<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 15, 1997
REGISTRATION NO. 333-33111
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
THE PETERSEN COMPANIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 2721 36-4099296
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
----------------
6420 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90048
TELEPHONE: (213) 782-2000
(Address, including zip code, and telephone number, including
area code, of registrants' principal executive offices)
----------------
NEAL VITALE
PRESIDENT AND CHIEF OPERATING OFFICER
THE PETERSEN COMPANIES, INC.
6420 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90048
TELEPHONE: (213) 782-2000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
DENNIS M. MYERS STEVEN L. GROSSMAN
KIRKLAND & ELLIS O'MELVENY & MYERS LLP
200 EAST RANDOLPH DRIVE 400 SOUTH HOPE STREET
CHICAGO, ILLINOIS 60601 LOS ANGELES, CALIFORNIA 90071
(312) 861-2000 (213) 669-6000
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be used
in connection with a United States and Canadian offering of the registrant's
Class A Common Stock (the "U.S. Prospectus") and one to be used in connection
with a concurrent international offering of the registrant's Class A Common
Stock (the "International Prospectus" and, together with the U.S. Prospectus,
the "Prospectuses"). The International Prospectus will be identical to the
U.S. Prospectus except that it will have a different front cover page. The
U.S. Prospectus is included herein and is followed by the front cover page to
be used in the International Prospectus. The front cover page for the
International Prospectus included herein has been labeled "Alternate
International Cover Page."
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued September 15, 1997
6,250,000 Shares
[LOGO OF PETERSEN]
The Petersen Companies, Inc.
CLASS A COMMON STOCK
----------
ALL OF THE 6,250,000 SHARES OF CLASS A COMMON STOCK OFFERED HEREBY ARE BEING
SOLD BY THE COMPANY. OF THE 6,250,000 SHARES OF CLASS A COMMON STOCK BEING
OFFERED HEREBY, 5,000,000 SHARES ARE BEING OFFERED INITIALLY IN THE UNITED
STATES AND CANADA BY THE U.S. UNDERWRITERS AND 1,250,000 SHARES ARE BEING
OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE
INTERNATIONAL UNDERWRITERS. SEE "UNDERWRITERS." PRIOR TO THE OFFERING,
THERE HAS BEEN NO PUBLIC MARKET FOR THE CLASS A COMMON STOCK OF THE
COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING
PRICE PER SHARE WILL BE BETWEEN $15 AND $17. SEE "UNDERWRITERS" FOR A
DISCUSSION OF THE FACTORS TO BE CONSIDERED IN DETERMINING THE
INITIAL PUBLIC OFFERING PRICE.
----------
THE COMPANY HAS TWO CLASSES OF AUTHORIZED COMMON STOCK CONSISTING OF THE CLASS
A COMMON STOCK OFFERED HEREBY AND CLASS B COMMON STOCK. SEE "DESCRIPTION OF
CAPITAL STOCK." HOLDERS OF CLASS A COMMON STOCK ARE ENTITLED TO ONE VOTE PER
SHARE ON EACH MATTER SUBMITTED TO A VOTE OF STOCKHOLDERS. THE CLASS B
COMMON STOCK IS NON-VOTING EXCEPT UNDER CERTAIN LIMITED CIRCUMSTANCES AND
AS REQUIRED BY LAW. ALL HOLDERS OF COMMON STOCK ARE ENTITLED TO RECEIVE
SUCH DIVIDENDS AND DISTRIBUTIONS, IF ANY, AS MAY BE DECLARED FROM TIME
TO TIME BY THE BOARD OF DIRECTORS. UPON COMPLETION OF THE OFFERING,
AFFILIATES OF THE COMPANY WILL RETAIN APPROXIMATELY 70% OF THE
OUTSTANDING VOTING POWER. SEE "PRINCIPAL STOCKHOLDERS."
----------
THE CLASS A COMMON STOCK HAS BEEN APPROVED FOR LISTING, SUBJECT TO OFFICIAL
NOTICE OF ISSUANCE, ON THE NEW YORK STOCK EXCHANGE UNDER THE SYMBOL "PTN."
----------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------
PRICE $ A SHARE
----------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
-------- --------------- -----------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total (3).................................. $ $ $
</TABLE>
- -----
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriters."
(2) Before deducting expenses payable by the Company, estimated at
$1,500,000.
(3) The Company has granted to the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
937,500 additional Shares of Class A Common Stock at the Price to Public
less Underwriting Discounts and Commissions, for the purpose of covering
over-allotments, if any. If the U.S. Underwriters exercise such option
in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriters."
----------
The Shares of Class A Common Stock are offered, subject to prior sale, when,
as and if accepted by the Underwriters named herein and subject to approval of
certain legal matters by O'Melveny & Myers LLP, counsel for the Underwriters.
It is expected that delivery of the Shares will be made on or about , 1997 at
the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against
payment therefor in immediately available funds.
----------
MORGAN STANLEY DEAN WITTER DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
BT ALEX. BROWN
, 1997
<PAGE>
PETERSEN'S OPERATING STRUCTURE
Centralized Revenues Functions
__________________________
. Non-Endemic Advertising Sales
. Events & Trade Shows
. Licensing
. Electronic Publishing
. Subscription Marketing
. Newsstand Sales
. List Rental
. Database
. Affinity Group Marketing
. Television Programming
. Custom Publishing
---AUTOMOTIVE---
PERFORMANCE
---MOTOR TREND---
---YOUTH---
- -----OUTDOOR-----
- ---PHOTO/MARINE---
- --- MOTORCYCLE/---
BICYCLE
---SPORT---
Centralized Corporate Functions
__________________________
.Senior Management
.Human Resources & Benefits
.Manufacturing & Distribution
.Paper Purchasing
.Finance/Treasury
.Information Systems
.Real Estate & Facilities
.Advertising Billing & Collection
.Accounting
.Fulfillment
.Creative Services
PETERSEN'S 15 CORE TITLES
<TABLE>
<S> <C> <C>
MOTOR TREND SKIN DIVER CIRCLE TRACK
TEEN SPORT PHOTOGRAPHIC
HOT ROD CAR CRAFT SPORT TRUCK
4 WHEEL & OFF-ROAD PETERSEN'S HUNTING DIRT RIDER
GUNS & AMMO MOTORCYCLIST CHEVY HIGH PERFORMANCE
</TABLE>
<PAGE>
[INSIDE FRONT COVER PAGE GATEFOLD GRAPHICS: PICTURES OF SAMPLE COVER PAGE OF 39
OF THE COMPANY'S MAGAZINES. THE COVER PAGES ARE ARRANGED AMONG THE COMPANY'S
SEVEN PUBLISHING GROUPS.]
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THE CLASS A COMMON STOCK OFFERED HEREBY,
NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY
ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION TO SUCH PERSON.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER
ANY CIRCUMSTANCE IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
----------------
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
----------------
FOR INVESTORS OUTSIDE THE UNITED STATES: NO ACTION HAS BEEN OR WILL BE TAKEN
IN ANY JURISDICTION BY THE COMPANY OR BY ANY UNDERWRITER THAT WOULD PERMIT A
PUBLIC OFFERING OF THE CLASS A COMMON STOCK OR POSSESSION OR DISTRIBUTION OF
THIS PROSPECTUS IN ANY JURISDICTION WHERE ACTION FOR THAT PURPOSE IS REQUIRED,
OTHER THAN IN THE UNITED STATES. PERSONS INTO WHOSE POSSESSION THIS PROSPECTUS
COMES ARE REQUIRED BY THE COMPANY AND THE UNDERWRITERS TO INFORM THEMSELVES
ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THE OFFERING OF THE CLASS A COMMON
STOCK AND THE DISTRIBUTION OF THIS PROSPECTUS.
----------------
The Company's logo and each of the titles of the Company's publications
referenced herein are trademarks of the Company. Each trade name, trademark or
service mark of any other company appearing in this Prospectus is the property
of its holder.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................... 4
Risk Factors............................................................... 12
Use of Proceeds............................................................ 17
The Reorganization......................................................... 18
Capitalization............................................................. 19
Dividend Policy............................................................ 20
Dilution................................................................... 21
Unaudited Pro Forma Financial Data......................................... 22
Selected Historical Financial Data......................................... 31
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................................ 33
Industry................................................................... 41
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Business.................................................................. 42
Management................................................................ 56
Certain Relationships and Related Transactions............................ 64
Principal Stockholders.................................................... 66
Description of Capital Stock.............................................. 68
Shares Eligible for Future Sale........................................... 71
Certain Federal Income Tax Consequences to Non-United States Holders...... 72
Underwriters.............................................................. 75
Legal Matters............................................................. 78
Experts................................................................... 78
Additional Information.................................................... 79
Index to Financial Statements............................................. F-1
</TABLE>
----------------
Certain statements contained herein under "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" including, without limitation, those
concerning the Company's business and operating strategy, contain certain
forward-looking statements concerning the Company's operations, economic
performance and financial condition. Because such statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause such
differences include, but are not limited to, those discussed under "Risk
Factors."
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THIS
OFFERING, AND MAY BID FOR, AND PURCHASE, SHARES OF CLASS A COMMON STOCK IN THE
OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
3
<PAGE>
PROSPECTUS 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. Unless otherwise indicated, the information
contained in the Prospectus: (i) assumes no exercise of the U.S. Underwriters'
over-allotment option and (ii) gives effect to the transactions described
herein under the heading "The Reorganization." On September 30, 1996, Petersen
Holdings, L.L.C. through a subsidiary 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 "Predecessor" is used herein to refer to the historical operations of the
publishing division of Petersen Publishing Company prior to the Acquisition;
(ii) the term "Petersen" is used herein to refer to the operations of Petersen
Holdings, L.L.C. and its consolidated subsidiaries following the Acquisition;
and (iii) the term "Company" is used herein to refer to The Petersen Companies,
Inc. and its consolidated subsidiaries after giving effect to the transactions
described herein under the heading "The Reorganization" and their respective
predecessors. See "The Reorganization." The Class A Common Stock and Class B
Common Stock to be outstanding immediately after completion of the Offering are
collectively referred to herein as the "Common Stock."
THE COMPANY
The Company is a leading publisher of special-interest magazines with a
diverse portfolio of 78 publications, including 25 monthly, 11 bimonthly and 42
single issue or annual publications. According to Veronis, Suhler and
Associates ("VSA"), special-interest magazine publishing has been the fastest
growing sector of the consumer magazine industry over the last five year
period. The special-interest nature of the Company's magazines creates an
opportunity for its advertisers to efficiently reach their target audience, as
the Company believes that its enthusiast readers value special-interest
magazines for both their product information as well as editorial content.
The Company's internationally-recognized magazines include: (i) Motor Trend,
which is a leading authority on new domestic and foreign automobiles and, with
its increase in rate base (expected paid circulation on which advertising rates
are based) to 1.15 million effective January 1998, is anticipated to be the
world's leading automotive magazine in terms of paid circulation; (ii) Teen,
which has the largest paid circulation of any of the Company's magazines with
paid circulation of more than 1.8 million as of the June 1997 issue; and (iii)
Hot Rod, which is one of the largest paid circulation automotive magazines in
the world with a paid circulation of over 800,000 as of the June 1997 issue.
The Company's other core publications are Petersen's 4 Wheel & Off-Road, Guns
and Ammo, Skin Diver, Sport, Car Craft, Petersen's Hunting, Motorcyclist,
Circle Track and Racing Technology, Petersen's Photographic, Sport Truck, Dirt
Rider and Chevy High Performance. The Company's 15 core magazines average over
30 years in publication.
Based on data from Mediamark Research, Inc. ("Mediamark"), the Company
estimates that its magazines are read by more adults and men than are the
magazines of any other U.S. special-interest publisher--approximately 48
million adults and 40 million male readers each month. Of the Company's 15 core
publications, nine are ranked first in their respective markets based on paid
circulation, including two magazines that are the only national magazines
published in their respective markets.
The Company had net revenues of $227.2 and $120.1 million for the twelve
months ended December 31, 1996 and the six months ended June 30, 1997,
respectively. The Company's principal sources of revenue are from advertising
and circulation. For the six months ended June 30, 1997, approximately 61.1% of
the Company's revenues were from advertising, 35.8% from circulation and 3.1%
from other sources. For the twelve months ended December 31, 1996, 13 of the
Company's 15 core magazines each generated an operating contribution (revenue
less direct costs associated with each magazine) of more than $1.0 million. Due
to the effects of the Acquisition, the Company reported net losses attributable
to common equity of $10.6 million and $20.3 million for the three months ended
December 31, 1996 and the six months ended June 30, 1997, respectively.
4
<PAGE>
The Company is organized into seven publishing groups: Automotive
Performance, Motor Trend, Youth, Outdoor, Photo/Marine, Motorcycle/Bicycle and
Sport. Each publishing group is organized around one or more of the Company's
core monthly publications which target a distinct special-interest segment or
specific general-interest segment (e.g., Teen and Sport). The operations of
each group are focused on delivering high-quality editorial content, generating
endemic advertising sales and developing new titles or activities to reach such
group's enthusiast readers. Each publishing group is supported by a number of
centralized corporate functions. The Company conducts all of its non-endemic
advertising, subscription and newsstand sales and marketing activities and
develops ancillary revenue through event management, licensing arrangements and
electronic publishing on a centralized basis to take advantage of the broad
reach and significant market presence of the Company's magazine portfolio. In
addition, all of the Company's production, distribution and administrative
activities are centralized to achieve economies of scale and operating
synergies. The combination of each group's focused editorial and sales staff
supported by centralized corporate functions has enabled the Company to improve
profit margins and provides a competitive advantage in the development and
launch of new titles within an existing group.
BUSINESS AND OPERATING STRATEGY
The Company's business and operating strategy is designed to provide strong
revenue growth and increase profitability by improving the performance of
existing titles, launching and acquiring additional publications and developing
ancillary revenue streams by capitalizing on its internationally-recognized
brands and efficient operations. The key elements of this strategy include:
Cross-Sell Advertising and Expand Advertiser Base. Management believes that,
in addition to maintaining a strong endemic advertising base, it will continue
to increase revenues by cross-selling advertising space across all of the
Company's magazines that reach the advertiser's target markets. In addition,
the Company is improving existing and implementing new programs that will
enable its advertisers to purchase other marketing services, such as event
sponsorships, direct marketing programs, database access and services and
point-of-purchase promotions. Management intends to increase the Company's
advertiser base by targeting new advertisers in existing and new categories,
with a focus on non-endemic categories. The Company believes that its ability
to provide effective and efficient advertising enables it to maintain
competitive and in some cases premium advertising rates.
Increase Direct Subscription Sales and Magazine Prices. Management believes
that there are numerous opportunities to increase circulation revenues by
expanding direct subscription sales. The Company has invested in new
promotional programs, including direct mail, insert cards, gift campaigns and
cover wraps, designed to increase the number of subscriptions purchased
directly from the Company. Direct subscriptions provide significantly higher
revenues than those purchased through independent subscription agents. The
Company has also developed a database that includes detailed demographic
information on approximately 16 million current and former subscribers that
will enable it to more effectively cross-sell its publications and other
products directly to subscribers. In addition, the Company recently increased
the newsstand and subscription prices on certain publications to levels
comparable to those of competitive magazines and will continue to adjust its
magazine prices in the future based on market conditions.
Develop Ancillary Revenue Opportunities. The Company believes that there are
numerous opportunities to increase ancillary revenues by leveraging the
editorial content, readers and subscriber database and the internationally-
recognized brands of the Company's existing publications through domestic and
international licensing arrangements, strategic joint ventures, retail
alliances, affinity group marketing, electronic software and games and book
publishing. The Company has entered into agreements to license certain of its
brand names for television shows and compact disc and cassette music
recordings. In addition, the Company is currently negotiating the license of
certain of its brand names for use by an arena football team and for computer
game software.
5
<PAGE>
Develop and Launch New Titles. By using its core publications as platforms
for launching new "spin-off" publications, the Company has efficiently
developed and produced a diverse and profitable portfolio of highly-specialized
publications. The Company believes that it has a competitive advantage as a
result of its ability: (i) to identify potential markets for new publications;
(ii) to leverage existing editorial and advertising personnel and resources;
and (iii) to gain access to newsstand distribution channels. The Company plans
to continue to develop and launch new special-interest magazines that will
complement and enhance its existing portfolio.
Selectively Acquire Titles. The Company follows a disciplined acquisition
strategy designed to acquire titles that either enhance the Company's
competitive position in one of its existing special-interest segments or
establish a new cluster or group of publications that is complementary to the
Company's existing portfolio. The Company believes that its efficient operating
structure and favorable vendor contracts provides it with a competitive
advantage by reducing the operating costs of acquired titles. Management
believes that significant opportunities exist to acquire special-interest
magazines that will complement and enhance its existing portfolio. The Company
currently has no definitive agreement with respect to any acquisitions.
Develop Business-to-Business Opportunities. The Company believes that its
experience in developing, marketing and producing targeted special-interest
magazines will enable it to expand into business-to-business activities in the
markets served by its existing magazines. Such activities include trade
magazine publishing, trade shows, directories and database marketing. For
example, the Company recently acquired the rights to produce SHOT Business, the
monthly magazine of the National Shooting Sports Foundation.
Continue to Identify and Implement Operating Improvements. The Company's
current management identified and implemented operating improvements that have
resulted in significant cost savings through personnel reductions, lower lease
costs, tighter purchasing procedures and controls and restructuring the
Company's relationships with its principal vendors. In addition, the Company
adopted a new operating policy that provides for one or more of the following
actions if any of its publications generate continued losses: (i) discontinue
or sell such magazine; (ii) merge such magazine with one of the Company's
existing magazines; or (iii) enter into strategic partnerships with third
parties. The successful implementation of these improvements has contributed to
the improvement in the Company's EBITDA margin, which increased from 10.8% for
the ten month period ended September 30, 1996 to 25.0% for the six-month period
ended June 30, 1997. Due to the effects of the Acquisition, however, the
Company's operating income decreased from $15.8 million to $10.6 million and
its net income applicable to common equity decreased from $17.3 million to a
loss of $20.3 million during the same periods. The Company will remain focused
on identifying additional operating improvements to further increase its
operating efficiencies and gross profit margins.
BACKGROUND
The Company's origins date to 1948, when its founder, Robert E. Petersen,
first began publishing and selling a specialized newsletter entitled Hot Rod.
Since that time, the Company grew into a leading publisher of special-interest
magazines, expanding principally into areas in which Mr. Petersen had a
personal interest. On September 30, 1996, an investor group led by Willis Stein
& Partners, L.P. ("Willis Stein"), James D. Dunning, Jr. and certain members of
the Company's senior management (collectively, the "Investor Group") acquired,
through the Company, substantially all of the publishing assets of the
Predecessor in the Acquisition. The aggregate purchase price of the Acquisition
(including expenses and reflecting the receipt of a $2.5 million purchase price
adjustment) was approximately $462.8 million plus the assumption of unearned
subscription revenues and other liabilities of $49.0 million. To finance 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 the Investor
Group. Following the Acquisition, the Company issued $100.0 million in
aggregate principal amount of 11 1/8% Senior Subordinated Notes due 2006 (the
"Notes"), the proceeds of which were used to repay the Bridge Financing
Facility. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The Company was incorporated in August 1996 under the laws of the State of
Delaware. The Company's principal executive offices are located at 6420
Wilshire Boulevard, Los Angeles, California 90048 and its telephone number is
(213) 782-2000.
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Class A Common Stock offered:
U.S. Offering................. 5,000,000 shares
International Offering........ 1,250,000 shares
----------
Total....................... 6,250,000 shares (1)
==========
Common Stock to be outstanding
after the Offering............. 34,090,994 shares (1)(2)
Use of proceeds................. The net proceeds to the Company from the
Offering will be used to repay certain
outstanding indebtedness under the Senior
Credit Facility and to redeem a portion of
the Notes issued by the Company's operating
subsidiary. See "Use of Proceeds."
Voting rights................... Upon completion of the Offering, the Company
will have two classes of outstanding Common
Stock. The Class A Common Stock and Class B
Common Stock are substantially identical,
except with respect to voting rights. Each
holder of Class A Common Stock is entitled to
one vote per share on all matters submitted
to a vote of stockholders and each holder of
Class B Common Stock is not entitled to vote
except under certain limited circumstances
and as required by law. See "Risk Factors--
Significant Influence of Certain
Stockholders" and "Description of Capital
Stock."
Proposed New York Stock Exchange
symbol......................... PTN
</TABLE>
- --------
(1) Assumes the U.S. Underwriters' over-allotment option is not exercised. See
"Underwriters."
(2) Includes 7,682,632 shares of Class B Common Stock. Does not include: (i)
320,685 shares of Class A Common Stock issuable upon the exercise of
options granted under the 1997 Long-Term Equity Incentive Plan (the "1997
Incentive Plan") or (ii) 1,811,141 additional shares of Class A Common
Stock reserved for grants or awards under The Petersen Companies, Inc. 1997
Long-Term Equity Incentive Plan (the "New Incentive Plan") or The Petersen
Companies, Inc. Employee Stock Discount Purchase Plan (the "Stock Purchase
Plan"). See "Management--1997 Long-Term Equity Incentive Plan" and "--
Employee Stock Discount Purchase Plan."
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 in evaluating an investment in the shares of Class A Common
Stock offered hereby.
7
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
The following table presents summary historical financial data of: (i) the
Predecessor for each of the four years in the period ended November 30, 1995
and the ten months ended September 30, 1996, which have been derived from the
audited financial statements of the Predecessor and (ii) Petersen for the three
months ended December 31, 1996 and the six months ended June 30, 1997, which
have been derived from the audited financial statements of Petersen. The
audited financial statements of the Predecessor for each of the two years in
the period ended November 30, 1995 and the ten months ended September 30, 1996
and of Petersen for the three months ended December 31, 1996 and the six months
ended June 30, 1997 appear elsewhere in this Prospectus. The summary historical
financial data of the Predecessor for the ten months ended September 30, 1995,
the three months ended December 31, 1995 and the six months ended June 30, 1996
have been derived from unaudited financial statements of the Predecessor 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 period. Results for the six months ended June 30,
1997 are not necessarily indicative of results that may be expected for the
entire year. The Acquisition was accounted for using the purchase method of
accounting. Accordingly, certain of the historical financial data of the
Predecessor is not comparable to that of Petersen. The summary historical
financial data set forth below should be read in conjunction with, and are
qualified by reference to, "Selected Historical Financial Data," "Management's
Discussion and Analysis of Financial Conditions and Results of Operations" and
the financial statements and the accompanying notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR (1) PETERSEN (2) PREDECESSOR (1) PETERSEN (2)
------------------------------------------------------------------- ------------ --------------- ------------
TEN MONTHS
ENDED THREE MONTHS SIX MONTHS
YEAR ENDED NOVEMBER 30, SEPTEMBER 30, ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------- ------------------ --------------------- ----------------------------
1992 1993 1994 1995 1995 1996 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- ------- ------------ --------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OP-
ERATIONS DATA:
Net revenues.... $181,643 $187,212 $202,792 $214,515 $179,400 $189,614 $50,938 $ 53,277 $115,040 $ 120,143
Production,
selling and
other direct
costs.......... 135,155 142,254 149,586 171,579 140,831 148,874 42,342 41,223 91,971 82,440
-------- -------- -------- -------- -------- -------- ------- ---------- -------- ----------
Gross profit.... 46,488 44,958 53,206 42,936 38,569 40,740 8,596 12,054 23,069 37,703
General and
administrative
expenses....... 32,328 35,604 33,267 28,145 23,537 24,650 8,952 2,666 12,903 8,955
Amortization of
goodwill and
other
intangible
assets......... 1,235 198 421 433 355 339 111 8,992 196 18,151
-------- -------- -------- -------- -------- -------- ------- ---------- -------- ----------
Operating income
(loss)......... 12,925 9,156 19,518 14,358 14,677 15,751 (467) 396 9,970 10,597
Interest income
(expense),
net............ 856 317 476 549 428 352 209 (11,001) 85 (15,498)
Gain (loss) on
sale of assets
and minority
member's equity
in loss of
subsidiary..... -- -- -- -- -- 1,554 13 11 1,554 (28)
-------- -------- -------- -------- -------- -------- ------- ---------- -------- ----------
Income (loss)
before
provision for
income taxes... 13,781 9,473 19,994 14,907 15,105 17,657 (245) (10,594) 11,609 (4,929)
Provision for
income taxes
(3)............ (267) (251) (698) (549) (458) (331) (138) -- (199) --
-------- -------- -------- -------- -------- -------- ------- ---------- -------- ----------
Net income
(loss)......... 13,514 9,222 19,296 14,358 14,647 17,326 (383) (10,594) 11,410 (4,929)
Preferred unit
dividends...... -- -- -- -- -- -- -- -- -- (15,419)
-------- -------- -------- -------- -------- -------- ------- ---------- -------- ----------
Net income
(loss)
attributable to
common units... $ 13,514 $ 9,222 $ 19,296 $ 14,358 $ 14,647 $ 17,326 $ (383) $ (10,594) $ 11,410 $ (20,348)
======== ======== ======== ======== ======== ======== ======= ========== ======== ==========
Pro forma loss
per share (4).. $ (.38) $ (.73)
========== ==========
Pro forma
weighted
average number
of shares
outstanding
(4)............ 27,840,994 27,840,994
========== ==========
OTHER DATA:
Depreciation and
amortization... $ 3,381 $ 3,137 $ 3,118 $ 3,439 $ 2,704 $ 2,704 $ 1,015 $ 9,570 $ 1,667 $ 19,106
Capital
expenditures... 1,419 4,739 2,866 4,423 3,492 768 878 -- 463 228
EBITDA (5)...... 17,162 12,610 23,112 18,346 17,809 20,546 771 10,090 11,875 30,030
Cash provided by
operating
activities..... 2,479 10,680 27,059 9,593 5,530 24,719 N/A 22,376 23,808 18,119
Cash provided by
(used in)
investing
activities..... 11,545 (30) (14,478) 2,254 3,185 5,421 N/A (465,652) 1,704 2,183
Cash provided by
(used in)
financing
activities..... (14,013) (14,901) (17,382) (6,092) (5,377) (27,625) N/A 451,037 (2,425) (21,140)
</TABLE>
(footnotes appear on following page)
8
<PAGE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
--------------------------
PRO FORMA
AS
ACTUAL ADJUSTED (6)
-------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 6,923 $ 6,323
Working capital
deficiency (7)......... (27,503) (22,103)
Adjusted working capital
(7).................... 1,303 6,703
Total assets............ 588,977 581,738
Total long-term debt,
including current
portion................ 277,750 188,531
Total equity............ 150,481 232,610
</TABLE>
(footnotes from previous page)
- --------
(1) The Predecessor's fiscal year ended on November 30.
(2) Petersen's fiscal year ends on December 31.
(3) Consists of state and local income taxes. As a subchapter S corporation
under the Internal Revenue Code of 1986, as amended (the "Code"), the
Predecessor was not subject to U.S. federal income taxes or most state
income taxes. Instead, such taxes were paid by the Predecessor's
stockholder. The Predecessor periodically paid dividends to its stockholder
in respect of such tax liabilities. Prior to the Reorganization, Petersen
was a limited liability company and was not subject to U.S. federal income
taxes or most state taxes. Instead, such taxes were paid by Petersen's
equity holders.
(4) Pro forma loss per share is based on the weighted average shares
outstanding after giving retroactive effect to 27,840,994 shares to be
issued in connection with the Reorganization (assuming an initial public
offering price of $16 per share, the midpoint of the range set forth on the
cover page of this Prospectus). See "The Reorganization."
(5) "EBITDA" is defined as income before interest expense, 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 with GAAP
or as a measure of profitability or liquidity, management understands that
EBITDA is customarily used in evaluating the equity value of magazine
publishing companies. The EBITDA measures presented herein may not be
comparable to similarly titled measures of other companies.
(6) The unaudited pro forma as adjusted balance sheet data of the Company as of
June 30, 1997 gives effect to: (i) the $12.2 million non-recurring non-cash
compensation expense recorded in the third quarter of 1997 in connection
with the issuance of Class D Common Units in exchange for all outstanding
Class B Common Units and Class C Common Units (the "Exchange") as described
under the heading "Certain Relationships and Related Transactions"; (ii)
the transactions as described under the heading "The Reorganization"
(collectively, the "Reorganization"); (iii) the Offering and the
application of the net proceeds therefrom as described under "Use of
Proceeds"; and (iv) the refinancing of the Company's Senior Credit
Facility, as if such transactions had occurred on June 30, 1997. All of the
outstanding Common Units of Petersen will be exchanged for Common Stock of
the Company in the Reorganization. See "The Reorganization," "Unaudited Pro
Forma Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
(7) The calculation of working capital deficiency includes the current portions
of unearned subscription revenues, a non-cash obligation of the Company,
and deferred subscription acquisition costs. The calculation of adjusted
working capital excludes the current portions of unearned subscription
revenues and deferred subscription acquisition costs.
9
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
The following summary unaudited pro forma statement of operations data of the
Company for the twelve months ended December 31, 1996 and for the six months
ended June 30, 1996 give effect to: (i) the Acquisition and the financing
transactions related thereto; (ii) the transactions described under the heading
"The Reorganization"; (iii) the Offering and the application of the net
proceeds therefrom as described under "Use of Proceeds"; and (iv) the
refinancing of the Senior Credit Facility, each as if they had occurred at the
beginning of each such period. The summary unaudited pro forma statement of
operations for the six months ended June 30, 1997 give effect to the
transactions described in items (ii) through (iv) as if such transactions had
occurred at the beginning of such period. The unaudited pro forma balance sheet
data as of June 30, 1997 give effect to the Exchange and the transactions
described in items (ii) through (iv) above as if such transactions had occurred
on such date. This pro forma information is not necessarily indicative of the
results that would have occurred had the transactions referenced above 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 "Unaudited Pro Forma Financial Data," "Selected Historical
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and the notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31, SIX MONTHS ENDED SIX MONTHS ENDED
1996 (1) JUNE 30, 1996 JUNE 30, 1997
------------------- ---------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues............. $ 227,212 $ 115,040 $ 120,143
Production, selling and
other direct costs...... 175,127 89,623 82,440
---------- ---------- ----------
Gross profit............. 52,085 25,417 37,703
General and administra-
tive expenses (2) ...... 21,407 10,419 8,957
Amortization of goodwill
and other intangible
assets.................. 36,277 18,181 18,151
---------- ---------- ----------
Operating income (loss)
........................ (5,599) (3,183) 10,595
Interest expense, net.... (22,814) (14,763) (9,749)
Gain (loss) on sale of
assets.................. 1,554 1,554 (33)
---------- ---------- ----------
Income (loss) before pro-
vision for income taxes
and extraordinary item.. (26,859) (16,392) 813
Provision for income tax-
es...................... -- -- --
---------- ---------- ----------
Income (loss) before ex-
traordinary item........ $ (26,859) $ (16,392) $ 813
========== ========== ==========
Pro forma income (loss)
per share (3)(4)........ $ (.79) $ (.48) $ .02
========== ========== ==========
Pro forma weighted
average number of shares
outstanding (4)......... 34,090,994 34,090,994 34,090,994
========== ========== ==========
OTHER DATA:
Depreciation and amorti-
zation.................. $ 38,973 $ 19,652 $ 19,106
EBITDA (5)............... 33,487 16,469 30,023
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1997
-------------
<S> <C>
BALANCE SHEET DATA (2):
Cash and cash equivalents......................................... $ 6,323
Working capital deficiency (6).................................... (22,103)
Adjusted working capital (6)...................................... 6,703
Total assets...................................................... 581,738
Total long-term debt, including current portion................... 188,531
Total equity...................................................... 232,610
</TABLE>
(footnotes appear on following page)
10
<PAGE>
(footnotes from previous page)
(1) Includes the results of operations of the Predecessor for the nine month
period ended September 30, 1996 and the results of operations of the
Company for the three month period ended December 31, 1996 on a combined
basis.
(2) In connection with the Exchange, the Company recorded a non-recurring non-
cash compensation charge of $12.2 million in the third quarter of 1997.
Such amount has not been reflected in the Pro Forma Statement of Operations
Data for any of the periods shown but is reflected in the Pro Forma Balance
Sheet Data.
(3) The pro forma net income (loss) per share excludes the extraordinary loss
from early extinguishment of debt in the amount of $8.0 million for the
twelve months ended December 31, 1996, $8.0 million for the six months
ended June 30, 1996 and $7.0 million for the six months ended June 30,
1997.
(4) Pro forma net income (loss) per share is based on the weighted average
shares outstanding after giving effect to 6,250,000 shares to be issued in
connection with the Offering and 27,840,994 shares to be issued in
connection with the Reorganization (assuming an initial public offering
price of $16, the midpoint of the range set forth on the cover page of this
Prospectus). See "The Reorganization."
(5) "EBITDA" is defined as income before interest expense, 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 the
equity value of magazine publishing companies. The EBITDA measures
presented herein may not be comparable to similarly titled measures of
other companies.
(6) The calculation of working capital deficiency includes the current portions
of unearned subscription revenues, a non-cash obligation of the Company,
and deferred subscription acquisition costs. The calculation of adjusted
working capital excludes the current portions of unearned subscription
revenues and deferred subscription acquisition costs.
11
<PAGE>
RISK FACTORS
This Prospectus contains certain forward-looking statements. While the
Company believes these statements are reasonable, prospective purchasers of
the Class A Common Stock offered hereby 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 in determining
whether to purchase the Class A Common Stock offered hereby.
RISKS ASSOCIATED WITH FLUCTUATIONS IN PAPER COSTS AND POSTAL RATES
The Company's principal raw material is paper. Paper costs represented
approximately 20.7%, 25.9%, 22.8% and 20.4% of the Company's production,
selling and other direct costs for the six months ended June 30, 1997, the ten
months ended September 30, 1996 and the fiscal years ended November 30, 1994
and 1995, respectively. Certain commodity grades of paper have shown
considerable price volatility over the last decade, including the commodity
grade used by the Company. Paper prices rose sharply during the latter part of
1995, and, in response, the Predecessor purchased a large supply of paper in
anticipation of additional price increases and supply shortages continuing for
the remainder of 1995 and 1996. The increase in paper prices in late 1995 and
the Predecessor's large purchase at such increased prices materially adversely
affected the Predecessor's production, selling and other direct costs for the
year ended November 30, 1995 and the twelve months ended December 31, 1996.
Following the Acquisition, the Company entered into an agreement with World
Color Press, Inc. ("World Color") to secure sufficient paper to meet its
projected raw material needs through the end of 1997 at a fixed price. The
Company is currently in discussions with World Color regarding the terms on
which the Company will purchase paper in 1998. There can be no assurance that
the Company will be able to reach agreement with World Color on terms
favorable to the Company or that future fluctuations in paper prices will not
have a material adverse effect on the Company's results of operations or
financial condition.
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. The United States Postal Service has
recently requested approval for up to a 5.4% increase for commercial magazine
rates, which, if approved, is expected to become effective no sooner than May
1998. The Company estimates that its net income for the twelve months ended
December 31, 1996 would have been decreased by approximately $1.1 million and
its net loss for the six months ended June 30, 1997 would have been increased
by approximately $0.5 million if such a postal rate increase had occurred at
the beginning of each respective period (assuming in each case that the
Company was unable to pass the increase through to its advertisers or readers
or to take any other action to offset or minimize the impact of such
increase). Future fluctuations in postal rates could have a material adverse
effect on the Company's results of operations or financial condition. No
assurance can be given that the Company can recoup paper or postal cost
increases by passing them through to its advertisers and readers. In addition,
future fluctuations in paper prices or postal rates 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 THE IMPORTANCE OF CERTAIN PUBLICATIONS
Certain of the Company's publications have historically represented a
significant portion of the Company's net revenues and operating contribution,
and the Company expects that such publications will continue to do so in the
future. Motor Trend, Teen and Hot Rod accounted for 14.3%, 11.4% and 8.5%,
respectively, of the Company's net revenues for the twelve months ended
December 31, 1996 and 16.3%, 12.6% and 8.7%, respectively, for the six months
ended June 30, 1997. In the aggregate, Motor Trend, Teen and Hot Rod accounted
for 50.1% and 41.7% of the Company's operating contribution for the twelve
months ended December 31, 1996 and the six months ended June 30, 1997,
respectively. 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 could have a material adverse effect on the
Company's results of operations.
12
<PAGE>
RISKS ASSOCIATED WITH SIGNIFICANT INDEBTEDNESS
As of June 30, 1997 on a pro forma as adjusted basis giving effect to the
Offering and the application of the net proceeds therefrom as described under
"Use of Proceeds" and the refinancing of the Senior Credit Facility, the
Company would have had outstanding indebtedness of approximately $188.5
million, representing 44.8% of the Company's total capitalization. See
"Capitalization." The Company incurred significant debt in connection with the
Acquisition and, following the Offering, will continue to have significant
indebtedness. The Company's leveraged financial position exposes it to the
risks that: (i) a substantial portion of the Company's cash flow from
operations will be dedicated to the payment of principal and interest on such
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 leveraged financial
position may make it more vulnerable to economic downturns and may limit its
ability to withstand competitive pressures. 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. 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 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."
The agreements governing the outstanding indebtedness of the Company impose
certain operating and financial restrictions on the Company. Specifically, the
Senior Credit Facility and the indenture (the "Indenture") pursuant to which
the Notes were issued contain certain restrictive covenants, including, but
not limited to, restrictions on incurrence of debt, dividend payments, certain
asset sales, transactions with affiliates, liens and investments.
Contemporaneously with the Offering, the Company intends to refinance its
existing indebtedness under the Senior Credit Facility with a new senior
credit facility (the "New Credit Facility"). The Company anticipates that the
New Credit Facility will impose operating and financial restrictions on the
Company similar to those contained in the Senior Credit Facility. A failure to
comply with the obligations in the Senior Credit Facility, the New Credit
Facility or the Indenture, as the case may be, could result in an event of
default under such agreements, which, if not cured or waived, would permit
acceleration of the indebtedness thereunder and acceleration of indebtedness
under other instruments that may contain cross-acceleration or cross-default
provisions which could have a material adverse effect on the Company.
RISKS RELATING TO CONCENTRATION OF ADVERTISING REVENUES
For the twelve months ended December 31, 1996, automotive manufacturers and
retailers of original equipment and of aftermarket parts accounted for
approximately 17.0% and 21.5% of the Company's advertising revenues,
respectively. A significant decline in the advertising spending of the
automotive industry could have a material adverse effect on the Company's
results of operations, and could have an effect on quarterly comparisons of
the results of operations and financial condition of the Company. In addition,
advertising spending can be adversely affected by legislation, which may
affect the cost of advertising or the demand for the products of the Company's
advertisers. The Company anticipates that its revenues from manufacturers of
tobacco related products will decrease in the future as a result of the
resolution of certain litigation involving such manufacturers. Advertising
revenues from such manufacturers were $6.9 million, or 3.0% of the Company's
net revenues, for the twelve months ended December 31, 1996, and $3.9 million,
or 3.2% of the Company's net revenues, for the six months ended June 30, 1997.
CYCLICALITY AND SEASONALITY OF REVENUE
The Company's revenues from the publication of its magazines are principally
derived from advertising and circulation. Circulation revenues are generated
from subscription, newsstand and list rental sales. For the six months ended
June 30, 1997, approximately 61.1% of the Company's net revenues were from
advertising, 35.8%
13
<PAGE>
were from circulation and 3.1% 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. In
addition, the Company's business is somewhat seasonal. The Company typically
experiences decreased revenue during the first and fourth quarters of each
calendar year due to the seasonal nature of activities associated with its
publications. For the twelve months ended December 31, 1996, approximately
24.5% of the Company's net revenues were generated in the first quarter, 26.1%
were generated in the second quarter, 25.9% were generated in the third
quarter and 23.5% were generated in the fourth quarter. For a discussion of
the cyclical and seasonal nature of the Company's revenues, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Industry."
CONSOLIDATION OF PRINCIPAL VENDORS
The Company's principal vendors include paper suppliers, printers,
fulfillment houses and national newsstand distributors. Each of these
industries is currently experiencing significant consolidation among their
principal participants. Such consolidation may result in (i) decreased
competition for providing such services and thus increased prices; (ii)
interruptions and delays in services provided by such vendors; and (iii)
greater dependence on certain vendors. Consolidation could adversely affect
the Company's results of operations.
In addition, the historical patterns of newsstand distribution have changed
as a result of the on-going consolidation of newsstand wholesalers and the
shifting focus of such wholesalers to servicing retail outlets instead of
geographic areas. These changes, among others, have led to a decrease in
newsstand sales on an industry-wide basis. Newsstand sales accounted for
approximately 18.5% and 17.7% of the Company's net revenues for the twelve
months ended December 31, 1996 and the six months ended June 30, 1997,
respectively. The Company believes that such changes in newsstand distribution
may have an adverse impact on its results of operations.
RISKS ASSOCIATED WITH RECENT NET LOSSES; EXPECTED THIRD QUARTER LOSS
The Acquisition was accounted for using the purchase method of accounting.
As a result, the Company's amortization of goodwill and other intangible
assets has significantly increased to approximately $35.0 million per year. In
addition, due to the effect of the increased borrowings of the Company to
finance the Acquisition, the Company's interest expense increased
significantly in periods following the Acquisition. The on-going impact of
amortization and interest expenses have resulted in the Company reporting
significant net losses in the periods following the Acquisition. The Company
reported net losses applicable to its common equity of $10.6 million and $20.3
million for the three months ended December 31, 1996 and the six months ended
June 30, 1997, respectively. On a pro forma as adjusted basis giving effect to
the Offering and the application of net proceeds therefrom as described under
"Use of Proceeds" and the refinancing of the Senior Credit Facility, the
Company had a loss before provision for income taxes and extraordinary item of
$26.9 million, or $.79 per share, for the twelve months ended December 31,
1996. In addition, the Company incurred a non-recurring non-cash compensation
charge of $12.2 million in connection with the Exchange in the third quarter
of 1997. As a result of such charge and the on-going impact of the expenses
related to the Acquisition, the Company expects to report a net loss in the
third quarter of 1997. There can be no assurance that the Company will report
positive net income in the future.
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. Certain of such competitors are
larger and have greater financial resources than the Company. Other such
competitors are smaller and are capable of quickly identifying a niche
publication that could compete for the Company's readers and advertisers. 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."
14
<PAGE>
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 and Richard S Willis, all of whom have
significant experience in the magazine publishing industry. Messrs.
Bahrenburg, Vitale and Willis each entered into an employment agreement with
the Company, which provides for his continued employment through December 31,
2001 and restricts his ability to compete with the Company during such
employment period and one year thereafter. See "Management--Employment
Agreements." Although the Company believes it could replace such key employees
in an orderly fashion should the need arise, the loss of any 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 and employees.
See "Management--Directors, Executive Officers and Key Employees."
SIGNIFICANT INFLUENCE OF CERTAIN STOCKHOLDERS
Upon the completion of the Offering, Willis Stein and the other existing
stockholders will own approximately 28.4% and 47.9%, respectively, of the
outstanding Class A Common Stock (27.4% and 46.3%, respectively, if the U.S.
Underwriters' over-allotment option is exercised in full). Under the terms of
a Securityholders Agreement (as defined herein), holders of at least 25% and
up to approximately 45% of the Company's voting securities have agreed or may
agree to vote their shares in favor of those individuals designated by Willis
Stein to serve on the Board of Directors of the Company (the "Board of
Directors" or the "Board") and granted or may grant Willis Stein the right to
vote their shares on all significant corporate changes. As a result, Willis
Stein has the ability to elect all directors and control the policies and
operations of the Company. Such concentration of ownership could also have the
effect of delaying, deterring or preventing a change in control of the Company
that might otherwise be beneficial to stockholders. See "Principal
Stockholders."
POTENTIAL VOLATILITY OF FUTURE OPERATING RESULTS
The Company's operating results may fluctuate on a quarterly basis as a
result of a number of factors, including advertising and newsstand sales,
magazine start-up costs and timing and success of events. Fluctuations in
quarterly results could affect the market price of the Common Stock in a
manner unrelated to the long-term operating performance of the Company.
DIVIDEND POLICY; RESTRICTIONS ON PAYMENT OF DIVIDENDS
The Company intends to retain earnings to support its growth strategy and
reduce indebtedness and does not anticipate paying dividends in the
foreseeable future. As a holding company, the Company's ability to pay
dividends in the future is dependent upon the receipt of dividends or other
payments from its principal operating subsidiary. The payment of dividends by
such subsidiary to the Company for the purpose of paying dividends to holders
of Common Stock is prohibited by the Senior Credit Facility and is restricted
under the Indenture. The Company expects that the New Credit Facility will
likewise prohibit the payment of dividends to the Company for such purpose.
See "Dividend Policy."
ABSENCE OF PRIOR PUBLIC MARKET; MARKET PRICE FLUCTUATIONS
Prior to the Offering, there has been no public market for the Class A
Common Stock. The initial public offering price of the Class A Common Stock
will be determined by negotiations among the Company and the Representatives
(as defined) and may not be indicative of the market price for shares of the
Class A Common Stock after the Offering. For a description of factors
considered in determining the initial public offering price, see
"Underwriters." There can be no assurance that an active trading market for
the Class A Common Stock will develop or if developed, that such market will
be sustained. The market price for shares of the Class A Common Stock may be
significantly affected by such factors as quarter-to-quarter variations in the
Company's results of operations, news announcements or changes in general
market conditions. In addition, broad market fluctuation and general economic
and political conditions may adversely affect the market price of the Class A
Common Stock, regardless of the Company's actual performance.
15
<PAGE>
SUBSTANTIAL AND IMMEDIATE DILUTION
Based upon the Company's pro forma net tangible book value deficit as of
June 30, 1997, purchasers of the Class A Common Stock offered hereby will
experience an immediate dilution of $25.04 in the tangible net book value per
share of Class A Common Stock from an assumed initial public offering price of
$16 per share. See "Dilution."
IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company expects to have 34,090,994
shares of Common Stock outstanding. Of these shares, the 6,250,000 shares of
Class A Common Stock (7,187,500 shares if the U.S. Underwriters' over-
allotment option is exercised in full) sold in the Offering will be freely
tradeable without restriction under the Securities Act of 1933, as amended
(the "Securities Act"), except any such shares which may be acquired by an
"affiliate" of the Company. Approximately 27,840,994 shares of Common Stock
will be eligible for sale in the public market, subject to compliance with the
resale volume limitations and other restrictions of Rule 144 under the
Securities Act, beginning one year after the date of this Prospectus.
Beginning 180 days after the completion of the Offering, the holders of an
aggregate of approximately 7,501,360 shares of Common Stock will have certain
rights to require the Company to register their shares of Common Stock under
the Securities Act at the Company's expense pursuant to the Securityholders
Agreement. In addition, holders of an aggregate of 20,339,634 shares of Common
Stock have certain "piggyback" registration rights under the Securityholders
Agreement (as defined). Future sales of the shares of Common Stock held by
existing stockholders could have an adverse effect on the price of the Class A
Common Stock. See "Shares Eligible for Future Sale."
CERTAIN ANTI-TAKEOVER EFFECTS
Certain provisions of the Company's Certificate of Incorporation and By-laws
may inhibit changes in control of the Company not approved by the Board of
Directors. These provisions include: (i) a classified Board of Directors; (ii)
a prohibition on stockholder action through written consents; (iii) a
requirement that special meetings of stockholders be called only by the Board;
(iv) advance notice requirements for stockholder proposals and nominations;
(v) limitations requiring the affirmative vote of holders of at least 66 2/3%
of the total votes eligible to be cast in the election of directors to amend,
alter or repeal the Company's Restated Certificate of Incorporation and By-
laws; and (vi) the authority of the Board to issue preferred stock with such
terms as the Board may determine without stockholder approval. The Company
will also be afforded the protections of Section 203 of the Delaware General
Corporation Law, which could have similar effects. See "Description of Capital
Stock." The Securityholders Agreement (as defined), provides Willis Stein with
the ability to control the vote on any significant corporate changes, such as
a merger, consolidation or sale of the Company.
In addition, the Indenture provides that upon a "change of control," each
Note holder will have the right to require the Company to purchase all or a
portion of such holder's Notes at a purchase price of 101% of the principal
amount thereof, together with accrued and unpaid interest, if any, to the date
of such redemption. A "change of control" is defined in the Indenture to
include, among other things, any person or group of persons acting in concert
as a partnership or other group (other than members of the Investor Group,
including Willis Stein) acquiring beneficial ownership of securities of the
Company representing 20% of the combined voting power of the then outstanding
securities of the Company. Such obligation, if it arises, could have a
material adverse effect on the Company. Such provision could also delay, deter
or prevent a takeover attempt.
16
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 6,250,000 shares of Class A
Common Stock in the Offering are estimated to be approximately $92.0 million
(approximately $106.0 million if the U.S. Underwriters' over-allotment option
is exercised in full), assuming an initial public offering price of $16 per
share, the midpoint of the range set forth on the cover page of this
Prospectus. The Company intends to use such net proceeds as follows: (i)
approximately $64.2 million to repay a portion of the indebtedness incurred
under the Senior Credit Facility and (ii) approximately $27.8 million (as of
June 30, 1997) to redeem $25.0 million aggregate principal amount of the Notes
and to pay the redemption premium and accrued and unpaid interest thereon.
The indebtedness to be repaid under the Senior Credit Facility consists of
term loans, which have a scheduled maturity of December 31, 2002 and September
30, 2004. The Tranche A term loan generally amortizes in increasing increments
prior to maturity; the Tranche B term loan is payable primarily in balloon
payments due in 2003 and 2004. Such term loans bear interest at varying rates.
The overall effective interest rate for such indebtedness at August 31, 1997
was approximately 8.53%. In connection with the Offering, the Company expects
to refinance its remaining indebtedness under the Senior Credit Facility after
the application of the net proceeds of the Offering as described above. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The Company used borrowings under the Senior Credit Facility and proceeds
from the Bridge Financing Facility to finance a portion of the Acquisition.
Proceeds from the sale of the Notes were used to repay the Bridge Financing
Facility. The Notes mature on November 15, 2006, and bear interest at the rate
of 11 1/8% per annum. The redemption of the Notes will be effected as soon as
practicable following the completion of the Offering. Pending such redemption,
the Company will invest such proceeds in short-term, investment grade,
interest-bearing securities. The amount necessary to redeem the Notes will
change depending on the actual date of the redemption. Any additional amount
so required will reduce the amount to be repaid under the Senior Credit
Facility.
The reduction in the Company's indebtedness as a result of the application
of the net proceeds of the Offering will enhance the Company's ability to make
acquisitions of publications and businesses complementary to the Company's
existing portfolio. See "Business--Business and Operating Strategy." The
Company, however, currently has no definitive agreements with respect to any
acquisitions, nor can there be any assurance that the Company will make any
such acquisition in the future.
17
<PAGE>
THE REORGANIZATION
The Company is a holding company that serves as Petersen's sole managing
member. The operations of Petersen are conducted by its operating subsidiary,
Petersen Publishing Company, L.L.C. ("Publishing"). The outstanding equity
securities of Petersen and the Company are held by a common group of investors
in the same relative proportions (other than certain equity interests of
Petersen held by management). The outstanding equity securities of Petersen
consist of one class of preferred units (the "Preferred Units") and two
classes of common units (the "Common Units"), designated as Class A and Class
D. There are five series of Class D Common Units.
Prior to the consummation of the Offering, all of the existing
securityholders of the Company and Petersen will enter into a Contribution and
Recapitalization Agreement (the "Recapitalization Agreement") pursuant to
which, among other things, each existing securityholder of the Company and
Petersen will contribute all of its existing shares of common stock of the
Company and Preferred Units and Common Units of Petersen to the Company in
exchange for newly-issued shares of Common Stock. Pursuant to the
Recapitalization Agreement: (i) all of the Preferred Units of Petersen will be
exchanged for an aggregate of 11,708,907 shares of Common Stock (assuming an
initial public offering price of $16 per share, the midpoint of the range set
forth on the cover page of this Prospectus) and (ii) all of the Class A and
Class D Common Units of Petersen and all of the common stock of the Company
will be exchanged for an aggregate of 16,132,087 shares of Common Stock. The
number of shares of Common Stock that will be issued under the
Recapitalization Agreement to the existing securityholders of the Company and
Petersen will be determined according to the relative preference rankings of
such securities and will be based upon the initial public offering price of
the Class A Common Stock. The actual number of shares to be issued to each
securityholder in exchange for its Preferred Units under the Recapitalization
Agreement is subject to change based upon changes in the assumed initial
public offering price and the effective date of the transactions contemplated
by the Recapitalization Agreement. Following the transactions contemplated by
the Recapitalization Agreement, Petersen will be merged into Publishing. The
transactions described above are collectively referred to herein as the
"Reorganization." The Reorganization is conditioned upon the completion of the
Offering contemplated hereby.
Upon completion of the Reorganization, the Company's authorized capital will
include two classes of Common Stock, Class A Common Stock and Class B Common
Stock, which will be identical in all respects except that the Class B Common
Stock will be non-voting and will be convertible into Class A Common Stock at
the option of the holder thereof. The Class B Common Stock will be issued in
order to enable the holders thereof, which are affiliates of bank holding
companies, to comply with regulatory requirements applicable to them.
Set forth below is the organizational structure of the Company, Petersen and
Publishing immediately prior to and following the Reorganization:
Prior to the Reorganization: After the Reorganization:
[LOGO OF THE REORGANIZATION]
18
<PAGE>
CAPITALIZATION
The following table sets forth at June 30, 1997: (i) the actual
capitalization of Petersen and the Company on a combined basis; (ii) the pro
forma capitalization of the Company after giving effect to the Exchange and
the Reorganization; and (iii) the pro forma as adjusted capitalization of the
Company to reflect (a) the sale by the Company of 6,250,000 shares of Class A
Common Stock pursuant to the Offering, assuming an initial public offering
price of $16 per share (the midpoint of the range set forth on the cover page
of this Prospectus), and the application of the net proceeds therefrom as
described under "Use of Proceeds" and (b) the refinancing of the Senior Credit
Facility. This table should be read in conjunction with "Selected Historical
Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Unaudited Pro Forma Financial
Data" and the audited financial statements and the notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, current portion.............. $ 6,000 $ 6,000 $ --
======== ======== ========
Long-term debt, less current portion:
Senior Credit Facility..................... $171,750 $171,750 $113,531
Senior Subordinated Notes.................. 100,000 100,000 75,000
-------- -------- --------
Total long-term debt, less current por-
tion.................................... 271,750 271,750 188,531
-------- -------- --------
Members' and Stockholders' equity:
Common Units............................... 1,707 -- --
Preferred Units............................ 181,464 -- --
Common Stock............................... 153 -- --
Preferred Stock, $0.01 par value, 5,000,000
shares authorized; no shares issued on an
actual, pro forma and pro forma as
adjusted basis............................ -- -- --
Class A Common Stock, $0.01 par value,
75,000,000 shares authorized; no shares
issued on an actual basis; 20,158,362
shares issued on a pro forma basis; and
26,408,362 shares issued on a pro forma as
adjusted basis (1)........................ -- 202 264
Class B Common Stock, $0.01 par value,
25,000,000 shares authorized; no shares
issued on an actual basis; 7,682,632
shares issued on a pro forma and pro forma
as adjusted basis......................... -- 77 77
Additional paid-in capital................. -- 195,225 284,382
Accumulated deficit (2).................... (30,944) (43,124) (50,363)
Less: Notes receivable from related
parties................................... (1,750) (1,750) (1,750)
-------- -------- --------
Total equity............................. 150,630 150,630 232,610
-------- -------- --------
Total capitalization................... $422,380 $422,380 $421,141
======== ======== ========
</TABLE>
- --------
(1) Does not include: (i) 320,685 shares of Class A Common Stock issuable upon
the exercise of options granted under the 1997 Incentive Plan or (ii)
1,811,141 additional shares of Class A Common Stock reserved for grants or
awards under the New Incentive Plan or Stock Purchase Plan.
(2) Pro forma accumulated deficit reflects the non-recurring non-cash
compensation charge of $12.2 million related to the Exchange. The Company
determined the amount of such compensation charge based upon the
difference in value of the Class D Common Units and the Class B Common
Units and Class C Common Units. The value of the Class D Common Units was
determined by the Board of Directors as of the date of issuance based
primarily upon an independent appraisal of the Company. Pro forma as
adjusted accumulated deficit reflects the write-off of the remaining
unamortized deferred financing costs of $7.2 million resulting from the
reduction of debt and the refinancing of the Company's Senior Credit
Facility.
19
<PAGE>
DIVIDEND POLICY
Since the Acquisition, the Company has not declared or paid any cash or
other dividends on its Common Stock and does not expect to pay dividends for
the foreseeable future. The Company anticipates that all of its earnings in
the foreseeable future will be used to support its growth strategy and reduce
indebtedness. As a holding company, the ability of the Company to pay
dividends in the future is dependent upon the receipt of dividends or other
payments from its principal operating subsidiary, Publishing. The payment of
dividends by Publishing to the Company for purposes of paying dividends to
holders of Common Stock is prohibited by the Senior Credit Facility and
restricted by the Indenture. The Company anticipates that the New Credit
Facility will likewise prohibit the payment of dividends by Publishing to the
Company for such purpose. Any future determination to pay dividends will be at
the discretion of the Board of Directors and will depend upon, among other
factors, the Company's results of operations, financial condition, capital
requirements and contractual restrictions. See "Risk Factors--Dividend Policy;
Restrictions on Payment of Dividends."
20
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1997 was
a deficit of $396.6 million, or $(14.25) per share of Class A Common Stock.
Pro forma net tangible book value per share is determined by dividing the
tangible net worth of the Company (total assets less intangible assets and
total liabilities) by the aggregate number of shares of Common Stock
outstanding, assuming the Reorganization had taken place on June 30, 1997.
After giving effect to the sale of the 6,250,000 shares of Class A Common
Stock offered hereby (at an assumed initial public offering price of $16 per
share, the midpoint of the range set forth on the cover page of this
Prospectus) and the receipt and application of the net proceeds therefrom, pro
forma net tangible book value of the Company as of June 30, 1997 would have
been a deficit of approximately $308.0 million, or $(9.04) per share. This
represents an immediate increase in pro forma net tangible book value of $5.21
per share to the current stockholders of the Company and an immediate dilution
in pro forma net tangible book value of $25.04 per share to purchasers of
Class A Common Stock in the Offering. The following table illustrates this per
share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............ $16.00
Pro forma net tangible book value per share at June 30,
1997...................................................... (14.25)
Increase in pro forma net tangible book value per share
attributable to purchasers in the Offering................ 5.21
------
Pro forma net tangible book value per share after the
Offering.................................................. (9.04)
------
Dilution in pro forma net tangible book value per share to
purchasers of
Class A Common Stock in the Offering (1).................. $25.04
======
</TABLE>
- --------
(1) Dilution is determined by subtracting pro forma net tangible book value
per share after the Offering from the initial public offering price per
share.
The following table summarizes, on a pro forma basis, as of June 30, 1997,
the number of shares purchased, the total consideration paid (or to be paid)
and the average price per share paid (or to be paid) by the existing
stockholders and the purchasers of Class A Common Stock in the Offering, at an
assumed initial public offering price of $16 per share (the midpoint of the
range set forth on the cover page of this Prospectus), before deducting the
estimated offering expenses and underwriting discounts and commissions:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- -------------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 27,840,994 81.7% $168,160 62.7% $6.04
Purchasers of Class A Common
Stock in the Offering...... 6,250,000 18.3 100,000 37.3 16.00
---------- ----- -------- -----
Total..................... 34,090,994 100.0% $268,160 100.0%
========== ===== ======== =====
</TABLE>
The foregoing calculations exclude an aggregate of: (i) 320,685 shares of
Class A Common Stock issuable upon the exercise of options granted under the
1997 Incentive Plan or (ii) 1,811,141 additional shares of Class A Common
Stock reserved for grants or awards under the New Incentive Plan or Stock
Purchase Plan.
21
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma 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 the Company,
Predecessor and Petersen for the periods indicated. The adjustments are
described in the accompanying notes. The twelve month period ended December
31, 1996 includes the operations of the Company from the period of inception
(August 15, 1996) to December 31, 1996, the operations of the Predecessor for
the nine months ended September 30, 1996 and the operations of Petersen for
the three months ended December 31, 1996 on a combined basis.
The unaudited pro forma statement of operations data for the twelve months
ended December 31, 1996 and for the six months ended June 30, 1996 give effect
to: (i) the Acquisition and the financing transactions and reduced operating
costs related thereto; (ii) the Reorganization; (iii) the Offering and the
application of the net proceeds therefrom as described under "Use of
Proceeds"; and (iv) the refinancing of the Company's Senior Credit Facility,
each as if they had occurred at the beginning of each such period. The
unaudited pro forma statement of operations data for the six months ended June
30, 1997 give effect to the transactions described in items (ii) through (iv)
above as if such transactions had occurred at the beginning of such period.
The unaudited pro forma statement of operations data do not give effect to the
non-recurring non-cash compensation charge of $12.2 million related to the
Exchange. The unaudited pro forma balance sheet data as of June 30, 1997 give
effect to the Exchange and the transactions described in items (ii) through
(iv) above as if such transactions occurred on such date. 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 such transactions 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 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.
22
<PAGE>
THE PETERSEN COMPANIES, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS AND OTHER DATA
<TABLE>
<CAPTION>
COMPANY PREDECESSOR PETERSEN
----------------- ------------- ------------
ACTUAL
--------------------------------------------
NINE MONTHS THREE MONTHS
AUGUST 15, 1996 ENDED ENDED
(INCEPTION) TO SEPTEMBER 30, DECEMBER 31,
DECEMBER 31, 1996 1996 1996
----------------- ------------- ------------
<S> <C> <C> <C>
Net revenues.... $ -- $173,935 $ 53,277
Production,
selling and
other direct
costs.......... -- 137,301 41,223
------- -------- --------
Gross profit.... -- 36,634 12,054
General and
administrative
expenses....... -- 22,439 2,666
Amortization of
goodwill and
other
intangible
assets......... -- 307 8,992
------- -------- --------
Operating income
(loss)......... -- 13,888 396
Interest
income......... -- 472 113
Interest
expense........ -- (185) (11,114)
Gain on sale of
assets......... -- 1,554 --
------- -------- --------
Income (loss)
before equity
in loss of
subsidiary
minority
interest and
provision for
income taxes... -- 15,729 (10,605)
Equity in loss
of subsidiary.. (11) -- --
Minority
members' equity
in loss of
subsidiary..... -- -- 11
------- -------- --------
Income (loss)
before
provision for
income taxes
and
extraordinary
item........... (11) 15,729 (10,594)
Provision for
income taxes... -- (298) --
------- -------- --------
Income (loss)
before
extraordinary
item........... $ (11) $ 15,431 $(10,594)
======= ======== ========
Pro forma net
loss per
share (4)(5)...
Shares used in
computing pro
forma net loss
per share (5)..
EBITDA (6)...... $ (11) $ 16,785 $ 10,090
</TABLE>
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31, 1996
----------------------------------------------------------------------
PRO FORMA ADJUSTMENTS
-------------------------------------------------
ACQUISITION
AND REORGANIZATION (2),
OPERATING OFFERING AND
COMBINED ELIMINATIONS IMPROVEMENTS (1) REFINANCING (3) PRO FORMA
-------- ------------ ---------------- ------------------- ----------
<S> <C> <C> <C> <C> <C>
Net revenues.... $227,212 $ -- $ -- $ -- $ 227,212
Production,
selling and
other direct
costs.......... 178,524 -- (3,397) -- 175,127
-------- ------ -------- ------- ----------
Gross profit.... 48,688 -- 3,397 -- 52,085
General and
administrative
expenses....... 25,105 -- (3,698) -- 21,407
Amortization of
goodwill and
other
intangible
assets......... 9,299 -- 26,978 -- 36,277
-------- ------ -------- ------- ----------
Operating income
(loss)......... 14,284 -- (19,883) -- (5,599)
Interest
income......... 585 -- (472) -- 113
Interest
expense........ (11,299) -- (23,124) 11,496 (22,927)
Gain on sale of
assets......... 1,554 -- -- -- 1,554
-------- ------ -------- ------- ----------
Income (loss)
before equity
in loss of
subsidiary
minority
interest and
provision for
income taxes... 5,124 -- (43,479) 11,496 (26,859)
Equity in loss
of subsidiary.. (11) 11 -- -- --
Minority
members' equity
in loss of
subsidiary..... 11 (11) -- -- --
-------- ------ -------- ------- ----------
Income (loss)
before
provision for
income taxes
and
extraordinary
item........... 5,124 -- (43,479) 11,496 (26,859)
Provision for
income taxes... -- -- 298 -- --
-------- ------ -------- ------- ----------
Income (loss)
before
extraordinary
item........... $ 5,124 $ -- $(43,181) $11,496 $ (26,859)
======== ====== ======== ======= ==========
Pro forma net
loss per
share (4)(5)... $ (.79)
==========
Shares used in
computing pro
forma net loss
per share (5).. 34,090,994
==========
EBITDA (6)...... $ 26,875 $ -- $ 6,623 $ -- $ 33,487
</TABLE>
See Notes to Unaudited Pro Forma Statement of Operations and Other Data.
23
<PAGE>
THE PETERSEN COMPANIES, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS AND OTHER DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
-----------------------------------------------------------
PRO FORMA ADJUSTMENTS
------------------------------------
ACQUISITION REORGANIZATION (2),
PREDECESSOR AND OPERATING OFFERING AND
ACTUAL IMPROVEMENTS (1) REFINANCING (3) PRO FORMA
----------- ---------------- ------------------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues............ $115,040 $ -- $ -- $ 115,040
Production, selling and
other direct costs..... 91,971 (2,348) -- 89,623
-------- -------- ------ ----------
Gross profit............ 23,069 2,348 -- 25,417
General and
administrative
expenses............... 12,903 (2,484) -- 10,419
Amortization of goodwill
and other intangible
assets................. 196 17,985 -- 18,181
-------- -------- ------ ----------
Operating income
(loss)................. 9,970 (13,153) -- (3,183)
Interest income......... 238 (238) -- --
Interest expense........ (153) (20,359) 5,749 (14,763)
Gain on sale of assets.. 1,554 -- -- 1,554
-------- -------- ------ ----------
Income (loss) before
provision for income
taxes and extraordinary
item................... 11,609 (33,750) 5,749 (16,392)
Provision for income
taxes.................. (199) 199 -- --
-------- -------- ------ ----------
Income (loss) before
extraordinary item..... $ 11,410 $(33,551) $5,749 $ (16,392)
======== ======== ====== ==========
Pro forma net loss per
share (4)(5)........... $ (.48)
==========
Shares used in computing
pro forma net loss per
share (5).............. 34,090,994
==========
EBITDA (6).............. $ 11,875 $ 4,594 $ -- $ 16,469
</TABLE>
See Notes to Unaudited Pro Forma Statement of Operations and Other Data.
24
<PAGE>
THE PETERSEN COMPANIES, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS AND OTHER DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
--------------------------------------------------------------------------
REORGANIZATION (2),
COMPANY PETERSEN OFFERING AND
ACTUAL ACTUAL CONSOLIDATED ELIMINATIONS REFINANCING (3) PRO FORMA
------- -------- ------------ ------------ ------------------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net revenues............ $ -- $120,143 $120,143 $ -- $ -- $ 120,143
Production, selling and
other direct costs..... -- 82,440 82,440 -- -- 82,440
----- -------- -------- ----- ------ ----------
Gross profit............ -- 37,703 37,703 -- -- 37,703
General and administra-
tive expenses.......... 2 8,955 8,957 -- -- 8,957
Amortization of goodwill
and other intangible
assets................. -- 18,151 18,151 -- -- 18,151
----- -------- -------- ----- ------ ----------
Operating income
(loss)................. (2) 10,597 10,595 -- -- 10,595
Interest income......... -- 355 355 -- -- 355
Interest expense........ -- (15,853) (15,853) -- 5,749 (10,104)
Loss on sale of assets.. -- (33) (33) -- -- (33)
----- -------- -------- ----- ------ ----------
Income (loss) before mi-
nority interest and
provision for income
taxes.................. (2) (4,934) (4,936) -- 5,749 813
Equity in loss of sub-
sidiary................ (5) -- (5) 5 -- --
Minority members' equity
in loss of subsidiary.. -- 5 5 (5) -- --
----- -------- -------- ----- ------ ----------
Income (loss) before
provision for income
taxes and extraordinary
item................... (7) (4,929) (4,936) -- 5,749 813
Provision for income
taxes.................. -- -- -- -- -- --
----- -------- -------- ----- ------ ----------
Income (loss) before ex-
traordinary item....... $ (7) $ (4,929) $ (4,936) $ -- $5,749 $ 813
===== ======== ======== ===== ====== ==========
Pro forma net income per
share (4)(5)........... $ .02
==========
Shares used in computing
pro forma net income
per share (5).......... 34,090,994
==========
EBITDA (6) ............. $ (7) $ 30,030 $ -- $ -- $ -- $ 30,023
</TABLE>
See Notes to Unaudited Pro Forma Statement of Operations and Other Data.
25
<PAGE>
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS AND OTHER DATA
(DOLLARS IN THOUSANDS)
(1) The Acquisition occurred on September 30, 1996. As a result, transactions
associated with the Acquisition were not recorded on the books and records
of the Predecessor and are not reflected in the actual Statement of
Operations Data of the Predecessor. Therefore, the following pro forma
adjustments have been made to reflect the transactions associated with the
Acquisition for the twelve months ended December 31, 1996 and for the six
months ended June 30, 1996, as if the Acquisition had occurred at the
beginning of the period presented. The adjustments for the twelve months
ended December 31, 1996 only apply to the nine months ended September 30,
1996 since the impact of the Acquisition has been reflected in the actual
amounts for the three months ended December 31, 1996.
(a) Amortization of goodwill and other intangible assets would have
increased as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1996
------------------- ----------------
<S> <C> <C>
Goodwill............................ $17,978 $11,985
Subscriber list..................... 9,000 6,000
------- -------
Total increase in amortization of
goodwill and other intangible
assets............................. $26,978 $17,985
======= =======
</TABLE>
(b) Had the debt issued to finance the Acquisition been issued at the
beginning of the period presented, interest expense would have
increased and the deferred financing costs associated with the issuance
of the debt would have been amortized during the period. As a result,
total interest would have increased as follows:
<TABLE>
<CAPTION>
AVERAGE
INTEREST AMOUNT TWELVE MONTHS ENDED SIX MONTHS ENDED
RATE OUTSTANDING DECEMBER 31, 1996 JUNE 30, 1996
-------- ----------- ------------------- ----------------
<S> <C> <C> <C> <C>
SENIOR CREDIT FACILITY:
Tranche A & B term
loans.................. 9.0% $200,000 $13,500 $ 9,000
Revolver (commitment
fee)................... .5 60,000 225 150
Additional amortization
of deferred financing
costs.................. 755 504
SENIOR SUBORDINATED
NOTES:
Notes................... 11.125 100,000 8,344 5,563
Additional amortization
of deferred financing
costs.................. 300 200
BRIDGE FINANCING
FACILITY:
Interest expense........ 8.0 100,000 -- 1,980
Amortization of deferred
financing costs........ -- 2,962
------- -------
Total additional
interest expense....... $23,124 $20,359
======= =======
</TABLE>
(c) As a result of the Acquisition, cash on hand at September 30, 1996 was
retained by the Predecessor. Petersen is a limited liability company
with a minority interest owned by The Petersen Companies, Inc. These
changes result in the following pro forma adjustments for the twelve
months ended December 31, 1996 and for the six months ended June 30, 1996,
as if the Acquisition had occurred at the beginning of the period
presented.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1996
------------------- ----------------
<S> <C> <C>
Reduction in interest income........ $472 $238
Reduction in provision for income
taxes.............................. 298 199
</TABLE>
26
<PAGE>
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS AND OTHER DATA
The Predecessor was an S corporation, and as such recorded a provision for
certain state taxes. Petersen is a limited liability company, therefore,
the obligation for federal and state taxes is that of the members. As a
result, the provision for income taxes has been eliminated.
(d) Subsequent to the Acquisition, management of Petersen implemented a
plan to reduce operating costs which included the replacement of the
Predecessor's executive management team by Petersen's executive
management team, the termination of employees in various corporate and
operating positions, a revised travel and entertainment policy and the
renegotiation of vendor contracts and the lease governing Petersen's
corporate headquarters. As a result of this plan, savings were realized
in "Production, selling and other direct costs" and "General and
administrative expenses." The following table reflects these savings as
if the plan had been implemented at the beginning of the periods
presented (in thousands):
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1996
------------------- ----------------
<S> <C> <C>
Production, selling and other
direct costs:
Renegotiated lease............... $ 322 $ 215
Employee terminations............ 2,351 1,650
Subleasing of excess space....... 516 344
Reduced travel and
entertainment................... 208 139
------- -------
Total savings of production,
selling and other direct costs.. $ 3,397 $ 2,348
======= =======
General and administrative:
Employee terminations............ $ 488 $ 343
Elimination of Predecessor's
executive management costs...... 4,543 3,029
New executive management costs... (1,958) (1,305)
Reduced travel and
entertainment................... 625 417
------- -------
Total savings of general and
administrative.................. $ 3,698 $ 2,484
======= =======
</TABLE>
(2) On July 31, 1997, Petersen issued Class D Common Units in exchange for all
outstanding Class B Common Units and Class C Common Units. As a result,
the Company recorded a non-recurring non-cash compensation charge of $12.2
million in the third quarter of 1997. The Company determined the amount of
such compensation charge based upon the incremental value transferred in
the exchange of the Class B Common Units and Class C Common Units for the
Class D Common Units. The value of the Class D Common Units was determined
by the Board of Directors as of the date of issuance based primarily upon
an independent appraisal of the Company. Such amount has not been
reflected in the Pro Forma Statements of Operations Data for any of the
periods presented. See "Certain Relationships and Related Transactions."
(3) The column titled "Reorganization, Offering and Refinancing" reflects: (i)
net proceeds from the Offering of 6,250,000 shares of Class A Common Stock
offered hereby (at an assumed initial public offering price of $16 per
share, the midpoint of the range set forth on the cover page of this
Prospectus); (ii) the use of the net proceeds as follows: (a)
approximately $64.2 million to repay a portion of the indebtedness
incurred under the Senior Credit Facility and (b) approximately $27.8
million (as of June 30, 1997) to redeem $25.0 million aggregate principal
amount of the Notes and to pay the redemption premium and accrued and
unpaid interest thereon; and (iii) the refinancing of the remaining amount
outstanding under the Senior Credit Facility, as described below, as if
each of these transactions had occurred at the beginning of the period
presented. As a result, the following pro forma adjustments are required:
27
<PAGE>
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS AND OTHER DATA
(DOLLARS IN THOUSANDS)
(a) Interest expense would have been reduced as a result of the reduction
in debt. Such reduction would be offset by the amortization of deferred
financing costs associated with the paydown of debt. The net savings in
interest expense would be as follows:
<TABLE>
<CAPTION>
SIX SIX
TWELVE MONTHS MONTHS
AVERAGE MONTHS ENDED ENDED ENDED
INTEREST AMOUNT DECEMBER 31, JUNE 30, JUNE 30,
RATE PAID 1996 1996 1997
-------- ------- ------------ -------- --------
<S> <C> <C> <C> <C> <C>
Senior Credit Facility.. 9.0% $64,219 $5,780 $2,890 $2,890
Senior Subordinated
Notes.................. 11.125 25,000 2,781 1,391 1,391
------ ------ ------
Net reduction in
interest expense
associated with debt
reductions............. $8,561 $4,281 $4,281
====== ====== ======
</TABLE>
(b) Upon completion of the Offering, the Company plans to refinance the
remaining amount outstanding under the Senior Credit Facility at a more
favorable interest rate. As a result, interest expense will be
increased due to the remaining deferred financing costs associated with
the Senior Credit Facility being amortized, offset by the interest rate
reduction. In addition, costs associated with the new credit facility
will be capitalized and amortized over the term of the new debt. For
pro forma purposes, only the interest rate reduction and the
amortization of new deferred financing costs are included below. The
amortization of the deferred financing costs associated with the Senior
Credit Facility are treated as an extraordinary item resulting in a
decrease in interest expense.
<TABLE>
<CAPTION>
REDUCTION SIX SIX
IN TWELVE MONTHS MONTHS
AVERAGE MONTHS ENDED ENDED ENDED
INTEREST AMOUNT DECEMBER 31, JUNE 30, JUNE 30,
RATE REFINANCED 1996 1996 1997
--------- ---------- ------------ -------- --------
<S> <C> <C> <C> <C> <C>
Interest rate
reduction.............. 2.25% $139,031 $3,055 $1,528 $1,528
Amortize new deferred
financing costs........ (120) (60) (60)
------ ------ ------
Net decrease in interest
expense as a result of
debt refinance......... $2,935 $1,468 $1,468
====== ====== ======
</TABLE>
(4) The pro forma net loss per share excludes the extraordinary loss on early
extinguishment of debt of $8,049, $8,049 and $6,986 for the twelve months
ended December 31, 1996 and the six months ended June 30, 1996 and 1997,
respectively.
(5) Pro forma net income (loss) per share is based on the weighted average
shares outstanding after giving effect to 6,250,000 shares to be issued in
connection with the Offering and 27,840,994 shares to be issued in
connection with the Reorganization (assuming an initial public offering
price of $16, the midpoint of the range set forth on the cover page of
this Prospectus). See "The Reorganization."
(6) "EBITDA" is defined as income before interest expense, 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 with
GAAP or as a measure of profitability or liquidity, management understands
that EBITDA is customarily used in evaluating the equity value of magazine
publishing companies. The EBITDA measures presented herein may not be
comparable to similarly titled measures of other companies.
28
<PAGE>
THE PETERSEN COMPANIES, INC.
UNAUDITED PRO FORMA BALANCE SHEET DATA
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-----------------------------------------------------------------------------------------
ACTUAL
----------------- EXCHANGE AND OFFERING AND
COMPANY PETERSEN ELIMINATIONS CONSOLIDATED REORGANIZATION (1) REFINANCING (2) PRO FORMA
------- -------- ------------ ------------ ------------------ --------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ -- $ 6,923 $ -- $ 6,923 $ -- $ (600) $ 6,323
Accounts receivable,
net................... -- 24,011 -- 24,011 -- -- 24,011
Inventories............ -- 3,721 -- 3,721 -- -- 3,721
Current portion of
deferred subscription
acquisition costs..... -- 40,711 -- 40,711 -- -- 40,711
Deferred direct mail
advertising costs..... -- 2,340 -- 2,340 -- -- 2,340
Prepaid expenses and
other current assets.. -- 653 -- 653 -- -- 653
------ -------- ------- -------- --------- -------- --------
Total current assets.... -- 78,359 -- 78,359 -- (600) 77,759
Investment in
Publishing............. 149 -- (149) -- -- -- --
Investment in Petersen
....................... 1,513 -- (1,513) -- -- -- --
Deferred subscription
acquisition costs...... -- 44,680 -- 44,680 -- -- 44,680
Property and equipment,
net.................... -- 3,360 -- 3,360 -- -- 3,360
Goodwill, net........... -- 341,595 -- 341,595 -- -- 341,595
Subscriber list, net.... -- 111,000 -- 111,000 -- -- 111,000
Deferred financing
costs.................. -- 9,352 -- 9,352 -- (6,639) 2,713
Other assets............ -- 631 -- 631 -- -- 631
------ -------- ------- -------- --------- -------- --------
Total assets............ $1,662 $588,977 $(1,662) $588,977 $ -- $ (7,239) $581,738
====== ======== ======= ======== ========= ======== ========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and
accrued liabilities... $ -- $ 16,623 $ -- $ 16,623 $ -- $ -- $ 16,623
Accrued payroll and
related costs......... -- 4,098 -- 4,098 -- -- 4,098
Accrued interest....... -- 3,628 -- 3,628 -- -- 3,628
Customer incentive
bonuses............... -- 5,735 -- 5,735 -- -- 5,735
Current portion of
unearned subscription
revenues, net......... -- 69,517 -- 69,517 -- -- 69,517
Current portion of
long-term debt........ -- 6,000 -- 6,000 -- (6,000) --
Other accrued expenses
and current
liabilities........... -- 261 -- 261 -- -- 261
------ -------- ------- -------- --------- -------- --------
Total current
liabilities............ -- 105,862 -- 105,862 -- (6,000) 99,862
Unearned subscription
revenues, net.......... -- 52,071 -- 52,071 -- -- 52,071
Senior credit facility.. -- 171,750 -- 171,750 -- (58,219) 113,531
Senior subordinated
notes.................. -- 100,000 -- 100,000 -- (25,000) 75,000
Other noncurrent
liabilities............ -- 8,664 -- 8,664 -- -- 8,664
------ -------- ------- -------- --------- -------- --------
Total liabilities....... -- 438,347 -- 438,347 -- (89,219) 349,128
Due to minority
members................ -- 149 (149) -- -- -- --
Members' equity:
Common units........... -- 1,707 -- 1,707 (1,707) -- --
Preferred units........ -- 181,464 -- 181,464 (181,464) -- --
Accumulated deficit.... -- (30,942) -- (30,942) 30,942 -- --
Less: Notes receivable
from related parties.. -- (1,748) -- (1,748) 1,748 -- --
------ -------- ------- -------- --------- -------- --------
Total members' equity... -- 150,481 -- 150,481 (150,481) -- --
------ -------- ------- -------- --------- -------- --------
Stockholders' equity:
Common stock........... 1,682 -- (1,529) 153 126 62 341
Additional paid-in
capital............... -- -- -- -- 195,225 89,157 284,382
Accumulated deficit.... (18) -- 16 (2) (43,122) (7,239) (50,363)
Less: Notes receivable
from related parties.. (2) -- -- (2) (1,748) -- (1,750)
------ -------- ------- -------- --------- -------- --------
Total stockholders'
equity................. 1,662 -- (1,513) 149 150,481 81,980 232,610
------ -------- ------- -------- --------- -------- --------
Total liabilities and
equity................. $1,662 $588,977 $(1,662) $588,977 $ -- $ (7,239) $581,738
====== ======== ======= ======== ========= ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Balance Sheet Data.
29
<PAGE>
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET DATA
(1) On July 31, 1997, Petersen issued Class D Common Units in exchange for
all outstanding Class B Common Units and Class C Common Units in the
Exchange. As a result, the Company recorded a non-recurring non-cash
compensation charge of $12.2 million in the third quarter of 1997. Such
amount has been reflected in the pro forma balance sheet data. In
connection with the Reorganization, all of the outstanding Preferred
Units and Common Units will be converted into shares of Common Stock.
As a result, the members' equity of the limited liability company will
be transferred into the appropriate equity account of the Company.
(2) The column titled "Offering and Refinancing" reflects the following pro
forma adjustments as if each of the following transactions had occurred
at June 30, 1997:
(a) net proceeds from the Offering of 6,250,000 shares of Class A
Common Stock offered hereby (at an initial public offering price of
$16 per share, the midpoint of the range set forth on the cover page
of this Prospectus).
(b) the use of the net proceeds as follows: (i) approximately $64.2
million to repay a portion of the indebtedness incurred under the
Senior Credit Facility and (ii) approximately $27.8 million (as of
June 30, 1997) to redeem $25.0 million aggregate principal amount
of the Notes and to pay the redemption premium and accrued and
unpaid interest thereon. As a result of the reduction in the Notes
and the Senior Credit Facility, deferred financing costs of $3.2
million were written off.
(c) the refinancing of the remaining amount outstanding under the
Senior Credit Facility. As a result, costs of $.6 million were
incurred in association with the refinancing. In addition, a write
off of $4.0 million was recorded, representing the unamortized
deferred financing costs associated with the Senior Credit
Facility.
30
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table presents selected historical financial data of: (i) the
Predecessor for each of the four years in the period ended November 30, 1995
and the ten months ended September 30, 1996, which have been derived from the
audited financial statements of the Predecessor and (ii) Petersen for the
three months ended December 31, 1996 and the six months ended June 30, 1997,
which have been derived from the audited financial statements of Petersen. The
audited financial statements of the Predecessor for each of the two years in
the period ended November 30, 1995 and the ten months ended September 30, 1996
and of Petersen for the three months ended December 31, 1996 and the six
months ended June 30, 1997 that appear elsewhere in this Prospectus. Each of
the audited financial statements referred to above have been audited by Ernst
& Young LLP, independent certified public accountants. The selected historical
financial data of the Predecessor for the ten months ended September 30, 1995,
the three months ended December 31, 1995 and the six months ended June 30,
1996 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 period. Results for the six months ended June 30, 1997
are not necessarily indicative of results that may be expected for the entire
year. The Acquisition was accounted for using the purchase method of
accounting. Accordingly, certain of the historical financial data of the
Predecessor is not comparable to that of Petersen. The selected historical
financial data set forth below should be read in conjunction with, and are
qualified by reference to, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and the
accompanying notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR (1)
---------------------------------------------------------
TEN MONTHS
ENDED
YEAR ENDED NOVEMBER 30, SEPTEMBER 30,
-------------------------------------- ------------------
1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
(3):
Net revenues:
Advertising.... $103,539 $105,991 $117,433 $124,310 $103,422 $112,525
Newsstand...... 34,499 37,507 40,048 39,889 33,326 34,318
Subscriptions.. 40,324 41,258 42,639 43,901 36,811 36,474
Other.......... 3,281 2,456 2,672 6,415 5,841 6,297
-------- -------- -------- -------- -------- --------
Net revenues... 181,643 187,212 202,792 214,515 179,400 189,614
Production,
selling and
other direct
costs.......... 135,155 142,254 149,586 171,579 140,831 148,874
-------- -------- -------- -------- -------- --------
Gross profit.... 46,488 44,958 53,206 42,936 38,569 40,740
General and
administrative
expenses....... 32,328 35,604 33,267 28,145 23,537 24,650
Amortization of
goodwill and
other
intangible
assets......... 1,235 198 421 433 355 339
-------- -------- -------- -------- -------- --------
Operating income
(loss)......... 12,925 9,156 19,518 14,358 14,677 15,751
Interest income
............... 856 317 476 549 428 537
Interest
expense........ -- -- -- -- -- (185)
Gain (loss) on
sale of assets
and minority
members' equity
in loss of
subsidiary..... -- -- -- -- -- 1,554
-------- -------- -------- -------- -------- --------
Income (loss)
before
provision for
income taxes... 13,781 9,473 19,994 14,907 15,105 17,657
Provision for
income taxes
(4)............ (267) (251) (698) (549) (458) (331)
-------- -------- -------- -------- -------- --------
Net income
(loss)........ 13,514 9,222 19,296 14,358 14,647 17,326
Preferred unit
dividends...... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Net income
(loss)
attributable to
common units... $ 13,514 $ 9,222 $ 19,296 $ 14,358 $ 14,647 $ 17,326
======== ======== ======== ======== ======== ========
Pro forma loss
per share (5)..
Pro forma
weighted
average number
of shares
outstanding
(5)............
<CAPTION>
PETERSEN (2) PREDECESSOR (1) PETERSEN (2)
--------------------- --------------- ------------
THREE MONTHS SIX MONTHS
ENDED DECEMBER 31, ENDED JUNE 30,
--------------------- ----------------------------
1995 1996 1996 1997
------- ------------ --------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
(3):
Net revenues:
Advertising.... $29,362 $ 31,912 $67,397 $ 73,438
Newsstand...... 9,338 10,037 21,281 21,249
Subscriptions.. 10,725 10,404 21,828 21,736
Other.......... 1,513 924 4,534 3,720
------- ---------- ------- ----------
Net revenues... 50,938 53,277 115,040 120,143
Production,
selling and
other direct
costs.......... 42,342 41,223 91,971 82,440
------- ---------- ------- ----------
Gross profit.... 8,596 12,054 23,069 37,703
General and
administrative
expenses....... 8,952 2,666 12,903 8,955
Amortization of
goodwill and
other
intangible
assets......... 111 8,992 196 18,151
------- ---------- ------- ----------
Operating income
(loss)......... (467) 396 9,970 10,597
Interest income
............... 210 113 238 355
Interest
expense........ (1) (11,114) (153) (15,853)
Gain (loss) on
sale of assets
and minority
members' equity
in loss of
subsidiary..... 13 11 1,554 (28)
------- ---------- ------- ----------
Income (loss)
before
provision for
income taxes... (245) (10,594) 11,609 (4,929)
Provision for
income taxes
(4)............ (138) -- (199) --
------- ---------- ------- ----------
Net income
(loss)........ (383) (10,594) 11,410 (4,929)
Preferred unit
dividends...... -- -- -- (15,419)
------- ---------- ------- ----------
Net income
(loss)
attributable to
common units... $ (383) $ (10,594) $11,410 $ (20,348)
======= ========== ======= ==========
Pro forma loss
per share (5).. $ (.38) $ (.73)
========== ==========
Pro forma
weighted
average number
of shares
outstanding
(5)............ 27,840,994 27,840,994
========== ==========
</TABLE>
(footnotes appear on following page)
31
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR (1)
---------------------------------------------------
TEN MONTHS
ENDED
YEAR ENDED NOVEMBER 30, SEPTEMBER 30,
----------------------------------- ---------------
1992 1993 1994 1995 1995 1996
------- ------- -------- ------- ------ -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Depreciation and
amortization... $ 3,381 $ 3,137 $ 3,118 $ 3,439 $2,704 $ 2,704
Capital
expenditures... 1,419 4,739 2,866 4,423 3,492 768
EBITDA (6)...... 17,162 12,610 23,112 18,346 17,809 20,546
Cash provided by
operating
activities..... 2,479 10,680 27,059 9,593 5,530 24,719
Cash provided by
(used in)
investing
activities..... 11,545 (30) (14,478) 2,254 3,185 5,421
Cash provided by
(used in)
financing
activities..... (14,013) (14,901) (17,382) (6,092) (5,377) (27,625)
BALANCE SHEET DATA (AT PERIOD END)
(3):
Cash and cash
equivalents.... $13,235 $ 8,984 $ 4,183 $ 9,938 $12,453
Working capital
deficiency
(7)............ 1,591 (3,629) (11,027) 5,760 (2,791)
Adjusted working
capital (7).... 22,251 18,312 13,367 32,429 23,652
Total assets.... 93,027 98,389 119,454 136,803 124,483
Total long-term
debt, including
current
portion........ -- -- -- -- --
Total equity
(capital
deficiency).... 4,126 (1,553) 361 8,627 (1,672)
<CAPTION>
PETERSEN (2) PREDECESSOR (1) PETERSEN (2)
------------------- --------------- ------------
THREE MONTHS SIX MONTHS ENDED
ENDED DECEMBER 31, JUNE 30,
------------------- ----------------------------
1995 1996 1996 1997
------ ------------ --------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
OTHER DATA:
Depreciation and
amortization... $1,015 $ 9,570 $1,667 $19,106
Capital
expenditures... 878 -- 463 228
EBITDA (6)...... 771 10,090 11,875 30,030
Cash provided by
operating
activities..... N/A 22,376 23,808 18,119
Cash provided by
(used in)
investing
activities..... N/A (465,652) 1,704 2,183
Cash provided by
(used in)
financing
activities..... N/A 451,037 (2,425) (21,140)
BALANCE SHEET DATA (AT PERIOD END)
(3):
Cash and cash
equivalents.... $ 7,761 $ 6,923
Working capital
deficiency
(7)............ (18,484) (27,503)
Adjusted working
capital (7).... 8,844 1,303
Total assets.... 604,073 588,977
Total long-term
debt, including
current
portion........ 300,000 277,750
Total equity
(capital
deficiency).... 154,300 150,481
</TABLE>
(footnotes from previous page)
- -------
(1) The Predecessor's fiscal year ended on November 30.
(2) Petersen's fiscal year ends on December 31.
(3) Certain reclassifications have been made to the balance sheet and
statements of operations for each of the four years in the period ended
November 30, 1995 and the consolidated balance sheet and statements of
operations for the three months ended December 31, 1996 to conform their
presentation to the presentation for the six months ended June 30, 1997.
(4) Consists of state and local income taxes. As a subchapter S corporation
under the Code, the Predecessor was not subject to U.S. federal income
taxes or most state income taxes. Instead, such taxes have been paid by the
Predecessor's stockholder. The Predecessor periodically paid dividends to
its stockholder in respect of such tax liabilities. Prior to the
Reorganization, Petersen and Publishing were limited liability companies
and were not subject to U.S. federal income taxes or most state taxes.
Instead, such taxes were paid by Petersen's equity holders.
(5) Pro forma loss per share is based on the weighted average shares
outstanding after giving retroactive effect to 27,840,994 shares to be
issued in connection with the Reorganization (assuming an initial public
offering price of $16, the midpoint of the range set forth on the cover
page of this Prospectus). See "The Reorganization."
(6) "EBITDA" is defined as income before interest expense, income taxes,
depreciation and amortization and gain on sale of assets. EBITDA is not a
measure of performance under GAAP. Such items excluded 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 the
equity value of the magazine publishing companies. The EBITDA measures
presented herein may not be comparable to similarly titled measures of
other companies.
(7) The calculation of working capital deficiency includes the current portions
of unearned subscription revenues, a non-cash obligation of the Company,
and deferred subscription acquisition costs. The calculation of adjusted
working capital excludes the current portions of unearned subscription
revenues and deferred subscription acquisition costs.
32
<PAGE>
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 84 general-interest and 111 special-
interest magazines, special-interest magazine publishing has been the fastest
growing sector of the consumer magazine industry over the last five year
period. The Company had net revenues of $120.1 million for the six months
ended June 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. For the six
months ended June 30, 1997, approximately 61.1% of the Company's revenues were
from advertising, 35.8% were from circulation (including 16.8% from
subscription sales, 17.7% from newsstand sales and 1.3% from list rentals) and
approximately 3.1% 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. 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. No single advertiser has comprised more than 5.0% of the
Company's advertising revenues during any of the last three years. In
addition, the Company's top 20 advertisers only accounted for approximately
30% of total advertising revenues for the twelve months ended December 31,
1996. The Company anticipates that its revenues from manufacturers of tobacco
related products will decrease in the future as a result of the resolution of
certain litigation involving such manufacturers. Advertising revenues from
such manufacturers were $6.9 million for the twelve months ended December 31,
1996 and $3.9 million for the six months ended June 30, 1997. The Company's
revenues are generated predominantly from U.S. sources.
The principal components of the Company's production and selling costs are
raw materials, advertising sales, distribution, printing and binding and
editorial expenses, which represented approximately 20.7%, 16.2%, 13.6%, 11.5%
and 11.0%, respectively, of the Company's cost of sales in the six months
ended June 30, 1997. The Company's principal raw material is paper. Paper
supply and prices are subject to volatility. The supply and prices of paper
may be significantly affected by many factors, including market fluctuations
and economic, political and weather conditions. Following the Acquisition, the
Company secured sufficient paper to meet its projected raw material needs
through the end of 1997 at a fixed price. The Company is currently in
discussions regarding the terms on which the Company will purchase paper in
1998. There can be no assurance that the Company will be able to reach
agreement on terms favorable to the Company. The Company currently purchases
all of its paper requirements on an as needed basis. As a result, the Company
does not carry a significant amount of paper in inventory. The Company has a
long-term agreement with World Color to print all of its magazines. The
Company's advertising and sales expense comprises salaries, commissions,
travel and entertainment, marketing, promotions and research. In addition, the
Company believes that its editorial expenses are lower because, among other
reasons, most of its editorial staff is not located in New York City. See
"Risk Factors--Risks Associated with Fluctuations in Paper Costs and Postal
Rates" and "Business--Production, Distribution and Fulfillment" and "--Raw
Materials."
Since the Acquisition, the Company has expended significant resources to
increase direct subscription sales, develop its subscriber database and
establish Petersen Enterprises to pursue ancillary revenue opportunities. In
addition, the Company has made improvements in its Youth Group publications,
including refocusing the editorial content and improving the design of Teen
and adding staff at All About You!. These investments are expected to
aggregate $9.0 million for the twelve months ended December 31, 1997. The
Company believes the return on such investments will be realized in future
periods. See "Business--Business and Operating Strategy."
33
<PAGE>
The Acquisition was accounted for using the purchase method of accounting.
As a result, the Acquisition has affected and will continue to affect the
Company's results of operations in certain significant respects. The aggregate
purchase price of the Acquisition (including expenses and reflecting the
receipt of a $2.5 million purchase price adjustment) was approximately $462.8
million plus the assumption of unearned subscription revenue and other
liabilities of approximately $49.0 which 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. The allocation
of the purchase price of the assets acquired in the Acquisition has resulted
in annual depreciation and amortization expense of approximately $35.0 million
per year. The Predecessor's historical annual depreciation and amortization
expense over the past five years has been less than $4.5 million per year.
Prior to the Acquisition, the Predecessor was operated as an S corporation
under the Code. As a result, it did not incur federal and state income taxes.
Federal and state income taxes (except with respect to certain states)
attributable to the Predecessor's income during such periods were incurred and
paid directly by the Predecessor's stockholder. The Predecessor made periodic
distributions to its stockholder in respect of such tax liability. As a
limited liability company, Petersen also does not incur federal and state
income taxes. Federal and state income taxes attributable to Petersen's income
and tax benefit attributable to Petersen's losses will be incurred directly by
Petersen's equity holders. Accordingly, no discussion of income taxes is
included in "Results of Operations" below. Any tax benefit attributable to
losses generated by Petersen prior to the Reorganization will not be available
to the Company. As a C corporation, the Company is fully subject to federal
and state income taxation.
RESULTS OF OPERATIONS
The following table summarizes historical results of operations as a
percentage of net revenues of: (i) the Predecessor for (a) the years ended
November 30, 1994 and 1995, (b) the ten months ended September 30, 1995 and
1996, (c) the three months ended December 31, 1995, and (d) the six months
ended June 30, 1996; and (ii) Petersen for (a) the three months ended December
31, 1996 and (b) the six months ended June 30, 1997.
<TABLE>
<CAPTION>
PREDECESSOR PETERSEN PREDECESSOR PETERSEN
---------------------------------------------- -------- ----------- --------
YEAR ENDED TEN MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, SEPTEMBER 30, DECEMBER 31, JUNE 30,
-------------- ----------------- -------------------- --------------------
1994 1995 1995 1996 1995 1996 1996 1997
------ ------ ----------- ----- ----------- -------- ----------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues:
Advertising............ 57.9% 57.9% 57.6% 59.3% 57.6% 59.9% 58.6% 61.1%
Newsstand.............. 19.7 18.6 18.6 18.1 18.3 18.8 18.5 17.7
Subscriptions.......... 21.0 20.5 20.5 19.2 21.1 19.5 19.0 18.1
Other.................. 1.4 3.0 3.3 3.4 3.0 1.8 3.9 3.1
------ ------ ----- ----- ----- ----- ----- -----
Total net revenues..... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Production, selling and
other direct costs.... 73.8 80.0 78.5 78.5 83.1 77.4 79.9 68.6
------ ------ ----- ----- ----- ----- ----- -----
Gross profit........... 26.2 20.0 21.5 21.5 16.9 22.6 20.1 31.4
General and
administrative
expenses.............. 16.4 13.1 13.1 13.0 17.6 5.0 11.2 7.5
Amortization of
goodwill and other
intangible assets..... .2 .2 .2 .2 .2 16.9 .2 15.1
------ ------ ----- ----- ----- ----- ----- -----
Operating income (loss)
...................... 9.6 6.7 8.2 8.3 N/A .7 8.7 8.8
Interest expense....... -- -- -- .1 -- 20.9 .1 13.2
Net income ............ 9.5% 6.7% 8.2% 9.1% N/A N/A 9.9% N/A
OTHER DATA:
EBITDA................. 11.4% 8.6% 9.9% 10.8% 1.5% 18.9% 10.3% 25.0%
</TABLE>
34
<PAGE>
PETERSEN SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO PREDECESSOR SIX MONTHS
ENDED JUNE 30, 1996
Net revenues. Net revenues increased $5.1 million, or 4.4%, to $120.1
million for the six months ended June 30, 1997 from $115.0 million for the six
months ended June 30, 1996. This increase is primarily the result of a $6.0
million, or 9.0%, increase in advertising revenues, offset by a $.1 million
decline in circulation revenues, a $.5 million decline in miscellaneous
revenues (mainly reprint revenues) and a $.3 million decline in show 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 June 30, 1996 for those two
publications were $4.7 million (comprised of $2.9 million in advertising, $1.7
million in subscription and newsstand, and $.1 million other). Net revenues,
excluding these two discontinued publications, increased $9.8 million, or
8.9%, to $120.1 million for the six months ended June 30, 1997 from $110.4
million for the six months ended June 30, 1996.
Production, selling and other direct costs. Production, selling and other
direct costs decreased $9.5 million, or 10.4%, to $82.4 million for the six
months ended June 30, 1997 from $91.9 million for the six months ended June
30, 1996. Production, selling and other direct costs decreased as a percentage
of net revenues to 68.6% from 79.9% for the same periods. The successful
implementation of the Company's operating improvements contributed to the
decrease in production, selling and other direct costs. This decrease is
primarily comprised of a $6.7 million, or 28.2%, decrease in paper costs, a
$1.1 million, or 10.7%, decrease in printing expenses and a $3.4 million, or
13.5%, decrease in editorial and advertising sales expenses.
Other expenses. General and administrative expenses decreased $3.9 million,
or 30.6%, to $9.0 million for the six months ended June 30, 1997 from $12.9
million for the six months ended June 30, 1996. General and administrative
expenses decreased as a percentage of net revenues to 7.5% from 11.2% 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.
Amortization of goodwill and other intangible assets increased to $18.2
million for the six months ended June 30, 1997 from $.2 million for the six
months ended June 30, 1996. This expense represents amortization of goodwill
and the subscribers list purchased in the Acquisition.
Operating income. Operating income increased $.6 million, or 6.3%, to $10.6
million for the six months ended June 30, 1997 from $10.0 million for the six
months ended June 30, 1996, for the reasons stated above. Operating income
increased as a percentage of net revenues to 8.8% from 8.7% for the same
periods.
Interest expense. Interest expense increased $15.7 million to $15.9 million
for the six months ended June 30, 1997 from $.2 million for the six months
ended June 30, 1996. This increase is the result of indebtedness incurred
under the Senior Credit Facility and the Notes in connection with the
Acquisition.
Net income (loss). The net loss was $4.9 million for the six months ended
June 30, 1997 as compared to net income of $11.4 million for the six months
ended June 30, 1996. This decrease is primarily the result of the increases in
interest and amortization expenses as stated above.
PETERSEN THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO PREDECESSOR THREE
MONTHS ENDED DECEMBER 31, 1995.
Net Revenues. Net revenues increased $2.3 million, or 4.6%, to $53.2 million
for the three months ended December 31, 1996 from $50.9 million for the three
months ended December 31, 1995. This increase is primarily the result of a
$2.6 million or 8.7% increase in advertising revenues, offset by a $.6 million
decline in miscellaneous revenues (primarily reprint 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,
35
<PAGE>
Teen and Hot Rod; and (iii) additional revenues from relatively new and start-
up publications. In December 1996, the Company discontinued the publication of
Sassy. Net revenues for the period ended December 31, 1996 for this
publication were $.5 million (comprised of $.3 million in advertising and $.2
million in circulation).
Production, selling and other direct costs. Production, selling and other
direct costs decreased $1.1 million, or 2.6%, to $41.2 million for the three
months ended December 31, 1996 from $42.3 million for the three months ended
December 31, 1995. Production, selling and other direct costs decreased as a
percentage of net revenues to 77.4% from 83.1% for the same periods. The
successful implementation of the Company's operating improvements contributed
to the decrease in production, selling and other direct costs. This decrease
is primarily comprised of a $2.0 million, or 18.6%, decrease in paper costs
offset by a $1.1 million, or 84.0%, increase in circulation promotion for the
same periods.
Other expenses. General and administrative expenses decreased $6.3 million,
or 70.2%, to $2.7 million for the three months ended December 31, 1996 from
$9.0 million for the three months ended December 31, 1995. General and
administrative expenses decreased as a percentage of net revenues to 5.0% from
17.6% 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. Amortization of goodwill and other intangible assets increased to
$9.0 million for the three months ended December 31, 1996 from $.1 million for
the three months ended December 31, 1995. This expense represents amortization
of goodwill and the subscribers list purchased in the Acquisition.
Operating income (loss). Operating income was $.4 million for the three
months ended December 31, 1996 as compared to an operating loss of $.5 million
for the three months ended December 31, 1995, for the reasons stated above.
Interest expense. Interest expense was $11.1 million, for the three months
ended December 31, 1996 as compared to interest expense of $.0 million for the
three months ended December 31, 1995. This increase is the result of
indebtedness incurred under the Senior Credit Facility, the Bridge Financing
Facility and the Notes in connection with the Acquisition.
Net loss. Net loss increased $10.2 million to $10.6 million for the three
months ended December 31, 1996 from $.4 million for the three months ended
December 31, 1995. This increase is primarily the result of the increased
interest and amortization expenses as stated above.
PREDECESSOR TEN MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO PREDECESSOR TEN
MONTHS ENDED SEPTEMBER 30, 1995
Net revenues. Net revenues increased $10.2 million, or 5.7%, to $189.6
million for the ten months ended September 30, 1996 from $179.4 million for
the ten months ended September 30, 1995. This increase is primarily the result
of a $9.1 million or 8.8% increase in advertising revenue and a $.7 million,
or .9%, increase in circulation revenues. The increase in advertising revenues
was due principally to: (i) an overall increase in the Company's advertising
rates and (ii) higher advertising revenues generated by Motor Trend and Teen.
The increase in newsstand revenues was due principally to increased sales of
Teen and All About You!
Production, selling and other direct costs. Production, selling and other
direct costs increased $8.0 million, or 5.7%, to $148.8 million for the ten
months ended September 30, 1996 from $140.8 million for the ten months ended
September 30, 1995. Production, selling and other direct costs, as a
percentage of net revenues, remained constant at 78.5% for the same periods.
This dollar increase was primarily the result of increased paper costs and
incremental production costs. See "--Overview."
Other expenses. General and administrative expenses increased $1.1 million,
or 4.7%, to $24.6 million for the ten months ended September 30, 1996 from
$23.5 million for the ten months ended September 30, 1995. General and
administrative expenses decreased as a percentage of net revenues to 13.0%
from 13.1% for the same periods. This increase was primarily the result of an
accrual of $.8 million for litigation expenses. This litigation remains the
responsibility of the seller under the terms of the Acquisition.
36
<PAGE>
Operating income. Operating income increased $1.1 million, or 7.3%, to $15.8
million for the ten months ended September 30, 1996 from $14.7 million for the
ten months ended September 30, 1995, for the reasons stated above. Operating
income increased as a percentage of net revenues to 8.3% from 8.2% for the
same periods.
Net income. Net income increased $2.7 million or 18.3% to $17.3 million for
the ten months ended September 30, 1996 from $14.6 million for the ten months
ended September 30, 1995, for the reasons stated above. Net income increased
as a percentage of net revenues to 9.1% from 8.2% for the same periods.
PREDECESSOR YEAR ENDED NOVEMBER 30, 1995 COMPARED TO PREDECESSOR YEAR ENDED
NOVEMBER 30, 1994
Net revenues. Net revenues for the year ended November 30, 1995 increased
$11.7 million, or 5.8%, to $214.5 million from $202.8 million for the year
ended November 30, 1994. Of this increase, advertising revenue accounted for
$6.9 million, revenues generated from the newly-established trade show and
event group accounted for $2.8 million and circulation revenue accounted for
$1.1 million. The increase in advertising revenue was principally due to the
Company's acquisition of Sassy in December 1994.
Production, selling and other direct costs. Production, selling and other
direct costs increased $22.0 million, or 14.7%, to $171.6 million for the year
ended November 30, 1995 from $149.6 million for the year ended November 30,
1994. Production, selling and other direct costs as a percentage of net
revenues increased to 80.0% from 73.8% for the same period. This increase is
primarily the 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.
Other expenses. General and administrative expenses decreased $5.1 million,
or 15.4%, to $28.1 million for the year ended November 30, 1995 from $33.2
million for the year ended November 30, 1994. General and administrative
expenses decreased as a percentage of net revenues to 13.2% from 16.4% for the
same period. This decrease is primarily the result of lower compensation
expense for Mr. Petersen.
Operating income. Operating income decreased $5.2 million, or 26.4%, to
$14.3 million for the year ended November 30, 1995 from $19.5 million for the
year ended November 30, 1994, for the reasons stated above. Operating income
as a percentage of net revenues decreased to 6.7% from 9.6% for the same
periods.
Net income. Net income decreased $4.9 million, or 25.6%, to $14.4 million
for the years ended November 30, 1995 from $19.3 million for the year ended
November 30, 1994 for the reasons stated above. Net income as a percentage of
net revenues decreased to 6.7% from 9.5% for the same period.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $6.9 million and working capital
deficiency totaled $27.5 million at June 30, 1997. At December 31, 1996, cash
and cash equivalents totaled $7.8 million and working capital deficiency
totaled $18.5 million. The decrease in working capital from December 31, 1996
to June 30, 1997 resulted primarily from a $22.3 million repayment of bank
borrowings offset by cash generated from operations. Excluding the current
portion of unearned subscription revenues and deferred subscription
acquisition costs, working capital totaled $1.3 million at June 30, 1997 and
$8.8 million at December 31, 1996.
The Company's net cash provided by operations was $18.1 million for the six
months ended June 30, 1997 compared to $23.8 million for the six months ended
June 30, 1996. Of this difference, $10.5 million relates to changes in
inventory and $16.5 million relates to decreased net income, offset by a $19.1
million increase in depreciation and amortization and an aggregate $5.8
million increase in accrued liabilities. Net cash provided by operations was
$24.7 million, $9.6 million and $27.1 million in the ten months ended
September 30, 1996 and years ended November 30, 1995 and 1994, respectively.
37
<PAGE>
The Company's net cash provided by investing activities was $2.2 million for
the six months ended June 30, 1997, as compared to $1.7 million for the six
months ended June 30, 1996, which included $2.5 million in proceeds in the
sale of its Viking Color pre-press operations. Net cash provided by (used in)
investing activities was $5.4 million, $2.3 million and $(14.5) million in the
ten months ended September 30, 1996 and years ended November 30, 1995 and
1994, respectively. The Company's operations are not capital intensive. The
Company's capital expenditures were $.2 million and $.5 million in the six
months ended June 30, 1997 and 1996, respectively, and $.8 million, $4.4
million and $2.9 million in the ten months ended September 30, 1996 and the
fiscal years ended November 30, 1995 and 1994, respectively.
The Company's net cash used in financing activities for the six months ended
June 30, 1997 was comprised of $22.3 million of repayments of borrowings under
the Senior Credit Facility. Of this amount, $21.8 million represented an early
repayment. Net cash used in financing activities in prior years, comprised
principally of distribution of Predecessor's S corporation earnings to its
stockholder and changes in advances to other divisions of Petersen, were $27.6
million and $6.1 million and $17.4 million for the ten months ended September
30, 1996 and the years ended November 30, 1995 and 1994, respectively.
The Company's EBITDA (excluding the impact of the sale of its Viking Color
pre-press operations in 1996) increased $18.1 million, or 152.9%, to $30.0
million for the six months ended June 30, 1997 from $11.9 million for the six
months ended June 30, 1996. EBITDA as a percentage of net revenues increased
to 25.0% from 10.3% for the same periods. The Company's EBITDA increased $9.3
million to $10.1 million for the three months ended December 31, 1996 from $.8
million for the three months ended December 31, 1995. EBITDA as a percentage
of net revenues increased to 18.9% from 1.5% for the same periods. The
successful implementation of the Company's operating improvements contributed
to these increases in EBITDA.
To finance 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 the Investor Group led by Willis Stein, James D. Dunning,
Jr. and certain members of the Company's senior management. Following the
Acquisition, the Company issued $100.0 million aggregate principal amount of
the Notes, the proceeds of which were used to repay the Bridge Financing
Facility.
The Senior Credit Facility consists of a $100.0 million Tranche A term loan
and a $100.0 million Tranche B term loan, maturing on December 31, 2002 and
September 30, 2004, respectively. The Company has repaid $22.3 million of the
$100.0 million Tranche B term loan as of August 31, 1997. In addition, the
Senior Credit Facility provides borrowings under a revolving facility in the
maximum principal amount of $60.0 million. The Tranche A term loan generally
amortizes in increasing increments prior to maturity; the Tranche B term loan
is payable primarily in balloon payments due in 2003 and 2004. The Revolving
Credit Facility becomes due in full on December 31, 2002. The Revolving Credit
Facility and the Tranche A term loan bear interest at either LIBOR (5.688% at
August 31, 1997) plus 1.375% to 2.750% based on borrowings or the prime rate
of the agent bank (8.5% at August 31, 1997) plus .125% to 1.5% based on
borrowings. The Tranche B term loan bears interest at either LIBOR plus 2.625%
to 3.250% based on borrowings or the prime rate of the agent bank plus 1.375%
to 2.0% based on borrowings. Since the Acquisition, the Company has been able
to fund operations from cash generated from operations and has not incurred
borrowings under the Revolving Credit Facility. The Senior Credit Facility
contains customary restrictions and requirements with respect to security,
covenants (including financial covenants) and events of default. The Company
is in compliance with the covenants of the Senior Credit Facility.
As of August 31, 1997, Publishing had outstanding $100.0 million aggregate
principal amount of the Notes. The Notes bear interest at a rate of 11 1/8%
per annum payable semi-annually in arrears on each May 15 and November 15. The
Notes are unsecured obligations of Publishing and are subordinated in right of
payment to all Senior Indebtedness of Publishing (as defined in the
Indenture). The Notes are unconditionally guaranteed, on a senior subordinated
basis, as to payment of principal, premium, if any, and interest, jointly and
severally by Petersen. The Indenture contains certain restrictive covenants,
including, but not limited to, restrictions on incurrence of debt, dividends
payments, certain assets sales, transactions with affiliates, liens and
investments. The Company, Petersen and Publishing are in compliance with the
Indenture.
38
<PAGE>
A portion of the consolidated debt of the Company bears interest at floating
rates; therefore, the Company's financial position is and will continue to be
affected by changes in prevailing interest rates. Effective October 7, 1996,
the Company purchased an interest rate cap on $150.0 million initial notional
principal amount at a fixed rate of 6.23%, which expires on October 7, 1999.
The cap is intended to provide partial protection from exposure relating to
the Company's variable rate debt instruments in the event of higher interest
rates. If the Company's actual borrowing rate had been higher by 1% during the
six months ended June 30, 1997, the interest rate cap agreement would have
resulted in interest savings of approximately $700,000. If the Company's
actual borrowing rate had been lower by 1% during the six months ended June
30, 1997, the interest rate cap agreement would not have provided the Company
with any interest expense savings.
The Company will use the net proceeds from the Offering as follows: (i)
approximately $64.2 million to repay a portion of the indebtedness incurred
under the Senior Credit Facility and (ii) approximately $27.8 million (as of
June 30, 1997) to redeem $25.0 million aggregate principal amount of the Notes
and to pay the redemption premium and accrued and unpaid interest thereon. In
connection with the Offering, the Company expects to refinance its remaining
indebtedness under the Senior Credit Facility after the application of the net
proceeds of the Offering. The New Credit Facility is expected to be a $175.0
million non-amortizing revolving credit facility maturing on September 30,
2002. The New Credit Facility will be secured by a first priority security
interest in all assets of Publishing. In addition, the borrowings under the
New Credit Facility will be guaranteed by the Company, which will be secured
by a pledge of all of the outstanding equity interests of Publishing. The New
Credit Facility will contain customary restrictions and requirements with
respect to security, covenants (including financial covenants) and events of
default, none of which are expected to be more restrictive than those of the
Senior Credit Facility.
In the event of a change of control (as defined in the Indenture), 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, 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.
The Company believes that net cash provided by operations will be sufficient
to fund its future cash requirements. Excluding any acquisition activity, the
Company currently projects that it will not have to utilize the New Credit
Facility to fund operations. No assurances can be given, however, that this
will be the case. The Company expects that future cash requirements will
principally be for repayments of indebtedness, working capital requirements,
capital expenditures and other needs. The Company's future operating
performance and ability to service or refinance its current indebtedness will
be subject to future economic conditions and to financial, business and other
factors, many of which are beyond the Company's control. For a discussion of
certain relevant factors, see "Risk Factors."
SEASONALITY
Historically, the Company has experienced limited seasonality, with
decreased revenues during the first and fourth quarters of each calendar year
due to the seasonal nature of activities associated with its publications.
Historically, seasonality has not had an identifiable impact on the Company's
net income. The following table sets forth the unaudited net revenues of the
Company for its last eight quarters (in thousands):
<TABLE>
<CAPTION>
QUARTERS ENDED
-------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1996 1996 1996 1996 1997 1997
------------- ------------ --------- -------- ------------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $56,411 $50,938 $55,694 $59,347 $58,895 $53,277 $57,474 $62,670
</TABLE>
39
<PAGE>
INFLATION
The Company believes that inflation has not had a material impact on its
results of operations for the periods discussed herein.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS No. 123, "Accounting for Stock-Based Compensation" encourages, but does
not require, a fair market value based method of accounting for employee stock
options or similar equity instruments. The Company has elected to continue to
measure compensation cost under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" as was previously required, and to
comply with pro forma disclosure of net income and earnings per share as if
the fair market value based method of accounting had been applied.
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS"), No. 128,
"Earnings Per Share" which simplifies the computation of earnings per share.
The statement is effective for financial statements issued for periods ending
after December 15, 1997 and requires restatement of all prior period earnings
per share data presented. The statement will be adopted in calendar year 1997
and is not expected to significantly impact the financial statements of the
Company.
In February 1997, the FASB issued SFAS, No. 129, which establishes new
standards for disclosing information about an entity's capital structure. The
statement is effective for financial statements issued for periods ending
after December 15, 1997. The statement will be adopted in calendar year 1997
and the Company will add certain disclosures to the footnotes of the financial
statements.
In June 1997, the FASB issued SFAS, No. 130, which establishes standards for
reporting and display of comprehensive income and its components. The
statement is effective for fiscal years beginning after December 15, 1997. The
statement will be adopted in calendar 1998 and the Company expects that it
will add additional disclosure to the financial statements.
40
<PAGE>
INDUSTRY
Market data used throughout this Prospectus were obtained from internal
surveys and from industry publications, including reports generated by VSA,
Mediamark and Publishers Information Bureau. These industry publications
generally indicate that the information contained therein has been obtained
from sources believed to be reliable, but that the accuracy and completeness
of such information is not guaranteed. The Company has not independently
verified such market data. Similarly, internal surveys, while believed to be
reliable, have not been verified by any independent source. These publications
were not commissioned by, or prepared at the request of, the Company or any of
its affiliates. The Company has not sought the consent of any of these
organizations to refer to their reports herein.
The consumer magazine market is comprised of 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. During
the five years ended December 31, 1996 (the latest period for which data is
available), special-interest publications targeted to niche audiences have
grown significantly and are now estimated to account for approximately one
quarter of the overall consumer magazine market in terms of total advertising
and circulation spending. Special-interest magazines have generally exhibited
stronger growth in both advertising and circulation spending as compared to
general-interest magazines over the last five year period. For example, based
on a VSA survey of 84 general-interest and 111 special-interest magazines,
advertising and circulation spending on special-interest publications have
grown at compound annual rates of 9.5% and 2.5%, respectively, as compared to
8.9% and 1.9%, respectively, for general-interest publications during the
period from 1991 to 1996. In addition, because special-interest magazines
target enthusiasts, the publishers are typically 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 $2.18 in 1996,
nearly 50% higher than the $1.48 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.
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 economic downturns.
Industry sources estimate that total advertising spending for special-
interest publications increased by approximately 8.0% in 1996. According to
the Publishers Information Bureau, the top ten categories of industries ranked
by consumer magazine advertising expenditures in 1996 were automotive and
automotive accessories (12%), direct response companies (11%), computers,
office equipment and stationery (9%), toiletries and cosmetics (8%), business
and consumer services (8%), drugs and remedies (6%), foods and food products
(6%), apparel, footwear and accessories (6%), travel, hotels and resorts (5%)
and publishing and media (3%). The automotive industry has traditionally
accounted for the largest percentage of total advertising expenditures in the
consumer magazine industry. During the period from 1991 to 1996, advertising
spending by the automotive industry increased at a compound annual growth rate
of 9.0%.
Circulation revenues are generated from subscription, newsstand and list
rental sales. During the fifteen years ended December 31, 1996, the aggregate
number of consumer magazines distributed through newsstand sales declined in
relation to the number distributed through subscription sales. Due to
increases in newsstand cover prices, the amount of circulation revenue
generated from newsstand sales by special-interest magazines has grown over
the five years ended December 31, 1996. According to the VSA survey, the
average price per copy for special-interest magazines increased at a compound
annual growth rate of 2.2% for the period from 1991 to 1996. 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.
The historical patterns of newsstand distribution have changed as a result
of the on-going consolidation of newsstand wholesalers and the shifting focus
of such wholesalers to servicing retail outlets instead of geographic areas.
The changes, among others, have led to a decrease in newsstand sales on an
industry-wide basis.
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 and other assets across different media formats and to
capitalize on their existing brand names.
41
<PAGE>
BUSINESS
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. Based on data from Mediamark, the
Company estimates that its magazines are read by approximately 48 million
adult readers including 40 million male readers each month. The Company offers
its advertisers the ability to reach both a targeted market within its
individual magazines as well as a larger audience by advertising across the
Company's broad portfolio of magazines. The Company's internationally-
recognized magazines include: (i) Motor Trend, which is a leading authority on
new domestic and foreign automobiles and, with its increase in base rate
(expected paid circulation on which advertising rates are based) to 1.15
million effective January 1998, is anticipated to be the world's leading
automotive magazine in terms of paid circulation; (ii) Teen, which has the
largest paid circulation of any of the Company's magazines with paid
circulation of more than 1.8 million as of the June 1997 issue; and (iii) Hot
Rod, which is one of the largest paid circulation automotive magazines in the
world with a paid circulation of over 800,000 as of the June 1997 issue. Of
the Company's 15 core magazines, nine are ranked first in their respective
markets based on annual paid circulation in 1996, including two magazines that
are the only national magazines published in their respective markets.
The Company had net revenues of $227.2 million and $120.1 million for the
twelve months ended December 31, 1996 and the six months ended June 30, 1997,
respectively. The Company's principal sources of revenues are from advertising
and circulation. For the six months ended June 30, 1997, approximately 61.1%
of the Company's revenues were from advertising, 35.8% from circulation and
3.1% were from other sources. Due to the effects of the Acquisition, the
Company reported net losses attributable to common equity of $10.6 million and
$20.3 million for the three months ended December 31, 1996 and the six months
ended June 30, 1997, respectively.
The special-interest nature of the Company's magazines creates an
opportunity for its advertisers to efficiently reach their target audience, as
the Company believes that its enthusiast readers value special-interest
magazines for both their product information and editorial content. Based on
data from Mediamark, the Company estimates that its magazines are read by more
adult males (ages 18 to 34) than that of any other U.S. special-interest
magazine publisher and are read by approximately one-third of all young
females (ages 12 to 19) in the United States. 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 early stages of this important
consumer group's buying behavior. Further, the Company believes that the
endemic nature of the Company's advertiser base and the diversity of its
publications makes its advertising revenues less susceptible to changes in
general economic conditions.
The Company is organized into seven publishing groups: Automotive
Performance, Motor Trend, Youth, Outdoor, Photo/Marine, Motorcycle/Bicycle and
Sport. Each publishing group is organized around one or more of the Company's
core monthly publications which target a distinct special-interest segment or
specific general-interest segment (e.g., Teen and Sport). The operations of
each group are focused on delivering high-quality editorial content,
generating endemic advertising sales and developing new titles or activities
to reach such group's enthusiast readers. Each publishing group is supported
by a number of centralized corporate functions. The Company conducts all of
its non-endemic advertising, subscription and newsstand sales and marketing
activities and develops ancillary revenue through event management, licensing
arrangements and electronic publishing on a centralized basis to take
advantage of the broad reach and significant market presence of the Company's
magazine portfolio. In addition, all of the Company's production, distribution
and administrative activities are centralized to achieve economies of scale
and operating synergies. The combination of each group's focused editorial and
sales staff supported by centralized corporate functions has enabled the
Company to improve profit margins and provides a competitive advantage in the
development and launch of new titles within an existing group.
42
<PAGE>
The Company's 15 core magazines average over 30 years in publication and
have developed internationally-recognized brands within each of their
respective markets. For the twelve months ended December 31, 1996, 13 of the
Company's 15 core magazines each generated an operating contribution of more
than $1.0 million. The following table sets forth certain information
regarding the Company's 15 core magazines for the twelve months ended December
31, 1996 and the six months ended June 30, 1997:
<TABLE>
<CAPTION>
NET
MAGAZINE TITLE REVENUES (1) TOTAL CIRCULATION (2) CIRCULATION RANK (3)
- ------------------------ --------------------- --------------------- --------------------
(AMOUNTS IN MILLIONS) (COPIES IN THOUSANDS)
<S> <C> <C> <C>
Motor Trend............. $ 32.5 1,047.7 2 of 4
Teen.................... 25.8 1,661.1 3 of 3
Hot Rod................. 19.3 780.4 1 of 2
Petersen's 4 Wheel &
Off-Road............... 13.5 365.8 1 of 3
Guns & Ammo............. 13.0 588.3 1 of 3
Skin Diver.............. 13.0 200.1 1 of 2
Sport................... 10.3 789.0 1 of 2
Car Craft............... 9.5 383.6 1 of 1
Petersen's Hunting...... 7.7 359.5 1 of 1
Motorcyclist............ 7.2 241.0 2 of 2
Circle Track and Racing
Technology............. 6.5 131.8 2 of 3
Petersen's
Photographic........... 6.4 202.9 3 of 3
Sport Truck............. 6.2 200.3 1 of 2
Dirt Rider.............. 6.1 165.6 1 of 3
Chevy High Performance.. 4.5 179.4 2 of 2
------ -------
Total................. $181.5 7,296.5
====== =======
</TABLE>
- --------
(1) Includes advertising, circulation and other revenues for the twelve months
ended December 31, 1996.
(2) Based on the average paid circulation (per issue) for each publication for
the six months ended June 30, 1997.
(3) Includes only national monthly publications (9 or more issues per year)
that are audited by the Audit Bureau of Circulation and believed by the
Company to directly compete with its publications, and based on average
paid circulation for the six months ended June 30, 1997. Does not include
weekly or bi-weekly publications since such publications are not generally
considered by the Company to be competitive with monthly publications.
BUSINESS AND OPERATING STRATEGY
The Company's business and operating strategy is designed to provide strong
revenue growth and increase profitability by improving the performance of
existing titles, launching and acquiring additional publications and
developing ancillary revenue streams by capitalizing on its internationally-
recognized brands and efficient operations. The key elements of this strategy
include:
Cross-Sell Advertising and Expand Advertiser Base. Management believes that,
in addition to maintaining a strong endemic advertising base, it will continue
to increase revenues by cross-selling advertising space across all of the
Company's magazines that reach the advertiser's target markets. In addition,
the Company is improving existing and implementing new programs that will
enable its advertisers to purchase other marketing services, such as event
sponsorships, direct marketing programs, database access and services and
point-of-purchase promotions. Management intends to increase the Company's
advertiser base by targeting new advertisers in existing and new categories,
with a focus on non-endemic categories. Such non-endemic categories include,
among others, apparel, footwear and accessories, cosmetics, food and beverages
and financial products. The Company believes that its ability to provide
effective and efficient advertising enables it to maintain competitive and in
some cases premium advertising rates.
43
<PAGE>
Increase Direct Subscription Sales and Magazine Prices. Management believes
that there are numerous opportunities to increase circulation revenues by
expanding direct subscription sales. The Company has historically focused on
the newsstand distribution channel and has relied heavily upon agency
subscription sales in managing its circulation operations. The Company has
invested in new promotional programs, including direct mail, insert cards,
gift campaigns and cover wraps, designed to increase the number of
subscriptions purchased directly from the Company. A direct subscription
typically generates approximately seven times more revenue to the Company than
an agency subscription. The Company has also developed a database that
includes detailed demographic information on approximately 16 million current
and former subscribers that will enable it to more effectively cross-sell its
publications and other products directly to subscribers. In addition, the
Company recently increased the newsstand and subscription prices on certain
publications to levels comparable to those of competitive magazines and will
continue to adjust its magazine prices in the future based on market
conditions.
Develop Ancillary Revenue Opportunities. The Company believes that there are
numerous opportunities to increase ancillary revenues by leveraging the
editorial content, readers and subscriber database and the internationally-
recognized brands of the Company's existing publications through domestic and
international licensing arrangements, strategic joint ventures, retail
alliances, affinity group marketing, electronic software and games and book
publishing. For the six months ended June 30, 1997, approximately 3.1% of the
Company's revenues were from ancillary sources of which 1.9% were from shows.
The Company is pursuing certain ancillary revenue opportunities afforded to it
by its well-established brand names. For example, the Company has licensed
Motor Trend and Hot Rod brand names for television shows on TNN and Hot Rod
for use in cassette and compact disc music recordings with EMI-Capital Music
Special Markets. In addition, the Company is currently negotiating the license
of Hot Rod for use as the brand name for a Los Angeles arena football team and
for computer game software.
Develop and Launch New Titles. By using its core publications as platforms
for launching new "spin-off" publications, the Company has efficiently
developed and produced a diverse and profitable portfolio of highly-
specialized publications. The Company believes that it has a competitive
advantage as a result of its editorial staff's ability to identify potential
markets for new publications and the Company's ability to gain access to
newsstand distribution channels has enabled its new publications to become
established and to leverage existing editorial and advertising personnel
resources and to gain access to newsstand distribution channels. Since the
Acquisition, the Company has launched six new multiple frequency publications,
which collectively generated approximately $3.4 million in revenues in the
first six months of 1997. Since the Acquisition, the Company has also
increased frequency on four publications from single issue to bi-monthly, and
has launched or anticipates to launch 14 new single issue publications. The
Company is currently negotiating with NASCAR to produce two automotive
publications. The Company plans to continue to develop and launch new special-
interest magazines that will complement and enhance its existing portfolio.
Selectively Acquire Titles. The Company follows a disciplined acquisition
strategy designed to acquire titles that either enhance the Company's
competitive position in one of its existing special-interest segments or
establish a new cluster or group of publications that is complementary to the
Company's existing portfolio. In evaluating acquisition candidates, management
considers whether such publications have developed or have the potential to
develop a brand identity. Since the Acquisition, the Company has acquired the
exclusive right to use the name of certain individuals for the following three
publications: Richard Petty's Stock Car Magazine, Dick Vitale's College
Basketball Yearbook and Bob Griese's College Football Yearbook. The Company
believes that its efficient operating structure provides it with a competitive
advantage by reducing the operating costs of acquired titles. Management
believes that significant opportunities exist to acquire special-interest
magazines that will complement and enhance its existing portfolio. The Company
currently has no definitive agreements with respect to any acquisitions.
Develop Business-to-Business Opportunities. The Company believes that its
experience in developing, marketing and producing targeted special-interest
magazines will enable it to expand into business-to-business activities in the
markets served by its existing magazines. Such activities include trade
magazine publishing, trade
44
<PAGE>
shows, directories and database marketing. For example, the Company recently
acquired the rights to produce SHOT Business, the monthly magazine of the
National Shooting Sports Foundation.
Continue to Identify and Implement Operating Improvements. The Company's
current management identified and implemented operating improvements that have
resulted in significant cost savings through personnel reductions, lower lease
costs, tighter purchasing procedures and controls and restructuring the
Company's relationships with its principal vendors. In addition, the Company
adopted a new operating policy that provides for one or more of the following
actions if any of its publications generate continued losses: (i) discontinue
or sell such magazine; (ii) merge such magazine with the Company's existing
magazines; or (iii) enter into strategic partnerships with third parties. The
successful implementation of these improvements has contributed to the
improvement in the Company's EBITDA margin, which increased from 10.8% for the
ten month period ended September 30, 1996 to 25.0% for the six-month period
ended June 30, 1997. Due to the effects of the Acquisition, however, the
Company's operating income decreased from $15.8 million to $10.6 million and
its net income applicable to common equity decreased from $17.3 million to a
loss of $20.3 million during the same periods. The Company will remain focused
on identifying additional operating improvements to further increase its
operating efficiencies and gross profit margins.
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
domestic and international licensing arrangements. Circulation revenues are
generated from subscription and newsstand sales and list rentals. The
following table sets forth the sources and amounts of the Predecessor's
revenues for the fiscal years ended November 30, 1994 and 1995 and the
Company's revenues for the twelve months ended December 31, 1996 and the six
months ended June 30, 1997 (dollars in millions):
<TABLE>
<CAPTION>
PREDECESSOR COMBINED (1) COMPANY
---------------------------------- ------------------ --------------
FISCAL YEARS ENDED NOVEMBER 30, TWELVE MONTHS SIX MONTHS
---------------------------------- ENDED ENDED
1994 1995 DECEMBER 31, 1996 JUNE 30, 1997
---------------- ---------------- ------------------ --------------
SOURCES OF REVENUE AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- ------------------ ---------------- ---------------- ------------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Advertising............. $ 117.4 57.9% $ 124.3 57.9% $ 135.5 59.6% $ 73.4 61.1%
Newsstand............... 40.1 19.7 39.9 18.6 42.0 18.5 21.3 17.7
Subscriptions........... 42.6 21.0 43.9 20.5 43.3 19.1 21.7 18.1
Other................... 2.7 1.4 6.4 3.0 6.4 2.8 3.7 3.1
-------- ------- -------- ------- --------- -------- ------- ------
Total................. $ 202.8 100.0% $ 214.5 100.0% $ 227.2 100.0% $ 120.1 100.0%
======== ======= ======== ======= ========= ======== ======= ======
</TABLE>
- --------
(1) Reflects the operations of the Predecessor for nine months ended September
30, 1996 and those of Petersen for the three months ended December 31,
1996 on a combined basis.
Advertising
Advertising sales accounted for approximately 59.6% and approximately 61.1%
of the Company's net revenues for the twelve months ended December 31, 1996
and the six months ended June 30, 1997, 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.
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 and the endemic nature of
its advertiser base. In addition, the Company has a diverse advertiser base,
with its top 20 advertisers accounting for only 29.7% of the Company's
advertising revenues during the twelve months ended December 31, 1996. The
Company anticipates that its revenues from manufacturers of tobacco related
products will decrease in the future as a result of the resolution of certain
litigation involving such manufacturers. Advertising revenues from such
manufacturers were $6.9 million for the twelve months ended December 31, 1996
and $3.9 million for the six months ended June 30, 1997.
45
<PAGE>
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 new cars, trucks and motorcycles, 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. Certain of
the Company's advertisers rely on the Company's publications as their primary
source of media advertising. 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 apparel, footwear and
accessories, cosmetics and food and beverages. 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 the twelve months ended
December 31, 1996, the Company derived approximately 17.0% and 21.5% of its
advertising revenues from automotive manufacturers of original equipment and
aftermarket parts, respectively.
Newsstand
Newsstand sales accounted for approximately 18.5% and approximately 17.7% of
the Company's net revenues for the twelve months ended December 31, 1996 and
the six months ended June 30, 1997, respectively. The Company generally
receives between 40% and 50% of the cover price of 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 19.1% and approximately 18.1%
of the Company's net revenues for the twelve months ended December 31, 1996
and the six months ended June 30, 1997, respectively. Subscriptions to the
Company's magazines are generally sold either directly by the Company or by an
independent subscription agent, such as Publishers Clearing House. The
percentage of subscriptions sold through an agent varies across the Company's
publications and generally ranges from 45% to 70% on the Company's core
publications. Such agents remit a percentage of the subscription price to the
Company. In certain instances, the subscription agent receives a fee from the
Company in addition to retaining the entire subscription price. In the
aggregate, the Company receives approximately 10% to 15% of the total price of
subscriptions sold through agents. In addition to utilizing subscription
agents, the Company has historically sold its subscriptions using a variety of
techniques including direct reply subscription cards, direct mail and
television advertisements.
Other Circulation
The Company has developed a database that includes detailed demographic
information on approximately 16 million current or former subscribers. The
Company uses this database to, among other things, develop specific subscriber
lists for third parties including the Company's advertisers. For the six
months ended June 30, 1997, subscriber list rental income accounted for
approximately 1.9% of net revenues. The Company believes it can continue to
increase list rental income by actively marketing its subscriber database to a
broad group of potential users.
Other Revenue Sources
Prior to the Acquisition, the Company was operated as a traditional consumer
magazine company deriving substantially all of its revenues from advertising
and circulation sales. Management estimates that many consumer magazine
publishers currently derive approximately 10% to 20% of their revenues from
ancillary revenue sources while the Company derived only about 3% to 4% of its
revenues from ancillary sources prior to the Acquisition. These additional
revenues are derived primarily from domestic and international licensing
arrangements and sponsorship of special events, such as trade shows and
outdoor festivals that relate to the
46
<PAGE>
editorial content of the Company's magazines. Since the Acquisition the
Company has pursued the ancillary revenue opportunities afforded to it as a
result of its internationally-recognized brands and has recently formed
Petersen Enterprises and added a new senior manager to pursue such
opportunities.
The Company believes that there are significant opportunities to increase
revenues by leveraging off the editorial content, readers and subscription
database and the internationally-recognized brands 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, Bicyclist and
Petersen's Photographic, and expects to establish a Teen web-site in the near
future. 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 through which
the Company would sell complementary products or services in addition to
magazines directly to its subscribers. Through such programs, the Company will
seek to increase its revenues from 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 for products and services that use the
Company's internationally-recognized brands.
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 and entering into strategic joint
ventures.
PUBLICATIONS
The Company is organized into seven publishing groups: Automotive
Performance, Motor Trend, Youth, Outdoor, Photo/Marine, Motorcycle/Bicycle and
Sport. Each publishing group is organized around one or more of the Company's
core monthly publications that targets a distinctive special-interest segment
or specific general-interest segment (e.g., Teen and Sport). Each publishing
group operates independently with respect to the generation of editorial
content and endemic advertising sales. In addition, each publishing group
develops "spin-off" publications that target related complimentary niches,
thereby leveraging the brand strength of its core publications.
47
<PAGE>
The Company's portfolio includes 25 monthly, 11 bi-monthly and 42 single
issue or annual publications. The following table sets forth selected
information relating to the Company's current portfolio of monthly and bi-
monthly publications:
<TABLE>
<CAPTION>
AVERAGE
CIRCULATION
FOR THE SIX
MONTHS ENDED FREQUENCY OF YEAR OF
GROUP MAGAZINE TITLE JUNE 30, 1997 (1) PUBLICATION (2) INTRODUCTION
------------------------ ------------------------ ----------------- --------------- ------------
(COPIES IN
THOUSANDS)
<C> <S> <C> <C> <C>
Automotive Performance: Hot Rod................. 780.4 Monthly 1948
Car Craft............... 383.6 Monthly 1953
Petersen's 4 Wheel &
Off-Road................ 365.8 Monthly 1977
Sport Truck............. 200.3 Monthly 1988
Chevy High Performance.. 179.4 Monthly 1987
Circle Track and Racing
Technology.............. 131.8 Monthly 1982
Rod & Custom............ 118.0 Monthly 1955
Mustang & Fords......... 100.4 Bi-Monthly 1980
Custom Classic Trucks
(3)..................... 93.9 Bi-Monthly 1994
Hot Rod Bikes (3)....... 71.4 Monthly 1994
5.0 Mustang (3)......... 58.5 Bi-Monthly 1994
Kit Car (3)............. 72.3 Monthly 1982
Super Street (4)........ -- Monthly 1996
4x4 Power (4)........... -- Monthly 1996
VW Custom & Classic
(4)..................... -- Bi-Monthly 1997
Watercraft Power (4).... -- Monthly 1997
Motor Trend: Motor Trend............. 1,047.7 Monthly 1949
Youth: Teen.................... 1,661.1 Monthly 1957
All About You!.......... 302.9 Monthly 1995
Outdoor: Guns & Ammo............. 588.3 Monthly 1958
Petersen's Hunting...... 359.5 Monthly 1973
Handguns................ 150.3 Monthly 1987
Petersen's Bowhunting... 161.5 Bi-Monthly 1989
SHOT Business (5)....... 21.0 Monthly 1993
Petersen's Shotguns
(4)..................... -- Bi-Monthly 1997
Rifle Shooter (4)....... -- Bi-Monthly 1997
Petersen's
Photo/Marine: Photographic............ 202.9 Monthly 1972
Skin Diver.............. 200.1 Monthly 1951
Family Photo (4)........ -- Bi-Monthly 1997
Motorcycle/Bicycle: Motorcyclist............ 241.0 Monthly 1912
Dirt Rider.............. 165.6 Monthly 1982
Mountain Biker.......... 124.9 Monthly 1994
Bicyclist............... 99.1 Bi-Monthly 1984
Sport Rider............. 92.2 Bi-Monthly 1993
Cruiser (4)............. -- Bi-Monthly 1997
Sport: Sport................... 789.0 Monthly 1946
</TABLE>
- -------
(1) Based on circulation information provided by the Company to the Audit
Bureau of Circulation except for SHOT Business.
(2) Magazines that are published 10 to 12 times per year are classified as
monthly publications. Magazines that are published 6 to 9 times per year
are classified as bi-monthly publications.
(3) Based on sworn average circulation for the six months ended December 31,
1996, except for Kit Car, which is for the six months ended December 31,
1995.
(4) No circulation information is available due to the publication's limited
operating history.
(5) Based on circulation information provided by BPA International for the
six-months ended June 30, 1996.
48
<PAGE>
Each publishing group produces single issue publications, annuals, hard
cover books and/or technical volumes. These publications generally provide
more in-depth coverage of topics addressed in the Company's monthly and bi-
monthly magazines. Examples of such single issue publications include Teen's
Celebs, Sharks & Divers, Muscle Car How-To's and BMX Racer. By utilizing
portions of the editorial content previously appearing in its monthly and bi-
monthly 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 bi-monthly
publications were first introduced as single issue publications. The Company
has scheduled the publication of 44 single issue publications for 1997.
The following table sets forth selected information relating to magazines
that have increased or are anticipated to increase publication frequency or
were started, acquired or licensed since the Acquisition:
<TABLE>
<CAPTION>
MONTH OF
FIRST ISSUE
PUBLISHED BY
MAGAZINE TITLE FREQUENCY COMPANY
- ------------------------------------------------------- --------- --------------
<S> <C> <C>
INCREASED PUBLICATION FREQUENCY:
Motorcycle Cruiser.................................... 6 January 1997
Family Photo.......................................... 6 February 1997
Rifle Shooter......................................... 6 August 1997
Petersen's Shotguns................................... 6 September 1997
START-UPS:
4x4 Power............................................. 12 October 1996
Super Street.......................................... 12 October 1996
VW Custom & Classic................................... 6 November 1996
Watercraft Power...................................... 10 February 1997
Concealed Carry Guns.................................. 1 April 1997
Teen's Great Looks.................................... 4 May 1997
MX Racer.............................................. 6 May 1997
.22 Rimfire........................................... 1 June 1997
Sharks & Divers....................................... 1 June 1997
Test Fire............................................. 1 July 1997
Whoops!............................................... 1 July 1997
Teen's Celebs......................................... 1 September 1997
How It Works.......................................... 1 September 1997
Muscle Car How-To's................................... 1 October 1997*
Girls of Sport Truck.................................. 1 October 1997*
Chevy Small Block Engines............................. 1 November 1997*
4-Wheel Tech & How-To................................. 1 November 1997*
Teen's Guys........................................... 1 November 1997*
Build Your First Race Car............................. 1 December 1997*
BMX Racer............................................. 1 December 1997*
ACQUISITIONS OR LICENSES:
Richard Petty's Stock Car Racing...................... 4 July 1997
Bob Griese's College Football Preview................. 1 July 1997
Dick Vitale's College Basketball Preview.............. 1 October 1997*
SHOT Business......................................... 12 October 1997*
</TABLE>
- --------
* Projected.
49
<PAGE>
The following sets forth a brief description of each of the Company's 15
core magazines by publishing group:
AUTOMOTIVE PERFORMANCE GROUP
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 automobile 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 and competes with Popular Hot Rodding. The
Company has licensed the use of the Hot Rod brand name in connection with a
television show for TNN. For the twelve months ended December 31, 1996, Hot
Rod generated approximately 8.5% of the Company's net revenues.
Petersen's 4 Wheel & Off-Road ("4 Wheel & Off-Road") is a leading magazine
for four-wheel drive 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 drive their four-wheel drive in competitive settings. 4 Wheel &
Off-Road provides its readers with a significant number of 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 truck and off-road events. 4 Wheel & Off-Road
principally competes with Four Wheeler and Off-Road. For the twelve months
ended December 31, 1996, 4 Wheel & Off-Road generated approximately 5.9% of
the Company's net revenues.
Car Craft is a comprehensive do-it-yourself street performance magazine.
Established in 1953, Car Craft is devoted to knowledgeable enthusiasts
interested in obtaining maximum 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. For the twelve months ended
December 31, 1996, Car Craft generated approximately 4.2% of the Company's net
revenues.
Sport Truck provides its readers with information about the street truck
marketplace. Sport Truck provides both step-by-step and technical articles
that detail the customizing process and provides complete coverage of the
products and tools involved in the customization. Sport Truck focuses 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 the twelve months ended December 31, 1996, Sport Truck generated
approximately 2.7% of the Company's net revenues.
Chevy High Performance is designed to be an authoritative source for
enthusiasts who are interested in buying, building, restoring and modifying
high-performance Chevrolet automobiles ("Chevys"). Chevy High Performance was
first introduced in 1987 and was converted into a monthly publication in 1995.
Chevy High Performance provides its readers with in depth, step-by-step
technical articles that show the reader how to modify, fabricate and build
high performance into their Chevys. The magazine answers readers' questions
and offers shopping tips about performance and restoration. Features also
include the latest news, profile readers' cars and highlight upcoming Chevy
events. Chevy High Performance's principal competition is from Super Chevy
magazine. For the twelve months ended December 31, 1996, Chevy High
Performance generated approximately 2.0% of the Company's net revenues.
Circle Track & Racing Technology ("Circle Track") is a leading technical
magazine for oval-track racers, fans and enthusiasts. Circle Track provides an
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 and Open Wheel. For the twelve months
ended December 31, 1996, Circle Track generated approximately 2.8% of the
Company's net revenues.
50
<PAGE>
MOTOR TREND GROUP
Motor Trend 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 one of the most
prestigious in the industry. During the last two years, Motor Trend has been
the fastest growing magazine in the automobile field in terms of paid
circulation.
For the twelve months ended December 31, 1996, Motor Trend generated
approximately 14.3% of the Company's net revenues. In June 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. During June
1997, the web-site averaged 466,762 hits per day. 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 television show for TNN. In addition, the Company published
six Motor Trend buyer's guides in 1996. Motor Trend's principal competitors
are Car and Driver, Road & Track and Automobile.
YOUTH GROUP
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. In December 1996, the Company
discontinued the publication of Sassy and provided its subscribers with a Teen
subscription in early 1997. Teen principally competes with Seventeen and YM.
For the twelve months ended December 31, 1996, Teen generated approximately
11.4% of the Company's net revenues.
Following the Acquisition, management made a number of changes to Teen
designed to increase its appeal to both readers and advertisers, including
refocusing its editorial content 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 improved Teen's cover layout and
artwork and upgraded the paper grade used for its production. Teen's
management has recently been moved to New York City to increase its visibility
among advertisers in the fashion and cosmetic industries.
OUTDOOR GROUP
Guns & Ammo is edited for the sportsman with an 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 articles on all facets of sport shooting.
Each issue of Guns & Ammo delivers an editorial mix that includes hunting,
shooting, reloading, antique and modern arms, ballistics and firearms
legislation. Natural resource protection and environmental conservation 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 and Guns. For the twelve months ended
December 31, 1996, Guns & Ammo generated approximately 5.7% of the Company's
net revenues.
Petersen's Hunting ("Hunting") is the only U.S. national monthly publication
devoted entirely to the sport of recreational hunting. Every issue contains
instructional and entertaining articles for the hunting enthusiast. Hunting
presents in-depth coverage of the various hunting disciplines: big and small
game, waterfowl, upland game, 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 roles
played in these areas by the hunter
51
<PAGE>
and the manufacturer, and basic where-to and how-to information for all types
of recreational hunting. Hunting has no direct competitors and indirectly
competes with American Hunter and North American Hunter, each of which is
associated with a hunting organization, and Sports Afield, which covers a wide
variety of outdoor activities. For the twelve months ended December 31, 1996,
Hunting generated approximately 3.4% of the Company's net revenues.
PHOTO/MARINE GROUP
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 categories: (i) diving news, 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
all aspects of skin diving and competes on a limited basis with Rodale's Scuba
Diving. For the twelve months ended December 31, 1996, Skin Diver generated
approximately 5.7% of the Company's net revenues.
Petersen's Photographic ("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 and blends equipment coverage with reports on photography
techniques, workshops, schools, photo travel and contests. Each issue includes
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 information on how best to take
advantage of the photographic opportunities afforded by travel. Photographic
was introduced in 1972 and principally competes with American Photo and
Popular Photography. For the twelve months ended December 31, 1996,
Photographic generated approximately 2.8% of the Company's net revenues.
MOTORCYCLE/BICYCLE GROUP
Motorcyclist is the only U.S. national monthly 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 enthusiast, offering authoritative road tests
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 the twelve
months ended December 31, 1996, Motorcyclist generated approximately 3.1% 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. The editorial content focuses on 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 the twelve
months ended December 31, 1996, Dirt Rider generated approximately 2.7% of the
Company's net revenues.
SPORT GROUP
Sport was acquired by the Company in 1988 and celebrated its 50th year in
publication in 1996. Sport is the largest monthly sports publication in the
market. Sport is designed to provide more in-depth and insightful coverage of
action both on and off the field than can be found through other sources of
sports news. Interviews, season previews, players and team evaluations and
behind-the-scenes reports for both professional and collegiate
52
<PAGE>
sports aim to give the reader insight not available from television,
newspapers or sports weeklies. Since the Acquisition, the Company has
implemented a number of changes to Sport designed to improve its operating
performance. The changes include redirecting its editorial focus and improving
its layout and graphic quality. Sport principally competes with Inside Sports.
The Company does not consider Sports Illustrated to be a competive publication
due primarily to the frequency of its publication. For the twelve months ended
December 31, 1996, Sport generated approximately 4.5% of the Company's net
revenues.
SALES AND MARKETING
The Company's sales and marketing activities are designed to implement the
Company's business and operating strategy of increasing advertising,
circulation and ancillary revenues. The Company employs a staff of 204 persons
who are engaged in sales and marketing.
Advertising
A key portion of the Company's advertising marketing strategy is designed to
increase advertising revenues from non-endemic advertisers. Non-endemic
advertising sales are currently handled by a centralized sales staff that is
managed from New York City, in order to be in close proximity to the major
non-endemic accounts. The Company also instituted a new commission plan for
salespersons in order to properly motivate the staff throughout the year and
upgraded the support staff in the areas of marketing, creative services and
research. The Company has also expanded the number of salespersons dedicated
to single, large advertising accounts, such as in the new automobile and
aftermarket fields. The Company's endemic advertising sales are made by each
publishing group.
Circulation
Prior to the Acquisition, circulation marketing was managed in Los Angeles
by a staff organized by magazine group. The department has subsequently been
moved to New York City, so it can more readily draw on experienced circulation
marketing talent, and has been reorganized along functional lines. The
Company's subscription marketing strategy is designed to increase the number
of readers who buy subscriptions directly from the Company. To implement this
strategy, the Company has instituted a number of new promotional programs such
as the creation and testing of over 70 direct mail packages, television
advertisement and new billing advertisement renewal efforts.
Ancillary Revenues
Since the Acquisition, the Company has pursued certain ancillary revenue
opportunities afforded it by its well-established brand names and intends to
continue to do so in the future. The Company has recently added a new senior
manager as well as three new staff members to focus on such opportunities.
PRODUCTION, DISTRIBUTION AND FULFILLMENT
The Company employs a staff of professionals to manage the production and
oversee the printing, distribution and fulfillment of its magazines, which are
outsourced to third parties. Through the use of state-of-the-art design and
production technology, 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 utilizes an integrated
publishing environment that is networked with satellite offices and World
Color. Approximately 60 employees of the Company are engaged in the production
and distribution of the Company's publications.
The Company sold all of its assets relating to its pre-press operations to
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 December 31,
2003.
53
<PAGE>
All of the Company's magazines are currently printed by World Color pursuant
to an agreement that expires on December 31, 2003. The Company believes that
its relationship with World Color is good. The Company believes, however, that
other printers of similar quality could be engaged on similar terms. The
Company believes that its high volume of printing with World Color enables it
to receive favorable printing rates. In February 1997, in exchange for an
agreement to purchase additional printing services, the Company's then
existing agreements with World Color were amended to extend the terms of the
agreement and to provide more favorable pricing terms with respect to color
separation, pre-press and related services.
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, 1998,
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 believes that using a
single distribution agent enables it to receive favorable pricing terms. See
"Risk Factors--Consolidation of Principal Vendors."
The Company's subscriptions are serviced by Neodata Services, Inc.
("Neodata"), which: (i) receives, verifies, balances and deposits payments
from subscribers; (ii) maintains master files on all subscribers by magazine
and issues bills and renewal notices to subscribers; (iii) issues address
labels for the magazines as directed by the Company; and (iv) furnishes
various reports to monitor all aspects of the subscription operations. The
Company's existing agreement with Neodata may be terminated by either party
after August 31, 1998.
RAW MATERIALS
The Company's principal raw material is paper. Paper costs represented
approximately 20.7%, 25.9%, 22.8% and 20.4% of the Company's production,
selling and other direct costs for the six months ended June 30, 1997, the ten
months ended September 30, 1996 and the fiscal years ended November 30, 1994
and 1995, respectively. The Company's outside printer currently supplies the
Company with substantially all of its paper requirements. The Company believes
that using this arrangement enables it to obtain favorable pricing as a result
of the printer's large volume of paper purchasing. The available sources of
paper have been, and the Company believes will continue to be, adequate to
supply the Company's needs. Certain commodity grades of paper have shown
considerable price volatility over the last decade, including the commodity
grade used by the Company. Paper prices rose sharply during the latter part of
1995, and, in response, the Predecessor purchased a large supply of paper in
anticipation of additional price increases and supply shortages continuing for
the remainder of 1995 and 1996. The increase in paper prices in late 1995 and
the Predecessor's large purchase at such increased prices materially adversely
affected the Predecessor's production, selling and other direct costs for the
year ended November 30, 1995 and the twelve months ended December 31, 1996.
Following the Acquisition, the Company secured sufficient paper to meet its
projected raw material needs through the end of 1997 at a fixed price. The
Company is currently in discussions relating to the terms on which the Company
will purchase paper in 1998. There can be no assurance that the Company will
be able to reach agreement on terms favorable to the Company or that future
fluctuations in paper prices 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."
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 as
those published by the Company. Such competitors include: K-III Communications
Company, which publishes Seventeen, Automobile and Truckin'; Hachette
Filipacchi Magazines, Inc. ("Hachette"), which publishes Road and Track, Car &
Driver, Popular Photography and Cycle World; Gruner + Jahr Publishing, which
publishes YM; Rodale Press Inc., which publishes Bicycling and Rodale's Scuba
Diving; and The Times Mirror Company, which publishes Outdoor Life and Field &
Stream. Certain of the Company's competitors are
54
<PAGE>
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. Of the Company's 15 core magazines, nine are
ranked first in their respective markets based on annual circulation in 1996,
including two magazines that were the only national magazines published in
their respective markets.
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 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 several trademarks, service marks and logos used in its publishing
business in the United States. 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, all of which are leased by the
Company, 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 188,309 11/30/09 Headquarters
New York................ 110 Fifth Avenue 47,304 3/31/09 Circ./Sales/Corp.
New York (1)............ 437 Madison Avenue 29,301 10/31/04 Sales Office
Chicago................. 815 North LaSalle Street 10,407 9/30/05 Sales Office
Detroit................. 333 Fort Street 6,695 12/31/03 Sales Office
Boulder................. 5350 Manhattan Circle 1,435 2/28/99 Circulation
Atlanta................. Five Concourse Parkway 3,524 4/30/98 Sales Office
Dallas (2).............. 800 West Airport Freeway 1,230 12/31/97 Sales Office
</TABLE>
- --------
(1) The Company is currently pursuing opportunities to sublease this space.
(2) This sales office was closed pursuant to management's business and
operating strategy.
The Company leases space used for its corporate headquarters and Chicago
regional sales office from entities controlled by Mr. Petersen. See "Certain
Relationships and Related Transactions."
EMPLOYEES
As of June 30, 1997, the Company employed approximately 600 full-time
employees, none of whom are members of a union. The Company believes that its
relations with its employees are good.
LEGAL PROCEEDINGS
The Company is a party to various litigation matters incidental to the
conduct of its business. Although management cannot predict the outcome of any
of such matters, it 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
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information (ages as of June 15,
1997) with respect to the persons who are members of the Board of Directors,
executive officers or key employees of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James D. Dunning, Jr. .. 50 Chairman of the Board and Chief Executive Officer
D. Claeys Bahrenburg.... 50 Vice Chairman of the Board and Chairman of the Executive Committee
Neal Vitale............. 43 President, Chief Operating Officer and Director
Richard S Willis........ 36 Executive Vice President, Chief Financial Officer and Director
Laurence H. Bloch....... 43 Vice Chairman of the Board
Avy H. Stein............ 42 Director
Daniel H. Blumenthal.... 33 Director
Stuart Karu............. 50 Director
John R. Willis.......... 47 Director
Michael Borchetta....... 32 Vice President, Circulation
James Guthrie........... 56 Executive Vice President, Marketing and Sales
Justin McCormack........ 37 President, Petersen Enterprises
John Dianna............. 54 President, Automotive Performance Group
Ken Elliott............. 57 Vice President, Executive Publisher, Outdoor Group
Lee Kelley.............. 55 President, Motor Trend Group
Richard P. Lague........ 53 Vice President, Executive Publisher, Motorcycle/Bicycle Group
Charlotte Anne Perkins.. 42 President, Sport Group
Paul J. Tzimoulis....... 60 Vice President, Executive Publisher, Photo/Marine Group
Amy P. Wilkins.......... 34 President, Youth Group
</TABLE>
DIRECTORS AND EXECUTIVE OFFICERS
James D. Dunning, Jr. has served as the Chairman of the Board and Chief
Executive Officer of the Company since the Acquisition. Since 1993, Mr.
Dunning has been Chairman and Chief Executive Officer of TransWestern
Publishing Company, L.P. ("TransWestern"), the largest independent publisher
of yellow pages in the United States and is currently Chairman and Chief
Executive Officer of The Dunning Group, Inc. Mr. Dunning was formerly Chairman
of SRDS Media Information, L.P. ("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, Mr. Dunning 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.
D. Claeys Bahrenburg currently serves as Vice Chairman and Chairman of the
Executive Committee of the Company and has served as a Director of the Company
and as Chief Executive Officer of Publishing since the Acquisition. From 1989
to 1995, Mr. Bahrenburg served as President of the Magazine Publishing
Division of The Hearst Corporation ("Hearst"), the largest publisher of
monthly magazines in the world. From 1986 to 1989, Mr. Bahrenburg served as
Executive Vice President and Group Publishing Director at Hearst, 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 currently serves as the President and Chief Operating Officer of
the Company and has served as a Director of the Company and President and
Chief Operating Officer of Publishing 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
56
<PAGE>
President, Entertainment, where he was responsible for the publications 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 currently serves as Executive Vice President, and Chief
Financial Officer of the Company and has served as a Director of the Company
since December 1996 and has served as Executive Vice President and Chief
Financial Officer of Publishing since the Acquisition. Prior to the
Acquisition, Mr. Willis served as the Vice President, Finance of the
Predecessor since October 1995. From 1993 to 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.
Laurence H. Bloch has served as the Vice Chairman of the Company since the
Acquisition. Mr. Bloch also serves as Vice Chairman and Chief Financial
Officer of TransWestern, which he joined in May 1993. From September 1990 to
March 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.
Avy H. Stein has served as a Director of the Company since the Acquisition.
Mr. Stein is a founder and Managing Director of Willis Stein. Prior to
founding Willis Stein, Mr. Stein served as a Managing Director of Continental
Illinois Venture Corporation ("CIVC"), a venture capital investment firm, from
1989 through 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, Tremont Corporation, Racing Champions Corporation,
UC Television Network Corp. and a number of privately-held companies.
Daniel H. Blumenthal has served as a Director of the Company since the
Acquisition. Mr. Blumenthal is a founder and Managing Director of Willis
Stein. Prior to founding Willis Stein, Mr. Blumenthal served as Vice President
of CIVC from 1993 through 1994. Prior to his tenure at CIVC, Mr. Blumenthal
was a corporate tax attorney with Latham & Watkins, a national law firm, from
1988 to 1993. Mr. Blumenthal also serves as a director of a number of
privately-held companies.
Stuart Karu has served as a Director of the Company since the Acquisition.
Mr. Karu currently is a private investor. From 1994 to 1995, Mr. Karu served
as Vice Chairman of SRDS and in 1995 he served as the interim Chief Executive
Officer of SRDS. From 1992 to 1994, Mr. Karu was the Chief Executive Officer
and major shareholder of Balsam Spring Water. From 1979 to 1989, Mr. Karu was
the Chief Executive Officer and principal shareholder of Henry S. Kaufman,
Inc., a national advertising and public relations firm. Mr. Karu serves as a
director of TransWestern and was formerly a director of SRDS and MLM.
John R. Willis has served as a Director of the Company since December 1996.
Mr. Willis is a founder and Managing Director of Willis Stein. Prior to
founding Willis Stein, Mr. Willis served as President of CIVC from 1989
through 1994. Prior to his tenure at CIVC, Mr. Willis founded and served as a
Managing Director of Continental Mezzanine Investment Group, following his
serving in various senior lending positions at Continental Bank which he
joined in 1974. Mr. Willis also serves as a director of TransWestern and a
number of other privately-held companies.
57
<PAGE>
Executive officers of the Company are duly elected by the Board of
Directors to serve until their respective successors are elected and
qualified. There are no family relationships between any of the Directors or
executive officers of the Company.
CERTAIN KEY EMPLOYEES
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 January 1996 and as Subscription
Director of Cahners from January 1990 to January 1996. Mr. Borchetta has also
held positions with Act III Communications and Cowles Media Company.
James Guthrie has served as Executive Vice President, Marketing and Sales
since April 1997. From November 1987 to March 1997, Mr. Guthrie served as
Executive Vice President-Marketing Development at Magazine Publishers of
America ("MPA"). Prior to joining MPA, Mr. Guthrie was President and Chief
Operating Officer of the advertising agency John Emmerling, Inc. for six
years.
Justin McCormack has served as President, Petersen Enterprises since March
1997. From February 1993 to March 1997, Mr. McCormack served as Executive Vice
President of Marvel Characters, Inc. where he oversaw advertising, licensing
and merchandising for the Marvel Entertainment Group. From June 1991 to
February 1993, Mr. McCormack served as President and owner of the Nicholas
James Group, a consultant and supplier to entertainment and publishing
companies for special promotions, merchandising and new product development.
John Dianna currently serves as President, Automotive Performance Group of
Petersen. Mr. Dianna served with the Predecessor for over 27 years, and served
as Vice-President, Executive Publisher, Automotive Performance Group since
August 1991. 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 Vice President, Executive Publisher, Outdoor
Group of Petersen. Mr. Elliott served with the Predecessor for over 23 years,
and served as Vice President, Executive Publisher, Outdoor Group since October
1995. Mr. Elliott served as Group Publisher from December 1990 to October
1995. Mr. Elliott is primarily responsible for the publication of Guns & Ammo,
Hunting, Bowhunting, Handguns and related publications.
Lee Kelley currently serves as President, Motor Trend Group of Petersen. Mr.
Kelley served with the Predecessor for over 21 years, and served as Vice-
President, Executive Publisher, Motor Trend Group since August 1991. Mr.
Kelley is primarily responsible for the publication of Motor Trend and related
publications.
Richard P. Lague currently serves as Vice President, Executive Publisher,
Motorcycle/Bicycle Group of Petersen. Mr. Lague served with the Predecessor
for approximately 21 years, and served as Vice President, Executive Publisher
Motorcycle/Bicycle Group since February 1992. From August 1991 to February
1992, Mr. Lague served as Vice President Motorcycle/Bicycle Group. Mr. Lague
is primarily responsible for the publication of Motorcyclist and motorcycle
related publications, Bicycle Guide and Mountain Biker.
Charlotte Anne Perkins has served as President, Sport Group since March 1997
and is responsible for Sport and its special-interest publications. Prior to
joining the Company, Ms. Perkins served as Publishing Director of Sport
Traveler magazine, which she founded in September 1992, and previously held
various positions at Hearst and Hachette.
Paul J. Tzimoulis currently serves as Vice President, Executive Publisher,
Photo/Marine Group of Petersen. Mr. Tzimoulis served with the Predecessor for
over 32 years, and has served as Vice President, Executive Publisher,
Photo/Marine Group since August 1984. Mr. Tzimoulis is responsible for the
publication of Skin Diver and Photographic and other related publications.
Amy P. Wilkins has served as President, Youth Group since May 1997 and is
responsible for Teen and its special-interest publications. From April 1995 to
May 1997, Ms. Wilkins served as Publisher of Health magazine (published by
Time Warner, Inc.) after serving in various positions with Health since 1989.
58
<PAGE>
BOARD COMPOSITION
The Board of Directors will consist of ten members following the Offering,
which will include the nine current members of the Board plus one additional
"independent director" (within the meaning of the regulations of the New York
Stock Exchange (the "NYSE")). It is expected that the new director will be
approved to the Board within three months following the closing of the
Offering. All of the current members of the Board were designated by Willis
Stein pursuant to the terms of the Securityholders Agreement. See "Principal
Stockholders--Securityholders Agreement." Directors of the Company are
currently elected annually by its stockholders to serve during the ensuing
year or until their respective successors are duly elected and qualified.
Prior to the completion of the Offering, the Board will be divided into
three classes, as nearly equal in number as possible, with each Director
serving a three-year term and one class being elected at each year's annual
meeting of stockholders. The Company's By-laws provide that Directors shall be
elected by a plurality vote, with no cumulative voting. Messrs. R. Willis, J.
Willis and Karu will be in the class of directors whose term expires at the
1998 annual meeting of the Company's stockholders. Messrs. Bahrenburg,
Blumenthal and Bloch will be in the class of directors whose term expires at
the 1999 annual meeting of the Company's stockholders. Messrs. Vitale, Stein
and Dunning will be in the class of directors whose term expires at the 2000
annual meeting of the Company's stockholders. At each annual meeting of the
Company's stockholders, successors to the class of directors whose term
expires at such meeting will be elected to serve for three-year terms, and
until their respective successors are elected and qualified. The Company
intends to hold its first annual meeting of stockholders following the
completion of the Offering in 1998.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors currently has two committees: (i) an Audit Committee
and (ii) a Compensation Committee. Immediately prior to the completion of the
Offering, the Board will establish an Executive Committee.
The Audit Committee is currently comprised of Messrs. J. Willis, Bloch and
Karu. The Audit Committee reviews and recommends to the Board, as it deems
necessary, the internal accounting and financial controls for the Company and
the accounting principles and auditing practices and procedures to be employed
in preparation and review of financial statements of the Company. The Audit
Committee makes recommendations to the Board concerning the engagement of
independent public accountants and the scope of the audit to be undertaken by
such accountants. Ernst & Young LLP presently serves as the independent
auditors of the Company. Following the Offering, the composition of the Audit
Committee will be revised to comply with the requirements of the NYSE.
The Compensation Committee is currently comprised of Messrs. Stein, Dunning
and Blumenthal. The Compensation Committee reviews and, as it deems
appropriate, recommends to the Board policies, practices and procedures
relating to the compensation of the officers and other managerial employees
and the establishment and administration of employee benefit plans. The
Compensation Committee exercises 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
advises and consults with the officers of the Company as may be requested
regarding managerial personnel policies. The Compensation Committee will have
such additional powers and be granted additional authority as may be conferred
upon it from time to time by the Board.
The Executive Committee will be comprised of Messrs. Bahrenburg, Dunning and
Stein. The Executive Committee will be authorized, subject to certain
limitations, to exercise all of the powers of the Board of Directors during
periods between Board meetings. The Board may also establish other committees
to assist in the discharge of its responsibilities.
COMPENSATION OF DIRECTORS
Each of the Directors of the Company (other than Messrs. Bahrenburg, Vitale
and R. Willis) is paid annual compensation of $35,000, plus reimbursement for
out-of-pocket expenses incurred in connection with attending Board meetings.
59
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following Summary Compensation Table includes individual compensation
information for the Chief Executive Officer and each of the four other most
highly compensated executive officers of the Company in the year ended December
31, 1996 (collectively, the "Named Executive Officers") for services rendered
in all capacities to the Company during the twelve months ended December 31,
1996. In certain circumstances, the amounts shown in the table combine the
compensation received for services that were provided to the Predecessor from
January 1, 1996 through September 30, 1996, and to the Company from October 1,
1996 through December 31, 1996. There were no stock options exercised during
the Company's last fiscal year nor were any options outstanding at the end of
the Company's last fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------ -------------
STOCK ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARDS($) (1) COMPENSATION(S)
------------------ ---- ---------- -------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
James D. Dunning, Jr.
(2).................... 1996 $ 25,000 $ -- $ 37,085 $ 8,750 (3)
Chairman and Chief Ex-
ecutive Officer
D. Claeys Bahrenburg
(2).................... 1996 133,333 -- 23,180 --
Vice Chairman and
Chairman of
Executive Committee
Neal Vitale (2)......... 1996 111,133 25,000 23,180 --
President and Chief Op-
erating Officer
Richard S Willis........ 1996 181,791 50,000 4,635 115,875 (4)
Executive Vice Presi-
dent and Chief
Financial Officer
Robert E. Petersen (5).. 1996 1,175,000 -- -- --
Chairman Emeritus
</TABLE>
- --------
(1) Represents the estimated fair market value at the time of issuance of the
Class A, B and C Common Units of Petersen. Each of the Class A, B and C
Common Units issued to such executive officers were subject to vesting over
a five-year period and the Class B and C Common Units were not eligible to
participate in any distributions by Petersen until the original purchasers
of the Preferred Units and the remaining Class A Common Units achieved a
specified rate of return on their total investment in Petersen. The Class A
Common Units so issued were valued at $4.50 per unit, the price paid
therefor by the investors in connection with the Acquisition. Because of
the terms applicable to the Class B and C Common units, the fair market
value of such Class B and C Common Units was determined by the Board of
Directors to be zero at the time of issuance. At the end of the Company's
last fiscal year, the Named Executive Officers held the following Common
Units:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
COMMON UNITS COMMON UNITS COMMON UNITS
------------ ------------ ------------
<S> <C> <C> <C>
James D. Dunning, Jr................. 8,241 1,000 1,000
D. Claeys Bahrenburg................. 5,151 625 625
Neal Vitale.......................... 5,151 625 625
Richard S Willis..................... 1,030 125 125
</TABLE>
The value of such Common Units at the end of the Company's last fiscal year
was determined to be the same as at the time of the Acquisition in light of
their close proximity. On July 31, 1997, the Named Executive Officers
exchanged their Class B Common Units and Class C Common Units for Class D
Common Units, which resulted in the Company recording a non-recurring non-
cash charge of $12.2 million. As a result of the Reorganization, all of the
restricted Common Units held by the Named Executive Officers will be
converted into shares of Class A Common Stock. See "Certain Relationships
and Related Transactions" and "Principal Stockholders."
(2) Executive's employment with the Company commenced on September 30, 1996.
See "--Employment Agreements."
(3) Represents amounts received as payment of director's fees.
(4) Represents payment made to Mr. Willis pursuant to the terms of his
Employment Agreement to reimburse him for losses incurred in connection
with the sale of his principal residence.
(5) Mr. Petersen served as Chief Executive Officer of the Predecessor prior to
the Acquisition.
60
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee was established in December 1996 and is
comprised of Messrs. Blumenthal, Dunning and Stein. Messrs. Blumenthal and
Stein are each Managing Directors of Willis Stein, which is a principal
stockholder of Company. See "Principal Stockholders."
EMPLOYMENT AGREEMENTS
In connection with the Acquisition, Messrs. Bahrenburg, Vitale and R. Willis
each entered into an Executive Securities Purchase and Employment Agreement
(the "Employment Agreements") with the Company. The Employment Agreements
provide for the continued employment of Mr. Bahrenburg as the Chief Executive
Officer of Publishing, Mr. Vitale as the President of Publishing and Mr.
Willis as the Chief Financial Officer of Publishing until December 31, 2001,
unless terminated earlier as provided in the respective Employment Agreement.
The Employment Agreements of Messrs. Bahrenburg, Vitale and Willis provide
for: (i) an annual base salary of $500,000, $325,000, and $200,000,
respectively (subject to annual increases based on the consumer price index);
(ii) annual bonuses of up to half base salary of such person based on the
achievement of certain EBITDA targets; and (iii) a deferred bonus payable upon
the first to occur of: (a) a sale of 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 or without cause. If such executive is
terminated by the Company with "cause" or resigns other than for "good reason"
(each as defined in such agreements), 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. Each of Messrs. Bahrenburg, Vitale and Willis is
entitled to his base salary and fringe benefits and any accrued bonus for a
period of twelve months following his termination in the event such executive
is terminated without cause or resigns with good reason. Pursuant to the
Employment Agreements, Messrs. Bahrenburg, Vitale and Willis each has agreed
not to compete with the Company during the employment period and for one year
thereafter. The Employment Agreements also provide each executive with
customary fringe benefits and vacation periods. "Cause" is 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; (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 specified level of
EBITDA in any fiscal year. "Good reason" is 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 diminution 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 of such Employment Agreements, 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 or the Los Angeles area in the
case of Mr. Vitale and Mr. Willis. The Employment Agreements also provided for
the purchase by Messrs. Bahrenburg, Vitale and Willis of Preferred Units,
Common Units and Common Stock for a combination of cash and notes. The Company
has agreed to nominate Messrs. Bahrenburg and Vitale to the Board of Directors
in accordance with their employment agreements. See "Certain Relationships and
Related Transactions."
Mr. Dunning receives an annual salary of $200,000 per annum for serving as
Chairman of Petersen and Mr. Bloch receives an annual salary of $100,000 per
annum for serving as Vice Chairman of Petersen. 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.
61
<PAGE>
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 responsibility, authority and status.
1997 LONG-TERM EQUITY INCENTIVE PLAN
In July 1997, the Board of Directors, acting as managing member of Petersen,
adopted the Petersen Holdings, L.L.C. 1997 Long-Term Equity Incentive Plan
(the "1997 Incentive Plan"). The 1997 Incentive Plan authorizes the grant of
options to those officers, key employees of, and other key individuals
performing services for, Petersen and its subsidiaries as selected by the
Board of Directors or a committee of the Board (if the Board has delegated the
administration of the 1997 Incentive Plan to such committee). The 1997
Incentive Plan authorizes the granting of options to purchase up to 10,000
Class A Common Units, subject to adjustment upon the occurrence of certain
events. The price per Class A Common Unit payable upon the exercise of each
option granted under the 1997 Incentive Plan as well as the terms under which
the options may be exercised will be determined by the Board or Committee, as
the case may be, in its sole discretion at the time of grant.
To date, the Board, acting as managing member of Petersen has granted
options to purchase an aggregate of approximately 8,867 Class A Common Units
under the 1997 Incentive Plan. Such options vest and become exercisable on the
fifth anniversary of the grant date, provided that the optionee has been
continuously employed by Petersen through such date. In the event of an
initial public offering (an "IPO"), the Accelerated Portion (as defined) of
the option becomes fully vested and exercisable and the remaining portion
vests and becomes exercisable ratably, on a daily basis, over the period from
the date of the completion of the IPO through December 31, 1999, until the
employee ceases to be employed by Petersen. The "Accelerated Portion" means a
fraction, the numerator of which is the number of days from and after January
1, 1997 through the IPO completion date, and the denominator of which is
1,096. In addition, such options become immediately vested and exercisable
upon the sale of Petersen. In the event an optionee's employment with Petersen
is terminated for any reason, Petersen has the right to repurchase the Class A
Common Units issued or issuable upon the exercise of such option at a price
equal to fair market value. All of the outstanding options have an exercise
price equal per Class A Common Unit to the fair market value of a Class A
Common Unit on the date of grant.
Upon consummation of the Reorganization: (i) each option outstanding under
the 1997 Incentive Plan will cease to be exercisable for Class A Common Units
and will become exercisable instead for the number of shares of Class A Common
Stock into which the number of Class A Common Units previously subject to such
option is exchanged pursuant to the Recapitalization Agreement; (ii) the
exercise price of each such option is proportionately adjusted; (iii) the
Company will assume Petersen's obligations and succeed to the rights of
Petersen under the 1997 Incentive Plan; and (iv) any remaining units eligible
for issuance under the 1997 Incentive Plan will be cancelled.
Prior to the consummation of the Offering, the Board and stockholders of the
Company are expected to approve and adopt the New Incentive Plan. The New
Incentive Plan will be administered by the Compensation Committee of the Board
of Directors (the "Committee") composed of at least two non-employee directors
(as that term is defined in Rule 16b-3 under the Exchange Act), who will be
appointed by the Board. In addition to holders of options previously issued
under the 1997 Incentive Plan, certain employees, advisors and consultants of
the Company will be eligible to participate in the New Incentive Plan (a
"Participant"). The Committee will be authorized under the New Incentive Plan
to select the Participants and determine the terms and conditions of
62
<PAGE>
the awards under the New Incentive Plan. The New Incentive Plan will provide
for the issuance of the following types of incentive awards: stock options,
stock appreciation rights, restricted stock, performance grants and other
types of awards that the Compensation Committee deems consistent with the
purposes of the New Incentive Plan. An aggregate of 2,041,269 shares of Class
A Common Stock of the Company have been reserved for issuance under the New
Incentive Plan (including the 320,685 shares of Class A Common reserved for
issuance under the options previously issued under the 1997 Incentive Plan),
subject to certain adjustments reflecting changes in the Company's
capitalization. The New Incentive Plan will provide that Participants will be
limited to receiving awards relating to no more than 100,000 shares of Class A
Common Stock per year.
Options granted under the New Incentive Plan may be either incentive stock
options ("ISOs") or such other forms of non-qualified stock options ("NQOs")
as the Committee may determine. ISOs are intended to qualify as "incentive
stock options" within the meaning of Section 422 of the Code. The exercise
price of (i) an ISO granted to an individual who owns shares possessing more
than 10% of the total combined voting power of all classes of stock of the
Company (a "10% Owner") will be at least 110% of the fair market value of a
share of common stock on the date of grant and (ii) an ISO granted to an
individual other than a 10% Owner will be at least 100% of the fair market
value of a share of Class A Common Stock on the date of grant.
Options granted under the New Incentive Plan may be subject to time vesting
and certain other restrictions at the sole discretion of the Committee.
Subject to certain exceptions, the right to exercise an option generally will
terminate at the earlier of (i) the first date on which the initial grantee of
such option is not employed by the Company for any reason other than
termination without cause, death or permanent disability or (ii) the
expiration date of the option. If the holder of an option dies or suffers a
permanent disability while still employed by the Company, the right to
exercise all unexpired installments of such option shall be accelerated and
shall vest as of the latest of the date of such death, the date of such
permanent disability and the date of the discovery of such permanent
disability, and such option shall be exercisable, subject to certain
exceptions, for 180 days after such date. If the holder of an option is
terminated without cause, to the extent the option has vested, such option
will be exercisable for 30 days after such date.
All outstanding awards under the New Incentive Plan will terminate
immediately prior to consummation of a liquidation or dissolution of the
Company, unless otherwise provided by the Board. In the event of the sale of
all or substantially all of the assets of the Company or the merger of the
Company with another corporation, all restrictions on any outstanding awards
will terminate and Participants will be entitled to the full benefit of their
awards immediately prior to the closing date of such sale or merger, unless
otherwise provided by the Board.
The Board generally will have the power and authority to amend the New
Incentive Plan at any time without approval of the Company's stockholders,
subject to applicable federal securities and tax laws limitations (including
regulations of the NYSE).
EMPLOYEE STOCK DISCOUNT PURCHASE PLAN
The Petersen Companies, Inc. Employee Stock Discount Purchase Plan (the
"Employee Stock Purchase Plan") will be approved by the Board and the existing
stockholders prior to the consummation of the Offering. The Employee Stock
Purchase Plan will be established to give employees desiring to do so a
convenient means of purchasing shares of Class A Common Stock through payroll
deductions. The Employee Stock Purchase Plan will provide an incentive to
participate by permitting certain purchases at a discounted price equal to 85%
of fair market value of the Class A Common Stock on the date of purchase. The
Company believes that ownership of stock by employees will foster greater
employee interest in the success, growth and development of the Company. An
aggregate of 90,557 shares of Class A Common Stock have been reserved for sale
under the Employee Stock Purchase Plan.
63
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 1, 1994, the Company entered into 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%.
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 that the terms of the foregoing
leases are not as favorable as the Company could obtain from an independent
third party.
In connection with the Acquisition, Messrs. Dunning, Bahrenburg, Bloch and
Karu, Willis Stein, Petersen Properties Company, BankAmerica Investment
Corporation ("BAIC") and others entered into a securities purchase agreement
(the "Securities Purchase Agreement") with Petersen and the Company pursuant
to which they purchased Preferred Units and Common Units of Petersen and Class
A Common Stock of the Company for cash. The following table sets forth the
securities purchased by such persons pursuant to the Securities Purchase
Agreement (in each case as adjusted to give effect to the Reorganization and
based upon an assumed initial public offering price of $16 per share, the
midpoint of the range set forth on the cover page of this Prospectus) and the
aggregate consideration paid for such securities:
<TABLE>
<CAPTION>
AGGREGATE
DIRECTOR, EXECUTIVE OFFICER OR 10% OWNER COMMON STOCK CONSIDERATION
---------------------------------------- ------------ -------------
<S> <C> <C>
James D. Dunning, Jr. (1)(2)................... 330,060 $ 2,200,000
D. Claeys Bahrenburg........................... 75,014 500,000
Laurence H. Bloch (1).......................... 150,027 1,000,000
Stuart Karu (1)................................ 150,027 1,000,000
Willis Stein & Partners, L.P. ................. 7,501,360 50,000,000
Petersen Properties Company.................... 3,750,680 25,000,000
BankAmerica Investment Corporation (3)......... 3,000,544 20,000,000
Chase Equity Associates, L.P. ................. 2,250,408 15,000,000
Allstate Insurance Company..................... 2,250,408 15,000,000
</TABLE>
- --------
(1) Pursuant to the Securities Purchase Agreement, the Company also issued to
Messrs. Dunning, Bloch and Karu the following shares of Class A Common
Stock (giving effect to the Exchange and Reorganization): Mr. Dunning--
776,860 Class A Common Stock; Mr. Bloch--462,940 Class A Common Stock; and
Mr. Karu--287,102 Class A Common Stock.
(2) Includes 15,002 Class A Common Stock held in trusts for which Mr. Dunning
serves as trustee.
(3) Includes 300,054 shares of Class B Common Stock held by CIVC Partners II,
a partnership of which all of the partners are employees of BAIC or an
affiliate thereof.
Pursuant to his Employment Agreement, Mr. Bahrenburg purchased an aggregate
of 150,027 shares of Class A Common Stock for an aggregate purchase price of
$1.0 million (giving effect to the Exchange and the Reorganization). Mr.
Bahrenburg paid for these securities with promissory notes in the aggregate
amount of $1,000,000. Of this amount, $200,000 was paid 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 bear interest
at a rate equal to the Company's weighted average cost of borrowing (8.5% at
August 31, 1997) as determined by the Board. Mr. Bahrenburg's obligations
under such notes are secured by a pledge of the securities purchased
therewith. In addition, pursuant to the Employment Agreement, the Company
issued to Mr. Bahrenburg an aggregate of 358,877 shares of Class A Common
Stock (giving effect to the Exchange and the Reorganization) for no additional
consideration.
Pursuant to his Employment Agreement, Mr. Vitale purchased an aggregate of
112,520 shares of Class A Common Stock for an aggregate purchase price of
$750,000 (giving effect to the Exchange and the Reorganization). Mr. Vitale
paid 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
64
<PAGE>
(8.5% at August 31, 1997) 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 are secured by a pledge
of the securities purchased therewith. In addition, pursuant to the Employment
Agreement, the Company issued to Mr. Vitale an aggregate of 441,314 shares of
Class A Common Stock (giving effect to the Exchange and the Reorganization)
for no additional consideration.
Pursuant to his Employment Agreement, Mr. Willis purchased an aggregate of
45,008 shares of Class A Common Stock for an aggregate purchase price of
$300,000 (giving effect to the Exchange and the Reorganization). Mr. Willis
paid for these securities with $100,000 in cash and promissory notes in the
aggregate amount of $200,000. Such promissory notes bear interest at a rate
equal to the Company's weighted average cost of borrowing (8.5% at August 31,
1997) 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 are secured by a pledge of the securities
purchased therewith. In addition, pursuant to the Employment Agreement, the
Company issued to Mr. Willis an aggregate of 132,229 shares of Class A Common
Stock (giving effect to the Exchange and the Reorganization) for no additional
consideration.
A portion of the securities issued to Messrs. Bahrenburg, Vitale and Willis
pursuant to the Employment Agreements will be subject to repurchase by the
Company in the event such executive leaves the 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.
On July 31, 1997, Petersen and all of the holders of Class A, B and C Common
Units entered into an agreement whereby all of the outstanding Class B and C
Common Units were converted into five series of Class D Common Units in the
Exchange. The Class D Common Units for Messrs. Bahrenburg, Vitale and Willis
are subject to vesting and scheduled to vest on the fifth anniversary of their
issue date provided that the holder thereof has been continuously employed by
the Company through such date. Vesting accelerates upon death or disability of
such holder or the sale of Petersen. In the event of an IPO, vesting of such
Class D Common Units will accelerate as follows so long as the holder is
continuously employed through the date of such IPO: (i) if the holder
continues to be employed on the first, second or third anniversary of the IPO
date such that 33 1/3% will vest upon each of the first, second and third
anniversaries of the IPO date and (ii) if the holder ceases to be employed on
a date other than such an anniversary, such that a pro rata portion will vest
since the later of the IPO date and the last anniversary of the IPO date. As a
result of the Reorganization, these Class D Common Units will be exchanged for
shares of Class A Common Stock, which will continue to be subject to the same
vesting schedule set forth above for Messrs. Bahrenburg, Vitale and Willis.
The following table sets forth the shares of Class A Common Stock to be issued
to each executive officer of the Company for their Class D Common Units:
<TABLE>
<CAPTION>
NUMBER OF
CLASS A
NAME COMMON STOCK
---- ------------
<S> <C>
James D. Dunning, Jr............................................ 477,449
D. Claeys Bahrenburg ........................................... 171,744
Laurence H. Bloch............................................... 238,381
Stuart Karu..................................................... 137,396
Neal Vitale..................................................... 254,182
Richard S Willis................................................ 94,803
</TABLE>
Willis Stein, a significant stockholder of the Company, owns approximately
18.0% of the equity securities of Racing Champions Corporation ("Racing
Champions") and has two representatives on Racing Champions' board of
directors. The Company has entered into licensing and marketing arrangements
with Racing Champions in connection with the Racing Champions Mint and Racing
Champions Hot Rod Collection. The Company has received payments of
approximately $45,000 in 1997 from Racing Champions in connection with these
licenses.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the equity securities of the Company as of September 15, 1997 and
immediately following the Offering (in each case giving effect to the
Reorganization at an assumed initial public offering price of $16 per share,
the midpoint of the range set forth of the cover page of this Prospectus) by:
(i) each of the Directors and the Named Executive Officers; (ii) all Directors
and executive officers as a group; and (iii) each owner of more than 5% of any
class of equity securities of the Company ("5% Owners"). The actual number of
shares to be issued to each existing stockholder of the Company in the
Reorganization is subject to change based upon changes in the assumed initial
public offering price and the effective date of the Reorganization. Unless
otherwise noted, the address for each executive officer of the Company is c/o
the Company, 6420 Wilshire Boulevard, Los Angeles, California 90048.
<TABLE>
<CAPTION>
CLASS A COMMON STOCK (1) CLASS B COMMON STOCK (1)
----------------------------- ----------------------------
PERCENT OF CLASS PERCENT OF CLASS
------------------ ------------------
FOLLOWING FOLLOWING
NO. OF PRIOR TO THE NO. OF PRIOR TO THE
SHARES OFFERING OFFERING SHARES OFFERING OFFERING
---------- -------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
DIRECTORS AND NAMED EX-
ECUTIVE OFFICERS:
James D. Dunning, Jr.
(2).................... 1,106,920 5.5% 4.2% -- -- % -- %
D. Claeys Bahrenburg ... 583,918 2.9 2.2 -- -- --
Neal Vitale ............ 553,834 2.7 2.1 -- -- --
Richard S Willis ....... 177,237 * * -- -- --
Laurence H. Bloch (3)... 612,967 3.0 2.3 -- -- --
Avy H. Stein (4)........ 7,501,360 37.2 28.4 -- -- --
Daniel H. Blumenthal
(4).................... 7,501,360 37.2 28.4 -- -- --
Stuart Karu............. 437,129 2.2 1.7 -- -- --
John R. Willis (4)...... 7,501,360 37.2 28.4 -- -- --
All Directors and
executive officers as a
group
(9 persons)............ 10,973,365 54.4 41.6 -- -- --
5% OWNERS:
Willis Stein & Partners,
L.P. (5)............... 7,501,360 37.2 28.4 -- -- --
Robert E. Petersen (6).. 3,750,680 18.6 14.2 -- -- --
BankAmerica Investment
Corporation (1)(7)..... 3,000,544 13.0 10.2 3,000,544 39.1 39.1
Chase Equity Associates,
L.P. (1)(8)............ 2,250,408 10.7 8.2 931,408 12.1 12.1
Allstate Insurance Com-
pany (9)............... 2,250,408 11.2 8.5 -- -- --
First Union Investors,
Inc. (1)(10)........... 1,875,340 8.5 6.6 1,875,340 24.4 24.4
CIBC WG Argosy Merchant
Fund 2, L.L.C.
(1)(11)................ 1,875,340 8.5 6.6 1,875,340 24.4 24.4
</TABLE>
- -------
* Represents less than one percent.
(1) The Company 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 non-voting and is
convertible to Class A Common Stock at any time at the option of the
holder thereof. Beneficial ownership of the Common Stock has been
determined in accordance with the rules of the Commission. Pursuant to
such rules, a person is deemed to be the beneficial owner of any security
in which that person has the right to acquire beneficial ownership of
such security within 60 days. As a result, holders of Class B Common
Stock are deemed to be the beneficial owners of the Class A Common Stock
issuable upon the conversion thereof. Such shares of Class A Common
Stock, however, are not deemed outstanding for purposes of computing the
percentage ownership of any other person. See "Description of Capital
Stock."
(2) Includes 15,002 shares of Class A Common Stock held in trusts for which
Mr. Dunning serves as trustee.
(3) Such shares of Class A Common Stock are held in a trust for which Mr.
Bloch serves as trustee.
(4) Includes 7,501,360 shares of the Class A Common Stock of the Company
beneficially owned by Willis Stein. Such persons disclaim beneficial
ownership of all such shares beneficially owned by Willis Stein. Such
person's address is c/o Willis Stein, 227 West Monroe Street, Suite 4300,
Chicago, Illinois 60606.
(5) The address of Willis Stein is 227 West Monroe Street, Suite 4300,
Chicago, Illinois 60606.
(6) Mr. Petersen's interests in the Company are owned through Petersen
Properties Company. Such person's address is 6420 Wilshire Boulevard, Los
Angeles, California 90048.
(7) Such person's address is c/o BankAmerica Investment Corporation, 231 S.
LaSalle Street, Chicago, Illinois 60697. Also includes shares of Class B
Common Stock held by CIVC Partners II, a partnership all of the partners
of which are employees of BAIC or an affiliate thereof.
(8) Such person's address is 380 Madison Avenue, 12th Floor, New York, New
York 10017-2951.
(9) Such person's address is 3075 Sanders Road, Suite G5D, Northbrook.
Illinois 60062-7127.
(10) 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.
(11) Such person's address is 425 Lexington Avenue, 3rd Floor, New York, New
York 10017.
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<PAGE>
SECURITYHOLDERS AGREEMENT
At the time of the Acquisition, the Company, Petersen, Willis Stein and the
other investors named therein (collectively, the "Investors") entered into a
securityholders agreement (the "Securityholders Agreement"), providing for:
(i) the composition of the Board of Directors; (ii) restrictions on the
transfer of equity securities of Petersen, the Company 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 the Company have agreed
to vote their shares in favor of those individuals designated by Willis Stein
to serve on the Board of Directors. 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 such time as the Company consummates an initial
public offering of its equity securities resulting in the receipt by the
Company of at least $75.0 million of gross proceeds and which indicates a
market capitalization of the Company without giving effect to any issuances of
equity securities following its initial capitalization of at least $330.0
million (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 the Company or the other Investors and "tag-along" rights in favor of the
other Investors. All of the Investors have agreed that Willis Stein (through
the Company) may control the circumstances under which a sale of Petersen 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 the Company's
equity securities may take place. The Securityholders Agreement provides for
up to four long-form and unlimited short-form demand registrations in favor of
Willis Stein, two short-form demand registrations in favor of a majority of
the non-Willis Stein Investors at such time as the Company is eligible to use
a short-form registration statement and unlimited "piggyback" registrations in
favor of the Investors.
Prior to the Offering, certain of the parties to the Securityholders
Agreement are expected to agree to extend the voting provisions of the
Securityholders Agreement for a period of at least 21 months following the
Offering. Such voting provisions would have otherwise terminated by their
terms as a result of the Offering being a Qualified IPO. As a result of such
amendment, Willis Stein will have the power to vote shares of Class A Common
Stock representing more than 50% of the Company's voting securities.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL MATTERS
At the time of the Offering, the total amount of authorized capital stock of
the Company will consist of 75,000,000 shares of Class A Common Stock, par
value $.01 per share, 25,000,000 shares of Class B Common Stock, par value
$.01 per share and 5,000,000 shares of preferred stock, par value $.01 per
share (the "Preferred Stock"). Upon completion of the Offering, 26,408,362
shares of Class A Common Stock, 7,682,632 shares of Class B Common Stock and
no shares of Preferred Stock will be issued and outstanding (assuming an
initial public offering price of $16 per share, the midpoint of the range set
forth on the cover page of this Prospectus). As of August 31, 1997, there were
2,162.7 shares of Class A Common Stock and 1,200 shares of Class B Common
Stock outstanding, which were held by 27 and 5 holders of record,
respectively. The discussion herein describes the Company's capital stock, the
Restated Certificate of Incorporation and By-laws as anticipated to be in
effect upon consummation of the Offering. The following summary of certain
provisions of the Company's capital stock describes all material provisions
of, but does not purport to be complete and is subject to, and qualified in
its entirety by, the Restated Certificate of Incorporation and the By-laws of
the Company that are included as exhibits to the Registration Statement of
which this Prospectus forms a part and by the provisions of applicable law.
The Restated Certificate of Incorporation and By-laws will contain certain
provisions that are intended to enhance the likelihood of continuity and
stability in the composition of the Board of Directors and which may have the
effect of delaying, deferring or preventing a future takeover or change in
control of the Company unless such takeover or change in control is approved
by the Board of Directors.
CLASS A COMMON STOCK
The issued and outstanding shares of Class A Common Stock are, and the
shares of Class A Common Stock being offered by the Company will be upon
payment therefor, validly issued, fully paid and nonassessable. Subject to the
prior rights of the holders of any Preferred Stock, the holders of outstanding
shares of Class A Common Stock are entitled to receive dividends out of assets
legally available therefor at such time and in such amounts as the Board of
Directors may from time to time determine. See "Dividend Policy." The shares
of Common Stock are not convertible and the holders thereof have no preemptive
or subscription rights to purchase any securities of the Company. Upon
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to receive pro rata the assets of the Company which are
legally available for distribution, after payment of all debts and other
liabilities and subject to the prior rights of any holders of Preferred Stock
then outstanding. Each outstanding share of Class A Common Stock is entitled
to one vote on all matters submitted to a vote of stockholders. There is no
cumulative voting. Except as otherwise required by law or the Restated
Certificate of Incorporation, the Class A Common Stock will vote on all
matters submitted to a vote of the stockholders, including the election of
directors.
CLASS B COMMON STOCK
Except with respect to voting and conversion rights, the Class B Common
Stock is identical to the Class A Common Stock. Under the Restated Certificate
of Incorporation, holders of Class B Common Stock have no right to vote on
matters submitted to a vote of stockholders, except (i) as otherwise required
by law and (ii) that the holders of Class B Common Stock shall have the right
to vote as a class on any amendment, repeal or modification to the Certificate
of Incorporation that adversely affects the powers, preferences or special
rights of the holders of the Class B Common Stock. The shares of Class B
Common Stock are convertible into an equal number of shares of Class A Common
Stock at any time at the option of the holder thereof.
PREFERRED STOCK
The Board of Directors may, without further action by the Company's
stockholders, from time to time, direct the issuance of shares of Preferred
Stock in series and may, at the time of issuance, determine the rights,
preferences and limitations of each series. Satisfaction of any dividend
preferences of outstanding shares of Preferred Stock would reduce the amount
of funds available for the payment of dividends on shares of Common
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<PAGE>
Stock. Holders of shares of Preferred Stock may be entitled to receive a
preference payment in the event of any liquidation, dissolution or winding-up
of the Company before any payment is made to the holders of shares of Common
Stock. Under certain circumstances, the issuance of shares of Preferred Stock
may render more difficult or tend to discourage a merger, tender offer or
proxy contest, the assumption of control by a holder of a large block of the
Company's securities or the removal of incumbent management. Upon the
affirmative vote of a majority of the total number of directors then in
office, the Board of Directors, without stockholder approval, may issue shares
of Preferred Stock with voting and conversion rights which could adversely
affect the holders of shares of Common Stock. Upon consummation of the
Offering, there will be no shares of Preferred Stock outstanding, and the
Company has no present intention to issue any shares of Preferred Stock.
CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
The Restated Certificate of Incorporation provides for the Board to be
divided into three classes, as nearly equal in number as possible, serving
staggered terms. Approximately one-third of the Board will be elected each
year. See "Management." Under the Delaware General Corporation Law, directors
serving on a classified board can only be removed for cause. The provision for
a classified board could prevent a party who acquires control of a majority of
the outstanding voting stock from obtaining control of the Board until the
second annual stockholders meeting following the date the acquiror obtains the
controlling stock interest. The classified board provision could have the
effect of discouraging a potential acquiror from making a tender offer or
otherwise attempting to obtain control of the Company and could increase the
likelihood that incumbent directors will retain their positions.
The Restated Certificate of Incorporation provides that stockholder action
can be taken only at an annual or special meeting of stockholders and cannot
be taken by written consent in lieu of a meeting. The Restated Certificate of
Incorporation and the By-laws provides that, except as otherwise required by
law, special meetings of the stockholders can only be called pursuant to a
resolution adopted by a majority of the Board of Directors or by the chief
executive officer of the Company. Stockholders will not be permitted to call a
special meeting or to require the Board to call a special meeting.
The By-laws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of stockholders of the Company,
including proposed nominations of persons for election to the Board.
Stockholders at an annual meeting may only consider proposals or nominations
specified in the notice of meeting or brought before the meeting by or at the
direction of the Board or by a stockholder who was a stockholder of record on
the record date for the meeting, who is entitled to vote at the meeting and
who has given to the Company's Secretary timely written notice, in proper
form, of the stockholder's intention to bring that business before the
meeting. Although the By-laws do not give the Board the power to approve or
disapprove stockholder nominations of candidates or proposals regarding other
business to be conducted at a special or annual meeting, the By-laws may have
the effect of precluding the conduct of certain business at a meeting if the
proper procedures are not followed or may discourage or deter a potential
acquiror from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of the Company.
The Restated Certificate of Incorporation and By-laws provide that the
affirmative vote of holders of at least 66 2/3% of the total votes eligible to
be cast in the election of directors is required to amend, alter, change or
repeal certain of their Provisions. This requirement of a super-majority vote
to approve amendments to the Restated Certification of Incorporation and By-
laws could enable a minority of the Company's stockholders to exercise veto
power over any such amendments.
CERTAIN PROVISIONS OF DELAWARE LAW
Following the consummation of the Offering, the Company will be subject to
the "Business Combination" provisions of the Delaware General Corporation Law.
In general, such provisions prohibit a publicly held Delaware corporation from
engaging in various "business combination" transactions with any "interested
69
<PAGE>
stockholder" for a period of three years after the date of the transaction
which the person became an "interested stockholder," unless: (i) the
transaction is approved by the Board of Directors prior to the date the
"interested stockholder" obtained such status; (ii) upon consummation of the
transaction which resulted in the stockholder becoming an "interested
stockholder," the "interested stockholder," owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned by (a) persons who are directors and also officers and (b)
employee stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or (iii) on or subsequent to such date
the "business combination" is approved by the board of directors and
authorized at an annual or special meeting of stockholders by the affirmative
vote of at least 66 2/3% of the outstanding voting stock winch is not owned by
the "interested stockholder." A "business combination" is defined to include
mergers, asset sales and other transactions resulting in financial benefit to
a stockholder. In general, an "interested stockholder" is a Person who,
together with affiliates and associates, owns (or within three years, did own)
15% or more of a corporation's voting stock. The statute could prohibit or
delay mergers or other takeover or change in control attempts with respect to
the Company and, accordingly, may discourage attempts to acquire the Company.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Restated Certificate of Incorporation limits the liability of Directors
to the fullest extent permitted by the Delaware General Corporation Law. In
addition, the Restated Certificate of Incorporation will provide that the
Company shall indemnify Directors and officers of the Company to the fullest
extent permitted by such law. The Company anticipates entering into separate
indemnification agreements with its current Directors and executive officers
prior to the completion of the Offering which will have the effect of
providing such persons indemnification protection in the event the Restated
Certificate of Incorporation is subsequently amended.
LISTING
The Class A Common Stock has been approved for listing, subject to official
notice of issuance, on the NYSE under the symbol "PTN."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Class A Common Stock is BankBoston,
N.A.
70
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no market for the Common Stock of the
Company. The Company can make no predictions as to the effect, if any, that
sales of shares or the availability of shares for sale will have on the market
price prevailing from time to time. Nevertheless, sales of significant amounts
of the Common Stock in the public market, or the perception that such sales
may occur, could adversely affect prevailing market prices. See "Risk
Factors--Impact of Shares Eligible for Future Sale."
Upon completion of the Offering, the Company expects to have 34,090,994
shares of Common Stock outstanding. Of the shares outstanding after the
Offering, the 6,250,000 shares of Class A Common Stock (7,187,500 shares if
the U.S. Underwriters' over-allotment is exercised in full) sold in the
Offering will be freely tradeable without restriction under the Securities
Act, except for any such shares which may be acquired by an "affiliate" of the
Company (an "Affiliate"), as that term is defined in Rule 144 under the
Securities Act, which shares will be subject to the volume limitations of Rule
144.
An aggregate of 27,840,994 shares of Common Stock held by existing
stockholders upon completion of the Offering will be "restricted securities"
(as that phrase is defined in Rule 144) and may not be resold in the absence
of registration under the Securities Act or pursuant to exemptions from such
registration, including among others, the exemption provided by Rule 144 under
the Securities Act. One year after the date of this Prospectus, approximately
27,840,994 shares of Common Stock will be eligible for sale in the public
market pursuant to Rule 144, subject to the volume limitations and other
restrictions described below.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, if a period of at least one year has elapsed
since the later of the date the "restricted securities" were acquired from the
Company and the date they were acquired from an Affiliate, then the holder of
such restricted securities (including an Affiliate) is entitled to sell a
number of shares within any three-month period that does not exceed the
greater of 1% of the then outstanding shares of the Common Stock
(approximately 340,910 shares immediately after the Offering) or the average
weekly reported volume of trading of the Class A Common Stock on the NYSE
during the four calendar weeks preceding such sale. The holder may only sell
such shares through unsolicited brokers' transactions. Sales under Rule 144
are also subject to certain requirements pertaining to the manner of such
sales, notices of such sales and the availability of current public
information concerning the Company. Affiliates may sell shares not
constituting restricted shares in accordance with the foregoing volume
limitations and other requirements without regard to any holding period. Under
Rule 144(k), if a period of at least two years has elapsed between the later
of the date restricted securities were acquired from the Company and the date
they were acquired from an Affiliate, as applicable, a holder of such
restricted securities who is not an Affiliate at the time of the sale and has
not been an Affiliate for at least three months prior to the sale would be
entitled to sell the shares immediately without regard to the volume
limitations and other restrictions described above.
Any employee of the Company who purchased his or her shares of Common Stock
or received an option to purchase Common Stock pursuant to a written
compensation plan or contract while the Company was not subject to the
reporting requirements of the Exchange Act may be entitled to rely on the
resale provisions of Rule 701 under the Securities Act, which permits
nonaffiliates to sell their Rule 701 shares without having to comply with the
current public information, holding period, volume limitation or notice
provisions of Rule 144 and permits Affiliates to sell their Rule 701 shares
without having to comply with the holding period provision of Rule 144, in
each case beginning 90 days after the Company became subject to the reporting
requirements of the Exchange Act.
Notwithstanding the foregoing, in connection with the Offering, the
Company's executive officers, Directors, all existing stockholders of the
Company, who own in aggregate 27,840,994 shares of Common Stock have agreed
that, without the prior written consent of Morgan Stanley & Co. Incorporated
on behalf of the Underwriters, they will not (a) offer, pledge, loan, sell
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, or
otherwise
71
<PAGE>
transfer or dispose of, directly or indirectly, any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common
Stock (whether such shares or any such securities are then owned by such
person or are thereafter acquired directly from the Company), or (b) enter
into any swap or similar agreement that transfers, in whole or in part, any of
the economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (a) or (b) of this paragraph is to be settled
by delivery of such Common Stock or such other securities, in cash or
otherwise, for a period of 180 days after the date of this Prospectus, other
than (i) the sale to the Underwriters of the shares of Common Stock under the
Underwriting Agreement (as defined) or (ii) the issuance by the Company of
shares of Common Stock upon the exercise of an option sold or granted pursuant
to an existing benefit plan of the Company and outstanding on the date of this
Prospectus.
The Securityholders Agreement provides for up to four long-form and
unlimited short-form demand registrations in favor of Willis Stein, two short-
form demand registrations in favor of a majority of the non-Willis Stein
Investors at such time as the Company is eligible to use a short-form
registration statement and unlimited "piggyback" registrations in favor of the
Investors, in each case at the Company's expense. As a result of such
agreement, holders of an aggregate of 7,501,360 shares of Common Stock will
have the right to require the Company to register their shares of Common Stock
under the Securities Act at the Company's expense beginning 180 days after the
completion of the Offering. In addition, holders of an aggregate of 20,339,634
shares of Common Stock have certain "piggyback" registration rights under the
Securityholders Agreement.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES TO NON-UNITED STATES HOLDERS
GENERAL
The following general discussion of certain United States federal income and
estate tax consequences of the ownership and disposition of Class A Common
Stock by a Non-U.S. Holder has been prepared by Kirkland & Ellis, special
counsel to the Company. For this purpose, the term "Non-U.S. Holder" is
defined as any person or entity that is, for United States federal income tax
purposes, a foreign corporation, a non-resident alien individual, a foreign
partnership or a non-resident fiduciary of a foreign estate or trust. This
discussion does not address all aspects of United States federal income and
estate taxes and does not deal with foreign, state and local consequences that
may be relevant to such Non-U.S. Holders in light of their personal
circumstances nor does it discuss certain tax provisions which may apply to
individuals who relinquish their U.S. citizenship or residence. Furthermore,
this discussion is based on provisions of the Code, existing and proposed
regulations promulgated thereunder and administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change either retroactively or prospectively. EACH PROSPECTIVE PURCHASER OF
CLASS A COMMON STOCK IS ADVISED TO CONSULT A TAX ADVISOR WITH RESPECT TO
CURRENT AND POSSIBLE FUTURE TAX CONSEQUENCES OF ACQUIRING, HOLDING AND
DISPOSING OF CLASS A COMMON STOCK AS WELL AS ANY TAX CONSEQUENCES THAT MAY
ARISE UNDER THE LAWS OF ANY U.S. STATE, MUNICIPALITY OR OTHER TAXING
JURISDICTION.
An individual may, subject to certain exceptions, be deemed to be a resident
alien (as opposed to a nonresident alien) by virtue of being present in the
United States for at least 31 days in the calendar year and for an aggregate
of at least 183 days during a three-year period ending in the current calendar
year (counting for such purposes all of the days present in the current year,
one-third of the days present in the immediately preceding year, and one-sixth
of the days present in the second preceding year). Resident aliens are subject
to U.S. federal tax as if they were U.S. citizens.
DIVIDENDS
The Company currently does not intend to pay dividends on the Common Stock.
See "Dividend Policy." In the event that dividends are paid on shares of Class
A Common Stock, dividends paid to a Non-U.S. Holder of Class A Common Stock
will be subject to withholding of United States federal income tax at a 30%
rate or such lower rate as may be specified by an applicable income tax
treaty. However, unless the dividends are effectively connected with the
conduct of a trade or business of the Non-U.S. Holder within the United States
and an Internal Revenue Service Form 4224 is filed with the payor, dividends
that are effectively connected with
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the conduct of a trade or business by the Non-U.S. Holder within the United
States and, where a tax treaty applies, are attributable to a United States
permanent establishment of the Non-U.S. Holder, are not subject to the
withholding tax, but instead are subject to United States federal income tax
on a net income basis at applicable graduated individual or corporate rates.
Any such effectively connected dividends received by a foreign corporation
may, under certain circumstances, be subject to an additional "branch profits
tax" at a rate of 30% or such lower rate as may be specified by an applicable
income tax treaty.
Dividends paid to an address outside the United States are presumed to be
paid to a resident of such country (unless the payer has knowledge to the
contrary) for purposes of the withholding discussed above and for purposes of
determining the applicability of a tax treaty rate. However, under proposed
regulations, in the case of dividends paid after December 31, 1997 (December
31, 1999 in the case of dividends paid to accounts in existence on or before
the date that is 60 days after the proposed regulations are published as final
regulations), a Non-U.S. Holder generally would be subject to United States
withholding tax at a 31% rate under the backup withholding rules described
below, rather than at a 30% rate or at a reduced rate under an income tax
treaty, unless certain certification procedures (or, in the case of payments
made outside the United States with respect to an offshore account, certain
documentary evidence procedures) are complied with, directly or through an
intermediary. Currently, certain certification and disclosure requirements
must be complied with in order to be exempt from withholding under the
effectively connected income exemption discussed above.
A Non-U.S. Holder of Class A Common Stock eligible for a reduced rate of
United States withholding tax pursuant to an income tax treaty may obtain a
refund of any excess amounts withheld by filing an appropriate claim for
refund with the IRS.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder will generally not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
Class A Common Stock unless: (i) the gain is effectively connected with a
trade or business of the Non-U.S. Holder in the United States and, where a tax
treaty applies, is attributable to a United States permanent establishment of
the Non-U.S. Holder; (ii) in the case of a Non-U.S. Holder who is an
individual and holds the Class A Common Stock as a capital asset, such holder
is present in United States for 183 or more days in the taxable year of the
sale or other disposition and certain other conditions are met; or (iii) the
Company is or has been a "U.S. real property holding corporation" for United
States federal income tax purposes. The Company believes it is not and does
not anticipate becoming a "U.S. real property holding corporation" for United
States federal income tax purposes.
If an individual Non-U.S. Holder falls under clause (i) above, he will
unless an applicable treaty provides otherwise, be taxed on his net gain
derived from the sale under regular graduated United States federal income tax
rates. If an individual Non-U.S. Holder falls under clause (ii) above, he will
be subject to a flat 30% tax on the gain derived from the sale, which may be
offset by certain United States capital losses.
If a Non-U.S. Holder that is a foreign corporation falls under clause (i)
above, he will be taxed on his gain under regular graduated United States
federal income tax rates and may be subject to an additional branch profits
tax equal to 30% of his effectively connected earnings and profits within the
meaning of the Code for the taxable year, as adjusted for certain items,
unless he qualifies for a lower rate under an applicable income tax treaty.
FEDERAL ESTATE TAX
Class A Common Stock held by an individual Non-U.S. Holder at the time of
death will be included in such holder's gross estate for United States federal
estate tax purposes, unless an applicable estate tax treaty provides
otherwise.
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INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
Under Treasury regulations, the Company must report annually to the IRS and
to each Non-U.S. Holder the amount of dividends paid to such holder and the
tax withheld with respect to such dividends, regardless of whether withhold
was required. Copies of the information returns reporting such dividends and
withholding may also be made available to the tax authorities in the country
in which the Non-U.S. Holder resides under the provisions of an applicable
income tax treaty.
A backup withholding tax is imposed at the rate of 31% on certain payments
to persons that fail to furnish certain identifying information to the payer.
Backup withholding generally will not apply to dividends paid to a Non-U.S.
Holder at an address outside the United States (unless the payer has knowledge
that the payee is a U.S. person). However, under proposed regulations, in the
case of dividends paid after December 31, 1997 (December 31, 1999 in the case
of dividends paid to accounts in existence on or before the date that is 60
days after the proposed regulations are published as final regulations), a
Non-U.S. Holder generally would be subject to withholding tax at a 31% rate,
unless certain certification procedures (or, in the case of payments made
outside the United States with respect to an offshore account, certain
documentary evidence procedures) are complied with, directly or through an
intermediary. Backup withholding and information reporting generally will also
apply to dividends paid on Class A Common Stock at addresses inside the United
States to Non-U.S. Holders that fail to provide certain identifying
information in the manner required.
Payment of the proceeds of a sale of Class A Common Stock by or through a
United States office of a broker is subject to both backup withholding and
information reporting unless the beneficial owner provides the payer with its
name and address and certifies under penalties of perjury that it is a Non-
U.S. Holder, or otherwise establishes an exemption. In general, backup
withholding and information reporting will not apply to a payment of the
proceeds of a sale of Class A Common Stock by or through a foreign office of a
broker. If, however, such broker is, for United States federal income tax
purposes, a U.S. person, a controlled foreign corporation, or a foreign person
that derives 50% or more if its gross income for certain periods from the
conduct of a trade or business in the United States, such payments will be
subject to information reporting, but not backup withholding, unless (i) such
broker has documentary evidence in its records that the beneficial owner is a
Non-U.S. Holder and certain other conditions are met or (ii) the beneficial
owner otherwise establishes an exemption. Proposed regulations would, if
adopted, alter the foregoing rules in certain respects. Among other things,
the proposed regulations would provide certain presumptions under which a Non-
U.S. Holder would be subject to backup withholding and information reporting
unless the Company receives certification from the holder of a non-U.S.
status.
Any amounts withheld under the backup withholding rules generally will be
allowed as a refund or a credit against such holder's U.S. federal income tax
liability provided the required information is furnished in a timely manner to
the IRS.
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UNDERWRITERS
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the U.S.
Underwriters named below for whom Morgan Stanley & Co. Incorporated,
Donaldson, Lufkin & Jenrette Securities Corporation, BT Alex. Brown
Incorporated and Goldman, Sachs & Co. are acting as U.S. Representatives, and
the International Underwriters named below for whom Morgan Stanley & Co.
International Limited, Donaldson, Lufkin & Jenrette International, BT Alex.
Brown International, a division of Bankers Trust International PLC, and
Goldman Sachs International are acting as International Representatives, have
severally agreed to purchase, and the Company has agreed to sell to them the
respective number of shares of Class A Common Stock set forth opposite the
names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated..................................
Donaldson, Lufkin & Jenrette Securities Corporation................
BT Alex. Brown Incorporated........................................
Goldman, Sachs & Co................................................
---------
Subtotal......................................................... 5,000,000
---------
International Underwriters:
Morgan Stanley & Co. International Limited.........................
Donaldson, Lufkin & Jenrette International.........................
BT Alex. Brown International, a division of Bankers Trust Interna-
tional PLC........................................................
Goldman Sachs International........................................
---------
Subtotal......................................................... 1,250,000
---------
Total.......................................................... 6,250,000
=========
</TABLE>
The U.S. Underwriters and the International Underwriters, and the U.S.
Representatives and the International Representatives, are collectively
referred to as the "Underwriters" and the "Representatives," respectively. The
Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Class A Common
Stock offered hereby are subject to the approval of certain legal matters by
their counsel and to certain other conditions. The Underwriters are obligated
to take and pay for all of the shares of Class A Common Stock offered hereby
(other than those covered by the U.S. Underwriters' over-allotment option
described below) if any such shares are taken.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions: (i)
it is not purchasing any Shares (as defined herein) for the account of anyone
other than a United States or Canadian Person (as defined herein) and (ii) it
has not offered or sold, and will not offer or sell, directly or indirectly,
any Shares or distribute any prospectus relating to the Shares outside the
United States or Canada or to anyone other than a United States or Canadian
Person. Pursuant to the Agreement between U.S. and International Underwriters,
each International Underwriter has represented and agreed that, with certain
exceptions: (i) it is not purchasing any Shares for the account of any United
States or Canadian Person and (ii) it has not offered or sold, and will not
offer or sell, directly or indirectly, any Shares or distribute any prospectus
relating to the Shares in the United States or Canada or to any United States
or Canadian Person. With respect to any Underwriter that is a U.S. Underwriter
and an International Underwriter, the foregoing representations and agreements
(i) made by it in its capacity as a U.S. Underwriter apply only to it in its
capacity as a U.S. Underwriter and (ii) made by it in its capacity as an
International Underwriter apply only to it in its capacity as an International
Underwriter. The foregoing limitations do not apply to stabilization
transactions or to certain other transactions specified in the Agreement
between U.S. and International Underwriters. As used herein, "United States or
Canadian Person" means any national or resident of the United States or
Canada, or any corporation, pension, profit-sharing or other trust or other
entity organized under the
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laws of the United States or Canada or of any political subdivision thereof
(other than a branch located outside the United States and Canada of any
United States or Canadian Person), and includes any United States or Canadian
branch of a person who is otherwise not a United States or Canadian Person.
All shares of Class A Common Stock to be purchased by the Underwriters under
the Underwriting Agreement are referred to herein as the "Shares."
Pursuant to the Agreement between U.S. and International Underwriters, sales
may be made between the U.S. Underwriters and International Underwriters of
any number of Shares as may be mutually agreed. The per share price of any
Shares sold shall be the public offering price set forth on the cover page
hereof, in United States dollars, less an amount not greater than the per
share amount of the concession to dealers set forth below.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has
agreed not to offer or sell, any Shares, directly or indirectly, in any
province or territory of Canada or to, or for the benefit of, any resident of
any province or territory of Canada in contravention of the securities laws
thereof and has represented that any offer or sale of Shares in Canada will be
made only pursuant to an exemption from the requirement to file a prospectus
in the province or territory of Canada in which such offer or sale is made.
Each U.S. Underwriter has further agreed to send to any dealer who purchases
from it any of the Shares a notice stating in substance that, by purchasing
such Shares, such dealer represents and agrees that it has not offered or
sold, and will not offer or sell, directly or indirectly, any of such Shares
in any province or territory of Canada or to, or for the benefit of, any
resident of any province or territory of Canada in contravention of the
securities laws thereof and that any offer or sale of Shares in Canada will be
made only pursuant to an exemption from the requirement to file a prospectus
in the province or territory of Canada in which such offer or sale is made,
and that such dealer will deliver to any other dealer to whom it sells any of
such Shares a notice containing substantially the same statement as is
contained in this sentence.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not
offered or sold and, prior to the date six months after the closing date for
the sale of the Shares to the International Underwriters, will not offer or
sell, any Shares to persons in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding, managing or disposing
of investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995; (ii) it has complied and will comply
with all applicable provisions of the Financial Services Act 1986 with respect
to anything done by it in relation to the Shares in, from or otherwise
involving the United Kingdom; and (iii) it has only issued or passed on and
will only issue or pass on in the United Kingdom any document received by it
in connection with the offering of the Shares to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom such document
may otherwise lawfully be issued or passed on.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has further represented that it has not offered or
sold, and has agreed not to offer or sell, directly or indirectly, in Japan or
to or for the account of any resident thereof, any of the Shares acquired in
connection with the distribution contemplated hereby, except for offers or
sales to Japanese International Underwriters or dealers and except pursuant to
any exemption from the registration requirements of the Securities and
Exchange Law and otherwise in compliance with applicable provisions of
Japanese law. Each International Underwriter has further agreed to send to any
dealer who purchases from it any of the Shares a notice stating in substance
that, by purchasing such Shares, such dealer represents and agrees that it has
not offered or sold, and will not offer or sell, any of such Shares, directly
or indirectly, in Japan or to or for the account of any resident thereof
except for offers or sales to Japanese International Underwriters or dealers
and except pursuant to any exemption from the registration requirements of the
Securities and Exchange Law and otherwise in compliance with applicable
provisions of Japanese law, and that such dealer will send to any other dealer
to whom it sells any of such Shares a notice containing substantially the same
statement as is contained in this sentence.
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The Underwriters initially propose to offer part of the shares of Class A
Common Stock directly to the public at the public offering price set forth on
the cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price. Any
Underwriter may allow, and such dealers may reallow, a concession not in
excess of $ a share to other Underwriters or to certain other dealers.
After the initial offering of the shares of Class A Common Stock, the offering
price and other selling terms may from time to time be varied by the
Representatives.
Pursuant to the Underwriting Agreement, the Company has granted to the U.S.
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to an aggregate of 937,500 additional shares of
Class A Common Stock at the public offering price set forth on the cover page
hereof, less underwriting discounts and commissions. The U.S. Underwriters may
exercise such option to purchase solely for the purpose of covering over-
allotments, if any, made in connection with the offering of the shares of
Class A Common Stock offered hereby. To the extent such option is exercised,
each U.S. Underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of such additional shares of Class
A Common Stock as the number set forth next to such U.S. Underwriter's name in
the preceding table bears to the total number of shares of Class A Common
Stock set forth next to the names of all U.S. Underwriters in the preceding
table.
The Class A Common Stock has been approved for listing, subject to official
notice of issuance, on the NYSE under the symbol "PTN." In order to meet the
requirements for listing the Class A Common Stock on the NYSE, the
Underwriters have undertaken to meet the NYSE's minimum distribution, issuance
and market value requirements.
Each of the Company, the Company's executive officers and Directors and all
other stockholders of the Company have agreed that, without the prior written
consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters,
they will not, during the period ending 180 days after the date of this
Prospectus, (i) offer, pledge, loan, sell, contract to sell, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of Class A Common Stock or any securities
convertible into or exercisable or exchangeable for Class A Common Stock
(whether such shares or any such securities are then owned by such person or
are thereafter acquired directly from the Company), or (ii) enter into any
swap or other arrangement that transfers to another, in whole or in part, any
of the economic consequences of ownership of the Class A Common Stock, whether
any such transaction described in clause (i) or (ii) of this paragraph is to
be settled by delivery of Class A Common Stock or such other securities, in
cash or otherwise. The restrictions described in this paragraph do not apply
to (a) the sale to the Underwriters of the shares of Class A Common Stock
under the Underwriting Agreement or (b) the issuance by the Company of shares
of Class A Common Stock upon the exercise of an option or warrant sold or
granted pursuant to an existing employee benefit plan of the Company and
outstanding on the date of this Prospectus.
At the request of the Company, the Underwriters have reserved shares of
Class A Common Stock offered hereby for sale, at the initial public offering
price, up to 312,500 shares to be issued by the Company and offered hereby for
Directors, officers, employees, business associates and related persons of the
Company. The number of shares of Class A Common Stock available for sale to
the general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares which are not so purchased will be
offered by the Underwriters to the general public on the same basis as the
other shares offered hereby.
The Underwriters have informed the Company that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
Class A Common Stock offered by them.
In order to facilitate the offering of the Class A Common Stock, the
Underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the Class A Common Stock. Specifically, the Underwriters
may over-allot in connection with the Offering, creating a short position in
the Class A Common Stock for their own account. In addition, to cover over-
allotments or to stabilize the price of the Class A Common Stock, the
Underwriters may bid for, and purchase, shares of Class A Common Stock in the
open market. Finally,
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the underwriting syndicate may reclaim selling concessions allowed to an
Underwriter or a dealer for distributing the Class A Common Stock in the
Offering, if the syndicate repurchases previously distributed Class A Common
Stock in transactions to cover syndicate short positions, in stabilization
transactions or otherwise. Any of these activities may stabilize or maintain
the market price of the Class A Common Stock above independent market levels.
The Underwriters are not required to engage in these activities, and may end
any of these activities at any time.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
PRICING OF THE OFFERING
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be determined by negotiations between
the Company and the Representatives. Among the factors to be considered in
determining the initial public offering price will be the Company's record of
operations, the Company's current financial position and future prospects, the
experience of its management, the economies of the industry in general, the
general condition of the equity securities market, sales, earnings and certain
other financial operating information of the Company in recent periods, the
price-earnings ratios, price-sales ratios, market prices of securities and
certain financial and operating information of companies engaged in activities
similar to those of the Company. The estimated initial public offering price
range set forth on the cover page of this Preliminary Prospectus is subject to
change as a result of market conditions and other factors. There can be no
assurance that a regular trading market for the shares of Class A Common Stock
will develop after the offering or, if developed, that a public trading market
can be sustained. There can be no assurance that the prices at which the Class
A Common Stock will sell in the public market after the Offering will not be
lower than the prices at which it is offered by the Underwriters in the
Offering.
LEGAL MATTERS
The validity of the Class A Common Stock offered hereby will be passed upon
for the Company by Kirkland & Ellis, Chicago, Illinois (a partnership which
includes professional corporations). Certain legal matters will be passed upon
for the Underwriters by O'Melveny & Myers LLP, Los Angeles, California.
EXPERTS
The financial statements of The Petersen Companies, Inc. as of December 31,
1996 and June 30, 1997 and for the period from August 15, 1996 (inception) to
December 31, 1996 and the six months ended June 30, 1997, the consolidated
financial statements of Petersen Holdings, L.L.C. as of December 31, 1996 and
June 30, 1997 and for the three months ended December 31, 1996 and the six
months ended June 30, 1997 and the financial statements of the publishing
division of Petersen Publishing Company as of November 30, 1995 and September
30, 1996 and for each of the two years in the period ended November 30, 1995
and the ten months ended September 30, 1996 included in this Prospectus have
been audited by Ernst & Young LLP, independent auditors, as stated in their
reports appearing herein and are included in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
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ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "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, with respect to the Class A
Common Stock being offered in the Offering. This Prospectus does not contain
all the information set forth in the Registration Statement. For further
information with respect to the Company and the securities offered hereby,
reference is made to the 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 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 Registration Statement, including the
exhibits thereto, can be inspected and copied at the public reference
facilities maintained by the Commission referred to below.
Upon completion of the Offering, the Company will become subject to the
informational requirements of the Exchange Act, and in accordance therewith
will be required to file periodic reports and other information with the
Commission. Petersen and Publishing are currently subject to the informational
requirements of the Exchange Act as the result of the effectiveness of its
Registration Statement on Form S-4 (Registration No. 333-18017) and in
accordance therewith file periodic reports and other information with the
Commission. Such reports and other information regarding the Company may 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 Seven 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, information statements and
other information regarding registrants that file electronically with the
Commission. The address of such site is http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements audited by independent certified
public accountants.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
THE PETERSEN COMPANIES, INC.
Report of Ernst & Young LLP, Independent Auditors...................... F-2
Balance Sheets at December 31, 1996 and June 30, 1997.................. F-3
Statements of Operations for the period from August 15, 1996
(inception) to December 31, 1996 and the six months ended June 30,
1997.................................................................. F-4
Statements of Shareholders' Equity for the period from August 15, 1996
(inception) to December 31, 1996 and the six months ended June 30,
1997.................................................................. F-5
Statements of Cash Flows for the period from August 15, 1996
(inception) to December 31, 1996 and the six months ended June 30,
1997.................................................................. F-6
Notes to Financial Statements.......................................... F-7
PETERSEN HOLDINGS, LLC
Report of Ernst & Young LLP, Independent Auditors...................... F-10
Consolidated Balance Sheets at December 31, 1996 and June 30, 1997..... F-11
Consolidated Statements of Operations for the three months ended
December 31, 1996 and the six months ended June 30, 1997.............. F-12
Consolidated Statements of Members' Equity for the three months ended
December 31, 1996 and the six months ended June 30, 1997.............. F-13
Consolidated Statements of Cash Flows for the three months ended
December 31, 1996 and the six months ended June 30, 1997.............. F-14
Notes to Consolidated Financial Statements............................. F-15
PETERSEN PUBLISHING COMPANY PUBLISHING DIVISION
Report of Ernst & Young LLP, Independent Auditors...................... F-23
Balance Sheets at November 30, 1995 and September 30, 1996............. F-24
Statements of Operations and Divisional Equity for the years ended
November 30, 1994 and 1995, the six months ended June 30, 1996
(unaudited) and the ten months ended September 30, 1996............... F-25
Statements of Cash Flows for the years ended November 30, 1994 and
1995, the six months ended June 30, 1996 (unaudited) and the ten
months ended September 30, 1996....................................... F-26
Notes to Financial Statements.......................................... F-27
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
The Petersen Companies, Inc.
We have audited the accompanying balance sheets of The Petersen Companies,
Inc. (formerly known as BrightView Communications Group, Inc.), as of December
31, 1996 and June 30, 1997, and the related statements of operations and
shareholders' equity and cash flows for the period from August 15, 1996
(inception) to December 31, 1996 and the six months ended June 30, 1997. These
financial statements 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 The Petersen Companies,
Inc., at December 31, 1996 and June 30, 1997, and the results of its
operations and its cash flows for the period from August 15, 1996 (inception)
to December 31, 1996 and the six months ended June 30, 1997, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
August 7, 1997, except as to Note 6 as to
which the date is September 12, 1997
F-2
<PAGE>
THE PETERSEN COMPANIES, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
<S> <C> <C>
ASSETS
Investment in Petersen Publishing, L.L.C. ............... $ 154 $ 149
Investment in Petersen Holdings, L.L.C. ................. 1,506 1,513
------ ------
Total assets............................................. $1,660 $1,662
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities.............................................. $ -- $ --
Commitments and contingencies
Shareholders' equity:
Class A Shares, $0.01 par value, 10,000 shares
authorized; 2,163.5 shares issued and outstanding..... 1,073 1,082
Class B Shares, $0.01 par value, 10,000 shares
authorized; 1,200 shares issued and outstanding....... 600 600
Accumulated deficit.................................... (11) (18)
------ ------
1,662 1,664
Notes receivable from related parties.................. (2) (2)
------ ------
Total liabilities and shareholders' equity............... $1,660 $1,662
====== ======
</TABLE>
See accompanying notes.
F-3
<PAGE>
THE PETERSEN COMPANIES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 15, 1996 SIX MONTHS
(INCEPTION) TO ENDED
DECEMBER 31, JUNE 30,
1996 1997
--------------- ----------
<S> <C> <C>
Net revenues......................................... $ -- $ --
General and administrative expenses.................. -- 2
----- -----
Loss from operations................................. -- (2)
Equity in loss of subsidiary......................... (11) (5)
----- -----
Net loss............................................. $ (11) $ (7)
===== =====
</TABLE>
See accompanying notes.
F-4
<PAGE>
THE PETERSEN COMPANIES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
CLASS A COMMON CLASS B COMMON FROM TOTAL
--------------- ---------------- ACCUMULATED RELATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT DEFICIT PARTIES EQUITY
------- ------- ------- ------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of August 15,
1996 (inception)....... -- $ -- -- $ -- $ -- $ -- $ --
Contributed capital..... 2,145 1,073 1,200 600 -- -- 1,673
Loans to related
parties................ -- -- -- -- -- (2) (2)
Net loss................ -- -- -- -- (11) -- (11)
------ ------- ------- ------- ----- ----- ------
Balance as of December
31, 1996............... 2,145 1,073 1,200 600 (11) (2) 1,660
Contributed capital..... 18 9 -- -- -- -- 9
Net loss................ -- -- -- -- (7) -- (7)
------ ------- ------- ------- ----- ----- ------
Balance as of June 30,
1997................... 2,163 $1,082 1,200 $600 $ (18) $ (2) $1,662
====== ======= ======= ======= ===== ===== ======
</TABLE>
See accompanying notes.
F-5
<PAGE>
THE PETERSEN COMPANIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
AUGUST 15, 1996 SIX MONTHS
(INCEPTION) TO ENDED
DECEMBER 31, JUNE 30,
1996 1997
--------------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss........................................... $ (11) $ (7)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Equity in loss of subsidiary...................... 11 5
------- ------
Net cash used in operating activities.............. -- (2)
INVESTING ACTIVITIES
Investment in Petersen Publishing Company,
L.L.C. ........................................... (165) 1
Investment in Petersen Holdings, L.L.C. ........... (1,505) (9)
------- ------
Net cash used in investing activities.............. (1,670) (8)
FINANCING ACTIVITIES
Proceeds from issuance of stock.................... 1,670 10
------- ------
Net cash provided by financing activities.......... 1,670 10
------- ------
Increase (decrease) in cash........................ -- --
Cash at beginning of period........................ -- --
------- ------
Cash at end of period.............................. $ -- $ --
======= ======
</TABLE>
See accompanying notes.
F-6
<PAGE>
THE PETERSEN COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
BrightView Communications Group, Inc. is a Delaware corporation, which
changed its name to The Petersen Companies, Inc. on August 7, 1997 (the
"Company"). The Company owns 1.0% of Petersen Holdings, L.L.C. ("Holdings")
and .1% of Petersen Publishing Company, L.L.C. ("Petersen"). The Company has
no business operations other than the investment in Holdings and Petersen.
BrightView was organized in August 1996 for the principal purpose of investing
in Holdings and Petersen. The Company is Holdings' managing member and as such
controls the policies and operations of Holdings and of Petersen through
Holdings.
Basis of Presentation
The financial statements reflect the activity of the Company for the period
from August 15, 1996 (inception) through December 31, 1996 and for the six
month period ended June 30, 1997, after elimination of intercompany
transactions. The Company reflects its investment in both Holdings and
Petersen on the equity method of accounting.
2. LONG-TERM DEBT
Senior Credit Facility:
On September 30, 1996, Petersen 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 Petersen 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").
The Revolver and the Tranche A Loan bear interest at either LIBOR (5.688% at
June 30, 1997), plus 1.375% to 2.750%, based on borrowings or the prime rate
of the agent bank (8.5% at June 30, 1997), plus .125% to 1.5%, based on
borrowings. As of December 31, 1996 and June 30, 1997, Petersen 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. Any future borrowings
under the Revolver will mature on December 31, 2002. As of December 31, 1996,
Petersen had $100,000,000 outstanding under the Tranche A Loan at a weighted
average interest rate of 8.375%. As of June 30, 1997, Petersen had $89,000,000
outstanding under the Tranche A Loan at a weighted average interest rate of
8.277%.
The Tranche B Loan bears interest at either LIBOR (5.688% at June 30, 1997),
plus 2.625% to 3.250%, based on borrowings or the prime rate of the agent bank
(8.5% at June 30, 1997), plus 1.375% to 2.0% based on borrowings. As of
December 31, 1996, Petersen had $100,000,000 outstanding under the Tranche B
Loan at a weighted average interest rate of 8.875%. As of June 30, 1997,
Petersen had $88,750,000 outstanding under the Tranche B Loan at a weighted
average interest rate of 8.777%.
F-7
<PAGE>
THE PETERSEN COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Revolver and Tranche A Loan mature on December 31, 2002 and Tranche B
Loan matures on September 30, 2004. Minimum annual repayment commitments for
the Tranche A Loan and Tranche B Loan are as follows:
<TABLE>
<CAPTION>
TRANCHE A LOAN TRANCHE B LOAN
-------------- --------------
<S> <C> <C>
1997 (6 months)................................ $ -- $ 500
1998........................................... 10,000 1,000
1999........................................... 15,000 1,000
2000........................................... 20,000 1,000
2001........................................... 25,000 1,000
Thereafter..................................... 19,000 84,250
------- -------
Total........................................ $89,000 $88,750
======= =======
</TABLE>
The Revolver is required to be permanently reduced and the Tranche A Loan
and Tranche B Loan are required to be prepaid with (i) 75% of excess cash flow
(as defined in the Senior Credit Facility), (ii) proceeds from asset sales or
other dispositions of property, (iii) proceeds from the issuance of certain
debt obligations or equity securities. In the six months ended June 30, 1997,
Petersen repaid $22,250,000 of the borrowings under the Senior Credit
Facility, including a prepayment of $11,000,000 on the Tranche A Loan and a
prepayment of $10,750,000 on the Tranche B Loan.
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 June 30, 1997, Petersen was in compliance with the covenants
of the Senior Credit Facility.
The Senior Credit Facility is guaranteed by Holdings and the Company.
Petersen estimates that the book value of the Senior Credit Facility
approximates its fair value.
Bridge Notes:
In August 1996, Petersen entered into a Bridge Commitment Agreement whereby
First Union Corporation and CIBC Inc. agreed to lend Petersen up to
$100,000,000 aggregate amount of senior subordinated increasing rate notes
(the "Bridge Notes"). The Bridge Notes bore interest at the prime rate (as
announced from time to time by First Union National Bank of North Carolina)
plus 425 basis points, with a maximum of 12.5% per annum. The interest rate
would increase by an additional 50 basis points under certain circumstances.
In December 1996, Petersen repaid the Bridge Notes in full.
F-8
<PAGE>
THE PETERSEN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. INVESTMENTS IN HOLDINGS AND PETERSEN
In August 1996, the Company issued shares of Class A and Class B Common
stock in exchange for proceeds aggregating $1,672,500. At the same time, the
Company invested $1,505,250 in 1.0% of Holdings and $167,250 in .1% of
Petersen. The Company reflects their proportionate share of the loss in both
Holdings and Petersen each period.
4. INCOME TAXES
No provision or liability for federal or state income taxes is included in
the accompanying financial statements. The difference between the tax bases
and the reported amounts of the Company's assets and liabilities is not
material at December 31, 1996 and June 30, 1997. The Company had no deferred
tax assets and liabilities at December 31, 1996 or June 30, 1997.
5. CONTINGENCIES
The Company 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 the company.
6. EVENTS SUBSEQUENT TO JUNE 30, 1997
On August 5, 1997, the Board of Directors of the Company authorized the
filing with the Securities and Exchange Commission of a registration statement
for the sale by the Company of shares of its Class A Common Stock to the
public. It is contemplated that in connection with the offering, all of the
existing securityholders of the Company and Holdings will enter into an
agreement in which all of the Holdings Common Units and Preferred Units and
all of the Company's common stock will be exchanged for an aggregate of
20,158,362 shares of Class A Common Stock and 7,682,632 shares of Class B
Common Stock.
F-9
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Petersen Holdings, L.L.C.
We have audited the accompanying consolidated balance sheets of Petersen
Holdings, L.L.C., as of December 31, 1996 and June 30, 1997, and the related
consolidated statements of operations, members' equity and cash flows for the
three months ended December 31, 1996 and the six months ended June 30, 1997.
These financial statements 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 consolidated financial position of Petersen
Holdings, L.L.C., at December 31, 1996 and June 30, 1997, and the consolidated
results of its operations and its cash flows for the three months ended
December 31, 1996 and the six months ended June 30, 1997, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
July 31, 1997, except as to Note 12 as to
which the date is September 12, 1997
F-10
<PAGE>
PETERSEN HOLDINGS, L.L.C.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 7,761 $ 6,923
Accounts receivable, less allowance for doubtful
accounts of $1,604 (1996) and $1,722 (1997)......... 20,141 24,011
Inventories.......................................... 4,408 3,721
Current portion of deferred subscription acquisition
costs............................................... 43,835 40,711
Deferred direct mail advertising costs, net of
accumulated amortization of $307 (1997)............. -- 2,340
Other prepaid expenses and current assets............ 730 653
--------- ---------
Total current assets................................... 76,875 78,359
Deferred subscription acquisition costs................ 41,168 44,680
Property and equipment, net of accumulated depreciation
of $560 (1996) and $1,501 (1997)...................... 4,152 3,360
Goodwill, net of accumulated amortization of $5,992
(1996) and $17,979 (1997)............................. 353,556 341,595
Subscriber list and established work force, net of
accumulated amortization of $3,000 (1996) and $9,000
(1997)................................................ 117,000 111,000
Deferred financing costs, net of accumulated
amortization of $3,276 (1996) and $4,659 (1997)....... 10,735 9,352
Other assets........................................... 587 631
--------- ---------
Total assets........................................... $ 604,073 $ 588,977
========= =========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities............. $ 13,288 $ 16,623
Accrued payroll and related costs.................... 1,963 4,098
Accrued interest on long-term debt................... 2,041 3,628
Customer incentives payable.......................... 5,785 5,735
Current portion of unearned subscription revenues.... 71,163 69,517
Current portion of long-term debt.................... 1,000 6,000
Other accrued expenses and current liabilities....... 119 261
--------- ---------
Total current liabilities.............................. 95,359 105,862
Unearned subscription revenues......................... 47,608 52,071
Long-term debt......................................... 299,000 271,750
Other noncurrent liabilities........................... 7,652 8,664
Due to minority member................................. 154 149
Members' equity:
Common units......................................... 1,671 1,707
Preferred units...................................... 165,171 181,464
Accumulated deficit.................................. (10,594) (30,942)
--------- ---------
156,248 152,229
Less: Notes receivable from related parties.......... (1,948) (1,748)
--------- ---------
Total members' equity.................................. 154,300 150,481
--------- ---------
Total liabilities and members' equity.................. $ 604,073 $ 588,977
========= =========
</TABLE>
See accompanying notes.
F-11
<PAGE>
PETERSEN HOLDINGS, L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PETERSEN HOLDINGS,
L.L.C.
-----------------------
THREE MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------
<S> <C> <C>
Net revenues:
Advertising......................................... $ 31,912 $ 73,438
Newsstand........................................... 10,037 21,249
Subscriptions....................................... 10,404 21,736
Other............................................... 924 3,720
---------- ----------
Total net revenues.................................... 53,277 120,143
Production, selling and other direct costs (including
rent paid to a related party of $1,032 and $2,187,
for the three months ended December 31, 1996 and the
six months ended June 30, 1997, respectively)........ 41,223 82,440
---------- ----------
Gross profit.......................................... 12,054 37,703
General and administrative expenses................... 2,666 8,955
Amortization of goodwill and other intangible assets.. 8,992 18,151
---------- ----------
Income from operations................................ 396 10,597
Other income (expense):
Interest income..................................... 113 355
Interest expense.................................... (11,114) (15,853)
Loss on sale of assets.............................. -- (33)
---------- ----------
Loss before minority interest......................... (10,605) (4,934)
Minority members' equity in loss of subsidiary........ 11 5
---------- ----------
Net loss.............................................. (10,594) (4,929)
Preferred unit dividends.............................. -- (15,419)
---------- ----------
Net loss attributable to common units................. $ (10,594) $ (20,348)
========== ==========
Pro forma net loss per share.......................... $ (.38) $ (.73)
========== ==========
Pro forma weighted average number of common shares
outstanding.......................................... 27,840,994 27,840,994
========== ==========
</TABLE>
See accompanying notes.
F-12
<PAGE>
PETERSEN HOLDINGS, L.L.C.
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
(IN THOUSANDS, EXCEPT UNIT AMOUNTS)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
COMMON UNITS PREFERRED UNITS FROM TOTAL
-------------- ---------------- ACCUMULATED RELATED MEMBERS'
UNITS AMOUNT UNITS AMOUNTS DEFICIT PARTIES EQUITY
------- ------ ------- -------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of September
30, 1996............... -- $ -- -- $ -- $ -- $ -- $ --
Contributed capital, net
of costs............... 413,550 1,671 371,295 165,171 -- -- 166,842
Loans to related
parties................ -- -- -- -- -- (1,948) (1,948)
Net loss................ -- -- -- -- (10,594) -- (10,594)
------- ------ ------- -------- -------- ------- --------
Balance as of December
31, 1996............... 413,550 1,671 371,295 165,171 (10,594) (1,948) 154,300
Contributed capital..... 4,061 36 1,960 874 -- -- 910
Preferred unit
dividend............... -- -- -- 15,419 (15,419) -- --
Payments against notes
receivable from related
parties................ -- -- -- -- -- 200 200
Net loss................ -- -- -- -- (4,929) -- (4,929)
------- ------ ------- -------- -------- ------- --------
Balance as of June 30,
1997................... 417,611 $1,707 373,255 $181,464 $(30,942) $(1,748) $150,481
======= ====== ======= ======== ======== ======= ========
</TABLE>
See accompanying notes.
F-13
<PAGE>
PETERSEN HOLDINGS, L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss............................................... $ (10,594) $ (4,929)
Adjustment to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization......................... 12,849 20,791
Allowance for doubtful accounts....................... -- 828
Loss on sale of assets................................ -- 33
Changes in operating assets and liabilities:
Accounts receivable................................... (2,092) (4,698)
Inventories........................................... 6,017 687
Deferred subscription acquisition costs............... (11,061) (388)
Deferred direct mail advertising costs................ -- (2,647)
Accounts payable and accrued liabilities.............. 9,102 2,848
Accrued payroll and related costs..................... (3,677) 2,135
Accrued interest on long-term debt.................... 2,041 1,587
Customer incentives payable........................... 411 (50)
Unearned subscription revenues........................ 11,840 2,817
Other current assets, net............................. 34 619
Other noncurrent liabilities.......................... 7,506 (1,514)
--------- --------
Total adjustments..................................... 32,970 23,048
--------- --------
Net cash provided by operating activities.............. 22,376 18,119
--------- --------
INVESTING ACTIVITIES
Decrease in minority interest.......................... -- (5)
Purchases of property and equipment.................... -- (228)
Purchases of magazines................................. -- (122)
Proceeds from sale of assets........................... -- 38
Acquisition of assets of publishing division of
Petersen Publishing Company, including liabilities
assumed and net of costs associated with the
acquisition........................................... (465,652) 2,500
--------- --------
Net cash (used in) provided by investing activities.... (465,652) 2,183
--------- --------
FINANCING ACTIVITIES
Proceeds from bank borrowings.......................... 200,000 --
Repayment of bank borrowings........................... -- (22,250)
Proceeds from issuance of Senior Subordinated Notes.... 100,000 --
Increase in deferred financing costs................... (14,011) --
Proceeds from issuance of members units................ 165,135 910
Reduction in notes receivable, related party........... -- 200
Costs associated with capital contributions............ (241) --
Cash contribution by minority member................... 154 --
--------- --------
Net cash provided by (used in) financing activities.... 451,037 (21,140)
--------- --------
Increase in cash and cash equivalents.................. 7,761 (838)
Cash and cash equivalents at beginning of period....... -- 7,761
--------- --------
Cash and cash equivalents at end of period............. $ 7,761 $ 6,923
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during period for:
Interest.............................................. $ 5,576 $ 10,842
========= ========
Taxes................................................. $ -- $ 12
========= ========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the three months ended December 31, 1996, the Company extended a loan
to related parties of $1,948 in exchange for Common and Preferred Units.
During the six months ended June 30, 1997, the Company increased goodwill and
accrued liabilities by $2,526 representing adjustments to the allocation of
the purchase price of the Acquisition. Additionally, the Company accrued the
cumulative Preferred Unit dividend of $15,419 during the six months ended June
30, 1997.
See accompanying notes.
F-14
<PAGE>
PETERSEN HOLDINGS, L.L.C.
NOTES TO 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"). Holdings has no business operations other than those of the
Company. The remaining 0.1% of the Company is owned by 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 ("Petersen") (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.
Basis of Presentation
The consolidated financial statements reflect the consolidated activity of
Holdings and the Company from October 1, 1996 through December 31, 1996 and
the six month period ended June 30, 1997, after elimination of intercompany
transactions and segregation of minority interest.
Certain reclassifications have been made to the consolidated balance sheets
and statements of operations for the three months ended December 31, 1996 to
conform to the presentation for the six months ended June 30, 1997.
Earnings Per Share
Pro forma net loss per share is based on the weighted average shares
outstanding after giving retroactive effect to the issuance of 27,840,994
shares of common stock in connection with the reorganization described in Note
12.
Cash Equivalents
Cash equivalents consist primarily of debt instruments with maturities of
three months or less at the acquisition date. The carrying amounts of cash and
cash equivalents reported in the balance sheet approximate its fair value.
Inventories
Inventories, consisting of paper held at a printing company, 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 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.
Goodwill and Other Intangible Assets
Goodwill resulting from the Acquisition will be amortized using the
straight-line method over its estimated useful life of 15 years. Other
intangible assets (consisting mainly of subscriber lists and established work
force) will be amortized over their estimated useful lives of ten years.
Deferred financing costs will be amortized over the term of the debt: ten
years for the Senior Subordinated Notes and an average of seven years for the
Senior Credit Facility.
F-15
<PAGE>
PETERSEN HOLDINGS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
As a limited liability company, Holdings is not subject to U.S. federal
income taxes or state income taxes.
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 the Company's revenues. The Company's
activities occur principally in the United States and revenues from outside
the United States are less than 10% of the Company's revenues.
Advertising Expenses
The Company began a new mailing program in 1997 and correspondingly
capitalizes direct response advertising costs. Such capitalized costs include
primarily printing and postage to current and potential subscribers and
totaled $2,647,000 at June 30, 1997 and will be amortized over twelve months
(the estimated period of future benefit), beginning two months after mailing.
No direct response advertising costs were capitalized at December 31, 1996.
Amortization of direct response advertising costs was $307,000 for the six
months ended June 30, 1997 and is included in production, selling and other
direct costs.
The Company expenses all other costs of advertising as incurred. Advertising
expense for the three months ended December 31, 1996 and the six months ended
June 30, 1997 were $23,000, and $946,000, respectively.
2. ACQUISITION OF THE PUBLISHING DIVISION OF PETERSEN PUBLISHING COMPANY
In August 1996, BrightView entered into an Asset Purchase Agreement to
purchase substantially all of the assets of the publishing division of
Petersen. BrightView assigned its rights under such agreement to the Company
and the Company assumed all of BrightView'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 the working capital of Petersen
between June 30, 1996 and September 30, 1996. During the six months ended June
30, 1997, the Company received $2,526,000 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 ended December 31, 1996 and the six months ended June 30, 1997
was $5,992,000 and $12,109,000, respectively. Amortization of other intangible
assets was $3,000,000 and $6,000,000 for the three months ended December 31,
1996 and the six months ended June 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 5 and 8 for a more comprehensive discussion of the debt and equity
issuances.
F-16
<PAGE>
PETERSEN HOLDINGS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. INVENTORIES
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
<S> <C> <C>
Paper.................................................. $ 611 $ 1,562
Magazines in process................................... 3,797 2,159
------- -------
$ 4,408 $ 3,721
======= =======
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
<S> <C> <C>
Leasehold improvements................................. $ 283 $ 283
Machinery and equipment................................ 2,230 2,379
Office furniture and equipment......................... 2,199 2,199
------- -------
4,712 4,861
Less accumulated depreciation and amortization......... 560 1,501
------- -------
$ 4,152 $ 3,360
======= =======
</TABLE>
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 became effective for the Company in 1996. The adoption of SFAS
No. 121 did not have a material impact on the Company's financial position or
results of operations.
5. 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").
The Revolver and the Tranche A Loan bear interest at either LIBOR (5.688% at
June 30, 1997), plus 1.375% to 2.750%, based on borrowings or the prime rate
of the agent bank (8.5% at June 30, 1997), plus .125% to 1.5%, based on
borrowings. As of December 31, 1996 and June 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. Any future borrowings
under the Revolver will mature on December 31, 2002. As of December 31, 1996,
the Company had $100,000,000 outstanding under the Tranche A Loan at a
weighted average interest rate of 8.375%. As of June 30, 1997, the Company had
$89,000,000 outstanding under the Tranche A Loan at a weighted average
interest rate of 8.277%.
The Tranche B Loan bears interest at either LIBOR (5.688% at June 30, 1997),
plus 2.625% to 3.250%, based on borrowings or the prime rate of the agent bank
(8.5% at June 30, 1997), plus 1.375% to 2.0% based on
F-17
<PAGE>
PETERSEN HOLDINGS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
borrowings. As of December 31, 1996, the Company had $100,000,000 outstanding
under the Tranche B Loan at a weighted average interest rate of 8.875%. As of
June 30, 1997, the Company had $88,750,000 outstanding under the Tranche B
Loan at a weighted average interest rate of 8.777%.
The Revolver and Tranche A Loan mature on December 31, 2002 and Tranche B
Loan matures on September 30, 2004. Minimum annual repayment commitments for
the Tranche A Loan and Tranche B Loan are as follows:
<TABLE>
<CAPTION>
TRANCHE A LOAN TRANCHE B LOAN
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
1997 (6 months)................................ $ -- $ 500
1998........................................... 10,000 1,000
1999........................................... 15,000 1,000
2000........................................... 20,000 1,000
2001........................................... 25,000 1,000
Thereafter..................................... 19,000 84,250
------- -------
Total........................................ $89,000 $88,750
======= =======
</TABLE>
The Revolver is required to be permanently reduced and the Tranche A Loan
and Tranche B Loan are required to be prepaid with (i) 75% of excess cash flow
(as defined in the Senior Credit Facility), (ii) proceeds from asset sales or
other dispositions of property, (iii) proceeds from the issuance of certain
debt obligations or equity securities. In the six months ended June 30, 1997,
the Company repaid $22,250,000 of the borrowings under the Senior Credit
Facility, including a prepayment of $11,000,000 on the Tranche A Loan and a
prepayment of $10,750,000 on the Tranche B Loan.
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 June 30, 1997, the Company was in compliance with the
covenants of the Senior Credit Facility.
The Senior Credit Facility is guaranteed by Holdings and BrightView.
The Company estimates that the book value of the Senior Credit Facility
approximates its fair value.
The Company incurred costs of approximately $7,000,000 in connection with
the Senior Credit Facility. These costs have been included in Deferred
Financing Costs and are being amortized over the term of the loans. During the
three months ended December 31, 1996 and the six months ended June 30, 1997,
the Company amortized approximately $250,000 and $1,183,000, respectively, of
such deferred financing costs. As a result of the early repayments, during the
six months ended June 30, 1997 the Company recorded additional amortization of
deferred financing costs of approximately $687,000.
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
F-18
<PAGE>
PETERSEN HOLDINGS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 June 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 ended December 31, 1996, and the six months ended June 30, 1997
the Company amortized approximately $67,000 and $200,000, 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.
Bridge Notes:
In August 1996, the Company entered into a Bridge Commitment Agreement
whereby First Union Corporation and CIBC Inc. agreed to lend the Company up to
$100,000,000 aggregate amount of senior subordinated increasing rate notes
(the "Bridge Notes"). The Bridge Notes bore interest at the prime rate (as
announced from time to time by First Union National Bank of North Carolina)
plus 425 basis points, with a maximum of 12.5% per annum. The interest rate
would increase by an additional 50 basis points under certain circumstances.
In December 1996, with proceeds from the issuance of the Notes, the Company
repaid the Bridge Notes in full, together with accrued interest of
approximately $1,980,000. In addition to this interest expense, the Company
incurred approximately $3,000,000 in costs associated with the Bridge Notes.
This amount is included in amortization of Deferred Financing Costs for the
three months ended December 31, 1996.
6. INCOME TAXES
The liability for federal and state income taxes of a limited liability
company is the obligation of the members. Therefore, no provision or liability
for federal or state income taxes is included in the accompanying financial
statements. The difference between the tax bases and the reported amounts of
the Company's assets and liabilities is not material at December 31, 1996 and
June 30, 1997. The Company had no deferred tax assets and liabilities at
December 31, 1996 or June 30, 1997.
Both the Senior Credit Facility and the Indenture governing the Notes
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.
F-19
<PAGE>
PETERSEN HOLDINGS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. MEMBERS' EQUITY
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.), Petersen, 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. BrightView is Holdings' managing member and as such
controls the policies and operations of Holdings and of the Company through
Holdings.
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 $166.3 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 Common
Units, Class B Common Units and Class C Common Units. After payment of the
Preference Amount, holders of Class A Common 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 Common Units held. After the
holders of the Preferred Units and Class A Common Units have received an
internal rate of return of 30%, inclusive of the Preference Amount, on their
total investment, holders of Class B Common Units will be entitled to
participate with the holders of Class A Common Units in any subsequent
distributions. Similarly, after the holders of the Preferred Units and Class A
Common Units have received an internal rate of return of 35% on their total
investment, holders of Class C Common Units will be entitled to participate
with the holders of Class A Common Units and the holders of Class B Common
Units in any subsequent distributions. The Class B Common Units and Class C
Common 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. See Note 11 for information as to the subsequent conversion of
Class B and Class C Common Units.
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 or their successors in interest; (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.
During the six months ended June 30, 1997, Holdings received $910,000 in
exchange for the issuance of additional Preferred Units and Common Units. See
Note 9 for a discussion of other transactions concerning Members' Equity.
Additionally, Holdings accrued $15,419,000 for the preferred yield on the
Preferred Units which represents the cumulative compounded yield through June
30, 1997.
8. PROFIT-SHARING RETIREMENT PLAN
Petersen had a profit-sharing retirement plan (the "Plan") for employees,
which was qualified for tax exempt status by the Internal Revenue Service.
Under the Plan, Petersen, at its discretion, made annual contributions for all
eligible employees not to exceed 15% of their aggregate annual compensation.
In November
F-20
<PAGE>
PETERSEN HOLDINGS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1996, Petersen and the Company entered into an amendment to the Plan, whereby
the Company became a sponsor of the Plan. Both Petersen and the Company agreed
to make contributions to the Plan on behalf of their respective employees
based on compensation paid by each company. However, in connection with the
Acquisition, the Company agreed to make the contribution to the Plan for 1996.
In December 1996, the Company contributed $1,300,000 to the Plan. No
contributions were made during the six months ended June 30, 1997 to the Plan.
In June 1997, the Company agreed to transfer the assets of the Plan into a new
401K Plan (the "New Plan"). Under the New Plan, the Company shall make
matching contributions equal to 50% of the first 6% of the participants' basic
compensation. As of June 30, 1997, $44,000 had been paid representing the
Company's matching contribution.
9. 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 10 for additional related party transactions.
10. COMMITMENTS AND CONTINGENCIES
Leases
Rent expense includes amounts charged to the Company by a member of Holdings
(the "Member") for the use of various office facilities, including its
corporate headquarters, owned by the Member. The lease governing the corporate
headquarters building had an initial term of 15 years and expires November 30,
2009. In connection with the Acquisition, the Company assumed this lease,
subject to certain reductions to the annual rental amounts and will continue
to pay rent to the Member. The lease provides for lease payments of $341,951
for each monthly period ended before November 30, 1996. For each fiscal year
thereafter, the monthly lease payments will be increased at an annual rate of
approximately 1.75%.
On October 1, 1996, the Company entered into another lease with the Member
for office space located 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 for 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.
In addition to the lease for its corporate headquarters, the Company assumed
other leases for sales offices throughout the United States. In addition to
the annual rentals, certain of these leases include renewal options and
require payments of real estate taxes, insurance and other expenses.
Rent expense is as follows (in thousands):
<TABLE>
<CAPTION>
RELATED
PARTY OTHERS TOTAL
------- ------ ------
<S> <C> <C> <C>
Three months ended December 31, 1996.................. $1,032 $452 $1,484
Six months ended June 30, 1997........................ 2,187 714 2,901
</TABLE>
F-21
<PAGE>
PETERSEN HOLDINGS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At June 30, 1997, minimum future annual rentals under long-term leases are
as follows (in thousands):
<TABLE>
<CAPTION>
RELATED
PARTY OTHERS TOTAL
------- ------- -------
<S> <C> <C> <C>
1997 (6 months)...................................... $ 2,193 $ 735 $ 2,928
1998................................................. 4,452 1,348 5,800
1999................................................. 4,530 1,281 5,811
2000................................................. 4,614 1,277 5,891
2001................................................. 4,691 1,277 5,968
Thereafter to 2009................................... 39,181 11,831 51,012
------- ------- -------
Total.............................................. $59,661 $17,749 $77,410
======= ======= =======
</TABLE>
Contingencies
The Company 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 the Company.
11. EVENTS SUBSEQUENT TO JUNE 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, Holdings recognized a non-recurring, non-cash
compensation charge of approximately $12.2 million in July 1997.
Additionally, in July 1997 Holdings established the Petersen Holdings,
L.L.C. 1997 Long-Term Equity Incentive Plan (the "Incentive Plan") pursuant to
which Holdings granted, to certain of the Company's employees, options to
purchase Class A Common Units. Such options vest on the fifth year after the
date of issuance. Should certain events occur (including an initial public
offering of the BrightView's common stock pursuant to a registration statement
filed with the Securities and Exchange Commission), the vesting period would
accelerate to an approximate three year vesting period. The exercise price for
each option is $320.685 per Class A Common Unit, which is equal to the fair
market value of each Class A Common Unit as determined by the Board of
Directors of BrightView, acting as Holdings' managing member, at the date of
grant of the options. Holdings is authorized to issue up to 10,000 Class A
Common Units under the Incentive Plan and in July 1997 granted to Company
employees, options to purchase an aggregate of 8,867 Class A Common Units.
12. EVENTS SUBSEQUENT TO JULY 31, 1997
On August 5, 1997, the Board of Directors of BrightView authorized the
filing with the Securities and Exchange Commission of a registration statement
for the sale by BrightView of shares of its Class A Common Stock to the
public. It is contemplated that in connection with the offering, all of
existing securityholders of BrightView and Holdings will enter into an
agreement in which all of Holdings Common Units and Preferred Units and all of
BrightView's common stock will be exchanged for an aggregate of 20,158,362
shares of Class A Common Stock and 7,682,632 shares of Class B Common Stock.
F-22
<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 operations and divisional equity, and cash flows
for each of the two years in the period ended November 30, 1995 and for the
ten months ended September 30, 1996. These financial statements 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 two years in
the period ended November 30, 1995 and the ten months ended September 30,
1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
December 16, 1996
F-23
<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 (1995) and $1,871 (1996)...... 18,535 18,777
Inventories....................................... 21,347 8,518
Current portion of deferred subscription
acquisition costs................................ 38,161 40,313
Other prepaid expenses and current assets......... 1,213 1,431
-------- --------
Total current assets................................ 92,938 81,547
Deferred subscription acquisition costs............. 31,834 33,629
Property and equipment, net......................... 7,784 5,241
Goodwill, net of accumulated amortization of $1,127
(1995) and $1,442 (1996)........................... 3,210 2,924
Other assets........................................ 1,037 1,142
-------- --------
Total assets........................................ $136,803 $124,483
======== ========
LIABILITIES AND DIVISIONAL EQUITY (CAPITAL
DEFICIENCY)
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......................................... 64,830 66,756
Other accrued expenses and current liabilities.... 592 687
-------- --------
Total current liabilities........................... 87,178 84,338
Unearned subscription revenues...................... 39,017 40,175
Deferred state income taxes......................... 1,321 1,494
Other noncurrent liabilities........................ 660 148
-------- --------
Total liabilities................................... 128,176 126,155
Commitments and contingencies
Divisional equity (capital deficiency).............. 8,627 (1,672)
-------- --------
Total liabilities and divisional equity (capital
deficiency)........................................ $136,803 $124,483
======== ========
</TABLE>
See accompanying notes.
F-24
<PAGE>
PETERSEN PUBLISHING COMPANY
PUBLISHING DIVISION
STATEMENTS OF OPERATIONS AND DIVISIONAL EQUITY (CAPITAL DEFICIENCY)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS TEN MONTHS
NOVEMBER 30, ENDED ENDED
------------------ JUNE 30, SEPTEMBER 30,
1994 1995 1996 1996
-------- -------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues:
Advertising.................... $117,433 $124,310 $ 67,397 $112,525
Newsstand...................... 40,048 39,889 21,281 34,318
Subscriptions.................. 42,639 43,901 21,828 36,474
Other.......................... 2,672 6,415 4,534 6,297
-------- -------- -------- --------
Total net revenues.............. 202,792 214,515 115,040 189,614
Production, selling and other
direct costs (including rent
paid to a related party of
$3,939, $3,875, $2,298, and
$3,778 in years ended 1994,
1995, the six months ended June
30, 1996 and the ten months
ended September 30, 1996,
respectively).................. 149,586 171,579 91,971 148,874
-------- -------- -------- --------
Gross profit.................... 53,206 42,936 23,069 40,740
General and administrative
expenses....................... 33,267 28,145 12,903 24,650
Amortization of goodwill and
other intangible assets........ 421 433 196 339
-------- -------- -------- --------
Income from operations.......... 19,518 14,358 9,970 15,751
Interest income................. 476 549 238 537
Interest expense................ -- -- (153) (185)
Gain on sale of assets.......... -- -- 1,554 1,554
-------- -------- -------- --------
Income before provision for
income taxes................... 19,994 14,907 11,609 17,657
Provision for state income
taxes.......................... (698) (549) (199) (331)
-------- -------- -------- --------
Net income...................... 19,296 14,358 11,410 17,326
Divisional equity (capital
deficiency) at beginning of
period......................... (1,553) 361 (8,379) 8,627
Distribution of S corporation
earnings....................... (26,400) (3,391) (1,950) (21,470)
Net change in advances to other
divisions of the Company....... 9,018 (2,701) (474) (6,155)
-------- -------- -------- --------
Divisional equity (capital
deficiency) at end of period... $ 361 $ 8,627 $ 607 $ (1,672)
======== ======== ======== ========
</TABLE>
See accompanying notes.
F-25
<PAGE>
PETERSEN PUBLISHING COMPANY
PUBLISHING DIVISION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS TEN MONTHS
NOVEMBER 30, ENDED ENDED
------------------ JUNE 30, SEPTEMBER 30,
1994 1995 1996 1996
-------- -------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................... $ 19,296 $ 14,358 $ 11,609 $ 17,326
Adjustments to reconcile net
cash provided by operating
activities:
Depreciation and amortization.. 3,118 3,439 1,667 2,704
Allowance for doubtful
accounts...................... 825 900 376 45
Gain on sale of assets......... -- -- (1,554) (1,554)
Deferred state income taxes.... 416 406 209 173
Changes in operating assets and
liabilities:
Accounts receivable........... (1,758) (197) (5,215) (287)
Inventories................... (1,204) (11,846) 11,148 12,829
Deferred subscription
acquisition costs............ (12,593) (5,805) (3,117) (3,947)
Other prepaid expenses and
current assets............... (162) (84) (84) (217)
Other assets.................. 385 (255) 6 (158)
Accounts payable.............. 2,116 2,205 104 (4,529)
Accrued payroll and related
costs........................ 842 (602) 660 (502)
Customer incentives payable... 830 355 353 170
Unearned subscription
revenues..................... 14,135 8,715 6,283 3,084
Other accrued expenses and
current liabilities.......... 1,111 (2,294) 1,455 95
Other noncurrent liabilities.. (298) 298 (92) (513)
-------- -------- -------- --------
Net cash (used in) provided by
operating activities........... 27,059 9,593 23,808 24,719
INVESTING ACTIVITIES
Purchases of property and
equipment...................... (2,866) (4,423) (463) (768)
Purchases of magazines.......... (1,300) -- -- --
Sales of investments............ 7,000 6,677 -- 3,689
Purchases of investments........ (17,312) -- (333) --
Proceeds from sale of assets.... -- -- 2,500 2,500
-------- -------- -------- --------
Net cash (used in) provided by
investing activities........... (14,478) 2,254 1,704 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) (1,950) (21,470)
Net change in advances to other
divisions of the Company....... 9,018 (2,701) (475) (6,155)
-------- -------- -------- --------
Net cash used in financing
activities..................... (17,382) (6,092) (2,425) (27,625)
-------- -------- -------- --------
Increase (decrease) in cash and
cash equivalents............... (4,801) 5,755 23,087 2,515
Cash and cash equivalents at
beginning period............... 8,984 4,183 (13,663) 9,938
-------- -------- -------- --------
Cash and cash equivalents at end
of period...................... $ 4,183 $ 9,938 $ 9,424 $ 12,453
======== ======== ======== ========
Supplemental information:
Income taxes paid.............. $ 342 $ 263 $ -- $ 40
Interest received.............. 350 741 238 538
Interest paid.................. -- -- -- 185
</TABLE>
See accompanying notes.
F-26
<PAGE>
PETERSEN PUBLISHING COMPANY
PUBLISHING DIVISION
NOTES TO FINANCIAL STATEMENTS
(Information Related to the Six Months Ended June 30, 1996 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 $462,800,000
(including costs associated with the Acquisition), plus the assumption of
certain liabilities totaling approximately $49,000,000. 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 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.
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.
F-27
<PAGE>
PETERSEN PUBLISHING COMPANY
PUBLISHING DIVISION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(Information Related to the Six Months Ended June 30, 1996 is Unaudited)
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, 1994 and 1995, the six months
ended June 30, 1996 and the ten months ended September 30, 1996, were $495,
$732, $351 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:
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.
F-28
<PAGE>
PETERSEN PUBLISHING COMPANY
PUBLISHING DIVISION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(Information Related to the Six Months Ended June 30, 1996 is Unaudited)
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 became effective for the Company in 1996. 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-29
<PAGE>
PETERSEN PUBLISHING COMPANY
PUBLISHING DIVISION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(Information Related to the Six Months Ended June 30, 1996 is Unaudited)
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS TEN MONTHS
NOVEMBER 30, ENDED ENDED
------------- JUNE 30, SEPTEMBER 30,
1994 1995 1996 1996
------ ------ ---------- -------------
<S> <C> <C> <C> <C>
State:
Current........................... $ 282 $ 143 $ 95 $158
Deferred.......................... 416 406 104 173
------ ------ ---- ----
$ 698 $ 549 $199 $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>
YEARS ENDED SIX MONTHS TEN MONTHS
NOVEMBER 30, ENDED ENDED
---------------- JUNE 30, SEPTEMBER 30,
1994 1995 1996 1996
------- ------- ---------- -------------
<S> <C> <C> <C> <C>
Income tax provision computed
at statutory federal income
tax rate.................... $ 6,798 $ 5,068 $ 3,947 $ 6,003
State income taxes........... 698 549 199 331
Effect of S Corporation
election.................... (6,798) (5,068) (3,947) (6,003)
------- ------- ------- -------
Total provision............ $ 698 $ 549 $ 199 $ 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, 1994 and 1995, the six months
ended June 30, 1996 and the ten months ended September 30, 1996 were $3,271
$1,294, none and $1,083, respectively.
F-30
<PAGE>
PETERSEN PUBLISHING COMPANY
PUBLISHING DIVISION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(Information Related to the Six Months Ended June 30, 1996 is Unaudited)
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 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:
1994........................................... $3,939 $1,130 $5,069
1995........................................... 3,875 1,575 5,450
Six months ended June 30, 1996................... 2,298 606 2,904
Ten months ended September 30, 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-31
<PAGE>
[INSIDE BACK COVER PAGE GRAPHICS: PICTURES OF VARIOUS TRADEMARKS OF THE COMPANY
INCLUDING A SAMPLE PAGE FROM THE MOTOR TREND INTERNET WEB SITE AND A SAMPLE
TELEVISION SCREEN FROM THE MOTOR TREND TELEVISION SHOW.]
<PAGE>
[LOGO OF PETERSEN]
[The Petersen Companies, Inc.]
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued September 15, 1997
6,250,000 Shares
[LOGO OF PETERSEN]
The Petersen Companies, Inc.
CLASS A COMMON STOCK
----------
ALL OF THE 6,250,000 SHARES OF CLASS A COMMON STOCK OFFERED HEREBY ARE BEING
SOLD BY THE COMPANY. OF THE 6,250,000 SHARES OF CLASS A COMMON STOCK BEING
OFFERED HEREBY, 1,250,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE
UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS AND 5,000,000
SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE
U.S. UNDERWRITERS. SEE "UNDERWRITERS." PRIOR TO THE OFFERING, THERE HAS
BEEN NO PUBLIC MARKET FOR THE CLASS A COMMON STOCK OF THE COMPANY. IT IS
CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE PER SHARE
WILL BE BETWEEN $15 AND $17. SEE "UNDERWRITERS" FOR A DISCUSSION OF
THE FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC
OFFERING PRICE.
----------
THE COMPANY HAS TWO CLASSES OF AUTHORIZED COMMON STOCK CONSISTING OF THE CLASS
A COMMON STOCK OFFERED HEREBY AND CLASS B COMMON STOCK. SEE "DESCRIPTION OF
CAPITAL STOCK." HOLDERS OF CLASS A COMMON STOCK ARE ENTITLED TO ONE VOTE PER
SHARE ON EACH MATTER SUBMITTED TO A VOTE OF STOCKHOLDERS. THE CLASS B
COMMON STOCK IS NON-VOTING EXCEPT UNDER CERTAIN LIMITED CIRCUMSTANCES AND
AS REQUIRED BY LAW. ALL HOLDERS OF COMMON STOCK ARE ENTITLED TO RECEIVE
SUCH DIVIDENDS AND DISTRIBUTIONS, IF ANY, AS MAY BE DECLARED FROM TIME
TO TIME BY THE BOARD OF DIRECTORS. UPON COMPLETION OF THE OFFERING,
AFFILIATES OF THE COMPANY WILL RETAIN APPROXIMATELY 70% OF THE
OUTSTANDING VOTING POWER. SEE "PRINCIPAL STOCKHOLDERS."
----------
THE CLASS A COMMON STOCK HAS BEEN APPROVED FOR LISTING, SUBJECT TO OFFICIAL
NOTICE OF ISSUANCE, ON THE NEW YORK STOCK EXCHANGE, UNDER THE SYMBOL "PTN."
----------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR INFORMATION THAT SHOULD
BE CONSIDERED BY PROSPECTIVE INVESTORS.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------
PRICE $ A SHARE
----------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
-------- --------------- -----------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total (3).................................. $ $ $
</TABLE>
- -----
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriters."
(2) Before deducting expenses payable by the Company, estimated at
$1,500,000.
(3) The Company has granted to the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
937,500 additional Shares of Class A Common Stock at the Price to Public
less Underwriting Discounts and Commissions, for the purpose of covering
over-allotments, if any. If the U.S. Underwriters exercise such option
in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriters."
----------
The Shares of Class A Common Stock are offered, subject to prior sale, when,
as and if accepted by the Underwriters named herein and subject to approval of
certain legal matters by O'Melveny & Myers LLP, counsel for the Underwriters.
It is expected that delivery of the Shares will be made on or about , 1997 at
the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against
payment therefor in immediately available funds.
----------
MORGAN STANLEY DEAN WITTER DONALDSON, LUFKIN & JENRETTE
INTERNATIONAL
BT ALEX. BROWN INTERNATIONAL GOLDMAN SACHS INTERNATIONAL
, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a statement of estimated expenses, to be paid solely by the
Company, of the issuance and distribution of the securities being registered:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $ 52,273
NASD filing fee................................................. 17,750
NYSE original listing fee....................................... 189,600
Blue Sky fees and expenses (including attorneys' fees and ex-
penses)........................................................ 20,000
Printing expenses............................................... 300,000
Accounting fees and expenses.................................... 300,000
Transfer agent's fees and expenses.............................. 10,000
Legal fees and expenses......................................... 400,000
Miscellaneous expenses (including certain anticipated roadshow
expenses)...................................................... 210,377
----------
Total......................................................... $1,500,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is incorporated under the laws of the State of Delaware. Section
145 of the General Corporation Law of the State of Delaware, inter alia,
("Section 145") provides that a Delaware corporation may indemnify any persons
who were, are or are threatened to be made, parties to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
such corporation), by reason of the fact that such person is or was an
officer, director, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer employee or agent of
another corporation or enterprise. The indemnity may include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such
action, suit or proceeding, provided such person acted in good faith and in a
manner he reasonably believed to be in or not opposed to the corporation's
best interests and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that his conduct was illegal. A Delaware
corporation may indemnify any persons who are, were or are threatened to be
made, a party to any threatened, pending or completed action or suit by or in
the right of the corporation by reasons of the fact that such person was a
director, officer, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent
of another corporation or enterprise. The indemnity may include expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit, provided
such person acted in good faith and in a manner he reasonably believed to be
in or not opposed to the corporation's best interests, provided that no
indemnification is permitted without judicial approval if the officer,
director, employee or agent is adjudged to be liable to the corporation. Where
an officer, director, employee or agent is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against the expenses which such officer or director has actually
and reasonably incurred.
The Company's Certificate of Incorporation provides that, to the fullest
extent permitted by the General Corporation Law of the State of Delaware as
the same exists or may hereafter be amended, a director of the Company shall
not be liable to the Company or its stockholders for monetary damages for a
breach of fiduciary duty as a director.
Article V of the By-laws of the Company ("Article V") provides, among other
things, that each person who was or is made a party or is threatened to be
made a party to or is involved in any action, suit or proceeding,
II-1
<PAGE>
whether civil, criminal, administrative or investigative, by reason of the
fact that he or a person of whom he is the legal representative, is or was a
director or officer, of the corporation or is or was serving at the request of
the Company as a director, officer, employee, fiduciary, or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
shall be indemnified and held harmless by the Company to the fullest extent
which it is empowered to do so by the General Corporation Law of the State of
Delaware, as the same exists or may hereafter be amended (but, in the case of
any such amendment, only to the extent that such amendment permits the Company
to provide broader indemnification rights than said law' permitted the Company
to provide prior to such amendment) against all expense, liability and loss
(including attorneys' fees actually and reasonably incurred by such person in
connection with such proceeding, and such indemnification shall inure to the
benefit of his or her heirs, executors and administrators; provided, however,
that, the Company shall indemnify any such person seeking indemnification in
connection with a proceeding initiated by such person only if such proceeding
was authorized by the board of directors of the Company.
Article V also provides that persons who are not covered by the foregoing
provisions of Article V and who are or were employees or agents of the
Company, or who are or were serving at the request of the Company as employees
or agents of another corporation, partnership, joint venture, trust or other
enterprise, may be indemnified to the extent authorized at any time or from
time to time by the board of directors.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation
or enterprise, against any liability asserted against him and incurred by him
in any such capacity, arising out of his status as such, whether or not the
corporation would otherwise have the power to indemnify him under Section 145.
Article V further provides that the Company may purchase and maintain
insurance on its own behalf and on behalf of any person who is or was a
director, officer, employee, fiduciary, or agent of the Company or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him or her and incurred by him or her
in any such capacity, whether or not the Company would have the power to
indemnify such person against such liability under Article V.
Under the Securityholders Agreement, the Company agrees to indemnify certain
of its directors and officers against certain liabilities, including
liabilities under the Securities Act.
II-2
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On September 30, 1996, the Company sold an aggregate of 2,106 shares of
Class A Common Stock and 1,200 shares of Class B Common Stock for $500 per
share pursuant to the terms of a Securities Purchase Agreement dated as of the
date thereof. The following persons purchased such shares in the amounts set
forth opposite their names:
<TABLE>
<CAPTION>
CLASS A COMMON STOCK CLASS B COMMON STOCK
-------------------- ----------------------
NAME SHARES NAME SHARES
---- ------ ---- ------
<S> <C> <C> <C>
Willis Stein & Partners
L.P. .................. 1,000 Chase Equity Associates, L.P. ........... 300
Petersen Properties Com-
pany................... 500 BankAmerica Investment Corporation ...... 360
Allstate Insurance Com-
pany................... 300 CIVC Partners II......................... 40
Norwest Equity Capital,
L.L.C. ................ 100 CIBC WG Argosy Merchant Fund 2, L.L.C. .. 250
Nassau Capital Partners
II, L.P. .............. 99.5 FUI, Inc. ............................... 250
NAS Partners I,
L.L.C. ................ .5
James D. Dunning, Jr. .. 42
The Laurence and Cindy
Bloch Trust............ 20
Stuart Karu............. 20
Thomas J. Strauss....... 1
Irwin Bard.............. 10
Bernard Shavitz......... 3
D. Claeys Bahrenburg.... 10
----- -----
Total................. 2,106 Total.................................... 1,200
===== =====
</TABLE>
In connection with the execution of their respective Employment Agreements
on September 30, 1996, the Company sold an aggregate of 41 shares of Class A
Common Stock at a price of $500 per share to the following executive officers:
<TABLE>
<CAPTION>
NAME SHARES
---- ------
<S> <C>
D. Claeys Bahrenburg............................................ 20
Neal Vitale..................................................... 15
Richard S Willis................................................ 6
On February 10, 1997, the Company sold an aggregate of 11.2 shares of Class
A Common Stock at a price of $500 per share to the following employees of the
Company:
<CAPTION>
NAME SHARES
---- ------
<S> <C>
Richard P. Lague................................................ 2
John Dianna..................................................... 2
Lee Kelley...................................................... 0.2
Paul J. Tzimoulis............................................... 2
David Myers..................................................... 1
Ken Elliott..................................................... 1
Jay Cole........................................................ 1
James D. Dunning III Trust...................................... 1
David F. Dunning Trust.......................................... 1
On June 13, 1997, the Company sold an aggregate of 6 shares of Class A
Common Stock at a price of $550 per share to the following employees of the
Company:
<CAPTION>
NAME SHARES
---- ------
<S> <C>
James Guthrie................................................... 2
Charlotte A. Perkins............................................ 1
Amy P. Wilkins.................................................. 1
Justin McCormack................................................ 2
</TABLE>
II-3
<PAGE>
Immediately prior to and contingent upon the consummation of the Offering,
the Company will effect the Reorganization whereby, among other things, all of
the existing securityholders of the Company and Petersen will enter into a
Contribution and Recapitalization Agreement (the "Recapitalization Agreement")
pursuant to which, among other things, each existing securityholder will
contribute all of its Preferred Units and Common Units of Petersen and common
stock of the Company to the Company in exchange for newly-issued shares of
Common Stock. Pursuant to the Recapitalization Agreement, the existing
securityholders of Petersen Holdings L.L.C. will receive an aggregate of
27,840,994 shares of Common Stock of the Company (assuming an initial public
offering price of $16 per share).
Except as set forth above, the Company has not sold any securities. All of
the transactions described above were effected in reliance upon the exemption
from the registration requirement of the Securities Act contained in Section
4(2) of the Securities Act and Regulation D and Rule 701 promulgated
thereunder on the basis such transactions did not involve any public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
*2.1 Form of Contribution and Recapitalization Agreement by and among the
Company, Petersen, Publishing and all of the Company's existing
stockholders.
*3.1 Form of Restated Certificate of Incorporation of the Company.
*3.2 Form of Amended and Restated By-Laws of the Company.
**4.1 Indenture, dated as of November 15, 1996, by and among Petersen,
Publishing, Capital and United States Trust Company of New York, as
trustee.
**4.2 Forms of 11 1/8% Senior Subordinated Notes and Series B 11 1/8%
Senior Subordinated Notes.
**4.3 Securities Purchase Agreement, dated November 20, 1996, by and among
Petersen, Capital, Publishing and the Initial Purchasers.
**4.4 Credit Agreement, dated as of September 30, 1996, by and among
Publishing, the Lenders named therein, First Union National Bank of
North Carolina ("First Union"), as Administrative Agent and
Syndication Agent and CIBC, Inc., as Documentation Agent.
**4.5 Pledge and Security Agreement, dated as of September 30, 1996, by and
between Publishing and First Union, as Administrative Agent.
**4.6 Pledge and Security Agreement, dated as of September 30, 1996, by and
among the Company, Petersen and First Union, as Administrative Agent.
**4.7 Guaranty, dated as of September 30, 1996, by and among the Company,
Petersen and First Union, as Administrative Agent.
**4.8 Senior Subordinated Credit Agreement, dated as of September 30, 1996,
among Publishing, the guarantors named therein, the Lenders named
therein and First Union, as Agent.
**4.9 Registration Rights Agreement, dated November 20, 1996, by and among
Publishing, Capital and the Initial Purchasers named therein.
*4.10 Specimen of Class A Common Stock.
4.11 Term sheet relating to the New Credit Facility.
5.1 Opinion and consent of Kirkland & Ellis.
8.1 Opinion of Kirkland & Ellis regarding certain tax matters.
**10.1 License Agreement, dated as of August 15, 1996, by and between Robert
E. Petersen, the Company and the Seller.
**10.2 Employment Agreement, dated as of August 15, 1996, by and between the
Company and Robert E. Petersen.
**10.3 Executive Securities Purchase and Employment Agreement, dated as of
September 30, 1996, by and among the Company, Petersen, Publishing
and D. Claeys Bahrenburg.
**10.4 Executive Securities Purchase and Employment Agreement, dated as of
September 30, 1996, by and among the Company, Petersen, Publishing
and Neal Vitale.
**10.5 Securities Purchase Agreement, dated as of September 30, 1996, made
by and among Petersen, Petersen Investment Corp., the Company, the
Seller, Willis Stein & Partners, L.P., and the other Persons set
forth on Schedule A thereto.
10.6 Reserved.
+10.7 Securityholders Agreement, dated as of September 30, 1996, among
Petersen Investment Corp., Petersen, the Company and the other
parties thereto.
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
+10.8 Promissory Note, dated as of September 30, 1996, from D. Claeys
Bahrenburg in favor of the Company in the amount of $8,000.
+10.9 Promissory Note, dated as of September 30, 1996, from D. Claeys
Bahrenburg in favor of the Company in the amount of $2,000.
+10.10 Promissory Note, dated as of September 30, 1996, from D. Claeys
Bahrenburg in favor of Petersen in the amount of $891,000.
+10.11 Promissory Note, dated as of September 30, 1996, from D. Claeys
Bahrenburg in favor of Petersen in the amount of $99,000.
+10.12 Promissory Note, dated as of September 30, 1996, from Neal Vitale in
favor of the Company in the amount of $7,500.
+10.13 Promissory Note, dated as of September 30, 1996, from Neal Vitale in
favor of Petersen in the amount of $742,500.
10.14 Asset Purchase Agreement, dated as of August 15, 1996, by and between
the Company (formerly known as BrightView Communications Group, Inc.)
and Petersen Publishing Company (the "Seller"), as amended by the
Letter Agreement, dated as of September 30, 1996, by and among the
Seller, the Company, Petersen and Publishing, incorporated by
reference to Exhibit 2.1 of the Registration Statement on Form S-4
(333-18017) of Petersen, Publishing and Petersen Capital Corp.
*10.15 The Petersen Companies, Inc. 1997 Long-Term Equity Incentive Plan.
*10.16 The Petersen Companies, Inc. Employee Stock Discount Purchase Plan.
*10.17 Agreement, dated as of July 31, 1997, between and among Petersen, the
Company, Publishing and Messrs. Dunning, Bloch, Karu, Vitale and R.
Willis.
*10.18 Petersen Holdings, L.L.C. 1997 Long-Term Equity Incentive Plan.
*10.19 Form of Amendment No. 1 to Securityholders Agreement, among Petersen
Investment Corp., Petersen, the Company and the other parties
thereto.
*11.1 Calculation of Earnings Per Share.
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young L.L.P.
23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1).
**24.1 Powers of Attorney.
**27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
**Previously filed.
+ Incorporated by reference to the same numbered exhibit to the Registration
Statement on S-4 (Registration No. 333-18017) of Petersen, Publishing and
Petersen Capital Corp.
(B) FINANCIAL STATEMENT SCHEDULES.
Schedule II--Petersen Holdings, L.L.C.--Valuation and Qualifying Accounts.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriter
at closing specified in the underwriting agreement certificates in such
denominations and registered in such names as requested by the Underwriter to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating
II-5
<PAGE>
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE PETERSEN
COMPANIES, INC., HAS DULY CAUSED THIS AMENDMENT NO. 1 TO REGISTRATION
STATEMENT ON FORM S-1 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE CITY OF LOS ANGELES, STATE OF CALIFORNIA, ON SEPTEMBER
12, 1997.
THE PETERSEN COMPANIES, INC.
By: /s/ Neal Vitale
---------------------------------
NEAL VITALE
PRESIDENT
* * * *
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
* Chairman of the Board September 12, 1997
- ------------------------------------- and Chief Executive
JAMES D. DUNNING, JR. Officer (Principal
Executive Officer)
/s/ Richard S Willis Executive Vice September 12, 1997
- ------------------------------------- President--Chief
RICHARD S WILLIS Financial Officer and
Director (Principal
Financial and
Accounting Officer)
* Director September 12, 1997
- -------------------------------------
D. CLAEYS BAHRENBERG
/s/ Neal Vitale Director September 12, 1997
- -------------------------------------
NEAL VITALE
* Director September 12, 1997
- -------------------------------------
LAURENCE H. BLOCH
* Director September 12, 1997
- -------------------------------------
AVY H. STEIN
* Director September 12, 1997
- -------------------------------------
DANIEL H. BLUMENTHAL
* Director September 12, 1997
- -------------------------------------
STUART KARU
* Director September 12, 1997
- -------------------------------------
JOHN A. WILLIS
</TABLE>
* The undersigned, by signing his name hereto, does sign and execute this
Amendment No. 1 to Registration Statement pursuant to the Power of Attorney
executed by the above-named officers and Directors and filed with the
Securities and Exchange Commission on behalf of such officers and Directors.
/s/ Neal Vitale
- -------------------------------------
NEAL VITALE, ATTORNEY-IN-FACT
II-7
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Petersen Holdings,
LLC as of December 31, 1996 and June 30, 1997, and for the three months ended
December 31, 1996 and the six months ended June 30, 1997, and have issued our
report thereon dated July 31, 1997, except as to Note 12 as to which the date
is September 12, 1997 (included elsewhere in this Registration Statement). Our
audits also included the financial statement schedule listed in Item 16(b) of
this Registration Statement. These schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
S-1
<PAGE>
PETERSEN HOLDINGS, L.L.C.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C--ADDITIONS COLUMN D COLUMN E
- --------------------------- ---------- ------------------- ---------- ---------
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- --------------------------- ---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Reserves and allowances
deducted from assets
accounts:
Allowance for doubtful
accounts of Petersen
Holdings, L.L.C.:
Three months ended Decem-
ber 31, 1996............ $1,871 -- -- $(267)(a) $1,604
Six months ended June 30,
1997.................... $1,604 $828 -- $(710)(a) $1,722
</TABLE>
- --------
(a) Represents amounts written-off against the allowance for doubtful accounts,
net of recoveries.
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
*2.1 Form of Contribution and Recapitalization Agreement by and among the
Company, Petersen, Publishing and all of the Company's existing
stockholders.
*3.1 Form of Restated Certificate of Incorporation of the Company.
*3.2 Form of Amended and Restated By-Laws of the Company.
**4.1 Indenture, dated as of November 15, 1996, by and among Petersen,
Publishing, Capital and United States Trust Company of New York, as
trustee.
**4.2 Forms of 11 1/8% Senior Subordinated Notes and Series B 11 1/8% Senior
Subordinated Notes.
**4.3 Securities Purchase Agreement, dated November 20, 1996, by and among
Petersen, Capital, Publishing and the Initial Purchasers.
**4.4 Credit Agreement, dated as of September 30, 1996, by and among
Publishing, the Lenders named therein, First Union National Bank of
North Carolina ("First Union"), as Administrative Agent and
Syndication Agent and CIBC, Inc., as Documentation Agent.
**4.5 Pledge and Security Agreement, dated as of September 30, 1996, by and
between Publishing and First Union, as Administrative Agent.
**4.6 Pledge and Security Agreement, dated as of September 30, 1996, by and
among the Company, Petersen and First Union, as Administrative Agent.
**4.7 Guaranty, dated as of September 30, 1996, by and among the Company,
Petersen and First Union, as Administrative Agent.
**4.8 Senior Subordinated Credit Agreement, dated as of September 30, 1996,
among Publishing, the guarantors named therein, the Lenders named
therein and First Union, as Agent.
**4.9 Registration Rights Agreement, dated November 20, 1996, by and among
Publishing, Capital and the Initial Purchasers named therein.
*4.10 Specimen of Class A Common Stock.
4.11 Term sheet relating to the New Credit Facility.
5.1 Opinion and consent of Kirkland & Ellis.
8.1 Opinion of Kirkland & Ellis regarding certain tax matters.
**10.1 License Agreement, dated as of August 15, 1996, by and between Robert
E. Petersen, the Company and the Seller.
**10.2 Employment Agreement, dated as of August 15, 1996, by and between the
Company and Robert E. Petersen.
**10.3 Executive Securities Purchase and Employment Agreement, dated as of
September 30, 1996, by and among the Company, Petersen, Publishing and
D. Claeys Bahrenburg.
**10.4 Executive Securities Purchase and Employment Agreement, dated as of
September 30, 1996, by and among the Company, Petersen, Publishing and
Neal Vitale.
**10.5 Securities Purchase Agreement, dated as of September 30, 1996, made by
and among Petersen, Petersen Investment Corp., the Company, the
Seller, Willis Stein & Partners, L.P., and the other Persons set forth
on Schedule A thereto.
10.6 Reserved.
+10.7 Securityholders Agreement, dated as of September 30, 1996, among
Petersen Investment Corp., Petersen, the Company and the other parties
thereto.
+10.8 Promissory Note, dated as of September 30, 1996, from D. Claeys
Bahrenburg in favor of the Company in the amount of $8,000.
+10.9 Promissory Note, dated as of September 30, 1996, from D. Claeys
Bahrenburg in favor of the Company in the amount of $2,000.
+10.10 Promissory Note, dated as of September 30, 1996, from D. Claeys
Bahrenburg in favor of Petersen in the amount of $891,000.
+10.11 Promissory Note, dated as of September 30, 1996, from D. Claeys
Bahrenburg in favor of Petersen in the amount of $99,000.
+10.12 Promissory Note, dated as of September 30, 1996, from Neal Vitale in
favor of the Company in the amount of $7,500.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
+10.13 Promissory Note, dated as of September 30, 1996, from Neal Vitale in
favor of Petersen in the amount of $742,500.
10.14 Asset Purchase Agreement, dated as of August 15, 1996, by and between
the Company (formerly known as BrightView Communications Group, Inc.)
and Petersen Publishing Company (the "Seller"), as amended by the
Letter Agreement, dated as of September 30, 1996, by and among the
Seller, the Company, Petersen and Publishing, incorporated by
reference to Exhibit 2.1 of the Registration Statement on Form S-4
(333-18017) of Petersen, Publishing and Petersen Capital Corp.
*10.15 The Petersen Companies, Inc. 1997 Long-Term Equity Incentive Plan.
*10.16 The Petersen Companies, Inc. Employee Stock Discount Purchase Plan.
*10.17 Agreement, dated as of July 31, 1997, between and among Petersen, the
Company, Publishing and Messrs. Dunning, Bloch, Karu, Vitale and R.
Willis.
*10.18 Petersen Holdings, L.L.C. 1997 Long-Term Equity Incentive Plan.
*10.19 Form of Amendment No. 1 to Securityholders Agreement, among Petersen
Investment Corp., Petersen, the Company and the other parties thereto.
*11.1 Calculation of Earnings Per Share.
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young L.L.P.
23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1).
**24.1 Powers of Attorney.
**27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
**Previously filed.
+ Incorporated by reference to the same numbered exhibit to the Registration
Statement on S-4 (Registration No. 333-18017) of Petersen, Publishing and
Petersen Capital Corp.
<PAGE>
EXHIBIT 1.1
[FORM OF UNDERWRITING AGREEMENT]
[September __], 1997
Morgan Stanley & Co. Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
BT Alex. Brown Incorporated
Goldman, Sachs & Co.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Morgan Stanley & Co. International Limited
Donaldson, Lufkin & Jenrette International
BT Alex. Brown International,
a division of Bankers Trust International PLC
Goldman Sachs International
c/o Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England
Dear Sirs and Mesdames:
The Petersen Companies, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell to the several Underwriters (as defined below)
6,250,000 shares of its Class A Common Stock, $.01 par value per share (the
"Firm Shares").
It is understood that, subject to the conditions hereinafter stated,
5,000,000 Firm Shares (the "U.S. Firm Shares") will be sold to the several U.S.
Underwriters named in Schedule I hereto (the "U.S. Underwriters") in connection
with the offering and sale of such U.S. Firm Shares in the United States and
Canada to United States and Canadian Persons (as such terms are defined in the
Agreement Between U.S. and International Underwriters of even date herewith),
and 1,250,000 Firm Shares (the "International Shares") will be sold to the
several International Underwriters named in Schedule II hereto (the
"International Underwriters") in connection with the offering and sale of such
International Shares outside the United States and Canada to persons other than
United States and Canadian Persons. Morgan Stanley & Co. Incorporated,
Donaldson, Lufkin & Jenrette Securities Corporation, BT Alex. Brown
Incorporated, and Goldman, Sachs & Co. shall act as representatives (the "U.S.
Representatives") of the several U.S. Underwriters, and Morgan Stanley & Co.
International Limited, Donaldson, Lufkin & Jenrette International, BT Alex.
Brown International, a division of Bankers Trust International PLC,
<PAGE>
and Goldman Sachs International shall act as representatives (the "International
Representatives") of the several International Underwriters. The U.S.
Underwriters and the International Underwriters are hereinafter collectively
referred to as the "Underwriters."
The Company also proposes to issue and sell to the several U.S.
Underwriters not more than an additional 937,500 shares of its Class A Common
Stock, par value $.01 per share (the "Additional Shares"), if and to the extent
that the U.S. Representatives shall have determined to exercise, on behalf of
the U.S. Underwriters, the right to purchase such shares of common stock granted
to the U.S. Underwriters in Section 2 hereof. The Firm Shares and the Additional
Shares are hereinafter collectively referred to as the "Shares." The shares of
Class A Common Stock, par value $.01 per share, of the Company to be outstanding
after giving effect to the sales contemplated hereby are hereinafter referred to
as the "Common Stock."
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement relating to the Shares. The registration
statement contains two prospectuses to be used in connection with the offering
and sale of the Shares: the U.S. prospectus, to be used in connection with the
offering and sale of Shares in the United States and Canada to United States and
Canadian Persons, and the international prospectus, to be used in connection
with the offering and sale of Shares outside the United States and Canada to
persons other than United States and Canadian Persons. The international
prospectus is identical to the U.S. prospectus except for the outside front
cover page. The registration statement as amended at the time it becomes
effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Securities Act of 1933, as amended (the "Securities Act"), is hereinafter
referred to as the "Registration Statement"; the U.S. prospectus and the
international prospectus in the respective forms first used to confirm sales of
Shares are hereinafter collectively referred to as the "Prospectus." If the
Company has filed an abbreviated registration statement to register additional
shares of Common Stock pursuant to Rule 462(b) under the Securities Act (the
"Rule 462 Registration Statement"), then any reference herein to the term
"Registration Statement" shall be deemed to include such Rule 462 Registration
Statement.
As part of the offering contemplated by this Agreement, BT Alex. Brown
Incorporated ("BT Alex. Brown") has agreed to reserve out of the Shares set
forth opposite its name on Schedule I to this Agreement, up to _________________
shares, for sale to
2
<PAGE>
the Company's employees, officers, and directors [and other parties associated
with the Company] (collectively, "Participants"), as set forth in the Prospectus
under the heading "Underwriting" (the "Directed Share Program"). The Shares to
be sold by BT Alex. Brown pursuant to the Directed Share Program (the "Directed
Shares") will be sold by BT Alex. Brown pursuant to this Agreement at the public
offering price. Any Directed Shares not orally confirmed for purchase by any
Participants by the end of the first business day after the date on which this
Agreement is executed will be offered to the public by BT Alex. Brown as set
forth in the Prospectus.
Immediately prior to the completion of the sale of the Shares pursuant
to the terms of this Agreement, the Company will undergo a reorganization (the
"Reorganization"), pursuant to which, among other things, Petersen Holdings
L.L.C. ("Holdings") and Petersen Publishing Company L.L.C. ("Publishing") will
become wholly owned subsidiaries of the Company.
1. Representations and Warranties. The Company represents and
------------------------------
warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective under the
Securities Act; no stop order suspending the effectiveness of the
Registration Statement is in effect, and no proceedings for such purpose
are pending before or, to the Company's knowledge, threatened by the
Commission.
(b) (i) The Registration Statement, when it became effective, did not
contain and, as amended or supplemented, if applicable, will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading, (ii) the Registration Statement and the Prospectus comply
and, as amended or supplemented, if applicable, will comply in all material
respects with the Securities Act and the applicable rules and regulations
of the Commission thereunder and (iii) the Prospectus does not contain and,
as amended or supplemented, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and
warranties set forth in this paragraph 1(b) do not apply to statements or
omissions in the Registration Statement or the Prospectus based upon
information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate
3
<PAGE>
power and authority to own its property and to conduct its business as
described in the Prospectus and is duly qualified to transact business and
is in good standing in each jurisdiction in which the conduct of its
business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or
be in good standing would not have a material adverse effect on the Company
and its subsidiaries, taken as a whole.
(d) Each of Holdings and Publishing is a duly formed and validly
existing limited liability company under the laws of the State of Delaware,
with the power under the Delaware Limited Liability Company Act, as amended
from time to time, and its certificate of formation and limited liability
company agreement to own its property and assets and to conduct its
business as described in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in which the conduct
of its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or
be in good standing would not have a material adverse effect on the Company
and its subsidiaries, taken as a whole; upon completion of the
Reorganization, all of the issued and outstanding membership interests of
Holdings and Publishing will be owned, either directly or indirectly, by
the Company, free and clear of all liens, encumbrances, equities or claims
except as otherwise described in the Prospectus.
(e) Petersen Capital Corp. ("Capital") has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
State of Delaware, has the corporate power and authority to own and lease
its property and to conduct its business and is duly qualified to transact
business and is in good standing in each jurisdiction in which the conduct
of its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or
be in good standing would not have a material adverse effect on the Company
and its subsidiaries, taken as a whole; all of the issued shares of capital
stock of Capital have been duly and validly authorized and issued, are
fully paid and non-assessable and are owned directly by Publishing, free
and clear of all liens, encumbrances, equities or claims.
(f) This Agreement has been duly authorized, executed and delivered by
the Company.
(g) The Company has all requisite corporate power and authority to (i)
execute, deliver and perform its obligations under this Agreement, (ii)
execute, deliver and perform its obligations under all other agreements and
instruments executed and delivered by the Company pursuant to or in
connection with this Agreement, and (iii) issue the Shares, in the manner
and for the purpose contemplated by this Agreement.
(h) Upon completion of the Reorganization, the authorized capital
stock of the Company will conform as to legal matters to the description
thereof contained in the Prospectus.
(i) The shares of Common Stock outstanding prior to the issuance of
the Shares have been duly authorized and are validly issued, fully paid and
non-assessable.
(j) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this
4
<PAGE>
Agreement, will be validly issued, fully paid and non-assessable, and the
issuance of such Shares will not be subject to any preemptive or similar
rights.
(k) As of the date hereof, except as set forth in the Prospectus, (i)
there are no outstanding subscriptions, options, warrants, rights,
convertible securities or other binding agreements or commitments of any
character obligating the Company or its subsidiaries to issue any
securities and (ii) there is no agreement, understanding or arrangement
among the Company or its subsidiaries and their respective securityholders
or any other Person relating to the ownership or disposition of any capital
stock in the Company or its subsidiaries or the governance of the Company's
or its subsidiaries' affairs, and such agreements, arrangements or
understandings will not be breached or violated as a result of the
execution and delivery of, or the consummation of the transactions
contemplated by, this Agreement.
(l) The execution and delivery by the Company of, and the performance
by the Company of its obligations under, this Agreement will not contravene
any provision of applicable law or the certificate of incorporation or by-
laws of the Company or any agreement or other instrument binding upon the
Company or any of its subsidiaries that is material to the Company and its
subsidiaries, taken as a whole, or any judgment, order or decree of any
governmental body, agency or court having jurisdiction over the Company or
any subsidiary, and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for the
performance by the Company of its obligations under this Agreement, except
such as may be required by the securities or Blue Sky laws of the various
states in connection with the offer and sale of the Shares.
(m) There are no legal or governmental proceedings pending or, to the
knowledge of the Company, threatened to which the Company or any of its
subsidiaries is a party or to which any of the properties of the Company or
any of its subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not so described or any
statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described or filed as
required.
(n) Each preliminary prospectus filed as part of the Registration
Statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Securities Act, complied when so filed in
all material
5
<PAGE>
respects with the Securities Act and the applicable rules and regulations
of the Commission thereunder.
(o) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described
in the Prospectus, will not be an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended.
(p) To the best of the Company's knowledge, the financial statements
of the Company together with related notes set forth in the Prospectus
fairly present the financial condition of the Company, as of the dates
indicated, and the results of operations and changes in financial position
for the periods therein specified in conformity with generally accepted
accounting principles consistently applied throughout the periods involved
(except as otherwise stated therein); the summary and selected financial
data in the Prospectus present fairly the financial information shown
therein and have been prepared and compiled on a basis consistent with
audited financial statements included therein, except as otherwise stated
therein; and the pro forma financial information and the related notes
thereto included in the Prospectus have been prepared using reasonable
assumptions and have been prepared in accordance with the applicable
requirements of the Securities Act and include all adjustments necessary to
present fairly the pro forma financial information included in the
Prospectus at the respective dates and for the respective periods
indicated. Ernst & Young LLP, which has reported upon the audited
financial statements included in the Prospectus, is an independent public
accounting firm as required by the Securities Act and the rules and
regulations thereunder.
(q) The Company and its subsidiaries (i) are in compliance with any
and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), (ii) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and
conditions of such permits, licenses or approvals would not, singly or in
the aggregate, have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
6
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(r) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with
Environmental Laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to third
parties) which would, singly or in the aggregate, have a material adverse
effect on the Company and its subsidiaries, taken as a whole.
(s) The execution and delivery of this Agreement and the sale of the
Shares to the Company will not involve any non-exempt prohibited
transaction within the meaning of Section 406 of ERISA or Section 4975 of
the Code on the part of the Company or any of its subsidiaries. No
Reportable Event (as defined in Section 4043 of ERISA) has occurred during
the five-year period prior to the date on which this representation is made
or deemed made with respect to any Employee Benefit Plan (as defined
below), and the Company and each of its subsidiaries have complied in all
material respects with the applicable provisions of ERISA and the Code in
connection with the Employee Benefit Plans. The present value of all
accrued benefits under each Employee Benefit Plan subject to Title IV of
ERISA (based on the current liability, interest rate and other assumptions
used in preparation of the plan's Form 5500 Annual Report) did not, as of
the last annual valuation date prior to the date on which this
representation is made or deemed made, exceed the value of the assets of
such plan allocable to such accrued benefits. Neither the Company, any of
its subsidiaries, nor any Commonly Controlled Entity (as defined below) has
had a complete or partial withdrawal from any Multiemployer Plan (as
defined in Section 4001(a)(3) of ERISA), and neither the Company, any of
its subsidiaries, nor any Commonly Controlled Entity would become subject
to any liability under ERISA if the Company, any of its subsidiaries, or
any such Commonly Controlled Entity were to withdraw completely from all
Multiemployer Plans as of the valuation date most closely preceding the
date on which such representation is made or deemed made. No such
Multiemployer Plan is in reorganization or insolvent. There are no
material liabilities of the Company, any of its subsidiaries, or any
Commonly Controlled Entity for post-retirement benefits to be provided to
their current and former employees under Plans which are welfare benefit
plans (as described in Section 3(1) of ERISA). "Commonly Controlled
Entity" shall mean any person or entity that, together with the Company or
any of its subsidiaries is treated as a single employer under Section
414(b), (c), (m) or (o) of the Code. "Employee Benefit Plan" shall mean an
employee benefit plan, as defined in Section 3(3) of ERISA, which is
maintained or contributed to by the Company or any of its subsidiaries or
any Commonly Controlled Entity or to
7
<PAGE>
which the Company or any of its subsidiaries or any Commonly Controlled
Entity may have liability.
(t) All tax returns required to be filed by the Company or its
subsidiaries in any jurisdiction (including foreign jurisdictions) have
been so filed and all taxes, assessments, fees and other charges including,
without limitation, withholding taxes, penalties, and interest ("Taxes")
due or claimed to be due have been paid, other than those Taxes being
contested in good faith and those Taxes for which adequate reserves or
accruals have been established in accordance with generally accepted
accounting principles, except where the failure to file such returns or to
pay such Taxes is not reasonably likely to have, singly or in the
aggregate, a material adverse effect on the Company and its subsidiaries,
taken as a whole. The Company knows of no actual or proposed additional
tax assessments for any fiscal period against the Company or its
subsidiaries that, individually or in the aggregate, is reasonably likely
to have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(u) Except with respect to the Registration Rights Agreement dated
November 25, 1996 (relating to the 144A Notes) and the Securityholders
Agreement dated as of September 30, 1996, there are no contracts,
agreements or understandings between the Company and any person granting
such person the right to require the Company to file a registration
statement under the Securities Act with respect to any securities of the
Company or to require the Company to include such Securities with the
Shares registered pursuant to the Registration Statement.
(v) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (i) the Company and
its subsidiaries have not incurred any material liability or obligation,
direct or contingent, nor entered into any material transaction not in the
ordinary course of business; (ii) the Company has not purchased any of its
outstanding capital stock, nor declared, paid or otherwise made any
dividend or distribution of any kind on its capital stock other than
ordinary and customary dividends; (iii) there has not been any material
change in the capital stock, short-term debt or long-term debt of the
Company and its consolidated subsidiaries; and (iv) there has not occurred
any material adverse change, or any development involving a prospective
material adverse change, in the condition, financial or otherwise, or in
the earnings, business or operations of the Company and its subsidiaries,
taken as a whole, from that set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this
8
<PAGE>
Agreement), except in each case as described in or contemplated by the
Prospectus.
(w) The Company and its subsidiaries have good and marketable title in
fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the
Company and its subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or
such as do not materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by the
Company and its subsidiaries; and any real property and buildings held
under lease by the Company and its subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of
such property and buildings by the Company and its subsidiaries, in each
case except as described in or contemplated by the Prospectus.
(x) The Company and its subsidiaries own or possess, or can acquire on
reasonable terms, all material patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information,
systems or procedures), trademarks, service marks and trade names currently
employed by them in connection with the business now operated by them, and
neither the Company nor any of its subsidiaries has received any notice of
infringement of or conflict with asserted rights of others with respect to
any of the foregoing which, singly or in the aggregate, if the subject of
an unfavorable decision, ruling or finding, would result in any material
adverse change in the condition, financial or otherwise, or in the
earnings, business or operations of the Company and its subsidiaries, taken
as a whole.
(y) No material labor dispute with the employees of the Company or any
of its subsidiaries exists, except as described in or contemplated by the
Prospectus, or, to the knowledge of the Company, is imminent; and the
Company is not aware of any existing, threatened or imminent labor
disturbance by the employees of any of its principal suppliers or
contractors that could result in any material adverse change in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole.
(z) The Company and each of its subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the businesses in which they
are engaged; neither the Company nor any such subsidiary has
9
<PAGE>
been refused any insurance coverage sought or applied for; and neither the
Company nor any such subsidiary has any reason to believe that it will not
be able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition, financial or otherwise, or the earnings,
business or operations of the Company and its subsidiaries, taken as a
whole, except as described in or contemplated by the Prospectus.
(aa) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or
foreign regulatory authorities necessary to conduct their respective
businesses, and neither the Company nor any such subsidiary has received
any notice of proceedings relating to the revocation or modification of any
such certificate, authorization or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would result in a material adverse change in the condition, financial or
otherwise, or in the earnings, business or operations of the Company and
its subsidiaries, taken as a whole, except as described in or contemplated
by the Prospectus.
(ab) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's general
or specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (iii)
access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets
is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(ac) The statistical and market-related data included in the
Prospectus are based on or derived from sources which the Company believes
to be reliable and accurate or represents the Company's good faith
estimates that are made on the basis of data derived from such sources,
and, where applicable, is consistent with the most recent six-month audit
reports issued by the Audit Bureau of Circulations.
(ad) As of the Closing Date, the Reorganization described in the
Prospectus under the heading "The Reorganization" will all have been
completed as described in the Prospectus.
10
<PAGE>
(ae) The Company has complied with all provisions of Section 517.075,
Florida Statutes relating to doing business with the Government of Cuba or
with any person or affiliate located in Cuba.
2. Agreements to Sell and Purchase. The Company hereby agrees to
-------------------------------
sell to the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company the respective numbers of Firm Shares set forth in Schedules I and II
hereto opposite its names at U.S.$__________/3/ a share ("Purchase Price").
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
to the U.S. Underwriters the Additional Shares, and the U.S. Underwriters shall
have a one-time right to purchase, severally and not jointly, up to 937,500
Additional Shares at the Purchase Price. If the U.S. Representatives, on behalf
of the U.S. Underwriters, elect to exercise such option, the U.S.
Representatives shall so notify the Company in writing not later than 30 days
after the date of this Agreement, which notice shall specify the number of
Additional Shares to be purchased by the U.S. Underwriters and the date on which
such shares are to be purchased. Such date may be the same as the Closing Date
(as defined below) but not earlier than the Closing Date nor later than ten
business days after the date of such notice. Additional Shares may be purchased
as provided in Section 4 hereof solely for the purpose of covering over-
allotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each U.S. Underwriter agrees, severally
and not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as the U.S. Representatives may
determine) that bears the same proportion to the total number of Additional
Shares to be purchased as the number of U.S. Firm Shares set forth in Schedule I
hereto opposite the name of such U.S. Underwriter bears to the total number of
U.S. Firm Shares.
The Company hereby agrees that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period ending 180 days after the date of the Prospectus, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
- -------------------
/3/ Insert offering price less underwriting fee, management fee and selling
concession.
11
<PAGE>
purchase any option or contract to sell, grant any option, right or warrant to
purchase, loan or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (ii) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic consequences
of ownership of the Common Stock, whether any such transaction described in
clause (i) or (ii) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. The foregoing sentence shall not apply
to (A) the Shares to be sold hereunder, (B) the issuance by the Company of
shares of Common Stock upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof of which the
Underwriters have been advised in writing, (C) the granting of _______ options
or other awards to purchase an equal number of Class A Common Stock of the
Company under the Company's 1997 Stock Option Plan or the issuance of _______
shares of Class A Common Stock under the Company's Stock Purchase Plan or (D)
the issuance of shares of Common Stock in connection with the Reorganization.
3. Terms of Public Offering. The Company is advised by you that the
------------------------
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Company is further
advised by you that the Shares are to be offered to the public initially at
U.S.$__________ a share (the "Public Offering Price") and to certain dealers
selected by you at a price that represents a concession not in excess of
U.S.$__________ a share under the Public Offering Price, and that any
Underwriter may allow, and such dealers may re-allow, a concession, not in
excess of U.S.$__________ a share, to any Underwriter or to certain other
dealers.
4. Payment And Delivery. Payment for the Firm Shares shall be made
--------------------
to the Company in Federal or other funds immediately available in New York City
against delivery of such Firm Shares for the respective accounts of the several
Underwriters at 10:00 A.M., New York City time, on ____________________,
1997,/6/ or at such other time on the same or such other date, not later than
____________________, 1997,/5/ as shall be designated in writing by you. The
time and date of such payment are hereinafter referred to as the "Closing Date."
- -------------------
/5/ Insert date 3 business days or, in the event the offering is priced after
4:30 P.M. Eastern Time, 4 business days after date of Underwriting Agreement.
/6/ Insert date 5 business days after the date inserted in accordance with note
5 above.
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<PAGE>
Payment for any Additional Shares shall be made to the Company in
Federal or other funds immediately available in New York City against delivery
of such Additional Shares for the respective accounts of the several
Underwriters at 10:00 A.M., New York City time, on the date specified in the
notice described in Section 2 or at such other time on the same or on such other
date, in any event not later than ____________________, 1997,/7/ as shall be
designated in writing by the U.S. Representatives. The time and date of such
payment are hereinafter referred to as the "Option Closing Date."
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters; with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
5. Conditions to the Underwriters' Obligations. The obligations of
-------------------------------------------
the Company to sell the Shares to the Underwriters and the several obligations
of the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than 5:00 P.M. (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor shall any
notice have been given of any intended or potential downgrading or of
any review for a possible change that does not indicate the direction
of the possible change, in the rating accorded any of the Company's or
any of its subsidiaries' securities by any "nationally recognized
statistical rating organization," as such term is defined for purposes
of Rule 436(g)(2) under the Securities Act; and
- ------------------
/7/ Insert date 10 business days after the expiration of the greenshoe option.
13
<PAGE>
(ii) there shall not have occurred any change, or any development
involving a prospective change, in the condition, financial or
otherwise, or in the earnings, business or operations of the Company
and its subsidiaries, taken as a whole, from that set forth in the
Prospectus (exclusive of any amendments or supplements thereto
subsequent to the date of this Agreement) that, in your judgment, is
material and adverse and that makes it, in your judgment,
impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of
the Company, to the effect set forth in clause (a)(i) above and to the
effect that the representations and warranties of the Company contained in
this Agreement are true and correct as of the Closing Date and that the
Company has complied with all of the agreements and satisfied all of the
conditions on its part to be performed or satisfied hereunder on or before
the Closing Date.
The officer signing and delivering such certificate may rely upon the
best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an
opinion of Kirkland & Ellis, outside counsel for the Company, dated the
Closing Date, to the effect that:
(i) the Company is a corporation duly incorporated, validly
existing and in good standing under the General Corporation Law of the
State of Delaware, has the power and authority to own and lease its
property and to conduct its business as described in the Prospectus
and is duly qualified to do business and is in good standing in the
jurisdictions set forth on a schedule to such opinion;
(ii) each subsidiary of the Company that is a limited liability
company is a duly formed and validly existing limited liability
company in good standing under the laws of the State of Delaware, with
the power and authority to own and lease its property and to conduct
its business as described in the Prospectus and is duly qualified to
do business and is in good standing in the jurisdictions set forth on
a schedule to such opinion;
(iii) each subsidiary of the Company that is a corporation is duly
incorporated, validly existing and in good standing under the laws of
the jurisdiction of
14
<PAGE>
its incorporation, has the power and authority to own and lease its property and
to conduct its business as described in the Prospectus and is duly qualified to
do business and is in good standing in the jurisdictions set forth on a schedule
to such opinion;
(iv) the authorized capital stock of the Company (including its authorized
Common Stock) is as set forth under the heading "Capitalization" on a pro forma
as adjusted basis in the Prospectus and conforms to the description of the terms
thereof contained under the heading "Description of Capital Stock" in the
Prospectus;
(v) the shares of Common Stock outstanding prior to the issuance of the
Shares have been duly authorized and are validly issued, fully paid and non-
assessable;
(vi) all of the issued membership interests of each subsidiary of the
Company that is a limited liability Company are owned directly by the Company,
free and clear of all liens, encumbrances, equities or claims and all of the
issued shares of capital stock of each subsidiary of the Company that is a
corporation have been duly authorized and are validly issued, fully paid and
non-assessable and are owned directly by the Company, free and clear of all
liens, encumbrances, equities or claims;
(vii) the Shares have been duly authorized and when appropriate certificates
representing such Shares are duly countersigned by the Company's transfer agent/
registrar and delivered against payment of the agreed consideration therefor in
accordance with the terms of this Agreement, will be validly issued, fully paid
and non-assessable. The issuance of such Shares is not subject to subject to any
preemptive rights under the terms of the statute under which the Company is
incorporated, under the Company's Certificate of Incorporation or under any
contractual provision of which such counsel has knowledge;
(viii) this Agreement has been duly authorized, executed and delivered by the
Company and the Company has all requisite corporate power and authority to (i)
execute, deliver and perform its obligations under this Agreement, (ii) execute,
deliver and perform its obligations under all other agreements and instruments
executed and delivered by the Company pursuant to or in connection with this
Agreement, and (iii) issue the Shares, in the manner and for the purpose
contemplated by this Agreement;
15
<PAGE>
(ix) the execution and delivery by the Company of, and the sale of the
Shares by the Company in accordance with, this Agreement do not (i) violate the
certificate of incorporation or by-laws of the Company, or (ii) constitute a
violation by the Company of any applicable provision of any law, statute or
regulation (except such counsel need not express any opinion in this paragraph
as to compliance with any disclosure requirement or any prohibition against
fraud or misrepresentation or as to whether performance of the indemnification
or contribution provisions in this Agreement would be permitted), or (iii)
violate, breach or result in a default under existing obligation of the Company
or any of its subsidiaries under, to the best of such counsel's knowledge, any
agreement or other instrument binding upon the Company or any of its
subsidiaries that is material to the Company and its subsidiaries, taken as a
whole, or (iv) to the best of such counsel's knowledge, contravene any judgment,
order or decree of any governmental body, agency or court having jurisdiction
over the Company or any subsidiary;
(x) The Company is not required to obtain any consent, approval,
authorization or order of any governmental agency for the issuance, delivery and
sale of the Shares under this Agreement, except such as may be required by the
securities or Blue Sky laws of the various states in connection with the offer
and sale of the Shares by the U.S. Underwriters or such as have been obtained
under the Securities Act;
(xi) the statements (A) in the Prospectus under the captions "The
Reorganization", "Shares Eligible for Future Sale", "Certain United States Tax
Considerations for Non-United States Holders", "Management--Employment
Agreements", "Principal Stockholders--Securityholders Agreement" and
"Description of Capital Stock" and (B) in the Registration Statement in Items 14
and 15 in each case to the extent that such statements constitute summaries of
laws, government rules or regulations or documents, fairly present the
information required by Form S-1;
(xii) such counsel does not know of any legal or governmental proceedings
pending or threatened against the Company or any of its subsidiaries that are
required to be described in the Prospectus and are not so described or of any
statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described or filed as
required;
16
<PAGE>
(xiii) the Company is not and, after giving effect to the offering and sale
of the Shares and the application of the proceeds thereof as described in the
Prospectus, will not be an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended;
(xiv) such counsel (A) is of the opinion that the Registration Statement
and Prospectus, on the Effective Date (except for financial statements and
schedules and other financial and statistical data included therein as to which
such counsel need not express any opinion), appeared on their face to comply in
all material respects with the requirements as to form for registration
statements on Form S-1 under the Securities Act and the applicable rules and
regulations of the Commission thereunder; (B) has no reason to believe that
(except for financial statements and schedules and other financial and
statistical data as to which such counsel need not express any belief) the
Registration Statement and the prospectus included therein at the time the
Registration Statement became effective contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading and (C) has no reason
to believe that (except for financial statements and schedules and other
financial and statistical data as to which such counsel need not express any
belief) the Prospectus at the date of such Prospectus contained, or at the date
of such opinion contains, any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(d) The Underwriters shall have received on the Closing Date an opinion of
O'Melveny & Myers LLP, counsel for the Underwriters, dated the Closing Date,
covering the matters referred to in subparagraphs (vii), (viii), (xi) (but only
as to the statements in the Prospectus under "Description of Capital Stock" and
"Underwriters"), and (xiv) of paragraph (c) above.
With respect to subparagraph (xiv) of paragraph (c) above, Kirkland & Ellis
and O'Melveny & Myers LLP may state that their opinion and belief are based upon
their participation in the preparation of the Registration Statement and
Prospectus and any amendments or supplements thereto and review and discussion
of the contents thereof, but are without independent check or verification,
except as specified.
17
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The opinion of Kirkland & Ellis described in paragraph (c) above shall
be rendered to the Underwriters at the request of the Company and shall so
state therein.
(e) The Underwriters shall have received, on each of the date hereof
and the Closing Date, a letter dated the date hereof or the Closing Date,
as the case may be, in form and substance satisfactory to the Underwriters,
from Ernst & Young LLP, independent public accountants, containing
statements and information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial statements
and certain financial information (including the pro forma financial
statements) contained in the Registration Statement and the Prospectus;
provided that the letter delivered on the Closing Date shall use a "cut-off
--------
date" not earlier than the date hereof.
(f) The "lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you and the shareholders, officers and directors
of the Company relating to sales and certain other dispositions of shares
of Common Stock or certain other securities, delivered to you on or before
the date hereof, shall be in full force and effect on the Closing Date.
(g) The several obligations of the U.S. Underwriters to purchase
Additional Shares hereunder are subject to the delivery to the U.S.
Representatives on the Option Closing Date of such documents as they may
reasonably request with respect to the good standing of the Company, the
due authorization and issuance of the Additional Shares and other matters
related to the issuance of the Additional Shares.
6. Covenants of the Company. In further consideration of the
------------------------
agreements of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, [nine] signed copies of the
Registration Statement (including exhibits thereto) and for delivery to
each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and to furnish to you in New York City, without
charge, prior to 5:00 P.M. New York City time on the business day next
succeeding the date of this Agreement and during the period mentioned in
paragraph (c) below, as many copies of the Prospectus and any supplements
and amendments thereto or to the Registration Statement as you may
reasonably request.
(b) Before amending or supplementing the Registration Statement or the
Prospectus, to furnish to you a copy of
18
<PAGE>
each such proposed amendment or supplement and not to file any such
proposed amendment or supplement to which you reasonably object, and to
file with the Commission within the applicable period specified in Rule
424(b) under the Securities Act any prospectus required to be filed
pursuant to such Rule.
(c) If, during such period after the first date of the public offering
of the Shares as in the opinion of counsel for the Underwriters the
Prospectus is required by law to be delivered in connection with sales by
an Underwriter or dealer, any event shall occur or condition exist as a
result of which it is necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances
when the Prospectus is delivered to a purchaser, not misleading, or if, in
the opinion of counsel for the Underwriters, it is necessary to amend or
supplement the Prospectus to comply with applicable law, forthwith to
prepare, file with the Commission and furnish, at its own expense, to the
Underwriters and to the dealers (whose names and addresses you will furnish
to the Company) to which Shares may have been sold by you on behalf of the
Underwriters and to any other dealers upon request, either amendments or
supplements to the Prospectus so that the statements in the Prospectus as
so amended or supplemented will not, in the light of the circumstances when
the Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request; provided, that in connection therewith the Company shall not be
--------
required to qualify as a foreign corporation or to file a general consent
to service of process in any jurisdiction.
(e) To make generally available to the Company's security holders and
to you as soon as practicable an earning statement covering the twelve-
month period ending [December 31], 1998 that satisfies the provisions of
Section 11(a) of the Securities Act and the rules and regulations of the
Commission thereunder.
(f) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of its obligations under this
Agreement, including: (i) the fees, disbursements and expenses of the
Company's counsel and the Company's accountants in connection with the
registration and delivery of the Shares under the Securities Act and all
other fees or expenses in connection with the preparation and filing of the
19
<PAGE>
Registration Statement, any preliminary prospectus, the Prospectus and
amendments and supplements to any of the foregoing, including all printing
costs associated therewith, and the mailing and delivering of copies
thereof to the Underwriters and dealers, in the quantities hereinabove
specified, (ii) all costs and expenses related to the transfer and delivery
of the Shares to the Underwriters, including any transfer or other taxes
payable thereon, (iii) the cost of printing or producing any Blue Sky or
Legal Investment memorandum in connection with the offer and sale of the
Shares under state securities laws and all expenses in connection with the
qualification of the Shares for offer and sale under state securities laws
as provided in Section 6(d) hereof, including filing fees and the
reasonable fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky or
Legal Investment memorandum, (iv) all filing fees and disbursements of
counsel to the Underwriters incurred in connection with the review and
qualification of the offering of the Shares by the National Association of
Securities Dealers, Inc., (v) all fees and expenses in connection with the
preparation and filing of the registration statement on Form 8-A relating
to the Common Stock and all costs and expenses incident to listing the
Shares on the NYSE, (vi) the cost of printing certificates representing the
Shares, (vii) the costs and charges of any transfer agent, registrar or
depositary, (viii) the costs and expenses of the Company relating to
investor presentations on any "road show" undertaken in connection with the
marketing of the offering of the Shares, including, without limitation,
expenses associated with the production of road show slides and graphics,
fees and expenses of any consultants engaged in connection with the road
show presentations with the prior approval of the Company, travel and
lodging expenses of the representatives and officers of the Company and any
such consultants, and the cost of any aircraft chartered in connection with
the road show, and (ix) all other costs and expenses incident to the
performance of the obligations of the Company hereunder for which provision
is not otherwise made in this Section. It is understood, however, that
except as provided in this Section, Section 7 entitled "Indemnity and
Contribution", and the last paragraph of Section 9 below, the Underwriters
will pay all of their costs and expenses, including fees and disbursements
of their counsel, stock transfer taxes payable on resale of any of the
Shares by them and any advertising expenses connected with any offers they
may make.
(g) to pay all reasonable fees and disbursements of counsel incurred
by BT Alex. Brown in connection with the Directed Share Program and stamp
duties, similar taxes or duties or other taxes, if any, incurred by BT
Alex. Brown in connection with the Directed Share Program.
20
<PAGE>
Furthermore, the Company covenants with BT Alex. Brown that the
Company will comply with all applicable securities and other applicable laws,
rules and regulations in each foreign jurisdiction, if any, in which the
Directed Shares are offered in connection with the Directed Share Program.
7. Indemnity And Contribution.
--------------------------
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person, if any, who controls any Underwriter within the meaning of
either Section 15 of the Securities Act or Section 20 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), from and against any
and all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred in connection
with defending or investigating any such action or claim) caused by any
untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement or any amendment thereof, any preliminary
prospectus or the Prospectus (as amended or supplemented if the Company
shall have furnished any amendments or supplements thereto), or caused by
any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages or liabilities
are caused by any such untrue statement or omission or alleged untrue
statement or omission based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you
expressly for use therein; provided, however, that the foregoing indemnity
-----------------
agreement with respect to any preliminary prospectus shall not inure to the
benefit of any Underwriter from whom the person asserting any such losses,
claims, damages or liabilities purchased Shares, or any person controlling
such Underwriter, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such
Underwriter to such person, if required by law so to have been delivered,
at or prior to the written confirmation of the sale of the Shares to such
person, and if the Prospectus (as so amended or supplemented) would have
cured the defect giving rise to such losses, claims, damages or
liabilities, unless such failure is the result of noncompliance by the
Company with Section 6(a) hereof.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement and each person, if any, who controls the Company
within the meaning of either Section 15 of the Securities Act or Section 20
of the Exchange Act to the same extent as the foregoing indemnity from the
Company to such Underwriter,
21
<PAGE>
but only with reference to information relating to such Underwriter
furnished to the Company in writing by such Underwriter through you
expressly for use in the Registration Statement, any preliminary
prospectus, the Prospectus or any amendments or supplements thereto.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may
be sought pursuant to paragraph (a) or (b) of this Section 7, such person
(the "indemnified party") shall promptly notify the person against whom
such indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party, upon request of the indemnified party, shall retain
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party and any others the indemnifying party may designate in
such proceeding and shall pay the reasonable fees and disbursements of such
counsel related to such proceeding. In any such proceeding, any
indemnified party shall have the right to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such
indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii)
the named parties to any such proceeding (including any impleaded parties)
include both the indemnifying party and the indemnified party and
representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them. It is
understood that the indemnifying party shall not, in respect of the legal
expenses of any indemnified party in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the fees and
expenses of more than one separate firm (in addition to any local counsel)
for all such indemnified parties and that all such fees and expenses shall
be reimbursed as they are incurred. Such firm shall be designated in
writing by Morgan Stanley & Co. Incorporated, in the case of parties
indemnified pursuant to paragraph (a) of this Section 7, and by the
Company, in the case of parties indemnified pursuant to paragraph (b) of
this Section 7. The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent, but if
settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or
judgment; provided that the indemnified party be entitled to
indemnification pursuant to this Section 7. Notwithstanding the foregoing
sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by the second and third sentences of this
paragraph, the indemnifying party agrees that it shall
22
<PAGE>
be liable for any settlement of any proceeding effected without its written
consent if (i) such settlement is entered into more than 30 days after
receipt by such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified party in
accordance with such request prior to the date of such settlement, unless a
good faith dispute regarding such fees and expenses exists and the
indemnifying party has provided notice to the indemnified party of such
dispute. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been
a party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter
of such proceeding.
(d) To the extent the indemnification provided for in paragraph (a) or
(b) of this Section 7 is unavailable to an indemnified party or
insufficient in respect of any losses, claims, damages or liabilities
referred to therein, then each indemnifying party under such paragraph, in
lieu of indemnifying such indemnified party thereunder, shall contribute to
the amount paid or payable by such indemnified party as a result of such
losses, claims, damages or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other hand from the offering of the
Shares or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company on the one hand and of the
Underwriters on the other hand in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities, as
well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the other
hand in connection with the offering of the Shares shall be deemed to be in
the same respective proportions as the net proceeds from the offering of
the Shares (before deducting expenses) received by the Company and the
total underwriting discounts and commissions received by the Underwriters,
in each case as set forth in the table on the cover of the Prospectus, bear
to the aggregate Public Offering Price of the Shares. The relative fault
of the Company on the one hand and the Underwriters on the other hand shall
be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
23
<PAGE>
Company or by the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement
or omission. The Underwriters' respective obligations to contribute
pursuant to this Section 7 are several in proportion to the respective
number of Shares they have purchased hereunder, and not joint.
(e) The Company and the Underwriters agree that it would not be just
or equitable if contribution pursuant to this Section 7 were determined by
pro rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in paragraph (d) of
this Section 7. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages and liabilities referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of this
Section 7, no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. The remedies provided for in this
Section 7 are not exclusive and shall not limit any rights or remedies
which may otherwise be available to any indemnified party at law or in
equity.
(f) The indemnity and contribution provisions contained in this
Section 7 and the representations, warranties and other statements of the
Company contained in this Agreement shall remain operative and in full
force and effect regardless of (i) any termination of this Agreement, (ii)
any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter or by or on behalf of the Company, its officers
or directors or any person controlling the Company and (iii) acceptance of
and payment for any of the Shares.
8. Termination. This Agreement shall be subject to termination by
-----------
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New
24
<PAGE>
York Stock Exchange, the American Stock Exchange, the National Association of
Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company or any of its subsidiaries shall have been suspended
on any exchange or in any over-the-counter market, (iii) a general moratorium on
commercial banking activities in New York shall have been declared by either
Federal or New York State authorities or (iv) there shall have occurred any
outbreak or escalation of hostilities or any change in financial markets or any
calamity or crisis that, in your judgment, is material and adverse and (b) in
the case of any of the events specified in clauses (a)(i) through (iv), such
event, singly or together with any other such event, makes it, in your judgment,
impracticable to market the Shares on the terms and in the manner contemplated
in the Prospectus.
9. Effectiveness; Defaulting Underwriters. This Agreement shall
--------------------------------------
become effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase Shares
that it has or they have agreed to purchase hereunder on such date, and the
aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase is not more than one-tenth of the
aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Firm Shares set forth opposite their respective names in Schedule I or Schedule
II bears to the aggregate number of Firm Shares set forth opposite the names of
all such non-defaulting Underwriters, or in such other proportions as you may
specify, to purchase the Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date; Provided
that in no event shall the number of Shares that any Underwriter has agreed to
purchase pursuant to this Agreement be increased pursuant to this Section 9 by
an amount in excess of one-ninth of such number of Shares without the written
consent of such Underwriter. If, on the Closing Date, any Underwriter or
Underwriters shall fail or refuse to purchase Firm Shares and the aggregate
number of Firm Shares with respect to which such default occurs is more than
one-tenth of the aggregate number of Firm Shares to be purchased, and
arrangements satisfactory to you and the Company for the purchase of such Firm
Shares are not made within 36 hours after such default, this Agreement shall
terminate without liability on the part of any non-defaulting Underwriter or the
Company. In any such case either you or the Company shall have the right to
postpone the Closing Date, but in no event for longer than seven days, in order
that the required changes, if any, in the Registration Statement and in the
Prospectus or in any other documents or arrangements may be effected. If, on
the Option Closing Date, any Underwriter or Underwriters shall fail or
25
<PAGE>
refuse to purchase Additional Shares and the aggregate number of Additional
Shares with respect to which such default occurs is more than one-tenth of the
aggregate number of Additional Shares to be purchased, the non-defaulting
Underwriters shall have the option to (i) terminate their obligation hereunder
to purchase Additional Shares or (ii) purchase not less than the number of
Additional Shares that such non-defaulting Underwriters would have been
obligated to purchase in the absence of such default. Any action taken under
this paragraph shall not relieve any defaulting Underwriter from liability in
respect of any default of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of the Company to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder. The Company shall have no obligation to
reimburse the Underwriters if the Underwriters terminate this Agreement pursuant
to Section 8 hereof.
10. Counterparts. This Agreement may be signed in two or more
------------
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument. Facsimile
signatures shall have the same effect as original signatures.
11. Applicable Law. This Agreement shall be governed by and
--------------
construed in accordance with the internal laws of the State of New York.
[Remainder of this page intentionally left blank.]
26
<PAGE>
12. Headings. The headings of the sections of this Agreement have
--------
been inserted for convenience of reference only and shall not be deemed a part
of this Agreement.
Very truly yours,
The Petersen Companies, Inc.
By
---------------------------------------
Name:
Title:
Accepted as of the date hereof
MORGAN STANLEY & CO. INCORPORATED
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
BT ALEX. BROWN INCORPORATED
GOLDMAN, SACHS & CO.
Acting severally on behalf of themselves
and the several U.S. Underwriters
named in Schedule I hereto.
By Morgan Stanley & Co. Incorporated
By
--------------------------
Name:
Title:
MORGAN STANLEY & CO. INTERNATIONAL LIMITED
DONALDSON, LUFKIN & JENRETTE INTERNATIONAL
BT ALEX. BROWN INTERNATIONAL,
A DIVISION OF BANKERS TRUST INTERNATIONAL PLC
GOLDMAN SACHS INTERNATIONAL
Acting severally on behalf of themselves
and the several International Underwriters
named in Schedule II hereto.
By Morgan Stanley & Co. International Limited
By
--------------------------
Name:
Title:
S-1
<PAGE>
Schedule I
U.S. Underwriters
-----------------
<TABLE>
<CAPTION>
Number of
Firm Shares
Underwriter To Be Purchased
- ---------------------------------------------------- ---------------
<S> <C>
Morgan Stanley & Co. Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
BT Alex. Brown Incorporated
Goldman, Sachs & Co.
[NAMES OF OTHER U.S. UNDERWRITERS]
____________
Total U.S. Firm Shares
============
</TABLE>
I
<PAGE>
Schedule II
International Underwriters
--------------------------
<TABLE>
<CAPTION>
Number of
Firm Shares
Underwriter To Be Purchased
- ------------------------------------------ ---------------
<S> <C>
Morgan Stanley & Co. International Limited
Donaldson, Lufkin & Jenrette International
BT Alex. Brown International,
a division of Bankers Trust International, PLC
Goldman Sachs International
[Names of other International
Underwriters]
____________
Total International Shares
============
</TABLE>
II
<PAGE>
EXHIBIT 4.11
[LETTERHEAD OF FIRST UNION NATIONAL BANK]
August 18, 1997
Petersen Publishing Company, L.L.C.
6420 Wilshire Boulevard
Los Angeles, California 90048
Attention: Mr. Richard S. Willis,
Chief Financial Officer
Gentlemen:
First Union National Bank ("First Union") and First Union Capital Markets
Corp. (the "Arranger") have been informed that Petersen Holdings, L.L.C.
("Holdings") and The Petersen Companies, Inc., formerly known as BrightView
Communications Group, Inc. ("TPC," and together with Holdings, the "Parent"),
which together presently hold 100% of the outstanding membership interests in
Petersen Publishing Company, L.L.C. (the "Company"), intend to enter into a
series of transactions substantially as follows:
(i) The Parent proposes to effect a reorganization as a result of
which, among other things, Holdings will become a direct wholly owned
subsidiary of TPC and the Company will become an indirect wholly owned
subsidiary of TPC;
(ii) TPC proposes to effect an initial registered public offering of its
common stock and to use the proceeds therefrom (A) to refinance
approximately $60 million in aggregate principal amount of the Company's
existing senior bank credit facility, (B) to prepay up to $25 million in
aggregate principal amount of the Company's outstanding senior subordinated
notes (together with the redemption premium and accrued and unpaid interest
thereon), and (C) to redeem Preferred Units of Holdings having an aggregate
liquidation preference and accrued and unpaid preferred yield of up to $50
million; and
(iii) The Company proposes to enter into a Credit Agreement having
substantially the terms set forth on the
<PAGE>
August 18, 1997
Page 2
- -----------------------------
summary of terms and conditions attached hereto (the "Term Sheet") with
certain financial institutions for a senior revolving credit facility in
the aggregate principal amount of $175 million (the "Bank Credit
Facility"), the proceeds of which will be used to refinance the remainder
of the Company's existing senior bank credit facility and for working
capital and general corporate purposes, including payment of fees and
expenses (the transactions described in clauses (i) through (iii),
collectively, the "Transactions").
The Company has requested that First Union commit to provide the entire
principal amount of the Bank Credit Facility and that the Arranger agree to
structure, arrange and syndicate the Bank Credit Facility.
Based upon and subject to the foregoing and to the terms and conditions set
forth below and in the Term Sheet, First Union is pleased to confirm its
commitment (this "Commitment") to provide $175 million of the Bank Credit
Facility to the Company. First Union's obligation to provide the Bank Credit
Facility pursuant to this Commitment and the Arranger's agreement to provide the
services described herein are subject to (i) the Company's written acceptance of
a letter from First Union to the Company of even date herewith (the "Fee
Letter") pursuant to which the Company agrees to pay to First Union certain fees
in connection with the Bank Credit Facility as more particularly set forth
therein, (ii) the completion of a definitive credit agreement and related
documentation for the Bank Credit Facility in form and substance reasonably
satisfactory to First Union, (iii) compliance with all applicable laws and
regulations (including compliance of this Commitment and the transactions
described herein with all applicable federal banking laws, rules and
regulations), (iv) the absence of any condition in the financial or capital
markets prior to the execution of such definitive credit documentation that
could reasonably be expected to have a material adverse effect on the primary
syndication of the Bank Credit Facility, and (v) the satisfaction of all other
conditions described herein, in the Term Sheet and in such definitive credit
documentation.
First Union reserves the right, prior to or after the execution of
definitive documentation with respect to the Bank Credit Facility, and as part
of any syndication thereof or otherwise, to assign part of this Commitment, in
accordance with the Term Sheet, to one or more financial institutions that will
become lenders and be party to such definitive documentation. It is agreed that
no lender will receive compensation from or on
<PAGE>
August 18, 1997
Page 3
- -------------------------
behalf of the Company outside the terms contained herein and in the Fee Letter
in order to obtain its commitment to participate in the Bank Credit Facility.
The Company understands that the Arranger intends to commence its
syndication efforts immediately and agrees to assist the Arranger and First
Union in promptly completing a mutually satisfactory syndication. The
syndication will be accomplished by a variety of means, including direct contact
during the syndication between senior management of the Parent and the Company
and First Union and the Arranger and their respective affiliates and advisors.
It is a further condition to this Commitment that First Union act as sole
administrative and syndication agent, that the Arranger act as sole arranger for
the Bank Credit Facility, and that each will perform all functions and exercise
all authority customarily performed and exercised by them in such capacities.
First Union reserves the right to allocate (in whole or in part) to the Arranger
or any of First Union's other affiliates any fees payable to it in such manner
as it and its affiliates may agree in their sole discretion. The Company agrees
that First Union and the Arranger may share with any of their respective
affiliates and advisors any information related to the Transactions or any other
matter contemplated hereby, on a confidential basis.
The Company also agrees that First Union and its affiliates will be
afforded an opportunity to offer proposals to provide (a) any interest rate
caps, currency swaps and other hedging transactions to be entered into by the
Company or its affiliates and (b) cash management, funds transfer, trade,
corporate trust and securities services to be obtained by the Company or its
affiliates.
The Company agrees to reimburse First Union and the Arranger for all of
their reasonable fees and expenses (including reasonable attorneys' fees and
expenses) incurred in connection with all of the transactions described herein,
whether or not the Bank Credit Facility is closed or any credit is extended
thereunder. The Company also agrees to indemnify and hold harmless First Union,
the Arranger and their affiliates and their respective directors, officers,
employees and agents (collectively, the "Indemnified Parties") from and against
any and all actions, suits, losses, claims, damages and liabilities of any kind
or nature, joint or several, to which such Indemnified Parties may become
subject, related to or arising out of any of the transactions contemplated
herein, including without limitation the execution of definitive credit
documentation, the syndication and closing of the Bank Credit Facility and the
<PAGE>
August 18, 1997
Page 4
- -------------------------------
closing of the other Transactions, and will reimburse the Indemnified Parties
for all out-of-pocket expenses (including reasonable attorneys' fees and
expenses) on demand as they are incurred in connection with the investigation
of, preparation for, or defense of any pending or threatened claim or any action
or proceeding arising therefrom; provided, however, that no Indemnified Party
shall have any right to indemnification for any of the foregoing to the extent
resulting primarily from its own gross negligence or willful misconduct or from
any material breach hereof. This Commitment is addressed solely to the Company,
and neither First Union nor the Arranger, on the one hand, nor the Company, on
the other hand, shall be liable to the other or any other person for any
consequential damages that may be alleged as a result of this Commitment or any
of the transactions referred to herein. In the event that the closing of the
Bank Credit Facility fails to occur for any reason, the provisions of this
paragraph shall survive any termination of this Commitment.
Until such time as the Company has accepted this Commitment in writing as
provided below, the Company is not authorized to show or circulate this
Commitment or the Term Sheet, or disclose the contents thereof, to any other
person or entity (other than to its directors, officers and legal and financial
counsel in connection with their evaluation hereof, provided that each of such
persons shall also be bound by the confidentiality provisions hereof), except as
may be required by law or applicable judicial process. If the Company does show
or circulate this Commitment or the Term Sheet, or disclose the contents
thereof, in breach of the foregoing sentence, then the Company shall be deemed
to have accepted this Commitment.
First Union shall have the right to review and approve any public
announcement or public filing made after the date hereof relating to the Bank
Credit Facility or to First Union before any such announcement or filing is made
(such approval not to be unreasonably withheld or delayed). The Company agrees
and consents to First Union's disclosure of information relating to this
transaction to Gold Sheets and other similar bank trade publications. Such
-----------
information will consist of deal terms and other information customarily found
in such publications.
This Commitment shall terminate at 5:00 p.m. on August 22, 1997, unless
accepted prior to such time and, if accepted prior to such time, shall expire at
the earlier of (i) consummation of the initial public offering of TPC's common
stock, (ii) the occurrence of any event that First Union reasonably believes in
good faith has, or could be expected to have, a material adverse
<PAGE>
August 18, 1997
Page 5
- -------------------------
effect on the business, properties, operations, condition (financial or
otherwise) or prospects of the Company, and (iii) 5:00 p.m. on October 15, 1997,
if the initial borrowing under the Bank Credit Facility shall not have occurred
by such time.
This Commitment and the Fee Letter shall be governed by and construed in
accordance with the internal laws of the State of North Carolina, and together
constitute the entire agreement between the parties relating to the subject
matter hereof and thereof and supersede any previous agreement, written or oral,
between the parties with respect to the subject matter hereof and thereof.
<PAGE>
August 18, 1997
Page 6
- -------------------------------
If the Company is in agreement with the foregoing, please sign the
enclosed copy of this Commitment and return it to First Union together with an
executed copy of the Fee Letter by no later than 5:00 p.m. on August 22, 1997.
This Commitment will terminate at such time unless signed copies of this letter
and the Fee Letter shall have been delivered to First Union in accordance with
the terms hereof.
Sincerely,
FIRST UNION NATIONAL BANK
By:
------------------------------
Title:
---------------------------
FIRST UNION CAPITAL MARKETS CORP.
By:
------------------------------
Title:
---------------------------
Agreed to and accepted as of
the date first above written:
PETERSEN PUBLISHING COMPANY, L.L.C.
By:
------------------------------
Title:
---------------------------
<PAGE>
Petersen Publishing Company, L.L.C. Confidential
- --------------------------------------------------------------------------------
SUMMARY OF TERMS AND CONDITIONS
- --------------------------------------------------------------------------------
BORROWER: Petersen Publishing Company, L.L.C.
("Petersen").
AMOUNT: $175,000,000.
FACILITY: $175,000,000 5 year Senior Secured Revolver
("Revolver").
The Revolver includes a $10,000,000 sublimit
for swingline loans provided by the
Administrative Agent and a $10,000,000
sublimit for the issuance of standby letters
of credit.
ARRANGERS: First Union Capital Markets Corp. and CIBC
Wood Gundy Securities Corp.
ADMINISTRATIVE AGENT: First Union National Bank ("First Union").
DOCUMENTATION AGENT: CIBC Wood Gundy Securities Corp.
LETTER OF CREDIT ISSUING BANK: First Union.
LENDERS: First Union, CIBC and a syndicate of other
financial institutions.
FINAL MATURITY DATE: September 30, 2002.
PURPOSE: To refinance indebtedness under the
Borrower's existing senior bank facilities,
for working capital and for other general
corporate purposes, including Permitted
Acquisitions.
AMORTIZATION: The Revolver shall be due in full on
September 30, 2002.
COLLATERAL: A pledge of the membership interests in the
Borrower and, to the extent of the Borrower's
direct or indirect ownership interest, the
stock of its subsidiaries, and a first
priority security interest in all assets of
the Borrower and its wholly owned
subsidiaries.
GUARANTORS: The Petersen Companies, Inc. ("TPC");
Petersen Holdings, L.L.C.; ("Holdings") and
all wholly-owned subsidiaries of the
Borrower, if any.
VOLUNTARY COMMITMENT
REDUCTIONS: The Borrower may voluntarily reduce the
commitments in amounts of $5,000,000 at any
time with prior notice and without premium or
penalty. Any such reductions will be
permanent.
MANDATORY PREPAYMENTS/
COMMITMENT REDUCTIONS: Shall be an amount equal to (i) 100% of
insurance proceeds not applied toward the
repair or replacement of damaged properties
within 180 days, (ii) 100% of proceeds for
asset sales not reinvested within 180 days,
other than assets sold in the normal course
of business, (iii) 25% of the proceeds from
the issuance of any equity (excluding equity
issued for acquisitions and the Initial
Public Offering of TPC's common stock) or
100% of any debt.
________________________________________________________________________________
SUMMARY OF TERMS AND CONDITIONS PAGE 1
<PAGE>
PETERSEN PUBLISHING COMPANY, L.L.C. CONFIDENTIAL
- -------------------------------------------------------------------------------
INTEREST RATE
OPTIONS: At the Borrower's option, the loans will bear
interest at either (i) the Alternate Base Rate
("ABR") plus the Applicable Margin or (ii) the
LIBOR rate plus the Applicable Margin.
ABR will be the higher of (i) the Administrative
Agent's Prime Rate or (ii) the overnight federal
funds rate plus 0.50%. Interest on ABR borrowings
will be payable quarterly in arrears and
calculated over a 365-day year. LIBOR will be
available for one, three and six-month borrowings.
Interest on LIBOR borrowings will be calculated
on the basis of a 360-day year and adjusted for
reserve requirements, if any. Interest on LIBOR
loans will be payable in arrears at the earlier of
maturity or every three months. The Credit
Agreement will include the Administrative Agent's
standard provisions for increased costs, capital
adequacy and withholding taxes.
APPLICABLE MARGIN: The Applicable Margin for the Revolver shall be
determined on the basis of the Borrower's Total
Funded Debt to Operating Cash Flow ("Leverage
Ratio") as set forth below:
<TABLE>
<CAPTION>
--------------------------------------------------
Leverage Ratio Base Rate+ LIBOR+ Commitment Fee
--------------------------------------------------
<S> <C> <C> <C>
greater than
and
equal to 4.00 0.000% 1.000% 0.250%
greater than
and
equal to 3.50
less than 4.00 0.000% 0.750% 0.250%
greater than
and
equal to 3.00
less than 3.50 0.000% 0.625% 0.200%
greater than
and
equal to 2.00
less than 3.00 0.000% 0.500% 0.175%
less than 2.00 0.000% 0.375% 0.150%
--------------------------------------------------
</TABLE>
DEFAULT INTEREST RATE: 2.00% in excess of the applicable interest rate at
the time.
COMMITMENT FEE: At a per annum rate as set forth in the above
pricing grid on the average unused commitment
under the Revolver, payable quarterly in arrears.
LETTER OF CREDIT FEE: Equivalent to the prevailing Applicable Margin on
LIBOR rate loans plus a fronting fee of 0.25%
payable to the Issuing Bank.
REPRESENTATIONS AND
WARRANTIES: Those customarily found in the credit agreements
for similar financings, including, but not limited
to representations and warranties concerning
corporate organization and power, enforceability
of the credit documents, governmental
authorization, absence of litigation, payment of
taxes, full disclosure of information, accuracy of
financial information, ownership of properties,
compliance with ERISA, environmental matters,
compliance with laws, labor relations, insurance
and material contracts.
CONDITIONS PRECEDENT: The closing and funding of the Facility will be
subject to the negotiation, execution, and
delivery of a definitive Credit Agreement and
other support documentation satisfactory to the
Administrative Agent, including but not limited to
each of the following:
a) All documentation and legal options relating
to the transaction and the structure of the
Borrower shall have been completed to the
satisfaction of the Administrative Agent and
its counsel;
________________________________________________________________________________
SUMMARY OF TERMS AND CONDITIONS PAGE 2
<PAGE>
PETERSEN PUBLISHING COMPANY, L.L.C. CONFIDENTIAL
- --------------------------------------------------------------------------------
b) All consents and approvals of the boards of
directors, shareholders, governmental and
regulatory bodies and other applicable third
parties (including holders of the Senior
Subordinated Notes) necessary or desirable in
connection with this transaction shall have
been obtained;
c) No material adverse change shall have
occurred;
d) There shall be no material pending litigation,
bankruptcy or insolvency, injunction, order or
claim with respect to the Borrower;
e) There shall have been prepaid, with the
proceeds of an initial public offering of
TPC's common stock, (1) not less than $25
million in aggregate principal amount of the
Borrower's senior subordinated notes and (2)
not less than $60 million in aggregate
principal amount of the indebtedness under the
Borrower's existing senior bank facilities
(with the remainder to be prepaid through the
initial draw under the Revolver).
AFFIRMATIVE COVENANTS: Those customarily found in the credit agreements
for similar financings, including, but not limited
to delivery of financial statements and other
business and financial information, maintenance of
properties, compliance with laws, payment of
obligations, maintenance of books and records,
maintenance of insurance and change in fiscal
year.
PERMITTED ACQUISITIONS: The Borrower may effect Permitted Acquisitions
provided that, with respect to each Permitted
Acquisition:
a) No Default or Event of Default shall have
occurred and be continuing at the time of
consummation of such Permitted Acquisition or
would exist immediately after giving effect
thereto;
b) The cash consideration for such Permitted
Acquisition may not exceed $100.0 million
without the prior consent of the Required
Lenders;
c) The Borrower shall deliver evidence of pro
forma covenant compliance and other specified
business and financial information.
NEGATIVE COVENANTS: Those customarily found in credit agreements for
similar financings, including, but not limited to
limitations on mergers, other indebtedness and
contingent obligations, liens, asset sales,
investments, restricted payments, dividends,
transactions with affiliates and lines of
business.
FINANCIAL COVENANTS: Leverage Ratio -
--------------
The Borrower shall not permit the Leverage Ratio
as of the end of any fiscal quarter to exceed the
following levels for each period:
-----------------------------------------
Period Leverage Ratio
-----------------------------------------
Closing to 12/31/98 4.50 to 1.00
1/1/99 to 12/31/00 4.00 to 1.00
1/1/01 to 12/31/01 3.75 to 1.00
Thereafter 3.50 to 1.00
-----------------------------------------
The Leverage Ratio shall be defined as the ratio
of Consolidated Funded Debt (total funded debt net
of cash on hand in excess of $5.0 million) to
Consolidated Operating Cash Flow ("EBITDA").
Interest Coverage
-----------------
________________________________________________________________________________
SUMMARY OF TERMS AND CONDITIONS PAGE 3
<PAGE>
EXHIBIT 5.1
KIRKLAND & ELLIS
PARTNERSHIPS INCLUDING PROFESSIONAL CORPORATIONS
200 East Randolph Drive
Chicago, Illinois 60601
To Call Writer Direct: 312 861-2000 Facsimile:
312 861-2000 312 861-2200
September 15, 1997
The Petersen Companies, Inc.
6420 Wilshire Boulevard
Los Angeles, CA 90048
Re: The Petersen Companies, Inc.
Registration Statement on Form S-1
Registration No. 333-33111
----------------------------------
Ladies and Gentlemen:
We are acting as special counsel to The Petersen Companies, Inc., a
Delaware corporation (the "Company"), in connection with the proposed
registration by the Company of 7,187,500 shares (the "Shares") of its Class A
Common Stock, par value $.01 per share (the "Common Stock"), to be issued and
sold by the Company pursuant to a Registration Statement on Form S-1
(Registration No. 333-33111), filed with the Securities and Exchange Commission
(the "Commission") under the Securities Act of 1933, as amended (the "Act")
(such Registration Statement, as amended or supplemented, is hereinafter
referred to as the "Registration Statement"). The Shares are to be sold pursuant
to an underwriting agreement (the "Underwriting Agreement") between the Company,
Morgan Stanley & Co. Incorporated, Donaldson, Lufkin & Jenrette Securities
Corporation, BT Alex. Brown Incorporated, Goldman Sachs & Co., as
representatives of the several U.S. Underwriters, and Morgan Stanley &
Co. International Limited, Donaldson, Lufkin & Jenrette International, BT Alex.
Brown International and Goldman Sachs International, as representatives of the
several International Underwriters.
In that connection, we have examined such corporate proceedings,
documents, records and matters of law as we have deemed necessary to enable us
to render this opinion.
For purposes of this opinion, we have assumed the authenticity of all
documents submitted to us as originals, the conformity to the originals of all
documents submitted to us as
<PAGE>
The Petersen Companies, Inc.
September 15, 1997
Page 2
copies and the authenticity of the originals of all documents submitted to us as
copies. We have also assumed the legal capacity of all natural persons, the
genuineness of the signatures of persons signing all documents in connection
with which this opinion is rendered, the authority of such persons signing on
behalf of the parties thereto other than the Company and the due authorization,
execution and delivery of all documents by the parties thereto other than the
Company. As to any facts material to the opinions expressed herein, we have
relied upon the statements and representations of officers and other
representations of the Company and others. For purposes of numbered paragraph 1,
we have relied exclusively upon certificates issued by governmental authorities
in the relevant jurisdictions and such opinion is not intended to provide any
conclusion or assurance beyond that conveyed by such certificates.
Our opinion expressed below is subject to the qualifications that we
express no opinion as to the applicability of, compliance with, or effect of (i)
any bankruptcy, insolvency, reorganization, fraudulent transfer, fraudulent
conveyance, moratorium or other similar law affecting the enforcement of
creditors' rights generally, (ii) general principles of equity (regardless of
whether enforcement is considered in a proceeding in equity or at law), (iii)
public policy considerations which may limit the rights of parties to obtain
certain remedies and (iv) any laws except the internal laws of the State of New
York, the General Corporation law of the State of Delaware and the federal law
of the United States of America.
Based upon and subject to the foregoing qualifications, assumptions
and limitations and the further limitations set forth below, we hereby advise
you that in our opinion:
(1) The Company is a corporation existing and in good standing under
the laws of the State of Delaware.
(2) Upon the effectiveness of the Restated Certificate of
Incorporation of the Company, the Shares will be duly authorized, and, when (i)
the Registration Statement becomes effective under the Act, (ii) the Board of
Directors of the Company has taken all necessary action to approve the issuance
and sale of the Shares, (iii) the Shares have been duly executed and delivered
on behalf of the Company and countersigned by the Company's transfer
agent/registrar and (iv) the Shares are issued in accordance with the terms of
the Underwriting Agreement upon receipt of the consideration to be paid
therefor, the Shares will be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion with the Commission as
Exhibit 5.1 to the Registration Statement. We also consent to the reference to
our firm under the heading "Legal Matters" in the Registration Statement. In
giving this consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Act or the rules and
<PAGE>
The Petersen Companies, Inc.
September 15, 1997
Page 3
regulations of the Commission. This opinion and consent may be incorporated by
reference in a subsequent registration statement on Form S-1 filed pursuant to
Rule 462(b) under the Act with respect to the registration of additional
securities for sale in the offering contemplated by the Registration Statement.
We do not find it necessary for the purposes of this opinion, and
accordingly we do not purport to cover herein, the application of the securities
or "Blue Sky" laws of the various states to the issuance and sale of the Shares.
This opinion is limited to the specific issues addressed herein, and
no opinion may be inferred or implied beyond that expressly stated herein. We
assume no obligation to revise or supplement this opinion should the present
laws of the States of New York or Delaware or the federal law of the United
States be changed by legislative action, judicial decision or otherwise.
This opinion is furnished to you in connection with the filing of the
Registration Statement and is not to be used, circulated, quoted or otherwise
relied upon for any other purpose.
Very truly yours,
/s/ KIRKLAND & ELLIS
KIRKLAND & ELLIS
<PAGE>
EXHIBIT 8.1
KIRKLAND & ELLIS
PARTNERSHIPS INCLUDING PROFESSIONAL CORPORATIONS
200 East Randolph Drive
Chicago, Illinois 60601
To Call Writer Direct: 312 861-2000 Facsimile:
312 861-2000 312 861-2200
September 15, 1997
The Petersen Companies, Inc.
6420 Wilshire Boulevard
Los Angeles, California 90048
In connection with The Petersen Companies, Inc.'s initial public
offering of up to 7,187,500 shares of its Class A Common Stock, par value $0.01
per share, you have requested our opinion concerning certain statements set
forth in Amendment No.1 to the Form S-1 Registration Statement (Registration No.
333-33111) filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Registration Statement").
Based on the foregoing, in our opinion, under the law in effect on the
date hereof, the statements made in the Registration Statement under the caption
"Certain Federal Income Tax Consequences to Non-United States Holders," insofar
as such statements purport to constitute summaries of matters of United States
federal tax law and regulations or legal conclusions with respect thereto,
constitute accurate summaries of the matters described therein in all material
respects.
The opinions set forth herein are based on the applicable provisions
of the Internal Revenue Code of 1986, as amended; the Treasury Regulations
promulgated or proposed thereunder; current positions of the Internal Revenue
Service (the "IRS") contained in published revenue rulings, revenue procedures
and announcements; existing judicial decisions; and other applicable
authorities.
In conclusion, we should note that unlike a ruling from the IRS,
opinions of counsel are not binding on the IRS. Hence, no assurance can be
given that the opinion stated in this letter will not be successfully challenged
by the IRS or rejected by a court. We express no opinion concerning any federal
income tax matter other than that discussed herein.
Very Truly Yours,
/s/ Kirkland & Ellis
Kirkland & Ellis
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
---------------------------
The following entities will be subsidiaries of The Petersen Companies, Inc.
(the "Company") upon completion of the Reorganization described under the
heading "The Reorganization" in the Company's Registration Statement on Form S-1
(Registration No. 333-33111). Unless otherwise indicated, each entity listed is
wholly owned by the immediately preceding listed entity.
Name Jurisdiction of Formation
- ---- -------------------------
Petersen Holdings L.L.C. Delaware
Petersen Publishing Company L.L.C. Delaware
Petersen Capital Corp. Delaware
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Selected
Historical Financial Data" and "Experts" and to the use of our reports dated
August 7, 1997 (except as to Note 6 as to which the date is September 12,
1997) for The Petersen Companies, Inc., July 31, 1997 (except Note 12, as to
which the date is September 12, 1997) for Petersen Holdings, L.L.C. and
December 16, 1996 for Petersen Publishing Company, Publishing Division, in the
Registration Statement (Amendment No. 1 to Form S-1 No. 333-33111) and related
Prospectus of The Petersen Companies, Inc. for the registration of 6,250,000
shares of its Class A Common Stock.
Ernst & Young LLP
Los Angeles, California
September 12, 1997
