FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For Quarter Ended: September 30, 1996
Commission file number: 1-11106
K-III COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3647573
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
745 Fifth Avenue, New York, New York
(Address of principal executive offices)
10151
(Zip Code)
Registrant's telephone number, including area code (212) 745-0100
--------------
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, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
---- ----
Number of shares of common stock, par value $.01 per share, outstanding as of
November 11, 1996: 128,957,055
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX
PAGE
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(Unaudited) as of December 31, 1995 and
September 30, 1996 2
Condensed Statements of Consolidated
Operations (Unaudited) for the nine months
ended September 30, 1995 and 1996 3
Condensed Statements of Consolidated
Operations (Unaudited) for the three months
ended September 30, 1995 and 1996 4
Condensed Statements of Consolidated
Cash Flows (Unaudited) for the nine months
ended September 30, 1995 and 1996 5
Notes to Condensed Consolidated
Financial Statements (Unaudited) 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-18
Part II. Other Information
Item 6. Exhibits 19
Signatures 20
<PAGE>
-2-
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
---- ----
(dollars in thousands, except per share amounts)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 27,226 $ 32,504
Accounts receivable, net 173,771 234,635
Inventories, net 70,844 56,752
Net assets held for sale 5,253 18,605
Prepaid expenses and other 26,732 39,405
----------- -----------
Total current assets 303,826 381,901
Property and equipment, net 112,013 129,788
Other intangible assets, net 699,617 924,792
Excess of purchase price over net
assets acquired, net 534,554 828,521
Other non-current assets 231,406 244,107
----------- -----------
$ 1,881,416 $ 2,509,109
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 90,414 $ 79,319
Accrued interest payable 9,326 24,971
Accrued expenses and other 125,967 120,317
Deferred revenues 128,679 155,913
Current maturities of long-term debt 6,000 6,000
----------- -----------
Total current liabilities 360,386 386,520
----------- -----------
Long-term debt 1,134,916 1,602,112
----------- -----------
Other non-current liabilities 33,924 37,953
----------- -----------
Exchangeable Preferred Stocks 231,606 438,375
----------- -----------
Common stock subject to redemption ($.01 par value,
2,406,513 shares and 720,810 shares outstanding at
December 31, 1995 and September 30, 1996,
respectively) 28,022 6,479
----------- -----------
Shareholders' Equity Common stock ($.01 par value,
125,921,221 shares and 128,174,765 shares
outstanding at December 31, 1995 and September 30,
1996, respectively) 1,259 1,282
Additional paid-in-capital 748,194 771,872
Accumulated deficit (655,616) (734,215)
Cumulative foreign currency translation adjustments (1,275) (1,269)
----------- -----------
Total shareholders' equity 92,562 37,670
----------- -----------
$ 1,881,416 $ 2,509,109
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
-3-
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1995 1996
(dollars in thousands, except per share amounts)
Sales, net:
<S> <C> <C>
Education $ 246,970 $ 268,277
Information 187,069 221,684
Media 327,457 505,090
------------- -------------
Total sales, net 761,496 995,051
Operating costs and expenses:
Cost of goods sold 181,050 250,806
Marketing and selling 132,414 183,937
Distribution, circulation and fulfillment 140,807 169,444
Editorial 53,998 74,804
Other general expenses 91,004 111,996
Corporate administrative expenses 13,596 15,336
Depreciation and amortization of
prepublication costs, property and equipment 19,385 27,182
Provision for loss on the sales of businesses, net 35,447 --
Restructuring and other costs 14,667 --
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 111,826 112,762
------------- -------------
Operating income (loss) (32,698) 48,784
Other income (expense):
Interest expense (78,683) (90,385)
Amortization of deferred financing and organizational costs (2,309) (2,784)
Write-off of unamortized deferred financing costs -- (7,572)
Other, net (575) 4,684
Net loss (114,265) (47,273)
Preferred stock dividends:
Non-cash (13,621) (12,257)
Cash (8,625) (19,069)
------------- -------------
Loss applicable to common shareholders $ (136,511) $ (78,599)
============= =============
Loss per common share $ (1.24) $ (.61)
============= =============
Weighted average common shares outstanding 110,120,522 128,721,459
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
-4-
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1995 1996
(dollars in thousands, except per share amounts)
Sales, net:
<S> <C> <C>
Education $ 75,715 $ 95,983
Information 69,116 76,992
Media 120,773 171,443
------------- -------------
Total sales, net 265,604 344,418
Operating costs and expenses:
Cost of goods sold 67,930 84,345
Marketing and selling 44,863 61,794
Distribution, circulation and fulfillment 48,229 59,392
Editorial 19,284 27,715
Other general expenses 30,282 39,454
Corporate administrative expenses 4,065 5,485
Depreciation and amortization of
prepublication costs, property and equipment 6,431 10,529
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 31,390 37,185
------------- -------------
Operating income 13,130 18,519
Other income (expense):
Interest expense (27,132) (33,409)
Amortization of deferred financing and organizational costs (815) (917)
Other, net 182 3,912
------------- -------------
Net loss (14,635) (11,895)
Preferred stock dividends:
Non-cash (4,876) (4,203)
Cash (2,875) (7,875)
------------- -------------
Loss applicable to common shareholders $ (22,386) $ (23,973)
============= =============
Loss per common share $ (.20) $ (.19)
============= =============
Weighted average common shares outstanding 110,909,810 128,874,002
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
-5-
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1995 1996
---- ----
(dollars in thousands)
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (114,265) $ (47,273)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation, amortization and other 133,520 142,728
Accretion of discount on acquisition obligation,
distribution advance and other 5,899 3,631
Write-off of deferred financing costs -- 7,572
Provision for loss on the sales of businesses, net 35,447 --
Other, net (102) (5,258)
Changes in operating assets and liabilities:
(Increase) Decrease in:
Accounts receivable, net (7,256) (28,170)
Inventories, net (13,247) 20,971
Prepaid expenses and other (9,145) (6,423)
Increase (Decrease) in:
Accounts payable (13,464) (17,477)
Accrued interest payable 12,758 15,645
Accrued expenses and other (23,415) (24,744)
Deferred revenues 8,155 3,393
Other non-current liabilities 849 (759)
----------- -----------
Net cash provided by operating activities 15,734 63,836
----------- -----------
INVESTING ACTIVITIES:
Additions to property, equipment and other (17,940) (18,669)
Proceeds from sales of businesses and other 58,314 5,788
Proceeds from sales of property, equipment and other 1,686 566
Payments for businesses acquired (262,967) (671,023)
----------- -----------
Net cash (used in) investing activities (220,907) (683,338)
----------- -----------
FINANCING ACTIVITIES:
Borrowings under credit agreements 422,059 1,685,910
Repayments of borrowings under credit agreements (351,000) (1,218,800)
Proceeds from issuance of 8 1/2% Senior Notes, net of discount -- 298,734
Repayment of acquisition obligation (3,000) (3,000)
Borrowings under Chase Term Loan 150,000 -
Repayment of Chase Term Loan -- (150,000)
Repayment of BONY Term Loan -- (150,000)
Proceeds from issuances of common stock, net of redemptions 26,740 2,951
Proceeds from issuance of old preferred stock 50,000 --
Proceeds from issuance of Series C (exchanged into Series D )
Preferred Stock, net of issuance costs -- 193,720
Redemption of old preferred stock (52,691) --
Dividends paid to preferred shareholders (8,625) (19,069)
Deferred financing costs paid (3,580) (14,926)
Other (374) (740)
----------- -----------
Net cash provided by financing activities 229,529 624,780
----------- -----------
Increase in cash and cash equivalents 24,356 5,278
Cash and cash equivalents, beginning of period 18,232 27,226
----------- -----------
Cash and cash equivalents, end of period $ 42,588 $ 32,504
=========== ===========
Supplemental information:
Cash interest paid $ 62,487 $ 73,420
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
-6-
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except per share amounts)
1. Basis of Presentation
---------------------
K-III Communications Corporation, together with its subsidiaries, is
collectively referred to as "K-III" or the "Company". In the opinion of the
Company's management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the prior year financial statements
to conform to the classifications used in the current period. The operating
results for the three and nine-month periods ended September 30 are not
necessarily indicative of the results that may be expected for a full year.
The Company's operations have been organized into three business segments:
education, information and media.
Effective January 1, 1996, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". This standard establishes the accounting for the impairment of
long-lived assets, certain identifiable intangibles and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. The adoption of this standard did
not have a material effect on the consolidated financial statements of the
Company.
Effective January 1, 1996, the Company adopted the Financial Accounting
Standards Board's SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). This standard establishes accounting and reporting standards for
stock-based employee compensation. The Company will continue to measure
compensation costs for its stock-based compensation plan using the intrinsic
value based method of accounting prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and will include
certain pro forma disclosures required by SFAS 123 in its published annual
report. The adoption of this standard did not have a material effect on the
consolidated financial statements of the Company.
2. Acquisitions
------------
In January 1996, K-III Magazine Corporation acquired certain net assets of
Cahners Consumer Magazines, a publisher of consumer and special interest
magazines including AMERICAN BABY, MODERN BRIDE, SAIL and POWER & MOTORYACHT,
along with 20 related properties. In May 1996, the Company acquired the
outstanding shares of and completed its merger with Westcott Communications,
Inc. ("Westcott"). Westcott utilizes various multimedia technologies to provide
workplace training, news, and information to professionals and students in the
corporate and professional, automotive, banking, government and public service,
education, health care, and interactive distance training markets. In addition
to the aforementioned transactions, the Company completed several other smaller
acquisitions during the nine-month period ended September 30, 1996. The above
acquisitions were financed through borrowings under the Company's credit
agreements. These acquisitions had an aggregate purchase price (net of
liabilities assumed of approximately $70,027) of $671,023 including certain
immaterial purchase price adjustments related to prior year acquisitions. The
excess purchase price over the fair value of the net assets acquired was
approximately $312,948.
The preliminary purchase cost allocations for the 1996 acquisitions are subject
to adjustment when additional information concerning asset and liability
valuations is obtained. The final asset and liability fair values may differ
from those set forth in the accompanying condensed consolidated balance sheet at
September 30, 1996; however, the changes are not expected to have a material
effect on the consolidated financial position of the Company.
These acquisitions have all been accounted for by the purchase method. The
financial statements include the operating results of these acquisitions
subsequent to their respective dates of acquisition. If the foregoing
acquisitions excluding Cahners and Westcott had occurred on January 1, 1995,
they would not have had a material impact on the results of operations for the
nine-month periods ended September 30, 1995 and 1996.
<PAGE>
-7-
The following pro forma information presents the results of operations of the
Company as if the acquisitions of Cahners and Westcott had occurred on January
1, 1995:
Nine Months Ended
September 30,
1995 1996
---- ----
Sales $ 902,614 $ 1,034,532
=========== ===========
Net loss $ (173,259) $ (74,794)
=========== ===========
Loss per common share $ (1.78) $ (.82)
=========== ===========
3. Divestitures
------------
Upon the acquisitions of Argus Publishers Corp./Autostar Productions and Argus
Inc. ("Argus") in 1995, the Company decided to sell AutoStar Productions, Inc.
("AutoStar") and certain product lines of Argus. The net assets of AutoStar and
the Argus product lines were recorded at net realizable value and have been
classified as a current asset in net assets held for sale on the accompanying
condensed consolidated balance sheet at December 31, 1995. On April 3, 1996,
McMullen Argus completed the sale of AutoStar. During June 1996, Intertec
completed the sale of certain Argus product lines. In connection with these
sales, the Company received aggregate cash proceeds of approximately $5,100. The
differences between the proceeds received and the carrying values of the net
assets held for sale were treated as adjustments to the excess of purchase price
over the net assets acquired related to the retained businesses. The operating
results of these businesses since acquisition have been excluded from the
accompanying statements of condensed consolidated operations for the nine-month
period ended September 30, 1996.
4. Assets Held for Sale
--------------------
During September 1996, the Company decided to divest Katharine Gibbs Schools,
Inc. ("Gibbs"), a component of the Education segment. K-III achieved its
objective of strengthening the operations and realized substantial revenue
growth at Gibbs; however, it was determined that the growth opportunities for
Gibbs will be better accomplished within an organization that has a fundamental
commitment to classroom-based career schools. The Company expects to complete
the sale of Gibbs in 1997. The net assets of Gibbs are recorded at their
carrying value of $18,605 and have been classified as a current asset in net
assets held for sale on the accompanying condensed consolidated balance sheet at
September 30, 1996. The operating results of Gibbs are included in the
accompanying statements of condensed consolidated operations for the three and
nine-month periods ended September 30, 1995 and 1996. Total sales for Gibbs were
$5,909 and $18,391 for the three and nine-month periods ending September 30,
1995, respectively and $6,912 and $20,424 for the same periods ending September
30, 1996, respectively.
5. Offerings
---------
8 1/2% SENIOR NOTES DUE 2006
On January 24, 1996, K-III completed a private offering of $300,000 of 8 1/2%
Senior Notes. The Senior Notes were issued at 99.578% with related issuance
costs of approximately $6,000. On August 21, 1996, the Company exchanged its
Senior Notes ("Old Notes") for a new series of $300,000 8 1/2% Senior Notes due
2006 ("New Notes"). The terms of the New Notes are the same as the terms of the
Old Notes except that the New Notes have been registered under the Securities
Act of 1933. The New Notes mature on February 1, 2006, with no sinking fund.
Interest on the New Notes is payable semi-annually in February and August at the
annual rate of 8 1/2%. The New Notes may not be redeemed prior to February 1,
2001 other than in connection with a change of control. Beginning in 2001 and
thereafter, the New Notes are redeemable in whole or in part, at the option of
the Company, at prices ranging from 104.25% with annual reductions to 100% in
2003 plus accrued and unpaid interest. The New Notes are fully and
unconditionally guaranteed jointly and severally on a senior basis by each of
the domestic restricted subsidiaries.
<PAGE>
-8-
$10.00 SERIES C EXCHANGEABLE PREFERRED STOCK
On January 24, 1996, K-III completed a private offering of 2,000,000 shares of
$10.00 Series C Exchangeable Preferred Stock ("Series C Preferred Stock") at
$100 per share. Annual dividends of $10.00 per share on the Series C Preferred
Stock are cumulative and payable quarterly, in cash, commencing May 1, 1996. On
August 21, 1996, the Company exchanged the Series C Preferred Stock for
2,000,000 shares of $10.00 Series D Exchangeable Preferred Stock ("Series D
Preferred Stock"). The terms of the Series D Preferred Stock are the same as the
terms of the Series C Preferred Stock except that (i) the Series D Preferred
Stock has been registered under the Securities Act of 1933 and (ii) the Series D
Preferred Stock is exchangeable into 10% Class D Subordinated Exchange
Debentures due 2008, in whole but not in part, at the option of the Company
provided that no shares of the Senior Preferred Stock are outstanding on the
date of exchange. On and after February 1, 2001, the Series D Preferred Stock
may be redeemed in whole or in part, at the option of the Company, at specified
redemption prices plus accrued and unpaid dividends. The Company is required to
redeem the Series D Preferred Stock on February 1, 2008 at a redemption price
equal to the liquidation preference of $100 per share, plus accrued and unpaid
dividends.
Net proceeds from these offerings of approximately $486,000 were primarily used
to pay down borrowings under the Revolving Credit Agreement.
6. Inventories
-----------
Inventories consist of the following:
December 31, September 30,
1995 1996
---- ----
Finished goods $49,026 $37,431
Work in process 969 4,478
Raw materials 27,978 23,244
------- -------
77,973 65,153
Less: allowance for obsolescence 7,129 8,401
------- -------
$70,844 $56,752
======= =======
7. Long-term debt
--------------
Long-term debt consists of the following:
December 31, September 30,
1995 1996
---- ----
Borrowings under Revolving Credit
Agreement $435,988 $ --
Borrowings under New Credit Facilities -- 903,115
BONY Term Loan 150,000 --
Chase Term Loan 150,000 --
8 1/2% Senior Notes due 2006, net -- 298,790
10 1/4% Senior Notes due 2004 100,000 100,000
10 5/8% Senior Notes due 2002 250,000 250,000
---------- ----------
Total 1,085,988 1,551,905
Acquisition obligation payable 54,928 56,207
---------- ----------
1,140,916 1,608,112
Less: current portion 6,000 6,000
---------- ----------
$1,134,916 $1,602,112
========== ==========
On May 31, 1996, the Company replaced its existing credit facilities under the
Revolving Credit Agreement, BONY Term Loan and the Chase Term Loan through which
the Company could borrow $970,000 in the aggregate with new credit facilities
with The Chase Manhattan Bank, The Bank of New York, Bankers Trust Company and
the Bank of Nova Scotia as agents (the "New Credit Facilities"). Under the New
Credit Facilities, the Company has commitments of $1,250,000 and can borrow up
to $1,500,000 in the aggregate. The Company used approximately $910,000 of the
proceeds from the New Credit Facilities to repay the previously existing credit
facilities and to pay certain related fees and expenses.
The New Credit Facilities are comprised of a $750,000 Tranche A Revolving Loan
Commitment ("Tranche A Loan Commitment"), a $250,000 Term Loan ("Term Loan") and
an additional $250,000 Revolving Loan Commitment, which is convertible at the
Company's option into a term loan ("Revolver/Term Loan"). In addition, the
Company has the right to solicit commitments of up to $250,000 under the Tranche
B Revolving Loan Facility ("Tranche B Facility"). The Tranche A Loan Commitment
may be utilized through the incurrence of Tranche A revolving credit loans,
swingline loans which may not exceed $40,000 in total, Canadian dollar loans
which may not exceed the Canadian dollar equivalent of $40,000 in total or the
issuance of letters of credit which may not exceed $40,000. If the Company
establishes commitments under
<PAGE>
-9-
the Tranche B Facility, the Tranche B Facility may be utilized through the
incurrence of Tranche B revolving credit loans. The proceeds of the New Credit
Facilities may be used for general corporate and working capital purposes as
well as to finance certain future acquisitions of stock and assets.
The commitments under Tranche A and Tranche B are subject to mandatory
reductions semi-annually on June 30 and December 31 with the first reduction on
June 30, 1999 and the final reduction on June 30, 2004. The mandatory reductions
for the Tranche A Loan Commitment are $75,000 in 1999, $150,000 in each of the
years 2000 through 2003 and $75,000 in 2004. The mandatory reductions for the
Tranche B Facility are based on defined percentages of the total Tranche B
Facility. To the extent that the total revolving credit loans outstanding exceed
the reduced commitment amount, these loans must be paid down to equal or less
than the reduced commitment amount. However, if the total revolving credit loans
outstanding do not exceed the reduced commitment amount, then there is no
requirement to pay down any of the revolving credit loans.
The principal amount of the Term Loan will be repaid semi-annually on June 30
and December 31 each year, with an initial payment of $25,000 on June 30, 2000,
installments of $25,000 on each payment date thereafter through December 31,
2003 and a final payment of $50,000 on June 30, 2004.
The revolving loans outstanding under the Revolver/Term Loan will convert at the
Company's option to term loans on May 23, 1997 and will mature on June 30, 2004.
If the Company exercises that right, then the term loans will be repaid
according to the same schedule as stated for the Term Loan above.
The amounts borrowed (other than swingline loans) pursuant to the New Credit
Facilities bear interest at the following rates per annum, at the Company's
option: (i) the higher of (a) the Federal Funds Effective Rate as published by
the Federal Reserve Bank of New York plus 0.5% and (b) the prime commercial
lending rate announced by the Agent from time to time (the "Base Rate"); plus,
in each case, an applicable margin of up to 1/8 of 1% as specified in the New
Credit Facilities or (ii) the Eurodollar Rate plus an applicable margin ranging
from 1/2 of 1% to 1 1/2% as specified in the New Credit Facilities. All
swingline loans bear interest at the Base Rate plus the applicable margin of up
to 1/8 of 1% as specified in the New Credit Facilities.
The Company has agreed to pay commitment fees equal to 3/8 of 1% per annum on
the daily average unused commitment of Tranche A and Tranche B, certain fees
with respect to the issuance of letters of credit and an annual administration
fee. The Company has agreed to pay a commitment fee of 1/8 of 1% per annum on
the daily average unused commitment of the $250,000 revolving credit under the
Revolver/Term Loan.
The covenants in the New Credit Facilities, among other things, limit the
ability of the Company to change the nature of its businesses, incur certain
indebtedness, create liens, sell assets, engage in mergers, consolidations or
transactions with affiliates, make investments in or loans to certain
subsidiaries, make guarantees and make certain restricted payments. The Company
is also prohibited from declaring or making dividend payments on the common
stock in excess of $25,000 per annum, unless the leverage test is below certain
levels. In addition, the New Credit Facilities require that the Company and its
restricted subsidiaries, on a consolidated basis, satisfy an interest coverage
test, a leverage test and a fixed charge coverage test. All of the Company's
subsidiaries are currently restricted subsidiaries.
Borrowings under the New Credit Facilities are guaranteed by each of the
domestic wholly-owned subsidiaries of the Company. Such guarantees are full,
unconditional and joint and several. The separate financial statements of the
domestic subsidiaries are not presented because the Company believes the
separate financial statements would not be material to the shareholders and
potential investors. The Company's foreign subsidiaries are not guarantors of
the above indebtedness. The total assets, revenues, income or equity of such
foreign subsidiaries, both individually and on a combined basis, are
inconsequential in relation to the total assets, revenue, income or equity of
the Company.
8. Exchangeable Preferred Stocks
-----------------------------
Exchangeable Preferred Stocks consist of the following:
December 31, September 30,
1995 1996
---- ----
$2.875 Senior Exchangeable Preferred Stock $ 97,992 $ 98,197
$11.625 Series B Exchangeable Preferred Stock 133,614 146,109
$10.00 Series D Exchangeable Preferred Stock -- 194,069
-------- --------
$231,606 $438,375
======== ========
<PAGE>
-10-
$2.875 SENIOR EXCHANGEABLE PREFERRED STOCK
The Company authorized 4,000,000 shares of $.01 par value Senior Preferred
Stock, all of which was issued and outstanding at December 31, 1995 and
September 30, 1996. The liquidation and redemption value at December 31, 1995
and September 30, 1996 was $100,000.
$11.625 SERIES B EXCHANGEABLE PREFERRED STOCK
The Company authorized 2,000,000 shares of $.01 par value Series B Preferred
Stock, 1,365,707 shares and 1,488,273 shares of which were issued and
outstanding at December 31, 1995 and September 30, 1996, respectively. The
liquidation and redemption value at December 31, 1995 and September 30, 1996 was
$136,571 and $148,827, respectively.
$10.00 SERIES D EXCHANGEABLE PREFERRED STOCK
The Company authorized 2,000,000 shares of $.01 par value Series D Preferred
Stock, all of which was issued and outstanding at September 30, 1996. The
liquidation and redemption value at September 30, 1996 was $200,000.
9. Loss per Common Share
---------------------
Loss per common share for the three and nine-month periods ended September 30,
1995 and 1996 was computed using the weighted average number of common stock
shares outstanding during each period. The effect of the assumed exercise of
stock options is not included because the effect is antidilutive. Loss per
common share assuming full dilution is not presented because such calculation is
antidilutive.
<PAGE>
-11-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
K-III Communications Corporation, together with its subsidiaries, is
collectively referred to as "K-III" or the "Company". The following
discussion and analysis of K-III's unaudited financial condition and
results of operations should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto. The Company
organizes its businesses into three segments: education, information and
media. Management believes that a meaningful comparison of the results of
operations for 1995 and 1996 is obtained by using this segment information.
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Unaudited Results of Consolidated Operations
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
1995 1996 1995 1996
---- ---- ---- ----
Sales, net:
<S> <C> <C> <C> <C>
Education $ 246,970 $ 268,277 $ 75,715 $ 95,983
Information 187,069 221,684 69,116 76,992
Media 327,457 505,090 120,773 171,443
--------- --------- --------- ---------
Total $ 761,496 $ 995,051 $ 265,604 $ 344,418
========= ========= ========= =========
Operating income (loss):
Education $ (33,058) $ 6,672 $ 1,659 $ (3,365)
Information (15,757) 15,154 4,821 8,232
Media 30,247 42,863 10,884 19,342
Corporate (14,130) (15,905) (4,234) (5,690)
--------- --------- --------- ---------
Total (32,698) 48,784 13,130 18,519
Other income (expense):
Interest expense (78,683) (90,385) (27,132) (33,409)
Amortization of deferred financing and
organizational costs (2,309) (2,784) (815) (917)
Write-off of unamortized deferred
financing costs -- (7,572) -- --
Other, net (575) 4,684 182 3,912
--------- --------- --------- ---------
Net loss $(114,265) $ (47,273) $ (14,635) $ (11,895)
========= ========= ========= =========
</TABLE>
<PAGE>
-12-
RESULTS OF OPERATIONS (dollars in thousands, except per share amounts)
- ----------------------------------------------------------------------
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30,
- --------------------------------------------------------------------------------
1995:
- -----
Consolidated Results:
- ---------------------
Consolidated sales increased 30.7% to $995,051 in the 1996 period over 1995 due
to internal growth in all three segments as well as the impact of acquisitions.
Specifically, the acquisitions of the Cahners Consumer Magazines ("Cahners"),
which now form the K-III Family and Leisure Group, Westcott Communications, Inc.
("Westcott") and the trade magazines of Argus Inc. ("Argus") added $138,146 to
revenue growth. Consolidated operating income was $48,784 in the 1996 period
compared to an operating loss of $32,698 in 1995. This improvement was driven by
the increase in sales, the impact of recent acquisitions, and the effect of
several one-time, principally non-cash charges, totaling $68,072 in the second
quarter of 1995. The increase occurred despite a 16.7% increase in paper prices
in the first nine months of 1996 and the effect of the required adoption of a
new method of accounting for advertising costs (the "Accounting Change"), which
K-III adopted on July 1, 1994. The Accounting Change had a $8,343 net positive
impact on operating income in the first six months of 1995 versus 1996,
predominantly within the education segment. In the third quarter and for all
future quarters, the comparative effects of the adoption of the accounting
change will not be material. Interest expense increased by $11,702 or 14.9% in
the 1996 period over 1995 because of the increased level of borrowings
associated with acquisitions as well as higher interest rates. As a result of
the refinancing of the Company's bank debt during the second quarter of 1996, a
non-cash charge of $7,572 was recorded representing the write-off of unamortized
deferred financing costs related to the previous bank financing. Despite this
write-off, the consolidated net loss decreased by $66,992 or 58.6% in the 1996
period over 1995.
Education:
- ----------
The education segment's sales increased by $21,307 or 8.6% in the 1996 period
over 1995. Increases at Krames, Weekly Reader and Films for the Humanities and
Sciences and the addition of Westcott offset declines at Newbridge. The
restructuring at Newbridge is stabilizing the operation as anticipated.
Newbridge is experiencing improved back-end performance in terms of lower return
rates, lower member attrition, and higher acceptance rate per announcement. The
education segment's operating profit increased to $6,672 in the 1996 period as
compared to an operating loss of $33,058 in the 1995 period. This improvement is
primarily due to the one-time charges in the second quarter of 1995 for a
provision for loss associated with the sale of Newfield and a restructuring
charge at Newbridge. Offsetting those charges, the Accounting Change had a
$8,541 net positive impact on operating profit in the first six months of 1995
versus 1996.
Information:
- ------------
The information segment's sales increased by $34,615 or 18.5% in the 1996 period
over 1995 primarily because of double-digit growth at the Apartment Guides and
Nelson as well as the impact of recent acquisitions. The information segment's
operating profit increased to $15,154 in the 1996 period as compared to an
operating loss of $15,757 in 1995 due to the increase in sales and a decrease in
amortization expense. Goodwill and intangible asset amortization expense
decreased by $17,870 in the 1996 period over 1995 as a result of an adjustment
to the carrying values of K-III Reference's goodwill and other intangible assets
totaling $17,958 in the second quarter of 1995.
Media:
- ------
The media segment's sales increased by $177,633 or 54.3% in the 1996 period over
1995 due to the growth of existing properties and the impact of the Cahners and
Argus acquisitions. Organic revenue growth was driven by the consumer magazines,
led principally by SEVENTEEN, SOAP OPERA DIGEST, NEW YORK and the enthusiast
magazines, led by the crafts area. Operating profit increased by $12,616 or
41.7% in the 1996 period over 1995. This increase was the result of the increase
in sales and the impact of the Cahners and Argus acquisitions, partially offset
by a 22.9% increase in average paper prices for magazine operations in the
nine-month period ending September 30, 1996.
<PAGE>
-13-
RESULTS OF OPERATIONS (dollars in thousands, except per share amounts)
- ----------------------------------------------------------------------
Three Months Ended September 30, 1996 Compared to Three Months Ended September
- -------------------------------------------------------------------------------
30, 1995:
- ---------
Consolidated Results:
- ---------------------
Consolidated sales increased by 29.7% to $344,418 in the third quarter of 1996
over 1995. The sales increase resulted from strong performances in all three
segments, as well as from the impact of recent acquisitions, in particular
Westcott, Cahners, and Argus which added $52,857 to the sales growth in the
third quarter of 1996. Consolidated operating profit increased to $18,519 in the
third quarter of 1996 as compared to operating profit of $13,130 in the same
period in 1995. This improvement was due to the increases in sales and the
favorable impact of recent acquisitions. Average paper prices were 2.5% higher
in the 1996 quarter versus 1995. Interest expense increased by $6,277 or 23.1%
in the third quarter 1996 over 1995 primarily due to the increased level of
borrowings associated with acquisitions as well as higher interest rates. The
consolidated net loss was $11,895 in the third quarter of 1996 versus $14,635 in
1995.
Education:
- ----------
The education segment's sales increased by $20,268 or 26.8% in the third quarter
of 1996 versus 1995. The increase in sales reflected gains at Weekly Reader,
Krames and Channel One, along with the addition of Westcott which the Company
acquired at the end of May. These gains offset the decline at Newbridge which
resulted from the restructuring plan discussed above. Channel One experienced an
increase in revenues, but an increase in operating loss for the quarter due to
startup investments relating to the College Channel and other product
developments. The College Channel was launched this fall with its first phase
consisting of educational programming on college preparation and selection. The
second phase, an SAT preparation course produced in partnership with Princeton
Review, will begin in Spring 1997. In addition, this fall, Channel One's
30-minute weekly news program for teens called, "One Zone", was launched,
appearing initially on the PBS station WNET in the New York metropolitan area.
The education segment had an operating loss of $3,365 in the third quarter
versus a profit of $1,659 in 1995.
Information:
- ------------
The information segment's sales increased by $7,876 or 11.4% in the third
quarter of 1996 over 1995. The increase in revenues was driven by a 26% increase
at the Apartment Guides and a 31% increase at Nelson. Daily Racing Form reported
an increase in revenues due to the stabilization of its operating results and
the addition of Pro Football Weekly, which was acquired in July 1996. The
operating profit for the information segment increased to $8,232 compared to an
operating profit of $4,821 in the 1995 period.
Media:
- ------
The media segment's sales increased by $50,670 or 42% in the third quarter of
1996 versus 1995 primarily due to the acquisition of new titles, particularly in
the Cahners and Argus acquisitions, and strong organic growth in all three areas
of consumer, trade and technical, and special interest magazines. Organic sales
growth was driven by an 11.4% increase in advertising revenues at the consumer
magazines, led principally by SOAP OPERA DIGEST, SEVENTEEN, NEW YORK and
CHICAGO. The media segment's operating profit increased to $19,342 in the third
quarter 1996 from $10,884 in the 1995 period due to the impact of acquisitions
and the effect of the organic growth in revenues, partially offset by a 4.6%
increase in paper prices in 1996.
Liquidity and Capital Resources
- -------------------------------
Consolidated working capital (deficiency) including current maturities of
long-term debt was $(4,619) at September 30, 1996 compared to $(56,560) at
December 31, 1995. Consolidated working capital reflects the expensing of
editorial and product development costs when incurred and the recording of
unearned subscription income as a current liability. Advertising costs are
expensed when the promotional activities occur except for certain
direct-response advertising costs which are capitalized as other non-current
assets and amortized over the estimated period of future benefit.
Earnings before interest, taxes, depreciation, amortization and provision for
one-time charges, or EBITDA, is included in the
<PAGE>
-14-
following discussion to provide additional information for determining the
ability of the Company to meet its future debt service requirements and to pay
cash dividends on its preferred stock. EBITDA is not intended to represent cash
flow from operations and should not be considered as an alternative to net
income or loss as an indicator of the Company's operating performance or to cash
flows as a measure of liquidity. The Company believes EBITDA is a standard
measure commonly reported and widely used by analysts, investors and other
interested parties in the media industry. Accordingly, this information is
disclosed herein to permit a more complete comparative analysis of the Company's
operating performance relative to other companies in its industry.
<PAGE>
-15-
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
1995 1996 1995 1996
---- ---- ---- ----
EBITDA:
<S> <C> <C> <C> <C>
Education $ 56,495 $ 54,484 $ 13,569 $ 18,191
Information 43,866 54,314 17,272 19,656
Media 61,862 95,266 24,175 33,871
Corporate (13,596) (15,336) (4,065) (5,485)
---------- ---------- ---------- ----------
Total $ 148,627 $ 188,728 $ 50,951 $ 66,233
========== ========== ========== ==========
Net Cash Provided by (Used in)
Operating Activities:
Education $ 12,059 $ 36,922 $ 13,427 $ 28,227
Information 40,897 46,550 13,646 14,223
Media 38,327 69,102 16,123 38,024
Corporate (75,549) (88,738) (21,100) (27,753)
---------- ---------- ---------- ----------
Total $ 15,734 $ 63,836 $ 22,096 $ 52,721
========== ========== ========== ==========
Net Cash Provided by (Used in)
Investing Activities:
Education $ 10,753 $ (435,255) $ 15,880 $ (11,768)
Information (82,096) (46,727) (5,427) (11,642)
Media (147,560) (200,479) (349) (6,451)
Corporate (2,004) (877) (365) (425)
---------- ---------- ---------- ----------
Total $ (220,907) $ (683,338) $ 9,739 $ (30,286)
========== ========== ========== ==========
Net Cash Provided by (Used in)
Financing Activities:
Education $ (640) $ (1,887) $ (128) $ (281)
Information (1,291) (2,608) 18 68
Media (3,515) (5,603) (3) (77)
Corporate 234,975 634,878 (9,959) (7,337)
---------- ---------- ---------- ----------
Total $ 229,529 $ 624,780 $ (10,072) $ (7,627)
========== ========== ========== ==========
Excess (Deficiency) of Earnings
to Fixed Charges:
Education $ (34,510) $ 3,554 $ 1,555 $ (3,451)
Information (21,219) 9,874 2,860 8,524
Media 27,737 41,576 10,103 21,755
Corporate (86,273) (102,277) (29,153) (38,723)
---------- ---------- ---------- ----------
Total $ (114,265) $ (47,273) $ (14,635) $ (11,895)
========== ========== ========== ==========
Excess (Deficiency) of Earnings
to Fixed Charges and Preferred
Stock Dividends:
Education $ (34,510) $ 3,554 $ 1,555 $ (3,451)
Information (21,219) 9,874 2,860 8,524
Media 27,737 41,576 10,103 21,755
Corporate (108,519) (133,603) (36,904) (50,801)
---------- ---------- ---------- ---------
Total $ (136,511) $ (78,599) $ (22,386) $ (23,973)
========== ========== ========== ==========
</TABLE>
<PAGE>
-16-
Consolidated EBITDA increased by $40,101 in the nine months ended September 30,
1996 over 1995 mainly as a result of growth from existing operations, new
product additions and acquisitions of businesses. The net cash provided by
operating activities during the nine months ended September 30, 1996, after
interest payments of $73,420, was $63,836. Net cash provided by operating
activities increased by $48,102 during the nine months ended September 30, 1996
over 1995 due primarily to the EBITDA growth. Capital expenditures increased by
$729 to $18,669 as compared to the 1995 period. Payments for Cahners Consumer
Magazines, Westcott Communications, Inc. and other acquisitions (including
certain immaterial purchase price adjustments relating to previous acquisitions)
totaled $671,023. Net cash used in investing activities increased as a result
of an increase in acquisition activity in the 1996 period as compared to the
1995 period.
Consolidated EBITDA increased by $15,282 in the three months ended September 30,
1996 over 1995 mainly as a result of growth from existing operations, new
product additions and acquisitions of businesses. The net cash provided by
operating activities during the three months ended September 30, 1996, after
interest payments of $28,723, was $52,721. Net cash provided by operating
activities increased by $30,625 during the three months ended September 30, 1996
over 1995 due primarily to the EBITDA growth. Capital expenditures were $8,511
during the three months ended September 30, 1996 which was an increase of $2,563
from the 1995 period. Payments of $21,587 (including certain immaterial purchase
price adjustments relating to previous acquisitions) were made during the three
months ended September 30, 1996 for other acquisitions.
The Company's earnings (defined as pretax income or loss from continuing
operations) are inadequate to cover fixed charges and fixed charges plus
preferred stock dividends by $114,265 and $136,511 and $47,273 and $78,599 for
the nine-month periods ended September 30, 1995 and 1996, respectively, and
$14,635 and $22,386 and $11,895 and $23,973 for the three-month periods ended
September 30, 1995 and 1996, respectively. Fixed charges consist of interest
expense on long-term debt and other non-current obligations (including current
maturities on long-term debt), amortization of deferred financing costs,
write-off of deferred financing costs and that portion of operating rental
expense that represents interest. Such earnings have been reduced by non-cash
charges (including depreciation, amortization and non-cash dividends) of
approximately $200,154 and $163,188 for the nine-month periods ended September
30, 1995 and 1996, respectively, and $45,503 and $53,353 for the three-month
periods ended September 30, 1995 and 1996, respectively. Adjusted to eliminate
these non-cash charges, earnings would have exceeded fixed charges and fixed
charges plus preferred stock dividends by approximately $72,268 and $63,643 and
$103,658 and $84,589 for the nine-month periods ended September 30, 1995 and
1996, respectively, and $25,992 and $23,117 and $37,255 and $29,380 for the
three-month periods ended September 30, 1995 and 1996, respectively.
Financing Arrangements
- ----------------------
OFFERINGS
On January 24, 1996, K-III completed a private offering of $300,000 of 8 1/2%
Senior Notes. The Senior Notes were issued at 99.578% with related issuance
costs of approximately $6,000. On August 21, 1996, the Company exchanged its
Senior Notes ("Old Notes") for a new series of $300,000 8 1/2% Senior Notes due
2006 ("New Notes"). The terms of the New Notes are the same as the terms of the
Old Notes except that the New Notes have been registered under the Securities
Act of 1933. The New Notes mature on February 1, 2006, with no sinking fund.
Interest on the New Notes is payable semi-annually in February and August at the
annual rate of 8 1/2%. The New Notes may not be redeemed prior to February 1,
2001 other than in connection with a change of control. Beginning in 2001 and
thereafter, the New Notes are redeemable in whole or in part, at the option of
the Company, at prices ranging from 104.25% with annual reductions to 100% in
2003 plus accrued and unpaid interest. The New Notes are fully and
unconditionally guaranteed jointly and severally on a senior basis by each of
the domestic restricted subsidiaries.
On January 24, 1996, K-III completed a private offering of 2,000,000 shares of
$10.00 Series C Exchangeable Preferred Stock ("Series C Preferred Stock") at
$100 per share. Annual dividends of $10.00 per share on the Series C Preferred
Stock are cumulative and payable quarterly, in cash, commencing May 1, 1996. On
August 21, 1996, the Company exchanged the Series C Preferred Stock for
2,000,000 shares of $10.00 Series D Exchangeable Preferred Stock ("Series D
Preferred Stock"). The terms of the Series D Preferred Stock are the same as the
terms of the Series C Preferred Stock except that (i) the Series D Preferred
Stock has been registered under the Securities Act of 1933 and (ii) the Series D
Preferred Stock is exchangeable into 10% Class D Subordinated Exchange
Debentures due 2008, in whole but not in part, at the option of the Company
provided that no shares of the Senior Preferred Stock are outstanding on the
date of exchange. On and
<PAGE>
-17-
after February 1, 2001, the Series D Preferred Stock may be redeemed in whole or
in part, at the option of the Company, at specified redemption prices plus
accrued and unpaid dividends.
The Company is required to redeem the Series D Preferred Stock on February 1,
2008 at a redemption price equal to the liquidation preference of $100 per
share, plus accrued and unpaid dividends.
Net proceeds from these offerings of approximately $486,000 were primarily used
to pay down borrowings under the Revolving Credit Agreement.
NEW CREDIT FACILITIES
On May 31, 1996, the Company replaced its existing credit facilities under the
Revolving Credit Agreement, BONY Term Loan and the Chase Term Loan through which
the Company could borrow $970,000 in the aggregate with new credit facilities
with The Chase Manhattan Bank, The Bank of New York, Bankers Trust Company and
the Bank of Nova Scotia as agents (the "New Credit Facilities"). Under the New
Credit Facilities, the Company has commitments of $1,250,000 and can borrow up
to $1,500,000 in the aggregate. The Company used approximately $910,000 of the
proceeds from the New Credit Facilities to repay the previously existing credit
facilities and to pay certain related fees and expenses.
The New Credit Facilities are comprised of a $750,000 Tranche A Revolving Loan
Commitment ("Tranche A Loan Commitment"), a $250,000 Term Loan ("Term Loan") and
an additional $250,000 Revolving Loan Commitment, which is convertible at the
Company's option into a term loan ("Revolver/Term Loan"). In addition, the
Company has the right to solicit commitments of up to $250,000 under the Tranche
B Revolving Loan Facility ("Tranche B Facility"). The Tranche A Loan Commitment
may be utilized through the incurrence of Tranche A revolving credit loans,
swingline loans which may not exceed $40,000 in total, Canadian dollar loans
which may not exceed the Canadian dollar equivalent of $40,000 in total or the
issuance of letters of credit which may not exceed $40,000. If the Company
establishes commitments under the Tranche B Facility, the Tranche B Facility may
be utilized through the incurrence of Tranche B revolving credit loans. The
proceeds of the New Credit Facilities may be used for general corporate and
working capital purposes as well as to finance certain future acquisitions of
stock and assets.
The amounts borrowed (other than swingline loans) pursuant to the New Credit
Facilities bear interest at the following rates per annum, at the Company's
option: (i) the higher of (a) the Federal Funds Effective Rate as published by
the Federal Reserve Bank of New York plus 0.5% and (b) the prime commercial
lending rate announced by the Agent from time to time (the "Base Rate"); plus,
in each case, an applicable margin of up to 1/8 of 1% as specified in the New
Credit Facilities or (ii) the Eurodollar Rate plus an applicable margin ranging
from 1/2 of 1% to 1 1/2% as specified in the New Credit Facilities. All
swingline loans bear interest at the Base Rate plus the applicable margin of up
to 1/8 of 1% as specified in the New Credit Facilities.
The Company has agreed to pay commitment fees equal to 3/8 of 1% per annum on
the daily average unused commitment of Tranche A and Tranche B, certain fees
with respect to the issuance of letters of credit and an annual administration
fee. The Company has agreed to pay a commitment fee of 1/8 of 1% per annum on
the daily average unused commitment of the $250,000 revolving credit under the
Revolver/Term Loan.
At September 30, 1996, $896,000 of bank loans, $7,106 of Canadian dollar loans
and $5,092 of letters of credit were outstanding under the New Credit
Facilities. Also, at September 30, 1996, K-III had outstanding $250,000 of 10
5/8% Senior Notes due 2002 (the "10 5/8% Senior Notes"), $100,000 of 10 1/4%
Senior Notes due 2004 (the "10 1/4% Senior Notes"), $300,000 of 8 1/2% Senior
Notes due 2006 (the "8 1/2% Senior Notes"), 4,000,000 shares of $2.875 Senior
Exchangeable Preferred Stock, liquidation preference $25.00 per share ("Senior
Preferred Stock"), 1,488,273 shares of $11.625 Series B Exchangeable Preferred
Stock, liquidation preference $100.00 per share ("Series B Preferred Stock") and
2,000,000 shares of $10.00 Series D Exchangeable Preferred Stock, liquidation
preference $100.00 per share ("Series D Preferred Stock"). The Senior Preferred
Stock is exchangeable, at K-III's option, for the 11 1/2% Subordinated
Debentures due 2004, and the Series B Preferred Stock is exchangeable, at
K-III's option, for the 11 5/8% Class B Subordinated Exchange Debentures due
2005 (the "Subordinated Debentures"). The Series D Preferred Stock is
exchangeable, at K-III's option, for the 10% Class D Subordinated Debentures due
2008. Before May 1, 1998, dividends or interest, as the case may be, on the
Series B Preferred Stock or the Subordinated Debentures, may be paid in cash or
by issuing additional
<PAGE>
-18-
shares of the Series B Preferred Stock or additional Subordinated Debentures, as
the case may be. On or after May 1, 1998, such dividends or interest must be
paid in cash. Dividends on the Senior Preferred Stock and the Series D Preferred
Stock are paid quarterly in cash.
The above indebtedness, among other things, limit the ability of the Company to
change the nature of its businesses, incur certain indebtedness, create liens,
sell assets, engage in mergers, consolidations or transactions with affiliates,
make investments in or loans to certain subsidiaries, make guarantees and make
certain restricted payments. The Company is also subject to certain provisions
before making dividend payments. In addition, the Company and its restricted
subsidiaries, on a consolidated basis, must satisfy an interest coverage test, a
leverage test and a fixed charge coverage test. All of the Company's
subsidiaries are currently restricted subsidiaries. Borrowings under the above
indebtedness are guaranteed by each of the domestic wholly-owned subsidiaries of
the Company. Such guarantees are full, unconditional and joint and several. Each
such guarantee is enforceable to the fullest extent permitted by law, limited
only to the extent necessary for such guarantee to not constitute a fraudulent
conveyance.
The commitments under Tranche A and Tranche B are subject to mandatory
reductions semi-annually on June 30 and December 31 with the first reduction on
June 30, 1999 and the final reduction on June 30, 2004. The mandatory reductions
for the Tranche A Loan Commitment are $75,000 in 1999, $150,000 in each of the
years 2000 through 2003 and $75,000 in 2004. The mandatory reductions for the
Tranche B Facility are based on defined percentages of the total Tranche B
Facility. To the extent that the total revolving credit loans outstanding exceed
the reduced commitment amount, these loans must be paid down to equal or less
than the reduced commitment amount. However, if the total revolving credit loans
outstanding do not exceed the reduced commitment amount, then there is no
requirement to pay down any of the revolving credit loans.
The principal amount of the Term Loan will be repaid semi-annually on June 30
and December 31 each year, with an initial payment of $25,000 on June 30, 2000,
installments of $25,000 on each payment date thereafter through December 31,
2003 and a final payment of $50,000 on June 30, 2004.
The revolving loans outstanding under the Revolver/Term Loan will convert at the
Company's option to term loans on May 23, 1997 and will mature on June 30, 2004.
If the Company exercises that right, then the term loans will be repaid
according to the same schedule as stated for the Term Loan above.
Principal payments on the 10 5/8% Senior Notes are scheduled to be $125,000 in
May 2001 and $125,000 in May 2002. The 10 1/4% Senior Notes mature in June 2004
and the 8 1/2% Senior Notes mature in February 2006. In addition, interest
payments of $6,000 relating to an acquisition obligation are scheduled to be
made in semi-annual installments of $3,000 on June 30 and December 31 each year
through 1997. The remaining principal and interest amounts of $63,500 will be
repaid from June 1998 through June 2001. K-III believes its liquidity, capital
resources and cash flows are sufficient to fund planned capital expenditures,
working capital requirements, interest and principal payments on its debt, the
payment of preferred stock dividends and other anticipated expenditures for the
foreseeable future.
Impact of Inflation
- -------------------
The impact of inflation was immaterial during 1995 and 1996, with the exception
of paper prices which began to rise around mid-year 1994 and continued to rise
more dramatically in 1995, and postal costs. Overall, paper prices increased
approximately 24% in 1995. In 1995, paper costs represented approximately 9% of
the Company's total operating costs and expenses. The Company believes it will
be able to meet its paper requirements in the future. Due to recent softening in
certain segments of the paper market, paper price increases of the magnitude
experienced in 1995 seem unlikely in the foreseeable future. In early 1995, a
postal rate increase of approximately 13% went into effect, the second such
increase since 1991. In 1995, postal costs represented approximately 7% of total
operating costs and expenses. In an attempt to contain postage costs, the
Company takes advantage of various postal discounts. The Company continually
addresses postal cost increases by taking advantage of sortation and
classification efficiencies and by passing costs onto the customer wherever
possible. In the past, the effects of inflation on operating expenses have
substantially been offset by K-III's ability to increase selling prices. In
addition to pricing actions, the Company is continuing to examine all aspects of
the manufacturing and purchasing processes to identify ways to offset some of
these cost increases.
<PAGE>
-19-
Item 6. EXHIBITS
(11) Statement Regarding Computation of Per Share Earnings
<PAGE>
-20-
SIGNATURES
Pursuant to the requirements 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.
K-III Communications Corporation
--------------------------------
(Registrant)
Date: November 14,1996 /s/ William F. Reilly
---------------- --------------------------------
(Signature)
Chairman and Chief Executive Officer
Date: November 14, 1996 /s/ Curtis A. Thompson
----------------- --------------------------------
(Signature)
Vice President, Controller and Chief
Accounting Officer
Exhibit 11
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
For the Three and Nine Months Ended September 30, 1995 and 1996
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Loss applicable to common
shareholders $ (22,386) $ (23,973) $ (136,511) $ (78,599)
=========== =========== =========== ===========
Weighted average common
shares outstanding 110,909,810 128,874,002 110,120,522 128,721,459
=========== =========== =========== ===========
Loss per common share $ (.20) $ (.19) $ (1.24) $ (.61)
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> SEP-30-1996
<CASH> 32,504
<SECURITIES> 0
<RECEIVABLES> 277,052
<ALLOWANCES> 42,417
<INVENTORY> 56,752
<CURRENT-ASSETS> 381,901
<PP&E> 234,451
<DEPRECIATION> 104,663
<TOTAL-ASSETS> 2,509,109
<CURRENT-LIABILITIES> 386,520
<BONDS> 1,602,112
438,375
0
<COMMON> 779,633
<OTHER-SE> (735,484)
<TOTAL-LIABILITY-AND-EQUITY> 2,509,109
<SALES> 995,051
<TOTAL-REVENUES> 995,051
<CGS> 250,806
<TOTAL-COSTS> 250,806
<OTHER-EXPENSES> 695,461
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 90,385
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