<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. FOR THE PERIOD ENDED SEPTEMBER 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 333-18017
PETERSEN HOLDINGS, L.L.C.
(Exact name of Registrant as specified in its charter)
DELAWARE 95-4597939
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6420 WILSHIRE BOULEVARD 90048
LOS ANGELES, CALIFORNIA (Zip Code)
(Address of principal executive offices)
Registrant's Telephone Number, Including Area Code: (213) 782-2000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_].
<PAGE>
PETERSEN HOLDINGS, L.L.C.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
<C> <S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets as of December 31, 1996
and September 30, 1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . 3
Unaudited condensed consolidated statements of operations for the three
and nine months ended September 30, 1996 and 1997 . . . . . . . . . . . . . . 4
Unaudited condensed consolidated statements of cash flows for the nine
months ended September 30, 1996 and 1997 . . . . . . . . . . . . . . . . . . 5
Notes to unaudited condensed consolidated financial statements . . . . . . .. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . .. 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
SIGNATURES
<PAGE>
PETERSEN HOLDINGS, L.L.C.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,761 $ 15,920
Accounts receivable, less allowance for doubtful accounts
of $1,604 (1996) and $1,988 (1997) 20,141 20,554
Inventories 4,408 3,814
Current portion of deferred subscription acquisition costs 43,835 36,493
Deferred direct mail advertising costs, net of
accumulated amortization of $1,007 (1997) -- 3,535
Other prepaid expenses and current assets 730 1,222
-------- --------
Total current assets 76,875 81,538
Deferred subscription acquisition costs 41,168 44,008
Property and equipment, net of accumulated depreciation
of $560 (1996) and $1,943 (1997) 4,152 3,358
Goodwill, net of accumulated amortization of
$5,992 (1996) and $24,096 (1997) 353,556 335,351
Subscriber list and established work force, net of
accumulated amortization of $3,000 (1996) and $12,000 (1997) 117,000 108,000
Deferred financing costs, net of accumulated
amortization of $3,276 (1996) and $11,286 (1997) 10,735 2,725
Other assets 587 645
-------- --------
TOTAL ASSETS $604,073 $575,625
======== ========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 13,288 $ 11,318
Accrued payroll and related costs 1,963 4,875
Accrued interest on long-term debt 2,041 4,454
Customer incentives payable 5,785 6,965
Current portion of unearned subscription revenues 71,163 66,874
Current portion of long-term debt 1,000 8,250
Other accrued expenses and current liabilities 119 524
-------- --------
Total current liabilities 95,359 103,260
Unearned subscription revenues 47,608 51,061
Long-term debt 299,000 269,250
Other noncurrent liabilities 7,652 6,941
Due to Minority Member 154 145
Commitments and contingencies
Members' equity
Common units 1,671 1,707
Preferred units 165,171 199,078
Accumulated deficit (10,594) (54,069)
-------- --------
156,248 146,716
Less: Notes receivable from related parties (1,948) (1,748)
-------- --------
TOTAL MEMBERS' EQUITY 154,300 144,968
-------- --------
TOTAL LIABILITIES AND MEMBERS' EQUITY $604,073 $575,625
======== ========
</TABLE>
See accompanying notes.
<PAGE>
PETERSEN HOLDINGS, L.L.C.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Petersen Petersen
Holdings Holdings
Predecessor LLC Predecessor LLC
------------ ----------- ------------ ----------
Three Months Nine Months
Ended Sept 30 Ended Sept 30
-------------- --------------
1996 1997 1996 1997
------------ ----------- --------- ----------
<S> <C> <C> <C> <C>
Net revenues:
Advertising $36,212 $38,421 $103,609 $111,860
Newsstand 10,717 11,746 31,998 32,995
Subscriptions (net of agency commissions of $14,261 and
$41,201 for the three and nine months ended September 30,
1996 and $13,604 and $41,327 for the three and nine months
ended September 30, 1997 respectively.) 11,010 11,814 32,838 33,551
Other 956 1,704 5,490 5,423
---------- --------- -------- --------
Total net revenues 58,895 63,685 173,935 183,829
Production, selling and other direct costs (including
rent paid to a related party of $1,149, and $3,347 for the
three and nine months ended Sept 30, 1996, and $1,093 and
$3,280 for the three and nine months ended Sept 30, 1997,
respectively) 45,362 43,530 137,334 125,970
-------- --------- -------- ---------
Gross profit 13,533 20,155 36,601 57,859
General and administrative expenses 9,536 3,475 22,439 12,430
Compensation expense -- 12,182 -- 12,182
Amortization of goodwill and other intangible assets 110 9,012 306 27,163
-------- --------- -------- ---------
Income (loss) from operations 3,887 (4,514) 13,856 6,084
Other income (expense):
Interest income 234 324 472 685
Interest expense -- (7,211) (153) (23,064)
Gain (loss) on sale of assets -- 14 1,554 (26)
-------- --------- -------- ---------
Income (loss) before provision for taxes 4,121 (11,387) 15,729 (16,321)
Provision for taxes 71 -- 270 --
-------- --------- -------- ---------
Net income (loss) before extraordinary items & minority
interest 4,050 (11,387) 15,459 (16,321)
Extraordinary Item
Loss on early extinguishment of debt -- (6,307) -- (6,307)
-------- --------- -------- ---------
Income (loss) before minority interest 4,050 (17,694) 15,459 (22,628)
Minority interest in loss of subsidiary -- 18 -- 23
-------- --------- -------- ---------
Net Income(loss) 4,050 (17,676) 15,459 (22,605)
Preferred unit dividends -- (5,451) -- (20,870)
Net income(loss) attriutable to common units $ 4,050 $ (23,127) $ 15,459 $ (43,475)
======== ========= ======== =========
Pro forma net loss per share -- $ (.86) -- $ (1.62)
======== ========= ======== =========
Pro forma weighted average number of common shares outstanding -- 26,859,264 -- 26,859,264
======== ========== ======== ==========
</TABLE>
See accompanying notes.
<PAGE>
PETERSEN HOLDINGS, L.L.C.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PETERSEN
PREDECESSOR HOLDINGS, L.L.C.
------------- -----------------
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPT 30, SEPT 30,
1996 1997
------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 15,459 $(22,605)
Adjustment to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 2,424 36,578
Allowance for doubtful accounts 426 1,110
(Gain) loss on sale of assets (1,554) 26
Deferred state income taxes (101) --
Non-cash, non-recurring compensation expense -- 12,182
Changes in operating assets and liabilities:
Accounts receivable (3,722) (1,524)
Inventories 12,146 594
Deferred direct mail advertising costs -- (3,535)
Deferred subscription acquisition costs (6,996) 4,502
Accounts payable and accrued liabilities 5,116 (4,246)
Accrued payroll and related costs 308 2,912
Accrued interest on long-term debt -- 2,413
Customer incentives payable 415 1,180
Unearned subscription revenues, net 9,678 (836)
Other current assets, net 495 (608)
Other noncurrent liabilities (163) (306)
-------- --------
Total adjustments 18,472 50,442
-------- --------
Net cash provided by operating activities 33,931 27,837
INVESTING ACTIVITIES
Decrease in minority interest -- (23)
Purchases of property and equipment (643) (669)
Purchases of magazines -- (122)
Purchases of investments (333) --
Proceeds from sale of assets 2,501 31
Acquisition of assets of publishing division of Petersen Publishing Company,
including liabilities assumed and net of costs associated with the acquisition -- 2,500
-------- --------
Net cash provided by investing activities 1,525 1,717
-------- --------
FINANCING ACTIVITIES
Repayment of bank borrowings -- (22,500)
Proceeds from issuance of members units -- 905
Reduction in notes receivable, related party -- 200
Distribution of S corporation earnings (3,969) --
Net change in advances of other divisions of the Company (5,312) --
-------- --------
Net cash used in financing activities (9,281) (21,395)
-------- --------
Increase (decrease) in cash and cash equivalents 26,175 8,159
Cash and cash equivalents at beginning of period (13,663) 7,761
-------- --------
Cash and cash equivalents at end of period $ 12,512 $ 15,920
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during period for:
Interest $ 152 $ 18,845
======== ========
Taxes $ 101 $ 43
======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the nine months ended September 30, 1997, the Company increased goodwill
and accrued liabilities by $2,276,000 representing adjustments to the allocation
of the purchase price of the Acquisition. Additionally, the Company recorded a
non-recurring non-cash compensation charge of $12,182,000 in September 1997.
See accompanying notes.
<PAGE>
PETERSEN HOLDINGS, L.L.C.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Petersen Holdings, L.L.C. ("Holdings") is a Delaware limited liability
company. Holdings owns 99.9% of Petersen Publishing Company , L.L.C. ("the
Company"). The remaining 0.1% of the Company is owned by The Petersen Companies
Inc. ("Petersen"), previously known as BrightView Communications Group, Inc.
("BrightView"). The Company was organized in 1996 for the principal purpose of
completing the acquisition (the "Acquisition") of substantially all of the
assets and assuming certain liabilities of the Publishing Division of Petersen
Publishing Company (the "Predecessor") (see Note 2). The Company is engaged in
the publishing business with revenues generated primarily from the publication
of various special interest magazines and the sale of related advertising,
principally within the United States, and is the operating subsidiary of
Petersen.
The Company and Holdings are each limited liability companies organized
under the Delaware Limited Liability Company Act (the "LLC Act"). Holdings is
the Company's managing member and as such controls the policies and operations
of the Company. Holdings is governed by a limited liability company agreement
(the "LLC Agreement") among Willis Stein & Partners, L.P. (through Petersen
Investment Corp.), the Predecessor, certain members of the Company's management
and other investors (collectively the "Members"). As a limited liability company
organized under Delaware law, members of Holdings are not liable for debts or
other obligations of Holdings. The LLC Agreement governs the relative rights and
duties of the Members. Petersen is Holdings' managing member and as such
controls the policies and operations of Holdings and of the Company through
Holdings. (see note 6)
During the nine months ended September 30, 1997, Holdings received $905,000
in exchange for the issuance of additional Preferred Units and Common Units.
Such funds were contributed by Holdings to the Company. Additionally, Holdings
recorded $20,870,000 for the preferred yield on the Preferred Units which
represents the cumulative compounded yield through September 30, 1997.
In July 1997, Holdings' limited liability company agreement was amended to
create new classes of equity securities. The new units (collectively, the "Class
D Common Units") were issued to the holders of the Class B Common Units and
Class C Common Units pro rata according to ownership of the Class B Common Units
and Class C Common Units. In connection with the issuance of the Class D Common
Units in such exchange, the Company recognized a non-recurring, non-cash
compensation charge of approximately $12.2 million.
Additionally, in July 1997, Holdings established the Petersen Holdings,
L.L.C. 1997 Long-Term Equity Incentive Plan (the "Incentive Plan") pursuant to
which Holdings granted, to certain of the Company's employees, options to
purchase Class A Common Units. Such options vest on the fifth year after the
date of issuance. Should certain events occur (including an initial public
offering of Petersen's common stock pursuant to a registration statement
filed with the Securities and Exchange Commission), the vesting period would
accelerate to an approximate three year vesting period. The exercise price for
each option is $320,685 per Class A Common Unit, which is equal to the fair
market value of each Class A Common Unit as determined by the Board of Directors
of Petersen, acting as Holdings' managing member, at the date of grant of the
options. Holdings is authorized to issue up to 10,000 Class A Common Units under
the Incentive Plan and in July 1997 granted to Company employees, options to
purchase an aggregate of 8,867 Class A Common Units. See Note 6 for a discussion
of other transactions concerning Members' Equity.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required to generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments consisting
of normal recurring accruals considered necessary for a fair presentation have
been included. Operating results for the three-month and nine-month period ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997. For further information, refer
to the financial statements and notes thereto included in Holdings special
financial report on Form 10-K for the three months ended December 31, 1996.
Upon completion of the Acquisition, Holdings changed its year-end to
December 31. The consolidated financial statements reflect then consolidated
activity of Holdings and the Company at September 1997 and the three and nine
months then ended, after elimination of intercompany transactions and
segregation of minority interest. The unaudited consolidated statement of
operations for the three and nine months ended September 30, 1997 relate to the
activity of Holdings and the Company. All references to the three and nine
months ended September 30, 1996 relate to activity of the Predecessor.
Certain reclassifications have been made to the consolidated balance sheet
at December 31, 1996, and consolidated statements of operations for the three
and nine months ended September 30, 1996 to conform to the presentation for the
three and nine months ended September 30, 1997.
Income Taxes
As a limited liability company, Holdings is not subject to U.S. federal
income taxes or state income taxes.
Advertising Expenses
The Company began a new mailing program in 1997. The Company accounts for
its direct response advertising costs in accordance with the American Institute
of Certified Public Accountants' Statement of Position 93-7 "Reporting on
Advertising Costs", pursuant to which qualified direct response advertising is
capitalized and amortized over its expected period of future benefit. Such
captalized costs include primarily printing and postage to current and potential
subscribers and totaled $3,535,000 at September 30, 1997 and will be amortized
over twelve months (the estimated period of future benefit), beginning two
months after mailing. No direct mail advertising costs were capitalized at
December 31, 1996. Amortization of direct response advertising costs was
$700,000 and $1,007,000 for the three and nine months ended September 30, 1997,
respectively and is included in production, selling and other direct costs.
The Company expenses all other costs of advertising as incurred. Advertising
expense was $39,000 and $985,000 for the three and nine months ended September
30, 1997, respectively.
<PAGE>
PETERSEN HOLDINGS, L.L.C.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
2. ACQUISITION OF THE PUBLISHING DIVISION OF PETERSEN PUBLISHING COMPANY
In August 1996, Petersen entered into an Asset Purchase Agreement to
purchase substantially all of the assets of the publishing division of the
Predecessor. Petersen assigned its rights under such agreement to the Company
and the Company assumed all of Petersen's obligations thereunder. The aggregate
purchase price (including expenses) was $462,800,000 (including costs associated
with the Acquisition), plus the assumption of unearned subscription revenues and
other certain liabilities totaling approximately $49,000,000. The Asset Purchase
Agreement provided for a final settlement of the purchase price related to
changes in working capital of Petersen between June 30, 1996 and September 30,
1996. During the nine months ended September 30, 1997, the Company received
$2,276,000 related to such changes and increased goodwill and accrued
liabilities accordingly. The Acquisition was completed on September 30, 1996. In
connection with the Acquisition, the Company recorded goodwill of approximately
$360,000,000 and other intangible assets of approximately $120,000,000. Goodwill
amortization expense for the three months and nine months ended September 30,
1997 was $5,995,000 and $18,104,000, respectively. Amortization of other
intangible assets was $3,000,000 and $9,000,000 for the three and nine months
ended September 30, 1997, respectively.
In order to finance the Acquisition, the Company entered into a Senior
Credit Facility for up to 260,000,000, issued 11 1/8% Senior Subordinated Notes
for $100,000,000 and Holdings issued equity securities for $165,000,000. See
Notes 4 and 5 for a more comprehensive discussion of the debt and equity
issuances.
3. INVENTORIES
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPT 30,
1996 1997
------------ --------
<S> <C> <C>
Paper $ 611 $1,265
Magazines in process 3,797 2,549
------ ------
$4,408 $3,814
====== ======
</TABLE>
4. LONG-TERM DEBT
Senior Credit Facility:
On September 30, 1996, the Company entered into a Senior Credit Facility
with First Union National Bank of North Carolina and CIBC Inc. (the "Lenders")
pursuant to which the Lenders agreed to loan the Company up to $260,000,000.
Such amount was allocated among a revolving credit facility for up to
$60,000,000 (the "Revolver"), of which up to $10,000,000 can be in the form of
letters of credit; a tranche A term loan for up to $100,000,000 (the "Tranche A
Loan"); and a tranche B term loan for up to $100,000,000 (the "Tranche B Loan").
On October 6, 1997, the Company entered into a Senior Revolving Credit
Facility with First Union National Bank of North Carolina and CIBC, Inc. (the
"Lenders") pursuant to which the Lenders agreed to loan the Company up to
$175,000,000. Such amount is allocated to a revolving credit facility for up to
$175,000,000 (the "1997 Revolver"), of which up to $10,000,000 can be in the
form of letters of credit.
The 1997 Revolver bears interest at either LIBOR, plus 0.625% based on
borrowings or the prime rate of the agent bank based on borrowings.
The 1997 Revolver matures on September 30, 2002.
The 1997 Revolver contains certain restrictive covenants including, but not
limited to, restrictions on capital expenditures, payments of dividends, liens,
investments and disposals of assets, as well as financial covenants including a
maximum leverage ratio, minimum interest coverage ratio and minimum fixed charge
coverage ratio, all as defined in the Senior Revolving Credit Facility.
The Revolver and the Tranche A Loan bear interest at either LIBOR (5.656% at
September 30, 1997), plus 1.375% to 2.750%, based on borrowings or the prime
rate of the agent bank (8.5% at September 30, 1997), plus .125% to 1.5%, based
on borrowings. As of December 31, 1996 and September 30, 1997, the Company had
no borrowings outstanding under the Revolver. However, a letter of credit for
$1,600,000 issued in January 1997 reduces the amount available under the
Revolver. The letter of credit expires in January 1998. As of September 30,
1997, the Company had $89,000,000 outstanding under the Tranche A Loan at a
weighted average interest rate of 8.264%.
The Tranche B Loan bears interest at either LIBOR (5.656% at September 30,
1997), plus 2.625% to 3.250%, based on borrowings or the prime rate of the agent
bank (8.5% at September 30, 1997), plus 1.375% to 2.0% based on borrowings. As
of September 30, 1997, the Company had $88,500,000 outstanding under the Tranche
B Loan at a weighted average interest rate of 8.764%.
The Revolver and Tranche A Loan mature on December 31, 2002 and Tranche B
Loan matures on September 30, 2004.
The Senior Credit Facility contains certain restrictive covenants including
but not limited to restrictions on capital expenditures, payments of dividends,
liens, investments and disposals of assets, as well as financial covenants
including a maximum leverage ratio, minimum interest coverage ratio and minimum
fixed charge coverage ratio, all as defined in the Senior Credit Facility. As of
September 30, 1997, the Company was in compliance with the covenants of the
Senior Credit Facility.
The Senior Credit Facility is guaranteed by Holdings and Petersen.
The Company estimates that the book value of the Senior Credit Facility
approximates its fair value.
As a result of refinancing the Senior Credit Facility, the Company recorded
additional amortization of deferred financing costs of approximately $5,399,000.
<PAGE>
11 1/8% Senior Subordinated Notes due 2006:
Holdings, the Company and its wholly-owned subsidiary, Petersen Capital
Corp. (together, the "Issuers"), issued $100,000,000 in 11 1/8% Senior
Subordinated Notes due 2006 (the "Notes") pursuant to an Offering Memorandum
dated November 20, 1996. The Notes bear interest at 11 1/8% per annum, payable
semi-annually on November 15 and May 15, commencing May 15, 1997. The Notes will
mature on November 15, 2006 and will not be subject to any sinking fund
requirement. The Notes are redeemable at the option of the Issuers, in whole or
in part, at any time on or after November 15, 2001, at the redemption prices set
forth in the Notes Purchase Agreement, plus accrued and unpaid interest to the
date of redemption. Under certain circumstances, prior to November 15, 1999, the
Issuers, at their option, may redeem in the aggregate up to 25% of the original
principal amount of the Notes at 111.125% of the aggregate principal amount so
redeemed, plus accrued and unpaid interest.
On November 6, 1997, the Company redeemed $25.0 million of the Notes. As a
result of the redemption, the Company recorded additional amortization of
deferred financing cost of approximately $908,000.
The Notes are general unsecured obligations of the Issuers and are subordinated
in right of payment to all existing and future senior indebtedness of the
Issuers. The Notes are guaranteed by Holdings.
The Indenture governing the Notes (the "Indenture") contains certain
restrictive covenants, including but not limited to, restrictions on incurrence
of debt, dividend payments, certain asset sales, transactions with affiliates,
liens and investments. As of September 30, 1997, the Company was in compliance
with the covenants contained in the Indenture.
The Company incurred costs of approximately $4,000,000 in connection with
the issuance of the Notes. These costs have been included in Deferred Financing
Costs and are being amortized over the term of the Notes. During the three
months and nine months ended September 30, 1997 the Company amortized
approximately $1,008,000 and $1,208,000, respectively, of such deferred
financing costs.
On March 11, 1997, the Company exchanged all of the outstanding Notes for
substantially identical notes that were registered pursuant to a registration
statement on Form S-4 under the Securities Act of 1933.
The Company estimates that the book value of the Senior Subordinated Notes
approximates their fair value.
<PAGE>
5. RELATED PARTY TRANSACTIONS
In connection with the Acquisition, the Company entered into employment
agreements with three officers of the Company. Pursuant to these employment
agreements, the officers purchased Common Units and Preferred Units with
promissory notes aggregating approximately $1,950,000. Of this amount, $200,000
was paid on March 1, 1997 and the balance of each promissory note will be due
and payable on the earlier to occur of: (i) December 31, 2001; (ii) the
termination of the employment with the Company of the officers or (iii) a sale
of the Company. Such promissory notes bear interest at a rate equal to the
Company's weighted average cost of borrowings. In addition, Holdings issued to
each of the officers additional Common Units without additional consideration.
Such Common Units vest ratably over a period of five years. See Note 1 for
additional information concerning Related Party transactions.
<PAGE>
PETERSEN HOLDINGS, L.L.C.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
7. EVENTS SUBSEQUENT TO SEPTEMBER 30, 1997
On October 7, 1997, Petersen issued 8,050,000 shares of Class A Common Stock
at $17.50 /share pursuant to the Securities and Exchange Registration Statement.
Net proceeds to Petersen in connection with the Offering was $131,376,000.
Petersen used $114,240,000 to repay a portion of the indebtedness incurred under
the Senior Credit Facility and $17,136,000 towards redemption of $25.0 million
aggregate principal amount of the Notes and redemption premium and accrued and
unpaid interest.
Upon completion of the Offering, Petersen has 34,909,264 shares of Common
Stock outstanding.
All of the existing securityholders of Petersen and Holdings have entered
into a Contribution and Recapitalization Agreement (the "Recapitalization
Agreement") pursuant to which, among other things, each existing securityholder
of Petersen and Holdings will contribute directly or indirectly all of its
existing shares of common stock of Petersen and Preferred Units and Common Units
of Holdings to Petersen in exchange for newly-issued shares of Common Stock.
Pursuant to the Recapitalization Agreement: (i) all of the Preferred Units of
Holdings will be exchanged for an aggregate of 10,727,176 shares of Common Stock
and (ii) all of the Class A and Class D Common Units of Holdings and all of the
common stock of Petersen will be exchanged for an aggregate of 16,132,088 shares
of Common Stock. The number of shares of Common Stock that will be issued under
the Recapitalization Agreement to the existing securityholders of Petersen and
Holdings has been determined according to the relative preference rankings of
such securities and is based upon the initial public offering price of the Class
A Common Stock. Following the transactions contemplated by the Recapitalization
Agreement, Holdings will be merged into Publishing.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is a leading publisher of special-interest magazines with a
diverse portfolio of 78 publications, including 25 monthly, 11 bi-monthly and 42
single issue or annual publications. The Company operates primarily within the
expanding special-interest segment of the consumer magazine publishing market.
According to a survey by VSA of 111 general-interest and 115 special-interest
magazines, special-interest magazine publishing is the fastest growing sector of
the consumer magazine industry. The Company had net revenues of $183.8 million
for the nine months ended September 30, 1997.
The Company's principal sources of revenues from the publication of its
magazines are derived from advertising and circulation. Circulation revenues are
generated from subscription, newsstand and list rental sales. Advertising
revenues of the Company, as well as those of the consumer magazine industry in
general, are cyclical and dependent upon general economic conditions. As
compared to general-interest magazines publishers, however, the Company believes
that its advertising revenues are less susceptible to changes in general
economic conditions due to the diversity of its publications and the endemic
nature of its advertiser base. The Company's revenues are generated
predominantly from U.S. sources.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO PREDECESSOR THREE MONTHS
ENDED SEPTEMBER 30, 1996
Net revenues increased $4.8 million, or 8.1%, to $63.7 million for the three
months ended September 30, 1997 from $58.9 million for the three months ended
September 30, 1996. This increase is primarily the result of a $2.2 million, or
6.1%, increase in advertising revenues. The increase in advertising revenues was
due principally to (i) an overall increase in the Company's advertising rates,
(ii) higher advertising revenues by Motor Trend, Teen and Hot Rod and (iii)
additional revenues from relatively new and start-up publications. In December
1996 and June 1997, the Company discontinued the publication of Sassy and
Petersen's Golfing, respectively. Net revenues for the three-month period ended
September 30, 1996 for those two publications were $2.5 million (comprised of
$1.5 million in advertising and $1.0 million in circulation.). Net revenues,
excluding these two discontinued publications, increased $7.3 million, or 12.9%,
to $63.7 million for the three months ended September 30, 1997 from $56.4
million for the three months ended September 30, 1996.
Production, selling and other direct costs decreased $1.8 million, or 4.0%,
to $43.5 million for the three months ended September 30, 1997 from $45.3
million for the three months ended September 30, 1996. Production, selling and
other direct costs decreased as a percentage of net revenues to 68.4% from 77.0%
for the same periods. The successful implementation of the Company's operating
improvements significantly contributed to the decrease in production, selling
and other direct costs. This decrease is primarily comprised of a $2.7 million,
or 23.0%, decrease in paper costs, a $.8 million, or 6.8%, decrease in editorial
and advertising sales expenses offset by an increase of $1.7 million, or 50.3%
in subscription promotion expenses.
General and administrative expenses decreased $6.0 million, or 63.6%, to
$3.5 million for the three months ended September 30, 1997 from $9.5 million for
the three months ended September 30, 1996. General and administrative expenses
decreased as a percentage of net revenues to 5.5% from 16.2% for the same
periods. The successful implementation of the Company's operating improvements,
including personnel and other operating expense reductions, contributed to the
decrease in general and administrative expenses. The Company recorded a non-
recurring non-cash compensation charge of $12.2 million in connection with the
exchange of Class B and Class C Common Units for Class D Common Units.
Amortization of goodwill and other intangible assets increased to $9.0 million
for the three months ended September 30, 1997 from $.1 million for the three
months ended September 30, 1996. This expense represents amortization of
goodwill and the subscribers list purchased in the Acquisition.
<PAGE>
Operating income decreased $8.4 million, or 216.1%, to a net operating loss
of $4.5 million for the three months ended September 30, 1997 from $3.9 million
for the three months ended September 30, 1996, for the reasons stated above.
Operating income decreased as a percentage of net revenues to (7.1%) from 6.6%
for the same periods. Operating income excluding the non-recurring non-cash
compensation charge increased $3.8 million. or 97.3%, to $7.7 million for the
three months ended September 30, 1997 from 3.9 million for the three months
ended September 30, 1996.
The increase in interest expense to $7.2 million for the three months ended
September 30, 1997 is the result of indebtedness incurred under the Senior
Credit Facility and the Notes in connection with the Acquisition.
The net loss was $17.7 million for the three months ended September 30, 1997
as compared to net income of $4.1 million for the three months ended September
30, 1996. This decrease is primarily the result of the increases in interest and
amortization expenses, loss on the early extinguishment of debt and recording
the non-recurring non-cash compensation charge as stated above.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO PREDECESSOR NINE MONTHS
ENDED SEPTEMBER 30, 1996
Net revenues increased $9.9 million, or 5.7%, to $183.8 million for the nine
months ended September 30, 1997 from $173.9 million for the nine months ended
September 30, 1996. This increase is primarily the result of a $8.3 million, or
8.0%, increase in advertising revenues, and a $1.7 million or 2.6% increase in
circulation revenues. The increase in advertising revenues was due principally
to (i) an overall increase in the Company's advertising rates, (ii) higher
advertising revenues by Motor Trend, Teen and Hot Rod and (iii) additional
revenues from relatively new and start-up publications. In December 1996 and
June 1997, the Company discontinued the publication of Sassy and Petersen's
Golfing, respectively. Net revenues for the period ended September 30, 1996 for
those two publications were $7.2 million (comprised of $4.4 million in
advertising, $2.7 million in subscription, and $.1 million other). Net revenues,
excluding these two discontinued publications, increased $17.1 million, or
10.2%, to $183.8 million for the nine months ended September 30, 1997 from
$166.7 million for the nine months ended September 30, 1996.
Production, selling and other direct costs decreased $11.3 million, or 8.3%,
to $126.0 million for the nine months ended September 30, 1997 from $137.3
million for the nine months ended September 30, 1996. Production, selling and
other direct costs decreased as a percentage of net revenues to 68.5% from 78.9%
for the same periods. The successful implementation of the Company's operating
improvements significantly contributed to the decrease in production, selling
and other direct costs. This decrease is primarily comprised of a $9.4 million,
or 36.0%, decrease in paper costs, a $2.2 million, or 13.8%, decrease in
printing expenses and a $4.2 million, or 11.3%, decrease in editorial and
advertising sales expenses.
General and administrative expenses decreased $10.0 million, or 44.6%, to
$12.4 million for the nine months ended September 30, 1997 from $22.4 million
for the nine months ended September 30, 1996. General and administrative
expenses decreased as a percentage of net revenues to 6.8% from 12.9% for the
same periods.. The successful implementation of the Company's operating
improvements, including personnel and other operating expense reductions,
contributed to the decrease in general and administrative expenses. The Company
recorded a non-recurring non-cash compensation charge of $12.2 million in
connection with the exchange of Class B and Class C Common Units for Class D
Common Units. Amortization of goodwill and other intangible assets increased to
$27.2 million for the nine months ended September 30, 1997 from $.3 million for
the nine months ended September 30, 1996. This expense represents amortization
of goodwill and the subscribers list purchased in the Acquisition.
Operating income decreased $7.8 million, or 56.1%, to $6.1 million for
the nine months ended
<PAGE>
September 30, 1997 from $13.9 million for the nine months ended September 30,
1996, for the reasons stated above. Operating income decreased as a percentage
of net revenues to 3.3% from 8.0% for the same periods. Operating income
excluding the non-recurring non-cash compensation charge increased $4.4 million,
or 31.8%, to $18.3 million for the nine months ended September 30, 1997 from
$13.9 for the nine months ended September 30, 1996.
Interest expense increased $22.9 million to $23.1 million for the nine
months ended September 30, 1997 from $.2 million for the nine months ended
September 30, 1996.
The net loss was $22.6 million for the nine months ended September 30, 1997
as compared to net income of $15.5 million for the nine months ended September
30, 1996. This decrease is primarily the result of the increase in interest and
amortization expenses, loss on the early extinguishment of debt and recording
the non-recurring non-cash compensation charge as stated above.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $15.9 million and working capital
(excluding the current portion of unearned subscription revenue) totaled $8.5
million at September 30, 1997. At December 31, 1996, cash and cash equivalents
totaled $7.8 million and working capital (excluding the current portion of
unearned subscription revenue) totaled $8.8 million.
The Company's net cash provided by operations was $27.8 million for the nine
months ended September 30, 1997 compared to $33.9 million for the nine months
ended September 30, 1996. Of this difference, $11.6 million relates to changes
in inventories and $38.1 million relates to decreased net income, offset by a
$34.2 million increase in depreciation and amortization and a non-cash non-
recurring compensation charge of 12.2 million.
The Company's net cash provided by investing activities was $1.7 million for
the nine months ended September 30, 1997, as compared to $1.5 million for the
nine months ended September 30, 1996, which included $2.5 million in proceeds
from the sale of its Viking Color pre-press operations. The Company's operations
are not capital intensive. The Company's capital expenditures were $.7 million
and $.6 million in the nine months ended September 30, 1997 and 1996,
respectively.
The Company's net cash used in financing activities for the nine months
ended September 30, 1997 was comprised of $22.5 million of repayments of
borrowings under the Senior Credit Facility. Of this amount, $21.8 million
represented an early repayment.
EARNINGS BEFORE INTEREST TAXES DEPRECIATION AND AMORTIZATION
Earnings before interest expense, taxes, depreciation and amortization
("EBITDA") is a widely used and commonly reported standard measure utilized by
analysts and investors in the analysis of the media industry. The following
EBITDA information can provide additional information for determining the
ability of the Company to meet its debt service requirements and for other
comparative analyses of the Company's operating performance relative to other
publishing companies.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
1996 1997 1996 1997
-------- -------- -------- --------
(unaudited)
(000's)
<S> <C> <C> <C> <C>
Total net $58,895 $ 63,685 $173,935 $183,829
Production, selling & other direct costs (excluding
depreciation of $647, $442, $2,119 and $1,406 for the
three months ended Sept. 30, 1996 and 1997, and nine
months ended Sept. 30, 1996 and 1997, respectively) 44,715 43,088 135,215 124,564
------- -------- -------- --------
Gross 14,180 20,597 38,720 59,265
General & administrative expenses (9,536) (15,657) (22,439) (24,609)
Other adjustments 234 187 2,026 502
------- -------- -------- --------
EBITDA 4,878 5,127 18,307 35,158
Extraordinary items
Non-cash Non-Recurring Compensation Expense -- 12,182 -- 12,182
Sale of Digital Services PrePress Facility -- -- (1,554) --
-------- -------- -------- --------
Adjusted EBITDA $ 4,878 $ 17,309 $ 16,753 $ 47,340
======== ======== ======== ========
</TABLE>
The Company's Adjusted EBITDA increased $30.6 million, or 182.6%, to $47.3
million for the nine months ended September 30, 1997 from $16.7 million for the
nine months ended September 30, 1997. Adjusted EBITDA as a percentage of net
revenues increased to 25.6% from 9.6% for the same periods.
The Company's Adjusted EBITDA increased $12.4 million to $17.3 million for
the three months ended September 30, 1997 from $4.9 million for the three months
ended September 30, 1996. Adjusted EBITDA as a percentage of net revenues
increased to 27.2% from 8.3% for the same periods. The successful implementation
of the Company's operating improvements contributed to these increases in
EBITDA.
<PAGE>
PETERSEN HOLDINGS, L.L.C.
September 30, 1997
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27. Financial Data Schedule
(b) Reports on Form 8-K:
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Petersen Holdings, L.L.C.
Date: November 14, 1997 By: /s/ Richard S Willis
----------------- --------------------
Richard S Willis
Vice President and Chief
Accounting Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q FOR
PERIOD ENDED 9/30/97 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 15,920
<SECURITIES> 0
<RECEIVABLES> 22,542
<ALLOWANCES> 1,988
<INVENTORY> 3,814
<CURRENT-ASSETS> 81,538
<PP&E> 5,301
<DEPRECIATION> 1,943
<TOTAL-ASSETS> 575,625
<CURRENT-LIABILITIES> 103,260
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 144,968
<TOTAL-LIABILITY-AND-EQUITY> 575,625
<SALES> 183,829
<TOTAL-REVENUES> 183,829
<CGS> 125,770
<TOTAL-COSTS> 125,770
<OTHER-EXPENSES> 51,775
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,064
<INCOME-PRETAX> (16,321)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,321)
<DISCONTINUED> 0
<EXTRAORDINARY> (6,307)
<CHANGES> 0
<NET-INCOME> (22,605)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
