the results of operations and financial condition of
the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview" and "Business--Raw Materials."
RISKS RELATING TO CONCENTRATION OF REVENUE FROM CERTAIN PUBLICATIONS
Certain of the Company's publications have historically represented a
significant portion of the Company's net revenues and profit contribution, and
the Company expects that such publications will continue to do so in the
future. In the aggregate, Motor Trend, 'TEEN and Hot Rod accounted for 35.2%
and 57.0% of the Company's net revenues and profit contribution, respectively,
for the year ended November 30, 1995 and 36.4% and 53.7%, respectively, for
the ten months ended September 30, 1996. In addition, the Company derived
approximately 17.9% and 20.6% of its advertising revenues from automotive
manufacturers of original equipment and aftermarket parts, respectively, in
fiscal 1995. As compared to industry standards, the Company believes it has a
diversified portfolio of special-interest publications and is not dependent on
any single publication; however, a significant decline in the performance of
any of these publications or in the advertising spending of the automotive
industry could have a material adverse effect on the Company's ability to
service its indebtedness, including principal and interest payments on the
Notes, and could have an effect on quarterly comparisons of the results of
operations and financial condition of the Company.
CYCLICALITY OF ADVERTISING REVENUE
The Company's principal sources of revenues from the publication of its
magazines are derived from advertising and circulation. Circulation revenues
are generated from both subscription and newsstand sales. For the year ended
November 30, 1995, approximately 58% of the Company's revenues were from
advertising, 38% were from circulation (including 20% from subscription sales
and 18% from newsstand sales) and 4% were from other sources. Advertising
revenues of the Company, as well as those of the consumer magazine industry in
general, are cyclical and dependent upon general economic conditions.
Historically, increases in advertising revenues have corresponded with
economic recoveries while decreases, as well as changes in advertising mix,
have corresponded with general economic downturns and regional and local
economic recessions. As compared to general-interest magazines, the Company
believes that its advertising revenues are less susceptible to changes in
general economic conditions due to the diversity of its publications, the
special-interest nature of its editorial content and the endemic nature of its
advertiser base. The endemic nature of the Company's advertiser base refers to
the fact that a significant portion of the Company's advertising revenues are
from advertisers that are
20
<PAGE>
manufacturers, marketers or distributors of products that relate directly to
the editorial content of the magazines in which they advertise. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview--Cyclicality of Advertising Revenue" and "Business--
Industry Overview."
COMPETITION
The consumer magazine publishing business is highly competitive. The Company
principally competes for advertising and circulation revenues with publishers
of other special-interest consumer magazines with similar editorial content as
those published by the Company. Certain of such competitors are larger and
have greater financial resources than the Company. In addition to other
special-interest magazines, the Company also competes for advertising revenues
with general-interest magazines and other forms of media, including broadcast
and cable television, radio, newspaper, direct marketing and electronic media.
There can be no assurance that the Company will be able to compete effectively
with such other forms of advertising in the future. See "Business--
Competition."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the continued services of its senior management
team. In connection with the Acquisition, the Company retained the services of
certain key employees to serve as senior executives of the Company, including
D. Claeys Bahrenburg, Neal Vitale, Richard Willis and the Company's existing
executive publishers, all of whom have significant experience in the magazine
publishing industry. Messrs. Bahrenburg, Vitale and Willis are each expected
to enter into an employment agreement with the Company, which will provide for
their continued employment for a five year term. See "Management--Employment
Contracts." Although the Company believes it could replace such key employees
in an orderly fashion should the need arise, the loss of such key personnel
could have a material adverse effect on the Company. The Company will not
maintain key person insurance for any of its officers, employees or directors.
See "Management--Directors, Executive Officers and Key Employees." Certain of
the Company's senior executives, including Messrs. Bahrenburg and Vitale,
joined the Company in connection with the Acquisition. While their tenure at
the Company to date has been successful, there can be no assurance that these
or any of the Company's other executives will continue to be successful in
managing the Company in the future.
CONTROLLING EQUITYHOLDER
The Company's equity securities are held 99.9% by Holdings and 0.1% by
BrightView. BrightView is the managing member of Holdings and as such controls
the policies and operations of Holdings and of the Company. See "Limited
Liability Company Agreement." Under the terms of a Securityholders Agreement
(as defined herein), all of the stockholders of BrightView have agreed to vote
their shares in favor of those individuals designated by Willis Stein to serve
on the Board of Directors of BrightView and granted Willis Stein the right to
vote their shares on all significant corporate changes. As a result, Willis
Stein has the ability to control the policies and operations of the Company.
Circumstances may occur in which the interests of Willis Stein, as the
principal equity holder of the Company, could be in conflict with the
interests of the holders of the Notes. In addition, the equity investors may
have an interest in pursuing acquisitions, divestitures or other transactions
that, in their judgment, could enhance their equity investment, even though
such transactions might involve risks to the holders of the Notes. See
"Security Ownership of Certain Beneficial Owners and Management."
LIMITATIONS ON CHANGE OF CONTROL
In the event of a Change of Control (as defined) the Issuers will be
required to make an offer for cash to repurchase the Notes at 101% of the
principal amount thereof, plus accrued and unpaid interest and Additional
Interest, if any, thereon to the repurchase date. See "Description of the
Notes--Certain Definitions." Certain events involving a Change of Control may
result in an event of default under the Senior Credit Facility or other
indebtedness of the Issuers that may be incurred in the future. Moreover, the
exercise by the holders of the Notes of their right to require the Issuers to
repurchase the Notes will cause an event of default under the Senior Credit
21
<PAGE>
Facility or such other indebtedness, even if the Change of Control does not.
The Issuers' obligations under this provision of the Indenture could delay,
deter or prevent a sale of the Company which might otherwise be advantageous
to holders of Notes. Finally, there can be no assurance that the Issuers will
have the financial resources necessary to repurchase the Notes upon a Change
of Control. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and "Description
of the Notes--Change of Control Offer."
RISK OF FRAUDULENT TRANSFER
Under applicable provisions of the U.S. Bankruptcy Code or comparable
provisions of state fraudulent transfer or conveyance laws, if the Company, at
the time it issued the Notes: (i) incurred such indebtedness with intent to
hinder, delay or defraud creditors or (ii)(a) received less than reasonably
equivalent value or fair consideration for incurring such indebtedness and
(b)(1) was solvent at the time of incurrence, (2) was rendered insolvent by
reason of such incurrence (and the application of the proceeds thereof), (3)
was engaged or was about to engage in a business or transaction for which the
assets remaining with the Company constituted unreasonably small capital to
carry on its businesses or (4) intended to incur, or believed that it would
incur, debts beyond its ability to pay such debts as they mature, then, in
each case, a court of competent jurisdiction could void, in whole or in part,
the Notes, or, in the alternative, subordinate the Notes to existing and
future indebtedness of the Company. The measure of insolvency for purposes of
the foregoing will vary depending upon the law applied in such case.
Generally, however, the Company would be considered insolvent if the sum of
its debts, including contingent liabilities, was greater than all of its
assets at fair valuation or if the present fair saleable value of its assets
was less than the amount that would be required to pay the probable liability
on its existing debts, including contingent liabilities, as they become
absolute and matured.
Management believes that, for purposes of the U.S. Bankruptcy Code and state
fraudulent transfer or conveyance laws, the Notes are being issued without the
intent to hinder, delay or defraud creditors and for proper purposes and in
good faith and that the Company, after the issuance of the Notes and the
application of the proceeds thereof, will be solvent, will have sufficient
capital for carrying on its business and will be able to pay its debts as they
mature. There can be no assurance, however, that a court passing on such
questions would agree with management's view.
ABSENCE OF A PUBLIC MARKET COULD ADVERSELY AFFECT THE VALUE OF THE NOTES
The Old Notes were issued to, and the Issuers believe are currently owned
by, a relatively small number of beneficial owners. Prior to the Exchange
Offer, there has not been any public market for the Old Notes. The Old Notes
have not been registered under the Securities Act and will be subject to
restrictions on transferability to the extent that they are not exchanged for
New Notes by holders who are entitled to participate in this Exchange Offer.
The holders of Old Notes (other than any such holder that is an "affiliate" of
the Issuers within the meaning of Rule 405 under the Securities Act) who are
not eligible to participate in the Exchange Offer are entitled to certain
registration rights, and the Issuers are required to file a Shelf Registration
Statement with respect to such Old Notes. The New Notes will constitute a new
issue of securities with no established trading market. The Issuers do not
intend to list the New Notes on any national securities exchange or seek the
admission thereof to trading in the National Association of Securities Dealers
Automated Quotation System. The Initial Purchasers have advised the Issuers
that they currently intend to make a market in the New Notes, but they are not
obligated to do so and may discontinue such market making at any time. In
addition, such market making activity will be subject to the limits imposed by
the Securities Act and the Exchange Act and may be limited during the Exchange
Offer and the pendency of the Shelf Registration Statement. Accordingly, no
assurance can be given that an active public or other market will develop for
the New Notes or as to the liquidity of the trading market for the New Notes.
If a trading market does not develop or is not maintained, holders of the New
Notes may experience difficulty in reselling the New Notes or may be unable to
sell them at all. If a market for the New Notes develops, any such market may
be discontinued at any time.
22
<PAGE>
If a public trading market develops for the New Notes, future trading prices
of such securities will depend on many factors including, among other things,
prevailing interest rates, the Company's results of operations and the market
for similar securities. Depending on prevailing interest rates, the market for
similar securities and other factors, including the financial condition of the
Company, the New Notes may trade at a discount from their principal amount.
FAILURE TO FOLLOW EXCHANGE OFFER PROCEDURES COULD ADVERSELY AFFECT HOLDERS
Issuance of the New Notes in exchange for the Old Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Issuers of such
Old Notes, a properly completed and duly executed Letter of Transmittal and
all other required documents. Therefore, holders of the Old Notes desiring to
tender such Old Notes in exchange for New Notes should allow sufficient time
to ensure timely delivery. The Issuers are under no duty to give notification
of defects or irregularities with respect to the tenders of Old Notes for
exchange. Old Notes that are not tendered or are tendered but not accepted
will, following the consummation of the Exchange Offer, continue to be subject
to the existing restrictions upon transfer thereof, and, upon consummation of
the Exchange Offer, certain registration rights under the Registration Rights
Agreement will terminate. In addition, any holder of Old Notes who tenders in
the Exchange Offer for the purpose of participating in a distribution of the
New Notes may be deemed to have received restricted securities, and if so,
will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives New Notes for its own account in exchange for
Old Notes, where such Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. See "Plan of Distribution." To the extent that Old Notes are
tendered and accepted in the Exchange Offer, the trading market for untendered
and tendered but unaccepted Old Notes could be adversely affected. See "The
Exchange Offer."
23
<PAGE>
THE TRANSACTIONS
The Acquisition. The Company completed the Acquisition on September 30,
1996. The aggregate purchase price of the Acquisition, which is subject to
certain working capital adjustments, was $450.0 million, plus the assumption
of certain ongoing liabilities incurred in the ordinary course of business.
The Company expects to receive at least $2.7 million from Petersen as a result
of the working capital adjustment.
The Financing Plan. The Initial Offering was part of a plan designed to
enable the Company to finance the Acquisition and to provide for additional
liquidity. In connection with the Acquisition, the Company: (i) borrowed
$200.0 million under the $260.0 million Senior Credit Facility; (ii) borrowed
$100.0 million under the Bridge Financing Facility and (iii) received equity
contributions of $165.3 million from an investor group led by Willis Stein.
See "Use of Proceeds."
In connection with the Acquisition, the Company entered into the Senior
Credit Facility, among FBNC and CIBC (together, the "Lenders") and the
Company, pursuant to which the Lenders will lend to the Company up to $260.0
million in senior secured credit facilities, such amount to be allocated
among: (i) a revolving credit facility of up to $60.0 million ( the "Revolving
Credit Facility"); a tranche A term loan in an aggregate principal amount of
$100.0 million (the "Tranche A Loan") and (iii) a tranche B term loan in an
aggregate principal amount of $100.0 million (the "Tranche B Loan" and,
together with the Tranche A Loan, the "Term Loans").
Commitments under the Revolving Credit Facility will not be reduced until
maturity on December 31, 2002. The Term Loans will be amortized on a quarterly
basis commencing on March 31, 1997. The Tranche A Loan amortizes gradually
prior to its maturity in 2002; the Tranche B Loan is payable primarily in two
balloon payments due in 2003 and 2004.
The interest rates per annum applicable to loans under the Senior Credit
Facility will be a fluctuating rate of interest measured, at the Company's
option, by reference either to: (i) LIBOR plus the applicable borrowing margin
or (ii) the published prime rate of the Agent Bank ("ABR") plus the applicable
borrowing margin. The applicable borrowing margin for the Revolving Credit
Facility and the Tranche A Loans will range from 1.375% to 2.750% for LIBOR
based borrowings and 0.125% to 1.500% for ABR based borrowings. The applicable
borrowing margin for the Tranche B Loan will be equal to that of the Revolving
Credit Facility and Tranche A Loan plus 0.500%; provided, however, that the
applicable margin for the Tranche B will not be less than 2.625% for LIBOR
based borrowings and 1.375% or ABR based borrowings. In addition, the Company
has agreed to pay certain fees to the Lenders with respect to the Senior
Credit Facility. See "Description of the Senior Credit Facility."
The following table sets forth the sources and uses of funds in the
Acquisition (dollars in thousands):
<TABLE>
<S> <C>
SOURCES:
Senior Credit Facility(a)(b)(c)..................................... $200,000
Bridge Financing Facility(b)........................................ 100,000
Equity contributions(b)............................................. 165,300
--------
Total sources..................................................... $465,300
========
USES:
Acquisition consideration(c)........................................ $450,000
Fees and expenses(d)................................................ 15,300
--------
Total uses........................................................ $465,300
========
</TABLE>
- --------
(a) On a pro forma basis, as of September 30, 1996, the Company would have had
$60.0 million of additional borrowing availability under the Senior Credit
Facility.
(b) FBNC and CIBC, affiliates of the Initial Purchasers, are the agents and
principal lenders under the Senior Credit Facility. First Union
Corporation and CIBC are the lenders under the Bridge Financing Facility.
First Union Investors, Inc. and CIBC WG Argosy Merchant Fund 2, L.L.C.,
both affiliates of the Initial Purchasers, provided a portion of the
equity financing in connection with the Acquisition.
(c) Does not reflect the working capital adjustment of at least $2.7 million
expected to be paid to the Company by Petersen in connection with the
Acquisition. The proceeds therefrom will be used to reduce borrowings
under the Senior Credit Facility.
(d) Includes estimated fees and expenses related to the Transactions and the
Initial Offering (including the Initial Purchasers' discount). To the
extent that such fees are less than estimated, the remainder will be
applied to working capital.
24
<PAGE>
THE INVESTORS
The Investors pursued the Acquisition because they believed it offered an
attractive opportunity to: (i) acquire a diverse portfolio of profitable
magazines with significant growth potential; (ii) bring together a skilled and
experienced management team, consisting of the Company's new senior managers
and Petersen's existing publishers and editorial staff; (iii) apply
professional management techniques to the Company's portfolio to improve its
operating results by increasing circulation and advertising revenues and
reducing operating costs and (iv) further develop the Company's brand-name
franchises with limited additional capital investment. Management believes
that opportunities exist to achieve each of these results both in the near
term and on a going-forward basis. The Investors include the following: Willis
Stein; First Union Investors, Inc.; CIBC WG Argosy Merchants Fund 2, L.L.C.;
Chase Equity Associates, L.P.; BankAmerica Investment Corporation, certain
other limited partners of Willis Stein; Robert E. Petersen, Petersen's founder
and the Company's Chairman Emeritus and the Management Investors. Under the
terms of a Securityholders Agreement, Willis Stein has the right to designate
each member of the Board of BrightView and thus controls the affairs and
policies of the Company. See "Security Ownership of Certain Beneficial Owners
and Management" and "Limited Liability Company Agreement."
Willis Stein is a private investment fund with committed capital of
approximately $343.0 million. The principals of Willis Stein were formerly
with CIVC, where they managed CIVC's investments in a number of media-related
companies as well as other investments. The Management Investors have
significant experience in managing media-related companies and in managing
leveraged acquisitions. Mr. Bahrenburg has served as President of the Magazine
Publishing Division of The Hearst Corporation ("Hearst") and as Publisher of
both House Beautiful and Cosmopolitan. Mr. Vitale has served in a variety of
managerial positions at Cahners Publishing Company, a division of Reed
Elsevier, Inc. Such positions included Vice President of Consumer Publishing,
Vice President/General Manager of Variety, and, most recently, Group Vice
President, Entertainment, where he was responsible for the publication of
Variety, Daily Variety, Broadcasting & Cable, Moving Pictures International,
On Production and Tradeshow Week. Mr. Dunning currently serves as the Chairman
and Chief Executive Officer of TransWestern Publishing Company, L.P.
("TransWestern"), the largest independent publisher of yellow pages in the
United States, and was formerly Chairman of SRDS Media Information, L.P.
("SRDS"), a media information and database publisher. Earlier in his career,
Mr. Dunning served as Executive Vice President of Ziff Communications and as
President of Rolling Stone Magazine. Mr. Bloch is Vice Chairman and Chief
Financial Officer of TransWestern and was formerly a director of SRDS. Mr.
Karu is a director of TransWestern and was formerly interim Chief Executive
Officer and a director of SRDS. See "Management."
USE OF PROCEEDS
The Company incurred $100.0 million of indebtedness under the Bridge
Financing Facility pending the issuance and sale of the Old Notes. The Bridge
Financing Facility provided for loans in the maximum principal amount of
$100.0 million. Such loans were to be repaid from the proceeds from the sale
of Notes, and if not paid on or prior to September 30, 1997, were to be
converted into term loans with a maturity date of September 30, 2006. The
loans under the Bridge Financing Facility bore interest at a fluctuating rate
equal to the ABR plus 4.250%. The Company applied the net proceeds of the
Initial Offering to repay the Bridge Financing Facility. Affiliates of the
Initial Purchasers were the lenders under the Bridge Financing Facility. The
Bridge Financing Facility was used to finance a portion of the Acquisition.
The Exchange Offer is intended to satisfy certain of the Issuers'
obligations under the Registration Rights Agreement. The Issuers will not
receive any cash proceeds from the issuance of the New Notes offered hereby.
In consideration for issuing the New Notes contemplated in this Prospectus,
the Issuers will receive Old Notes in like principal amount, the form and
terms of which are the same as the form and terms of the New Notes (which
replace the Old Notes), except as described herein.
25
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of September 30, 1996 pro forma to give effect to the Transactions
and the Initial Offering. The Old Notes surrendered in exchange for the New
Notes will be retired and canceled and cannot be reissued. Accordingly,
issuance of the New Notes will not result in any increase or decrease in the
indebtedness of the Issuers or the Guarantor. As such, no effect has been
given to the Exchange Offer in this capitalization table. The information in
this table should be read in conjunction with "Unaudited Pro Forma Financial
Data," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the financial statements and accompanying notes
thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
PRO FORMA
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Total debt:
Senior Credit Facility(a)(b)........................... $200,000
Notes.................................................. 100,000
--------
Total debt........................................... 300,000
Total equity............................................. 162,082
--------
Total capitalization..................................... $462,082
========
</TABLE>
- --------
(a) Current borrowings under the Senior Credit Facility consist of $200.0
million of term loans. The Senior Credit Facility also provides for a
Revolving Credit Facility in the maximum principal amount of $60.0
million. See "Description of Senior Credit Facility." On a pro forma
basis, as of September 30, 1996, the Company would have had $60.0 million
of additional borrowing availability under the Revolving Credit Facility.
(b) Does not reflect the working capital adjustment of at least $2.7 million
expected to be paid to the Company by Petersen in connection with the
Acquisition. The proceeds therefrom will be used to reduce borrowings
under the Senior Credit Facility.
26
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma consolidated financial data (the
"Unaudited Pro Forma Financial Data") of the Company have been derived by the
application of pro forma adjustments to the historical financial statements of
Petersen for the periods indicated. The adjustments are described in the
accompanying notes.
The Unaudited Pro Forma Financial Data give effect to the Transactions and
the Initial Offering as if the Transactions and the Initial Offering had
occurred as of September 30, 1996, for purposes of the balance sheet data, and
as of the beginning of each period presented, for purposes of the statement of
operations data. The Unaudited Pro Forma Financial Data do not give effect to
any transactions other than the Transactions and the Initial Offering and
those discussed in the accompanying notes. The Unaudited Pro Forma Financial
Data are provided for informational purposes only and do not purport to
represent the results of operations or financial position of the Company had
the Transactions and the Initial Offering in fact occurred on such dates, nor
do they purport to be indicative of the financial position or results of
operations as of any future date or for any future period.
The Acquisition was accounted for using the purchase method of accounting.
The total cost of the Acquisition will be allocated to the tangible and
intangible assets acquired and liabilities assumed based upon their respective
fair values as of the time the Acquisition was consummated. The excess of
purchase cost over the historical basis of the net assets acquired has not
been allocated in the accompanying Unaudited Pro Forma Financial Data, but has
been reflected therein as goodwill awaiting determination of the fair value of
the specific assets to be acquired. For pro forma amortization of such
goodwill, the Company has used a 15-year period. The pro forma adjustments are
based upon available information and upon certain assumptions that management
believes are reasonable. The actual allocation of purchase cost, however, and
the resulting effect on income from operations may differ significantly from
the pro forma amounts included herein.
Following the Acquisition, the Company employed a new senior management team
and adopted a refined business and operating strategy. This business and
operating strategy includes the implementation of certain operating
improvements and the adoption of new circulation and advertising strategies.
The Unaudited Pro Forma Financial Data reflects certain of the cost reduction
measures and operating improvements that are part of management's business and
operating strategy and implemented in connection with the Acquisition. The
Company's management believes that the successful implementation of its
business and operating strategy will result in further cost savings and
operating improvements. These additional adjustments are set forth in Note (i)
to the Unaudited Pro Forma Financial Data. There can be no assurance that the
Company will be able to fully implement its new business and operating
strategy or that the anticipated results of this strategy, including the
reduction of certain operating expenses, will be realized. See "Risk Factors--
Full Implementation of Business and Operating Strategy."
The Old Notes surrendered in exchange for the New Notes will be retired and
canceled and cannot be reissued. Accordingly, issuance of the New Notes will
not result in any increase or decrease in the indebtedness of the Issuers or
the Guarantor. As such, no effect has been given to the Exchange Offer in the
Unaudited Pro Forma Financial Data.
The Unaudited Pro Forma Financial Data and accompanying notes should be read
in conjunction with the financial statements and accompanying notes thereto
and the other financial information included elsewhere in this Prospectus.
27
<PAGE>
PETERSEN PUBLISHING COMPANY, L.L.C.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30, 1995
-----------------------------------
PETERSEN PRO FORMA COMPANY
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.............................. $213,615 $ -- $213,615
Production, selling and other direct
costs.................................... 171,112 (72)(a) 171,040
-------- -------- --------
Gross profit.............................. 42,503 72 42,575
General and administrative expenses....... 28,145 (3,713)(b) 24,432
Amortization of goodwill.................. -- 31,753 (c) 31,753
-------- -------- --------
Operating income (loss)................... 14,358 (27,968) (13,610)
Interest income........................... (549) 549 (d) --
Interest expense.......................... -- 34,814 (e) 34,814
-------- -------- --------
Income (loss) before provision for income
taxes.................................... 14,907 (63,331) (48,424)
Provision for income taxes................ 549 (549)(f) --
-------- -------- --------
Net income (loss)......................... $ 14,358 $(62,782) $(48,424)
======== ======== ========
OTHER DATA:
Depreciation and amortization............. $ 3,439 $ 35,192
Capital expenditures...................... 4,423 4,423
EBITDA(g)(h).............................. 17,797 21,582
EBITDA margin............................. 8.3% 10.1%
Ratio of earnings to fixed charges(i)..... 9.2x --
Earnings available to cover fixed
charges(i)............................... $ 16,724 --
</TABLE>
See Notes to Unaudited Pro Forma Statement of Operations Data.
28
<PAGE>
PETERSEN PUBLISHING COMPANY, L.L.C.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
TEN MONTHS ENDED SEPTEMBER
30, 1996
-----------------------------------
PETERSEN PRO FORMA COMPANY
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.............................. $189,114 $ -- $189,114
Production, selling and other direct
costs.................................... 148,713 (358)(a) 147,782
(573)(j)
-------- -------- --------
Gross profit.............................. 40,401 931 41,332
General and administrative expenses....... 24,650 (2,872)(b) 21,778
Amortization of goodwill.................. -- 26,461 (c) 26,461
-------- -------- --------
Operating income (loss)................... 15,751 (22,658) (6,907)
Interest income........................... (537) 537 (d) --
Interest expense.......................... 185 29,506 (e) 29,691
Gain on sale of assets.................... (1,554) -- (1,554)
-------- -------- --------
Income (loss) before provision for income
taxes.................................... 17,657 (52,701) (35,044)
Provision for income taxes................ 331 (331)(f) --
-------- -------- --------
Net income (loss)......................... $ 17,326 $(52,370) $(35,044)
======== ======== ========
OTHER DATA:
Depreciation and amortization............. $ 2,704 $ 29,165
Capital expenditures...................... 768 768
EBITDA(g)(h).............................. 20,009 23,812
EBITDA margin............................. 10.6% 12.6%
Ratio of earnings to fixed charges(i)..... 9.9x --
Earnings available to cover fixed
charges(i)............................... $ 19,644 --
</TABLE>
See Notes to Unaudited Pro Forma Statement of Operations Data.
29
<PAGE>
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS DATA
(a) In connection with the Acquisition, the pre-existing lease agreement
between Petersen and Mr. Petersen was assumed by the Company with certain
modifications to rental rates. This adjustment reflects the impact of the
lease modifications as if they were effective as of the beginning of the
periods presented.
(b) Reflects the net savings in payroll, benefits, and other related expenses
resulting from the replacement of Petersen's executive management by the
Company's new executive management as if such changes had occurred as of
the beginning of the periods presented as follows:
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED
NOVEMBER 30, 1995 SEPTEMBER 30, 1996
----------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Elimination of Petersen's executive
management cost...................... $6,323 $5,048
Cost of consulting contract with
former executive of Petersen......... (200) (167)
New executive management cost......... (2,410) (2,009)
------ ------
Total................................. $3,713 $2,872
====== ======
</TABLE>
The cost of new management is based on the Employment Agreements (as
defined herein) to be entered into between the Company and each of Messrs.
Bahrenburg and Vitale and other estimated expenses associated with new
management, including director fees and salaries of Holdings' officers.
(c) The Acquisition was accounted for under the purchase method of accounting.
Under the purchase method of accounting, a preliminary allocation of the
purchase price has been made to major categories of assets and liabilities
for purposes of the pro forma financial statements based upon available
information and assumptions that the Company's management believes are
reasonable. However, such amounts are subject to change and final amounts
may differ substantially. The Company is currently performing a study to
refine its preliminary allocation of the purchase price, the results of
which are not yet available. Assuming the purchase price is $476.3 million
(as adjusted to give effect to the receipt by the Company of an estimated
$2.7 million working capital adjustment) and such amount is amortized over
15 years, the resulting amortization is $31.8 million for the year ended
November 30, 1995 and $26.5 million for the ten months ended September 30,
1996.
(d) Reflects elimination of interest income attributable to cash and
investments retained by Petersen.
(e) Reflects the interest expense on the indebtedness incurred by the Company
in connection with the Transactions and the Initial Offering, as if the
Transactions and the Initial Offering had been consummated as of the
beginning of the periods presented, based on the borrowings and their
rates expected to be in effect at the offering date as follows:
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED
RATE AMOUNT NOVEMBER 30, 1995 SEPTEMBER 30, 1996
------ -------- ----------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Senior Credit Facility:
Unused revolver
commitment........... 0.500% $ 60,000 $ 300 $ 250
Tranche A Loan(1)..... 9.000 100,000 9,000 7,500
Tranche B Loan(1)..... 9.500 100,000 9,500 7,917
Notes................... 11.125 100,000 11,125 9,271
------- -------
29,925 24,938
Amortization of deferred
financing costs........ 4,368 4,134
Imputed interest on
accrued rent for excess
space.................. 521 434
------- -------
Total interest expense.. $34,814 $29,506
======= =======
</TABLE>
--------
(1) The Company has entered into a swap agreement with a bank providing for
a fixed base rate of 6.23% in lieu of a floating LIBOR rate covering
$150.0 million of the loans under the Senior Credit Facility through
October 7, 1997, after which the amount is reduced to $100.0 million
through October 7, 1999.
30
<PAGE>
(f) Eliminates the provisions for income taxes since the Company is a limited
liability company and will not be subject to the certain state income
taxes to which Petersen was subject.
(g) "EBITDA" is defined as income before interest, income taxes, depreciation
and amortization and gain on sale of assets. EBITDA is not a measure of
performance under GAAP. Such items excluded from income in calculating
EBITDA are significant components in understanding and evaluating the
Company's financial performance. While EBITDA should not be considered in
isolation or as a substitute for net income, cash flows from operating
activities and other income or cash flow statement data prepared in
accordance with GAAP, or as a measure of profitability or liquidity,
management understands that EBITDA is customarily used in evaluating
magazine publishing companies. The EBITDA measures presented herein may
not be comparable to similarly titled measures of other companies.
(h) Pro forma EBITDA, as presented, includes the effects of the pro forma
adjustments and does not reflect additional anticipated cost savings
related to management's business and operating strategy, which is
currently being implemented. The Company's management believes the
following additional adjustments are relevant to evaluating the future
operating performance of the Company. The following additional
adjustments, which eliminate the impact of certain nonrecurring charges
reflect the estimated impact of management's business and operating
strategy, are based on estimates and assumptions made and believed to be
reasonable by the Company and are inherently uncertain and subject to
change. The following calculation should not be viewed as indicative of
actual or future results. The following table reflects the effect of
certain of these items:
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED
NOVEMBER 30, 1995 SEPTEMBER 30, 1996
----------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Pro forma EBITDA...................... $21,582 $23,812
Additional adjustments:
Consolidation of Sassy(1)........... 4,699 3,234
Reorganization of loss-producing
magazine titles(2)................. 2,947 3,085
Nonrecurring software development
costs(3)........................... 4,026 1,589
Prior personnel reductions(4)....... 3,689 1,539
Effect of increased paper
prices(5).......................... 1,417 4,226
Effect of December 1995 paper
purchase(6)........................ -- 1,098
Restructuring plan cost savings(7).. 3,786 3,321
Other estimated cost savings(8)..... 1,111 819
------- -------
Total additional adjustments...... 21,675 18,911
------- -------
Adjusted pro forma EBITDA............. $43,257 $42,723
======= =======
Ratio of total debt to adjusted
annualized pro forma EBITDA.......... 5.8x
Ratio of adjusted pro forma EBITDA to
pro forma cash interest expense(9)... 1.7x
</TABLE>
--------
(1) In December 1996, the Company completed the process of merging Sassy
into 'TEEN, thereby eliminating the losses being generated by Sassy. In
addition to the cost savings related to the Sassy personnel who were
part of the reduction in personnel (for which the costs are included in
a pro forma adjustment (see Note (b)), the Company expects that the
remaining costs of Sassy, net of related revenues, which are summarized
below, will be eliminated:
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED
NOVEMBER 30, 1995 SEPTEMBER 30, 1996
----------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Revenues.............................. $ 3,852 $ 5,348
Costs and expenses.................... 8,551 8,582
------- -------
Total................................. $(4,699) $(3,234)
======= =======
</TABLE>
(2) Represents losses incurred by Petersen's Golfing, Sport, Bicycle Guide
and Mountain Biker during the periods presented. While these magazines
collectively are expected to break even or be marginally profitable in
fiscal 1997, in the event such magazines continue to generate losses,
management expects to take one or more of the following actions: (i)
discontinue or sell such magazines; (ii) merge such magazines with the
Company's existing magazines or (iii) enter into strategic partnerships
with third parties. Management expects that a final decision with
respect to each magazine will be made by the end of fiscal 1997.
31
<PAGE>
(3) In February 1992, Petersen engaged a consulting firm to design and
install systems and related software for use in its operations. The
systems and software principally related to an electronic magazine
layout system, an advertising rate and circulation modeling system and
an automated pre-press operating system. These systems were never
implemented by Petersen, were replaced by commercially available
systems and were ultimately abandoned during fiscal 1996. Petersen
subsequently initiated litigation against the consulting firm. Petersen
incurred costs of $4.0 million during the year ended November 30, 1995
and $1.6 million during the ten months ended September 30, 1996 related
to the consulting agreement, including an accrual of $0.8 million
during the ten months ended September 30, 1996 related to the resulting
litigation, which remains the responsibility of Petersen.
(4) Prior to the Acquisition, Petersen reduced its number of employees in
accordance with a plan to reduce costs. The costs of payroll, benefits
and severance related to these in employee reductions that are
estimated to be not recurring were $3.7 million during the year ended
November 30, 1995 and $1.5 million during the ten months ended
September 30, 1996.
(5) The market price of the paper that Petersen uses in the production of
its magazines rose significantly during the latter part of 1995.
According to Resource Information Systems, Inc., the median price for a
comparable grade of paper to that used by Petersen was approximately
$0.50 per pound over the last 20 years (as adjusted for inflation).
Amounts shown reflect the excess of the increased paper prices in the
market over the median historical price of $0.50 per pound during the
relevant periods.
(6) In response to the increase in the market price of paper during the
latter part of 1995, in December 1995, Petersen purchased a large
supply of 32 lb. paper at prices ranging from $0.61 to $0.66 per pound
in anticipation of additional price increases and supply shortages
continuing through the remainder of 1995 and 1996. By May 1996, paper
prices had returned to their historical levels of $0.50 per pound.
Amounts shown reflect the excess of the price actually paid by Petersen
for paper used over the actual market price for such paper during the
relevant periods.
(7) In connection with the Acquisition, the Company developed and has
substantially implemented a restructuring plan, which included the
termination of certain employees in various corporate and operating
positions. The savings related to the elimination of these salaries and
related costs, as if such changes had occurred as of the beginning of
the periods presented, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED
NOVEMBER 30, 1995 SEPTEMBER 30, 1996
----------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Production, selling and other
direct costs...................... $3,135 $2,750
General and administrative......... 651 571
------ ------
Total.............................. $3,786 $3,321
====== ======
</TABLE>
(8) Represents the estimate of the reduced levels of travel and
entertainment expenses which will be incurred by the Company due to
fewer employees and new travel and entertainment policies to be
implemented by the Company.
(9) Excludes amortization of deferred financing costs related to the
financing of the Acquisition in the amount of $4.1 million for the ten
months ended September 30, 1996.
(i) Earnings used in computing the pro forma ratio of earnings to fixed
charges consist of pro forma income before provision for income taxes plus
pro forma fixed charges. Pro forma fixed charges consist of: (i) interest
expense, including amortization of debt issuance costs and (ii) the
implied interest element of pro forma rent expense. Pro forma earnings
were insufficient to cover pro forma fixed charges by $48.4 million for
the year ended November 30, 1995 and $35.0 million for the ten months
ended September 30, 1996.
(j) As a result of personnel reductions and certain other operational
consolidations, the Company will have excess space under lease. The amount
shown is the Company's estimate of the rental costs which would have been
charged to accrued liabilities for excess rental space recorded in the
allocation of purchase price if the consolidations had occurred at the
beginning of the periods presented.
32
<PAGE>
PETERSEN PUBLISHING COMPANY, L.L.C.
UNAUDITED PRO FORMA BALANCE SHEET DATA
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
-----------------------------------------------
ASSETS AND
PETERSEN LIABILITIES TRANSACTION COMPANY
HISTORICAL RETAINED(A) ADJUSTMENTS PRO FORMA
---------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS(B)
Current assets
Cash and cash equivalents..... $12,453 $(12,448) $465,300 (c) $ 5
(450,000)(d)
(15,300)(e)
Short-term investments........ 55 (55) -- --
Accounts receivable, net...... 18,777 -- -- 18,777
Inventories................... 8,518 -- (1,086)(g) 7,432
Prepaid expenses and other
current assets............... 1,431 (693) -- 738
------- -------- -------- --------
Total current assets............ 41,234 (13,196) (1,086) 26,952
Property and equipment, net..... 5,241 (382) -- 4,859
Goodwill, net(b)................ 2,924 (2,924) 450,000 (d) 478,994
1,033 (e)
14,527 (f)
13,434 (g)
Deferred financing costs........ -- -- 14,011 (e) 11,049
(2,962)(h)
Other assets.................... 1,142 (200) -- 608
(334)
------- -------- -------- --------
Total Assets.................... $50,541 $(17,036) $488,957 $522,462
======= ======== ======== ========
LIABILITIES AND EQUITY(B)
Current liabilities:
Accounts payable.............. $ 5,907 $ (965) $ -- $ 4,942
Accrued payroll and related
costs........................ 5,614 (1,274) 4,700 (g) 9,040
Customer incentive bonuses.... 5,374 -- -- 5,374
Unearned subscription
revenues, net................ 26,443 -- -- 26,443
Other accrued expenses and
current liabilities.......... 687 (448) 3,944 (g) 4,183
------- -------- -------- --------
Total current liabilities....... 44,025 (2,687) 8,644 49,982
Unearned subscription revenues,
net............................ 6,546 -- -- 6,546
Deferred state income taxes..... 1,494 (1,494) -- --
Other noncurrent liabilities.... 148 -- 3,704 (g) 3,852
Senior Credit Facility.......... -- -- 200,000 (c) 200,000
Notes........................... -- -- 100,000 (c) 100,000
------- -------- -------- --------
Total liabilities............... 52,213 (4,181) 312,348 360,380
Divisional equity (capital
deficiency).................... (1,672) (12,855) 14,527 (f) --
Stockholders' equity............ -- -- 165,300 (c) 162,082
(2,962)(h)
(256)(e)
------- -------- -------- --------
Total Liabilities and Equity.... $50,541 $(17,036) $488,957 $522,462
======= ======== ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Balance Sheet Data.
33
<PAGE>
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET DATA
(a) Reflects the assets and liabilities to be retained by Petersen.
(b) The Acquisition was accounted for under the purchase method of accounting.
Under the purchase method of accounting, a preliminary allocation of the
purchase price has been made to major categories of assets and liabilities
for purposes of the pro forma financial statements based upon available
information and assumptions that the Company's management believes are
reasonable. However, such amounts are subject to change and final amounts
may differ substantially. The Company is currently performing a study to
refine its preliminary allocation of the purchase price, the results of
which are not yet available.
(c) Reflects the capitalization of the Company as if the Transactions and the
Initial Offering had occurred as of September 30, 1996 (dollars in
thousands):
<TABLE>
<S> <C>
SOURCES OF FUNDS:
Senior Credit Facility (1)....................................... $200,000
Notes............................................................ 100,000
Equity contributions............................................. 165,300
--------
Total sources.................................................. $465,300
========
</TABLE>
--------
(1) Does not include the estimated payment by Petersen to the Company for a
purchase price adjustment of at least $2.7 million to reflect the
actual level of working capital on the closing date of the Acquisition.
Such proceeds therefrom will be used to reduce borrowings under the
Senior Credit Facility.
(d) Reflects the purchase price of the Acquisition.
(e) Reflects the estimated professional fees and expenses related to the
Transactions and the Initial Offering and the allocation thereof between
deferred financing costs, stockholder's equity and the purchase price of
the Acquisition.
(f) Reflects the excess of liabilities over assets acquired from Petersen
which is added to the purchase price of the Acquisition.
(g) To accrue for severance costs related to the October 1996 personnel
reductions and for the estimated net future costs of excess space under
long-term leases which the Company intends to sublease and sales taxes
related to the Acquisition and the adjustment of the book value of the
Company's inventory.
(h)Reflects the write-off of deferred financing costs upon repayment of the
Bridge Financing Facility.
34
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following tables present selected historical financial data for each of
the five years in the period ended November 30, 1995 and for the ten-month
period ended September 30, 1996 that have been derived from the audited
financial statements of Petersen. The statements of income and divisional
equity and statements of cash flows for each of the three years in the period
ended November 30, 1995 and for the ten months ended September 30, 1996 and
the notes thereto appear elsewhere in this Prospectus. The selected historical
statement of operations and balance sheet data of Petersen for the ten months
ended September 30, 1995 have been derived from unaudited financial
statements, which, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results for the unaudited interim periods. Results for the
ten months ended September 30, 1996 are not necessarily indicative of results
that may be expected for the entire year.
<TABLE>
<CAPTION>
TEN MONTHS
YEARS ENDED NOVEMBER 30, ENDED SEPTEMBER 30,
------------------------------------------------ --------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- ----------- --------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues:
Advertising............ $101,208 $102,399 $105,101 $116,608 $123,410 $102,672 $112,025
Newsstand.............. 35,191 34,499 37,507 40,048 39,889 33,326 34,318
Subscriptions.......... 39,508 39,300 39,820 40,710 41,963 35,113 35,177
Other.................. 3,450 4,305 3,894 4,601 8,353 7,539 7,594
-------- -------- -------- -------- -------- -------- --------
Net revenues......... 179,357 180,503 186,322 201,967 213,615 178,650 189,114
Production, selling and
other direct costs..... 144,280 135,250 141,562 149,182 171,112 140,436 148,713
-------- -------- -------- -------- -------- -------- --------
Gross profit............ 35,077 45,253 44,760 52,785 42,503 38,214 40,401
General and
administrative
expenses............... 32,089 32,328 35,604 33,267 28,145 23,537 24,650
-------- -------- -------- -------- -------- -------- --------
Operating income........ 2,988 12,925 9,156 19,518 14,358 14,677 15,751
Interest income, net.... (1,429) (856) (317) (476) (549) (428) (352)
Gain on sale of assets.. -- -- -- -- -- -- (1,554)
-------- -------- -------- -------- -------- -------- --------
Income before provision
for income taxes....... 4,417 13,781 9,473 19,994 14,907 15,105 17,657
Provision for income
taxes(a)............... 125 267 251 698 549 458 331
-------- -------- -------- -------- -------- -------- --------
Net income........... $ 4,292 $ 13,514 $ 9,222 $ 19,296 $ 14,358 $ 14,647 $ 17,326
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA (AT
PERIOD END):
Working capital
(deficiency)........... $(10,588) $ 1,591 $ (3,629) $(11,027) $ 5,760 $ (2,791)
Total assets............ 56,396 50,973 46,792 55,264 66,808 50,541
Total debt.............. -- -- -- -- -- --
Total equity (capital
deficiency)............ 4,626 4,126 (1,553) 361 8,627 (1,672)
OTHER DATA:
Depreciation and
amortization........... $ 4,496 $ 3,381 $ 3,137 $ 3,118 $ 3,439 $ 2,704 $ 2,704
Capital expenditures.... 4,018 1,419 4,739 2,866 4,423 3,492 768
Cash provided by
operating activities... 5,254 2,479 10,680 27,059 9,593 5,530 24,719
Cash provided by (used
in) investing
activities............. 2,951 11,545 (30) (14,478) 2,254 3,185 5,421
Cash provided by (used
in) financing
activities............. 113 (14,013) (14,901) (17,382) (6,092) (5,377) (27,625)
EBITDA(b)............... 7,484 16,306 12,293 22,636 17,797 17,381 20,009
EBITDA margin........... 4.2% 9.0% 6.6% 11.2% 8.3% 9.7% 10.6%
Pro forma ratio of
earnings to fixed
charges................ (d) (e)
Ratio of earnings to
fixed charges.......... 3.6x 9.2x 6.8x 12.8x 9.2x 11.2x 9.9x
Earnings available to
cover fixed
charges(c)............. $ 6,137 $ 15,457 $ 11,120 $ 21,684 $ 16,724 $ 16,548 $ 19,644
</TABLE>
- --------
(a) Consists of state and local income taxes. As a subchapter S corporation
under the Code, Petersen has not been subject to U.S. federal income taxes
or most state income taxes. Instead, such taxes have been paid by
Petersen's stockholder. Petersen has periodically paid dividends to its
stockholder in respect of such tax liabilities.
(b) "EBITDA" is defined as income before interest, income taxes, depreciation
and amortization and gain on sale of assets. EBITDA is not a measure of
performance under GAAP. Such items excluded from income in calculating
EBITDA are significant components in understanding and evaluating the
Company's financial performance. While EBITDA should not be considered in
isolation or as a substitute for net income, cash flows from operating
activities and other income or cash flow statement data prepared in
accordance GAAP, or as a measure of profitability or liquidity, management
understands that EBITDA is customarily used in evaluating magazine
publishing companies. The EBITDA measures presented herein may not be
comparable to similarly titled measures of other companies.
(c) Earnings used in computing the ratio of earnings to fixed charges consist
of income before provision for income taxes plus fixed charges. Fixed
charges consist of the implied interest element of rent expense for all
periods presented except for the ten months ended September 30, 1996 for
which fixed charges also included interest expense of $185,000.
(d) Pro forma earnings were insufficient to cover pro forma fixed charges by
$48.4 million for the year ended November 30, 1995.
(e) Pro forma earnings were insufficient to cover pro forma fixed charges by
$35.0 million for the ten months ended September 30, 1996.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company. The Company is a leading publisher of special-interest
magazines. The Company's diverse portfolio currently contains a total of 73
publications, including 22 monthly publications, 9 bi-monthly publications and
42 single issue or annual publications. The Company operates primarily within
the expanding special-interest segment of the consumer magazine publishing
market. Over the last decade, special-interest publications targeted to niche
audiences have enjoyed significant growth and are now estimated to account for
approximately one quarter of the overall consumer magazine market in terms of
total advertising and circulation spending. The Company had net revenues of
$213.6 million and $189.1 million for the year ended November 30, 1995 and the
ten months ended September 30, 1996, respectively.
Sources of Revenue. The Company's principal sources of revenues from the
publication of its magazines are derived from advertising and circulation.
Circulation revenues are generated from both subscription and newsstand sales.
For fiscal 1995, approximately 58% of the Company's revenues were from
advertising, 38% were from circulation (including 20% from subscription sales
and 18% from newsstand sales) and 4% were from other sources. Advertising
revenues of the Company, as well as those of the consumer magazine industry in
general, are cyclical and dependent upon general economic conditions.
Historically, increases in advertising revenues have corresponded with
economic recoveries while decreases, as well as changes in advertising mix,
have corresponded with general economic downturns and regional and local
economic recessions. As compared to general-interest magazines, the Company
believes that its advertising revenues are less susceptible to changes in
general economic conditions due to the diversity of its publications, the
special-interest nature of its editorial content and the endemic nature of its
advertiser base. The endemic nature of the Company's advertiser base refers to
the fact that % of the Company's advertisers are manufacturers, marketers
or distributors of products which relate directly to the editorial content of
the magazines in which they advertise. See "Business--Industry Overview" and
"Risk Factors--Cyclicality of Revenues."
Potential Operating Improvements. As part of its business and operating
strategy, the Company has identified and is in the process of implementing
certain cost reduction measures and operating improvements that are expected
to result in annual cost savings when compared to Petersen's recent operating
history. The following table sets forth certain expenses incurred by Petersen
in each of the past three fiscal years and the ten-month periods ended
September 30, 1995 and 1996, which the Company believes will not recur in
future periods as a result of such cost reduction measures and operating
improvements. See "Business--Business and Operating Strategy." Certain of
these adjustments are reflected in the Company's unaudited pro forma financial
data. See "Unaudited Pro Forma Financial Data." Unless otherwise noted,
amounts shown have not been adjusted to reflect additional expenses which the
Company expects to incur in future periods, including additional professional
fees, interest expense, depreciation and amortization and other expenses. In
addition, while the Company believes the following expenses will not recur in
future periods, there can be no assurance that the Company will not incur
other expenses similar to the expenses described below in future periods. The
following calculation should not be viewed as indicative of future results.
<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEARS ENDED NOVEMBER 30, SEPTEMBER 30,
--------------------------- -----------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Compensation of senior
management(a)................... $ 12,273 $ 9,450 $ 3,713 $ 1,844 $ 2,872
Personnel reductions(b).......... 5,927 6,192 7,181 5,693 4,860
Excess travel and entertainment
expenses(c)..................... 917 1,036 1,111 890 819
Renegotiation of lease with
stockholder and sublease
revenues to be realized(d)...... 52 65 72 60 1,007
Effect of increased paper
prices(e)....................... -- -- 1,417 344 4,226
Effect of December 1995 paper
purchases(f).................... -- -- -- -- 1,098
Reduced software development
costs(g)........................ 2,475 3,507 4,026 3,281 1,589
Reorganization of loss-producing
magazine titles(h).............. (170) 1,707 7,646 5,600 6,319
Reduced retirement plan
contributions(i)................ 2,001 2,271 294 -- --
-------- -------- -------- -------- --------
Total nonrecurring expenses.... $ 23,475 $ 24,228 $ 25,460 $ 17,712 $ 22,790
======== ======== ======== ======== ========
</TABLE>
36
<PAGE>
(footnotes from previous page)
- --------
(a) Represents: (i) compensation and benefits paid to Mr. Petersen, Petersen's
Chairman and founder, and Mr. Waingrow, Petersen's former President, net
of compensation to be paid to the Company's new management team; (ii)
travel and entertainment expenses attributable to Messrs. Petersen and
Waingrow and (iii) compensation and benefits paid to certain support
personnel and professional consultants working primarily for Messrs.
Petersen and Waingrow. See "Unaudited Pro Forma Financial Data."
(b) Represents compensation, related benefits and severance paid to certain
former Petersen personnel who were terminated as part of cost reduction
programs by Petersen and to employees terminated in October 1996 as part
of the Company's personnel reduction program, net of the Company's
estimate of a normal level of severance costs after the personnel
reduction program is complete. See "Unaudited Pro Forma Financial Data."
(c) Represents the Company's estimate of travel and entertainment expenses
incurred by Petersen (excluding expenses included under "compensation of
senior management") in excess of such expenses to be incurred by the
Company after implementation of new travel and expense policies and
personnel reduction.
(d) Represents amounts paid in the periods presented for rent with respect to
certain properties owned by Mr. Petersen over amounts payable in future
periods pursuant to new leases negotiated in connection with the
Acquisition and the Company's estimate of the rental costs which would
have been charged to accrued liabilities for excess rental space recorded
in the allocation of purchase price if the consolidations had occurred at
the beginning of the periods presented. See "Unaudited Pro Forma Financial
Data."
(e) Amounts shown reflect the excess of the increased paper prices in the
market over the median historical price of $0.50 per pound during the
relevant periods. See "--Paper Prices."
(f) Amounts shown reflect the excess of the price actually paid by Petersen
for paper used over the actual market price for such paper during the
relevant periods. See "--Paper Prices."
(g) See "--Software Consulting Expenses" and "Unaudited Pro Forma Financial
Data."
(h) Represents losses incurred by Sassy, Petersen's Golfing, Sport, Bicycle
Guide and Mountain Biker during the periods presented. In December 1996,
the Company completed the process of merging Sassy into 'TEEN, thereby
eliminating the losses being generated by Sassy. While the remaining
magazines collectively are expected to break even or be marginally
profitable in fiscal 1997, in the event such magazines continue to
generate losses, management expects to take one or more of the following
actions: (i) discontinue or sell such magazines; (ii) merge such magazines
with the Company's existing magazines or (iii) enter into strategic
partnerships with third parties. Management expects that a final decision
with respect to each magazine will be made by the end of fiscal 1997.
(i) The Company will not continue making contributions to Petersen's
retirement plan and intends to establish a new defined contribution plan
for which the estimated annual cost is $1.0 million annually.
Paper Prices. The Company's principal raw material is paper. The Company
used 69.6 million, 76.0 million and 84.4 million pounds of commodity grade
paper in its fiscal years ended November 30, 1993, 1994 and 1995,
respectively, resulting in a total cost of paper during such periods of $29.0
million, $30.5 million and $39.3 million, respectively. While paper prices
have increased by an average of less than 1% annually since 1989, certain
commodity grades have shown considerable price volatility during that period,
including the commodity grade used by the Company. Paper prices rose sharply
during the latter part of 1995, and in response, Petersen purchased a large
supply of 32 lb. paper in December 1995 at prices ranging from $0.61 to $0.66
per pound in anticipation of additional price increases and supply shortages
continuing for the remainder of 1995 and 1996. Petersen purchased enough paper
to meet all of its production requirements through September 1996. The price
of such paper subsequently returned to historical levels of approximately
$0.50 per pound in May 1996. The increase in paper prices in late 1995 and
Petersen's large purchase at such increased prices materially adversely
affected Petersen's production, selling and other direct costs for year ended
November 30, 1995 and the ten months ended September 30, 1996, respectively.
Following the Acquisition, the Company entered into an oral agreement with a
vendor to secure sufficient paper to meet its projected raw material needs
through the end of fiscal 1997 at or below current market prices. While there
can be no assurances, the Company expects that such agreement will be
finalized by the end of March 1997. No assurance can be given, however, that
future fluctuations in paper prices after 1997 will not have a material
adverse effect on the results of operations and financial condition of the
Company. See "Risk Factors--Risks Associated with Fluctuations in Paper Costs
and Postal Rates" and "Business--Raw Materials."
Software Consulting Expenses. During the three year period ended November
30, 1995, Petersen engaged a consulting firm to design and install systems and
related software for use in its operations. The systems and software
principally related to an electronic magazine layout system, an advertising
rate and circulation modeling system and an automated pre-press operating
system. Petersen incurred total expenses of $2.5 million, $3.5 million and
$4.0 million in each of the three years in the period ended November 30, 1995,
respectively, with
37
<PAGE>
respect to this project. These systems were never completed satisfactorily.
Petersen subsequently purchased and installed commercially available systems
to perform such functions at a cost of less than $175,000. Petersen is
currently engaged in litigation over the matter with the consulting firm and
accrued $0.8 million in the ten months ended September 30, 1996 related to
such litigation, which remains the responsibility of Petersen.
Purchase Accounting Effects. The Acquisition was accounted for using the
purchase method of accounting. As a result, the Acquisition will prospectively
effect the Company's results of operations in certain significant respects.
The aggregate pro forma acquisition cost (including the assumption of ongoing
liabilities incurred in the ordinary course of business and estimated
transaction expenses of $15.3 million) of approximately $479.0 million has
been allocated to the tangible and intangible assets acquired and liabilities
assumed by the Company based upon their respective fair values as of the
acquisition date based upon valuations and other studies that are not yet
available. The preliminary allocation of the purchase price of the assets
acquired in the Acquisition is estimated to result in annual depreciation and
amortization expense of approximately $31.7 million per year. The Company's
historical annual depreciation and amortization expense over the past five
years has been less than $4.5 million per year. In addition, due to the
effects of the increased borrowing of the Company to finance the Acquisition,
the Company's interest expense will increase significantly in the periods
following the Acquisition.
Provision for Income Taxes. Prior to the Acquisition, Petersen was operated
as a subchapter S corporation under the Code. As a result, it did not incur
federal and state income taxes (except with respect to certain states) and,
accordingly, no discussion of income taxes is included in "Results of
Operations" below. Federal and state income taxes (except with respect to
certain states) with respect to Petersen's income during such periods were
incurred and paid directly by Petersen's stockholder. Petersen made periodic
distributions to its stockholder in respect of such tax liability. As a
limited liability company, the Company will also not incur federal and state
income taxes (except with respect to certain states). Federal and state income
taxes (except with respect to certain states) with respect to the Company's
income during future periods will be incurred and paid directly by the
Company's equity holders. Pursuant to the terms of its limited liability
company agreement, the Company will make distributions to its equity holders
in respect of such tax liabilities in future periods.
RESULTS OF OPERATIONS
The following table summarizes Petersen's historical results of operations
as a percentage of revenue for the years ended November 30, 1993, 1994 and
1995 and for the ten month periods ended September 30, 1995 and 1996:
<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEARS ENDED NOVEMBER 30, SEPTEMBER 30,
---------------------------- ------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DA-
TA:
Net revenues:
Advertising............... 56.4% 57.7% 57.8% 57.6% 59.2%
Newsstand................. 20.1 19.9 18.7 18.6 18.1
Subscriptions............. 21.4 20.1 19.6 19.6 18.6
Other..................... 2.1 2.3 3.9 4.2 4.1
-------- -------- -------- -------- --------
Total net revenues...... 100.0 100.0 100.0 100.0 100.0
Production, selling and
other direct costs......... 76.0 73.9 80.1 78.6 78.6
-------- -------- -------- -------- --------
Gross profit................ 24.0 26.1 19.9 21.4 21.4
General and administrative
expenses................... 19.1 16.4 13.2 13.2 13.0
-------- -------- -------- -------- --------
Operating income............ 4.9% 9.7% 6.7% 8.2% 8.4%
======== ======== ======== ======== ========
OTHER DATA:
EBITDA...................... 6.6% 11.2% 8.3% 9.7% 10.6%
</TABLE>
38
<PAGE>
Ten Months Ended September 30, 1996 Compared to Ten Months Ended September
30, 1995
Total revenues for the ten months ended September 30, 1996 increased by
$10.5 million, or 5.9%, to $189.1 million from $178.6 million for the ten
months ended September 30, 1995. Of this increase, advertising revenue
accounted for $9.4 million, supplemented by a $1.0 million increase in
newsstand revenue. The increase in advertising revenues was due principally to
an overall increase in the Company's advertising rates and higher advertising
revenues generated by Motor Trend, 'TEEN and All About You! The increase in
newsstand revenue was due principally to increased sales of 'TEEN and All
About You!
Production, selling and other direct costs for the ten months ended
September 30, 1996 increased by $8.3 million, or 5.9%, to $148.7 million from
$140.4 million for the ten months ended September 30, 1995, primarily as a
result of increased paper costs and incremental production costs. Production,
selling and other direct costs, as a percent of revenues, remained constant at
78.6% of revenues for the 1995 and 1996 periods. See""--Overview--Paper
Prices."
General and administrative expenses for the ten months ended September 30,
1996 increased by $1.1 million, or 4.7%, to $24.6 million from $23.5 million
for the ten months ended September 30, 1995, primarily as a result of an
accrual of $0.8 million for expenses relating to litigation against the
software consultant described in "--Overview--Software Consulting Expenses."
General and administrative expenses decreased as a percent of revenues over
the same period to 13.0% of revenues for the 1996 period from 13.2% of
revenues for the 1995 period.
Operating income for the ten months ended September 30, 1996 increased by
$1.1 million, or 7.3%, to $15.8 million from $14.7 million for the ten months
ended September 30, 1995, for the reasons stated above.
Year Ended November 30, 1995 Compared to Year Ended November 30, 1994
Total revenues for the year ended November 30, 1995 increased by $11.6
million, or 5.8%, to $213.6 million from $202.0 million for the year ended
November 30, 1994. Of this increase, advertising revenue accounted for $6.8
million, partially offset by a $0.2 million decrease in newsstand revenue and
supplemented by a $1.3 million increase in subscription revenue. The increase
in advertising revenue was principally due to the Company's acquisition of
Sassy in December 1994.
Production, selling and other direct costs for the year ended November 30,
1995 increased by $21.9 million, or 14.7%, to $171.1 million from $149.2
million for the year ended November 30, 1994, primarily as a result of the
cost of launching new magazine titles, additional costs associated with the
publication of Sassy and increases in paper prices and postal rates.
Production, selling and other direct costs increased as a percent of revenues
over the same period to 80.1% of revenues for the 1995 period from 73.9% of
revenues for the 1994 period due principally to the same causes. See "--
Overview--Paper Prices."
General and administrative expenses for the year ended November 30, 1995
decreased by $5.2 million, or 15.4%, to $28.1 million from $33.3 million for
the year ended November 30, 1994, primarily as a result of lower compensation
expense for Mr. Petersen. General and administrative expenses decreased as a
percent of revenues over the same period to 13.2% of revenues for the 1995
period from 16.4% of revenues for the 1994 period.
Operating income for the year ended November 30, 1995 decreased by $5.1
million, or 26.4%, to $14.4 million from $19.5 million for the year ended
November 30, 1994, for the reasons stated above.
Year Ended November 30, 1994 Compared to Year Ended November 30, 1993
Total revenues for the year ended November 30, 1994 increased by $15.7
million, or 8.4%, to $202.0 million from $186.3 million for the year ended
November 30, 1993. Of this increase, advertising revenue accounted for $11.5
million, supplemented by a $2.5 million increase in newsstand revenue and a
$0.9 million increase in subscription revenue. The increase in advertising
revenue was due primarily to the launch of
39
<PAGE>
Mountain Biker, 5.0 Liter Mustang, Hot Rod Bikes, Mustang & Fords and Custom
Classic Trucks and the acquisition of Bicycle Guide.
Production, selling and other direct costs for the year ended November 30,
1994 increased by $7.6 million, or 5.4%, to $149.2 million from $141.6 million
for the year ended November 30, 1993, primarily as a result of incremental
production costs from the launch of new magazines. Production, selling and
other direct costs decreased as a percent of revenues over the same period to
73.9% of revenues for the 1994 period from 76.0% of revenues for the 1993
period principally due to a new printing contract with more favorable terms.
General and administrative expenses for the year ended November 30, 1994
decreased by $2.3 million. or 6.6%, to $33.3 million from $35.6 million for
the year ended November 30, 1993, primarily as a result of the completion of
start-up activities for new magazine titles, partially offset by increased
compensation expense for Mr. Petersen. General and administrative expenses
decreased as a percent of revenues over the same period to 16.4% of revenues
for the 1994 period from 19.1% of revenues for the 1993 period.
Operating income for the year ended November 30, 1994 increased by $10.3
million, or 113.2%, to $19.5 million from $9.2 million for the year ended
November 30, 1993, for the reasons stated above.
LIQUIDITY AND CAPITAL RESOURCES
Historical Cash Flows from Operating Activities. Net cash provided by
operations was $24.7 million for the ten months ended September 30, 1996
compared to $5.5 million for the ten months ended September 30, 1995. Of this
difference, $19.9 million relates to changes in inventory levels and $2.7
million relates to increased net income. Net cash provided by operations
decreased to $9.6 million for the year ended November 30, 1995 from $27.1
million for the year ended November 30, 1994. This decrease resulted
principally from a $10.6 million increase in inventories and a $4.9 million
decrease in net income. The increase in net cash provided by operations to
$27.1 million for the year ended November 30, 1994 from $10.7 million for the
year ended November 30, 1993 was primarily due to a $10.1 million increase in
net income and a $6.9 million change in balance in accounts payable.
Historical Cash Flows from Investing Activities. Net cash provided by
investing activities was $5.4 million for the ten months ended September 30,
1996, including $2.5 million in proceeds from the sale of its Viking Color
pre-press operations, compared to $3.3 million for the ten months ended
September 30, 1995. Net cash provided by (used in) investing activities was
$2.3 million, $(14.5) million and $(30,000) in the years ended November 30,
1995, 1994 and 1993, respectively. The changes were primarily due to the
purchase and sale of marketable securities with cash. See "Capital
Expenditures" below for the level of capital expenditures.
Historical Cash Flow from Financing Activities. Net cash used in financing
activities, which was comprised solely of distributions of Petersen's S
corporation earnings to its stockholder and changes in advances to other
divisions of Petersen, were $27.6 million, $5.4 million, $6.1 million, $17.4
million and $14.9 million for the ten months ended September 30, 1996 and 1995
and the years ended November 30, 1995, 1994 and 1993, respectively.
Financing Activities Relating to the Acquisition. The Initial Offering was
part of a plan designed to enable the Company to finance the Acquisition and
to provide for additional liquidity. In connection with the Acquisition, the
Company: (i) borrowed $200.0 million under the $260.0 million Senior Credit
Facility; (ii) borrowed $100.0 million under the Bridge Financing Facility and
(iii) received equity contributions of $165.3 million from an investor group
led by Willis Stein. The Company used the proceeds from the Initial Offering
to repay the Bridge Financing Facility. See "The Transactions."
The borrowings under the Senior Credit Facility consist of a $100.0 million
Tranche A Loan and a $100.0 million Tranche B Loan, maturing on December 31,
2002 and September 30, 2004, respectively. The Revolving Credit Facility
provides for borrowings in the maximum principal amount of $60.0 million. The
Tranche A Loan
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<PAGE>
amortizes gradually prior to maturity; the Tranche B Loan is payable primarily
in two balloon payments due in 2003 and 2004. The Revolving Credit Facility
becomes due in full on December 31, 2002. The Senior Credit Facility contains
customary provisions with respect to security, covenants (including financial
covenants) and events of default. See "Description of Senior Credit Facility."
Capital Expenditures. The Company's operations are not capital intensive.
Capital expenditures were $0.8 million and $3.5 million in the ten months
ended September 30, 1996 and 1995, respectively, and $4.4 million, $2.9
million and $4.7 million in the fiscal years ended November 30, 1995, 1994 and
1993, respectively.
Liquidity. The Company's principal sources of funds following the
Acquisition are anticipated to be cash flows from operating activities and
borrowings under the Senior Credit Facility. Based upon the successful
implementation of management's business and operating strategy, the Company
believes that these funds will provide the Company with sufficient liquidity
and capital resources for the Company to meet its current and future financial
obligations, including the payment of principal and interest on the Notes, as
well as to provide funds for the Company's working capital, capital
expenditures and other needs. No assurance can be given, however, that this
will be the case. The Company's future operating performance and ability to
service or refinance the Notes and to repay, extend or refinance the Senior
Credit Facility will be subject to future economic conditions and to
financial, business and other factors, many of which are beyond the Company's
control. See "Risk Factors."
In the event of a Change of Control, the Company will be required to make an
offer for cash to repurchase the Notes at 101% of the principal amount
thereof, plus accrued and unpaid interest and Additional Interest, if any,
thereon to the repurchase date. Certain events involving a Change of Control
will result in an event of default under the Senior Credit Facility or other
indebtedness of the Company that may be incurred in the future. Moreover, the
exercise by the holders of the Notes of their right to require the Company to
repurchase the Notes may cause an event of default under the Senior Credit
Facility or such other indebtedness, even if the Change of Control does not.
Finally, there can be no assurance that the Company will have the financial
resources necessary to repurchase the Notes upon a Change of Control. See
"Risk Factors--Change of Control" and "Description of the Notes--Change of
Control Offer."
INFLATION
The Company believes that inflation has not had a material impact on its
results of operations for three years ended November 30, 1995.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No.
121"), which is effective for the Company in fiscal 1997. The Company does not
expect the adoption of SFAS No. 121 to have a material impact on the Company's
financial position or results of operations.
41
<PAGE>
BUSINESS
The Company is a leading publisher of special-interest magazines. The
Company's diverse portfolio currently contains a total of 73 publications,
including 22 monthly publications, 9 bimonthly publications and 42 single
issue or annual publications. According to Media Market Research Institute,
the Company's magazines reach over 40 million readers each month. The
Company's nationally-recognized magazines include: (i) Motor Trend, which is
recognized as a leading authority on new domestic and foreign automobiles and
has a current monthly circulation of approximately 1.0 million; (ii) 'TEEN,
which has the largest circulation of any of the Company's magazines with a
current monthly circulation of over 1.3 million and (iii) Hot Rod, which is
one of the largest circulation automotive magazines in the world with a
current monthly circulation of over 810,000. The Company's other core
publications are well-known in their respective markets and include Guns &
Ammo, Skin Diver, 4 Wheel & Off-Road, Car Craft, Petersen's Hunting,
Motorcyclist, Sport Truck, Circle Track, Photographic and Dirt Rider. Eight of
the Company's 13 core publications ranked first in their respective markets
base on annual circulation in 1995, including two magazines that were the only
national magazines published in their respective markets.
The Company's principal sources of revenues are from advertising and
circulation. The Company had net revenues of $213.6 million and $189.1 million
for fiscal 1995 and the ten months ended September 30, 1996, respectively.
Circulation revenues are generated from both subscription and newsstand sales.
For fiscal 1995, approximately 58% of the Company's revenues were from
advertising, 38% were from circulation (including 20% from subscription sales
and 18% from newsstand sales) and 4% were from other sources.
In fiscal 1995, the Company's 13 core publications each generated a minimum
of approximately $1.0 million of profit contributions and, in the aggregate,
generated over $55.2 million of the Company's profit contribution. During the
same period, no single publication accounted for more than 15% of the
Company's net revenues or 28% of profit contribution. As a result of such
diversification, the Company believes that it is not dependent on any single
publication and is less susceptible to shifts in advertising spending across
industry sectors. The Company's core publications collectively average over 30
years in publication and have developed nationally-recognized branded titles
within each of their respective markets. By using its core publications as a
platform for launching new "spin-off" publications, the Company has been able
to develop a portfolio of highly-specialized publications covering a wide
variety of interests. The Company believes that its reputation as a high-
quality publisher and its significant market presence has historically enabled
its new publications to gain market share more rapidly in their respective
special-interest segments.
Substantially all of the Company's magazines target special-interest
enthusiasts. By doing so, the Company is able to deliver a solid core audience
to its advertisers on a consistent basis and create an opportunity for its
advertisers to efficiently reach their target audience. Due to the special-
interest nature of the Company's magazines, readers not only value their
specialized editorial content but also rely on such magazines as a catalogue
of products in the relevant topic area. This catalogue aspect makes the
Company's magazines an essential advertising medium for many of the Company's
advertisers. Certain of the Company's advertisers rely on the Company's
publications as their primary source of media advertising. As compared to
general-interest magazines, the Company believes that its advertising revenues
are less susceptible to changes in general economic conditions due to the
diversity of its publications, the special-interest nature of its editorial
content and the endemic nature of its advertiser base. The endemic nature of
the Company's advertiser base refers to the fact that a significant portion of
the Company's advertising revenues are from advertisers that are
manufacturers, marketers or distributors of products that relate directly to
the editorial content of the magazines in which they advertise. In addition,
the Company has a diverse advertiser base, with its top 25 advertisers
accounting for only 32.6% and 32.8% of the Company's advertising revenues
during fiscal 1995 and the ten months ended September 30, 1996, respectively.
In addition to offering its advertisers targeted advertising within
individual magazines, the Company can offer its advertisers the ability to
reach a large audience by advertising across the Company's large portfolio of
magazines. Management believes this capability was not fully developed by
Petersen's prior management. In particular, the Company believes that many of
its publications provide its advertisers with unique access to the
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<PAGE>
adult male (ages 18 to 34) and young female (ages 12 to 19) markets. The
Company believes that, in the aggregate, its publications reach more adult
males than those of any other magazine publisher and reach over one-third of
all young females in the United States. In 1995, the Company's magazines
reached an aggregate of approximately 36.5 million of the approximately 60.1
million adult males in the United States, or 60.7% of the market. The
circulation of the Company's magazines targeting adult males and young females
is dependent to a certain extent on the number of persons in such demographic
groups in the U.S. population at any given time. The adult male market is
particularly attractive to advertisers due to its size and overall purchasing
power, while the young female market provides advertisers with the opportunity
to establish brand recognition during the formative stages of this important
consumer group's buying patterns.
The following table sets forth certain information regarding the Company's
13 core publications for its fiscal year ended November 30, 1995:
<TABLE>
<CAPTION>
NET TOTAL CIRCULATION
MAGAZINE TITLE REVENUES(A) CIRCULATION(B) RANK(B)(C)
-------------- --------------------- --------------------- -----------
(AMOUNTS IN MILLIONS) (COPIES IN THOUSANDS)
<S> <C> <C> <C>
Motor Trend......... $31.3 950.6 2 of 4
'TEEN............... 24.1 1,311.8 3 of 3
Hot Rod............. 19.7 810.2 1 of 2
Guns & Ammo......... 13.6 570.8 1 of 2
Skin Diver.......... 13.3 229.0 1 of 2
4 Wheel & Off-Road.. 12.0 367.7 1 of 2
Car Craft........... 9.8 389.7 1 of 1
Petersen's Hunting.. 7.3 331.2 1 of 1
Motorcyclist........ 6.8 239.6 2 of 2
Sport Truck......... 6.2 192.1 1 of 2
Circle Track........ 6.0 131.6 2 of 3
Photographic........ 5.7 217.5 3 of 3
Dirt Rider.......... 5.4 160.8 1 of 3
</TABLE>
- --------
(a) Includes advertising, circulation and other revenues for the year ended
November 30, 1995.
(b)Based on the average circulation for each publication for the year ended
December 31, 1995.
(c) Includes only national publications, that are tracked by industry analysts
and does not include small regional publications and newsletters.
The Company completed the Acquisition on September 30, 1996. The Investors
pursued the Acquisition because they believed it offered an attractive
opportunity to: (i) acquire a diverse portfolio of profitable magazines with
significant growth potential; (ii) bring together a skilled and experienced
management team, consisting of the Company's new senior managers and
Petersen's existing publishers and editorial staff; (iii) apply professional
management techniques to the Company's portfolio and improve its operating
results by increasing circulation and advertising revenues and reducing
operating costs and (iv) further develop the Company's brand-name franchises
with limited additional capital investment. Management believes that
opportunities exist to achieve each of these results both in the near term and
on a going-forward basis.
INDUSTRY OVERVIEW
The consumer magazine market includes both general-interest and special-
interest publications. General-interest magazines are characterized by broad-
based editorial content and readership, while special-interest magazines have
a more narrow editorial focus and subject-selective readership. The Company
operates primarily within the expanding special-interest segment of the
consumer magazine publishing market. The Company typically derives
approximately 80% of its publication revenues from special-interest magazines
with the balance coming from its general-interest publications, which include
'TEEN, All About You! and Sport. Over the last decade, special-interest
publications targeted to niche audiences have enjoyed significant growth and
are now estimated to account for approximately one quarter of the overall
consumer magazine market in terms of total advertising and circulation
spending. In recent years, special-interest magazines have generally exhibited
stronger growth in both advertising and circulation spending as compared to
general-interest magazines. For example,
43
<PAGE>
based on a representative survey of 111 general-interest and 115 special-
interest magazines compiled by Veronis, Suhler & Associates, advertising and
circulation spending on special-interest publications have grown at compound
annual rates of 8.1% and 2.7%, respectively, as compared to 5.6% and 1.3%,
respectively, for general-interest publications during the period from 1990 to
1995. In addition, because special-interest magazines target enthusiasts,
publishers are generally able to charge a higher cover price as compared to
general-interest magazines. Based on the survey noted above, the average price
of a special-interest magazine was $2.08 in 1995, nearly 50% higher than the
$1.41 average price of a general-interest magazine. For much the same reason,
the Company believes that readers of special-interest magazines are less
price-sensitive than readers of general-interest magazines.
Circulation revenues are generated from subscription and newsstand sales. On
an industry-wide basis, approximately 18% of consumer magazines are currently
distributed through newsstand sales and 82% are distributed through
subscription sales. Over the last fifteen years, the aggregate number of
consumer magazines distributed through newsstand sales has declined in
relation to the number distributed through subscription sales. The Company
believes that this decline is primarily the result of decreased newsstand
sales of general-interest magazines while newsstand sales of special-interest
magazines have remained relatively constant. Due to increases in newsstand
cover prices, the amount of circulation revenue generated from newsstand sales
by special-interest magazines has grown over the last decade. According to the
survey noted above, the average price per copy for special-interest magazines
increased at a compound annual growth rate of 2.6% for the period from 1990 to
1995. In addition, the Company believes that newsstand sales offer an
economically attractive vehicle for launching new magazines, attracting more
affluent subscribers and generating timely feedback about its editorial
content. For both the year ended November 30, 1995 and the ten months ended
September 30, 1996, approximately 49% of the Company's circulation revenues
were derived from newsstand sales and 51% were derived from subscription
sales. See "--Sources of Revenue."
In general, magazine publishers generate the majority of their revenues from
the sale of advertising. Advertising revenues, however, tend to be cyclical
and dependent upon general economic conditions. Historically, increases in
advertising revenues have corresponded with economic recoveries while
decreases have corresponded with general economic downturns. As compared to
general-interest magazines, the Company believes that its advertising revenues
are less susceptible to changes in general economic conditions due to the
diversity of its publications, the special-interest nature of its editorial
content and the endemic nature of its advertiser base. The endemic nature of
the Company's advertiser base refers to the fact that a significant portion of
the Company's advertising revenues are from advertisers that are
manufacturers, marketers or distributors of products that relate directly to
the editorial content of the magazines in which they advertise.
Industry sources estimate that total advertising spending for special-
interest publications increased by approximately 13% in 1995. According to the
Publishers Information Bureau, the top ten categories of industries ranked by
consumer magazine advertising expenditures in 1995 were automotive and
automotive accessories (15%), mail order and direct response (11%), toiletries
and cosmetics (10%), computers, office equipment and stationery (10%),
business and consumer services (9%), food and food products (8%), apparel,
footwear and accessories (7%), drugs and remedies (6%), travel, hotels and
resorts (5%) and cigarettes, tobacco and accessories (4%). The automotive
industry has traditionally accounted for the largest percentage of total
advertising expenditures in the consumer magazine industry. During the period
from 1990 to 1995, advertising spending by the automotive industry increased
at a compound annual growth rate of 8.2%.
In recent years, consumer magazine publishers have increasingly sought to
diversify their earnings and more effectively utilize their existing
publications by developing non-traditional revenue streams. In general,
magazine publishers have sought to expand the use of their magazines'
editorial content across different media formats and to capitalize on their
existing brand names. On an industry-wide basis, the Company estimates that
consumer magazine publishers currently derive approximately 10% to 20% of
their net revenues from ancillary revenue sources, such as licensing
arrangements, subscriber list rentals, joint ventures and new forms of media.
The Company believes that its portfolio of special-interest magazines provides
unique opportunities to develop ancillary revenues due to the special-interest
nature of such magazines' editorial content and the enthusiast nature of their
readership.
44
<PAGE>
BUSINESS AND OPERATING STRATEGY
The Company's core publications collectively average over 30 years in
publication and have developed nationally-recognized branded titles in each of
their respective markets. The Company believes that the enthusiast nature of
its readership provides it with a loyal subscriber base and enables it to
deliver a solid core audience to its advertisers on a consistent basis. As a
result, management believes that the Company maintains a number of significant
competitive advantages.
Historically, Petersen expanded primarily by introducing special-interest
magazines to serve niche audiences in areas in which its founder had a
personal interest. In pursuing such expansion, Petersen maintained a
consistent focus on the high-quality editorial content of its magazines.
However, Petersen was organized into six distinct publishing groups that
essentially operated independently from one another and were focused primarily
on editorial development and advertising revenue generation rather than
overall profitability. As a result, management believes that Petersen did not
fully realize all available operating synergies.
The Company's new management team has significant experience in the magazine
publishing industry, Based upon such experience, management has developed a
detailed business and operating strategy for the Company, primarily comprising
operating policies and procedures that have proven successful in their prior
experience and are widely practiced throughout the publishing industry. The
Company's business and operating strategy is primarily designed to leverage
off of its nationally-recognized brand names and improve the profitability of
the Company. The key elements of this strategy include:
REORGANIZE OPERATING STRUCTURE. Following the Acquisition, new management
reorganized several operating areas of the Company to facilitate a more
integrated and unified approach to circulation, production and advertising
sales, while retaining independent editorial direction of its magazines. The
Company's circulation operations, which include such functions as subscription
marketing and planning, fulfillment and newsstand distribution, were
previously organized by magazine group and managed by generalists focused on
each magazine group. Circulation operations have been reorganized on a
functional basis across all of the Company's publications and will be managed
by specialists within each function. Certain of these functions are being
relocated to New York in order to take advantage of expertise not readily
available elsewhere. In addition, the Company's production activities are
being centralized across all of its publications rather than by magazine
group. The Company's national advertising sales management is being relocated
from Los Angeles to New York to be in closer proximity to national advertising
accounts. Similarly, management of the young women's titles is being moved to
New York to increase the visibility of such magazines among advertisers in the
fashion and cosmetic industries.
IMPLEMENT OPERATING IMPROVEMENTS. Management has identified and has
substantially implemented operating improvements that are expected to result
in significant cost savings. These measures include the following:
. REDUCE OPERATING COSTS. At the time of the Acquisition, management
identified certain cost reduction measures including: (i) savings in
personnel and related net lease costs; (ii) lower utilization of
temporary employees and services; (iii) the consolidation of one or more
of the Company's regional sales offices; (iv) tighter purchasing
procedures and controls and (v) reductions in the Company's travel and
entertainment expenditures. A substantial number of these cost reduction
measures have been completed, including personnel reductions expected to
result in annualized cost savings of approximately $4.9 million.
. RESTRUCTURE VENDOR RELATIONSHIPS. Immediately following the Acquisition,
management commenced an extensive review of the Company's significant
vendor relationships, including its printing, paper supply, fulfillment
and newsstand distribution arrangements. Based on that review and
meetings with certain of such vendors, management believes that there are
opportunities to enhance these relationships and to improve the economic
terms of such arrangements for the Company. Although no definitive
agreements have been executed, the Company believes that it will be
successful in achieving more favorable terms with many of its vendors.
45
<PAGE>
. IMPROVE PERFORMANCE OF CERTAIN PUBLICATIONS. Management believes that it
can improve the Company's profitability by implementing changes designed
to eliminate or significantly reduce the losses currently being generated
by certain of the Company's publications. The Company has five magazines
(Sassy, Sport, Petersen's Golfing, Bicycle Guide and Mountain Biker) that
collectively accounted for a negative profit contribution of $7.6 million
and $6.3 million for fiscal 1995 and the ten months ended September 30,
1996, respectively. In December 1996, the Company completed the process
of merging Sassy into 'TEEN, thereby eliminating the losses being
generated by Sassy. Sassy generated negative profit contribution of $4.7
million and $3.2 million for fiscal 1995 and the ten months ended
September 30, 1996, respectively. While the remaining magazines
collectively are expected to break even or be marginally profitable in
fiscal 1997, in the event such magazines continue to generate losses,
management expects to take one or more of the following actions: (i)
discontinue or sell such magazines; (ii) merge such magazines with the
Company's existing magazines or (iii) enter into strategic partnerships
with third parties. Management expects that a final decision with respect
to each magazine will be made by the end of fiscal 1997.
INCREASE CIRCULATION AND ADVERTISING REVENUES. Management believes that
there are significant opportunities to increase circulation and advertising
revenues. The Company has historically focused on the newsstand distribution
channel and has relied heavily upon agency subscription sales in managing its
circulation operations. Management believes that it can increase subscription
revenues by instituting programs designed to increase the number of readers
who buy subscriptions directly from the Company. For example, the Company has
begun to develop a database of its over 32 million current or former
subscribers that will allow it to cross-sell its other publications to such
subscribers. In addition, management intends to increase the newsstand and
subscription prices on certain of its publications in order to bring such
prices in line with competitive publications.
Management believes that it can increase the Company's advertising revenues
by adopting a more unified approach to advertising sales, which will focus on
enhancing the ability of the Company's advertisers to purchase advertising
space across all of the Company's magazines that reach their target markets.
In addition, management intends to increase the Company's advertiser base by
targeting new advertisers and advertisers in other industry categories. Such
advertisers include, among others, manufacturers of men's apparel, footwear
and accessories and alcoholic beverages. The Company has also implemented a
new commission sales policy designed to provide more effective incentives to
the Company's advertising sales force. Prior management's policy did not
provide additional incentives to sales personnel once they had reached their
annual sales target, which often occurred prior to the conclusion of
Petersen's fiscal year. In addition, by designing the database described above
with the capability of identifying specific segments within each of its
markets, the Company believes it can offer its advertisers increased value and
thus generate additional advertising revenues.
ESTABLISH PERFORMANCE-BASED INCENTIVES. The significant equity interests
held by the Company's new senior management provide such executives with an
incentive to maximize the Company's overall profitability. In addition, to
provide incentives to the Company's existing management and assist new
management in implementing the new business strategy, the Company plans to
adopt new compensation arrangements designed to reward managers and other
participating employees based upon the Company's operating performance.
DEVELOP ANCILLARY REVENUE SOURCES. The Company was historically operated as
a traditional consumer magazine company deriving substantially all of its
revenues from advertising and circulation sales. On an industry-wide basis,
management estimates, based upon its experience in the industry, that consumer
magazine publishers currently derive approximately 10% to 20% of their
revenues from ancillary revenue sources while the Company currently derives
only about 4% of its revenues from such sources. In recent months, the Company
has begun to explore the ancillary revenue opportunities afforded by its well-
established brand names. For example, the Company has recently entered into
licensing agreements relating to the use of its Motor Trend and Hot Rod brand
names for weekly television shows on The Nashville Network (TNN) and its Guns
& Ammo brand name for a weekly television show on ESPN. In addition, because
the editorial content of many of its magazines would also appeal to readers
outside of the United States, management believes that significant
46
<PAGE>
opportunities exist to establish international licensing agreements,
particularly in Asia, Australia, Great Britain and Western Europe. The Company
believes that there are significant opportunities to increase revenues by
leveraging off the editorial content and the nationally-recognized brand names
of the Company's existing publications through licensing arrangements,
strategic joint ventures, retail alliances, subscriber list rentals, affinity
group marketing and electronic publishing.
ESTABLISH NEW TITLES. The Company has successfully expanded its magazine
portfolio by launching new publications to serve niche audiences in related
markets and by making selective acquisitions of existing magazine titles.
Thirteen of the Company's 31 current monthly and bimonthly titles were
launched or acquired by the Company since 1990. The Company plans to continue
to develop and launch new special-interest magazines and acquire existing
magazines that will complement and enhance its existing portfolio.
SOURCES OF REVENUE
Substantially all of the Company's revenues are derived from advertising and
circulation sales, with lesser amounts derived from other sources such as
subscriber list rentals. Circulation revenues are generated from both
subscription and newsstand sales. The following table sets forth the sources
and amounts of the Company's revenues for the fiscal years ended November 30,
1993, 1994 and 1995 and the ten months ended September 30, 1996 (dollars in
millions):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NOVEMBER 30, TEN MONTHS
---------------------------------------- ENDED
1993 1994 1995 SEPTEMBER 30, 1996
------------ ------------ ------------ ------------------
SOURCES OF REVENUE AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------------------ ------ ----- ------ ----- ------ ----- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Advertising............. $105.1 56.4% $116.6 57.7% $123.4 57.8% $ 112.0 59.2%
Newsstand............... 37.5 20.1 40.1 19.9 39.9 18.7 34.3 18.1
Subscriptions........... 39.8 21.4 40.7 20.1 42.0 19.6 35.2 18.6
Other................... 3.9 2.1 4.6 2.3 8.3 3.9 7.6 4.1
------ ----- ------ ----- ------ ----- --------- --------
Total................. $186.3 100.0% $202.0 100.0% $213.6 100.0% $ 189.1 100.0%
====== ===== ====== ===== ====== ===== ========= ========
</TABLE>
Advertising. Advertising sales accounted for approximately 58% and
approximately 59% of the Company's net revenues for fiscal 1995 and the ten
months ended September 30, 1996, respectively. The Company's advertising rates
and rate structures vary among the Company's publications and are based, among
other things, on the circulation of the particular publication and the size
and location of the advertisement in the publication. The Company's
advertising rates for a full-page advertisement ranged from $1,390 to $24,295
in fiscal 1995. The Company's top 25 advertisers accounted for only 32.6% and
32.8% of the Company's advertising revenues during fiscal 1995 and the ten
months ended September 30, 1996, respectively. As compared to general interest
magazines, the Company believes that its advertising revenues are less
susceptible to changes in general economic conditions due to the diversity of
its publications, the special-interest nature of its editorial content and the
endemic nature of the Company's advertiser base. The endemic nature of the
Company's advertiser base refers to the fact that a significant portion of the
Company's advertising revenues are from advertisers that are manufacturers,
marketers or distributors of products that relate directly to the editorial
content of the magazines in which they advertise.
The Company's advertising revenues are principally derived from large and
small manufacturers of products endemic to the editorial content of the
Company's magazines, such as aftermarket automotive parts, hunting equipment,
recreational firearms, bicycles and bicycle accessories, diving equipment and
photographic equipment and supplies. Such manufacturers utilize the Company's
magazines to efficiently advertise their specialized products to the Company's
enthusiast readership. In addition to revenues from endemic advertising, the
Company also derives a portion of its advertising revenues from well-known
national manufacturers of consumer products that do not directly relate to the
editorial content of the Company's magazines, such as liquor, cosmetics,
financial products and apparel. The Company derives the largest portion of its
advertising revenues from the automotive industry, which has traditionally
accounted for the largest percentage of total advertising expenditures in the
consumer magazine industry. For fiscal 1995, the Company derived approximately
17.9% and 20.6% of its advertising revenues from automotive manufacturers of
original equipment and aftermarket parts, respectively.
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<PAGE>
Newsstand. Newsstand distribution accounted for approximately 19% and
approximately 18% of the Company's net revenues for fiscal 1995 and the ten
months ended September 30, 1996, respectively. As compared to the industry
average, the Company typically has a greater percentage of revenues derived
from newsstand sales due to the Company's historic focus on the newsstand
distribution channel and the significant number of single issue or annual
publications, which are sold exclusively through newsstands. The Company
generally receives between 40% and 50% of the cover price from an individual
magazine sold through a newsstand with the balance of such cover price going
to such magazine's distributor, wholesaler and retailer.
Subscriptions. Subscription sales accounted for approximately 20% and
approximately 19% of the Company's net revenues for fiscal 1995 and the ten
months ended September 30, 1996, respectively. Subscriptions to the Company's
magazines are generally sold either directly by the Company or by an
independent subscription agent, such as Publishers' Clearinghouse. Such agents
remit a percentage of the subscription price to the Company, ranging from 0%
to 75%. In certain instances, the subscription agent receives a fee from the
Company in addition to retaining the entire subscription price. Magazine
publishers are occasionally willing to pay brokers for subscribers in order to
expand their advertising base. In the aggregate, the Company receives
approximately 10% to 15% of the total price of subscriptions sold through
agents. The Company has historically sold its subscriptions using a variety of
techniques including direct reply subscription cards, direct mail and
television advertisements.
Other Revenue Sources. The Company was historically operated as a
traditional consumer magazine company deriving substantially all of its
revenues from advertising and circulation sales. On an industry-wide basis,
management estimates that consumer magazine publishers currently derive
approximately 10% to 20% of their revenues from ancillary revenue sources
while the Company currently derives only about 4% of its revenues from
ancillary sources. These additional revenues are derived primarily from
subscriber list rentals and sponsorship of special events, such trade shows
and outdoor festivals that relate to the editorial content of the Company's
magazines. In recent months, the Company has begun to explore the ancillary
revenue opportunities afforded to it as a result of its well-established brand
names. For example, the Company has recently entered into licensing agreements
relating to the use of its Motor Trend and Hot Rod brand names for weekly
television shows on The Nashville Network (TNN) and its Guns & Ammo brand name
for a weekly television show on ESPN.
The Company believes that there are significant opportunities to increase
revenues by leveraging off the editorial content and the nationally-recognized
brand names of the Company's existing publications. With the growth of
electronic publishing, the Company believes that there will be increased
opportunities to utilize the editorial content of the Company's publications
across different formats. The Company has already established a web-site on
the Internet for Motor Trend and Bicycle Guide, and expects to establish a
'TEEN web-site in the next twelve to twenty-four months. The Company believes
that electronic publishing offers opportunities to generate additional
revenues through increased advertising sales, access fees and additional
subscription sales.
The Company also believes that significant opportunities exist to generate
additional revenues through affinity group marketing programs pursuant to
which the Company would attempt to sell complementary products or services
directly to its subscribers. Through such programs, the Company will seek to
increase its sales to a typical subscriber from a single magazine subscription
to a variety of related products and services. The Company believes that its
special-interest publications will provide an attractive platform through
which to pursue such programs. The Company also intends to enter into
licensing arrangements with manufacturers for the use of the Company's
nationally-recognized brand names.
Because the editorial content of many of its magazines would also appeal to
readers outside the United States, management believes that significant
opportunities exist to establish international licensing agreements,
particularly in Asia, Australia, Great Britain and Western Europe. Other areas
that the Company believes it can develop additional revenue streams include
developing business-to-business publications, sponsoring trade shows,
generating additional subscriber list rentals and entering into strategic
joint ventures. As a result of its large number of publications, the Company
has a subscriber list that includes over 32 million names of current
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or former subscribers. The Company is currently developing a database that
includes such names and believes that it can increase list rental income by
marketing such subscriber list database to a broad group of potential users.
PUBLICATIONS
For fiscal 1995, the Company's portfolio included 22 monthly, 7 bimonthly
and 44 single issue or annual publications. The following table sets forth
certain information relating to the Company's current portfolio of monthly and
bimonthly publications:
<TABLE>
<CAPTION>
AVERAGE CIRCULATION FOR THE YEAR
ENDED DECEMBER 31, 1995 YEAR OF
---------------------------------------- FREQUENCY OF INTRODUCTION
NEWSSTAND SUBSCRIPTION TOTAL PUBLICATION OR ACQUISITION
----------- -------------- ------------ ------------ --------------
(COPIES IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Motor Trend............. 163.8 786.8 950.6 Monthly 1949
'TEEN................... 386.6 925.2 1,311.8 Monthly 1957
Sassy................... 98.7 623.4 722.1 Monthly 1994
All About You!.......... 251.4 13.7 265.1 Bi-Monthly 1995
Hot Rod................. 141.3 668.9 810.2 Monthly 1948
Car Craft............... 297.2 92.5 389.7 Monthly 1953
4 Wheel & Off-Road...... 129.9 237.8 367.7 Monthly 1978
Sport Truck............. 81.7 110.4 192.1 Monthly 1991
Chevy High Performance.. 71.6 69.3 140.9 Monthly 1987
Circle Track............ 41.9 89.7 131.6 Monthly 1982
Rod & Custom............ 41.4 64.8 106.2 Monthly 1955
5.0 Liter Mustang....... 43.6 18.8 62.4 Monthly(b) 1994
Mustang & Fords......... 50.7 54.9 105.6 Bi-Monthly 1994
Custom Classic Trucks... 43.0 33.8 76.8 Bi-Monthly 1994
Hot Rod Bikes........... 39.0 34.9 73.9 Bi-Monthly(c) 1994
Kit Car................. 37.9 19.1 57.0 Bi-Monthly 1983
Skin Diver.............. 27.9 201.1 229.0 Monthly 1951
Photographic............ 43.9 173.6 217.5 Monthly 1972
Motorcyclist............ 77.4 162.2 239.6 Monthly 1971
Dirt Rider.............. 48.4 112.4 160.8 Monthly 1982
Bicycle Guide........... 19.3 87.8 107.1 10 Issues Per Year 1993
Sport Rider............. 69.0 32.2 101.2 Bi-Monthly 1993
Mountain Biker.......... 33.7 43.5 77.2 10 Issues Per Year 1994
Guns & Ammo............. 134.8 436.0 570.8 Monthly 1958
Handguns................ 63.3 106.0 169.3 Monthly 1987
Petersen's Hunting...... 40.3 290.9 331.2 Monthly 1973
Petersen's Bowhunting... 39.0 99.9 138.9 8 Issues Per Year 1988
Sport................... 105.4 648.8 754.2 Monthly 1988
Petersen's Golfing...... 36.7 121.3 158.0 Monthly 1994
</TABLE>
- --------
(a) The Company launched Super Street and 4x4 Power as monthly publications in
fiscal 1996. These publications have no significant operating history and
therefore have not been included in the table.
(b) This publication was converted to a monthly publication from a bimonthly
publication in October 1996.
(c) Introduced as a monthly publication in January 1997.
The Company also publishes a wide variety of single issue publications,
annuals, hard cover books and technical volumes. These publications generally
provide more in-depth coverage of topics addressed in the Company's monthly
and bimonthly magazines. Examples of such single issue publications include
Motor Trend New Car Buyer's Guide, Hot Rod Annual, Car Craft Drag Racing,
Chevy High Performance Special, Guns & Ammo Annual, Firearms for Law
Enforcement, Photo Buyer's Guide and Motorcycle Buyer's Guide. By utilizing
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<PAGE>
portions of the editorial content previously appearing in its monthly and
bimonthly publications, the Company is able to generate additional revenues in
a cost-effective manner through such publications. In addition, the Company
utilizes single issue publications as a means of developing and testing new
publications. Many of the Company's current monthly and bimonthly publications
were first introduced as single issue publications. The Company published 42
single issue publications in fiscal 1996.
The following sets forth a brief description of each of the Company's 13
core publications:
Motor Trend is the Company's flagship publication and is recognized as a
leading authority on new domestic and foreign automobiles. Founded by the
Company in 1949, Motor Trend provides comprehensive information and guidance
to new car buyers as well as car and truck enthusiasts. Motor Trend typically
tests more than 200 new cars, trucks, minivans and sport utility vehicles
annually, which the Company believes is more than any other competitive
publication. Many of these tests are conducted in the context of multi-vehicle
comparison tests, which provide the reader with detailed technical and driving
analysis in an easy-to-understand format. Motor Trend's annual automotive
industry awards (Car of the Year, Import Car of the Year and Truck of the
Year) are widely regarded as the most prestigious in the industry.
For fiscal 1995, Motor Trend generated approximately 15% of the Company's
net revenues. In July 1996, the Company established a Motor Trend web-site on
the Internet, which currently contains approximately 30% of the editorial
content of the monthly edition. The Company believes that the Internet offers
the Company additional opportunities to generate revenues through increased
advertising sales, access fees and additional subscription sales. The Company
has also licensed the use of the Motor Trend brand name in connection with a
weekly television show for The Nashville Network (TNN). For fiscal 1996, the
Company expects to publish six Motor Trend buyer's guides. Motor Trend
competes for circulation on the basis of the nature and quality of its
editorial content. Motor Trend's principal competitors are Car and Driver,
Road & Track and Automobile.
'TEEN has the largest circulation of any of the Company's magazines. 'TEEN's
editorial content covers a broad range of topics relevant to girls aged 12 to
19, including fashion, beauty, entertainment and a wide variety of
contemporary issues. 'TEEN places a strong emphasis on the development of
self-esteem and self-confidence among its readers. 'TEEN principally competes
with Seventeen and YM (Young & Modern). For fiscal 1995, 'TEEN generated
approximately 11% of the Company's net revenues.
As part of its business strategy, management intends to make a number of
changes to 'TEEN designed to increase its appeal to both readers and
advertisers, including a refocusing of the editorial content of 'TEEN to
attract more readers in their late teens in an effort to increase advertising
revenues from the cosmetic and fashion apparel industries. In addition,
management intends to improve 'TEEN's cover layout and artwork and upgrade the
paper grade used for its production. 'TEEN's management is being moved to New
York to increase its visibility among advertisers in the fashion and cosmetic
industries. The Company does not expect to incur significant expense in
connection with such relocation.
Hot Rod was the first magazine launched by the Company's founder in 1948.
Hot Rod is dedicated to the sport of "hot rodding" and primarily focuses on
high performance and personalized vehicles. Hot Rod's editorial content covers
all aspects of the performance industry and features the latest trends,
performance cars and trucks, custom built street rods as well as racing
vehicles of all types. Hot Rod's comprehensive coverage includes in-depth
product testing, technical articles, editorial commentary, road tests, engine
buildups and photo stories on project cars. Hot Rod is the dominant
publication in its targeted market. The Company has licensed the use of the
Hot Rod brand name in connection with a weekly television show for The
Nashville Network (TNN). For fiscal 1995, Hot Rod generated approximately 9%
of the Company's net revenues.
Guns & Ammo is edited for the sportsman with a keen interest in the
practical applications of sporting firearms, with an emphasis on their safe
and proper use. Guns & Ammo features information on current production of
sporting arms and their use, as well as technical and semi-technical articles
on all facets of sport shooting. As active participants, the editors of Guns &
Ammo share the interests of their readers, and each issue
50
<PAGE>
of the magazine delivers a well-balanced editorial mix that includes hunting,
shooting, reloading, antique and modem arms, ballistics and arms legislation.
Natural resource protection and environmental preservation as well as in-depth
reviews of new products and new trends represent other major editorial issues
covered by internationally renowned experts. Guns & Ammo principally competes
with Shooting Times. The Company has licensed the use of the Guns & Ammo brand
name in connection with a weekly television show for ESPN. For fiscal 1995,
Guns & Ammo generated approximately 6% of the Company's net revenues.
Skin Diver was introduced by the Company in 1951 and is the largest diving
magazine in the world in terms of annual circulation. The magazine's editorial
focus involves three basic categories: (i) diving news and diving safety and
educational issues; (ii) dive product performance reviews and (iii) local and
overseas dive travel. Skin Diver provides information on scuba diving
equipment, snorkeling, underwater photography, shipwreck exploration, marine
life, organized diving events, scuba education and dive travel. With global
coverage of dive travel activities, Skin Diver features in every issue dive
resorts, live-aboard dive boats and attractions in over 70 countries and
islands around the world. All topics are covered by an internal staff and
contributing editors who are among the most experienced and well trained
divers in the world. Skin Diver is the only national publication that focuses
primarily on skin diving and competes on a limited basis with Rodale's Scuba
Diving. For fiscal 1995, Skin Diver generated approximately 6% of the
Company's net revenues.
4 Wheel & Off-Road is widely considered the leading magazine among truck
enthusiasts. Established in 1978, 4 Wheel & Off-Road is dedicated to the four-
wheel drive enthusiast and industry. 4 Wheel & Off-Road is aimed at people
who: (i) are considering the purchase of a new four-wheel drive vehicle; (ii)
want to accessorize and improve their vehicle or (iii) frequently utilize
their four-wheel drives for enjoyment, many times in a competitive setting. 4
Wheel & Off-Road is regarded as a prominent source of the latest and most
accurate technical articles, including tests of new products and step-by-step
installation of popular accessories such as suspension lifts and engine
modifications. In addition to a strong technical base, 4 Wheel & Off-Road also
features monthly articles which cover the nation's most unique truck and off-
road events. 4 Wheel & Off-Road principally competes with Four Wheeler. For
fiscal 1995, 4 Wheel & Off-Road generated approximately 6% of the Company's
net revenues.
Car Craft is the most comprehensive do-it-yourself street performance
magazine currently in production in the United States. Established in 1953,
Car Craft is devoted to knowledgeable enthusiasts interested in obtaining
maximum legal performance from modified street machines and racing vehicles.
Car Craft features informative monthly articles, including technical how-to-
articles, in-depth testing of new performance cars and information regarding
new performance technology. Car Craft does not currently face competition from
any other national publication. For fiscal 1995, Car Craft generated
approximately 5% of the Company's net revenues.
Petersen's Hunting ("Hunting") is the only U.S. publication devoted entirely
to the sport of recreational hunting. Every issue contains instructional and
entertaining articles for the true hunting enthusiast. Hunting presents in-
depth coverage of the various hunting disciplines: big and small game,
waterfowl, upland game, guns and loads and foreign hunting. Monthly
departments focus on the more specialized aspects of the sport and its
equipment, including game management, vehicles, gun dogs, optics, handloading,
bowhunting and firearms. Editorial coverage also includes conservation and
ecological issues, the critical roles played in these areas by the hunter and
the manufacturer, and basic where-to and how-to information for all types of
recreational hunting. Hunting competes indirectly with American Hunter and, to
a lesser extent, with North American Hunter and Sports Afield. For fiscal
1995, Hunting generated approximately 3% of the Company's net revenues.
Motorcyclist is the only U.S. publication that is dedicated exclusively to
street motorcycles. The magazine's editorial focus is on the practical aspects
of owning, maintaining and riding a street motorcycle. Motorcyclist is written
for the serious enthusiast, offering the most authoritative road tests in the
industry along with information on how to improve and modify the reader's
current motorcycles. Regular features include maintenance and performance-
improvement articles and safety information such as helmet comparisons and
riding-techniques. Motorcyclist principally competes with Cycle World. For
fiscal 1995, Motorcyclist generated approximately 3% of the Company's net
revenues.
51
<PAGE>
Sport Truck is a full-service magazine that strives to keep its readers
informed of every aspect concerning the street truck marketplace, covering the
entire range of pickup and sport utility vehicles. Sport Truck provides both
step-by-step and technical articles, which detail the customizing process and
provide complete coverage of the product. Sport Truck's editorial focus is on
the latest trucks on the market as well as prototypes, including both domestic
and import models. Sport Truck's principal competition is from Truckin'
magazine. For fiscal 1995, Sport Truck generated approximately 3% of the
Company's net revenues.
Circle Track is the leading technical magazine for oval-track racers, fans
and enthusiasts. Circle Track provides a special emphasis on how-to technical
articles, in-depth discussions of engine, chassis and racing technology,
descriptive car features, behind-the-scenes event coverage and action
photography. Circle Track was introduced in 1982 and currently competes with
Stock Car Racing. For fiscal 1995, Circle Track generated approximately 3% of
the Company's net revenues.
Photographic magazine is a how-to guide dedicated to increasing photographic
knowledge, skill and enjoyment for both amateurs and professionals.
Photographic is edited for all levels of photography, blends equipment
coverage with reports on photography techniques, workshops, schools, photo
travel and contests. Each issue includes exciting travel features that
encourage readers to test and improve their photography skills. Each issue
also includes segments on outdoor and action photography as well as
information on travel destinations and helpful information on how to best take
advantage of the photographic opportunities travel brings. Photographic was
introduced in 1972 and principally competes with American Photo and Popular
Photography. For fiscal 1995, Photographic generated approximately 3% of the
Company's net revenues.
Dirt Rider is the world's largest dirt riding publication in terms of
circulation and covers all aspects of off-road motorcycling. Dirt Rider offers
readers full coverage of off-road motorcycling including new motorcycle
evaluations, technical information, riding tips and the latest in riding
accessories in an easy-to-read format. The editorial content focuses on
accurate and insightful reviews of the latest machinery and aftermarket
products from the off-road riding industry. Dirt Rider principally competes
with Dirt Bike and Motocross Action. For fiscal 1995, Dirt Rider generated
approximately 3% of the Company's net revenues.
PRODUCTION AND DISTRIBUTION
The Company employs a staff of professionals that oversees the production,
printing, distribution and fulfillment of its magazines. Through the use of
state-of-the-art production equipment, economies of scale in printing
contracts and efficiencies in subscription solicitation and fulfillment, the
Company is able to effectively produce and distribute all of its publications.
The Company's production system for both graphics and editing is state-of-the
art. Approximately 60 employees of the Company are engaged in the production
and distribution of the Company's publications.
In an effort to reduce production costs, the Company sold all of its assets
relating to its pre-press operations to World Color Press, Inc. ("World
Color") for approximately $2.5 million in February 1996. At the same time, the
Company entered into an agreement with World Color pursuant to which World
Color agreed to provide the Company's color separation, pre-press and related
service requirements with respect to most of the Company's publications for
the term of the agreement. Under the agreement, the Company is generally
required to use World Color for at least 85% of its pre-press and related
service requirements. This agreement with World Color expires on February 28,
2001.
A majority of the Company's magazines, including Motor Trend, Hot Rod,
'TEEN, 4 Wheel & Off-Road, Car Craft, Circle Track, Skin Diver, Guns & Ammo
and Hunting, are printed by World Color pursuant to an agreement that expires
on December 31, 1998. The Company's remaining magazines including All About
You! and Sport Rider, are printed by Johnson & Hardin Printing ("J&H"),
pursuant to an agreement that expires on December 31, 1997. The Company
believes that its relationships with its printers are good. However, should
the Company need to change printers, it is confident that other printers of
similar quality could be engaged on the
52
<PAGE>
same or better terms. The Company believes that its high volume of printing
with World Color and J&H enables it to receive favorable printing rates.
The newsstand distribution of the Company's magazines is handled exclusively
by Warner Publisher Services, Inc. ("Warner") pursuant to a distribution
agreement. Such agreement will remain in effect until December 31, 1997,
subject to automatic 90-day extensions thereafter unless either party delivers
a termination notice. Warner distributes the Company's publications through a
network of marketing representatives to domestic independent wholesalers as
well as to other channels of distribution. Warner also provides the Company
with other services, including management information and promotional and
specialty marketing services. Warner's marketing representatives solicit
national, regional and local retailers in an effort to expand the number of
retail outlets for the Company titles.
The Company's subscriptions are serviced by Neodata Services, Inc.
("Neodata"), which performs the following services for the Company: receiving,
verifying, balancing and depositing payments from subscribers; maintaining
master files on all subscribers by magazine; issuing bills and renewal notices
to subscribers; issuing labels, packaging and mailing magazines as directed by
the Company and furnishing various reports to monitor all aspects of the
subscription operations.
Immediately following the Acquisition, management commenced an extensive
review of the Company's significant vendor relationships, including its
printing, paper supply, fulfillment and newsstand distribution arrangements.
Based on that review and subsequent meetings with certain of such vendors,
management believes that there are opportunities to enhance these
relationships and to improve the economic terms of such arrangements for the
Company. Although no definitive agreements have been executed, the Company
believes that it will be successful in either amending its existing agreements
or entering into new agreements on more favorable terms with many of its
vendors.
RAW MATERIALS
The Company's principal raw material is paper. The Company used 69.6
million, 76.0 million and 84.4 million pounds of commodity grade paper in its
fiscal years ended November 30, 1993, 1994 and 1995, respectively, resulting
in a total cost of paper during such periods of $29.0 million, $30.5 million
and $39.3 million, respectively. While paper prices have increased by an
average of less than 1% annually since 1989, certain commodity grades have
shown considerable price volatility during that period, including the
commodity grade used by the Company. Paper prices rose sharply during the
later part of 1995, and in response, Petersen purchased a large supply of 32
lb. paper in December 1995 at prices ranging from $0.61 to $0.66 per pound in
anticipation of additional price increases and supply shortages continuing for
the remainder of 1995 and 1996. Petersen purchased enough paper to meet all of
its production requirements through September 1996. The price of such paper
subsequently returned to historical levels of approximately $0.50 per pound in
May 1996. The increase in paper prices in late 1995 and Petersen's large
purchase at such increased prices materially adversely affected Petersen's
production, selling and other direct costs for year ended November 30, 1995
and the ten months ended September 30, 1996. The excess of the increased paper
prices in the market during the fiscal year ended November 30, 1995 and the
ten months ended September 30, 1996 over the median historical price of $0.50
per pound was $1.4 million and $4.2 million, respectively. The excess of the
price actually paid by Petersen for paper used during the ten months ended
September 30, 1996 over the actual market price for such paper during such
period was $1.1 million.
Following the Acquisition, the Company entered into an oral agreement with a
vendor to secure sufficient paper to meet its projected raw material needs
through the end of 1997 at or below current market prices. While there can be
no assurances, the Company expects that such agreement will be finalized by
the end of March 1997.
No assurance can be given, however, that future fluctuations in paper prices
after 1997 will not have a material adverse effect on the results of
operations and financial condition of the Company. See "Risk Factors--Paper
Price Volatility and Postal Prices" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Overview."
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COMPETITION
The magazine publishing business is highly competitive. The Company
principally competes for advertising and circulation revenues with publishers
of other special-interest consumer magazines with similar editorial content
with those published by the Company. Such competitors include: K-III
Communications Company, which publishes Seventeen, Automobile and Truckin';
Hachette Filipacchi Magazines, Inc., which publishes Road and Track, Car &
Driver, Popular Photography and Cycle World; Gruner & Jahr Printing and
Publishing Company, which publishes YM (Young & Modern); Rodale Press Inc.,
which publishes Bicycling and Rodale's Scuba Diving and The Times Mirror
Company, which publishes Outdoor Life, Field & Stream and Golf Magazine.
Certain of the Company's competitors are larger and have greater financial
resources than the Company. Most of the Company's magazines face competition
within each of their respective markets from one to three other publications.
The Company believes that it competes with other special-interest publications
based on the nature and quality of its magazines' editorial content. Eight of
the Company's 13 core publications ranked first in their respective markets
based on annual circulation in 1995.
In addition to other special-interest magazines, the Company also competes
for advertising revenues with general-interest magazines and other forms of
media, including broadcast and cable television, radio, newspaper, direct
marketing and electronic media. In competing with general-interest magazines
and other forms of media, the Company relies on its ability to reach a
targeted segment of the population in a cost-effective manner.
INTELLECTUAL PROPERTY
The Company believes that it has developed strong brand name awareness
within each of its magazines' targeted markets. As a result, the Company
regards its branded magazine titles and logos to be valuable assets. The
Company has registered numerous trademarks, service marks and logos used in
its publishing business in the United States and foreign countries in which
the Company conducts business. In addition, each one of the Company's
publications is protected under Federal copyright laws. In connection with the
Acquisition, the Company entered into a license agreement with Mr. Petersen
pursuant to which it was granted an exclusive license to use the Petersen name
in perpetuity. The Company believes that it owns or licenses all the
intellectual property rights necessary to conduct its business.
PROPERTIES
The Company publishes its magazines and houses its corporate and
administrative staff at its headquarters located at 6420 Wilshire Boulevard,
Los Angeles, California. Information relating to the Company's corporate
headquarters and other regional sales offices is set forth in the following
table:
<TABLE>
<CAPTION>
LOCATION ADDRESS SQUARE FOOTAGE TERM EXPIRATION DESCRIPTION OF USE
-------- ------- -------------- --------------- ------------------
<S> <C> <C> <C> <C>
Los Angeles............. 6420 Wilshire Boulevard 209,475 11/30/09 Headquarters
Los Angeles............. 8480 Sunset Boulevard 2,300 month-to-month Photo Studio
New York................ 437 Madison Avenue 25,000 8/31/04 Sales Office
Chicago................. 815 North LaSalle Street 10,000 9/30/05 Sales Office
Detroit................. 333 Fort Street 9,346 6/30/97 Sales Office
Atlanta................. Five Concourse Parkway 3,524 4/30/98 Sales Office
Dallas(a)............... 800 West Airport Freeway 2,929 12/31/97 Sales Office
</TABLE>
- --------
(a) Such sales office was closed pursuant to management's business and
operating strategy. The Company intends to sublease the property to a
suitable tenant at its earliest opportunity.
The Company intends to consolidate one or more of the regional sales offices
listed above as part of its business and operating strategy. The Company does
not have any specific plans at this time to close any regional sales offices.
The Company leases space used for its corporate headquarters, photo studio and
Chicago regional sales office from Mr. Petersen. See "Certain Transactions."
54
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EMPLOYEES
As of December 31, 1996, the Company employed approximately 554 full-time
employees, none of whom are members of a union. After the Acquisition, the
Company initiated a restructuring plan which included the termination of
certain employees in various corporate and operating positions. The Company
believes that its relations with its employees are satisfactory.
LEGAL PROCEEDINGS
The Company is a party to various litigation matters incidental to the
conduct of its business. Management does not believe that the outcome of any
of the matters in which it is currently involved will have a material adverse
effect on the financial condition or results of operations of the Company.
55
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information (as of December 1, 1996)
with respect to the persons who are members of the Board of Directors (the
"Board") of BrightView or executive officers or key employees of the Company
or Holdings. BrightView controls the policies and operations of the Company.
See "Limited Liability Company Agreement." Willis Stein has the ability to
designate all of the members of the Board of BrightView pursuant to the
Securityholders Agreement. See "Security Ownership of Certain Beneficial
Owners and Management--Securityholders Agreement."
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES
---- --- --------------------
<S> <C> <C>
D. Claeys Bahrenburg.... 49 Chief Executive Officer and Director
Neal Vitale............. 43 President, Chief Operating Officer and Director
Richard S. Willis....... 36 Executive Vice President--Chief Financial Officer
Michael Borchetta....... 31 Vice President--Circulation
Jay N. Cole............. 56 Executive Publisher
John Dianna............. 54 Executive Publisher
Ken Elliott............. 56 Executive Publisher
Lee Kelley.............. 54 Executive Publisher
Richard P. Lague........ 52 Executive Publisher
Paul J. Tzimoulis....... 58 Executive Publisher
James D. Dunning, Jr. .. 49 Chairman and Chief Executive Officer of BrightView and Holdings
Laurence H. Bloch....... 42 Vice Chairman of BrightView and Holdings
Avy H. Stein............ 42 Director
Daniel H. Blumenthal.... 33 Director
Stuart Karu............. 49 Director
Robert E. Petersen...... 70 Chairman Emeritus
</TABLE>
D. Claeys Bahrenburg has served as the Chief Executive Officer of the
Company and a Director of BrightView and Capital since the Acquisition. From
1989 to 1995, Mr. Bahrenburg served as President of Hearst's Magazine
Publishing Division, the largest publisher of monthly magazines in the world.
Prior to that time, he served as Executive Vice President and Group Publishing
Director at Hearst from 1986 to 1989, where his responsibilities included
overseeing 12 publications, new magazine development and brand development.
From 1981 to 1986, Mr. Bahrenburg held the position of Publisher of both House
Beautiful and Cosmopolitan.
Neal Vitale has served as the President and Chief Operating Officer of the
Company and a Director of BrightView and Capital since the Acquisition. From
1989 to 1996, Mr. Vitale was employed by Cahners Publishing Company
("Cahners"), a division of Reed Elsevier, Inc. and a leading business-to-
business publisher, in a variety of managerial capacities, including Vice
President of Consumer Publishing; Vice President/General Manager of Variety
and, most recently, as Group Vice President, Entertainment, where he was
responsible for the publication of Variety, Daily Variety, Broadcasting &
Cable, Moving Pictures International, On Production and Tradeshow Week. From
1984 to 1989, Mr. Vitale was a partner at McNamee Consulting Company, Inc., a
management consulting firm specializing in publishing and direct marketing.
Richard S. Willis has served as Executive Vice President--Chief Financial
Officer of the Company and Capital since the Acquisition. Mr. Willis was
elected as a director of BrightView at the end of 1996. Prior to the
Acquisition, Mr. Willis served as the Vice President, Finance of Petersen
since October 1995. From 1993 to
56
<PAGE>
1995, Mr. Willis served as the Executive Vice President and Chief Financial
Officer of two divisions of World Color and from 1990 to 1993 as the Chief
Financial Officer and Secretary of Aster Publishing Company. From 1987 to
1990, Mr. Willis served as the Chief Financial Officer and Vice President of
Finance and Administration of the consumer magazine group of Cowles Media
Company. Prior thereto, Mr. Willis held various financial and managerial
positions with Capital Cities/ABC, including the Chief Financial Officer of
its consumer magazine division. Mr. Willis is not affiliated with Willis
Stein.
Michael Borchetta has served as Vice President--Circulation of the Company
since the Acquisition. Prior to joining the Company, Mr. Borchetta served as
Circulation Director of Cahners since 1989. Mr. Borchetta has also held
positions with Act III Communications and Cowles Media Company.
Jay N. Cole currently serves as an Executive Publisher of the Company. Mr.
Cole served with Petersen for over nine years, most recently as Vice
President--Executive Publisher. Mr. Cole has primary responsibility for the
publication of 'TEEN and All About You!
John Dianna currently serves as an Executive Publisher of the Company. Mr.
Dianna served with Petersen for over 27 years, most recently as Vice
President--Executive Publisher. Mr. Dianna is primarily responsible for the
publication of Hot Rod, 4 Wheel & Off-Road, Car Craft, Sport Truck, Circle
Track and related publications.
Ken Elliott currently serves as an Executive Publisher of the Company. Mr.
Elliott served with Petersen for over 22 years, most recently as Vice
President--Executive Publisher. Mr. Elliott is primarily responsible for the
publications of Guns & Ammo, Hunting, Bowhunting and related publications.
Lee Kelley currently serves as an Executive Publisher of the Company. Mr.
Kelley served with Petersen for over 20 years, most recently as Vice
President--Executive Publisher. Mr. Kelley is primarily responsible for the
publication of Motor Trend, Sport and related publications.
Richard P. Lague currently serves as an Executive Publisher of the Company.
Mr. Lague served with Petersen for approximately 20 years, most recently as
Vice President--Executive Publisher. Mr. Lague is primarily responsible for
the publications of Motorcyclist and motorcycle related publications, Bicycle
Guide and Mountain Biker.
Paul J. Tzimoulis currently serves as an Executive Publisher of the Company.
Mr. Tzimoulis served with Petersen for over 25 years, most recently as Vice
President--Executive Publisher. Mr. Tzimoulis is responsible for the
publication of Skin Diver and Photographic.
James D. Dunning, Jr. has served as the Chairman and Chief Executive Officer
of Holdings and BrightView and a Director of Capital since the Acquisition.
Since 1992, Mr. Dunning has been Chairman and Chief Executive Officer of
TransWestern, the largest independent publisher of yellow pages in the United
States and is currently Chairman and Chief Executive Officer of The Dunning
Group. Mr. Dunning was formerly Chairman of SRDS, a media information and
database publisher. From 1987 to 1992, Mr. Dunning was Chairman, Chief
Executive Officer and President of Multi-Local Media Information Group, Inc.
("MLM"), a yellow pages and database company. From 1985 to 1986, he served as
Executive Vice President of Ziff Communications, a consumer and trade
publisher. From 1982 to 1984, he was Senior Vice President and Director of
Corporate Finance at Thomson McKinnon Securities, Inc. ("Thomson McKinnon"),
an investment banking firm. Mr. Dunning served as President of Rolling Stone
Magazine from 1977 to 1982.
Laurence H. Bloch has served as the Vice Chairman of Holdings and BrightView
and a Director of Capital since the Acquisition. Mr. Bloch also serves as Vice
Chairman and Chief Financial Officer TransWestern, which he joined in 1993.
From 1990 to 1992, Mr. Bloch was Senior Vice President and Chief Financial
Officer of Lanxide Corporation, a materials technology company. Between 1980
and 1990, Mr. Bloch was an investment banker, initially with Thomson McKinnon
and later as a Managing Director of Smith Barney. Mr. Bloch is a director of
TransWestern and was formerly a director of SRDS and MLM.
57
<PAGE>
Avy H. Stein has served as a Director of BrightView and Capital since the
Acquisition. Mr. Stein has been a Managing Director of Willis Stein since its
inception in 1994. Prior to that time, he served as a Managing Director of
CIVC, a venture capital investment firm, from 1989 to 1994. Prior to his
tenure at CIVC, Mr. Stein served as a special consultant for mergers and
acquisitions to the Chief Executive Officer of NL Industries, Inc.; as the
Chief Executive Officer and principal shareholder of Regent Corporation; as
President of Cook Energy Corporation and as an attorney with Kirkland & Ellis,
a national law firm. Mr. Stein also serves as a director of TransWestern and
Tremont Corporation.
Daniel H. Blumenthal has served as a Director of BrightView and Capital
since the Acquisition. Mr. Blumenthal has been a Managing Director of Willis
Stein since its inception in 1994. Prior to that time, he served as Vice
President of CIVC from 1993 to 1994, and as a corporate tax attorney with
Latham & Watkins, a national law firm, from 1988 to 1993.
Stuart Karu has served as a Director of BrightView and Capital since the
Acquisition. Mr. Karu currently is a private investor. During 1995, Mr. Karu
served as the interim Chief Executive Officer of SRDS. Mr. Karu was formerly
Chief Executive Officer and principal shareholder of Henry S. Kaufman, Inc., a
national advertising agency. Mr. Karu serves as a director of TransWestern and
was formerly a director of SRDS and MLM.
Robert E. Petersen has served as the Chairman Emeritus of the Company since
the Acquisition. Mr. Petersen founded Petersen in 1948 and served as its
Chairman and Chief Executive Officer prior to the Acquisition.
Directors of BrightView are currently elected by its stockholders to serve
during the ensuing year or until a successor is duly elected and qualified.
Executive officers of the Company are designated by the Managing Member to
serve until their respective successors shall be duly designated and
qualified. Executive officers of Capital are designated by its board of
directors to serve until their respective successors shall be duly designated
and qualified. There are no family relationships among the executive officers
of the Issuers or the directors of BrightView or Capital.
COMPENSATION OF DIRECTORS
The Company is a limited liability company that is indirectly controlled by
BrightView. See "Limited Liability Company Agreement." Each of the Directors
of BrightView (other than Messrs. Bahrenburg and Vitale) will be paid annual
compensation of $35,000, plus reimbursement for out-of-pocket expenses
incurred in connection with attending Board meetings.
COMPENSATION OF EXECUTIVE OFFICERS
The compensation of executive officers of the Company will be determined by
the Board of BrightView. The following Summary Compensation Table includes
individual compensation information for the Chief Executive Officer and each
of the four other most highly compensated executive officers of Petersen for
the fiscal year ended November 30, 1995 (collectively, the "Named Executive
Officers") for services rendered in all capacities to Petersen during the
fiscal year ended November 30, 1995. There were no stock options exercised
during Petersen's last fiscal year nor were there any options outstanding at
the end of Petersen's last fiscal year.
58
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------- ALL OTHER
NAME AND PRINCIPAL POSITION AT PETERSEN SALARY BONUS COMPENSATION(A)
- --------------------------------------- ---------- ---------- ---------------
<S> <C> <C> <C>
Robert E. Petersen(b).................... $1,500,000 $1,450,000 $4,052
Chairman of the Board
Frederick R. Waingrow(c)................. 922,900 600,000 5,731
President
John Dianna.............................. 212,000 42,500 5,731
Vice President, Executive Publisher
Peter F. Clancy(d)....................... 195,750 40,000 5,731
Senior Vice President, Marketing & Sales
Nigel P. Heaton(d)....................... 178,250 35,000 5,731
Vice President, Circulation Marketing
Development
</TABLE>
- --------
(a)Reflects contribution by Petersen on behalf of such person under Petersen's
retirement plan.
(b)Mr. Petersen resigned as Chairman of Petersen upon consummation of the
Acquisition.
(c)Mr. Waingrow resigned as President of Petersen upon consummation of the
Acquisition.
(d)No longer employed by the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board intends to establish two standing committees: (i) an Audit
Committee and (ii) a Compensation Committee. The Board may also establish
other committees to assist in the discharge of its responsibilities.
The Audit Committee shall review and, as it shall deem appropriate,
recommend to the Board internal accounting and financial controls for the
Company and accounting principles and auditing practices and procedures to be
employed in the preparation and review of financial statements of the Company.
The Audit Committee shall make recommendations to the board concerning the
engagement of independent public accountants to audit the annual financial
statements of the Company and the scope of the audit to be undertaken by such
accountants. Ernst & Young LLP presently serves as the independent auditors of
the Company. The Company expects that three or four Directors will be
appointed to the Audit Committee.
The Compensation Committee shall review and, as it deems appropriate,
recommend to the Board policies, practices and procedures relating to the
compensation of managerial employees and the establishment and administration
of employee benefit plans. The Compensation Committee shall have and exercise
all authority under any employee stock option plans of the Company as the
committee therein specified (unless the Board resolution appoints any other
committee to exercise such authority), and shall otherwise advise and consult
with the officers of the Company as may be requested regarding managerial
personnel policies. The Company expects that three or four Directors will be
appointed to the Compensation Committee.
EMPLOYMENT AGREEMENTS
The Company expects that Messrs. Bahrenburg, Vitale and Willis will each
enter into an Executive Securities Purchase and Employment Agreement (the
"Employment Agreements") with BrightView, Holdings and the Company. The
Employment Agreements will provide for the continued employment of Mr.
Bahrenburg as the Chief Executive Officer of the Company, Mr. Vitale as the
President of the Company and Mr. Willis as the Chief Financial Officer of the
Company until December 31, 2001 unless terminated earlier as provided in the
respective Employment Agreement. The Employment Agreements of Messrs.
Bahrenburg, Vitale and Willis will provide for: (i) an annual base salary of
$500,000, $300,000, and $200,000 respectively (subject to annual increases
based on the consumer price index); (ii) annual bonuses based on the
achievement of certain EBITDA targets of up to half their base salary and
(iii) a deferred bonus payable upon the first to occur of: (a) a sale of
59
<PAGE>
the Company or (b) the fifth anniversary of the date of such agreements. Each
executive's employment may be terminated by the Company at any time with cause
or without cause. If such executive is terminated by the Company with cause or
resigns other than for good reason, the executive will be entitled to his base
salary and fringe benefits until the date of termination, but will not be
entitled to any unpaid bonus. Messrs. Bahrenburg, Vitale and Willis will be
entitled to their base salary and fringe benefits and any accrued bonus for a
period of twelve months following their in the event such executive is
terminated without cause or resigns with good reason. The Employment
Agreements will also provide each executive with customary fringe benefits and
vacation periods. "Cause" will be generally defined in the Employment
Agreements to mean: (i) the commission of a felony or a crime involving moral
turpitude; (ii) the commission of any other act or omission involving
dishonesty, disloyalty or fraud; (iii) the substantial and repeated failure to
perform duties as reasonably directed by the Board or Chairman of Holdings;
(iv) gross negligence or willful misconduct with respect to the Company or any
subsidiary; (v) any other material breach of the Employment Agreement or
Company policy established by the Board, which breach, if curable, is not
cured within 15 days after written notice thereof to the executive or (vi) the
failure by the Company to generate a minimum level of EBITDA in any fiscal
year. "Good Reason" will be defined to mean the occurrence, without such
executive's consent, of any of the following: (i) the assignment to the
executive of any significant duties materially inconsistent with the
executive's status as a senior executive officer of the Company or a
substantial adverse alteration in the nature or status of the executive's
responsibilities; (ii) a reduction by the Company in the executive's annual
base salary as in effect on the date hereof, except for across-the-board
salary reductions similarly affecting all senior executives of the Company or
(iii) the Board requires the executive to relocate from the New York area in
the case of Mr. Bahrenburg and the Los Angeles area in the case of Messrs.
Vitale and Willis. The Employment Agreements will also provide for the
purchase by Messrs. Bahrenburg, Vitale and Willis of preferred equity
securities of Holdings ("Preferred Units"), common equity securities of
Holdings ("Common Units") and common stock of BrightView ("Common Stock") for
a combination of cash and notes. See "Certain Transactions." The Company
expects such Employment Agreements to be finalized over the next 30 days.
Messrs. Dunning and Bloch will each receive an annual salary of $100,000 per
annum for serving as Chairman and Vice Chairman of Holdings, respectively.
Beginning in 1998, each will also be entitled, subject to approval of the
Board to receive an annual bonus upon the Company achieving certain financial
targets.
In connection with the Acquisition, the Company entered into an employment
agreement with Robert E. Petersen pursuant to which Mr. Petersen agreed to
serve as Chairman Emeritus of the Company for a five-year period in exchange
for annual compensation of $200,000 per annum. Under such agreement, Mr.
Petersen has agreed to, among other things, act as a public spokesperson and
representative of the Company at public functions and participate in
significant meetings of the key executives of the Company concerning marketing
and sales strategies, important personnel decisions and similar activities so
required by the Chairman of the Board. The employment agreement entitles Mr.
Petersen to certain fringe benefits and perquisites and severance payments
equal to his annual salary for the remaining unexpired term of the agreement
in the event he is terminated by the Company without cause or suffers a
"constructive termination," which is defined to include (i) the relocation of
Mr. Petersen from the Company's current principal executive office; (ii) any
material breach of the employment agreement by the Company or (iii) the
assignment of Mr. Petersen to a significantly lower position in the Company in
terms of his responsibility, authority and status.
60
<PAGE>
CERTAIN TRANSACTIONS
The Company is party to a lease with a trust controlled by Mr. Petersen and
his wife pursuant to which the Company leases office space for its corporate
headquarters. The lease expires on November 30, 2009. In connection with the
Acquisition, the lease was amended to provide for lease payments of $341,951
for each monthly period ending before November 30, 1996. For each fiscal year
thereafter, the monthly lease payments will be increased at an annual rate of
approximately 1.75%. The Company believes such lease provides for lease
payments at a market rate and for terms as favorable to the Company as could
have been negotiated with a third party at arm's length.
On October 1, 1996, the Company entered into a lease with Mr. Petersen with
respect to the Company's office space located at 815 North LaSalle Street in
Chicago, Illinois. The lease expires on September 30, 2005 and provides for
monthly lease payments of: (i) $16,500 for the period from October 1, 1996 to
September 30, 1999; (ii) $17,500 for the period from October 1, 1999 to
September 30, 2002 and (iii) $18,500 from October 1, 2002 through the end of
the term of the lease. The Company believes such lease provides for lease
payments at a market rate and for terms as favorable to the Company as could
have been negotiated with a third party at arm's length.
Pursuant to his Employment Agreement, Mr. Bahrenburg will purchase 20 shares
of Common Stock at a price of $500.00 per share, 2,200 Class A Units at a
price of $4.50 per unit and 2,200 Preferred Units at a price of $445.50 per
unit. Mr. Bahrenburg will pay for these securities with promissory notes in
the aggregate amount of $1,000,000. Of this amount, $200,000 will become due
and payable on March 1, 1997 and $800,000 will become due and payable on the
earlier to occur of: (i) December 31, 2001; (ii) the termination of
Mr. Bahrenburg's employment with the Company or (iii) a sale of the Company.
Such promissory notes will bear interest at a rate equal to the Company's
weighted average cost of borrowing as determined by the Board. Mr.
Bahrenburg's obligations under such notes will be secured by a pledge of the
securities purchased therewith. In addition, pursuant to the Employment
Agreement, the Company and Holdings will issue to Mr. Bahrenburg 5,150.708
Class A Units, 625 Class B Units and 625 Class C Units for no additional
consideration. The securities issued to Mr. Bahrenburg without consideration
will vest ratably over a period of five years.
Pursuant to his Employment Agreement, Mr. Vitale will purchase 15 shares of
Common Stock at a price of $500.00 per share, 1,650 Class A Units at a price
of $4.50 per unit and 1,650 Preferred Units at a price of $445.50 per unit.
Mr. Vitale will pay for these securities with promissory notes in the
aggregate amount of $750,000. Such promissory notes will bear interest at a
rate equal to the Company's weighted average cost of borrowing as determined
by the Board and will become due and payable on the earlier to occur of:
(i) December 31, 2001; (ii) the termination of Mr. Vitale's employment with
the Company or (iii) a sale of the Company. Mr. Vitale's obligations under
such notes will be secured by a pledge of the securities purchased therewith.
In addition, pursuant to the Employment Agreement, the Company and Holdings
will issue to Mr. Vitale 5,150.708 Class A Units, 625 Class B Units and 625
Class C Units for no additional consideration. The securities to be issued to
Mr. Vitale without consideration will vest ratably over a period of five
years.
Pursuant to his Employment Agreement, Mr. Willis will purchase 4 shares of
Common Stock at a price of $500.00 per share, 440 Class A Units at a price of
$4.50 per unit and 440 Preferred Units at a price of $445.50 per unit. Mr.
Willis will pay for these securities with promissory notes in the aggregate
amount of $200,000. Such promissory notes will bear interest at a rate equal
to the Company's weighted average cost of borrowing as determined by the Board
and will become due and payable on the earlier to occur of: (i) December 31,
2001; (ii) the termination of Mr. Willis' employment with the Company or (iii)
a sale of the Company. Mr. Willis' obligations under such notes will be
secured by a pledge of the securities purchased therewith. In addition,
pursuant to the Employment Agreement, the Company and Holdings will issue to
Mr. Willis 1,030.142 Class A Units, 125 Class B Units and 125 Class C Units
for no additional consideration. The securities to be issued to Mr. Willis
without consideration will vest ratably over a period of five years.
The securities to be issued to Messrs. Bahrenburg, Vitale and Willis
pursuant to the Employment Agreements will be subject to repurchase by
Holdings or BrightView in the event such executive leaves the
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<PAGE>
Company's employ under certain circumstances. If such executive is terminated
by the Company with cause or resigns without good reason (each as defined in
their respective employment agreements), the purchase price for any unvested
securities will be the lesser of their original cost or their fair market
value and the purchase price for any vested securities will be the fair market
value of such securities. If such executive is terminated by the Company
without cause or resigns with good reason, the Company can only repurchase
such executive's unvested securities, at a price equal to the lesser of their
original cost or their fair market value.
In connection with the Acquisition, Messrs. Bahrenburg, Dunning, Bloch and
Karu, Willis Stein, Petersen Properties Company, BankAmerica Investment
Corporation and others entered into a securities purchase agreement (the
"Securities Purchase Agreement") with Holdings and BrightView pursuant to
which they purchased Preferred Units and Common Units of Holdings and Common
Stock of BrightView for cash. The following table sets forth the securities
purchased by such persons and the aggregate consideration paid for such
securities:
<TABLE>
<CAPTION>
HOLDINGS
----------------- BRIGHTVIEW
DIRECTOR, EXECUTIVE OFFICER OR CLASS A PREFERRED COMMON AGGREGATE
10% OWNER UNITS UNITS STOCK CONSIDERATION
------------------------------ ------- --------- ---------- -------------
<S> <C> <C> <C> <C>
D. Claeys Bahrenburg........... 1,100 1,100 10 $ 500,000
James D. Dunning, Jr.(a)....... 4,620 4,620 42 2,100,000
Laurence H. Bloch(a)........... 2,200 2,200 20 1,000,000
Stuart Karu(a)................. 2,200 2,200 20 1,000,000
Willis Stein & Partners,
L.P. ......................... 110,000 110,000 1,000 50,000,000
Petersen Properties Company.... 55,000 55,000 500 25,000,000
BankAmerica Investment Corpora-
tion.......................... 44,000 44,000 400 20,000,000
</TABLE>
- --------
(a) Pursuant to the Securities Purchase Agreement, Holdings and BrightView
also issued to Messrs. Dunning, Bloch and Karu the following securities:
Mr. Dunning--8,241.133 Class A Units, 1,000 Class B Units and 1,000 Class
C Units; Mr. Bloch--6,180.850 Class A Units, 750 Class B Units and 750
Class C Units and Mr. Karu--4,120.567 Class A Units, 500 Class B Units and
500 Class C Units.
As part of its business strategy, the Company plans to adopt new
compensation arrangements designed to reward managers and other participating
employees based on the Company's operating performance. In connection with
such compensation arrangements, the Company expects to issue up to 11,331
Class A Units, 1,375 Class B Units and 1,375 Class C Units to certain members
of management of other key employees of the Company. The Company has made no
final determination with respect to when such equity securities will be issued
or to whom, if at all.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company's equity securities are held 99.9% by Holdings and 0.1% by
BrightView. The following table sets forth certain information as of December
1, 1996 regarding the beneficial ownership of the equity securities of
Holdings and BrightView by: (i) each of the Directors of BrightView and the
executive officers of the Company; (ii) all Directors and executive officers
as a group and (iii) each owner of more than 5% of any class of equity
securities of Holdings or BrightView ("5% Owners"). The following table
includes the securities to be issued to certain executive officers of the
Company under the Employment Agreements. The equity ownership of Holdings for
the persons listed below includes those interests owned indirectly through
BrightView. Unless otherwise noted, the address for each executive officer of
the Company and the Directors of BrightView is c/o the Company, 6420 Wilshire
Boulevard, Los Angeles, California 90048. All of Capital's issued and
outstanding capital stock is owned by the Company.
<TABLE>
<CAPTION>
HOLDINGS BRIGHTVIEW
------------------------------------ --------------------
SHARES OF PERCENT OF
COMMON PERCENT PREFERRED PERCENT COMMON VOTING
UNITS(A) OF CLASS UNITS OF CLASS STOCK(B) POWER(C)
-------- -------- --------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE
OFFICERS:
D. Claeys
Bahrenburg(d).......... 8,481 2.1% 3,300 * 30 1.4%
Neal Vitale(e).......... 6,816 1.7 1,655 * 15 *
Richard S. Willis(f).... 1,474 * 444 * 4 *
James D. Dunning,
Jr.(g)................. 12,903 3.1 4,662 1.2% 42 2.0
Laurence H. Bloch(h).... 8,401 2.0 2,220 * 20 *
Avy H. Stein(i)......... 111,000 26.9 111,000 29.7 1,000 46.6(c)
Daniel H.
Blumenthal(i).......... 111,000 26.9 111,000 29.7 1,000 46.6(c)
Stuart Karu (j)......... 6,341 1.5 2,220 * 20 *
All Directors and
executive officers as a
group (8 persons)...... 155,415 37.7 125,541 33.5 1,131 52.7
5% OWNERS:
Willis Stein & Partners,
L.P.(k)................ 111,000 26.9 111,000 29.7 1,000 46.6(c)
Robert E. Petersen(l)... 55,500 13.5 55,500 14.8 500 23.3
BankAmerica Investment
Corporation(m)......... 44,400 10.7 44,400 11.9 400 --
Chase Equity Associates,
L.P.(n)................ 33,300 8.1 33,300 8.9 300 --
Allstate Insurance
Company(o)............. 33,300 8.1 33,300 8.9 300 14.0
First Union Investors,
Inc.(p)................ 27,750 6.7 27,750 7.4 250 --
CIBC WG Argosy Merchant
Fund 2, L.L.C.(q)...... 27,750 6.7 27,750 7.4 250 --
</TABLE>
- --------
*Represents less than one percent.
(a) The Common Units represent the common equity of Holdings and consist of
Class A Units, Class B Units and Class C Units. Holders of Class B Units
and Class C Units are entitled to share in any distribution on a pro rata
basis with the holders of Class A Units, but only if the holders of the
Preferred Units and the Class A Units have achieved an internal rate of
return on their total investment of 30% in the case of Class B Units and
35% in the case of Class C Units. All Common Units listed in the table
represent Class A Units unless otherwise noted. See "Limited Liability
Company Agreement."
(b) BrightView has two classes of outstanding common stock, the Class A Common
Stock and the Class B Common Stock, which are identical in all respects
except that the Class B Common Stock is nonvoting and is convertible to
Class A Common Stock upon the occurrence of certain events. The Class B
Common Stock was issued in order to comply with certain regulatory
requirements imposed upon the holders, which are affiliates of bank
holding companies. All shares listed in the table represent Class A Common
Stock unless otherwise noted.
(c) Under the terms of the Securityholders Agreement, all of the stockholders
of BrightView have agreed to vote their shares in favor of those
individuals designated by Willis Stein to serve on the Board of BrightView
until such time as BrightView consummates a Qualified IPO (as defined
below). Willis Stein also has the right to vote such stockholders shares
on all significant corporate changes, such as a merger, consolidation or
sale of the Company. As a result, Willis Stein has the ability to control
the policies and operations of the Company.
(d) Includes 5,151 Class A Units, which are subject to vesting in equal
installments over a five-year period. Does not include 625 Class B Units
and 625 Class C Units owned by Mr. Bahrenburg.
(e) Includes 5,151 Class A Units, which are subject to vesting in equal
installments over a five-year period. Does not include 625 Class B Units
and 625 Class C Units owned by Mr. Vitale.
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<PAGE>
(f) Includes 1,030 Class A Units, which are subject to vesting in equal
installments over a five-year period. Does not include 125 Class B Units
and 125 Class C Units owned by Mr. Willis.
(g) Does not include 1,000 Class B Units and 1,000 Class C Units owned by Mr.
Dunning.
(h) Does not include 750 Class B Units and 750 Class C Units owned by Mr.
Bloch.
(i) Includes 110,000 Common Units and 110,000 Preferred Units of Holdings and
1,000 shares of the Class A Common Stock of BrightView beneficially owned
by Willis Stein. Such persons disclaim beneficial ownership of all such
interests beneficially owned by Willis Stein. Such person's address is c/o
Willis Stein, 227 West Monroe Street, Suite 4300, Chicago, Illinois 60606.
(j) Does not include 500 Class B Units and 500 Class C Units owned by Mr.
Karu.
(k) Willis Stein's interest in Holdings and BrightView are owned through
Petersen Investment Corp. The address of Willis Stein and Petersen
Investment Corp. is 227 West Monroe Street, Suite 4300, Chicago, Illinois
60606.
(l) Mr. Petersen's interest in Holdings and BrightView are owned through
Petersen Properties Company.
(m) Such person's address is c/o BankAmerica Investment Corporation ("BIC"),
231 S. LaSalle Street, Chicago, Illinois 60697. Such person holds Class B
Common Stock of BrightView. Also includes securities held by an affiliate
of BIC.
(n) Such person's address is 380 Madison Avenue, 12th Floor, New York, New
York 10017-2951. Such person holds Class B Common Stock of BrightView.
(o) Such person's address is 3075 Sanders Road, Suite G5D, Northbrook,
Illinois 60062-7127.
(p) Such person's address is c/o First Union Capital Partners, Inc., One First
Union Center, 301 S. College Street, 5th Floor, Charlotte, North Carolina
28288. Such person holds Class B Common Stock of BrightView.
(q) Such person's address is 425 Lexington Avenue, 3rd Floor, New York, New
York 10017. Such person holds Class B Common Stock of BrightView.
SECURITYHOLDERS AGREEMENT
At the time of the Acquisition, BrightView, Holdings, Petersen Investment
Corp. and the Investors entered into a securityholders agreement (the
"Securityholders Agreement"), providing for: (i) the composition of the Board
of BrightView; (ii) restrictions on the transfer of equity securities of
Holdings, BrightView and Petersen Investment Corp. (the "Equity Securities");
(iii) registration rights relating to the Equity Securities, (iv) obligations
of the Investors upon a sale of the Company and (v) preemptive rights in favor
of the non-Willis Stein Investors in connection with issuances of equity to
Willis Stein. Under the terms of the Securityholders Agreement, all of the
stockholders of BrightView have agreed to vote their shares in favor of those
individuals designated by Willis Stein to serve on the Board of Directors of
BrightView until such time as BrightView consummates an initial public
offering of its equity securities resulting in the receipt by BrightView of at
least $75.0 million of gross proceeds and which indicates a market
capitalization of BrightView without giving effect to any issuances of equity
securities following its initial capitalization of at least $330.0 million (a
"Qualified IPO"). Willis Stein also has the right to control the vote on any
significant corporate changes, such as a merger, consolidation or sale of the
Company until the occurrence of a Qualified IPO. The Securityholders Agreement
generally restricts the transfer of Equity Securities, other than in a public
sale. Any proposed transfer of Equity Securities is subject to a right of
first refusal in favor of BrightView or the other Investors and "tag-along"
rights in favor of the other Investors. All of the Investors have agreed that
Willis Stein (through BrightView) may control the circumstances under which a
sale of the Company may take place, and that each Investor will consent to
such transaction on the terms negotiated by Willis Stein. Willis Stein may
also control the circumstances under which a public offering of Holdings' or
BrightView's equity securities may take place. The Securityholders Agreement
provides for up to four demand registrations in favor of Willis Stein, two
demand registrations in favor of a majority of the non-Willis Stein Investors
at such time as BrightView is eligible to use a short-form registration
statement and unlimited "piggyback" registrations in favor of the Investors.
LIMITED LIABILITY COMPANY AGREEMENT
The Company and Holdings are each limited liability companies organized
under the Delaware Limited Liability Company Act (the "LLC Act"). The Company
is governed by a limited liability company agreement between Holdings and
BrightView. The Company's equity securities are held 99.9% by Holdings and
0.1% by BrightView. 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
(through Petersen Investment Corp.), Mr. Petersen, certain members of the
Company's management and the Investors (collectively the "Members"). The LLC
Agreement governs the relative rights and duties of the Members.
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BrightView is Holdings' managing member and as such controls the policies
and operations of Holdings and of the Company through Holdings. BrightView was
appointed as managing member pursuant to the LLC Agreement and may not be
removed. In the event of BrightView's resignation as managing member, a new
managing member will be appointed by Willis Stein (through Petersen Investment
Corp.).
The ownership interests of the Members in Holdings consist of Preferred
Units and Common Units. The Preferred Units are entitled to a preferred yield
of 12.0% per annum, compounded quarterly, and an aggregate liquidation
preference of $163.5 million (net of any prior repayments of Preferred Units)
plus any accrued and unpaid preferred yield (collectively, the "Preference
Amount") on any liquidation or other distribution by Holdings. The Common
Units represent the common equity of Holdings and consist of Class A Units,
Class B Units and Class C Units. After payment of the Preference Amount,
holders of Class A Units are entitled to share in any remaining proceeds of
any liquidation or other distribution by Holdings pro rata according to the
number of Class A Units held. After the holders of the Preferred Units and
Class A Units have received an internal rate of return of 30% on their total
investment, holders of Class B Units will be entitled to participate with the
holders of Class A Units in any subsequent distributions. Similarly, after the
holders of the Preferred Units and Class A Units have received an internal
rate of return of 35% on their total investment, holders of Class C Units will
be entitled to participate with the holders of Class A Units and the holders
of Class B Units in any subsequent distributions. The Class B Units and Class
C Units were issued to members of management to provide them with equity
incentives. The LLC Agreement grants BrightView broad authority in
establishing the magnitude and terms of management's equity participation in
the Company.
Both the Senior Credit Facility and the Indenture generally limit the
Company's ability to pay cash distributions to Holdings and BrightView other
than distributions in amounts approximately equal to the income tax liability
of such members of the Company (or, in the case of Holdings, the income tax
liability it would have had if it were required to pay income taxes) resulting
from the taxable income of the Company ("Tax Distributions"). Tax
Distributions will be based on the approximate highest combined tax rate that
applies to any one of the members of the Company.
The LLC Agreement, and therefore Holdings' existence, will continue in
effect until the earlier to occur of: (i) December 3, 2026; (ii) a unanimous
vote to that effect of its Members; (iii) a resolution to that effect of the
managing member; (iv) the incapacity or expulsion of the managing member or
any other event under the LLC Act which terminates Holdings unless the Members
vote within 90 days to continue Holdings' existence or (v) the entry of a
decree of judicial dissolution under the LLC Act. Other than as described in
(iv) above, the death, retirement, resignation, expulsion, incapacity,
bankruptcy or dissolution of a Member will not cause a dissolution of
Holdings. The Company's limited liability company agreement contains similar
terms governing the Company's continued existence.
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DESCRIPTION OF SENIOR CREDIT FACILITY
In connection with the Acquisition, the Company entered into the Senior
Credit Facility, among the Lenders and the Company, pursuant to which the
Lenders will lend to the Company up to $260.0 million in senior secured credit
facilities, such amount to be allocated among: (i) a Revolving Credit Facility
of up to $60.0 million; (ii) a Tranche A Loan in an aggregate principal amount
of $100.0 million and (iii) a Tranche B Loan in an aggregate principal amount
of $100.0 million.
Repayment. Commitments under the Revolving Credit Facility will not be
reduced until maturity on December 31, 2002 and the Term Loans will be
amortized on a quarterly basis commencing on March 31, 1997 based on the
following schedule:
<TABLE>
<CAPTION>
TRANCHE A TRANCHE B
LOAN LOAN
DATE AMORTIZATION AMORTIZATION
---- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
1997............................................... $ 0 $ 1,000
1998............................................... 10,000 1,000
1999............................................... 15,000 1,000
2000............................................... 20,000 1,000
2001............................................... 25,000 1,000
2002............................................... 30,000 1,000
2003............................................... 0 40,000
2004............................................... 0 54,000
-------- --------
Total............................................ $100,000 $100,000
======== ========
</TABLE>
Security; Guaranty. The Revolving Credit Facility and Term Loans will be
secured by a first priority lien on substantially all of the properties and
assets of the Company and its respective domestic subsidiaries, owned now or
acquired later, including a pledge of all of the shares of the Company's
respective existing and future domestic subsidiaries and 65% of the shares of
their respective existing and future foreign subsidiaries. The Revolving
Credit Facility and Term Loans are guaranteed by BrightView, Holdings and all
of the Company's future domestic subsidiaries.
Interest. At the Company's option, the interest rates per annum applicable
to the Revolving Credit Facility and the Tranche A Loan will be a fluctuating
rate of interest measured by reference either to: (i) LIBOR plus the
applicable borrowing margin or (ii) the ABR plus the applicable borrowing
margin. The applicable borrowing margin for the Revolving Credit Facility and
the Tranche A Loan will range from 1.375% to 2.750% for LIBOR based borrowings
and 0.125% to 1.500% for ABR based borrowings. The applicable borrowing margin
for the Tranche B Loan will be equal to that of the Revolving Credit Facility
and Tranche A Loan plus 0.50%; provided, however, that the applicable margin
for the Tranche B Loan will not be less than 2.625% for LIBOR based borrowings
and 1.375% for ABR based borrowings.
Fees. The Company has agreed to pay certain fees with respect to the Senior
Credit Facility including: (i) upfront facility fees; (ii) agent and
arrangement fees and (iii) commitment fees of 0.50% per annum on the unused
portion of the Revolving Credit Facility until the Company's Leverage Ratio
(as defined in the Senior Credit Facility) is less than or equal to 4:1 and
0.375% per annum thereafter.
Use of Proceeds. The entire amount of the Term Loans were made available to
the Company at the time of the Acquisition. The Revolving Credit Facility will
be made available to finance certain permitted acquisitions, working capital
requirements and general corporate purposes of the Company.
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Prepayments; Reduction of Commitments. Term Loans are required to be prepaid
and commitments under the Revolving Credit Facility are required to be
permanently reduced with: (i) 75% of excess cash flow, which percentage may be
reduced under certain circumstances; (ii) 100% of the net cash proceeds of all
non-ordinary-course asset sales or other dispositions of the property by the
Company and its subsidiaries (including insurance and condemnation proceeds),
subject to limited exceptions, (iii) 100% of the net proceeds of issuances of
debt obligations of the Company and its subsidiaries, subject to limited
exceptions and (iv) 75% of the net proceeds of issuances of equity securities
of the Company. Such mandatory prepayments and commitment reductions will
first be allocated pro rata among the Term Loan and second to commitments
under the Revolving Credit Facility. Within the Term Loans prepayments with
proceeds from asset sales will be applied pro rata to the remaining
amortization payments under each such Term Loan and proceeds from debtor
equity issuances will be applied to amortization payments in inverse order at
maturity. Voluntary prepayments will be permitted in whole or in part, at the
option of the Company, in minimum principal amounts of $3.0 million or any
greater multiple of $1.0 million, without premium or penalty.
Covenants. The Senior Credit Facility contains covenants restricting the
ability of the Company and its subsidiaries to, among other things: (i)
declare dividends or redeem or repurchase capital stock; (ii) prepay, redeem
or purchase debt; (iii) incur liens and engage in sale-leaseback transactions;
(iv) make loans and investments; (v) issue more debt; (vi) amend or otherwise
alter debt and other material agreements; (vii) make capital expenditures;
(viii) engage in mergers, acquisitions and asset sales; (ix) transact with
affiliates and (x) alter its lines of the business. The Company must also make
certain customary indemnifications of the Lenders and their agents and will
also be required to comply with financial covenants with respect to: (i) a
maximum leverage ratio; (ii) a minimum interest coverage ratio and (iii) a
minimum fixed charge coverage ratio. The Senior Credit Facility also contains
certain customary affirmative covenants.
Events of Default. Events of default under the Senior Credit Facility
include: (i) the Company's failure to pay principal or interest when due; (ii)
the Company's material breach of any covenant, representation or warranty
contained in the loan documents; (iii) customary cross-default provisions;
(iv) events of bankruptcy, insolvency or dissolution of the Company or its
subsidiaries; (v) the levy of certain judgments against the Company, its
subsidiaries, or their assets; (vi) certain adverse events under ERISA plans
of the Company or its subsidiaries; (vii) the actual or asserted invalidity of
security documents or guarantees of the Company or its subsidiaries and (viii)
a change of control of the Company.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were originally sold by the Issuers on November 25, 1996 to
the Initial Purchasers pursuant to the Purchase Agreement. The Initial
Purchasers subsequently resold the Old Notes to qualified institutional buyers
in reliance on Rule 144A under the Securities Act. As a condition to the
Purchase Agreement, the Issuers entered into the Registration Rights Agreement
with the Initial Purchaser pursuant to which the Issuers have agreed, for the
benefit of the holders of the Old Notes, at the Issuers' cost, to use their
best efforts to (i) file the Exchange Offer Registration Statement within 45
days after the date of the original issue of the Old Notes with the Commission
with respect to the Exchange Offer for the New Notes; (ii) use their best
efforts to cause the Exchange Offer Registration Statement to be declared
effective under the Securities Act within 135 days after the date of the
original issuance of the Old Notes and (iii) unless the Exchange Offer would
not be permitted by applicable law or Commission policy, commence the Exchange
Offer and use their best efforts to issue on or prior to 45 days after the
date on which the Exchange Offer Registration Statement was declared effective
by the Commission (the "Exchange Offer Effectiveness Date"). Upon the Exchange
Offer Registration Statement being declared effective, the Issuers will offer
the New Notes in exchange for surrender of the Old Notes. The Issuers will
keep the Exchange Offer open for not less than 20 days (or longer if required
by applicable law) after the date on which notice of the Exchange Offer is
mailed to the holders of the Old Notes. For each Old Note surrendered to the
Issuers pursuant to the Exchange Offer, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. Interest on each Old Note will accrue from the last interest payment
date on which interest was paid on the Old Note surrendered in exchange
therefor or, if no interest has been paid on such Old Note, from the date of
its original issue. Interest on each New Note will accrue from the date of its
original issue.
Under existing interpretations of the staff of the Commission contained in
several no-action letters to third parties, the New Notes will in general be
freely tradeable after the Exchange Offer without further registration under
the Securities Act. However, any purchaser of Old Notes who is an "affiliate"
of the Issuers or who intends to participate in the Exchange Offer for the
purpose of distributing the New Notes (i) will not be able to rely on the
interpretation of the staff of the Commission, (ii) will not be able to tender
its Old Notes in the Exchange Offer and (iii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the Old Notes, unless such sale or
transfer is made pursuant to an exemption from such requirements.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent
to the Issuers in the Letter of Transmittal that (i) the New Notes are to be
acquired by the holder or the person receiving such New Notes, whether or not
such person is the holder, in the ordinary course of business, (ii) the holder
or any such other person (other than a broker-dealer referred to in the next
sentence) is not engaging and does not intend to engage, in distribution of
the New Notes, (iii) the holder or any such other person has no arrangement or
understanding with any person to participate in the distribution of the New
Notes, (iv) neither the holder nor any such other person is an "affiliate" of
the Issuers within the meaning of Rule 405 under the Securities Act, and (v)
the holder or any such other person acknowledges that if such holder or any
other person participates in the Exchange Offer for the purpose of
distributing the New Notes it must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale of
the New Notes and cannot rely on those no-action letters. As indicated above,
each Participating Broker-Dealer that receives a New Note for its own account
in exchange for Old Notes must acknowledge that it (i) acquired the Old Notes
for its own account as a result of market-making activities or other trading
activities, (ii) has not entered into any arrangement or understanding with
the Issuers or any "affiliate" of the Issuers (within the meaning of Rule 405
under the Securities Act) to distribute the New Notes to be received in the
Exchange Offer and (iii) will deliver a prospectus meeting the requirements of
the Securities Act in connection with any resale of such New Notes. For a
description of the procedures for resales by Participating Broker-Dealers, see
"Plan of Distribution."
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<PAGE>
In the event that changes in the law or the applicable interpretations of
the staff of the Commission do not permit the Issuers to effect such an
Exchange Offer, or if for any other reason the Exchange Offer is not
consummated within 195 days of the date of the original issuance of the Old
Notes, the Issuers will (i) file the Shelf Registration Statement Registration
Statement covering resales of the Old Notes; (ii) use their reasonable best
efforts to cause the Shelf Registration Statement Registration Statement to be
declared effective under the Securities Act and (iii) use their reasonable
best efforts to keep effective the Shelf Registration Statement until the
earlier of three years after its effective date. The Issuers will, in the
event of the filing of the Shelf Registration Statement, provide to each
applicable holder of the Old Notes copies of the prospectus which is a part of
the Shelf Registration Statement, notify each such holder when the Shelf
Registration Statement has become effective and take certain other actions as
are required to permit unrestricted resale of the Old Notes. A holder of the
Old Notes that sells such Old Notes pursuant to the Shelf Registration
Statement permit generally will be required to be named as a selling security
holder in the related prospectus and to deliver a prospectus to purchasers,
will be subject to certain of the civil liability provisions under the
Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement which are applicable to such a
holder (including certain indemnification obligations). In addition, each
holder of the Old Notes will be required to deliver information to be used in
connection with the Shelf Registration Statement and to provide comments on
the Shelf Registration Statement within the time periods set forth in the
Registration Rights Agreement in order to have their Old Notes included in the
Shelf Registration Statement and to benefit from the provisions set forth in
the following paragraph.
The Registration Rights Agreement provides that (i) the Issuers will file an
Exchange Offer Registration Statement with the Commission on or prior to 45
days after the date of the original issue of the Old Notes with the
Commission, (ii) the Issuers will use their best efforts to have the Exchange
Offer Registration Statement declared effective by the Commission on or prior
to 135 days after the after the date of the original issue of the Old Notes,
(iii) unless the Exchange Offer would not be permitted by applicable law or
Commission policy, the Issuers will commence the Exchange Offer and use their
best efforts to issue on or prior to 45 days after the Exchange Offer
Effectiveness Date, New Notes in exchange for all Old Notes tendered prior
thereto in the Exchange Offer and (iv) if obligated to file the Shelf
Registration Statement, the Issuers will use their best efforts to file the
Shelf Registration Statement with the Commission in a timely fashion. If (a)
the Issuers fail to file any of the Registration Statements required by the
Registration Rights Agreement on or before the date specified for such filing,
(b) any of such Registration Statements is not declared effective by the
Commission on or prior to the date specified for such effectiveness, or (c)
the Issuers fail to consummate the Exchange Offer within 45 days of the
effectiveness of the Exchange Offer Registration Statement, or (d) the Shelf
Registration Statement or the Exchange Offer Registration Statement is
declared effective but thereafter ceases to be effective or usable in
connection with resales of Transfer Restricted Securities during the period
specified in the Registration Rights Agreement (each such event referred to in
clauses (a) through (d) above a "Registration Default"), the sole remedy
available to holders of the Old Notes will be the immediate assessment of
Additional Interest as follows: the per annum interest rate on the Old Notes
will increase by 0.5% and the per annum interest rate will increase by an
additional 0.25% for each subsequent 90-day period during which the
Registration Default remains uncured, up to a maximum additional interest rate
of 2.0% per annum in excess of 11 1/8% per annum. All Additional Interest will
be payable to holders of the Old Notes in cash on each November 15 and May 15,
commencing with the first such date occurring after any such Additional
Interest commences to accrue, until such Registration Default is cured. After
the date on which such Registration Default is cured, the interest rate on the
Old Notes will revert to 11 1/8% per annum.
Holders of Old Notes will be required to make certain representations to the
Issuers (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information
to be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set forth
in the Registration Rights Agreement in order to have their Old Notes included
in the Shelf Registration Statement and benefit from the provisions regarding
Additional Investors set forth above.
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<PAGE>
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by, all the provisions of the Registration Rights Agreement, a
copy of which is filed as an exhibit to the Exchange Offer Registration
Statement of which this Prospectus is a part.
Following the consummation of the Exchange Offer, holders of the Old Notes
who were eligible to participate in the Exchange Offer but who did not tender
their Old Notes will not have any further registration rights and such Old
Notes will continue to be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for such Old Notes could be adversely
affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Issuers will accept any and all Old
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Issuers will issue $1,000 principal amount
of New Notes in exchange for each $1,000 principal amount of outstanding Old
Notes accepted in the Exchange Offer. Holders may tender some or all of their
Old Notes pursuant to the Exchange Offer. However, Old Notes may be tendered
only in integral multiples of $1,000.
The form and terms of the New Notes are the same as the form and terms of
the Old Notes except that (i) the New Notes bear a Series B designation and a
different CUSIP Number from the Old Notes, (ii) the New Notes have been
registered under the Securities Act and hence will not bear legends
restricting the transfer thereof and (iii) the holders of the New Notes will
not be entitled to certain rights under the Registration Rights Agreement,
including the provisions providing for an increase in the interest rate on the
Old Notes in certain circumstances relating to the timing of the Exchange
Offer, all of which rights will terminate when the Exchange Offer is
terminated. The New Notes will evidence the same debt as the Old Notes and
will be entitled to the benefits of the Indenture.
As of the date of this Prospectus, $100,000,000 aggregate principal amount
of Old Notes were outstanding. The Issuers have fixed the close of business on
February 10, 1997 as the record date for the Exchange Offer for purposes of
determining the persons to whom this Prospectus and the Letter of Transmittal
will be mailed initially.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the General Corporation Law of Delaware, the Limited Liability Company Act of
Delaware or the Indenture in connection with the Exchange Offer. The Issuers
intend to conduct the Exchange Offer in accordance with the applicable
requirements of the Exchange Act and the rules and regulations of the
Commission thereunder.
The Issuers shall be deemed to have accepted validly tendered Old Notes
when, as and if the Issuers have given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the New Notes from the Issuers.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Old Notes will be
returned, without expense, to the tendering holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes pursuant to the Exchange Offer. The Issuers will pay all charges and
expenses, other than transfer taxes in certain circumstances, in connection
with the Exchange Fees and Expenses.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
March 11, 1997, unless the Issuers, in their sole discretion, extend the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
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In order to extend the Exchange Offer, the Issuers will notify the Exchange
Agent of any extension by oral or written notice and will mail to the
registered holders an announcement thereof, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled expiration
date.
The Issuers reserve the right, in their sole discretion, prior to the
Expiration Date (i) to delay accepting any Old Notes, to extend the Exchange
Offer or to terminate the Exchange Offer if any of the conditions set forth
below under "Conditions" shall not have been satisfied, by giving oral or
written notice of such delay, extension or termination to the Exchange Agent
or (ii) to amend the terms of the Exchange Offer in any manner. Any such delay
in acceptance, extension, termination or amendment will be followed as
promptly as practicable by oral or written notice thereof to the registered
holders.
INTEREST ON THE NEW NOTES
The New Notes will bear interest from their date of issuance. Holders of Old
Notes that are accepted for exchange will receive, in cash, accrued interest
thereon to, but not including, the date of issuance of the New Notes. Such
interest will be paid with the first interest payment on the New Notes on May
15, 1997. Interest on the Old Notes accepted for exchange will cease to accrue
upon issuance of the New Notes.
Interest on the New Notes is payable semi-annually on each May 15 and
November 15, commencing on May 15, 1997.
PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with the Old
Notes and any other required documents, to the Exchange Agent prior to 5:00
p.m., New York City time, on the Expiration Date. To be tendered effectively,
the Old Notes, Letter of Transmittal or an Agent's Message in connection with
a book-entry transfer and other required documents must be completed and
received by the Exchange Agent at the address set forth below under "Exchange
Agent" prior to 5:00 p.m., New York City time, on the Expiration Date.
Delivery of the Old Notes may be made by book-entry transfer in accordance
with the procedures described below. Confirmation of such bookentry transfer
must be received by the Exchange Agent prior to the Expiration Date.
The term "Agent's Message" means a message, transmitted by a book-entry
transfer facility to, and received by, the Exchange Agent forming a part of a
confirmation of a book-entry transfer, which states that such Book-Entry
Transfer Facility has received an express acknowledgment from the participant
in such Book-Entry Transfer Facility tendering the Notes that such participant
has received and agrees to be bound by the terms of the Letter of Transmittal
and that the Company may enforce such agreement against such participant.
By executing the Letter of Transmittal, each holder will make to the Issuers
the representations set forth above in the third paragraph under the heading
"--Purpose and Effect of the Exchange Offer."
The tender by a holder and the acceptance thereof by the Issuers will
constitute agreement between such holder and the Issuers in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE
RISK OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE
ISSUERS. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
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COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See
"Instructions to Registered Holder and/or Book-Entry Transfer Facility
Participant from Beneficial Owner" included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Old Notes tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal
or (ii) for the account of an Eligible Institution. In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guarantee must be by a member firm
of the Medallion System (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered
holder as such registered holder's name appears on such Old Notes with the
signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, offices of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Issuers of their authority to so act must be submitted with the Letter of
Transmittal.
The Issuers understand that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the
Old Notes at the Book-Entry Transfer Facility for the purpose of facilitating
the Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the Book-Entry Transfer Facility's system
may make book-entry delivery of Old Notes by causing such Book-Entry Transfer
Facility to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with the Book-Entry Transfer Facility's
procedures for such transfer. Although delivery of the Old Notes may be
effected through book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility, an appropriate Letter of Transmittal properly
completed and duly executed with any required signature guarantee and all
other required documents must in each case be transmitted to and received or
confirmed by the Exchange Agent at its address set forth below on or prior to
the Expiration Date, or, if the guaranteed delivery procedures described below
are complied with, within the time period provided under such procedures.
Delivery of documents to the Book-Entry Transfer Facility does not constitute
delivery to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old
Notes will be determined by the Issuers in their sole discretion, which
determination will be final and binding. The Issuers reserve the absolute
right to reject any and all Old Notes not properly tendered or any Old Notes
the Issuers' acceptance of which would, in the opinion of counsel for the
Issuers, be unlawful. The Issuers also reserve the right in their sole
discretion to waive any defects, irregularities or conditions of tender as to
particular Old Notes. The Issuers' interpretation of the terms and conditions
of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be
cured within such time as the Issuer shall determine. Although the Issuers
intend to notify holders of defects or irregularities with respect to tenders
of Old Notes, neither the Issuer, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Old Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be
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returned by the Exchange Agent to the tendering holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent or (iii) who
cannot complete the procedures for book-entry transfer, prior to the
Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution,
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Old Notes and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within five
New York Stock Exchange trading days after the Expiration Date, the Letter
of Transmittal (or facsimile thereof) together with the certificate(s)
representing the Old Notes (or a confirmation of book-entry transfer of
such Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility), and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (of
facsimile thereof), as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Old Notes into the Exchange Agent's account at the Book-
Entry Transfer Facility), and all other documents required by the Letter of
Transmittal are received by the Exchange Agent upon five New York Stock
Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York
City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Old Notes to be withdrawn
(the "Depositor"); (ii) identify the Old Notes to be withdrawn (including the
certificate number(s) and principal amount of such Old Notes, or, in the case
of Old Notes transferred by book-entry transfer, the name and number of the
account at the Book-Entry Transfer Facility to be credited); (iii) be signed
by the holder in the same manner as the original signature on the Letter of
Transmittal by which such Old Notes were tendered (including any required
signature guarantees) or be accompanied by documents of transfer sufficient to
have the Trustee with respect to the Old Notes register the transfer of such
Old Notes into the name of the person withdrawing the tender and (iv) specify
the name in which any such Old Notes are to be registered, if different from
that of the Depositor. All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Issuers,
whose determination shall be final and binding on all parties. Any Old Notes
so withdrawn will be deemed not to have been validly tendered for purposes of
the Exchange Offer and no New Notes will be issued with respect thereto unless
the Old Notes so withdrawn are validly retendered. Any Old Notes which have
been tendered but which are not accepted for exchange will be returned to the
holder thereof without cost to such holder as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Old Notes may be retendered by following one of the procedures
described above under "--Procedures for Tendering" at any time prior to the
Expiration Date.
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CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Issuers shall not
be required to accept for exchange, or exchange New Notes for, any Old Notes,
and may terminate or amend the Exchange Offer as provided herein before the
acceptance of such Old Notes, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the reasonable judgment of the Issuers, might materially impair
the ability of the Issuers to proceed with the Exchange Offer or any
material adverse development has occurred in any existing action or
proceeding with respect to the Issuers or any of their subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the staff of
the Commission is proposed, adopted or enacted, which, in the reasonable
judgment of the Issuers, might materially impair the ability of the Issuers
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Issuers; or
(c) any governmental approval has not been obtained, which approval the
Issuers shall, in their reasonable discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Issuers determine in their reasonable discretion that any of the
conditions are not satisfied, the Issuers may (i) refuse to accept any Old
Notes and return all tendered Old Notes to the tendering holders, (ii) extend
the Exchange Offer and retain all Old Notes tendered prior to the expiration
of the Exchange Offer, subject, however, to the rights of holders to withdraw
such Old Notes (see "--Withdrawal of Tenders") or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Old Notes which have not been withdrawn.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
By Mail: By Overnight Courier:
United States Trust Company of New United States Trust Company of New
York York
P.O. Box 844 Cooper Station 770 Broadway
New York, New York 10276-0844 New York, New York 10003
Attention: Corporate Trust Attention: Corporate Trust
Operations Operations
(registered or certified mail
recommended)
By Hand:
Facsimile Transmission: (212)
United States Trust Company of New 420-6152
York
111 Broadway Confirm by Telephone: (800) 548-6565
New York, New York 10006
Attention: Lower Level Corporate
Trust Window
DELIVERY TO AN ADDRESS OTHER THAN SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Issuers. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
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The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Issuers. Such expenses include fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs,
among others.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value, as reflected in the Company's accounting records on the
date of exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company. The expenses of the Exchange Offer will be expensed
over the term of the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes that are not exchanged for New Notes pursuant to the Exchange
Offer will remain restricted securities. Accordingly, such Old Notes may be
resold only (i) to the Issuers (upon redemption thereof or otherwise), (ii) so
long as the Old Notes are eligible for resale pursuant to Rule 144A, to a
person inside the United States whom the seller reasonably believes is a
qualified institutional buyer within the meaning of Rule 144A under the
Securities Act in a transaction meeting the requirements of Rule 144A, in
accordance with Rule 144 under the Securities Act, or pursuant to another
exemption from the registration requirements of the Securities Act (and based
upon an opinion of counsel reasonably acceptable to the Issuers), (iii)
outside the United States to a foreign person in a transaction meeting the
requirements of Rule 904 under the Securities Act, or (iv) pursuant to an
effective registration statement under the Securities Act, in each case in
accordance with any applicable securities laws of any state of the United
States.
RESALE OF THE NEW NOTES
With respect to resales of New Notes, based on interpretations by the staff
of the Commission set forth in no-action letters issued to third parties, the
Company believes that a holder or other person who receives New Notes, whether
or not such person is the holder (other than a person that is an "affiliate"
of the Issuers within the meaning of Rule 405 under the Securities Act) who
receives New Notes in exchange for Old Notes in the ordinary course of
business and who is not participating, does not intend to participate, and has
no arrangement or understanding with any person to participate, in the
distribution of the New Notes, will be allowed to resell the New Notes to the
public without further registration under the Securities Act and without
delivering to the purchasers of the New Notes a prospectus that satisfies the
requirements of Section 10 of the Securities Act. However, if any holder
acquires New Notes in the Exchange Offer for the purpose of distributing or
participating in a distribution of the New Notes, such holder cannot rely on
the position of the staff of the Commission enunciated in such no-action
letters or any similar interpretive letters, and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration
is otherwise available. Further, each Participating Broker-Dealer that
receives New Notes for its own account in exchange for Old Notes, where such
Old Notes were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Notes.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent
to the Company in the Letter of Transmittal that (i) the New Notes are to be
acquired by the holder or the person receiving such New Notes, whether or not
such person is the holder, in the ordinary course of business, (ii) the holder
or any such other person (other than a broker-dealer referred to in the next
sentence) is not engaging and does not intend to engage, in the distribution
of the New
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Notes, (iii) the holder or any such other person has no arrangement or
understanding with any person to participate in the distribution of the New
Notes, (iv) neither the holder nor any such other person is an "affiliate" of
the Issuers within the meaning of Rule 405 under the Securities Act, and (v)
the holder or any such other person acknowledges that if such holder or other
person participates in the Exchange Offer for the purpose of distributing the
New Notes it must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale of the New
Notes and cannot rely on those no-action letters. As indicated above, each
Participating Broker-Dealer that receives a New Note for its own account in
exchange for Old Notes must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. For a description of the
procedures for such resales by Participating Broker-Dealers, see "Plan of
Distribution."
DESCRIPTION OF THE NOTES
The New Notes will be issued under an Indenture, dated as of November 15,
1996 among the Issuers, the Guarantors stated therein and United States Trust
Company of New York, as trustee (the "Trustee"). The terms of the New Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act") as in effect on the date of the Indenture. The form and terms of the New
Notes are the same as the form and terms of the Old Notes (which they replace)
except that (i) the New Notes bear a Series B designation, (ii) the New Notes
have been registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof, and (iii) the holders of New Notes
will not be entitled to certain rights under the Registration Rights
Agreement, including the provisions providing for an increase in the interest
rate on the Old Notes in certain circumstances relating to the timing of the
Exchange Offer, which rights will terminate when the Exchange Offer is
consummated. The New Notes are subject to all such terms, and holders of the
New Notes are referred to the Indenture and the Trust Indenture Act for a
statement of them. The following is a summary of the material terms and
provisions of the New Notes. This summary does not purport to be a complete
description of the New Notes and is subject to the detailed provisions of, and
qualified in its entirety by reference to, the New Notes and the Indenture
(including the definitions contained therein). A copy of the Indenture has
been filed as an exhibit to the Exchange Offer Registration Statement of which
this Prospectus forms a part. See "Available Information." Definitions
relating to certain capitalized terms are set forth under "-- Certain
Definitions" and throughout this description. Capitalized terms that are used
but not otherwise defined herein have the meanings assigned to them in the
Indenture and such definitions are incorporated herein by reference. The Old
Notes and the New Notes are sometimes referred to herein collectively as the
"Notes."
GENERAL
The Notes will be limited in aggregate principal amount to $100,000,000. The
Notes will be general unsecured obligations of the Issuers, subordinated in
right of payment to Senior Indebtedness of the Issuers and senior in right of
payment to any current or future subordinated indebtedness of the Issuers. The
Notes will be joint and several obligations of the Issuers.
The Notes will be unconditionally guaranteed, on a senior subordinated
basis, as to payment of principal, premium, if any, and interest, jointly and
severally, by the Guarantors (including each Restricted Subsidiary which
guarantees payment of the Notes pursuant to the covenant described under
"Limitation on Creation of Subsidiaries").
MATURITY, INTEREST AND PRINCIPAL
The Notes will mature on November 15, 2006. The Notes will bear interest at
a rate of 11 1/8% per annum from the date of original issuance until maturity.
Interest is payable semi-annually in arrears on each May 15 and November 15,
commencing May 15, 1997, to holders of record of the Notes at the close of
business on the immediately preceding May 1 and November 1, respectively.
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OPTIONAL REDEMPTION
The Notes will be redeemable at the option of the Issuers, in whole or in
part, at any time on or after November 15, 2001 at the following redemption
prices (expressed as a percentage of principal amount), together, in each
case, with accrued interest to the redemption date, if redeemed during the
twelve-month period beginning on November 15, of each year listed below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001........................................................... 105.563%
2002........................................................... 103.708%
2003........................................................... 101.854%
2004 and thereafter............................................ 100.000%
</TABLE>
Notwithstanding the foregoing, the Issuers may redeem in the aggregate up to
25% of the original principal amount of Notes at any time and from time to
time prior to November 15, 1999 at a redemption price equal to 111.125% of the
aggregate principal amount so redeemed plus accrued interest to the redemption
date out of the Net Proceeds of one or more Public Equity Offerings; provided
that at least $75.0 million of the principal amount of Notes originally issued
remain outstanding immediately after the occurrence of any such redemption and
that any such redemption occurs within 90 days following the closing of any
such Public Equity Offering.
In the event of redemption of fewer than all of the Notes, the Trustee shall
select, if the Notes are listed on a national securities exchange, in
accordance with the rules of such exchange or, if the Notes are not so listed,
either on a pro rata basis or by lot or in such other manner as it shall deem
fair and equitable the Notes to be redeemed; provided, that if a partial
redemption is made with the proceeds of a Public Equity Offering, selection of
the Notes or portion thereof for redemption will be made by the Trustee on a
pro rata basis, unless such method is prohibited. The Notes will be redeemable
in whole or in part upon not less than 30 nor more than 60 days' prior written
notice, mailed by first class mail to a holder's last address as it shall
appear on the register maintained by the Registrar of the Notes. On and after
any redemption date, interest will cease to accrue on the Notes or portions
thereof called for redemption unless the Issuers shall fail to redeem any such
Note.
SUBORDINATION
The indebtedness represented by the Notes is, to the extent and in the
manner provided in the Indenture, subordinated in right of payment to the
prior indefeasible payment and satisfaction in full in cash of all existing
and future Senior Indebtedness of the Issuers. As of August 31, 1996, after
giving pro forma effect to the Transactions and the Initial Offering, the
principal amount of outstanding Senior Indebtedness of the Issuers, on a
consolidated basis, would have been $200.0 million. In addition, the Issuers
would have had $60.0 million of undrawn commitments available under the
Revolving Credit Facility.
In the event of any insolvency or bankruptcy case or proceeding, or any
receivership, liquidation. arrangement, reorganization or other similar case
or proceeding in connection therewith, relative to the Issuers or to their
creditors, as such, or to their assets, whether voluntary or involuntary, or
any liquidation, dissolution or other winding-up of the Issuers, whether
voluntary or involuntary and whether or not involving insolvency or
bankruptcy, or any general assignment for the benefit of creditors or other
marshalling of assets or liabilities of the Issuers (except in connection with
the merger or consolidation of the Issuers or its liquidation or dissolution
following the transfer of substantially all of their assets, upon the terms
and conditions permitted under the circumstances described under "--Mergers,
Consolidations or Sale of Assets") (all of the foregoing referred to herein
individually as a "Bankruptcy Proceeding" and collectively as "Bankruptcy
Proceedings"), the holders of Senior Indebtedness of the Issuers will be
entitled to receive payment and satisfaction in full in cash of all amounts
due on or in respect of all Senior Indebtedness of the Issuers before the
holders of the Notes are entitled to receive or retain any payment or
distribution of any kind on account of the Notes. In the event that,
notwithstanding the foregoing, the Trustee or any holder of Notes receives any
payment or distribution of assets of the Issuers of any kind, whether in cash,
property or securities, including, without limitation, by way of set-off
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or otherwise, in respect of the Notes before all Senior Indebtedness of the
Issuers is paid and satisfied in full in cash, then such payment or
distribution will be held by the recipient in trust for the benefit of holders
of Senior Indebtedness and will be immediately paid over or delivered to the
holders of Senior Indebtedness or their representative or representatives to
the extent necessary to make payment in full of all Senior Indebtedness
remaining unpaid, after giving effect to any concurrent payment or
distribution, or provision therefor, to or for the holders of Senior
Indebtedness. By reason of such subordination, in the event of liquidation or
insolvency, creditors of the Issuers who are holders of Senior Indebtedness
may recover more, ratably, than other creditors of the Issuers, and creditors
of the Issuers who are not holders of Senior Indebtedness or of the Notes may
recover more, ratably, than the holders of the Notes.
No payment or distribution of any assets or securities of the Issuers or any
Restricted Subsidiary of any kind or character (including, without limitation.
cash, property and any payment or distribution which may be payable or
deliverable by reason of the payment of any other Indebtedness of the Issuers
being subordinated to the payment of the Notes by the Issuers) may be made by
or on behalf of the Issuers or any Restricted Subsidiary, including, without
limitation, by way of set-off or otherwise, for or on account of the Notes, or
for or on account of the purchase, redemption or other acquisition of the
Notes, and neither the Trustee nor any holder or owner of any Notes shall take
or receive from the Issuers or any Restricted Subsidiary, directly or
indirectly in any manner, payment in respect of all or any portion of Notes
following the delivery by the representative of the holders of Designated
Senior Indebtedness (the "Representative") to the Trustee of written notice of
the occurrence of a Payment Default, and in any such event, such prohibition
shall continue until such Payment Default is cured, waived in writing or
ceases to exist. At such time as the prohibition set forth in the preceding
sentence shall no longer be in effect, subject to the provisions of the
following paragraph, the Issuers shall resume making any and all required
payments in respect of the Notes, including any missed payments.
Upon the occurrence of a Non-Payment Event of Default on Designated Senior
Indebtedness, no payment or distribution of any assets of the Issuers of any
kind may be made by the Issuers, including, without limitation, by way of set-
off or otherwise, on account of the Notes, or for on account of the purchase,
redemption, defeasance or other acquisition of Notes, and neither the Trustee
nor any holder or owner of Notes shall take or receive from the Issuers or any
Restricted Subsidiary, directly or indirectly in any manner, payment in
respect of all or any portion of the Notes for a period (a "Payment Blockage
Period") commencing on the date of receipt by the Trustee of written notice
from the Representative of such Non-Payment Event of Default unless and until
(subject to any blockage of payments that may then be in effect under the
preceding paragraph) the earliest of (x) more than 179 days shall have elapsed
since receipt of such written notice by the Trustee, (y) such NonPayment Event
of Default shall have been cured or waived in writing or shall have ceased to
exist or such Designated Senior Indebtedness shall have been paid in full or
(z) such Payment Blockage Period shall have been terminated by written notice
to the Issuers or the Trustee from such Representative, after which, in the
case of clause (x), (y) or (z), the Issuers shall resume making any and all
required payments in respect of the Notes, including any missed payments.
Notwithstanding any other provision of the Indenture, in no event shall a
Payment Blockage Period commenced in accordance with the provisions of the
Indenture described in this paragraph extend beyond 179 days from the date of
the receipt by the Trustee of the notice referred to above (the "Initial
Blockage Period"). Any number of additional Payment Blockage Periods may be
commenced during the Initial Blockage Period; provided, however, that no such
additional Payment Blockage Period shall extend beyond the Initial Blockage
Period. After the expiration of the Initial Blockage Period, no Payment
Blockage Period may be commenced until at least 180 consecutive days have
elapsed from the last day of the Initial Blockage Period. Notwithstanding any
other provision of the Indenture, no event of default with respect to
Designated Senior Indebtedness (other than a Payment Default) which existed or
was continuing on the date of the commencement of any Payment Blockage Period
initiated by the Representative shall be, or be made, the basis for the
commencement of a second Payment Blockage Period initiated by the
Representative, whether or not within the Initial Blockage Period, unless such
event of default shall have been cured or waived for a period of not less than
90 consecutive days.
Each Guarantee will, to the extent set forth in the Indenture, be
subordinated in fight of payment to the prior payment in full of all Senior
Indebtedness of the respective Guarantor, including obligations of such
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Guarantor with respect to the Senior Credit Facility (including any guarantee
thereof), and will be subject to the fights of holders of Designated Senior
Indebtedness of such Guarantor to initiate blockage periods, upon terms
substantially comparable to the subordination of the Notes to all Senior
Indebtedness of the Issuers.
If the Issuers or any Guarantor fails to make any payment on the Notes or
any Guarantee, as the case may be, when due or within any applicable grace
period, whether or not on account of payment blockage provisions. such failure
would constitute an Event of Default under the Indenture and would enable the
holders of the Notes to accelerate the maturity thereof. See "--Events of
Default."
A holder of Notes by his acceptance of Notes agrees to be bound by such
provisions and authorizes and expressly directs the Trustee, on his behalf. to
take such action as may be necessary or appropriate to effectuate the
subordination provided for in the Indenture and appoints the Trustee his
attorney-in-fact for such purpose.
CERTAIN COVENANTS
The Indenture will contain, among other things, the following covenants.
Except as otherwise specified, all of the covenants described below will
appear in the Indenture.
Limitation on Additional Indebtedness
The Issuers will not, and will not permit any Restricted Subsidiary of the
Issuers to, directly or indirectly, incur (as defined) any Indebtedness
(including Acquired Indebtedness) unless (a) after giving effect to the
incurrence of such Indebtedness and the receipt and application of the
proceeds thereof, the ratio of the total Indebtedness of the Issuers and their
Restricted Subsidiaries (excluding any Indebtedness owed to a Restricted
Subsidiary by any other Restricted Subsidiary or the Issuers and any
Indebtedness owed to the Issuers by any Restricted Subsidiary) to the Issuers'
EBITDA (determined on a pro forma basis for the last four fiscal quarters of
the Issuers for which financial statements are available at the date of
determination) is less than 6.0 to 1; provided, however, that if the
Indebtedness which is the subject of a determination under this provision is
Acquired Indebtedness, or Indebtedness incurred in connection with the
simultaneous acquisition of any Person, business, property or assets, then
such ratio shall be determined by giving effect to (on a pro forma basis, as
if the transaction had occurred at the beginning of the four-quarter period)
both the incurrence or assumption of such Acquired Indebtedness or such other
Indebtedness by the Issuers and the inclusion in the Issuers' EBITDA of the
EBITDA of the acquired Person, business, property or assets and any pro forma
expense and cost reductions calculated on a basis consistent with Regulation
S-X under the Securities Act as in effect and as applied as of the date
hereof, and (b) no Default or Event of Default shall have occurred and be
continuing at the time or as a consequence of the incurrence of such
Indebtedness.
Neither BrightView nor Holdings will, directly or indirectly, incur or
remain or become directly or indirectly liable with respect to any
Indebtedness except that BrightView and Holdings (a) may guarantee (i) the
Notes hereunder, (ii) the indebtedness of the Company under the Senior Credit
Facility and the other Credit Documents (as defined in the Senior Credit
Facility) and (iii) any Indebtedness of the Company or any Restricted
Subsidiary permitted to be incurred under the immediately preceding paragraph
and (b) may incur Indebtedness in an aggregate principal amount not exceeding
$5,000,000 outstanding at any time issued to repurchase their Capital Stock
from former management employees in connection with their termination or
departure (provided that such Indebtedness is subordinated in right and time
of payment to (i) and (ii) of (a) above).
Notwithstanding the foregoing, the Issuers and their Restricted Subsidiaries
may incur Permitted Indebtedness.
Limitation on Restricted Payments
The Issuers will not make, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, make, any Restricted Payment, unless:
(a) no Default or Event of Default shall have occurred and be continuing
at the time of or immediately after giving effect to such Restricted
Payment;
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(b) immediately after giving pro forma effect to such Restricted Payment,
the Issuers could incur $1.00 of additional Indebtedness (other than
Permitted Indebtedness) under the covenant set forth under "Limitation on
Additional Indebtedness"; and
(c) immediately after giving effect to such Restricted Payment, the
aggregate of all Restricted Payments declared or made after the Issue Date
does not exceed the sum of (1) 50% of the cumulative Consolidated Net
Income of the Company subsequent to the Issue Date (or minus 100% of any
cumulative deficit in Consolidated Net Income during such period) plus (2)
100% of the aggregate Net Proceeds and the fair market value of securities
or other property received by the Company from the issue or sale, after the
Issue Date, of Capital Stock (other than Disqualified Capital Stock or
Capital Stock of the Company issued to any Subsidiary of the Company) of
the Company or any Indebtedness or other securities of the Company
convertible into or exercisable or exchangeable for Capital Stock (other
than Disqualified Capital Stock) of the Company which has been so converted
or exercised or exchanged, as the case may be, plus (3) without duplication
of any amounts included in clause (1) and (2) above, 100% of the aggregate
net proceeds of any equity contribution received by the Company from a
holder of the Company's Capital Stock. For purposes of determining under
this clause (c) the amount expended for Restricted Payments, cash
distributed shall be valued at the face amount thereof and property other
than cash shall be valued at its fair market value.
The provisions of this covenant shall not prohibit (i) the payment of any
distribution within 60 days after the date of declaration thereof, if at such
date of declaration such payment would comply with the provisions of the
Indenture, (ii) the retirement of any shares of Capital Stock of the Company
or subordinated Indebtedness by conversion into, or by or in exchange for,
shares of Capital Stock (other than Disqualified Capital Stock), or out of,
the Net Proceeds of the substantially concurrent sale (other than to a
Subsidiary of the Company) of other shares of Capital Stock of the Company
(other than Disqualified Capital Stock), (iii) the redemption or retirement of
Indebtedness of the Issuers subordinated to the Notes in exchange for, by
conversion into, or out of the Net Proceeds of, a substantially concurrent
sale or incurrence of Indebtedness (other than any Indebtedness owed to a
Subsidiary) of the Issuers that is contractually subordinated in right of
payment to the Notes to at least the same extent as the subordinated
Indebtedness being redeemed or retired, (iv) the retirement of any shares of
Disqualified Capital Stock by conversion into, or by exchange for, shares of
Disqualified Capital Stock, or out of the Net Proceeds of the substantially
concurrent sale (other than to a Subsidiary of the Company) of other shares of
Disqualified Capital Stock, (v) if no Event of Default listed in clauses (i),
(ii) or (vi) under "Events of Default" shall have occurred and be continuing,
or would result from any such distribution, Permitted Tax Distributions or
(vi) dividend payments or other distributions of cash by the Company in an
amount not in excess of (y) $1,000,000 per fiscal year solely for the purpose
of paying fees and expenses of BrightView and Holdings, including directors'
fees, less (z) the amount of any management, advisory, consulting and similar
fees, paid by the Company to Willis Stein and its Affiliates during such
fiscal year.
Not later than the date of making any Restricted Payment, the Issuers shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "Limitation on Restricted Payments" were computed,
which calculations may be based upon the Issuer's latest available financial
statements, and that no Default or Event of Default exists and is continuing
and no Default or Event of Default will occur immediately after giving effect
to any Restricted Payments.
Limitation on Other Senior Subordinated Debt
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, directly or indirectly, incur, contingently or otherwise, any
Indebtedness (other than the Notes and the Guarantees, as the case may be)
that is both (i) subordinate in right of payment to any Senior Indebtedness of
the Issuers or their Restricted Subsidiaries, as the case may be, and (ii)
senior in right of payment to the Notes and the Guarantees, as the case may
be. For purposes of this covenant, Indebtedness is deemed to be senior in
right of payment to the Notes and the Guarantees, as the case may be, if it is
not explicitly subordinate in right of payment to Senior Indebtedness
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at least to the same extent as the Notes and the Guarantees, as the case may
be, are subordinate to Senior Indebtedness.
Limitations on Investments
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, make any Investment other than (i) a Permitted Investment or
(ii) an Investment that is made as a Restricted Payment in compliance with the
"Limitation on Restricted Payments" covenant, after the Issue Date.
Limitations on Liens
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, create, incur or otherwise cause or suffer to exist or become
effective any Liens of any kind (other than Permitted Liens) upon any property
or assets of the Issuers or any Restricted Subsidiary or any shares of stock
or debt of any Restricted Subsidiary which owns property or assets, now owned
or hereafter acquired, unless (i) if such Lien secures Indebtedness which is
pari passu with the Notes, then the Notes are secured on an equal and ratable
basis with the obligations so secured until such time as such obligation is no
longer secured by a Lien or (ii) if such Lien secures Indebtedness which is
subordinated to the Notes, any such Lien shall be subordinated to the Lien
granted to the Holders of the Notes to the same extent as such subordinated
Indebtedness is subordinated to the Notes.
Limitation on Transactions with Affiliates
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, directly or indirectly, enter into or suffer to exist any
transaction or series of related transactions (including, without limitation,
the sale, purchase, exchange or lease of assets, property or services) with
any Affiliate (including entities in which the Issuers or any of its
Restricted Subsidiaries own a minority interest) or holder of 10% or more of
the Issuers' Common Stock (an "Affiliate Transaction"), other than
transactions existing on the date hereof and described elsewhere in this
Prospectus, or extend, renew, waive or otherwise modify the terms of any
Affiliate Transaction entered into prior to the Issue Date if such extension,
renewal, waiver or other modification is more disadvantageous to the Holders
in any material respect than the original agreement as in effect on the Issue
Date unless (i) such Affiliate Transaction is between or among the Issuers and
their Wholly-Owned Subsidiaries or (ii) the terms of such Affiliate
Transaction are fair and reasonable to the Issuers or such Restricted
Subsidiary, as the case may be, and the terms of such Affiliate Transaction
are at least as favorable as the terms which could be obtained by the Issuers
or such Restricted Subsidiary, as the case may be, in a comparable transaction
made on an arm's-length basis between unaffiliated parties. In any Affiliate
Transaction involving an amount or having a value in excess of $1.0 million
which is not permitted under clause (i) above, the Issuers must obtain a
resolution of the Board of Directors certifying that such Affiliate
Transaction complies with clause (ii) above. In transactions with a value in
excess of $3.0 million which are not permitted under clause (i) above, the
Issuers must obtain a written opinion as to the fairness of such a transaction
from an independent investment banking firm.
The foregoing provisions will not apply to (i) any Restricted Payment that
is not prohibited by the provisions described under "Limitations on Restricted
Payments" contained herein (ii) any transaction, approved by the Board of
Directors of the Issuers, with an officer or director of the Issuers or of any
Subsidiary in his or her capacity as officer or director entered into in the
ordinary course of business (iii) transactions permitted by the Indenture
under the provision "Merger, Consolidation or Sale of Assets" or (iv)
transactions after the date of the Indenture that are expressly contemplated
by the Securities Purchase Agreement and the Securityholders Agreement
(including any registration rights described therein) and are not prohibited
by any other provision of this Indenture or the Notes; provided, that the
aggregate management, advisory, consulting and similar fees paid by the
Company to Willis Stein and its Affiliates pursuant to the Securities Purchase
Agreement or otherwise shall not exceed (y) $1,000,000 during any fiscal year
less (z) the amount of any distributions made by the Company during such
fiscal year pursuant to clause (vi) of the second paragraph under "--
Limitation on Restricted Payments," and provided further, that any such fees
may accrue but shall not be paid by the Company at any time after the
occurrence and during the continuance of a Default or Event of Default.
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Limitation on Creation of Subsidiaries
The Issuers shall not create or acquire, nor permit any of their Restricted
Subsidiaries to create or acquire, any Subsidiary other than (i) a Restricted
Subsidiary that is acquired or created in connection with the acquisition by
the Company of a media related business or asset or (ii) an Unrestricted
Subsidiary; provided, however, that each Restricted Subsidiary acquired or
created pursuant to clause (i) shall at the time it has either assets or
stockholders' equity in excess of $5,000 have evidenced its guarantee with
such documentation satisfactory in form and substance to the Trustee relating
thereto as the Trustee shall require, including, without limitation, a
supplement or amendment to the Indenture and opinions of counsel as to the
enforceability of such guarantee, pursuant to which such Restricted Subsidiary
shall become a Guarantor. As of the Issue Date, the Company will have no
Subsidiaries, other than Capital, and Capital will have no Subsidiaries. See
"--General."
Limitation on Certain Asset Sales
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, consummate an Asset Sale unless (i) the Issuers or such
Restricted Subsidiary, as the case may be, receives consideration at the time
of such sale or other disposition at least equal to the fair market value
thereof (as determined in good faith by the Company's Board of Directors, and
evidenced by a board resolution); (ii) not less than 85% of the consideration
received by the Company or its Subsidiaries, as the case may be, is in the
form of cash or Temporary Cash Investments and (iii) the Asset Sale Proceeds
received by the Company or such Restricted Subsidiary are applied (a) first,
to the extent the Company elects, or is required, to prepay, repay or purchase
debt under any then existing Senior Indebtedness of the Company or any
Restricted Subsidiary within 180 days following the receipt of the Asset Sale
Proceeds from any Asset Sale, provided that any such repayment shall result in
a permanent reduction of the commitments thereunder in an amount equal to the
principal amount so repaid; (b) second, to the extent of the balance of Asset
Sale Proceeds after application as described above, to the extent the Company
elects, to an investment in assets (including Capital Stock or other
securities purchased in connection with the acquisition of Capital Stock or
property of another person) used or useful in businesses similar or ancillary
to the business of the Company or such Restricted Subsidiary as conducted at
the time of such Asset Sale, provided that such investment occurs or the
Company or a Restricted Subsidiary enters into contractual commitments to make
such investment, subject only to customary conditions (other than the
obtaining of financing), on or prior to the 181st day following receipt of
such Asset Sale Proceeds (the "Reinvestment Date") and Asset Sale Proceeds
contractually committed are so applied within 270 days following the receipt
of such Asset Sale Proceeds: and (c) third, if on the Reinvestment Date with
respect to any Asset Sale, the Available Asset Sale Proceeds exceed $5.0
million, the Issuers shall apply an amount equal to such Available Asset Sale
Proceeds to an offer to repurchase the Notes, at a purchase price in cash
equal to 100% of the principal amount thereof plus accrued and unpaid
interest, if any, to the date of repurchase (an "Excess Proceeds Offer"). If
an Excess Proceeds Offer is not fully subscribed, the Company may retain the
portion of the Available Asset Sale Proceeds not required to repurchase Notes.
If the Issuers are required to make an Excess Proceeds Offer, the Issuers
shall mail, within 30 days following the Reinvestment Date, a notice to the
Holders stating, among other things: (1) that such Holders have the right to
require the Issuers to apply the Available Asset Sale Proceeds to repurchase
such Notes at a purchase price in cash equal to 100% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of purchase; (2)
the purchase date, which shall be no earlier than 30 days and not later than
60 days from the date such notice is mailed; (3) the instructions, determined
by the Issuers, that each Holder must follow in order to have such Notes
repurchased and (4) the calculations used in determining the amount of
Available Asset Sale Proceeds to be applied to the repurchase of such Notes.
Limitation on Preferred Stock of Subsidiaries
The Issuers will not permit any Restricted Subsidiary to issue any Preferred
Stock (except Preferred Stock to the Company or a Restricted Subsidiary) or
permit any Person (other than the Company or a Subsidiary) to hold any such
Preferred Stock unless the Company or such Restricted Subsidiary would be
entitled to incur or
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assume Indebtedness under the first paragraph of the covenant described under
"Limitation on Additional Indebtedness" in the aggregate principal amount
equal to the aggregate liquidation value of the Preferred Stock to be issued.
Limitation on Capital Stock of Subsidiaries
The Issuers will not (i) sell, pledge, hypothecate or otherwise convey or
dispose of any Capital Stock of a Subsidiary (other than under the Senior
Credit Facility or a successor facility or under the terms of any Designated
Senior Indebtedness) or (ii) permit any of their Subsidiaries to issue any
Capital Stock, other than to the Issuers or a wholly-owned Subsidiary of the
Issuers. The foregoing restrictions shall not apply to an Asset Sale made in
compliance with "Limitation on Certain Asset Sales" or the issuance of
Preferred Stock in compliance with the covenant described under "Limitation on
Preferred Stock of Subsidiaries." In no event will the Company sell, pledge,
hypothecate or otherwise convey or dispose of any Capital Stock of Capital or
will Capital issue any of its Capital Stock.
Limitation on Sale and Lease-Back Transactions
The Issuers will not, and will not permit any Restricted Subsidiary to,
enter into any Sale and Lease-Back Transaction unless (i) the consideration
received in such Sale and Lease-Back Transaction is at least equal to the fair
market value of the property sold, as determined by a board resolution of the
Company and (ii) the Issuers could incur the Attributable Indebtedness in
respect of such Sale and Lease-Back Transaction in compliance with the
covenant described under "Limitation on Additional Indebtedness."
Payments for Consent
Neither the Issuers nor any of their Subsidiaries shall, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any holder of any Notes for or as an inducement
to any consent, waiver or amendment of any of the terms or provisions of the
Indenture or the Notes unless such consideration is offered to be paid or
agreed to be paid to all holders of the Notes which so consent, waive or agree
to amend in the time frame set forth in solicitation documents relating to
such consent. waiver or agreement.
CHANGE OF CONTROL OFFER
Within 20 days of the occurrence of a Change of Control, the Company shall
notify the Trustee in writing of such occurrence and shall make an offer to
purchase (the "Change of Control Offer") the outstanding Notes at a purchase
price equal to 101% of the principal amount thereof plus any accrued and
unpaid interest to the Change of Control Payment Date (as hereinafter defined)
(such applicable purchase price being hereinafter referred to as the "Change
of Control Purchase Price") in accordance with the procedures set forth in
this covenant.
Within 20 days of the occurrence of a Change of Control, the Company also
shall (i) cause a notice of the Change of Control Offer to be sent at least
once to the Dow Jones News Service or similar business news service in the
United States and (ii) send by first-class mail, postage prepaid, to the
Trustee and to each holder of the Notes, at the address appearing in the
register maintained by the Registrar of the Notes, a notice stating:
(i) that the Change of Control Offer is being made pursuant to this
covenant and that all Notes tendered will be accepted for payment, and
otherwise subject to the terms and conditions set forth herein;
(ii) the Change of Control Purchase Price and the purchase date (which
shall be a Business Day no earlier than 20 business days from the date such
notice is mailed (the "Change of Control Payment Date"));
(iii) that any Note not tendered will continue to accrue interest;
(iv) that, unless the Issuers default in the payment of the Change of
Control Purchase Price, any Notes accepted for payment pursuant to the
Change of Control Offer shall cease to accrue interest after the Change of
Control Payment Date;
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(v) that holders accepting the offer to have their Notes purchased
pursuant to a Change of Control Offer will be required to surrender the
Notes to the Paying Agent at the address specified in the notice prior to
the close of business on the Business Day preceding the Change of Control
Payment Date.
(vi) that holders will be entitled to withdraw their acceptance if the
Paying Agent receives, not later than the close of business on the third
Business Day preceding the Change of Control Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the principal amount of the Notes delivered for purchase, and a
statement that such holder is withdrawing his election to have such Notes
purchased;
(vii) that holders whose Notes are being purchased only in part will be
issued new Notes equal in principal amount to the unpurchased portion of
the Notes surrendered, provided that each Note purchased and each such new
Note issued shall be in an original principal amount in denominations of
$1,000 and integral multiples thereof;
(viii) any other procedures that a holder must follow to accept a Change
of Control Offer or effect withdrawal of such acceptance; and
(ix) the name and address of the Paying Agent.
On the Change of Control Payment Date, the Issuers shall, to the extent
lawful, (i) accept for payment Notes or portions thereof tendered pursuant to
the Change of Control Offer; (ii) deposit with the Paying Agent money
sufficient to pay the purchase price of all Notes or portions thereof so
tendered and (iii) deliver or cause to be delivered to the Trustee Notes so
accepted together with an Officers' Certificate stating the Notes or portions
thereof tendered to the Issuers. The Paying Agent shall promptly mail to each
holder of Notes so accepted payment in an amount equal to the purchase price
for such Notes, and the Issuers shall execute and issue, and the Trustee shall
promptly authenticate and mail to such holder, a new Note equal in principal
amount to any unpurchased portion of the Notes surrendered; provided that each
such new Note shall be issued in an original principal amount in denominations
of $1,000 and integral multiples thereof.
The Indenture requires that if the Senior Credit Facility is in effect, or
any amounts are owing thereunder or in respect thereof, at the time of the
occurrence of a Change of Control, prior to the mailing of the notice to
holders described in the preceding paragraph, but in any event within 20 days
following any Change of Control, the Issuers on a joint and several basis
covenant to (i) repay in full all obligations under or in respect of the
Senior Credit Facility or offer to repay in full all obligations under or in
respect of the Senior Credit Facility and repay the obligations under or in
respect of the Senior Credit Facility of each lender who has accepted such
offer or (ii) obtain the requisite consent under the Senior Credit Facility to
permit the repurchase of the Notes as described above. The Issuers must first
comply with the covenant described in the preceding sentence before they shall
be required to purchase Notes in the event of a Change of Control; provided
that the Issuers' failure to comply with the covenant described in the
preceding sentence constitutes an Event of Default described in clause (iii)
under "Events of Default" below if not cured within 60 days after the notice
required by such clause. As a result of the foregoing, a holder of the Notes
may not be able to compel the Issuers to purchase the Notes unless the Issuers
are able at the time to refinance all of the obligations under or in respect
of the Senior Credit Facility or obtain requisite consents under the Senior
Credit Facility. Failure by the Issuers to make a Change of Control Offer when
required by the Indenture constitutes a default under the Indenture and, if
not cured within 60 days after notice, constitutes an Event of Default.
The Indenture provides that, (A) if either Issuer or any Subsidiary thereof
has issued any outstanding (i) Indebtedness that is subordinated in right of
payment to the Notes or (ii) Preferred Stock, and such Issuer or Subsidiary is
required to make a change of control offer or to make a distribution with
respect to such subordinated Indebtedness or Preferred Stock in the event of a
change of control, the Issuers shall not consummate any such offer or
distribution with respect to such subordinated Indebtedness or Preferred Stock
until such time as the Issuers shall have paid the Change of Control Purchase
Price in full to the holders of Notes that have accepted the Issuers' Change
of Control Offer and shall otherwise have consummated the Change of Control
Offer made to holders of the Notes and (B) the Issuers will not issue
Indebtedness that is subordinated
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in right of payment to the Notes or Preferred Stock with change of control
provisions requiring the payment of such Indebtedness or Preferred Stock prior
to the payment of the Notes in the event of a Change in Control under the
Indenture.
In the event that a Change of Control occurs and the holders of Notes
exercise their right to require the Issuers to purchase Notes, if such
purchase constitutes a "tender offer" for purposes of Rule 14e-1 under the
Exchange Act at that time, the Issuers will comply with the requirements of
Rule 14e-1 as then in effect with respect to such repurchase.
MERGER, CONSOLIDATION OR SALE OF ASSETS
Neither of the Issuers nor any Guarantor will, consolidate with, merge with
or into. or transfer all or substantially all of its assets (as an entirety or
substantially as an entirety in one transaction or a series of related
transactions), to any Person unless (in the case of the Company or any
Guarantor): (i) the Company or such Guarantor, as the case may be, shall be
the continuing Person, or the Person (if other than the Company or such
Guarantors) formed by such consolidation or into which the Company or such
Guarantors, as the case may be, is merged or to which the properties and
assets of the Company or such Guarantor, as the case may be, are transferred
shall be a corporation (or, in the case of the Company or Holdings, a
corporation or a limited liability company) organized and existing under the
laws of the United States or any State thereof or the District of Columbia and
shall expressly assume, by a supplemental indenture, executed and delivered to
the Trustee, in form satisfactory to the Trustee, all of the obligations of
the Company or such Guarantor, as the case may be, under the Notes and the
Indenture, and the obligations under the Indenture shall remain in full force
and effect; provided, that at any time the Company or its successor is a
limited liability company, there shall be a co-issuer of the Notes that is a
corporation; (ii) immediately before and immediately after giving effect to
such transaction, no Default or Event of Default shall have occurred and be
continuing; (iii) immediately after giving effect to such transaction or
series of transactions on a pro forma basis the Consolidated Net Worth of the
Company or the surviving entity as the case may be is at least equal to the
Consolidated Net Worth of the Company immediately before such transaction or
series of transactions and (iv) immediately after giving effect to such
transaction on a pro forma basis the Company or such Person could incur at
least $1.00 of additional Indebtedness (other than Permitted Indebtedness)
under the covenant set forth under "Limitation on Additional Indebtedness,"
provided that Holdings may merge into the Company, the Company may merge into
Holdings and Holdings or the Company may merge into BrightView without
complying with this clause (iv).
In connection with any consolidation, merger or transfer of assets
contemplated by this provision, the Issuers shall deliver, or cause to be
delivered, to the Trustee, in form and substance reasonably satisfactory to
the Trustee, an Officers' Certificate and an opinion of counsel, each stating
that such consolidation, merger or transfer and the supplemental indenture in
respect thereto comply with this provision and that all conditions precedent
herein provided for relating to such transaction or transactions have been
complied with.
GUARANTEES
The Notes are guaranteed on a senior subordinated basis by the Guarantors.
All payments pursuant to the Guarantees by the Guarantors are subordinated in
right of payment to the prior payment in full of all Senior Indebtedness of
the Guarantor, to the same extent and in the same manner that all payments
pursuant to the Notes are subordinated in right of payment to the prior
payment in full of all Senior Indebtedness of the Issuers.
The obligations of each Guarantor are limited to the maximum amount as will,
after giving effect to all other contingent and fixed liabilities of such
Guarantor (including, without limitation, any guarantees of Senior
Indebtedness) and after giving effect to any collections from or payments made
by or on behalf of any other Guarantor in respect of the obligations of such
other Guarantor under its Guarantee or pursuant to its contribution
obligations under the Indenture, result in the obligations of such Guarantor
under the Guarantee not constituting a fraudulent conveyance or fraudulent
transfer under federal or state law. Each Guarantor that makes a payment
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or distribution under a Guarantee shall be entitled to a contribution from
each other Guarantor in a pro rata amount based on the Adjusted Net Assets of
each Subsidiary Guarantor.
A Guarantor shall be released from all of its obligations under its
Guarantee if all or substantially all of its assets are sold or all of its
Capital Stock is sold, in each case in a transaction in compliance with the
covenant described under "Limitation on Certain Asset Sales," or the Guarantor
merges with or into or consolidates with, or transfers all or substantially
all of its assets to, the Company or another Guarantor in a transaction in
compliance with "Merger, Consolidation or Sale of Assets," and such Guarantor
has delivered to the Trustee an Officers' Certificate and an opinion of
counsel, each stating that all conditions precedent herein provided for
relating to such transaction have been complied with.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) default in payment of any principal of, or premium, if any, on the
Notes;
(ii) default for 30 days in payment of any interest on the Notes;
(iii) default by either of the Issuers or any Guarantor in the observance
or performance of any other covenant in the Notes or the Indenture for 60
days after written notice from the Trustee or the holders of not less than
25% in aggregate principal amount of the Notes then outstanding;
(iv) failure to pay when due principal, interest or premium in an
aggregate amount of $1,000,000 or more with respect to any Indebtedness of
the Issuers or any Restricted Subsidiary thereof, or the acceleration of
any such Indebtedness aggregating $1,000,000 or more which default shall
not be cured, waived or postponed pursuant to an agreement with the holders
of such Indebtedness within 60 days after written notice as provided in the
Indenture, or such acceleration shall not be rescinded or annulled within
20 days after written notice as provided in the Indenture;
(v) any final judgment or judgments which can no longer be appealed for
the payment of money in excess of $1,000,000 shall be rendered against
either of the Issuers or any Restricted Subsidiary thereof, and shall not
be discharged for any period of 60 consecutive days during which a stay of
enforcement shall not be in effect; and
(vi) certain events involving bankruptcy, insolvency or reorganization of
either of the Issuers or any Restricted Subsidiary thereof.
The Indenture provides that the Trustee may withhold notice to the holders
of the Notes of any default (except in payment of principal or premium, if
any, or interest on the Notes) if the Trustee considers it to be in the best
interest of the holders of the Notes to do so.
The Indenture will provide that if an Event of Default (other than an Event
of Default resulting from certain events of bankruptcy, insolvency or
reorganization) shall have occurred and be continuing, then the Trustee or the
holders of not less than 25% in aggregate principal amount of the Notes then
outstanding may declare to be immediately due and payable the entire principal
amount of all the Notes then outstanding plus accrued interest to the date of
acceleration and such amounts shall become immediately due and payable or if
there are any amounts outstanding under or in respect of the Senior Credit
Facility, such amounts shall become due and payable upon the first to occur of
an acceleration of amounts outstanding under or in respect of the Senior
Credit Facility or five business days after receipt by the Company and the
representative of the holders of Senior Indebtedness under or in respect of
the Senior Credit Facility, of notice of the acceleration of the Notes;
provided, however, that after such acceleration but before a judgment or
decree based on acceleration is obtained by the Trustee, the holders of a
majority in aggregate principal amount of outstanding Notes may, under certain
circumstances, rescind and annul such acceleration if all Events of Default,
other than nonpayment of accelerated principal, premium or interest, have been
cured or waived as provided in the Indenture. In case an Event of Default
resulting from certain events of bankruptcy, insolvency or reorganization
shall occur, the principal,
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premium and interest amount with respect to all of the Notes shall be due and
payable immediately without any declaration or other act on the part of the
Trustee or the holders of the Notes.
The holders of a majority in principal amount of the Notes then outstanding
shall have the right to waive any existing default or compliance with any
provision of the Indenture or the Notes and to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee,
subject to certain limitations specified in the Indenture.
No holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such holder
shall have previously given to the Trustee written notice of a continuing
Event of Default and unless also the holders of at least 25% in aggregate
principal amount of the outstanding Notes shall have made written request and
offered reasonable indemnity to the Trustee to institute such proceeding as a
trustee, and unless the Trustee shall not have received from the holders of a
majority in aggregate principal amount of the outstanding Notes a direction
inconsistent with such request and shall have failed to institute such
proceeding within 60 days. However, such limitations do not apply to a suit
instituted on such Note on or after the respective due dates expressed in such
Note.
DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides that the Issuers may elect either (a) to defease and
be discharged from any and all obligations with respect to the Notes (except
for the obligations to register the transfer or exchange of such Notes, to
replace temporary or mutilated, destroyed, lost or stolen Notes, to maintain
an office or agency in respect of the Notes and to hold monies for payment in
trust) ("defeasance") or (b) to be released from their obligations with
respect to the Notes under certain covenants contained in the Indenture and
described above under "Certain Covenants" ("covenant defeasance"), upon the
deposit with the Trustee (or other qualifying trustee), in trust for such
purpose, of money and/or U.S. Government Obligations which through the payment
of principal and interest in accordance with their terms will provide money,
in an amount sufficient to pay the principal of, premium, if any, and interest
on the Notes, on the scheduled due dates therefor or on a selected date of
redemption in accordance with the terms of the Indenture. Such a trust may
only be established if, among other things, the Issuers have delivered to the
Trustee an Opinion of Counsel (as specified in the Indenture) (i) to the
effect that neither the trust nor the Trustee will be required to register as
an investment company under the Investment Company Act of 1940, as amended,
and (ii) describing either a private ruling concerning the Notes or a
published ruling of the Internal Revenue Service, to the effect that holders
of the Notes or persons in their positions will not recognize income, gain or
loss for federal income tax purposes as a result of such deposit, defeasance
and discharge and will be subject to federal income tax on the same amount and
in the same manner and at the same times, as would have been the case if such
deposit, defeasance and discharge had not occurred.
MODIFICATION OF INDENTURE
From time to time, the Issuers, the Guarantors and the Trustee may, without
the consent of holders of the Notes, amend the Indenture or the Notes or
supplement the Indenture for certain specified purposes, including providing
for uncertificated Notes in addition to certificated Notes, and curing any
ambiguity, defect or inconsistency, or making any other change that does not
adversely affect the rights of any holder. The Indenture contains provisions
permitting the Issuers, the Guarantors and the Trustee, with the consent of
holders of at least a majority in principal amount of the outstanding Notes,
to modify or supplement the Indenture or the Notes, except that no such
modification shall, without the consent of each holder affected thereby, (i)
reduce the amount of Notes whose holders must consent to an amendment,
supplement, or waiver to the Indenture or the Notes; (ii) reduce the rate of
or change the time for payment of interest on any Note; (iii) reduce the
principal of or premium on or change the stated maturity of any Note; (iv)
make any Note payable in money other than that stated in the Note or change
the place of payment from New York, New York; (v) change the amount or time of
any payment required by the Notes or reduce the premium payable upon any
redemption of Notes, or change the time before which no such redemption may be
made; (vi) waive a default in the payment of the principal of, interest on, or
redemption payment with respect to any Note; (vii) take any other action
otherwise prohibited by
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the Indenture to be taken without the consent of each holder affected thereby
or (viii) affect the ranking of the Notes or the Guarantee in a manner adverse
to the Holders.
REPORTS TO HOLDERS
So long as the Issuers are subject to the periodic reporting requirements of
the Exchange Act, they will continue to furnish the information required
thereby to the Commission and to the holders of the Notes. The Indenture
provides that even if the Company is entitled under the Exchange Act not to
furnish such information to the Commission or to the holders of the Notes, it
will nonetheless continue to furnish such information to the Commission and
holders of the Notes.
COMPLIANCE CERTIFICATE
The Issuers will deliver to the Trustee on or before 100 days after the end
of the Issuers' fiscal year and on or before 50 days after the end of each the
first, second and third fiscal quarters in each year an Officers' Certificate
stating whether or not the signers know of any Default or Event of Default
that has occurred. If they do, the certificate will describe the Default or
Event of Default and its status.
THE TRUSTEE
The Trustee under the Indenture will be the Registrar and Paying Agent with
regard to the Notes. The Indenture provides that, except during the
continuance of an Event of Default, the Trustee will perform only such duties
as are specifically set forth in the Indenture. During the existence of an
Event of Default, the Trustee will exercise such rights and powers vested in
it under the Indenture and use the same degree of care and skill in its
exercise as a prudent person would exercise under the circumstances in the
conduct of such person's own affairs.
TRANSFER AND EXCHANGE
Holders of the Notes may transfer or exchange the Notes in accordance with
the Indenture. The Registrar under such Indenture may require a holder, among
other things, to furnish appropriate endorsements and transfer documents, and
to pay any taxes and fees required by law or permitted by the Indentures. The
Registrar is not required to transfer or exchange any Note selected for
redemption. Also, the Registrar is not required to transfer or exchange any
Note for a period of 15 days before selection of the Notes to be redeemed.
The registered holder of a Note may be treated as the owner of it for all
purposes.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants contained in the Indenture. Reference is made to the Indenture for
the full definition of all such terms as well as any other capitalized terms
used herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person (including an
Unrestricted Subsidiary) existing at the time such Person becomes a Restricted
Subsidiary or assumed in connection with the acquisition of assets from such
Person.
"Adjusted Net Assets" of a Guarantor at any date shall mean the lesser of
the amount by which (x) the fair value of the property of such Guarantor
exceeds the total amount of liabilities, including, without limitation,
contingent liabilities (after giving effect to all other fixed and contingent
liabilities), but excluding liabilities under the Guarantee, of such Guarantor
at such date and (y) the present fair salable value of the assets of such
Guarantor at such date exceeds the amount that will be required to pay the
probable liability of such Guarantor on its debts (after giving effect to all
other fixed and contingent liabilities and after giving effect to any
collection from any Subsidiary of such Guarantor in respect of the obligations
of such Subsidiary under the Guarantee), excluding Indebtedness in respect of
the Guarantee, as they become absolute and matured.
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"Affiliate" of any specified Person means any other Person which directly or
indirectly through one or more intermediaries controls, or is controlled by,
or is under common control with, such specified Person. For the purposes of
this definition, "control" (including, with correlative meanings, the terms
"controlling," "controlled by," and "under common control with"), as used with
respect to any Person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by agreement or
otherwise.
"Asset Sale" means the sale, transfer or other disposition (other than to
the Company or any of its Restricted Subsidiaries) in any single transaction
or series of related transactions of (a) any Capital Stock of or other equity
interest in any Restricted Subsidiary of the Issuers, (b) all or substantially
all of the assets of the Issuers or of any Restricted, Subsidiary thereof, (c)
real property or (d) all or substantially all of the assets of any magazine or
publishing property, or part thereof, owned by the Issuers or any Restricted
Subsidiary thereof, or a division, line of business or comparable business
segment of the Issuers or any Restricted Subsidiary thereof; provided that
Asset Sales shall not include (i) sales, leases, conveyances, transfers or
other dispositions to the Company or to a Restricted Subsidiary or to any
other Person if after giving effect to such sale, lease, conveyance, transfer
or other disposition such other Person becomes a Restricted Subsidiary or (ii)
the sale or other disposition of any or all right, title and interest of the
Company and its Subsidiaries in and to the assets and properties (other than
cash) directly associated with the Scheduled Titles, and the sale or other
disposition of any Investments made by the contribution of any of the
Scheduled Titles to a joint venture, partnership or other Person (which may be
a Subsidiary) as permitted by clause (xii) of the definition of Permitted
Investments.
"Asset Sale Proceeds" means, with respect to any Asset Sale, (i) cash
received by the Issuers or any Restricted Subsidiary from such Asset Sale
(including cash received as consideration for the assumption of liabilities
incurred in connection with or in anticipation of such Asset Sale), after (a)
provision for all income or other taxes measured by or resulting from such
Asset Sale, (b) payment of all brokerage commissions, underwriting and other
fees and expenses related to such Asset Sale, (c) provision for minority
interest holders in any Restricted Subsidiary as a result of such Asset Sale
and (d) deduction of appropriate amounts to be provided by the Issuers or a
Restricted Subsidiary as a reserve, in accordance with GAAP, against any
liabilities associated with the assets sold or disposed of in such Asset Sale
and retained by the Issuers or a Restricted Subsidiary after such Asset Sale,
including, without limitation, pension and other post employment benefit
liabilities and liabilities related to environmental matters or against any
indemnification obligations associated with the assets sold or disposed of in
such Asset Sale, and (ii) promissory notes and other non-cash consideration
received by the Issuers or any Restricted Subsidiary from such Asset Sale or
other disposition upon the liquidation or conversion of such notes or non-cash
consideration into cash.
"Attributable Indebtedness" in respect of a Sale and Lease-Back Transaction
means, as at the time of determination, the greater of (i) the fair value of
the property subject to such arrangement (as determined by the Board of
Directors) and (ii) the present value of the notes (discounted at a rate of
10%, compounded annually) of the total obligations of the lessee for rental
payments during the remaining term of the lease included in such Sale and
Lease-Back Transaction (including any period for which such lease has been
extended).
"Available Asset Sale Proceeds" means, with respect to any Asset Sale, the
aggregate Asset Sale Proceeds from such Asset Sale that have not been applied
in accordance with clauses (iii)(a) or (iii)(b), and which has not yet been
the basis for an Excess Proceeds Offer in accordance with clause (iii)(c), of
the first paragraph of "Certain Covenants--Limitation on Certain Asset Sales".
"Capital Stock" means, with respect to any Person, any and all shares or
other equivalents (however designated) of capital stock, partnership interests
or any other participation, right or other interest in the nature of an equity
interest in such Person or any option, warrant or other security convertible
into any of the foregoing.
"Capitalized Lease Obligations" means Indebtedness represented by
obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with GAAP, and the amount of such Debt shall
be the capitalized amount of such obligations determined in accordance with
GAAP.
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A "Change of Control" means the occurrence of one or more of the following
events: (i) Holdings and BrightView collectively shall cease to own all of the
outstanding Capital Stock of the Company; (ii) prior to a Qualified IPO, (x)
Holdings shall cease to be the managing member of the Company or shall
otherwise cease to have the sole right and authority to exercise control over
the management of the Company, (y) BrightView shall cease to be the managing
member of Holdings or shall otherwise cease to have the sole right and
authority to exercise control over the management of Holdings; or (z) Willis
Stein shall cease to have the power (regardless of whether such power is
exercised) to elect a majority of the Board of Directors of BrightView and
(iii) in connection with or subsequent to a Qualified IPO, any Person or group
of Persons acting in concert as a partnership or other group (other than the
Permitted Holders) shall, as a result of a tender or exchange offer, open
market purchases, privately negotiated purchases or otherwise, have become,
after the date hereof, the "beneficial owner" (within the meaning of such term
under Rule 13d-3 under the Exchange Act) of securities of Holdings or
BrightView or such successor entity representing 20% or more of the combined
voting power of the then outstanding securities of Holdings or BrightView or
such successor entity, as the case may be, ordinarily (and apart from rights
accruing under special circumstances) having the right to vote in the election
of directors, managers or other members of its governing body.
"Commodity Hedge Agreement" shall mean any option, hedge or other similar
agreement or arrangement designed to protect against fluctuations in commodity
or materials prices.
"Common Stock" of any Person means all Capital Stock of such Person that s
generally entitled to (i) vote in the election of directors of such Person or
(ii) if such Person is not a corporation, vote or otherwise participate in the
selection of the governing body, partners, managers or others that will
control the management and policies of such Person.
"Consolidated Interest Expense" means, with respect to any Person, for any
period, the aggregate amount of interest which, in conformity with GAAP, would
be set forth opposite the caption "interest expense" or any like caption on an
income statement for such Person and its Subsidiaries on a consolidated basis
(including, but not limited to, Redeemable Dividends, whether paid or accrued,
on Preferred Stock of Subsidiaries of such Person, imputed interest included
in Capitalized Lease Obligations, all commissions, discounts and other fees
and charges owed with respect to letters of credit and bankers' acceptance
financing, the net costs associated with hedging obligations, amortization of
other financing fees and expenses, the interest portion of any deferred
payment obligation, amortization of discount or premium, if any, and all other
non-cash interest expense (other than interest amortized to cost of sales))
plus, without duplication, all net capitalized interest for such period and
all interest incurred or paid under any guarantee of Indebtedness (including a
guarantee of principal, interest or any combination thereof) of any Person,
plus the amount of all dividends or distributions paid on Disqualified Stock
(other than dividends paid or payable in shares of Capital Stock of the
Company).
"Consolidated Net Income" means, with respect to any Person, for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP minus
Permitted Tax Distributions (to the extent such Permitted Tax Distributions
are made)" provided, however, that (a) the Net Income of any Person (the
"other Person") in which the Person in question or any of its Subsidiaries has
less than a 100% interest (which interest does not cause the net income of
such other Person to be consolidated into the net income of the Person in
question in accordance with GAAP) shall be included only to the extent of the
amount of dividends or distributions paid to the Person in question or the
Subsidiary, (b) the Net Income of any Subsidiary of the Person in question
that is subject to any restriction or limitation on the payment of dividends
or the making of other distributions (other than pursuant to the Notes or the
Indenture) shall be excluded to the extent of such restriction or limitation,
(c)(i) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition and (ii) any
net gain (but not loss) resulting from an Asset Sale by the Person in question
or any of its Subsidiaries other than in the ordinary course of business shall
be excluded and (d) extraordinary gains and losses (including any related tax
effects on the Issuers) shall be excluded.
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"Consolidated Net Worth" means, with respect to any Person at any date, the
consolidated stockholder's equity of such Person less the amount of such
stockholder's equity attributable to Disqualified Capital Stock of such Person
and its Subsidiaries, as determined in accordance with GAAP.
"Designated Senior Indebtedness" as to the Company or any Guarantor, as the
case may be, means any Senior Indebtedness (a) under the Senior Credit
Facility, or (b) which at the time of determination exceeds $25 million in
aggregate principal amount (or accreted value in the case of Indebtedness
issued at a discount) outstanding or available under a committed facility, and
(i) which is specifically designated in the instrument evidencing such Senior
Indebtedness as "Designated Senior Indebtedness" by such Person and (ii) as to
which the Trustee has been given written notice of such designation.
"Disqualified Capital Stock" means any Capital Stock of the Company or a
Restricted Subsidiary thereof which, by its term (or by the terms of any
security into which it is convertible or for which it is exchangeable at the
option of the holder), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, in whole or in part, on or
prior to the maturity date of the Notes, for cash or securities constituting
Indebtedness. Without limitation of the foregoing, Disqualified Capital Stock
shall be deemed to include (i) any Preferred Stock of a Restricted Subsidiary
of the Company and (ii) any Preferred Stock of the Company, with respect to
either of which, under the terms of such Preferred Stock, by agreement or
otherwise, such Restricted Subsidiary or the Company is obligated to pay
current dividends or distributions in cash during the period prior to the
maturity date of the Notes; provided, however, that Preferred Stock of the
Company or any Restricted Subsidiary thereof that is issued with the benefit
of provisions requiring a change of control offer to be made for such
Preferred Stock in the event of a change of control of the Company or
Restricted Subsidiary, which provisions have substantially the same effect as
the provisions of the Indenture described under "Change of Control," shall not
be deemed to be Disqualified Capital Stock solely by virtue of such
provisions.
"EBITDA " means, for any Person, for any period, an amount equal to (a) the
sum of (i) Consolidated Net Income for such period, plus (ii) the provision
for taxes for such period based on income or profits to the extent such income
or profits were included in computing Consolidated Net Income and any
provision for taxes utilized in computing net loss under clause (i) hereof,
plus (iii) Consolidated Interest Expense for such period (but only including
Redeemable Dividends in the calculation of such Consolidated Interest Expense
to the extent that such Redeemable Dividends have not been excluded in the
calculation of Consolidated Net Income), Plus (iv) depreciation for such
period on a consolidated basis, plus (v) amortization of intangibles for such
period on a consolidated basis, plus (vi) any other non-cash items reducing
Consolidated Net Income for such period, plus (vii) to the extent not already
included in Consolidated Net Income, all special management compensation
earned or accrued prior to the Issue Date to the extent paid or accrued in
such Period, plus (viii) Permitted Tax Distributions minus (b) all non-cash
items increasing Consolidated Net Income for such period, all for such Person
and its Subsidiaries determined in accordance with GAAP, except that with
respect to the Issuers each of the foregoing items shall be determined on a
consolidated basis with respect to the Issuers and their Restricted
Subsidiaries only; provided, however, that, for purposes of calculating EBITDA
during any fiscal quarter, cash income from a particular Investment of such
Person shall be included only (x) if cash income has been received by such
Person with respect to such Investment during each of the previous four fiscal
quarters, or (y) if the cash income derived from such Investment is
attributable to Temporary Cash Investments.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles consistently applied
as in effect on the date of the Indenture.
"incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise),
assume, guarantee or otherwise become liable in respect of such Indebtedness
or other obligation or the recording, as required pursuant to GAAP or
otherwise, of any such Indebtedness or other obligation on the balance sheet
of such person (and "incurrence," "incurred,"
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"incurrable," and "incurring" shall have meanings correlative to the
foregoing); provided that a change in GAAP that results in an obligation of
such Person that exists at such time becoming Indebtedness shall not be deemed
an incurrence of such Indebtedness.
"Indebtedness" means (without duplication), with respect to any Person, any
indebtedness at any time outstanding, secured or unsecured, contingent or
otherwise, which is for borrowed money (whether or not the recourse of the
lender is to the whole of the assets of such Person or only to a portion
thereof), or evidenced by bonds, notes, debentures or similar instruments or
representing the balance deferred and unpaid of the purchase price of any
property (excluding, without limitation, any balances that constitute accounts
payable or trade payables, and other accrued liabilities arising in the
ordinary course of business) if and to the extent any of the foregoing
indebtedness would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, and shall also include, to the extent not
otherwise included (i) any Capitalized Lease Obligations, (ii) obligations
secured by a lien to which the property or assets owned or held by such Person
is subject, whether or not the obligation or obligations secured thereby shall
have been assumed (provided, however, that if such obligation or obligations
shall not have been assumed, the amount of such indebtedness shall be deemed
to be the lesser of the principal amount of the obligation or the fair market
value of the pledged property or assets), (iii) guarantees of items of other
Persons which would be included within this definition for such other Persons
(whether or not such items would appear upon the balance sheet of the
guarantor), (iv) all obligations for the reimbursement of any obligor on any
letter of credit, banker's acceptance or similar credit transaction (provided
that in the case of any such letters of credit, the items for which such
letters of credit provide credit support are those of other Persons which
would be included within this definition for such other Persons), (v) in the
case of the Issuers, Disqualified Capital Stock of the Issuers or any
Restricted Subsidiary thereof, and (vi) obligations of any such Person under
any Interest Rate Agreement applicable to any of the foregoing (if and to the
extent such Interest Rate Agreement obligations would appear as a liability
upon a balance sheet of such Person prepared in accordance with GAAP). The
amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and,
with respect to contingent obligations, the maximum liability upon the
occurrence of the contingency giving rise to the obligation, provided (i) that
the amount outstanding at any time of any Indebtedness issued with original
issue discount is the principal amount of such Indebtedness less the remaining
unamortized portion of the original issue discount of such Indebtedness at
such time as determined in conformity with GAAP and (ii) that Indebtedness
shall not include any liability for federal, state, local or other taxes.
Notwithstanding any other provision of the foregoing definition, any trade
payable arising from the purchase of goods or materials or for services
obtained in the ordinary course of business shall not be deemed to be
"Indebtedness" of the Company or any Restricted Subsidiaries for purposes of
this definition. Furthermore, guarantees of (or obligations with respect to
letters of credit supporting) Indebtedness otherwise included in the
determination of such amount shall not also be included.
"Interest Rate Agreement" shall mean any interest or foreign currency rate
swap, cap, collar, option, hedge, forward rate or other similar agreement or
arrangement designed to protect against fluctuations in interest rates or
currency exchange rates.
"Investments" means, directly or indirectly, any advance, account receivable
(other than an account receivable arising in the ordinary course of business
or acquired as part of the assets acquired by the Issuers in connection with
an acquisition of assets which is otherwise permitted by the terms of the
Indenture), loan or capital contribution to (by means of transfers of property
to others, payments for property or services for the account or use of others
or otherwise), the purchase of any stock, bonds, notes, debentures,
partnership or joint venture interests or other securities of, the
acquisition, by purchase or otherwise, of all or substantially all of the
business or assets or stock or other evidence of beneficial ownership of, any
Person or the making of any investment in any Person. Investments shall
exclude (i) extensions of trade credit on commercially reasonable terms in
accordance with normal trade practices and (ii) the repurchase of securities
of any Person by such Person.
"Issue Date" means the date the Notes are first issued by the Issuers and
authenticated by the Trustee under the Indenture.
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"Lien" means with respect to any property or assets of any Person, any
mortgage or deed of trust, pledge, hypothecation, assignment, deposit
arrangement, security interest, lien, charge, easement, encumbrance,
preference, priority, or other security agreement or preferential arrangement
of any kind or nature whatsoever on or with respect to such property or assets
(including without limitation, any Capitalized Lease Obligation, conditional
sales, or other title retention agreement having substantially the same
economic effect as any of the foregoing).
"Net Income" means, with respect to any Person for any period, the net
income (loss) of such Person determined in accordance with GAAP.
"Net Proceeds" means (a) in the case of any sale of Capital Stock by the
Company or BrightView, the aggregate net proceeds received by the Company or
BrightView, after payment of expenses, commissions and the like incurred in
connection therewith, whether such proceeds are in cash or in property (valued
at the fair market value thereof, as determined in good faith by the board of
directors, at the time of receipt) and (b) in the case of any exchange,
exercise, conversion or surrender of outstanding securities of any kind for or
into shares of Capital Stock of the Company which is not Disqualified Stock,
the net book value of such outstanding securities on the date of such
exchange, exercise, conversion or surrender (plus any additional amount
required to be paid by the holder to the Company upon such exchange, exercise,
conversion or surrender, less any and all payments made to the holders, e.g.,
on account of fractional shares and less all expenses incurred by the Company
in connection therewith).
"Non-Payment Event of Default" means any event (other than a Payment
Default) the occurrence of which entities one or more Persons to accelerate
the maturity of any Designated Senior Indebtedness.
"Officers' Certificate" means, with respect to any Person, a certificate
signed by the Chief Executive Officer, the President or any Vice President and
the Chief Financial Officer or any Treasurer of such Person that shall comply
with applicable provisions of the Indenture.
"Payment Default" means any default, whether or not any requirement for the
giving of notice, the lapse of time or both, or any other condition to such
default becoming an event of default has occurred, in the payment of principal
of (or premium, if any) or interest on or any other amount payable in
connection with Designated Senior Indebtedness.
"Permitted Holders" means, collectively, Neal Vitale and each Person who
purchased Capital Stock of Holdings, BrightView or Petersen Investment Corp.
pursuant to the Securities Purchase Agreement.
"Permitted Indebtedness" means:
(i) Indebtedness of the Company or any Restricted Subsidiary arising
under or in connection with the Senior Credit Facility in an amount not to
exceed $260 million less any mandatory prepayments actually made thereunder
(to the extent, in the case of payments of revolving credit indebtedness,
that the corresponding commitments have been permanently reduced) or
scheduled payments actually made thereunder;
(ii) Indebtedness under the Notes and the Guarantees;
(iii) Indebtedness not covered by any other clause of this definition
which is outstanding on the date of the Indenture;
(iv) Indebtedness of the Company to any Restricted Subsidiary and
Indebtedness of any Restricted Subsidiary to the Company or another
Restricted Subsidiary;
(v) Interest Rate Agreements;
(vi) Refinancing Indebtedness;
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(vii) Indebtedness under Commodity Hedge Agreements entered into in the
ordinary course of business consistent with reasonable business
requirements and not for speculation;
(viii) Indebtedness of the type described in, and secured by Liens of the
type described in, clauses (ix) and (xix) of the definition of Permitted
Liens;
(ix) Indebtedness consisting of guarantees made in the ordinary course of
business by the Company or any of its Subsidiaries of obligations of the
Issuers or any of their Subsidiaries, which obligations are otherwise
permitted under this Agreement;
(x) Contingent Obligations of the Company or its Subsidiaries in respect
of customary indemnification and purchase price adjustment obligations
incurred in connection with an Asset Sale; provided that the maximum
assumable liability in respect of all such obligations shall at no time
exceed the gross proceeds actually received by the Company and its
Subsidiaries in connection with such Asset Sale; and
(xi) Purchase Money Indebtedness of the Company and its Subsidiaries and
any refinancings, renewals or replacements of any such Purchase Money
Indebtedness (subject to the limitations on the principal amount thereof
set forth in this clause (iv)), and other Indebtedness that is unsecured
(other than Indebtedness specified in clauses (i) through (x) above), which
Purchase Money Indebtedness and other unsecured Indebtedness shall not
exceed $10 million in the aggregate at any time.
"Permitted Investments" means, for any Person, Investments made on or after
the date of the Indenture consisting of:
(i) Investments by the Company, or by a Restricted Subsidiary thereof, in
the Company or a Restricted Subsidiary;
(ii) Temporary Cash Investments;
(iii) Investments by the Company, or by a Restricted Subsidiary thereof,
in a Person, if as a result of such Investment (a) such Person becomes a
Restricted Subsidiary of the Company, (b) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Restricted Subsidiary thereof or (c) such businesses or assets are owned by
the Company or a Restricted Subsidiary;
(iv) an Investment that is made by the Company or a Restricted Subsidiary
thereof in the form of any stock, bonds, notes, debentures, partnership or
joint venture interests or other securities that are issued by a third
party to the Issuers or Restricted Subsidiary solely as partial
consideration for the consummation of an Asset Sale that is otherwise
permitted under the covenant described under "Limitation on Sale of
Assets";
(v) Investments consisting of (a) purchases and acquisitions of
inventory, supplies, materials and equipment, or (b) licenses or leases of
intellectual property and other assets, in each case in the ordinary course
of business;
(vi) Investments consisting of loans and advances to employees for
reasonable travel, relocation and business expenses in the ordinary course
of business, extensions of trade credit in the ordinary course of business,
and prepaid expenses incurred in the ordinary course of business;
(vii) without duplication, Investments consisting of Indebtedness
permitted pursuant to clause (iv) under the definition of Permitted
Indebtedness;
(viii) Investments existing on the date of this Indenture;
(ix) Investments of the Company under Interest Rate Agreements;
(x) Investments under Commodity Hedge Agreements entered into in the
ordinary course of business consistent with reasonable business
requirements and not for speculation;
(xi) Investments consisting of endorsements for collection or deposit in
the ordinary course of business;
(xii) Investments consisting of the contribution by the Company to
partnerships, joint ventures or other Persons (including Subsidiaries) of
the Scheduled Titles in exchange for equity interests in such Persons,
provided that all such Investments are made within 365 days after the date
hereof,
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(xiii) Investments consisting of the licensing of publication titles and
other assets pursuant to joint marketing arrangements with other Persons;
and
(xiv) Investments (other than Investments specified in clauses (i)
through (xiii) above) in an aggregate amount, as valued at the time each
such Investment is made, not exceeding $5 million for all such Investments
from and after the date hereof.
"Permitted Liens" means (i) Liens on property or assets of, or any shares of
stock of or secured debt of, any corporation existing at the time such
corporation becomes a Restricted Subsidiary of the Company or at the time such
corporation is merged into the Company or any of its Restricted Subsidiaries;
provided that such Liens are not incurred in connection with, or in
contemplation of, such corporation becoming a Restricted Subsidiary of the
Company or merging into the Company or any of its Restricted Subsidiaries,
(ii) Liens securing Refinancing Indebtedness; provided that any such Lien does
not extend to or cover any Property, shares or debt other than the Property,
shares or debt securing the Indebtedness so refunded, refinanced or extended,
(iii) Liens in favor of the Issuers or any of their Restricted Subsidiaries,
(iv) Liens securing industrial revenue bonds, (v) Liens to secure Purchase
Money Indebtedness that is otherwise permitted under the Indenture, provided
that (a) any such Lien is created solely for the purpose of securing
Indebtedness representing, or incurred to finance, refinance or refund, the
cost (including sales and excise taxes, installation and delivery charges and
other direct costs of, and other direct expenses paid or charged in connection
with, such purchase or construction) of such Property, (b) the principal
amount of the Indebtedness secured by such Lien does not exceed 100% of such
costs, and (c) such Lien does not extend to or cover any Property other than
such item of Property and any improvements on such item, (vi) statutory liens
or landlords', carriers', warehouseman's, mechanics', suppliers',
materialmen's, repairmen's or other like Liens arising in the ordinary course
of business which do not secure any Indebtedness and with respect to amounts
not yet delinquent or being contested in good faith by appropriate
proceedings, if a reserve or other appropriate provision, if any, as shall be
required in conformity with GAAP shall have been made therefor, (vii) other
Liens securing obligations incurred in the ordinary course of business which
obligations do not exceed $5 million in the aggregate at any one time
outstanding, (viii) any extensions, substitutions, replacements or renewals of
the foregoing, (ix) Liens for taxes, assessments or governmental charges that
are being contested in good faith by appropriate proceedings, (x) Liens
securing Capital Lease Obligations permitted to be incurred under clause (v)
of the definition of "Permitted Indebtedness," provided that such Lien does
not extend to any property other than that subject to the underlying lease,
(xi) Liens securing Designated Senior Indebtedness, (xii) Liens existing on
the date of this Indenture, (xiii) Liens imposed by law, such as Liens of
carriers, warehousemen, mechanics, materialmen and landlords, and other
similar Liens incurred in the ordinary course of business for sums not
constituting borrowed money that are not overdue for a period of more than
thirty (30) days or that are being contested in good faith by appropriate
proceedings and for which adequate reserves have been established in
accordance with GAAP (if so required), (xiv) Liens incurred in the ordinary
course of business in connection with worker's compensation, unemployment
insurance or other forms of government insurance or benefits, or to secure the
performance of letters of credit, bids, tenders, statutory obligations, surety
and appeal bonds, leases, government contracts and other similar obligations
(other than obligations for borrowed money) entered into in the ordinary
course of business, (xv) any attachment or judgment Lien not constituting an
Event of Default under the Indenture that is being contested in good faith by
appropriate proceedings and for which adequate reserves have been established
in accordance with GAAP (if so required), (xvi) Liens arising from the filing,
for notice purposes only, of financing statements in respect of operating
leases, (xvii) Liens arising by operation of law in favor of depositary banks
and collecting banks, incurred in the ordinary course of business, (xviii)
Liens consisting of restrictions on the transfer of securities pursuant to
applicable federal and state securities laws (xix) interests of lessors and
licensors under leases and licenses to which the Issuers or any of their
Restricted Subsidiaries is a party and (xx) with respect to any real property
occupied by the Company or any of their Restricted Subsidiaries, all
easements, rights or way, licenses and similar encumbrances on title that do
not materially impair the use of such property of its intended purposes.
"Permitted Tax Distributions" means, subject to the limitations set forth in
clause (v) of the second paragraph under "Certain Covenants-Limitation on
Restricted Payments," distributions by the Company to Holdings and BrightView
from time to time in an amount approximately equal to the income tax liability
of
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such member of the Company (but in the case of Holdings and for so long as
Holdings is treated as a passthrough entity for taxation purposes, to the
income tax liability that Holdings would have if it were required to pay
income taxes) resulting from the taxable income of the Company (after taking
into account all of the Company's prior tax losses, to the extent such losses
have not previously been deemed to reduce the taxable income of the Company
and thereby reduce distributions for taxes in accordance herewith), such
distribution for taxes shall be based on the approximate highest combined tax
rate that applies to any one of the members of the Company.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government (including any agency or political subdivision thereof).
"Preferred Stock" means any Capital Stock of a Person, however designated,
which entitles the holder thereof to a preference with respect to dividends,
distributions or liquidation proceeds of such Person over the holders of other
Capital Stock issued by such Person.
"Property" of any Person means all types of real, personal, tangible,
intangible or mixed property owned by such Person whether or not included in
the most recent consolidated balance sheet of such Person and its Subsidiaries
under GAAP.
"Public Equity Offering" means a public offering by BrightView of shares of
its Common Stock (however designated and whether voting or non-voting) and any
and all rights, warrants or options to acquire such Common Stock; provided,
however, that in connection with any such Public Equity Offering the net
proceeds of such Public Equity Offering are contributed to the Company as
common equity.
"Purchase Money Indebtedness" means any Indebtedness incurred in the
ordinary course of business by a Person to finance the cost (including the
cost of construction) of an item of Property, the principal amount of which
Indebtedness does not exceed the sum of (i) 100% of such cost and (ii)
reasonable fees and expenses of such Person incurred in connection therewith.
"Qualified IPO " shall have the meaning given to such term in the
Securityholders Agreement.
"Redeemable Dividend" means, for any dividend or distribution with regard to
Disqualified Capital Stock, the quotient of the dividend or distribution
divided by the difference between one and the maximum statutory federal income
tax rate (expressed as a decimal number between 1 and 0) then applicable to
the issuer of such Disqualified Capital Stock.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances or
extends any Indebtedness of the Company outstanding on the Issue Date or other
Indebtedness permitted to be incurred by the Company or its Restricted
Subsidiaries pursuant to the terms of the Indenture, but only to the extent
that (i) the Refinancing Indebtedness is subordinated to the Notes to at least
the same extent as the Indebtedness being refunded, refinanced or extended, if
at all, (ii) the Refinancing Indebtedness is scheduled to mature either (a) no
earlier than the Indebtedness being refunded, refinanced or extended, or (b)
after the maturity date of the Notes, (iii) the portion, if any, of the
Refinancing Indebtedness that is scheduled to mature on or prior to the
maturity date of the Notes has a weighted average life to maturity at the time
such Refinancing Indebtedness is incurred that is equal to or greater than the
weighted average life to maturity of the portion of the Indebtedness being
refunded, refinanced or extended that is scheduled to mature on or prior to
the maturity date of the Notes, (iv) such Refinancing Indebtedness is in an
aggregate principal amount that is equal to or less than the sum of (a) the
aggregate principal amount then outstanding under the Indebtedness being
refunded, refinanced or extended, (b) the amount of accrued and unpaid
interest, if any, and premiums owed, if any, not in excess of preexisting
prepayment provisions on such Indebtedness being refunded, refinanced or
extended and (c) the amount of customary fees, expenses and costs related to
the incurrence of such Refinancing Indebtedness, and (v) such Refinancing
Indebtedness is incurred by the same Person that initially incurred the
Indebtedness being refunded, refinanced or extended, except that the Company
may incur Refinancing Indebtedness to refund, refinance or extend Indebtedness
of any Wholly-Owned Subsidiary of the Company.
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"Restricted Payment" means any of the following: (i) the declaration or
payment of any dividend or any other distribution or payment on Capital Stock
of the Company or any Restricted Subsidiary of the Company or any payment made
to the direct or indirect holders (in their capacities as such) of Capital
Stock of the Company or any Restricted Subsidiary of the Company (other than
(x) dividends or distributions payable solely in Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to purchase
Capital Stock (other than Disqualified Stock), and (y) in the case of
Restricted Subsidiaries of the Company, dividends or distributions payable to
the Company or to a Wholly-Owned Subsidiary of the Company), (ii) the
purchase, redemption or other acquisition or retirement for value of any
Capital Stock of the Company or any of its Restricted Subsidiaries (other than
Capital Stock owned by the Company or a Wholly-Owned Subsidiary of the
Company, excluding Disqualified Stock), (iii) the making of any principal
payment on, or the purchase, defeasance, repurchase, redemption or other
acquisition or retirement for value, prior to any scheduled maturity,
scheduled repayment or scheduled sinking fund payment, of any Indebtedness
which is subordinated in right of payment to the Notes other than subordinated
Indebtedness acquired in anticipation of satisfying a scheduled sinking fund
obligation, principal installment or final maturity, in each case due within
one year of the date of acquisition, (iv) the making of any Investment or
guarantee of any Investment in any Person other than a Permitted Investment,
(v) any designation of a Restricted Subsidiary as an Unrestricted Subsidiary
on the basis of the Investment by the Issuers therein and (vi) forgiveness of
any Indebtedness of an Affiliate of the Issuers (other than a Restricted
Subsidiary) to the Issuers or a Restricted Subsidiary. For purposes of
determining the amount expended for Restricted Payments, cash distributed or
invested shall be valued at the face amount thereof and property other than
cash shall be valued at its fair market value.
"Restricted Subsidiary" means a Subsidiary of the Company other than an
Unrestricted Subsidiary and includes all of the Subsidiaries of the Company
existing as of the Issue Date. The Board of Directors of the Company may
designate any Unrestricted Subsidiary or any Person that is to become a
Subsidiary as a Restricted Subsidiary if immediately after giving effect to
such action (and treating any Acquired Indebtedness as having been incurred at
the time of such action), the Company could have incurred at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
"Limitation on Additional Indebtedness" covenant.
"Sale and Lease-Back Transaction" means any arrangement with any Person
providing for the leasing by the Company or any Restricted Subsidiary of the
Company of any real or tangible personal Property, which Property has been or
is to be sold or transferred by the Company or such Restricted Subsidiary to
such Person in contemplation of such leasing.
"Scheduled Titles" shall refer to the following publications: Sassy, Sport,
Petersen's Golfing, Mountain Biker, Bicycle Guide, Custom Classic Trucks, Pro
Basketball, Pro Baseball, Pro Football, Pro Hockey, College Basketball,
College Football, Super Street, VW Custom & Classic, Event Scene, Hot Rod
Bikes, 4x4 Power and Family Photo.
"Securities Purchase Agreement" means the Securities Purchase Agreement,
dated as of September 30, 1996, among Holdings, Petersen Investment Corp.,
BrightView, Petersen, Willis Stein and the Purchasers named therein.
"Senior Credit Facility" means the Credit Agreement, dated as of September
30, 1996, among the Company, the lenders listed therein and FBNC, as
administrative agent, and CIBC, as documentation agent, together with the
documents related thereto (including, without limitation, any guarantee
agreements and security documents), in each case as such agreements may be
amended (including any amendment and restatement thereof), supplemented or
otherwise modified from time to time, including any agreement extending the
maturity of, refinancing, replacing or otherwise restructuring (including
adding Subsidiaries of the Issuers as additional borrowers or guarantors
thereunder) all or any portion of the Indebtedness under such agreement or any
successor or replacement agreement and whether by the same or any other agent,
lender or group of lenders.
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"Senior Indebtedness" means the principal of and premium, if any, and
interest (including, without limitation, interest accruing or that would have
accrued but for the filing of a bankruptcy, reorganization or other insolvency
proceeding whether or not such interest constitutes an allowable claim in such
proceeding) on, and any and all other fees, expense reimbursement obligations
and other amounts due pursuant to the terms of all agreements, documents and
instruments providing for, creating, securing or evidencing or otherwise
entered into in connection with (a) a Indebtedness of the Company owed to
lenders under the Senior Credit Facility, (b) all obligations of the Company
with respect to any Interest Rate Agreement, (c) all obligations of the
Company to reimburse any bank or other person in respect of amounts paid under
letters of credit, acceptances or other similar instruments, (d) all other
Indebtedness of the Company which does not provide that it is to rank pari
passu with or subordinate to the Notes and (e) all deferrals, renewals,
extensions and refundings of, and amendments, modifications and supplements
to, any of the Senior Indebtedness described above. Notwithstanding anything
to the contrary in the foregoing, Senior Indebtedness will not include (i)
Indebtedness of the Company to any of its Subsidiaries, (ii) Indebtedness
represented by the Notes, (iii) any Indebtedness which by the express terms of
the agreement or instrument creating, evidencing or governing the same is
junior or subordinate in right of payment to any item of Senior Indebtedness,
(iv) any trade payable arising from the purchase of goods or materials or for
services obtained in the ordinary course of business and (v) Indebtedness
(other than that described in clause (a) above) incurred in violation of the
Indenture.
"Subsidiary" of any specified Person means any corporation, partnership,
joint venture, association or other business entity, whether now existing or
hereafter organized or acquired, (i) in the case of a corporation, of which
more than 50% of the total voting power of the Capital Stock entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, officers or trustees thereof is held by such first-named Person or
any of its Subsidiaries; or (ii) in the case of a partnership, joint venture,
association or other business entity, with respect to which such first-named
Person or any of its Subsidiaries has the power to direct or cause the
direction of the management and policies of such entity by contract or
otherwise or if in accordance with generally accepted accounting principles
such entity is consolidated with the first-named Person for financial
statement purposes.
"Temporary Cash Investments" means (i) Investments in marketable, direct
obligations issued or guaranteed by the United States of America, or of any
governmental agency or political subdivision thereof, maturing within 365 days
of the date of purchase; (ii) Investments in certificates of deposit issued by
a bank organized under the laws of the United States of America or any state
thereof or the District of Columbia, in each case having capital, surplus and
undivided profits totaling more than $500,000,000 and rated at least A by
Standard & Poor's Corporation and A-2 by Moody's Investors Service, Inc.,
maturing within 365 days of purchase; or (iii) Investments not exceeding 365
days in duration in money market funds that invest substantially all of such
funds' assets in the Investments described in the preceding clauses (i) and
(ii).
"Unrestricted Subsidiary" means (a) any Subsidiary of an Unrestricted
Subsidiary and (b) any Subsidiary of the Company which is classified after the
Issue Date as an Unrestricted Subsidiary by a resolution adopted by the
Company; provided that a Subsidiary organized or acquired after the Issue Date
may be so classified as an Unrestricted Subsidiary only if such classification
is in compliance with the covenant set forth under "Limitation on Restricted
Payments." The Trustee shall be given prompt notice by the Company of each
resolution adopted by the managing member of the Company under this provision,
together with a copy of each such resolution adopted.
"Wholly-Owned Subsidiary" means any Restricted Subsidiary, all of the
outstanding voting securities (other than directors' qualifying shares) of
which are owned, directly or indirectly, by the Company.
BOOK ENTRY, DELIVERY AND FORM
The New Notes initially will be represented by one or more Notes in
registered, global form without interest coupons (collectively, the "Global
Note"). The Global Note will be deposited upon issuance with the Trustee, as
custodian for DTC, in New York, New York, and registered in the name of DTC or
its nominee, in each case
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for credit to an account of a direct or indirect participant as described
below. Notes sold to Accredited Investors may be represented by the Global
Note or, if such an investor may not hold an interest in the Global Note, a
certificated Note.
Except as set forth below, the Global Note may be transferred, in whole and
not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial Interests in the Global Note may not be exchanged for
Notes in certificated form except in the limited circumstances described
below. See "--Exchange of Book-Entry Notes for Certificated Notes."
The Notes may be presented for registration of transfer and exchange at the
offices of the Registrar.
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic book-
entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchasers), banks,
trust companies, clearing corporations and certain other organizations. Access
to DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may
beneficially own securities held by or on behalf of DTC only through the
Participants or the Indirect Participants. The ownership interest and transfer
of ownership interest of each actual purchaser of each security held by or on
behalf of DTC are recorded on the records of the Participants and Indirect
Participants.
DTC has also advised the Company that pursuant to procedures established by
it, (i) upon deposit of the Global Note, DTC will credit the accounts of
Participants designated by the Exchange Agent with portions of the principal
amount of the Global Note and (ii) ownership of such interests in the Global
Note will be shown on, and the transfer of ownership thereof will be effected
only through, records maintained by DTC (with respect to the Participants) or
by the Participants and the Indirect Participants (with respect to other
owners of beneficial interests in the Global Note).
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in a Global Note to such persons may be limited
to that extent. Because DTC can act only on behalf of Participants, which in
turn act on behalf of Indirect Participants and certain banks, the ability of
a person having beneficial interests in a Global Note to pledge such interests
to persons or entities that do not participate in the DTC system, or otherwise
take actions in respect of such interests, may be affected by the lack of a
physical certificate evidencing such interests. For certain other restrictions
on the transferability of the Notes, see "--Exchange of Book-Entry Notes for
Certificated Notes."
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respects of the principal of (and premium, if any) and interest
on the Global Note registered in the name of DTC or its nominee will be
payable to DTC or its nominee in its capacity as the registered holder under
the Indenture. Under the terms of the Indenture, the Company and the Trustee
will treat the persons in whose names the Notes, including the Global Note,
are registered as the owners thereof for the purpose of receiving such
payments and for any and all other purposes whatsoever. Consequently, neither
the Company, the Trustee nor any agent of the Company or the Trustee has or
will have any responsibility or liability for (i) any aspect or accuracy of
DTC's records or any Participant's or Indirect Participant's records relating
to or payments made on account of beneficial ownership interests in the Global
Note, or for maintaining, supervising or reviewing any of DTC's records or any
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in the Global Note, or (ii) any other matter relating to
the actions and practices of DTC or any of its Participants or Indirect
Participants.
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DTC has advised the Company that its current practice, upon receipt of any
payment in respect of securities such as the Notes (including principal and
interest), is to credit the accounts of the relevant Participants with the
payment on the payment date, in amounts proportionate to their respective
holdings in principal amount of beneficial interests in the relevant security
such as the Global Note as shown on the records of DTC. Payments by the
Participants and the Indirect Participants to the beneficial owners of Notes
will be governed by standing instructions and customary practices and will not
be the responsibility of DTC, the Trustee or the Company. Neither the Company
nor the Trustee will be liable for any delay by DTC or any of its Participants
in identifying the beneficial owners of the Notes, and the Company and the
Trustee may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee as the registered owner of the Notes for
all purposes.
Interests in the Global Note will trade in DTC's Same-Day Funds Settlement
System and secondary market trading activity in such interests will therefore
settle in immediately available funds, subject in all cases to the rules and
procedures of DTC and its participants. Transfers between Participants in DTC
will be effected in accordance with DTC's procedures, and will be settled in
same-day funds.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more Participants
to whose account with DTC interests in the Global Notes are credited and only
in respect of such portion of the aggregate principal amount of the Notes as
to which such Participant or Participants has or have given such direction.
However, if any of the events described under "--Exchange of Book Entry Notes
for Certificated Notes" occur, DTC reserves the right to exchange the Global
Notes for Notes in certificated form, and to distribute such Notes to its
Participants.
The information in this section concerning DTC, and its book-entry system
has been obtained from sources that the Company believes to be reliable, but
the Company takes no responsibility for the accuracy thereof.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Global Note among accountholders in DTC, it is under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Company, the Trustee
nor any agent of the Company or Trustee will have any responsibility for the
performance by DTC, or its respective accountholders, indirect participants or
accountholders of their respective obligations under the rules and procedures
governing their operations.
A Global Note is exchangeable for definitive Notes in registered
certificated form if (i) DTC (x) notifies the Company that it is unwilling or
unable to continue as depositary for the Global Note and the Company thereupon
fails to appoint a successor depositary or (y) has ceased to be a clearing
agency registered under the Exchange Act; (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of the
Notes in certificated form or (iii) there shall have occurred and be
continuing a Default or an Event of Default with respect to the Notes. In all
cases, certificated Notes delivered in exchange for any Global Note or
beneficial interests therein will be registered in the names, and issued in
any approved denominations, requested by or on behalf of the depositary (in
accordance with its customary procedures).
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended, applicable Treasury regulations, judicial
authority and administrative rulings and practice. There can be no assurance
that the Internal Revenue Service (the "Service") will not take a contrary
view, and no ruling from the Service has been or will be sought. Legislative,
judicial or administrative changes or interpretations may be forthcoming that
could alter or modify the statements and conditions set forth herein. Any such
changes or interpretations may or may not be retroactive and could affect the
tax consequences to holders. Certain holders (including insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United
States) may be subject to special rules
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not discussed below. The Issuers recommend that each holder consult such
holder's own tax advisor as to the particular tax consequences of exchanging
such holder's Old Notes for New Notes, including the applicability and effect
of any state, local or foreign tax laws.
The Issuers believe that the exchange of Old Notes for New Notes pursuant to
the Exchange Offer will not be treated as an "exchange" for federal income tax
purposes because the New Notes will not be considered to differ materially in
kind or extent from the Old Notes. Rather, the New Notes received by a holder
will be treated as a continuation of the Old Notes in the hands of such
holder. As a result, there will be no federal income tax consequences to
holders exchanging Old Notes for New Notes pursuant to the Exchange Offer.
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus,
as it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of New Notes received
in exchange for Old Notes where such Old Notes were acquired as a result of
market-making activities or other trading activities. The Issuers have agreed
that for a period of 180 days after the Expiration Date, they will make this
Prospectus, as amended or supplemented, available to any Participating Broker-
Dealer for use in connection with any such resale; provided, however, the
Issuers and the Guarantor have no obligation to amend or supplement this
Prospectus unless one of them has received written notice from a Participating
Broker-Dealer of their prospectus delivery requirements under the Exchange Act
within five business days following consummation of the Exchange Offer. In
addition, until May 12, 1997 (90 days after the commencement of the Exchange
Offer), all dealers effecting transactions in the New Notes, whether or not
participating in this distribution, may be required to deliver a prospectus.
The Issuers will not receive any proceeds from any sales of the New Notes by
Participating Broker Dealers. New Notes received by Participating Broker-
Dealers for their own account pursuant to the Exchange Offer may be sold from
time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the New Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such Participating Broker-Dealer and/or the purchasers of
any such New Notes. Any Participating Broker-Dealer that resells the New Notes
that were received by it for its own account pursuant to the Exchange Offer
and any broker or dealer that participates in a distribution of such New Notes
may be deemed to be an "underwriter" within the meaning of the Securities Act
and any profit on any such resale of New Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that
by acknowledging that it will deliver and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The Issuers have agreed that, for a period of 180 days after the Expiration
Date, they will make copies of this Prospectus available to any Participating
Broker-Dealer for use in connection with resales of the New Notes; provided,
however, that the Issuers have no obligation to amend or supplement this
Prospectus unless they have received written notice from a Participating
Broker-Dealer of its prospectus delivery requirements under the Securities Act
within five days following consummation of the Exchange Offer.
LEGAL MATTERS
The validity of the issuance of the New Notes will be passed upon for the
Issuers by Kirkland & Ellis, Chicago, Illinois (a partnership which includes
professional corporations). Certain partners of Kirkland & Ellis are limited
partners of Willis Stein.
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INDEPENDENT AUDITORS
The financial statements of the publishing division of Petersen Publishing
Company at November 30, 1995 and September 30, 1996 and for each of the three
years in the period ended November 30, 1995 and for the ten months ended
September 30, 1996 appearing in this Prospectus and Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in
accounting and auditing.
The Issuers and Holdings were formed in September 1996 to effect the
Acquisition and, prior thereto, did not have any assets or liabilities or
conduct any operations. The latest period for which financial information is
included herein is as of and for the ten months ended September 30, 1996. As a
result, separate financial statements of the Issuers and Holdings have not
been included herein.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PETERSEN PUBLISHING COMPANY PUBLISHING DIVISION
Report of Ernst & Young LLP, Independent Auditors................... F-2
Balance Sheets at November 30, 1995 and September 30, 1996.......... F-3
Statements of Income and Divisional Equity (Capital Deficiency) for
the years ended November 30, 1993, 1994 and 1995 and ten months
ended September 30, 1995 (unaudited) and 1996...................... F-4
Statements of Cash Flows for the years ended November 30, 1993, 1994
and 1995 and ten months ended September 30, 1995 (unaudited) and
1996............................................................... F-5
Notes to Financial Statements....................................... F-6
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Petersen Publishing Company
We have audited the accompanying balance sheets of Petersen Publishing
Company, Publishing Division, as of November 30, 1995 and September 30, 1996,
and the related statements of income and divisional equity, and cash flows for
each of the three years in the period ended November 30, 1995 and for the ten
months ended September 30, 1996. Our audits also included the financial
statement schedule listed in Item 21(b) of this Registration Statement. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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 Petersen Publishing
Company, Publishing Division, at November 30, 1995 and September 30, 1996, and
the results of its operations and its cash flows for each of the three years
in the period ended November 30, 1995 and the ten months ended September 30,
1996, in conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Ernst & Young LLP
Los Angeles, California
December 16, 1996
F-2
<PAGE>
PETERSEN PUBLISHING COMPANY
PUBLISHING DIVISION
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOVEMBER 30, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 9,938 $12,453
Short-term investments............................ 3,744 55
Accounts receivable, less allowance for doubtful
accounts of $2,220 in 1995 and $1,871 in 1996.... 18,535 18,777
Inventories....................................... 21,347 8,518
Other prepaid expenses and current assets......... 1,213 1,431
------- -------
Total current assets............................ 54,777 41,234
Property and equipment, net......................... 7,784 5,241
Goodwill, net of accumulated amortization of $1,127
in 1995 and $1,442 in 1996......................... 3,210 2,924
Other assets........................................ 1,037 1,142
------- -------
Total assets.................................... $66,808 $50,541
======= =======
LIABILITIES AND DIVISIONAL EQUITY (CAPITAL DEFICIEN-
CY)
Current liabilities:
Accounts payable.................................. $10,436 $ 5,907
Accrued payroll and related costs................. 6,116 5,614
Customer incentives payable....................... 5,204 5,374
Current portion of unearned subscription revenues,
net of deferred subscription acquisition costs of
$38,161 in 1995 and $40,313 in 1996.............. 26,669 26,443
Other accrued expenses and current liabilities.... 592 687
------- -------
Total current liabilities....................... 49,017 44,025
Unearned subscription revenues, net of deferred
subscription acquisition costs of $31,834 in 1995
and $33,629 in 1996................................ 7,183 6,546
Deferred state income taxes......................... 1,321 1,494
Other noncurrent liabilities........................ 660 148
------- -------
Total liabilities............................... 58,181 52,213
Commitments and contingencies
Divisional equity (capital deficiency).............. 8,627 (1,672)
------- -------
Total liabilities and divisional equity (capital
deficiency).................................... $66,808 $50,541
======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
PETERSEN PUBLISHING COMPANY
PUBLISHING DIVISION
STATEMENTS OF INCOME AND DIVISIONAL EQUITY (CAPITAL DEFICIENCY)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEARS ENDED NOVEMBER 30, SEPTEMBER 30,
---------------------------- --------------------
1993 1994 1995 1995 1996
-------- -------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues:
Advertising.............. $105,101 $116,608 $123,410 $102,672 $112,025
Newsstand................ 37,507 40,048 39,889 33,326 34,318
Subscriptions............ 39,820 40,710 41,963 35,113 35,177
Other.................... 3,894 4,601 8,353 7,539 7,594
-------- -------- -------- -------- --------
Total net revenues..... 186,322 201,967 213,615 178,650 189,114
Production, selling and
other direct costs
(including rent paid to a
related party of $3,651,
$3,939, $3,875, $3,185 and
$3,778 in 1993, 1994, 1995
and the ten months ended
September 30, 1995 and
1996)..................... 141,562 149,182 171,112 140,436 148,713
-------- -------- -------- -------- --------
Gross profit............... 44,760 52,785 42,503 38,214 40,401
General and administrative
expenses.................. 35,604 33,267 28,145 23,537 24,650
-------- -------- -------- -------- --------
Income from operations..... 9,156 19,518 14,358 14,677 15,751
Interest income............ (317) (476) (549) (428) (537)
Interest expense........... -- -- -- -- 185
Gain on sale of assets..... -- -- -- -- (1,554)
-------- -------- -------- -------- --------
Income before provision for
income taxes.............. 9,473 19,994 14,907 15,105 17,657
Provision for state income
taxes..................... 251 698 549 458 331
-------- -------- -------- -------- --------
Net income................. 9,222 19,296 14,358 14,647 17,326
Divisional equity (capital
deficiency) at beginning
of period................. 4,126 (1,553) 361 361 8,627
Distribution of S
corporation earnings...... -- (26,400) (3,391) (3,300) (21,470)
Net change in advances to
other divisions of the
Company................... (14,901) 9,018 (2,701) (2,077) (6,155)
-------- -------- -------- -------- --------
Divisional equity (capital
deficiency) at end of
period.................... $ (1,553) $ 361 $ 8,627 $ 9,631 $ (1,672)
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
PETERSEN PUBLISHING COMPANY
PUBLISHING DIVISION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEARS ENDED NOVEMBER 30, SEPTEMBER 30,
---------------------------- -------------------
1993 1994 1995 1995 1996
-------- -------- -------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income................. $ 9,222 $ 19,296 $ 14,358 $14,647 $17,326
Adjustments to reconcile
net cash provided by
operating activities:
Depreciation and
amortization............ 3,137 3,118 3,439 2,704 2,704
Allowance for doubtful
accounts................ 740 825 900 750 45
Gain on sale of assets... -- -- -- -- (1,554)
Deferred state income
taxes................... -- 416 406 339 173
Changes in operating assets
and liabilities:
Accounts receivable...... (2,711) (1,758) (197) 2,110 (287)
Inventories.............. (796) (1,204) (11,846) (7,028) 12,829
Other prepaid expenses
and current assets...... (389) (162) (84) 12 (217)
Other assets............. (22) 385 (255) (363) (158)
Accounts payable......... (4,828) 2,116 2,205 (2,443) (4,529)
Accrued payable and
related costs........... 3,123 842 (602) (526) (502)
Customer incentives
payable................. 25 830 355 (13) 170
Unearned subscription
revenues, net........... 1,964 1,542 2,910 (2,485) (863)
Other accrued expenses
and current
liabilities............. 959 1,111 (2,294) (2,337) 95
Other noncurrent
liabilities............. 256 (298) 298 163 (513)
-------- -------- -------- ------- -------
Net cash provided by
operating activities...... 10,680 27,059 9,593 5,530 24,719
INVESTING ACTIVITIES
Purchases of property and
equipment................. (4,739) (2,866) (4,423) (3,492) (768)
Purchases of magazines..... (1,850) (1,300) -- -- --
Sales of investments....... 23,963 7,000 6,677 6,677 3,689
Purchases of investments... (17,404) (17,312) -- -- --
Proceeds from sale of
assets.................... -- -- -- -- 2,500
-------- -------- -------- ------- -------
Net cash (used in) provided
by investing activities... (30) (14,478) 2,254 3,185 5,421
FINANCING ACTIVITIES
Proceeds from bank
borrowing................. -- -- -- -- 10,000
Repayment of bank
borrowing................. -- -- -- -- (10,000)
Distribution of S
corporation earnings...... -- (26,400) (3,391) (3,300) (21,470)
Net change in advances to
other divisions of the
Company................... (14,901) 9,018 (2,701) (2,077) (6,155)
-------- -------- -------- ------- -------
Net cash used in financing
activities................ (14,901) (17,382) (6,092) (5,377) (27,625)
-------- -------- -------- ------- -------
Increase (decrease) in cash
and cash equivalents...... (4,251) (4,801) 5,755 3,338 2,515
Cash and cash equivalents
at beginning period....... 13,235 8,984 4,183 4,183 9,938
-------- -------- -------- ------- -------
Cash and cash equivalents
at end of period.......... $ 8,984 $ 4,183 $ 9,938 $ 7,521 $12,453
======== ======== ======== ======= =======
Supplemental information:
Income taxes paid........ $ 563 $ 342 $ 263 $ 120 $ 40
Interest received........ 364 350 741 393 538
Interest paid............ -- -- -- -- 185
</TABLE>
See accompanying notes.
F-5
<PAGE>
PETERSEN PUBLISHING COMPANY
PUBLISHING DIVISION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE TEN MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Petersen Publishing Company (the "Petersen Company") is a California
corporation which is wholly-owned by the R.E. & M.M. Petersen Living Trust.
The Publishing Division of the Petersen Company ("Petersen") 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. The Petersen Company's other major
division, which is excluded from these financial statements, rents and manages
commercial real estate properties and operates ranch properties.
The Petersen Company has elected to be taxed as an S corporation for federal
and state income tax purposes.
Basis of Presentation
On August 15, 1996, the Company entered into an asset purchase agreement to
sell substantially all of the assets of the Publishing Division to BrightView
Communications Group, Inc. ("BrightView") for approximately $450,000,000, plus
the assumption of certain liabilities. The acquisition was consummated on
September 30, 1996.
Although these financial statements present the Publishing Division's
balance sheet as of the time of the sale, these financial statements have been
prepared as if the Publishing Division will continue as a going concern and as
a division of the Company. No adjustments have been made to reflect the
purchase of assets, the assumption of liabilities by BrightView or the
expenses incurred by Petersen Company related to the sale of Petersen.
Certain reclassifications have been made to the 1995 financial statements to
conform to the 1996 presentation.
Cash Equivalents and Short-Term Investments
Cash equivalents consist primarily of debt instruments with maturities of
three months or less at the acquisition date. Short-term investments consist
of state and local government debt securities (considered available-for-sale
securities) with maturities greater than 90 days; however, none of Petersen's
investments have maturities greater than one year. Petersen has no investments
in equity securities. Short-term investments are carried at fair value which
approximates cost.
Inventories
Inventories consist of paper held at a printing company and are stated at
the lower of cost, which approximates the first-in, first-out method, or
market.
Deferred Subscription Acquisition Costs
Deferred subscription acquisition costs consist primarily of agency
commissions paid to obtain subscriptions and are amortized over the life of
the related subscriptions.
Depreciation and Amortization
Depreciation is provided on the straight-line method over the estimated
useful lives of the assets ranging from 3 to 5 years except for leasehold
improvements which are amortized over the lesser of 10 years or the life of
the lease.
F-6
<PAGE>
PETERSEN PUBLISHING COMPANY
PUBLISHING DIVISION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION RELATED TO THE TEN MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
Goodwill
Goodwill is amortized using the straight-line method over its useful life of
15 years and resulted from the acquisitions of Sport, Bicycle Guide, and Sassy
during fiscal years 1988, 1993, and 1994, respectively.
Income Taxes
The Petersen Company has elected to be taxed as an S corporation for federal
and state income tax purposes. As such, the Petersen Company is not subject to
U.S. federal income taxes or most state income taxes. Petersen reports the
state income taxes to which it is subject under the liability method as
required by Statement No. 109, "Accounting for Income Taxes," issued by the
Financial Accounting Standards Board ("FASB"). Under this method, deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
Revenue Recognition
Advertising revenue, net of provisions for related rebates and discounts, is
recognized at the "on sale" date of the publication containing the
advertisement. Subscription revenue is deferred and recognized pro rata as
fulfilled over the terms of such subscriptions and is recorded net of related
agency commissions. Sales of magazines intended for retail distribution on
newsstands are recorded at the time such publications are available for sale
by distributors to the public and are reduced by an estimated provision for
returns.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenues
No customer accounted for over 10% of Petersen's revenues. Petersen's
activities occur principally in the United States and revenues from outside
the United States are less than 10% of Petersen's revenues.
Advertising Expenses
Petersen expenses the costs of advertising as incurred. Advertising expense
(in thousands) for the years ended November 30, 1993, 1994 and 1995 and for
the ten months ended September 30, 1995 and 1996, were $437, $495, $732, $718
and $700, respectively.
General and Administrative Expenses
General and administrative expenses incurred by the Petersen Company were
allocated between Petersen and the Real Estate Division with the Real Estate
Division's portion equal to 3% of that Division's revenue which, in the
opinion of Petersen's management, approximates the portion of such expenses
which apply to the Real Estate Division.
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with the requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments,"
the following methods and assumptions were used by Petersen in estimating its
fair value disclosures for financial instruments:
F-7
<PAGE>
PETERSEN PUBLISHING COMPANY
PUBLISHING DIVISION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION RELATED TO THE TEN MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
Cash and Cash equivalents: The carrying amounts reported in the balance
sheets approximate its fair value.
Short-term investments: The carrying amounts reported in the balance sheets
approximate their fair value based upon quoted market prices.
3. INVENTORIES
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Paper........................................... $16,330 $3,933
Magazines in process............................ 5,017 4,585
------- ------
$21,347 $8,518
======= ======
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Buildings..................................... $ 518 $ 436
Machinery and equipment....................... 14,164 12,057
Office furniture and fixtures................. 6,447 6,189
------- -------
21,129 18,682
Less accumulated depreciation and
amortization................................. 13,345 13,441
------- -------
$ 7,784 $ 5,241
======= =======
</TABLE>
In February 1996, Petersen sold all of its assets relating to its pre-press
operations for approximately $2,500,000 in cash, resulting in a gain of
$1,554,000.
In March 1995, the Financing Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No.
121"), which is effective for the Company in fiscal 1997. The Company does not
expect the adoption of SFAS No. 121 to have a material impact on the Company's
financial position or results of operations.
5. NOTES PAYABLE
As of November 30, 1995, the Petersen Company had $3,000,000 available under
an unsecured revolving line of credit (the "Agreement"). During the ten months
ended September 30, 1996, the Company renegotiated the terms of the Agreement
increasing the amount available under the line to $10,000,000 and borrowed
$10,000,000. The Agreement expires on December 27, 1996 and provides for
interest at a fluctuating rate equal to the London Inter-bank Offered Rate
plus 1.0% and is payable quarterly. The Agreement contains certain financial
and nonfinancial covenants. The borrowings were repaid in full in March 1996.
6. INCOME TAXES
The liability for federal income taxes of an S corporation is the obligation
of the Petersen Company's stockholder. Therefore, no provision or liability
for federal income taxes is included in the accompanying financial statements.
The provision for income taxes is comprised of California franchise taxes at a
rate of 1.5%, which is the rate applicable to taxable income of S
corporations, and provisions for income taxes in certain other states in which
Petersen has operations.
F-8
<PAGE>
PETERSEN PUBLISHING COMPANY
PUBLISHING DIVISION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION RELATED TO THE TEN MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEARS ENDED NOVEMBER 30, SEPTEMBER 30,
-------------------------- -----------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
State:
Current..................... $ 251 $ 282 $ 143 $ 119 $ 158
Deferred.................... -- 416 406 339 173
-------- -------- -------- -------- --------
$ 251 $ 698 $ 549 $ 458 $ 331
======== ======== ======== ======== ========
</TABLE>
A reconciliation of the provision for income taxes computed by applying the
federal statutory rate of 34% to income before income taxes and the reported
provision for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
TEN MONTHS
ENDED
YEARS ENDED NOVEMBER 30, SEPTEMBER 30,
---------------------------- -------------- -----------
1993 1994 1996 1995 1996
-------- -------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income tax provision
computed at statutory
federal income tax rate.. $ 3,221 $ 6,798 $ 5,068 $5,136 $6,003
State income taxes........ 251 698 549 458 331
Effect of S Corporation
election................. (3,221) (6,798) (5,068) (5,136) (6,003)
-------- -------- -------- ------ ------
Total provision......... $ 251 $ 698 $ 549 $ 458 $ 331
======== ======== ======== ====== ======
</TABLE>
Petersen had deferred tax assets and liabilities as follows (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Deferred tax asset:
Accrued liabilities........................... $ 220 $ 205
Deferred tax liabilities:
Subscription acquisition costs................ (1,541) (1,699)
------- --------
Total deferred income tax liability......... $(1,321) $ (1,494)
======= ========
</TABLE>
7. PROFIT-SHARING RETIREMENT PLAN
The Petersen Company has a profit-sharing retirement plan (the "Plan") for
employees, which has been qualified for tax exempt status by the Internal
Revenue Service. Under the Plan, the Petersen Company may, at its discretion,
make annual contributions for all eligible employees not to exceed 15% of
their aggregate annual compensation. Petersen's contributions (in thousands)
to the Plan for the years ended November 30, 1993, 1994 and 1995 and for the
ten months ended September 30, 1995 and 1996 were $3,001, $3,271, $1,294,
$1,080 and $1,083, respectively.
8. COMMITMENTS AND CONTINGENCIES
Leases
Rent expense through November 30, 1994 includes amounts charged by the
Petersen Company's Real Estate Division to Petersen for the use of various
office facilities owned by the Petersen Company which were used by
F-9
<PAGE>
PETERSEN PUBLISHING COMPANY
PUBLISHING DIVISION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION RELATED TO THE TEN MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
Petersen for its principal operating and corporate headquarters. As of that
date, the Petersen Company sold its corporate headquarters building, which was
first occupied by Petersen in March 1993, to its stockholder and subsequent
thereto Petersen's rent for this facility has been paid to the Petersen
Company's stockholder in accordance with a lease which had an initial term of
15 years and expires November 30, 2009.
In addition to the annual rentals, certain of the leases include renewal
options and require payments of real estate taxes, insurance and other
expenses.
Rent expense is as follows (in thousands):
<TABLE>
<CAPTION>
REAL ESTATE
DIVISION OR
SHAREHOLDER OTHERS TOTAL
----------- ------ ------
<S> <C> <C> <C>
Year ended November 30:
1993........................................... $3,651 $1,290 $4,941
1994........................................... 3,939 1,130 5,069
1995........................................... 3,875 1,575 5,450
Ten months ended:
1995........................................... $3,185 $1,251 $4,436
1996........................................... 3,778 1,627 5,405
</TABLE>
At September 30, 1996, minimum future annual rentals under long-term leases
are as follows (in thousands):
<TABLE>
<CAPTION>
SHAREHOLDER OTHERS TOTAL
----------- ------ -------
<S> <C> <C> <C>
1996 (Two months ended November 30).......... $ 766 $ 195 $ 961
1997......................................... 4,676 1,101 5,777
1998......................................... 4,758 906 5,664
1999......................................... 4,841 850 5,691
2000......................................... 4,926 850 5,776
2001......................................... 5,012 850 5,862
Thereafter to 2009........................... 43,387 2,337 45,724
------- ------ -------
$68,366 $7,089 $75,455
======= ====== =======
</TABLE>
Contingencies
Petersen is a party to various legal actions and disputes arising in the
ordinary course of business. Management believes, based on the advice of
counsel, that any resulting liabilities from these actions will not have a
material adverse effect on the financial position of Petersen.
F-10
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH IN-
FORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE ISSUERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR A SOLICITATION
IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF THE ISSUERS SINCE THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................... iv
Summary.................................................................. 1
Risk Factors............................................................. 18
The Transactions......................................................... 24
The Investors............................................................ 25
Use of Proceeds.......................................................... 25
Capitalization........................................................... 26
Unaudited Pro Forma Financial Data....................................... 27
Selected Historical Financial Data....................................... 35
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 36
Business................................................................. 42
Management............................................................... 56
Certain Transactions..................................................... 61
Security Ownership of Certain Beneficial Owners and Management........... 63
Limited Liability Company Agreement...................................... 64
Description of Senior Credit Facility.................................... 66
The Exchange Offer....................................................... 68
Description of the Notes................................................. 76
Certain Federal Income Tax Consequences.................................. 100
Plan of Distribution..................................................... 101
Legal Matters............................................................ 101
Index to Financial Statements............................................ F-1
Independent Auditors..................................................... F-2
</TABLE>
UNTIL MAY 12, 1997 (90 DAYS AFTER THE COMMENCEMENT OF THE EXCHANGE OFFER),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPEC-
TUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UN-
SOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
----------------
PROSPECTUS
----------------
$100,000,000
PETERSEN PUBLISHING
COMPANY, L.L.C.
PETERSEN CAPITAL CORP.
OFFER TO EXCHANGE THEIR
11 1/8% SERIES B SENIOR
SUBORDINATED NOTES
DUE 2006
FOR ANY AND ALL OF THEIR
OUTSTANDING 11 1/8%
SENIOR SUBORDINATED NOTES
DUE 2006
FEBRUARY 10, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
