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: March 31, 1997
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
April 30, 1997: 129,221,684
<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, 1996 and
March 31, 1997 2
Condensed Statements of Consolidated
Operations (Unaudited) for the three months
ended March 31, 1996 and 1997 3
Condensed Statements of Consolidated
Cash Flows (Unaudited) for the three months
ended March 31, 1996 and 1997 4
Notes to Condensed Consolidated
Financial Statements (Unaudited) 5-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-12
Part II. Other Information: None
Signatures 13
<PAGE>
-2-
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
(dollars in thousands, except per share amounts)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 36,655 $ 30,573
Accounts receivable, net 233,603 180,932
Inventories, net 52,743 28,687
Net assets held for sale 18,684 286,700
Prepaid expenses and other 34,834 28,319
----------- -----------
Total current assets 376,519 555,211
Property and equipment, net 122,823 103,408
Other intangible assets, net 781,316 652,706
Excess of purchase price over net
assets acquired, net 971,665 932,251
Deferred income tax asset, net 176,200 176,200
Other non-current assets 123,692 110,386
----------- -----------
$ 2,552,215 $ 2,530,162
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 107,258 $ 67,259
Accrued interest payable 22,150 24,513
Accrued expenses and other 140,959 107,487
Deferred revenues 144,857 134,094
Current maturities of long-term debt 6,000 6,000
----------- -----------
Total current liabilities 421,224 339,353
----------- -----------
Long-term debt 1,565,686 1,649,643
----------- -----------
Other non-current liabilities 35,062 32,202
----------- -----------
Exchangeable preferred stock 442,729 447,478
----------- -----------
Common stock subject to redemption ($.01 par value,
643,310 shares and 508,310 shares outstanding at
December 31, 1996 and March 31, 1997, respectively) 5,957 4,801
----------- -----------
Shareholders' equity
Common stock ($.01 par value, 128,349,045 shares
and 128,657,874 shares outstanding at December 31, 1996
and March 31, 1997, respectively) 1,283 1,287
Additional paid-in-capital 772,642 774,473
Accumulated deficit (691,098) (717,524)
Cumulative foreign currency translation adjustments (1,270) (1,551)
----------- -----------
Total shareholders' equity 81,557 61,486
----------- -----------
$ 2,552,215 $ 2,530,162
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
-3-
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1997
(dollars in thousands, except per share amounts)
Sales, net:
<S> <C> <C>
Specialty Media $ 164,047 $ 173,512
Education 83,052 104,887
Information 67,854 73,892
----------- -----------
Total sales, net 314,953 352,291
Operating costs and expenses:
Cost of goods sold 83,445 80,098
Marketing and selling 60,798 70,202
Distribution, circulation and fulfillment 55,481 63,387
Editorial 22,145 29,310
Other general expenses 36,074 42,503
Corporate administrative expenses 5,798 6,750
Depreciation and amortization of
prepublication costs, property and equipment 7,674 9,839
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 36,553 29,724
----------- -----------
Operating income 6,985 20,478
Other income (expense):
Interest expense (28,358) (34,341)
Amortization of deferred financing and organizational costs (900) (842)
Other, net 1,533 474
----------- -----------
Loss before income tax benefit and extraordinary charge (20,740) (14,231)
Income tax benefit - carryback claim -- 1,685
----------- -----------
Loss before extraordinary charge (20,740) (12,546)
Extraordinary charge - extinguishment of debt -- (1,554)
----------- -----------
Net loss (20,740) (14,100)
Preferred stock dividends:
Non-cash (3,969) (4,451)
Cash (2,875) (7,875)
----------- -----------
Loss applicable to common shareholders $ (27,584) $ (26,426)
=========== ===========
Loss applicable to common shareholders per common share:
Loss before extraordinary charge $ (.21) $ (.19)
Extraordinary charge $ -- $ (.01)
----------- -----------
Net loss $ (.21) $ (.20)
=========== ===========
Weighted average common shares outstanding 128,502,847 129,114,344
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
-4-
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1997
(dollars in thousands)
Operating activities:
<S> <C> <C>
Net loss $ (20,740) $ (14,100)
Adjustments to reconcile net loss to net
cash used in operating activities:
Extraordinary charge - extinguishment of debt -- 1,554
Depreciation, amortization and other 45,127 40,405
Accretion of discount on acquisition obligation,
distribution advance and other 1,681 1,653
Other, net (1,359) (95)
Changes in operating assets and liabilities:
(Increase) Decrease in:
Accounts receivable, net (7,716) 13,714
Inventories, net 7,923 1,408
Prepaid expenses and other (3,558) (9,847)
Increase (Decrease) in:
Accounts payable (19,916) (22,903)
Accrued interest payable 14,123 2,363
Accrued expenses and other (13,074) (12,745)
Deferred revenues (2,823) (8,934)
Other non-current liabilities (397) (34)
----------- -----------
Net cash used in operating activities (729) (7,561)
----------- -----------
Investing activities:
Additions to property, equipment and other (3,989) (7,075)
Proceeds from sales of property, equipment and other 1,412 87
Payments for businesses acquired (210,831) (66,435)
----------- -----------
Net cash used in investing activities (213,408) (73,423)
----------- -----------
Financing activities:
Borrowings under credit agreements 235,947 174,442
Repayments of borrowings under credit agreements (502,000) (70,950)
Proceeds from issuance of 8 1/2% Senior Notes, net of discount 298,734 --
Proceeds from issuance of common stock, net of redemptions 1,379 975
Proceeds from issuance of Series C (exchanged into Series D )
Preferred Stock, net of issuance costs 193,721 --
Purchases of 10 5/8% Senior Notes -- (21,891)
Dividends paid to preferred shareholders (2,875) (7,875)
Deferred financing costs paid (5,755) (83)
Other (18) 284
----------- -----------
Net cash provided by financing activities 219,133 74,902
----------- -----------
Increase (decrease) in cash and cash equivalents 4,996 (6,082)
Cash and cash equivalents, beginning of period 27,226 36,655
----------- -----------
Cash and cash equivalents, end of period $ 32,222 $ 30,573
=========== ===========
Supplemental information:
Cash interest paid $ 11,617 $ 30,001
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
-5-
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 month periods ended March 31 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:
specialty media, education and information.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" which
becomes effective for the Company's consolidated financial statements beginning
in the fourth quarter of 1997. SFAS No. 128 will eliminate disclosure of primary
earnings per share which includes the dilutive effect of stock options, warrants
and other convertible securities ("Common Stock Equivalents") and instead
requires reporting of "basic" earnings per share, which will exclude Common
Stock Equivalents. Additionally, SFAS No. 128 changes the methodology for fully
diluted earnings per share. In the opinion of the Company's management, it is
not anticipated that the adoption of this new accounting standard will have a
material effect on the reported earnings per share of the Company.
2. Acquisitions
------------
During the three-month period ended March 31, 1997, the Company completed
several acquisitions which were financed through borrowings under the Company's
credit agreements. Cash payments for these acquisitions on an aggregate basis
was $66,435 (net of liabilities assumed of approximately $5,741) and includes
certain immaterial purchase price adjustments related to prior year
acquisitions. The excess purchase price over net assets acquired was
approximately $30,408.
The preliminary purchase cost allocations for the 1997 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
March 31, 1997; 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 had occurred on January 1, 1996, they would not have had a material
impact on the results of operations for the three-month periods ended March 31,
1996 and 1997.
3. Net Assets Held for Sale
------------------------
On March 11, 1997, the Company announced its intention to divest the following
four non-core business units; Daily Racing Form, Inc. (including Pro-Football
Weekly), Newbridge Communications, Inc. (excluding Films for the Humanities and
Sciences), New Woman Magazine and Krames Communications Incorporated. These
planned divestitures, in addition to Katharine Gibbs Schools, Inc., which the
Company had decided to divest in 1996, collectively, the ("Non-Core Units"), are
part of the Company's plan to focus on six key businesses in markets that have
strong demographics and dynamic growth opportunities. The Company expects to
complete the sales of the Non-Core Units in 1997. The net assets of the Non-Core
Units have been classified under the caption net assets held for sale and are
recorded at their aggregate carrying value of $18,684 and $286,700 on the
accompanying condensed consolidated balance sheets at December 31, 1996 and
March 31, 1997, respectively. The operating results of the Non-Core Units are
included in the accompanying statements of condensed consolidated operations for
the three-month periods ended March 31, 1996 and 1997. Total sales for the
Non-Core Units were $68,616 and $66,203 for three-month periods ending March 31,
1996 and 1997, respectively. Operating income (loss) for the Non-Core Units was
$(4,712) and $505 for the three-month periods ending March 31, 1996 and 1997,
respectively.
<PAGE>
-6-
4. Inventories
-----------
Inventories consist of the following:
December 31, March 31,
1996 1997
---- ----
Finished Goods $ 41,497 $ 13,047
Work in Process 2,111 118
Raw Materials 17,838 18,297
-------- --------
61,446 31,462
Less allowance for obsolescence 8,703 2,775
-------- --------
$ 52,743 $ 28,687
======== ========
5. Long-term debt
--------------
Long-term debt consists of the following:
December 31, March 31,
1996 1997
---- ----
Borrowings under New Bank Facilities $ 884,992 $ 988,484
8 1/2% Senior Notes due 2006, net 298,811 298,833
10 1/4% Senior Notes due 2004 100,000 100,000
10 5/8% Senior Notes due 2002 233,250 212,400
---------- ----------
Total 1,517,053 1,599,717
Acquisition obligation payable 54,633 55,926
---------- ----------
1,571,686 1,655,643
Less: current portion 6,000 6,000
---------- ----------
$1,565,686 $1,649,643
========== ==========
In January 1997, the Company purchased, in aggregate, $20,850 of the 10 5/8%
Senior Notes at a weighted average price of 105%, plus accrued and unpaid
interest, from various brokers on the open market. The premium paid on the
purchase and the write-off of related deferred financing costs are classified as
an extraordinary charge and are recorded at an aggregate value of $1,554 on the
accompanying statement of condensed consolidated operations for the three months
ending March 31, 1997. (See Note 8 - Subsequent Events).
6. Exchangeable Preferred Stock
----------------------------
Exchangeable Preferred Stock consists of the following:
December 31, March 31,
1996 1997
---- ----
$2.875 Senior Exchangeable Preferred Stock $ 98,266 $ 98,334
$11.625 Series B Exchangeable Preferred Stock 150,513 155,043
$10.000 Series D Exchangeable Preferred Stock 193,950 194,101
-------- --------
$442,729 $447,478
======== ========
$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, 1996 and March
31, 1997. The liquidation and redemption value at December 31, 1996 and March
31, 1997 was $100,000.
<PAGE>
-7-
$11.625 Series B Exchangeable Preferred Stock
The Company authorized 2,000,000 shares of $.01 par value Series B Preferred
Stock, 1,531,526 shares and 1,576,036 shares of which were issued and
outstanding at December 31, 1996 and March 31, 1997, respectively. The
liquidation and redemption value at December 31, 1996 and March 31, 1997 was
$153,153 and $157,604, 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 December 31, 1996 and March
31, 1997. The liquidation and redemption value at December 31, 1996 and March
31, 1997 was $200,000.
7. Loss per Common Share
---------------------
Loss per common share for the three-month periods ended March 31, 1996 and 1997
was computed using the weighted average number of common stock shares
outstanding during each period. The effect of the assumed exercise of
non-qualified 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.
8. Subsequent Events
-----------------
In April 1997, the Company completed two product-line acquisitions, QWIZ, Inc.
in workplace learning and IntelliChoice, Inc. in business directories. The
aggregate purchase price approximated $53,000.
On April 21, 1997, the Company entered into a credit agreement with The Chase
Manhattan Bank, The Bank of New York, Bankers Trust Company and The Bank of Nova
Scotia as agents (the "Credit Agreement"). Under the Credit Agreement, the
Company has commitments of $150,000 which may be utilized through the incurrence
of revolving credit loans. The proceeds of the Credit Agreement may be used for
general corporate and working capital purposes, including the redemption of the
10 5/8% Senior Notes as well as to finance certain future acquisitions. The
Credit Agreement expires on April 20, 1998. As of May 14, 1997, the Company has
borrowed $80,000 under the Credit Agreement.
The amounts borrowed under the Credit Agreement bear interest, at the same rates
per annum as the Bank Credit Facilities, 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
administrative agent from time to time; plus in each case, an applicable margin
of up to 1/8 of 1% as specified in the Credit Agreement or (ii) the Eurodollar
Rate plus an applicable margin ranging from 1/2 of 1% to 1 1/2% as specified in
the Credit Agreement.
The Company has agreed to pay a commitment fee of 1/8 of 1% per annum on the
daily average unutilized commitment of the $150,000 Credit Agreement.
On May 1, 1997, the Company redeemed $212,400 principal amount of 10 5/8% Senior
Notes, at a redemption price of 104% of the outstanding principal amount
thereof, plus accrued and unpaid interest to the date of redemption of $11,284.
<PAGE>
-8-
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: specialty media, education
and information. Management believes that a meaningful comparison of the
results of operations for 1996 and 1997 is obtained by using this segment
information.
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Unaudited Results of Consolidated Operations
(dollars in thousands)
Three Months Ended
March 31,
1996 1997
---- ----
Sales, net:
Specialty Media $ 164,047 $ 173,512
Education 83,052 104,887
Information 67,854 73,892
--------- ---------
Total $ 314,953 $ 352,291
========= =========
Operating income (loss):
Specialty Media 8,230 17,569
Education 4,911 5,837
Information (182) 3,470
Corporate (5,974) (6,398)
--------- ---------
Total 6,985 20,478
Other income (expense):
Interest expense (28,358) (34,341)
Amortization of deferred financing
and organizational costs (900) (842)
Other, net 1,533 474
--------- ---------
Loss before income tax benefit and
extraordinary charge (20,740) (14,231)
Income tax benefit - carryback claim -- 1,685
--------- ---------
Loss before extraordinary charge (20,740) (12,546)
Extraordinary charge - extinguishment
of debt -- (1,554)
--------- ---------
Net loss $ (20,740) $ (14,100)
========== =========
<PAGE>
-9-
RESULTS OF OPERATIONS (dollars in thousands, except per share amounts)
- ----------------------------------------------------------------------
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996:
- --------------------------------------------------------------------------------
Consolidated Results:
- ---------------------
Consolidated sales increased by 11.9% to $352,291 in the first quarter of 1997
from $314,953 in 1996. The sales increase resulted from growth in all segments,
as well as from the impact of recent acquisitions, in particular, Westcott which
added $22,828 to the sales growth in the first quarter of 1997. Consolidated
operating profit increased to $20,478 in the first quarter of 1997 as compared
to operating profit of $6,985 in the same period in 1996. This improvement was
primarily due to the increases in sales and a decrease in amortization of
intangible assets, excess of purchase price over net assets acquired and paper
price reductions. Average paper prices were 23.2% lower in the 1997 quarter
versus 1996. Interest expense increased by $5,983 or 21.1% in the first quarter
1997 over 1996 primarily due to the increased level of borrowings associated
with acquisitions. The consolidated net loss decreased by $6,640 to $14,100 in
the first quarter of 1997 versus $20,740 in 1996 due primarily to the increase
in operating profit.
Specialty Media:
- ----------------
The specialty media segment's sales increased by $9,465 or 5.8% in the first
quarter of 1997 versus 1996 primarily due to greater advertising revenue,
particularly at Seventeen, New York and the Company's telecommunications trade
publications, plus certain acquisitions. The specialty media segment's operating
profit increased to $17,569 in the first quarter 1997 from $8,230 in the 1996
period due to the increased sales, the impact of acquisitions and the
stabilization of paper prices in 1997.
Education:
- ----------
The education segment's sales increased by $21,835 or 26.3% in the first quarter
of 1997 versus 1996. The increase in sales reflected gains at Weekly Reader and
Films for the Humanities and Sciences, along with the addition of Westcott which
the Company acquired in May 1996, offset by declines at Newbridge
Communications, Inc. Channel One's sales were held back because of one client's
major advertising campaign which was deferred to the second quarter of 1997. The
education segment had operating profit of $5,837 in the first quarter of 1997
versus an operating profit of $4,911 in 1996.
Information:
- ------------
The information segment's sales increased by $6,038 or 8.9% in the first quarter
of 1997 over 1996. The increase in revenues was driven by double-digit organic
growth in the apartment and home buyers guides, increased revenues at Bacon's
CD-ROM database plus the effect of acquisitions. The operating profit for the
information segment increased to $3,470 compared to an operating loss of $182 in
the 1996 period.
Liquidity and Capital Resources
- -------------------------------
Consolidated working capital (deficiency) including current maturities of
long-term debt was $215,858 at March 31, 1997 compared to $(44,705) at December
31, 1996. Excluding the effect of the reclassification of net assets held for
sale, consolidated working capital (deficiency) including current maturities of
long-term debt would have been $(48,978) at March 31, 1997 compared to $(69,317)
at December 31, 1996. Consolidated working capital reflects the expensing of
editorial and product development costs when incurred and the recording of
deferred revenues 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 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>
-10-
Three Months Ended
March 31,
1996 1997
---- ----
EBITDA:
Specialty Media $ 27,089 $ 30,687
Education 17,021 21,861
Information 12,900 14,243
Corporate (5,798) (6,750)
---------- ----------
Total $ 51,212 $ 60,041
========== ==========
Net Cash Provided by (Used in)
Operating Activities:
Specialty Media $ 6,360 $ 17,559
Education 697 (1,927)
Information 13,461 15,639
Corporate (21,247) (38,832)
---------- ----------
Total $ (729) $ (7,561)
========== ==========
Net Cash Used in Investing
Activities:
Specialty Media $ (184,844) $ (42,856)
Education (2,292) (4,201)
Information (26,004) (26,028)
Corporate (268) (338)
---------- ----------
Total $ (213,408) $ (73,423)
========== ==========
Net Cash Provided by (Used in)
Financing Activities:
Specialty Media $ (3,372) $ (43)
Education (1,443) 317
Information (1,630) (34)
Corporate 225,578 74,662
---------- ----------
Total $ 219,133 $ 74,902
========== ==========
Excess (Deficiency) of Earnings
to Fixed Charges:
Specialty Media $ 8,106 $ 16,955
Education 4,405 5,339
Information (1,148) 2,017
Corporate (32,103) (38,542)
---------- ----------
Total $ (20,740) $ (14,231)
========== ==========
Excess (Deficiency) of Earnings
to Fixed Charges and Preferred
Stock Dividends:
Specialty Media $ 8,106 $ 16,955
Education 4,405 5,339
Information (1,148) 2,017
Corporate (38,947) (50,868)
---------- ----------
Total $ (27,584) $ (26,557)
========== ==========
<PAGE>
-11-
Consolidated EBITDA increased by $8,829 in the first quarter of 1997 over 1996
mainly as a result of growth from existing operations, new product additions and
acquisitions of businesses. The net cash used in operating activities during the
first quarter of 1997, after interest payments of $30,001, was $7,561 versus
$729 in the first quarter of 1996, after interest payments of $11,617. Net cash
used in operating activities increased by $6,832 during the first quarter of
1997 over 1996 due primarily to an increase in prepaid expenses and a decrease
in accrued interest payable offset by EBITDA growth. Capital expenditures were
$7,075 during the first quarter of 1997 which was an increase of $3,086 from the
1996 period. Payments for acquisitions of $66,435 (including certain immaterial
purchase price adjustments relating to previous acquisitions) were made during
the first quarter of 1997.
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 $20,740 and $27,584 for the first quarter of 1996
and $14,231 and $26,557 for the first quarter of 1997. 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 $50,777 and $47,022 for the first quarter of 1996 and 1997,
respectively. Adjusted to eliminate these non-cash charges, earnings would have
exceeded fixed charges and fixed charges plus preferred stock dividends by
approximately $26,068 and $23,193 for the first quarter of 1996 and $28,340 and
$20,465 for the first quarter of 1997.
Recent Developments
- -------------------
In April 1997, the Company completed two product-line acquisitions, QWIZ, Inc.
in workplace learning and IntelliChoice, Inc. in business directories. The
aggregate purchase price approximated $53,000.
On April 21, 1997, the Company entered into a credit agreement with The Chase
Manhattan Bank, The Bank of New York, Bankers Trust Company and The Bank of Nova
Scotia as agents (the "Credit Agreement"). Under the Credit Agreement, the
Company has commitments of $150,000 which may be utilized through the incurrence
of revolving credit loans. The proceeds of the Credit Agreement may be used for
general corporate and working capital purposes, including the redemption of the
10 5/8% Senior Notes as well as to finance certain future acquisitions. The
Credit Agreement expires on April 20, 1998. As of May 14, 1997, the Company has
borrowed $80,000 under the Credit Agreement.
The amounts borrowed under the Credit Agreement bear interest, at the same rates
per annum as the Bank Credit Facilities, 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
administrative agent from time to time; plus in each case, an applicable margin
of up to 1/8 of 1% as specified in the Credit Agreement or (ii) the Eurodollar
Rate plus an applicable margin ranging from 1/2 of 1% to 1 1/2% as specified in
the Credit Agreement.
The Company has agreed to pay a commitment fee of 1/8 of 1% per annum on the
daily average unutilized commitment of the $150,000 Credit Agreement.
On May 1, 1997, the Company redeemed $212,400 principal amount of 10 5/8% Senior
Notes, at a redemption price of 104% of the outstanding principal amount
thereof, plus accrued and unpaid interest to the date of redemption of $11,284.
Impact of Inflation
- -------------------
The impact of inflation was immaterial during 1996 and 1997 with the exception
of paper prices in early 1996. Paper prices declined around mid-year 1996 and
continued that trend through the first quarter of 1997. Overall, the Company's
average paper prices were 23.2% lower in the first quarter 1997 over 1996. In
the first quarter of 1997, paper costs represented approximately 8% of the
Company's total operating costs and expenses. Postage for product distribution
and direct mail solicitations is also a significant expense of the Company. The
Company uses the U.S. Postal Service for distribution of many of its products
and marketing materials. Postage costs increase periodically and can be expected
to increase in the future. In the past, the effects of inflation on operating
expenses have substantially been offset by K-III's ability to increase selling
prices. No assurances can be given that the Company can pass such cost increases
through to its customers. 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 price increases.
<PAGE>
-12-
Forward Looking Information
- ---------------------------
This report contains certain forward-looking statements concerning the Company's
operations, economic performance and financial condition. These statements are
based upon a number of assumptions and estimates which are inherently subject to
uncertainties and contingencies, many of which are beyond the control of the
Company, and reflect future business decisions which are subject to change. Some
of these assumptions may not materialize and unanticipated events will occur
which can affect the Company's results.
<PAGE>
-13-
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: May 15, 1997 /s/ William F. Reilly
------------ ----------------------
Chairman and Director
(Principal Executive Officer)
Date: May 14, 1997 /s/ Curtis A. Thompson
------------ ------------------------
Vice President
(Principal Accounting Officer)
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> MAR-31-1997
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447,478
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