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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997 or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 1-13373
THE PETERSEN COMPANIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 36-4099296
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(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
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6420 WILSHIRE BOULEVARD, LOS ANGELES, CA 90048
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (213) 782-2000
Securities registered pursuant to Section 12(b) of the Act:
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Not applicable
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 16, 1998 at a closing sale price of $25.19 as reported
by the New York Stock Exchange Inc. was approximately $325.6 million. Shares
of Class A Common held by each officer and director and by each person who
owns or may be deemed to own 10% or more of the outstanding Class A Common
have been excluded since such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of March 16, 1998, the Registrant had 27,022,974 shares of Class A Common
Stock outstanding and 7,886,290 shares of Class B Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be used in connection with
the solicitation of proxies for the Annual Meeting to be held on April 22,
1998 (the "Proxy Statement") are incorporated by reference in Part III of this
Annual Report of Form 10-K (the "Form 10-K").
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THE PETERSEN COMPANIES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
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PAGE NO.
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PART I............................................................... 1
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security-Holders......... 11
Item 4A. Executive Officers of the Registrant....................... 11
PART II.............................................................. 13
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 13
Item 6. Selected Financial Data..................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 16
Item 8. Financial Statements and Supplementary Data................. 22
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 22
PART III............................................................. 23
Item 10. Directors and Executive Officers of the Registrant......... 23
Item 11. Executive Compensation..................................... 23
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 23
Item 13. Certain Relationships and Related Transactions............. 23
PART IV.............................................................. 23
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K........................................................ 23
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PART I
This Form 10-K contains forward-looking statements within the meaning of the
federal securities laws. These forward-looking statements are necessarily
based on certain assumptions and are subject to significant risks and
uncertainties. These forward-looking statements are based on management's
expectations as of the date hereof, and the Company does not undertake any
responsibility to update any of these statements in the future. Actual future
performance and results could differ from that contained in or suggested by
these forward-looking statements as a result of factors set forth in this
Form 10-K (including those sections hereof incorporated by reference from
other filings with the Securities and Exchange Commission), in particular as
set forth in the various topics discussed under Item 1 and set forth in the
"Management's Discussion and Analysis" under Item 7.
ITEM 1. BUSINESS.
The Petersen Companies, Inc. (the "Company") is a leading multi-media
marketing solutions and brand development company with a diverse portfolio of
more than 81 publications, including 25 monthly, 14 bimonthly and 42 single
issue or annual publications, television programs, licensing, tradeshows,
consumer events, databases, custom publishing and retail promotions. Based on
data from Mediamark, the Company estimates that its magazines are read by
approximately 52 million adult readers including 45 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, is among the
world's leading automotive magazines in terms of paid circulation with
approximately 1.1 million subscribers; (ii) Teen, which has the largest paid
circulation of any of the Company's magazines with paid circulation of more
than 1.8 million; and (iii) Hot Rod, which is one of the largest paid
circulation automotive magazines in the world with a paid circulation of
approximately 800,000. Of the Company's 15 core magazines, nine are ranked
first in their respective markets based on annual paid circulation in 1997,
including two magazines that are the only national magazines published in
their respective markets.
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.
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The Company's 15 core magazines average over 30 years in publication and
have developed internationally-recognized brands within each of their
respective markets.
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: (i) cross-sell advertising and expand advertiser base; (ii) increase
direct subscription sales and magazine prices; (iii) develop ancillary revenue
opportunities; (iv) develop and launch new titles; (v) selectively acquire
titles; (vi) develop business-to-business opportunities; and (vii) continue to
identify and implement operating improvements.
BACKGROUND
The Company's origin dates back to 1948, when its founder, Robert E.
Petersen, first began publishing and selling a specialized newsletter entitled
Hot Rod. The Company then 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 substantially all of the publishing assets of the Petersen
Publishing Company (the "Predecessor") in a leveraged acquisition (the
"Acquisition").
The Company's operations are conducted primarily through its operating
subsidiary, Petersen Publishing Company, L.L.C. ("Publishing"). 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.
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 years ended December 31, 1996 and 1997 (dollars in
millions):
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PREDECESSOR COMBINED (1) COMPANY
-------------------------- ------------------ ------------------
FISCAL YEARS ENDED
NOVEMBER 30, YEAR YEAR
-------------------------- ENDED ENDED
1994 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
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SOURCES OF REVENUE AMOUNT % AMOUNT % AMOUNT % AMOUNT %
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Advertising............. $117.4 57.9% $124.3 57.9% $ 135.5 59.6% $ 149.1 60.3%
Newsstand............... 40.1 19.7 39.9 18.6 42.0 18.5 43.7 17.7
Subscriptions, net (2).. 42.6 21.0 43.9 20.5 43.3 19.1 46.9 19.0
Other................... 2.7 1.4 6.4 3.0 6.4 2.8 7.4 3.0
------ ----- ------ ----- --------- -------- --------- --------
Total................... $202.8 100.0% $214.5 100.0% $ 227.2 100.0% $ 247.1 100.0%
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(1) Reflects the operations of the Predecessor for nine months ended September
30, 1996 and those of the Company for the three months ended December 31,
1996 on a combined basis.
(2) Subscription revenues are shown net of agency commissions of $42.0, $49.5,
$55.0, and $55.0 for the years ended November 30, 1994 and 1995, and the
years ended December 31, 1996 and 1997, respectively.
Advertising
Advertising sales accounted for approximately 59.6% and 60.3% of the
Company's net revenues for the years ended December 31, 1996 and 1997,
respectively. The Company's advertising rates and rate structures vary
2
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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 approximately 30% of the Company's advertising revenues for the years
ended December 31, 1996 and 1997.
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 year ended December
31, 1997, 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 17.7% of the Company's
net revenues for the years ended December 31, 1996 and 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 19.0% of the
Company's net revenues for the years ended December 31, 1996 and 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. 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. Subscriber list
rental income accounted for approximately .7 % and 1.5% of net revenues for
the years ended December 31, 1996 and 1997 respectively. 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 operated as a traditional consumer
magazine company deriving substantially all of its revenues from advertising
and circulation sales. Management estimates that while many consumer magazine
publishers currently derive approximately 10% to 20% of their revenues from
ancillary revenue sources, 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
3
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editorial content of the Company's magazines. Since the Acquisition, the
Company has pursued various new ancillary revenue opportunities including
television programming, licensing, databases, custom publishing and retail
promotions as a result of its internationally-recognized brands and in 1997,
the Company formed Petersen Enterprises, adding 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, 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 complimentary 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 continue to provide an
attractive platform through which to pursue such programs. The Company also
intends to continue 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
in which the Company is developing additional revenue streams include creating
business-to-business publications and entering into strategic joint ventures.
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PUBLICATIONS
The Company's portfolio includes 25 monthly, 14 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:
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AVERAGE CIRCULATION
FOR THE YEAR
ENDED
DECEMBER 31, FREQUENCY OF YEAR OF
GROUP MAGAZINE TITLE 1997 (1) PUBLICATION (2) INTRODUCTION
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(COPIES IN THOUSANDS)
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Automotive Performance: Hot Rod......................... 795.7 Monthly 1948
Car Craft....................... 395.9 Monthly 1953
Petersen's 4 Wheel & Off-Road... 359.8 Monthly 1977
Sport Truck..................... 201.4 Monthly 1988
Chevy High Performance.......... 175.4 Monthly 1987
Circle Track and Racing
Technology..................... 130.6 Monthly 1982
Rod & Custom.................... 117.8 Monthly 1955
Mustang & Ford.................. 103.1 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 Customer & Classic (4)....... -- Bi-Monthly 1997
Watercraft Power (4)............ -- Monthly 1997
Motor Trend: Motor Trend..................... 1068.2 Monthly 1949
Youth: Teen............................ 1842.2 Monthly 1957
All About You!.................. 276.9 Monthly 1995
Outdoor: Guns & Ammo..................... 591.7 Monthly 1958
Petersen's Hunting.............. 344.8 Monthly 1973
Handguns........................ 150.5 Monthly 1987
Petersen's Bowhunting........... 157.7 Bi-Monthly 1989
Pennsylvania Sportsman.......... 54.8 Bi-Monthly 1980
New York Sportsman.............. 32.9 Bi-Monthly 1991
Michigan Hunting & Fishing...... 31.0 Bi-Monthly 1993
SHOT Business (5)............... 20.8 Monthly 1993
Petersen's Shotguns (4)......... -- Bi-Monthly 1997
Rifle Shooter (4)............... -- Bi-Monthly 1997
Photo/Marine: Petersen's Photographic......... 204.5 Monthly 1972
Skin Diver...................... 206.0 Monthly 1951
Family Photo (4)................ -- Bi-Monthly 1997
Motorcycle/Bicycle: Motorcyclist.................... 344.8 Monthly 1912
Dirt Rider...................... 174.0 Monthly 1982
Mountain Biker.................. 122.7 Monthly 1994
Bicyclist....................... 88.8 Bi-Monthly 1984
Sport Rider..................... 100.7 Bi-Monthly 1993
Cruiser (4)..................... -- Bi-Monthly 1997
Sport: Sport........................... 752.0 Monthly 1946
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(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,
1997, except for Kit Car, which is for the six months ended December 31,
1996.
(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 December 31, 1997.
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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
bimonthly 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
bimonthly publications, the Company is able to generate additional revenues in
a cost-effective manner through such publications. In addition, the Company
utilizes single issue publications as a means of developing and testing new
publications. Many of the Company's current monthly and bimonthly publications
were first introduced as single issue publications.
The 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, and for automotive performanced based curriculum at
the United Technologies Institute Automotive Education Centers.
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
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. 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.
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.
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.
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 provides its readers with in depth, step-by-step
technical articles showing how to modify, fabricate and build high performance
into their Chevys. 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.
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 magazines.
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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. 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.
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 1997, the web-site averaged approximately
500,000 hits per day for the year and approximately 600,000 hits per day
during the fourth quarter of 1997. The Company believes that the Internet
offers 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 1997 and in December of 1997, launched a sister publication
Truck Trends. 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 13 to
19, including fashion, beauty, entertainment and a wide variety of
contemporary issues. Teen places a strong emphasis on the development of self-
esteem and self-confidence among its readers. Teen principally competes with
Seventeen and YM.
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. These changes
resulted in Teen's average circulation increasing from 1.2 million in 1996 to
over 1.8 million in 1997. Teen's management recently 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. Guns & Ammo principally competes with Shooting Times and Guns.
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, and other more specialized
aspects of the sport and its equipment. 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.
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PHOTO/MARINE GROUP
Skin Diver was introduced 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. 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.
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. Photographic was
introduced in 1972 and principally competes with American Photo and Popular
Photography.
MOTORCYCLE/BICYCLE GROUP
Motorcyclist, first introduced in 1912, is the oldest magazine published by
the Company and 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. Motorcyclist principally competes with Cycle World.
Dirt Rider is one of the world's largest dirt riding publications 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. Dirt Rider principally competes with Dirt Bike and Motocross
Action.
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, player and team evaluations and
behind-the-scenes reports for both professional and collegiate 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 competitive publication due primarily to
the frequency of its publication.
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
approximately 200 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. In 1997, the Company also instituted a new commission
plan for salespersons in order to motivate the staff throughout the year and
upgraded the support staff in the areas of marketing, creative services and
research. The
8
<PAGE>
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. The Company credits this effort as one of the reasons for its third and
fourth quarter advertising sales growth.
Circulation
Since the Acquisition, circulation marketing has moved to New York City, in
order to more readily draw upon experienced circulation marketing talent.
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 created Petersen
Enterprises and 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 Press, Inc. ("World Color") who provides the Company's color separation,
pre-press and related service requirements with respect to most of the
Company's publications.
The Company has an agreement with World Color in which it is generally
required to use World Color for at least 85% of its pre-press and related
service requirements. The Company believes, however, that other printers of
similar quality could be engaged on similar terms. The Company also 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. This agreement with World Color expires on
December 31, 2003.
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'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.
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.
9
<PAGE>
RAW MATERIALS
The Company's principal raw material is paper. Paper costs represented
approximately 22.8%, 20.4%, 24.7% and 20.6% of the Company's production,
selling and other direct costs for the fiscal years ended November 30, 1994
and 1995 and the years ended December 31, 1996 and 1997 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.
Following the Acquisition, the Company secured sufficient paper to meet its
projected raw material needs through the end of 1997 at a fixed price. In
November 1997, the Company reached an agreement with World Color regarding the
terms on which the Company will purchase paper in 1998.
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: Primedia, Inc.,
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 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 monthly
publications. The Company does not believe that its magazines compete with
weekly or bi-weekly publications and, with the exception of Sports
Illustrated, the Company is not aware of any significant weekly or bi-weekly
publication with similar editorial content to those of its 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 1997.
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.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 610 full-time
employees, none of whom are members of a union. The Company believes that its
relations with its employees are good.
10
<PAGE>
ITEM 2. PROPERTIES
The Company publishes most of its magazines and houses its corporate and
administrative staff at its headquarters located at 6420 Wilshire Boulevard,
Los Angeles, California. Sport and Teen are published at the Company's
New York Office. 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>
SQUARE TERM DESCRIPTION OF
LOCATION ADDRESS FOOTAGE EXPIRATION USE
-------- ------- ------- ---------- -----------------
<S> <C> <C> <C> <C>
Los Angeles... 6420 Wilshire Boulevard 188,309 11/30/09 Headquarters
New York...... 110 Fifth Avenue 47,304 03/31/09 Circ./Sales/Corp.
New York (1).. 437 Madison Avenue 29,301 10/31/04 N/A
Chicago....... 815 North LaSalle Street 10,407 09/30/05 Sales Office
Detroit....... 333 Fort Street 6,695 12/31/03 Sales Office
Boulder....... 5350 Manhattan Circle 1,435 02/28/99 Circulation
Atlanta....... Five Concourse Parkway 3,524 04/30/98 Sales Office
</TABLE>
- --------
(1) The Company is currently subleasing this space.
The Company leases space used for its corporate headquarters and Chicago
regional sales office from entities controlled by Mr. Petersen. The Company
believes that these facilities are adequate to meet its current operational
needs.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of the Company's security-holders in the
fourth quarter of 1997.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The information under this Item is furnished pursuant to Instruction 3 of
Item 401(b) of Regulation S-K. Executive officers of the Company are elected
by and serve at the discretion of the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
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............. 44 President and Chief Operating Officer
Richard S Willis........ 37 Executive Vice President and Chief Financial
Officer
</TABLE>
JAMES D. DUNNING, JR. has served as the Chairman of the Board and Chief
Executive Officer of the Company since the Acquisition. Mr. Dunning served as
Chairman and Chief Executive Officer of TransWestern Publishing Company, L.P.
("TransWestern"), the largest independent publisher of yellow pages in the
United States, from 1993 through September 1997, 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
11
<PAGE>
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
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 President, Entertainment, where he was responsible for 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.
12
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET INFORMATION
The Class A Common is traded on the New York Stock Exchange ("NYSE") under
the symbol "PTN." The Common Stock commenced trading on October 2, 1997. The
following table sets forth on a per share basis, the high and low closing sale
prices per share for the Common Stock as reported by the NYSE for the period
from October 2, 1997 through the end of the fourth quarter of 1997.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Fourth Quarter 1997 (beginning October 2, 1997)............ $23.00 $17.25
First Quarter 1998 (through March 16, 1998)................ $26.88 $20.19
</TABLE>
HOLDERS
As of the close of business on March 3, 1998, there were approximately 2,800
holders of the Company's Common Stock. A recent reported last sale price of
the Class A Common on the NYSE is set forth on the cover page of this report.
DIVIDENDS
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 in
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 Company's Bank Credit Agreement
and restructured by the Indenture under which its 11 1/8% Senior Subordinated
Notes were issued. 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.
RECENT SALES OF UNREGISTERED SECURITIES
No securities of the Company that were not registered under the Securities
Act have been issued or sold by the Company within the period covered by this
report, except for the following:
In connection with the Company's IPO, all of the existing securityholders of
the Company and Petersen entered into a Contribution and Recapitalization
Agreement, pursuant to which, among other things, the Company issued an
aggregate of 26,859,264 shares of Common Stock to its existing
securityholders. The issuance of these shares was not required to be
registered under the Securities Act pursuant to the exemptions provided by
Sections 3(a)(9) and 4(2) of the Securities Act.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following table presents selected historical financial data of; (i) the
Predecessor for each of the three 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) the Company for the
three months ended December 31, 1996 and the year ended December 31, 1997,
which have been derived from the audited financial statements of the Company.
The audited financial statements of the Predecessor for the year ended
November 30, 1995 and the ten months ended September 30, 1996 and of the
Company for the three months ended December 31, 1996 and the year ended
December 31, 1997, appear elsewhere in this annual report. 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, and the
three months ended December 31, 1995 have been derived from unaudited
financial statements which, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results for the unaudited interim period. 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 the Company. 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 annual report.
<TABLE>
<CAPTION>
PREDECESSOR (1) THE COMPANY(2)
--------------------------------------------------------------- ------------------------------------
TEN MONTHS
ENDED THREE MONTHS
YEAR ENDED NOVEMBER 30, SEPTEMBER 30, ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
---------------------------- -------------------- ---------------------- ------------------------
1993 1994 1995 1995 1996 1995 1996 1996 1997
-------- -------- -------- ----------- -------- ----------- ---------- ------------- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS,EXCEPT PER SHARE DATA) (PROFORMA)(9)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA (3):
Net revenues:
Advertising......... $105,991 $117,433 $124,310 $103,422 $112,525 $29,362 $ 31,912 $ 135,520 $ 149,051
Newsstand........... 37,507 40,048 39,889 33,326 34,318 9,338 10,037 42,035 43,736
Subscriptions, net
(4)................ 41,258 42,639 43,901 36,811 36,474 10,725 10,404 43,242 46,921
Other............... 2,456 2,672 6,415 5,841 6,297 1,513 924 6,415 7,366
-------- -------- -------- -------- -------- ------- ---------- ---------- ----------
Net revenues........ 187,212 202,792 214,515 179,400 189,614 50,938 53,277 227,212 247,074
Production, selling
and other direct
costs............... 142,254 149,586 171,579 140,831 148,874 42,342 41,190 178,524 169,048
-------- -------- -------- -------- -------- ------- ---------- ---------- ----------
Gross profit......... 44,958 53,206 42,936 38,569 40,740 8,596 12,087 48,688 78,026
General and
administrative
expenses............ 35,604 33,267 28,145 23,537 24,650 8,939 2,666 25,105 18,771
Compensation
expenses............ -- -- -- -- -- -- -- -- 12,182
Amortization of
goodwill and other
intangible assets... 198 421 433 355 339 111 8,993 9,299 36,163
-------- -------- -------- -------- -------- ------- ---------- ---------- ----------
Operating
income(loss)........ 9,156 19,518 14,358 14,677 15,751 (454) 428 14,284 10,910
Interest income...... 317 476 549 428 537 210 113 585 1,228
Interest expense..... -- -- -- -- (185) (1) (11,146) (11,299) (26,867)
Gain (loss) on sale
of assets........... -- -- -- -- 1,554 -- -- 1,554 --
-------- -------- -------- -------- -------- ------- ---------- ---------- ----------
Income (loss) before
provision for income
taxes............... 9,473 19,994 14,907 15,105 17,657 (245) (10,605) 5,124 (14,729)
Provision for income
taxes (5)........... (251) (698) (549) (458) (331) (138) -- (298) --
-------- -------- -------- -------- -------- ------- ---------- ---------- ----------
Income (loss) before
extraordinary item. 9,222 19,296 14,358 14,647 17,326 (383) (10,605) 4,826 (14,729)
Loss on early
extinguishment of
debt................ -- -- -- -- -- -- -- -- (9,088)
-------- -------- -------- -------- -------- ------- ---------- ---------- ----------
Net income (loss)... 9,222 19,296 14,358 14,647 17,326 (383) (10,605) 4,826 (23,817)
Preferred unit
dividends........... -- -- -- -- -- -- -- -- (21,274)
-------- -------- -------- -------- -------- ------- ---------- ---------- ----------
Net income (loss)
attributable to
common units........ $ 9,222 $ 19,296 $ 14,358 $ 14,647 $ 17,326 $ (383) $ (10,605) $ 4,826 $ (45,091)
======== ======== ======== ======== ======== ======= ========== ========== ==========
Net income (loss)
per share (6)....... $ (.39) .18 $ (1.56)
========== ========== ==========
Shares used in net
income (loss) per
share calculation
(6)................. 26,859,264 26,859,264 28,818,604
========== ========== ==========
</TABLE>
(see footnote explanations on next page)
14
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
------------------------------------------------------- --------------------------------------
TEN MONTHS
ENDED THREE MONTHS
YEAR ENDED NOVEMBER 30, SEPTEMBER 30, ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------- --------------- -------------------- ----------------------------
1993 1994 1995 1995 1996 1995 1996 1996 1997
------- ------- ------- ------ ------- ----------- -------- ---------------- -----------
(UNAUDITED) (UNAUDITED)
(PROFORMA)(9)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Depreciation and
amortization ....... $ 3,137 $ 3,118 $ 3,439 $2,704 $ 2,704 $1,015 $ 9,570 11,995 $ 38,016
Capital expenditures. 4,739 2,866 4,423 3,492 768 878 -- 643 1,007
EBITDA (7)........... 12,610 23,112 18,346 17,809 20,546 771 10,090 26,875 62,338
Cash provided by
operating
activities.......... 10,680 27,059 9,593 5,530 24,719 N/A 22,365 56,298 33,373
Cash provided by
(used in) investing
activities.......... (30) (14,478) 2,254 3,185 5,421 N/A (465,652) (464,128) (5,005)
Cash provided by
(used in) financing
activities.......... (14,901) (17,382) (6,092) (5,377) (27,625) N/A 451,048 441,767 (30,204)
BALANCE SHEET DATA
(AT PERIOD END) (3):
Cash and cash
equivalents......... $ 8,984 $ 4,183 $ 9,938 $12,453 7,761 7,761 $ 5,925
Working capital
excess (deficiency)
(8)................. (3,629) (11,027) 5,760 (2,791) (18,484) (18,484) (17,187)
Total assets......... 98,389 119,454 136,803 124,483 604,073 604,073 569,747
Total long-term debt,
including current
portion............. -- -- -- -- 300,000 300,000 140,000
Total equity (capital
deficiency)......... (1,553) 361 8,627 (1,672) 154,454 154,454 273,527
</TABLE>
(footnotes from previous page)
- -------
(1) The Predecessor's fiscal year ended on November 30.
(2) The Company is on a calendar year.
(3) Certain reclassifications have been made to the balance sheet and
statements of operations for each of the three 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 year ended December 31, 1997.
(4) Subscription revenues are shown net of agency commissions of $38,616,
$42,000, $49,503, $41,194, $45,554, $12,662, $13,804, $55,004, and $55,042
for the fiscal years ended November 30, 1993, 1994 and 1995, the ten
months ended September 30, 1995 and 1996, the three months ended December
31, 1995 and 1996 and the years ended December 31, 1996 and 1997,
respectively.
(5) 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
Predecessor's stockholder.
(6) Net income (loss) loss per share is based on the shares outstanding after
giving retroactive effect to 26,859,264 shares which were issued in
connection with the Company's reorganization.
(7) "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.
(8) The calculation of working capital excess (deficiency) includes the
current portions of unearned subscription revenues, a non-cash obligation
of the Company, and deferred subscription acquisition costs. Excluding the
current portions of unearned subscription revenues and deferred
subscription acquisition costs, the Company's working capital would have
been as follows: $18,312, $13,367, and $32,429 at November 30, 1993, 1994
and 1995, respectively, $23,652 at September 30, 1996, and $8,844 and
$15,328 at December 31, 1996 and 1997, respectively.
(9) Unaudited proforma amounts reflect the operations of the Predecessor for
the nine months ended September 30, 1996 and those of the Company for the
three months ended December 31, 1996 on a combined pro forma basis, as if
the Acquisition occurred on January 1, 1996.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
Management's discussion and analysis of the results of operations and
financial condition of the Company should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto.
OVERVIEW
The Company is a leading multimedia marketing solutions and brand
development company with a diverse portfolio of more than 81 publications,
including 25 monthly, 14 bimonthly and 42 single issue or annual publications,
television programs, licensing, tradeshows, consumer events, databases, custom
publishing and retail promotions. 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
$247.1 million for the year ended December 31, 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 year
ended December 31, 1997, approximately 60.3% of the Company's revenues were
from advertising, 36.7% were from circulation (including 17.5% from
subscription sales (net of agency commissions), 17.7% from newsstand sales and
1.5% from list rentals) and approximately 3.0% 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 30.0% of total advertising revenues for the year ended December
31, 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 20.6%, 15.8% 13.9%, 11.2%
and 11.2%, respectively, of the Company's cost of sales in the year ended
December 31, 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 has an agreement with
World Color regarding the terms on which the Company will purchase paper in
1998. 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.
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 several of its publications,
most notably in Sport and Youth Group publications, including refocusing the
editorial content and improving the design of Teen and adding staff at All
About You!. The Company believes the return on such investments will be
realized in future periods.
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 subsequent purchase
price adjustments) was approximately $460.5 million plus the assumption of
unearned subscription revenue and other liabilities of approximately $49.0
million 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 date of the Acquisition. The allocation
16
<PAGE>
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 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 the amount 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.
RESULT 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, and (c) the three months ended December 31, 1995, and (ii) the Company
for the three months ended December 31, 1996 and the year ended December 31,
1997.
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
-------------------------------------------- -------------------------------
YEAR ENDED TEN MONTHS ENDED THREE MONTHS ENDED YEAR ENDED
NOVEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
-------------- ----------------- ----------------------- -----------------
1994 1995 1995 1996 1995 1996 1996 1997
------ ------ ----------- ----- --------- ------------ ----------- -----
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(PROFORMA)
<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% 59.6% 60.3%
Newsstand............. 19.7 18.6 18.6 18.1 18.3 18.8 18.5 17.7
Subscriptions, net.... 21.0 20.5 20.5 19.2 21.1 19.5 19.1 19.0
Other................. 1.4 3.0 3.3 3.4 3.0 1.8 2.8 3.0
------ ------ ----- ----- --------- --------- ----- -----
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 77.3 78.6 68.4
------ ------ ----- ----- --------- --------- ----- -----
Gross profit.......... 26.2 20.0 21.5 21.5 16.9 22.7 21.4 31.6
General and
administrative
expenses............. 16.4 13.1 13.1 13.0 17.5 5.0 11.0 12.5
Amortization of
goodwill and other
intangible assets.... .2 .2 .2 .2 .2 16.9 4.1 14.6
------ ------ ----- ----- --------- --------- ----- -----
Operating income...... 9.6 6.7 8.2 8.3 N/A .8 6.3 4.5
Interest expense...... -- -- -- .1 -- 20.9 5.0 10.9
Net income 9.5% 6.7% 8.2% 9.1% N/A N/A 2.1 N/A
OTHER DATA:
EBITDA................ 11.4% 8.6% 9.9% 10.8% 1.5% 18.9% 11.8% 25.2%
</TABLE>
PETERSEN YEAR ENDED DECEMBER 31, 1997 COMPARED TO PROFORMA YEAR ENDED
DECEMBER 31, 1996
Net revenues. The Company's net revenues increased $19.9 million, or 8.8% to
$247.1 million for the year ended December 31, 1997 from $227.2 million for
the year ended December 31, 1996. This increase is primarily the result of a
$13.5 million, or 10.0% increase in advertising revenues, and a $5.4 million
or 6.3%
17
<PAGE>
increase in circulation revenues. In December 1996 and June 1997,
respectively, the Company discontinued the publication of Sassy and Petersen's
Golfing. Net revenues for the year ended December 31, 1996 for these two
publications were $8.0 million (comprised of $4.9 million in advertising, $3.0
million in subscription and newsstand, and $.1 million other). Excluding these
two discontinued publications, net revenues for the Company for 1997, when
compared to 1996, increased $27.9 million, or 12.7%. The increase in
advertising revenues was due principally to: (i) an overall increase in the
Company's advertising rates; (ii) increased advertising revenues by Motor
Trend, Teen and Hot Rod; and (iii) additional revenues from start-up
publications.
Production, selling and other direct costs. Production, selling and other
direct costs decreased $9.5 million, or 5.3%, to $169.0 million for the year
ended December 31, 1997, from $178.5 million for the year ended December 31,
1996. Production, selling and other direct costs decreased as a percentage of
net revenues to 68.4% from 78.6% 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 $8.3 million, or 19.2%, decrease in paper costs, a
$2.4 million, or 11.4%, decrease in printing expenses and a $3.7 million, or
7.4%, decrease in editorial and advertising sales expenses. These decreases
were offset in part by a $3.5 million, or 26.7%, increase in subscription
promotion costs.
Other expenses. General and administrative expenses, excluding a non-
recurring non-cash compensation charge of $12.2 million, decreased $6.3
million, or 25.1%, to $18.8 million for the year ended December 31, 1997, from
$25.1 million for the year ended December 31, 1996. The reductions in general
and administrative expenses resulted from the successful implementation of the
Company's operating improvements, including personnel and other operating
changes. General and administrative expenses, including compensation expenses,
increased $5.8 million, or 23.1%, to $30.9 million for the year ended December
31, 1997, from $25.1 million for the year ended December 31, 1996. General and
administrative expenses increased as a percentage of net revenues to 12.5%
from 11.0% for the same periods. Amortization of goodwill and other intangible
assets increased to $36.2 million for the year ended December 31, 1997 from
$9.3 million for the year ended December 31, 1996. This expense represents
primarily amortization of goodwill and the subscribers list purchased in the
Acquisition.
Operating income. Operating income for 1997, excluding the non-recurring
non-cash compensation charge of $12.2 million, increased $8.8 million, or
61.5% over 1996. Operating income including the one time charge decreased $3.4
million, or 23.8%, to $10.9 million for the year ended December 31, 1997, from
$14.3 million for the year ended December 31, 1996, for the reasons stated
above. Operating income decreased as a percentage of net revenues to 4.5% from
6.3% for the same periods.
Interest expense. Interest expense increased $15.6 million to $26.9 million
for the year ended December 31, 1997, from $11.3 million for the year ended
December 31, 1996. This increase resulted from indebtedness incurred under the
Senior Credit Facility and the Notes in connection with the Acquisition.
Net income (loss). The net loss was $23.8 million for the year ended
December 31, 1997 compared to net income of $4.8 million for the year ended
December 31, 1996. This decrease is primarily the result of increases in
interest and amortization expenses and the recording of a non-recurring, non-
cash compensation charge as noted above. In addition, in 1997, the Company
recognized a loss on early extinguishment of debt of $9.1 million, relating to
the early repayment of the Senior Credit Facility and pay down on the Notes.
PETERSEN THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO PREDECESSOR THREE
MONTHS ENDED DECEMBER 31, 1995.
Net Revenues. Net revenues increased $2.4 million, or 4.7% to $53.3 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
18
<PAGE>
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 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 77.3% 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 $6.2 million,
or 69.7%, to $2.7 million for the three months ended December 31, 1996 from
$8.9 million for the three months ended December 31, 1995. General and
administrative expenses decreased as a percentage of net revenues to 5.0% from
17.5% 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, resulting from indebtedness under the Senior Credit
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. This 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 $8.1 million, or 5.8%, to $148.9 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 cost and
incremental production costs.
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.
19
<PAGE>
General and administrative expenses as a percentage of net revenues remained
fairly constant at approximately 13.0% for the same periods.
Operating income. Operating income increased $1.1 million, or 7.5%, 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 remained fairly constant at
approximately 8% for the same periods.
Net income. Net income increased $2.7 million or 18.5% 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 for the
reasons stated above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash needs are for daily operations including the
production and distribution of its publications, capital expenditures and
strategic business acquisitions. Historically, the Company's primary sources
of cash for its business activities have been cash flows from operations,
issuing debt instruments and borrowings under its various credit facilities.
Working capital (excluding the current portion of unearned subscription
revenue) increased $6.5 million from $8.8 million at December 31, 1996, to
$15.3 million at December 31, 1997. The increase in working capital was
primarily the result of funds generated from improvements in the Company's
operations in excess of those used for financing and investing activities for
the period. Cash and cash equivalents totaled $7.8 million and $5.9 million at
December 31, 1996 and 1997, respectively.
The Company's net cash provided by operations was approximately $33.4
million for the year ended December 31, 1997. The increase in operating cash
relates primarily to improvements in the operating performance of the Company.
EBITDA, which is a measure of cash based income, increased $35.4 million, or
132%, to $62.3 million for the year ended December 31, 1997, from $26.9
million for the same period in 1996. Improved operations were the primary
contributing factors to the increase in EBITDA.
The Company's net cash used in investing activities was $5.0 million for the
year ended December 31, 1997. During 1997, the Company used funds, of
approximately $6.5 million for acquisitions including the purchase of
Northwoods Publications, Inc., publisher of various regional outdoor sporting
titles, and certain associations including the National Import Racing
Association (NIRA) and the National Muscle Car Association (NCMA). The Company
also had capital expenditures during 1997 for property and equipment of
approximately $1.0 million. Cash of approximately $2.5 million was provided
from an adjustment relating to the Acquisition. The Company did not have any
significant capital expenditure commitments at December 31, 1997.
The Company's net cash used in financing activities for the year ended
December 31, 1997 was $30.2 million. On October 2, 1997, the Company issued
8,050,000 shares of Class A Common Stock at $17.50 per share, pursuant to a
registration statement filed with the Securities & Exchange Commission. Net
proceeds to the Company net of costs were $129.6 million. The Company used the
proceeds to repay a portion of the indebtedness incurred under the Senior
Credit Facility and towards redemption of $25.0 million aggregate principal
amount of the Notes and redemption premium and accrued and unpaid interest.
On October 6, 1997, Publishing entered into a Senior Revolving Credit
Facility (the "Revolver") with First Union National Bank of North Carolina and
CIBC, Inc. which replaced the $200.0 million Senior Credit Facility dated
September 30, 1996. At December 31, 1997, the Revolver bore interest at either
Libor plus 0.625% based on borrowings or the prime rate of the agent bank
based on borrowings. As of December 31, 1997, the Company had $65.0 million
outstanding under the Senior Revolving Credit Facility.
20
<PAGE>
On November 6, 1997, the Company redeemed $25.0 million aggregate principal
of the Notes and as of December 31, 1997 had $75.0 million aggregate principal
outstanding. 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
Company is in compliance with the Indenture.
In February 1998, the Company announced commencement of a cash tender offer
for all of the outstanding 11 1/8% Senior Subordinated Notes due 2006 (the
"Tender Offer"). The purchase price will be an amount based on a yield to the
first redemption date equal to 75 basis points over the yield of the 7 1/2%
U.S. Treasury Note due November 15, 2001, less a consent payment of $30 per
$1,000 principal amount. The Tender Offer is scheduled to expire on March 25,
1998, unless extended.
In conjunction with the Tender Offer, the Company is also soliciting
consents from the holders of the Notes to effect certain amendments to the
indenture under which the Notes were issued. The Tender Offer and consent
solicitation are conditioned upon, among other things, the receipt of
sufficient funds from new financing being negotiated by the Company and its
banks. There can be no assurance that such financing will be completed or that
the net proceeds will be sufficient to purchase the Notes tendered.
The Company believes that net cash provided by operations and funds
available under the Revolving Credit Facility 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 Senior Revolving
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 strategic acquisitions. 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.
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
------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31 JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996 1997 1997 1997 1997
--------- -------- ------------- ------------ -------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $55,694 $59,346 $58,895 $53,277 $57,473 $62,670 $63,685 $63,246
</TABLE>
INFLATION
The Company believes that inflation has not had a material impact on its
results of operations for the periods discussed herein.
YEAR 2000
The Company has conducted an initial review of its computer systems devices,
applications and manufacturing equipment (collectively, "Computer Systems") to
identify those areas that could be affected by Year 2000 noncompliance.
Additionally, the Company has appointed a program manager for Year 2000
compliance and is presently assessing in detail the affected Computer Systems
and is developing plans to address the required modifications. The Company
presently intends to utilize internal and external resources to identify,
correct or reprogram and test its Computer Systems for Year 2000 compliance.
The total cost associated with Year 2000 compliance is not known at this time.
The Company is in the process of communicating with all
21
<PAGE>
known suppliers, service providers, distributors, wholesalers and other
entities with which it has a business relationship (collectively, "Third Party
Businesses") regarding compliance with Year 2000 requirements. The Company has
not determined the impact, if any, on its operations if Third Party Businesses
fail to comply with Year 2000 requirements. If modifications of the Company's
business critical Computer Systems, or Computer Systems of key Third Party
Businesses, are not completed in a timely manner, the Year 2000 issue could
have an adverse effect on the operations and financial position of the
Company.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("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 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. As such, the statement has
been adopted by the Company for calendar year 1997 with no significant impact
to the financial statements of the Company.
Also, 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 has been adopted for calendar year 1997
and as a result, the Company has added 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.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
With the exception of historical information (information relating to the
Company's financial condition and results of operations at historical dates or
for historical periods), the matters discussed in this Management's Discussion
and Analysis of Financial Condition and Results of Operations are forward-
looking statements that necessarily are based on certain assumptions and are
subject to certain risks and uncertainties. These forward-looking statements
are based on management's expectations as of the date hereof, and the Company
does not undertake any responsibility to update any of these statements in the
future. Actual future performance and results could differ from that contained
in or suggested by these forward-looking statements as a result of the factors
set forth in this Management's Discussion and Analysis of Financial Condition
and Results of Operations, various aspects of the business as described in
Item 1 of this Report on Form 10-K and elsewhere in the Company's filings with
the Securities and Exchange Commission.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 is set forth on pages F-1 through F-25 of
this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
22
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to Directors of the Company is set forth in the
Proxy Statement under the heading "Election of Directors," which information
is incorporated herein by reference. Information regarding the executive
officers of the Company is included as Item 4A of Part I of this Form 10-K as
permitted by Instruction 3 to Item 401(b) of Regulation S-K. Information
required by Item 405 of Regulation S-K is set forth in the Proxy Statement
under the heading "Section 16(a) Beneficial Ownership Reporting Compliance,"
which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to executive compensation is set forth in the Proxy
Statement under the heading "Compensation of Executive Officers," which
information is incorporated herein by reference (except for the Compensation
Committee Report on Executive Compensation and the Performance Graph).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to security ownership of certain beneficial owners
and management is set forth in the Proxy Statement under the heading
"Beneficial Ownership of Common Stock," which information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to certain relationships and related transactions
is set forth in the Proxy Statements under the headings "Election of Directors
- -- Compensation Committee Interlocks and Insider Participation" and "Election
of Directors -- Certain Relationships and Related Transactions," which
information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
1. Financial Statements. The following consolidated financial
statements of the Company and the report of the independent auditors
thereon, are included in this Form 10-K on pages F-1 through F-25:
THE PETERSEN COMPANIES, INC.
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets at December 31, 1996 and 1997
Consolidated Statements of Operations for the period from August
15, 1996 (inception) to December 31, 1996 and for the year
ended December 31, 1997
Consolidated Statements of Stockholders' Equity for the period
from August 15, 1996 (inception) to December 31, 1996 and for
the year ended December 31, 1997
Consolidated Statements of Cash Flows for the period from August
15, 1996 (inception) to December 31, 1996 and for the year
ended December 31, 1997
Notes to Consolidated Financial Statements
23
<PAGE>
PETERSEN PUBLISHING COMPANY PUBLISHING DIVISION
Report of Ernst & Young LLP, Independent Auditors
Statements of Operations and Divisional Equity for the year
ended November 30, 1995 and for the ten months ended September
30, 1996
Statements of Cash Flows for the year ended November 30, 1995
and for the ten months ended September 30, 1996
Notes to Financial Statements
2. Financial Statement Schedules.
The following consolidated financial statement schedule of the
Company for the period from August 15, 1996 (inception) to December
31, 1996 and the year ended December 31, 1997 is included in this
Form 10-K on page S-1.
<TABLE>
<CAPTION>
SCHEDULE NO. DESCRIPTION PAGE NO.
------------ ----------- --------
<C> <S> <C>
Schedule II Valuation and Qualifying Accounts S-1
</TABLE>
All other financial statement schedules have been omitted because
they are inapplicable or the required information is included or
incorporated by reference elsewhere herein.
3. Exhibits.
The Company will furnish to any eligible stockholder, upon written
request of such stockholder, a copy of any exhibit listed below upon
the payment of a reasonable fee equal to the Company's expenses in
furnishing such exhibit.
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<C> <S>
2.1 Contribution and Recapitalization Agreement by and among
the Company, Petersen Holdings, L.L.C. ("Petersen"),
Publishing and all of the Company's existing stockholders.
(1)
3.1 Restated Certificate of Incorporation of the Company. (1)
3.2 Amended and Restated By-Laws of the Company. (1)
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. (2)
4.2 Forms of 11 1/8% Senior Subordinated Notes and Series B 11
1/8% Senior Subordinated Notes. (2)
4.3 Securities Purchase Agreement, dated November 20, 1996, by
and among Petersen, Petersen Capital Corp. ("Capital"),
Publishing and the Initial Purchasers named therein. (2)
4.4 Credit Agreement, dated as of October 6, 1997, by and
among the Company, Publishing, the Lenders named therein,
First Union National Bank ("First Union"), as
Administrative Agent, and CIBC, Inc., as Documentation
Agent. (1)
4.5 Borrower Pledge and Security Agreement, dated as of
October 6, 1997, made by Publishing in favor of First
Union, as Administrative Agent. (1)
4.6 Parent Pledge and Security Agreement, dated as of October
6, 1997, made by Petersen and the Company in favor of
First Union, as Administrative Agent. (1)
4.7 Revolving Credit and Swingline Notes of Publishing, each
dated October 6, 1997. (1)
4.8 Parent Guaranty, dated as of October 6, 1997, by and among
Petersen, Publishing and First Union, as Administrative
Agent. (1)
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<C> <S>
4.9 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. (2)
4.10 Registration Rights Agreement, dated November 20, 1996, by
and among Publishing, Capital and the Initial Purchasers
named therein. (2)
4.11 Specimen of Class A Common Stock. (3)
10.1 License Agreement, dated as of August 15, 1996, by and
between Robert E. Petersen, the Company and the
Predecessor. (2)
10.2 Employment Agreement, dated as of August 15, 1996, by and
between the Company and Robert E. Petersen. (2)
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. (2)
10.4 Executive Securities Purchase and Employment Agreement,
dated as of September 30, 1996, by and among the Company,
Petersen, Publishing and Neal Vitale. (2)
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. (2)
10.6 Executive Securities Purchase and Employment Agreement,
dated as of September 30, 1996, by and among the Company,
Petersen, Publishing and Richard S Willis.
10.7 Securityholders Agreement, dated as of September 30, 1996,
among Petersen Investment Corp., Petersen, the Company and
the other parties thereto. (2)
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. (2)
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. (2)
10.10 Promissory Note, dated as of September 30, 1996, from D.
Claeys Bahrenburg in favor of Petersen in the amount of
$891,000. (2)
10.11 Promissory Note, dated as of September 30, 1996, from D.
Claeys Bahrenburg in favor of Petersen in the amount of
$99,000. (2)
10.12 Promissory Note, dated as of September 30, 1996, from Neal
Vitale in favor of the Company in the amount of $7,500.
(2)
10.13 Promissory Note, dated as of September 30, 1996, from Neal
Vitale in favor of Petersen in the amount of $742,500. (2)
10.14 Asset Purchase Agreement, dated as of August 15, 1996, by
and between the Company (formerly known as BrightView
Communications Group, Inc.) and the Predecessor, as
amended by the Letter Agreement, dated as of September 30,
1996, by and among the Seller, the Company, Petersen and
Publishing. (2)
10.15 The Petersen Companies, Inc. 1997 Long-Term Equity
Incentive Plan. (1)
10.16 The Petersen Companies, Inc. Employee Stock Discount
Purchase Plan. (1)
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<C> <S>
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. (3)
10.18 Petersen Holdings, L.L.C. 1997 Long-Term Equity Incentive
Plan. (1)
10.19 Amendment No. 1 to Securityholders Agreement, among
Petersen Investment Corp., Petersen, the Company and the
other parties thereto. (1)
10.20 Promissory Note, dated as of January 27, 1997, from
Richard S Willis in favor of Petersen in the amount of
$198,000*
10.21 Promissory Note, dated as of January 27, 1997, from
Richard S Willis in favor of the Company in the amount of
$2,000*
21.1 Subsidiaries of the Company.
24.1 Powers of Attorney.
27.1 Financial Data Schedule.*
</TABLE>
- --------
(1) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1997 (Commission File No. 1-
13373).
(2) Incorporated by reference to Publishing's Registration Statement on Form S-
4 (Registration No. 333-18017).
(3) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-33111).
* Filed herewith.
(b) Reports on Form 8-K.
None.
26
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THIS SIXTEENTH
DAY OF MARCH, 1998.
THE PETERSEN COMPANIES, INC.
By /s/ Richard S Willis
-----------------------------------
Richard S Willis
Executive Vice President and
Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT IN THE CAPACITIES INDICATED ON THIS SIXTEENTH DAY OF MARCH, 1998.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<S> <C>
/s/ James D. Dunning, Jr. Chairman of the Board and Chief
____________________________________ Executive Officer (Principal Executive
James D. Dunning, Jr. Officer)
/s/ Richard S Willis Executive Vice President-Chief Financial
____________________________________ Officer and Director (Principal
Richard S Willis Financial and Accounting Officer)
/s/ D. Claeys Bahrenburg Director
____________________________________
D. Claeys Bahrenburg
/s/ Neal Vitale Director
____________________________________
Neal Vitale
/s/ Laurence H. Bloch Director
____________________________________
Laurence H. Bloch
/s/ Avy H. Stein Director
____________________________________
Avy H. Stein
/s/ Daniel H. Blumenthal Director
____________________________________
Daniel H. Blumenthal
/s/ Milton J. Block, Jr. Director
____________________________________
Milton J. Block, Jr.
/s/ John R. Willis Director
____________________________________
John R. Willis
/s/ Stacey J. Lippman Director
____________________________________
Stacey J. Lippman
</TABLE>
II-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
THE PETERSEN COMPANIES, INC.
Report of Ernst & Young LLP, Independent Auditors...................... F-2
Consolidated Balance Sheets at December 31, 1996 and December 31, 1997. F-3
Consolidated Statements of Operations for the period from August 15,
1996 (inception) to December 31, 1996 and the year ended December 31,
1997.................................................................. F-4
Consolidated Statements of Stockholders' Equity for the period from
August 15, 1996 (inception) to December 31, 1996 and the year ended
December 31, 1997..................................................... F-5
Consolidated Statements of Cash Flows for the period from August 15,
1996 (inception) to December 31, 1996 and the year ended December 31,
1997 ................................................................. F-6
Notes to Consolidated Financial Statements............................. F-7
PETERSEN PUBLISHING COMPANY PUBLISHING DIVISION
Report of Ernst & Young LLP, Independent Auditors...................... F-19
Statements of Operations and Divisional Equity for the year ended
November 30, 1995 and the ten months ended September 30, 1996......... F-20
Statements of Cash Flows for the year ended November 30, 1995 and the
ten months ended September 30, 1996................................... F-21
Notes to Financial Statements.......................................... F-22
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
The Petersen Companies, Inc.
We have audited the accompanying consolidated balance sheets of The Petersen
Companies, Inc. (formerly known as BrightView Communications Group, Inc.), as
of December 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for the period from August 15,
1996 (inception) to December 31, 1996 and the year ended December 31, 1997.
Our audits also included the financial statement schedule listed in the Index
at Item 14(a). These financial statements and schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Petersen Companies, Inc. at December 31, 1996 and 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 year ended December 31, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
Ernst & Young LLP
Los Angeles, California
January 28, 1998
F-2
<PAGE>
THE PETERSEN COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 7,761 $ 5,925
Accounts receivable, net of allowance for doubtful
accounts of $1,604 (1996) and $1,286 (1997)........ 20,141 25,408
Receivable from related party....................... -- 2,420
Inventories......................................... 4,408 4,124
Current portion of deferred subscription
acquisition costs.................................. 43,835 39,070
Deferred direct mail advertising costs, net of
accumulated amortization of $2,058 (1997).......... -- 5,339
Other prepaid expenses and current assets........... 730 2,795
-------- --------
Total current assets.............................. 76,875 85,081
Deferred subscription acquisition costs.............. 41,168 36,905
Property and equipment, net of accumulated
depreciation of $560 (1996) and $2,391 (1997)....... 4,152 3,248
Goodwill, net of accumulated amortization of $5,992
(1996) and $29,965 (1997)........................... 353,556 334,102
Subscriber list and established work force, net of
accumulated amortization of $3,000 (1996) and
$15,000 (1997)...................................... 117,000 105,000
Deferred financing costs, net of accumulated
amortization of $3,276 (1996) and $11,397 (1997).... 10,735 3,336
Other assets......................................... 587 2,075
-------- --------
Total assets...................................... $604,073 $569,747
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities............ $ 13,288 $ 14,299
Accrued payroll and related costs................... 1,963 6,414
Accrued interest on long-term debt.................. 2,041 1,283
Customer incentives payable......................... 5,785 6,982
Current portion of unearned subscription revenues... 71,163 71,585
Current portion of long-term debt................... 1,000 --
Other accrued expenses and current liabilities...... 119 1,705
-------- --------
Total current liabilities............................ 95,359 102,268
Unearned subscription revenues....................... 47,608 46,360
Bank Borrowings...................................... 199,000 65,000
Senior Subordinated Notes............................ 100,000 75,000
Other noncurrent liabilities......................... 7,652 7,592
Commitments and contingencies
Stockholders' equity:
Class A Common Stock, $.01 par value; 10,000 shares
authorized, 2,145 shares issued and outstanding
(1996); 75,000,000 shares authorized, 27,172,974
shares issued and outstanding (1997)............... -- 272
Class B Common Stock, $.01 par value; 10,000 shares
authorized, 1,200 shares issued and outstanding
(1996); 25,000,000 shares authorized, 7,736,290
shares issued and outstanding (1997)............... -- 77
Additional paid-in capital.......................... 167,009 330,624
Accumulated deficit................................. (10,605) (55,696)
-------- --------
156,404 275,277
Less: notes receivable from related parties......... (1,950) (1,750)
-------- --------
Total stockholders' equity.......................... 154,454 273,527
-------- --------
Total liabilities and stockholders' equity........ $604,073 $569,747
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
THE PETERSEN COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AUGUST 15, 1996
(INCEPTION) TO YEAR ENDED
DECEMBER 31, DECEMBER
1996 31, 1997
--------------- -----------
<S> <C> <C>
Net revenues:
Advertising..................................... $ 31,912 $ 149,051
Newsstand....................................... 10,037 43,736
Subscriptions (net of agency commissions of
$13,804 (1996), and $55,042 (1997))............ 10,404 46,921
Other........................................... 924 7,366
---------- -----------
Total net revenues................................ 53,277 247,074
Production, selling and other direct costs
(including rent paid to a related party of $1,032
(1996), and $4,379 (1997)) ...................... 41,190 169,048
---------- -----------
Gross profit...................................... 12,087 78,026
General and administrative expenses............... 2,666 18,771
Compensation expense.............................. -- 12,182
Amortization of goodwill and other intangible
assets........................................... 8,993 36,163
---------- -----------
Income from operations............................ 428 10,910
Other income (expense):
Interest income................................. 113 1,228
Interest expense................................ (11,146) (26,867)
---------- -----------
Loss before extraordinary item ................... (10,605) (14,729)
Extraordinary item:
Loss on early extinguishment of debt............ -- (9,088)
---------- -----------
Net loss ......................................... (10,605) (23,817)
Preferred unit dividends.......................... -- (21,274)
---------- -----------
Net loss attributable to common stockholders...... $ (10,605) $ (45,091)
========== ===========
Loss per share attributable to common
stockholders..................................... $ (0.39) $ (1.25)
Loss per share on early extinguishment of debt.... -- (0.31)
---------- -----------
Net loss per share (basic and diluted)............ $ (0.39) $ (1.56)
========== ===========
Weighted average number of common shares
outstanding...................................... 26,859,264 28,818,604
========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
THE PETERSEN COMPANIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
ADDITIONAL FROM TOTAL
PAID IN ACCUMULATED RELATED STOCKHOLDERS'
CLASS A COMMON CLASS B COMMON CAPITAL DEFICIT PARTIES EQUITY
----------------- ---------------- ---------- ----------- ---------- -------------
SHARES AMOUNT SHARES AMOUNT
---------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of August 15,
1996 (inception)....... -- $-- -- $-- $ -- $ -- $ -- $ --
Contributed capital..... 2,145 -- 1,200 -- 167,009 -- -- 167,009
Loans to related
parties................ -- -- -- -- -- -- (1,950) (1,950)
Net loss................ -- -- -- -- -- (10,605) -- (10,605)
---------- ---- --------- ---- --------- --------- ------- --------
Balance as of
December 31, 1996...... 2,145 -- 1,200 -- 167,009 (10,605) (1,950) 154,454
Contributed Capital..... 18 -- -- -- 9 -- -- 9
Proceeds from issuance
of membership units.... -- -- -- -- 896 -- -- 896
Payments against notes
receivable from related
parties................ -- -- -- -- -- -- 200 200
Preferred unit
dividends.............. -- -- -- -- 21,274 (21,274) -- --
Non-cash non-recurring
compensation........... -- -- -- -- 12,182 -- 12,182
Effect of
Reorganization......... 19,120,811 191 7,735,090 77 (268) -- -- --
Proceeds from initial
public offering, net of
expenses............... 8,050,000 81 -- -- 129,522 -- -- 129,603
Net loss................ -- -- -- -- -- (23,817) -- (23,817)
---------- ---- --------- ---- --------- --------- ------- --------
Balances of
December 31, 1997...... 27,172,974 $272 7,736,290 $ 77 $ 330,624 $ (55,696) $(1,750) $273,527
========== ==== ========= ==== ========= ========= ======= ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
THE PETERSEN COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 15, 1996 YEAR
(INCEPTION) TO ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
--------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.......................................... $ (10,605) $ (23,817)
Adjustment to reconcile net loss to net cash
provided by operating activities:
Depreciation..................................... 560 1,853
Amortization..................................... 12,289 44,285
Allowance for doubtful accounts.................. -- 860
Non-cash non-recurring compensation.............. -- 12,182
Changes in operating assets and liabilities:
Accounts receivable.............................. (2,092) (6,127)
Inventories...................................... 6,017 284
Deferred subscription acquisition costs.......... (11,061) 9,028
Deferred direct mail advertising costs........... -- (5,339)
Accounts payable and accrued liabilities......... 9,102 (429)
Accrued payroll and related costs................ (3,677) 4,451
Accrued interest on long-term debt............... 2,041 (758)
Customer incentives payable...................... 411 1,197
Unearned subscription revenues................... 11,840 (826)
Other current assets, net........................ 34 (3,171)
Other current and noncurrent liabilities......... 7,506 (300)
--------- ---------
Total adjustments................................ 32,970 57,190
--------- ---------
Net cash provided by operating activities......... 22,365 33,373
--------- ---------
INVESTING ACTIVITIES
Purchases of property and equipment............... -- (1,007)
Purchases of magazines and associations........... -- (6,531)
Proceeds from sale of assets...................... -- 33
Acquisition, net of costs......................... (465,652) 2,500
--------- ---------
Net cash used in investing activities............. (465,652) (5,005)
--------- ---------
FINANCING ACTIVITIES
Proceeds from bank borrowings..................... 200,000 65,000
Repayment of bank borrowings...................... -- (200,000)
Proceeds from issuance of equity and IPO, net of
costs............................................ 165,059 130,499
Proceeds from issuance of Senior Subordinated
Notes............................................ 100,000 --
Repayment of Senior Subordinated Notes............ -- (25,000)
Increase in deferred financing costs.............. (14,011) (722)
Increase in notes receivable, related party....... -- (181)
Payment against notes receivable, related party... -- 200
--------- ---------
Net cash provided by (used in) financing
activities....................................... 451,048 (30,204)
--------- ---------
Increase (decrease) in cash and cash equivalents.. 7,761 (1,836)
Cash and cash equivalents at beginning of period.. -- 7,761
--------- ---------
Cash and cash equivalents at end of period........ $ 7,761 $ 5,925
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during period for:
Interest......................................... $ 5,576 $ 21,181
========= =========
Taxes............................................ $ -- $ 71
========= =========
</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 $1,950,000 in exchange for Common and Preferred Units.
Additionally, the Company accrued cumulative Preferred Unit dividends of
$21,274,000 during the year ended December 31, 1997. In October 1997, in
connection with the Recapitalization Agreement, Petersen issued 26,859,264
shares of Common Stock in exchange for all the membership units of Holdings.
See accompanying notes.
F-6
<PAGE>
THE PETERSEN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
BrightView Communications Group, Inc., a Delaware corporation, changed its
name to The Petersen Companies, Inc. ("Petersen" or the "Company") on August
7, 1997. Prior to October 2, 1997, Petersen owned 1.0% of Petersen Holdings
L.L.C. ("Holdings") and .1% of Petersen Publishing Company, L.L.C.
("Publishing"). Subsequent to October 2, 1997, Petersen owns 100% of Holdings.
See Note 7 for a discussion of the transactions resulting in this change of
ownership. Petersen was organized in August 1996 for the principal purpose of
investing in Holdings and Publishing and has no business operations other than
the investments in Holdings and Publishing. Publishing 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. Petersen is Holdings' sole member and as
such, controls the policies and operations of Holdings and of Publishing
through Holdings.
Basis of Presentation
The consolidated financial statements reflect the consolidated activity of
Petersen, Holdings and Publishing for the period from August 15, 1996
(inception) through December 31, 1996 and for the year ended December 31,
1997, after elimination of intercompany transactions. Due to the fact that
Petersen, Holdings and Publishing were under common ownership since September
30, 1996 and as a result of Petersen's increased ownership in Holdings (see
Note 7), the financial statements for 1996 have been restated to reflect the
consolidated balances of Petersen, Holdings and Publishing as of the beginning
of the earliest period presented. 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 year
ended December 31, 1997.
Petersen is a holding company with substantially no assets, operations or
cash flows other than its investment in Holdings and Publishing. Petersen and
Holdings are guarantors of Publishing's Revolving Credit Facility (as defined
in Note 5) and Holdings is a guarantor of Publishing's Notes (as defined in
Note 5). Petersen has not presented separate financial statements and other
disclosures concerning Holdings and Publishing because management has
determined that such information is not material to investors.
Earnings Per Share
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants
and convertible securities. All earnings per share amounts presented have been
calculated according to SFAS 128. See Note 13 for the computation of basic and
diluted loss per share.
Cash Equivalents
Cash equivalents consist primarily of debt instruments with maturities of
three months or less. The carrying amounts of cash and cash equivalents
reported in the balance sheet approximate 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 ranging from 12 to 36 months.
F-7
<PAGE>
THE PETERSEN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 is amortized using the straight-line method over its estimated
useful life of 15 years. Goodwill associated with Petersen's acquisition of
certain intellectual properties is amortized using the straight-line method
over its estimated useful life of 5 years. Other intangible assets (consisting
mainly of subscriber lists and established work force) are amortized over
their estimated useful lives of ten years. Deferred financing costs are
amortized over the terms of the underlying debt (see Note 5).
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 began a new mailing program in 1997. Petersen accounts for its
direct response advertising costs in accordance with the American Institute of
Certified Public Accountants Statement of Position 93-7 "Reporting on
Advertising Costs" pursuant to which qualified direct response advertising is
capitalized and amortized over its expected period of future benefit. Such
capitalized costs include primarily printing and postage to current and
potential subscribers and totaled $5,339,000 at December 31, 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 for the year ended December 31, 1997 was $2,058,000.
Petersen expenses all other costs of advertising as incurred. Advertising
expense for the three months ended December 31, 1996 and the year ended
December 31, 1997 were $23,000 and $1,094,000, respectively.
Recently Issued Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", 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 statements will be adopted in
calendar year 1998 and Petersen expects that it will add additional disclosure
to the financial statements.
F-8
<PAGE>
THE PETERSEN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACQUISITIONS
Acquisition of the Publishing Division of Petersen Publishing Company
In August 1996, Petersen entered into an Asset Purchase Agreement to
purchase substantially all of the assets of the Publishing Division of
Petersen Publishing Company (the "Predecessor") (the "Acquisition"). Petersen
assigned its rights under such agreement to Publishing and Publishing assumed
all of Petersen's obligations thereunder. The aggregate purchase price
(including expenses) was $462,800,000 (including costs associated with the
Acquisition), plus the assumption of unearned subscription revenues and other
certain liabilities totaling approximately $49,000,000.
The Acquisition was completed on September 30, 1996. In connection with the
Acquisition, Publishing recorded goodwill of approximately $360,000,000 and
other intangible assets of approximately $120,000,000.
The Asset Purchase Agreement provided for a final settlement of the purchase
price related to changes in the working capital of the Predecessor between
June 30, 1996 and September 30, 1996. During the year ended December 31, 1997,
Publishing received $2,526,000 related to such changes. At December 31, 1997,
Petersen recorded a receivable of $2,300,000 from the Predecessor,
representing additional amounts due as a result of changes in the working
capital of the Predecessor, and adjusted accrued liabilities and goodwill
accordingly. Such amount was received by the Company subsequent to December
31, 1997.
In order to finance the Acquisition, Publishing 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 7 for a more comprehensive discussion of the debt and equity issuances.
Other Acquisitions
In October 1997, Petersen acquired substantially all of the assets of a
magazine publisher, including all rights to certain magazines, for an
aggregate purchase price of $3,450,000, plus the assumption of certain
liabilities. As a result of the acquisition, Petersen recorded goodwill
totaling $4,409,000.
In November 1997, Petersen purchased the assets of three auto-related
associations, consisting mainly of intellectual property (i.e. trademarks,
service marks and logos). As a result of these purchases, Petersen recorded
goodwill of $1,500,000. Such amount will be amortized over five years.
Goodwill amortization expense and amortization of other intangibles for the
period from August 15, 1996 (inception) to December 31, 1996 was $5,992,000
and $3,000,000, respectively. Goodwill amortization expense and amortization
of other intangibles for the year ended December 31, 1997 was $24,046,000 and
$12,000,000, respectively.
3. INVENTORIES
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
------ ------
<S> <C> <C>
Paper.......................................................... $ 611 $ 824
Magazines in process........................................... 3,797 3,300
------ ------
$4,408 $4,124
====== ======
</TABLE>
The Company purchases substantially all of its paper supplies and printing
services from one vendor.
F-9
<PAGE>
THE PETERSEN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
------ ------
<S> <C> <C>
Leasehold improvements........................................ $ 283 $ 859
Machinery and equipment....................................... 2,230 2,581
Office furniture and equipment................................ 2,199 2,199
------ ------
4,712 5,639
Less accumulated depreciation and amortization................ 560 2,391
------ ------
$4,152 $3,248
====== ======
</TABLE>
5. LONG-TERM DEBT
Credit Facility:
On September 30, 1996, Publishing 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 Publishing up to $260,000,000. As
of December 31, 1996, Publishing had $200,000,000 outstanding under the Senior
Credit Facility. In October 1997, Publishing repaid in full all amounts
outstanding under the Senior Credit Facility. Publishing incurred costs of
approximately $7,000,000 in connection with the Senior Credit Facility. These
costs were included in Deferred Financing Costs and were being amortized over
the average terms of the loans. During the period from August 15, 1996
(inception) to December 31, 1996 and the year ended December 31, 1997,
Publishing amortized approximately $250,000 and $1,403,000, respectively, of
such deferred financing costs. As a result of the early repayments, during the
year ended December 31, 1997, Publishing recorded additional amortization of
deferred financing costs of approximately $5,398,000, which amount has been
classified as an extraordinary item.
In October 1997, Publishing entered into a Senior Secured Revolving Credit
Facility (the "Revolving Credit Facility") with First Union Capital Markets
Corp. and a syndicate of other financial institutions. The Revolving Credit
Facility provides for up to $175,000,000 in borrowings, including up to
$10,000,000 for standby letters of credit and $10,000,000 for swingline loans.
The Revolving Credit Facility bears interest at the Alternate Base rate (8.5%
at December 31, 1997), or LIBOR (6.0% at December 31, 1997) plus .375% to
1.0%, based on certain ratios defined in the Revolving Credit Facility
agreement. As of December 31, 1997, Publishing had $65,000,000 outstanding
under the Revolving Credit Facility at a weighted average interest rate of
6.625%. In addition, at December 31, 1997, a $1,600,000 letter of credit was
outstanding, reducing the amount available under the Revolving Credit
Facility. The letter of credit expires in January 1999 and is renewable
annually.
The Revolving Credit Facility matures on September 30, 2002. The Revolving
Credit Facility is required to be permanently reduced with (i) 100% of
insurance proceeds not applied toward the repair or replacement of damaged
properties within 180 days, (ii) 100% of proceeds from assets 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 Offering (see Note 7)) or 100% of any
debt.
The Revolving Credit Facility contains certain restrictive covenants
including, but not limited to, restrictions on indebtedness, liens, disposals
of assets, payments of dividends and investments, as well as certain financial
ratio covenants. As of December 31, 1997, Publishing was in compliance with
the covenants of the Revolving Credit Facility.
F-10
<PAGE>
THE PETERSEN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Revolving Credit Facility is guaranteed by Petersen, Holdings and all
wholly-owned subsidiaries of Publishing, if any. As collateral for the
Revolving Credit Facility, Publishing pledged a first priority security
interest in all of its assets and all of the assets of any wholly-owned
subsidiaries.
Publishing estimates that at December 31, 1997, the book value of the
Revolving Credit Facility approximated its fair value.
Publishing incurred costs of approximately $722,000 in connection with the
Revolving Credit Facility. These costs are included in Deferred Financing
Costs and are being amortized over five years. During the year ended December
31, 1997, Publishing amortized approximately $36,000, of such deferred
financing costs.
11 1/8% Senior Subordinated Notes due 2006:
Publishing 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. Petersen Capital Corp. ("Capital") was incorporated for the purpose
of serving as a co-issuer of the Notes in order to facilitate the offering of
the Notes. Capital has no operations, revenues or assets of any kind and does
not participate in the servicing of the interest or principal obligations of
the Notes. The indenture governing the Notes imposes substantial restrictions
on the activities of Capital. On March 11, 1997, Publishing 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 Notes bear interest at 11 1/8% per annum, payable semi-annually on
November 15 and May 15, commencing May 15, 1997. The Notes will mature on
November 15, 2006 and will not be subject to any sinking fund requirement. The
Notes are redeemable at the option of the Issuers, in whole or in part, at any
time on or after November 15, 2001, at the redemption prices set forth in the
Notes Purchase Agreement, plus accrued and unpaid interest to the date of
redemption. Under certain circumstances, prior to November 15, 1999, the
Issuers, at their option, may redeem in the aggregate up to 25% of the
original principal amount of the Notes at 111.125% of the aggregate principal
amount so redeemed, plus accrued and unpaid interest. In October 1997,
Publishing elected to redeem such aggregate amount and, as a result, paid
$27,781,000 to holders of 25% of the original principal amount. Such amount
includes a redemption premium of $2,781,000, which has been classified as an
extraordinary item. In addition, accrued and unpaid interest of $1,321,000 was
paid to the holders of the redeemed Notes.
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 December 31, 1997, Publishing was in
compliance with the covenants contained in the Indenture.
Publishing incurred costs of approximately $4,000,000 in connection with the
original issuance of the Notes. These costs are included in Deferred Financing
Costs and are being amortized over the term of the Notes. During the period
from August 15, 1996 (inception) to December 31, 1996 and the year ended
December 31, 1997, Publishing amortized approximately $67,000, and $1,283,000,
respectively, of such deferred financing costs. The 1997 amounts include
additional amortization of $908,000, representing costs associated with the
portion of the Notes redeemed by Publishing. Such amount has been classified
as an extraordinary item.
The Company estimates that the book value of the Senior Subordinated Notes
approximates their fair value.
F-11
<PAGE>
THE PETERSEN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
Holdings and Publishing are limited liability companies. The liability for
federal and state income taxes of a limited liability company is the
obligation of the members. Therefore, at December 31, 1996, no provision or
liability for federal or state income taxes was recorded.
At December 31, 1997, Publishing had no provision or liability for federal
or state income taxes based on the net loss from operations during the year.
Deferred income taxes reflect the net tax effects of the net operating loss
carryforwards and temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Significant components of Petersen's deferred tax
liabilities and assets as of December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Vacation pay accrual............................................ $ 756
Other accruals.................................................. 100
Amortization expense............................................ 4,234
Net operating loss carryforward................................. 641
Depreciation expense............................................ 377
-------
Total deferred tax assets......................................... 6,108
Deferred tax liabilities:
Capitalized advertising costs................................... 2,312
Prepaid expenses................................................ 1,060
Bad debt expense................................................ 212
State income taxes.............................................. 164
-------
Total deferred tax liabilities.................................... 3,748
-------
Net deferred tax assets........................................... 2,360
Valuation allowance............................................... (2,360)
-------
Net deferred tax assets........................................... $ --
=======
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards
available to reduce future federal taxable income of $1,658,000, which expires
in 2017. In addition, at December 31, 1997, the Company had net operating loss
carryforwards available to reduce future state taxable income. Due to the
Company filing in multiple jurisdictions, the related expiration dates and
amounts that are deductible, vary by state.
7. SHAREHOLDERS' EQUITY
In August 1996, Petersen issued 2,145 shares of its Class A common stock,
par value $.01 per share, (the "Class A Common Stock") and 1,200 shares of its
Class B common stock, par value $.01 per share, (the "Class B Common Stock")
in exchange for proceeds aggregating $1,671,000. With such proceeds, Petersen
invested $1,505,250 in Holdings membership units, representing 1% of Holdings'
total members' equity and $167,250 in Publishing membership units,
representing .1% of Publishing's total members' equity. Also in August 1996,
Holdings issued 367,950 shares of Class A Common Units and 367,950 Preferred
Units in exchange for proceeds aggregating $165,135,000. See Note 11 regarding
additional common units issued by Holdings.
On September 30, 1997, pursuant to a Contribution and Recapitalization
Agreement (the "Recapitalization Agreement"), each existing securityholder of
Petersen and Holdings contributed all of its existing shares of
F-12
<PAGE>
THE PETERSEN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Common Stock of Petersen and Preferred Units and Common Units of Holdings to
Petersen in exchange for newly-issued shares of Common Stock of Petersen.
Pursuant to the Recapitalization Agreement: (i) all of the Preferred Units of
Holdings were exchanged for an aggregate of 10,727,176 shares of Common Stock
and (ii) all of the Class A and Class D Common Units (see Note 11) of Holdings
and all of the Common Stock of Petersen was exchanged for an aggregate of
16,132,088 shares of Common Stock. Such exchanges are collectively referred to
herein as the "Reorganization".
On October 2, 1997, Petersen issued an additional 8,050,000 shares of Class
A Common Stock pursuant to a registration statement filed with the Securities
and Exchange Commission (the "Offering"). Proceeds from the Offering
aggregated approximately $130,000,000, after deduction of commissions and
expenses related to the Offering.
As a result of the Offering and the Reorganization, the total amount of
authorized capital stock of Petersen consists of 75,000,000 shares of Class A
Common Stock (27,172,974 shares issued and outstanding at December 31, 1997)
and 25,000,000 shares of Class B Common Stock (7,736,290 shares issued and
outstanding at December 31, 1997).
The holders of the 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. Such dividends are
subject to the prior rights of holders of any Preferred Stock of Holdings.
Upon liquidation, dissolution or winding up of Petersen, the holders of Class
A Common Stock are entitled to receive pro rata the assets of Petersen 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
of Holdings then outstanding. Each outstanding share of Class A Common Stock
is entitled to one vote on all matters submitted to a vote of stockholders.
Except with respect to voting and conversion rights, the Class B Common
Stock is identical to the Class A Common Stock. 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. Upon the occurrence of
certain events (including, but not limited to, any public offering or public
sale of such shares, certain sales of securities of Petersen, a merger,
consolidation or similar transaction) each holder of Class B Common Stock is
entitled to convert on a share-for-share basis any or all of the shares of
such holder's Class B Common Stock being distributed, disposed of or sold in
connection with such event.
8. LONG TERM EQUITY INCENTIVE PLAN
Pursuant to the terms of Petersen's Long-Term Equity Incentive Plan (the
"Plan"), Petersen may grant incentive or nonqualified stock options, stock
appreciation rights in tandem with options, or performance awards to purchase
shares of its Class A Common Stock to the Company's officers, key employees,
or other individuals selected by the Compensation Committee (the "Committee")
of Petersen's Board of Directors. An aggregate of 2,041,269 shares may be
issued under the Plan at an exercise price to be established by the Committee.
However, the Plan provides that in the case of incentive stock options, the
exercise price may not be less than 100% of the stock's fair market value as
of the date of grant of the option, unless the grantee owns more than 10% of
the total combined voting power of all classes of Petersen's, in which case
the exercise price may not be less than 110% of the stock's fair market value
at the date of grant of the option. The term during which each option may be
exercised shall be determined by the Committee, but in no event shall an
option be exercisable in whole or in part, more than ten years from the date
of grant.
F-13
<PAGE>
THE PETERSEN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
------- --------------
<S> <C> <C>
Outstanding at December 31, 1996................... -- $ --
Granted............................................ 320,685 8.87
Surrendered, forfeited or expired.................. 4,111 8.87
Exercised.......................................... --
------- -----
Outstanding at December 31, 1997................... 316,574 $8.87
======= =====
Exercisable at December 31, 1997................... --
=======
</TABLE>
All options outstanding as of December 31, 1997 had an exercise price of
$8.87, vest ratably from the date of grant (July 31, 1997) to December 31,
1999, and expire five years from the date of grant. The weighted average
remaining contractual life of the options is approximately 4.5 years. At
December 31, 1997, Petersen has reserved 2,041,269 shares of its common stock
with respect to shares issuable under the Plan.
On January 9, 1998, the Board of Directors granted to certain employees a
total of 358,500 options to purchase shares of the Company's Class A Common
Stock at an option price of $20.38, which was the closing price for the Class
A Common Stock on January 9, 1998. These options vest on the third anniversary
date of the grant.
Fair Value Disclosure
Petersen has adopted SFAS No. 123, "Accounting for Stock-Based Compensation"
. In accordance with SFAS 123, Petersen has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related Interpretations in accounting for its employee stock
options because, as discussed below, the alternative fair value accounting
provided for under SFAS 123 requires use of option valuation models that were
not developed for use in valuing stock options. Under APB 25, because the
exercise price of Petersen's stock options granted in 1997 equaled the market
price of the underlying stock on the date of grant, no compensation expense
was recognized.
Pro forma information regarding net income is required by SFAS 123, and has
been determined as if Petersen had accounted for its employee stock options
under the fair value method of SFAS 123. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions: risk-free interest rate of 5.5%;
dividend yield of 0%; volatility factors of the expected market price of
Petersen common stock of .40 and a weighted average expected life of the
options of 2.5 years. These assumptions resulted in a weighted-average fair
value of $2.66 per share for stock options granted in 1997.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restriction and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions (see above), including the expected stock price
volatility. Because Petersen's stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The pro
forma effect on net income for the year ended December 31, 1997 is not
representative of the pro forma effect on net income in future years because
pro forma information in future
F-14
<PAGE>
THE PETERSEN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
years will reflect the amortization of a larger number of stock options
granted in several succeeding years. The pro forma loss per share does not
include the shares which would be issuable upon exercise of the options as
their inclusion would be antidilutive.
Petersen's pro forma information for the year ended December 31, 1997
follows (in thousands):
<TABLE>
<S> <C>
Pro forma net loss............................................. $(45,238)
========
Pro forma loss per share....................................... $ (1.57)
========
</TABLE>
9. EMPLOYEE STOCK DISCOUNT PURCHASE PLAN
The Petersen Companies, Inc. Employee Stock Discount Purchase Plan (the
"Employee Stock Purchase Plan") was approved by the Board and the existing
stockholders upon consummation of the Offering. The Employee Stock Purchase
Plan will 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 the fair market value of the
Class A Common Stock on the date of purchase. Petersen believes that ownership
of stock by employees will foster greater employee interest in the success,
growth and development of Petersen. At December 31, 1997 no shares had been
issued in connection with the Employee Stock Purchase Plan. An aggregate of
90,557 shares of Class A Common Stock have been reserved for sale under the
Employee Stock Purchase Plan.
10. PROFIT-SHARING RETIREMENT AND 401K PLANS
The Predecessor had a profit-sharing retirement plan (the "Retirement Plan")
for employees, which was qualified for tax exempt status by the Internal
Revenue Service. Under the Retirement Plan, the Predecessor, at its
discretion, made annual contributions for all eligible employees not to exceed
15% of their aggregate annual compensation. In November 1996, the Predecessor
and Publishing entered into an amendment to the Retirement Plan, whereby
Publishing became a sponsor of the Retirement Plan. Both the Predecessor and
Publishing agreed to make contributions to the Retirement Plan on behalf of
their respective employees based on compensation paid by each company.
However, in connection with the Acquisition, Publishing agreed to make the
contribution to the Retirement Plan for 1996. In December 1996, Publishing
contributed $1,300,000 to the Retirement Plan. In June 1997, Publishing agreed
to transfer the assets of Retirement Plan into a new 401K Plan (the "New
Plan"). Under the New Plan, Publishing shall make matching contributions equal
to 50% of the first 6% of the participants' basic compensation. Publishing
recorded expense of $332,000, representing its matching contributions for the
year ended December 31, 1997.
11. RELATED PARTY TRANSACTION
In connection with the Acquisition, Publishing entered into employment
agreements with three officers of Publishing. Pursuant to these employment
agreements, the officers purchased Common Units and Preferred Units of
Holdings and Common Stock of Petersen 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 Publishing of the officers; or (iii) a sale of Publishing. Such
promissory notes bear interest at a rate equal to Publishing's weighted
average cost of borrowings. In connection with the Reorganization, the Common
Units and Preferred Units held by the officers were exchanged for Class A
Common Stock of the Company.
In addition, Holdings issued to each of the officers additional Common Units
without additional consideration. These Common Units vested ratably over a
five-year period. In July 1997, these Common Units were exchanged for Class D
Common Units. As a result of such exchange, Holdings recognized a non-
recurring,
F-15
<PAGE>
THE PETERSEN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
non-cash compensation charge of $12,182,000. In connection with the Offering
and the Reorganization, the Class D Common Units were exchanged for Class A
Common Stock and the vesting was accelerated to a three-year period following
consummation of the Offering.
See Note 12 for additional related party transactions.
12. COMMITMENTS AND CONTINGENCIES
Leases
Rent expense includes amounts charged to Publishing by a stockholder of
Petersen (the "Stockholder") for the use of various office facilities,
including its corporate headquarters, owned by the Stockholder. The lease
governing the corporate headquarters building had an initial term of 15 years
and expires November 30, 2009. In connection with the Acquisition, Publishing
assumed the lease, subject to certain reductions to the annual rental amounts
and will continue to pay rent to the Stockholder. 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, Publishing entered into another lease with the
Stockholder 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. Publishing believes
such lease provides for lease payments at a market rate and for terms as
favorable to Publishing as could have been negotiated with a third party at
arm's length.
In addition to the lease for its corporate headquarters, Publishing 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
Year ended December 31, 1997........................ 4,379 1,403 5,782
</TABLE>
At December 31, 1997, minimum future annual rentals under long-term leases
are as follows (in thousands):
<TABLE>
<CAPTION>
RELATED
PARTY OTHERS TOTAL
------- ------- -------
<S> <C> <C> <C>
1998.............................................. $ 4,452 $ 2,316 $ 6,768
1999.............................................. 4,530 2,379 6,909
2000.............................................. 4,614 2,409 7,023
2001.............................................. 4,691 2,686 7,377
2002.............................................. 4,773 2,689 7,462
Thereafter to 2009................................ 33,374 9,458 42,832
------- ------- -------
Total......................................... $56,434 $21,937 $78,371
======= ======= =======
</TABLE>
The Company has entered into a sublease for a portion of its corporate
headquarters. The term of the sublease expires in 2007. Aggregate future
minimum rentals to be received under this sublease are $3,102,000 as of
December 31, 1997. The Company has entered into other subleases for certain of
its sales offices. The terms
F-16
<PAGE>
THE PETERSEN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of these subleases expire within three years and aggregate future minimum
rentals to be received under these subleases are not material.
Legal Matters
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 the company.
13. LOSS PER SHARE
As required by SFAS 128, basic earnings per share is based upon the
weighted-average number of common shares outstanding. Diluted earnings per
share is based upon the weighted-average number of common shares and dilutive
potential common shares outstanding. Potential common shares are outstanding
options under the Company's stock option plan.
Options to purchase 316,574 shares of common stock at $8.87 per share, which
will be exercisable in periods subsequent to December 31, 1997 and could
potentially dilute basic loss per share and supplemental loss per share, have
not been included in the basic and diluted or supplemental loss per share
computations because their effect would have been antidilutive for the year
ended December 31, 1997.
Basic and Diluted Loss Per Share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------
WEIGHTED PER-
INCOME AVERAGE SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------- -------------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Loss before extraordinary item........ $(14,729)
Preferred dividends................... (21,274)
--------
Loss before extraordinary item
attributable to common stockholders.. (36,003) (28,818,604) $(1.25)
Loss on early extinguishment of debt.. (9,088) (28,818,604) (0.31)
-------- ------
Net loss attributable to common
stockholders......................... $(45,091) (28,818,604) $(1.56)
======== ======
</TABLE>
Supplemental Loss Per Share:
The following supplemental loss per share information gives effect to the
Offering and subsequent reduction in debt, as if such transactions had
occurred on January 1, 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------
WEIGHTED PER-
INCOME AVERAGE SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------- -------------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Loss before extraordinary item........ $ (5,495) 34,856,104 $(0.16)
Loss on early extinguishment of debt.. (9,769) 34,856,104 (0.28)
-------- ------
Net loss.............................. $(15,264) 34,856,104 $(0.44)
======== ======
</TABLE>
F-17
<PAGE>
THE PETERSEN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
For the quarter ended December 31, 1997, as a result of the Offering and the
Reorganization, Petersen's results of operations were consolidated with those
of Holdings and Publishing. The unaudited quarterly financial data for
Petersen for the quarters ended March 31, June 30 and September 30 have been
restated to reflect the consolidated balances of Petersen, Holdings and
Publishing. In calculating the net loss per share, retroactive effect has been
given to the Reorganization for each of the quarters presented.
The following reflects unaudited quarterly financial data and net loss per
share data for Petersen for the year ended December 31, 1997 (in thousands,
except share and per share amounts):
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Net revenues............... $ 57,473 $ 62,670 $ 63,685 $ 63,246
Gross profit............... 17,446 20,257 20,155 20,168
Income (loss) before
extraordinary item........ (4,178) (758) (11,390) 1,597
Loss on early
extinguishment of debt.... -- -- 6,307 2,781
Net loss................... (4,178) (758) (17,697) (1,184)
Preferred unit dividends... -- 15,419 5,472 383
Net loss attributable to
common stockholders....... (4,178) (16,177) (23,169) (1,567)
Per share
Income (loss) before
extraordinary item
attributable to common
stockholders.............. $ (0.16) $ (0.60) $ (0.63) $ 0.04
Loss on early
extinguishment of debt.... -- -- (0.23) (0.08)
---------- ---------- ---------- ----------
Net loss attributable to
common stockholders....... $ (0.16) $ (0.60) $ (0.86) $ (0.04)
========== ========== ========== ==========
Weighted average number of
common shares outstanding. 26,859,264 26,859,264 26,859,264 34,909,264
</TABLE>
As more fully described in Note 11, in the quarter ended September 30, 1997,
Petersen recorded a non-recurring non-cash compensation charge of $12,182,000.
15. SUBSEQUENT EVENT (UNAUDITED)
In February 1998, Publishing, together with its wholly-owned subsidiary,
Petersen Capital Corp., announced commencement of a cash tender offer for all
of the outstanding Notes (the "Tender Offer"). The purchase price for Notes
validly tendered and accepted for purchase will be an amount based on a yield
to the first redemption date equal to 85 basis points over the yield of the 7
1/2% U.S. Treasury Note due November 15, 2001 less a consent payment of $30
per $1,000 principal amount. The Tender Offer is scheduled to expire on March
25, 1998, unless extended. In conjunction with the Tender Offer, Petersen is
soliciting consents from the holders of the Notes to effect certain amendments
to the indenture under which the Notes were issued (the "Consent
Solicitation"). The Tender Offer and Consent Solicitation are conditioned
upon, among other things, the receipt of sufficient funds from new financing
being negotiated by the Company and its banks. There can be no assurance that
such financing will be completed or that the net proceeds will be sufficient
to purchase the Notes tendered.
F-18
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Petersen Publishing Company
We have audited the accompanying statements of operations, divisional equity
and cash flows of Petersen Publishing Company, Publishing Division, for the
year 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 results of operations of Petersen Publishing
Company, Publishing Division and its cash flows for the year 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-19
<PAGE>
PETERSEN PUBLISHING COMPANY
PUBLISHING DIVISION
STATEMENTS OF OPERATIONS AND DIVISIONAL EQUITY (CAPITAL DEFICIENCY)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED
NOVEMBER 30, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Net revenues:
Advertising....................................... $124,310 $112,525
Newsstand......................................... 39,889 34,318
Subscriptions (net of agency commissions of
$49,503 (1995) and $45,554 (1996))............... 43,901 36,474
Other............................................. 6,415 6,297
-------- --------
Total net revenues.................................. 214,515 189,614
Production, selling and other direct costs
(including rent paid to a related party of $3,875
(1995) and $3,778 (1996)).......................... 171,579 148,874
-------- --------
Gross profit........................................ 42,936 40,740
General and administrative expenses................. 28,145 24,650
Amortization of goodwill and other intangible
assets............................................. 433 339
-------- --------
Income from operations.............................. 14,358 15,751
Interest income..................................... 549 537
Interest expense.................................... -- (185)
Gain on sale of assets.............................. -- 1,554
-------- --------
Income before provision for income taxes............ 14,907 17,657
Provision for state income taxes.................... (549) (331)
-------- --------
Net income.......................................... 14,358 17,326
Divisional equity (capital deficiency) at beginning
of period.......................................... 361 8,627
Distribution of S corporation earnings.............. (3,391) (21,470)
Net change in advances to other divisions of the
Company............................................ (2,701) (6,155)
-------- --------
Divisional equity (capital deficiency) at end of
period............................................. $ 8,627 $ (1,672)
======== ========
</TABLE>
See accompanying notes.
F-20
<PAGE>
PETERSEN PUBLISHING COMPANY
PUBLISHING DIVISION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED
NOVEMBER 30, SEPTEMBER 30,
1995 1996
------------ ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income...................................... $ 14,358 $ 17,326
Adjustments to reconcile net cash provided by
operating activities:
Depreciation and amortization.................. 3,439 2,704
Allowance for doubtful accounts................ 900 45
Gain on sale of assets......................... -- (1,554)
Deferred state income taxes.................... 406 173
Changes in operating assets and liabilities:
Accounts receivable........................... (197) (287)
Inventories................................... (11,846) 12,829
Deferred subscription acquisition costs....... (5,805) (3,947)
Other prepaid expenses and current assets..... (84) (217)
Other assets.................................. (255) (158)
Accounts payable.............................. 2,205 (4,529)
Accrued payroll and related costs............. (602) (502)
Customer incentives payable................... 355 170
Unearned subscription revenues................ 8,715 3,084
Other accrued expenses and current
liabilities.................................. (2,294) 95
Other noncurrent liabilities.................. 298 (513)
-------- --------
Net cash (used in) provided by operating
activities..................................... 9,593 24,719
INVESTING ACTIVITIES
Purchases of property and equipment............. (4,423) (768)
Sales of investments............................ 6,677 3,689
Proceeds from sale of assets.................... -- 2,500
-------- --------
Net cash (used in) provided by investing
activities..................................... 2,254 5,421
FINANCING ACTIVITIES
Proceeds from bank borrowing.................... -- 10,000
Repayment of bank borrowing..................... -- (10,000)
Distribution of S corporation earnings.......... (3,391) (21,470)
Net change in advances to other divisions of the
Company........................................ (2,701) (6,155)
-------- --------
Net cash used in financing activities........... (6,092) (27,625)
-------- --------
Increase (decrease) in cash and cash
equivalents.................................... 5,755 2,515
Cash and cash equivalents at beginning period... 4,183 9,938
-------- --------
Cash and cash equivalents at end of period...... $ 9,938 $ 12,453
======== ========
Supplemental information:
Income taxes paid.............................. $ 263 $ 40
Interest received.............................. 741 538
Interest paid.................................. -- 185
</TABLE>
See accompanying notes.
F-21
<PAGE>
PETERSEN PUBLISHING COMPANY
PUBLISHING DIVISION
NOTES TO FINANCIAL STATEMENTS
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 primarily of agency
commissions paid to obtain subscriptions and are amortized over the life of
the related subscriptions.
Depreciation and Amortization
Depreciation is provided on the straight-line method over the estimated
useful lives of the assets ranging from 3 to 5 years except for leasehold
improvements which are amortized over the lesser of 10 years or the life of
the lease.
F-22
<PAGE>
PETERSEN PUBLISHING COMPANY
PUBLISHING DIVISION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Goodwill
Goodwill is amortized using the straight-line method over its useful life of
15 years and resulted from the acquisitions of Sport, Bicycle Guide, and Sassy
during fiscal years 1988, 1993, and 1994, respectively.
Income Taxes
The Petersen Company has elected to be taxed as an S corporation for federal
and state income tax purposes. As such, the Petersen Company is not subject to
U.S. federal income taxes or most state income taxes. Petersen reports the
state income taxes to which it is subject under the liability method as
required by Statement No. 109, "Accounting for Income Taxes," issued by the
Financial Accounting Standards Board ("FASB"). Under this method, deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
Revenue Recognition
Advertising revenue, net of provisions for related rebates and discounts, is
recognized at the "on sale" date of the publication containing the
advertisement. Subscription revenue is deferred and recognized pro rata as
fulfilled over the terms of such subscriptions and is recorded net of related
agency commissions. Sales of magazines intended for retail distribution on
newsstands are recorded at the time such publications are available for sale
by distributors to the public and are reduced by an estimated provision for
returns.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenues
No customer accounted for over 10% of Petersen's revenues. Petersen's
activities occur principally in the United States and revenues from outside
the United States are less than 10% of Petersen's revenues.
Advertising Expenses
Petersen expenses the cost of advertising as incurred. Advertising expense
(in thousands) for the years ended November 30, 1995 and the ten months ended
September 30, 1996, were $732 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.
F-23
<PAGE>
PETERSEN PUBLISHING COMPANY
PUBLISHING DIVISION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. 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.
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED
NOVEMBER 30, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
State:
Current....................................... $143 $158
Deferred...................................... 406 173
---- ----
$549 $331
==== ====
</TABLE>
A reconciliation of the provision for income taxes computed by applying the
federal statutory rate of 34% to income before income taxes and the reported
provision for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED
NOVEMBER 30, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Income tax provision computed at statutory
federal income tax rate...................... $ 5,068 $ 6,003
State income taxes............................ 549 331
Effect of S Corporation election.............. (5,068) (6,003)
------- -------
Total provision............................. $ 549 $ 331
======= =======
</TABLE>
3. 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 year ended November 30, 1995, and the ten months ended
September 30, 1996 were $1,294, and $1,083, respectively.
4. 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.
F-24
<PAGE>
PETERSEN PUBLISHING COMPANY
PUBLISHING DIVISION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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-25
<PAGE>
THE PETERSEN COMPANIES, INC.
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 The
Petersen Companies,
Inc.:
Period from August 15,
1996 (inception) to
December 31, 1996.... $1,871 -- -- $ (267)(a) $1,604
Year ended December
31, 1997............. $1,604 $860 -- $(1,178)(a) $1,286
</TABLE>
- --------
(a) Represents amounts written-off against the allowance for doubtful accounts
of The Petersen Companies, Inc., net of recoveries.
S-1
<PAGE>
[LOGO OF THE PETERSEN COMPANIES, INC.]
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. EXHIBIT NO.
------- ------- ----
<C> <S> <C>
2.1 Contribution and Recapitalization Agreement by and among the
Company, Petersen Holdings, L.L.C. ("Petersen"), Publishing and
all of the Company's existing stockholders. (1)
3.1 Restated Certificate of Incorporation of the Company. (1)
3.2 Amended and Restated By-Laws of the Company. (1)
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. (2)
4.2 Forms of 11 1/8% Senior Subordinated Notes and Series B 11 1/8%
Senior Subordinated Notes. (2)
4.3 Securities Purchase Agreement, dated November 20, 1996, by and
among Petersen, Petersen Capital Corp. ("Capital"), Publishing
and the Initial Purchasers named therein. (2)
4.4 Credit Agreement, dated as of October 6, 1997, by and among the
Company, Publishing, the Lenders named therein, First Union
National Bank ("First Union"), as Administrative Agent, and
CIBC, Inc., as Documentation Agent. (1)
4.5 Borrower Pledge and Security Agreement, dated as of October 6,
1997, made by Publishing in favor of First Union, as
Administrative Agent. (1)
4.6 Parent Pledge and Security Agreement, dated as of October 6,
1997, made by Petersen and the Company in favor of First Union,
as Administrative Agent. (1)
4.7 Revolving Credit and Swingline Notes of Publishing, each dated
October 6, 1997. (1)
4.8 Parent Guaranty, dated as of October 6, 1997, by and among
Petersen, Publishing and First Union, as Administrative Agent.
(1)
4.9 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. (2)
4.10 Registration Rights Agreement, dated November 20, 1996, by and
among Publishing, Capital and the Initial Purchasers named
therein. (2)
4.11 Specimen of Class A Common Stock. (3)
10.1 License Agreement, dated as of August 15, 1996, by and between
Robert E. Petersen, the Company and the Predecessor. (2)
10.2 Employment Agreement, dated as of August 15, 1996, by and
between the Company and Robert E. Petersen. (2)
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. (2)
10.4 Executive Securities Purchase and Employment Agreement, dated
as of September 30, 1996, by and among the Company, Petersen,
Publishing and Neal Vitale. (2)
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. (2)
10.6 Executive Securities Purchase and Employment Agreement, dated
as of September 30, 1996, by and among the Company, Petersen,
Publishing and Richard S Willis.
10.7 Securityholders Agreement, dated as of September 30, 1996,
among Petersen Investment Corp., Petersen, the Company and the
other parties thereto. (2)
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. (2)
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. (2)
</TABLE>
