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: June 30, 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
July 31, 1997: 129,384,319
<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
June 30, 1997 2
Condensed Statements of Consolidated
Operations (Unaudited) for the six months
ended June 30, 1996 and 1997 3
Condensed Statements of Consolidated
Operations (Unaudited) for the three months
ended June 30, 1996 and 1997 4
Condensed Statements of Consolidated
Cash Flows (Unaudited) for the six months
ended June 30, 1996 and 1997 5
Notes to Condensed Consolidated
Financial Statements (Unaudited) 6-11
Item 2. Management's Discussion and Analysis of
------ Financial Condition and Results of Operations 12-20
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 21
-------
Signatures 22
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
---- ----
(dollars in thousands, except per share amounts)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 36,655 $ 26,268
Accounts receivable, net 233,603 172,597
Inventories, net 52,743 27,711
Net assets held for sale 18,684 274,736
Prepaid expenses and other 34,834 49,226
------------- ------------
Total current assets 376,519 550,538
Property and equipment, net 122,823 100,394
Other intangible assets, net 781,316 668,712
Excess of purchase price over net
assets acquired, net 971,665 963,085
Deferred income tax asset, net 176,200 176,200
Other non-current assets 123,692 104,534
------------- ------------
$ 2,552,215 $ 2,563,463
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 107,258 $ 58,971
Accrued interest payable 22,150 23,026
Accrued expenses and other 140,959 115,567
Deferred revenues 144,857 127,501
Current maturities of long-term debt 6,000 6,000
------------- ------------
Total current liabilities 421,224 331,065
------------- ------------
Long-term debt 1,565,686 1,713,057
------------- ------------
Other non-current liabilities 35,062 31,828
------------- ------------
Exchangeable preferred stock 442,729 447,776
------------- ------------
Common stock subject to redemption ($.01 par value,
643,310 shares and 443,470 shares outstanding at
December 31, 1996 and June 30, 1997, respectively) 5,957 4,052
------------- ------------
Shareholders' equity:
Common stock ($.01 par value, 128,349,045 shares
and 128,895,484 shares outstanding at December 31, 1996 and
June 30, 1997, respectively) 1,283 1,289
Additional paid-in capital 772,642 776,150
Accumulated deficit (691,098) (740,126)
Cumulative foreign currency translation adjustments (1,270) (1,628)
------------- ------------
Total shareholders' equity 81,557 35,685
------------- ------------
$ 2,552,215 $ 2,563,463
============= ============
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1997
(dollars in thousands, except per share amounts)
Sales, net:
<S> <C> <C>
Specialty Media $ 333,647 $ 361,174
Education 172,294 199,562
Information 144,692 160,317
-------------- --------------
Total sales, net 650,633 721,053
Operating costs and expenses:
Cost of goods sold 166,461 159,663
Marketing and selling 122,143 138,718
Distribution, circulation and fulfillment 110,052 127,249
Editorial 47,089 59,677
Other general expenses 72,542 80,839
Corporate administrative expenses 9,851 12,710
Depreciation and amortization of prepublication
costs, property and equipment 16,653 18,224
Amortization of intangible assets, excess of
purchase price over net assets acquired and other 75,577 63,977
-------------- --------------
Operating income 30,265 59,996
Other income (expense):
Interest expense (57,597) (68,963)
Amortization of deferred financing costs (1,867) (1,582)
Other, net 1,393 18
-------------- --------------
Loss before income tax benefit and extraordinary charge (27,806) (10,531)
Income tax benefit - carryback claim - 1,685
-------------- --------------
Loss before extraordinary charge (27,806) (8,846)
Extraordinary charge - extinguishment of debt (7,572) (15,401)
-------------- --------------
Net loss (35,378) (24,247)
Preferred stock dividends:
Non-cash (8,054) (4,451)
Cash (11,194) (20,330)
-------------- --------------
Loss applicable to common shareholders $ (54,626) $ (49,028)
============== ==============
Loss applicable to common shareholders per
common share:
Loss before extraordinary charge $ (0.36) $ (0.26)
Extraordinary charge $ (0.06) $ (0.12)
-------------- --------------
Net loss $ (0.42) $ (0.38)
============== ==============
Weighted average common shares outstanding 128,645,188 129,201,826
=============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1996 1997
(dollars in thousands, except per share amounts)
Sales, net:
<S> <C> <C>
Specialty Media $ 169,600 $ 187,662
Education 89,242 94,675
Information 76,838 86,425
--------------- --------------
Total sales, net 335,680 368,762
Operating costs and expenses:
Cost of goods sold 83,016 79,565
Marketing and selling 61,345 68,516
Distribution, circulation and fulfillment 54,571 63,862
Editorial 24,944 30,367
Other general expenses 36,468 38,336
Corporate administrative expenses 4,053 5,960
Depreciation and amortization of
prepublication costs, property and equipment 8,979 8,385
Amortization of intangible assets, excess of
purchase price over net assets acquired and other 39,024 34,253
--------------- --------------
Operating income 23,280 39,518
Other expense:
Interest expense (29,239) (34,622)
Amortization of deferred financing costs (967) (740)
Other, net (140) (456)
--------------- --------------
Income (loss) before extraordinary charge (7,066) 3,700
Extraordinary charge - extinguishment of debt (7,572) (13,847)
--------------- --------------
Net loss (14,638) (10,147)
Preferred stock dividends:
Non-cash (4,084) -
Cash (8,319) (12,455)
--------------- --------------
Loss applicable to common shareholders $ (27,041) $ (22,602)
=============== ==============
Loss applicable to common shareholders per common share:
Loss before extraordinary charge $ (0.15) $ (0.07)
Extraordinary charge $ (0.06) $ (0.11)
--------------- --------------
Net loss $ (0.21) $ (0.18)
=============== ==============
Weighted average common shares outstanding 128,787,528 129,289,307
=============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1997
(dollars in thousands)
Operating activities:
<S> <C> <C>
Net loss $ (35,378) $ (24,247)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Extraordinary charge - extinguishment of debt 7,572 15,401
Depreciation, amortization and other 94,097 83,783
Accretion of discount on acquisition obligation,
distribution advance and other 3,112 3,305
Other, net (1,391) (177)
Changes in operating assets and liabilities:
(Increase) Decrease in:
Accounts receivable, net 3,883 22,515
Inventories, net 14,814 1,130
Prepaid expenses and other (13,159) (11,333)
Increase (Decrease) in:
Accounts payable (23,892) (29,085)
Accrued interest payable 11,509 876
Accrued expenses and other (26,356) (16,185)
Deferred revenues (22,750) (18,737)
Other non-current liabilities (946) (1,844)
------------- ------------
Net cash provided by operating activities 11,115 25,402
------------- ------------
Investing activities:
Additions to property, equipment and other (10,158) (14,708)
Proceeds from sales of property, equipment and other 529 105
Proceeds from sales of businesses and other 6,013 5,423
Payments for businesses acquired (649,436) (142,291)
------------- ------------
Net cash used in investing activities (653,052) (151,471)
------------- ------------
Financing activities:
Borrowings under credit agreements 1,619,324 523,930
Repayments of borrowings under credit agreements (1,153,000) (142,950)
Repayment of Chase Term Loan (150,000) -
Repayment of BONY Term Loan (150,000) -
Proceeds from issuance of 8 1/2% Senior Notes, net of discount 298,734 -
Repayment of acquisition obligation (3,000) (3,000)
Proceeds from issuance of common stock, net of redemptions 2,652 2,203
Proceeds from the issuance of Series C (exchanged into Series D)
Preferred Stock, net of issuance costs 193,720 -
Redemptions of 10 5/8% Senior Notes - (242,787)
Dividends paid to preferred shareholders (11,194) (20,330)
Deferred financing costs paid (14,362) (1,617)
Other (467) 233
------------- ------------
Net cash provided by financing activities 632,407 115,682
------------- ------------
Decrease in cash and cash equivalents (9,530) (10,387)
Cash and cash equivalents, beginning of period 27,226 36,655
------------- ------------
Cash and cash equivalents, end of period $ 17,696 $ 26,268
============= ============
Supplemental information:
Cash interest paid $ 44,697 $ 67,060
============= ============
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
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 classification used in the current period. The operating
results for the three and six-month periods ended June 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:
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". SFAS No.
128 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 excludes
Common Stock Equivalents. Additionally, SFAS No. 128 changes the methodology for
fully dilutive 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.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 129,
"Disclosure of Information about Capital Structure". SFAS No. 129 becomes
effective for the Company's consolidated financial statements beginning in the
fourth quarter of 1997. SFAS No. 129 requires certain disclosures regarding
outstanding securities, preferred stock and redeemable stock. In June 1997, the
Financial Accounting Standards Board issued SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which become effective for the Company's
1998 consolidated financial statements. SFAS No. 130 requires the disclosure of
comprehensive income, defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources, in the Company's consolidated financial statements. SFAS No.
131 requires that a public business enterprise report certain financial and
descriptive information about its reportable operating segments. In the opinion
of the Company's management, it is not anticipated that the adoption of these
new accounting standards will have a material effect on the consolidated
financial statements of the Company.
2. Acquisitions
------------
During the six-month period ended June 30, 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
$142,291 (net of liabilities assumed of approximately $19,955) and includes
certain immaterial purchase price adjustments related to prior year
acquisitions. The excess purchase price over net assets acquired was
approximately $72,937.
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
June 30, 1997; however, the changes are not expected to have a material effect
on the consolidated financial statements 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 and six-month periods ended
June 30, 1996 and 1997.
3. Net Assets Held for Sale
------------------------
In September 1996, the Company decided to divest Katharine Gibbs Schools, Inc.
("Katharine Gibbs"). The net assets of Katharine Gibbs were classified under the
caption net assets held for sale and were recorded at their carrying value on
the accompanying condensed consolidated balance sheet as of December 31, 1996.
(See Note 4 - Divestiture).
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. Subsequent
to March 11, 1997, the Company decided to sell Stagebill. These planned
divestitures, (collectively, the "Non-Core Units"), are part of the Company's
plan to focus on six key growth vehicles in markets that have 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 $274,736 on the accompanying condensed consolidated balance sheet at
June 30, 1997. The operating results of the Non-Core Units are included in the
accompanying statements of condensed consolidated operations for the three and
six-month periods ended June 30, 1996 and 1997. Total sales for the Non-Core
Units were $72,457 and $136,755 and $65,309 and $125,654 for the three and
six-month periods ended June 30, 1996 and 1997, respectively. Operating (loss)
income for the Non-Core Units was $(67) and $(5,488) and $7,465 and $6,621 for
the three and six-month periods ended June 30, 1996 and 1997, respectively. (See
Note 9 - Subsequent Events).
4. Divestiture
-----------
On May 30, 1997, the Company sold Katharine Gibbs pursuant to a stock purchase
agreement and received a portion of the purchase price. The sale is subject to
certain regulatory approvals and is expected to be completed by the end of 1997.
The operating results of Katharine Gibbs prior to the divestiture are not
material to the consolidated operations of the Company and are included in the
accompanying statements of condensed consolidated operations for the three and
six-month periods ended June 30, 1996 and 1997. The proceeds from the sale
approximate the Company's carrying value of Katharine Gibbs.
<PAGE>
5. Inventories
-----------
Inventories consist of the following:
December 31, June 30,
1996 1997
---- ----
Finished Goods $ 41,497 $ 12,570
Work in Process 2,111 2,433
Raw Materials 17,838 15,501
--------- ----------
61,446 30,504
Less allowance for obsolescence 8,703 2,793
--------- ----------
$ 52,743 $ 27,711
========= ==========
6. Long-term debt
-------------
Long-term debt consists of the following:
December 31, June 30,
1996 1997
---- ----
Borrowings under Bank Credit Facilities $ 884,992 $ 1,185,982
Borrowings under New Credit Facility - 80,000
8 1/2% Senior Notes due 2006, net 298,811 298,856
10 1/4% Senior Notes due, 2004 100,000 100,000
10 5/8% Senior Notes due 2002 233,250 -
----------- -----------
Total 1,517,053 1,664,838
Acquisition obligation payable 54,633 54,219
----------- -----------
1,571,686 1,719,057
Less current portion 6,000 6,000
----------- -----------
$ 1,565,686 $ 1,713,057
=========== ===========
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. On May 1, 1997, the Company
redeemed the $212,400 remaining principal amount of the 10 5/8% Senior Notes at
104% plus accrued and unpaid interest. The aggregate premium paid and the
write-off of related deferred financing costs are classified as an extraordinary
charge and are recorded at an aggregate value of $13,847 and $15,401 on the
accompanying statements of condensed consolidated operations for the three and
six-month periods ended June 30, 1997.
The write-off of the unamortized deferred financing costs of $7,572 related to
the Company's May 1996 bank debt refinancing has been reclassified as an
extraordinary charge on the accompanying statements of condensed consolidated
operations for the three and six-month periods ended June 30, 1996 to conform to
the 1997 presentation.
On April 21, 1997, the Company entered into a new 364-day credit facility with
The Bank of New York, Bankers Trust Company, The Bank of Nova Scotia and The
Chase Manhattan Bank as agents (the "New Credit Facility") which expires April
20, 1998. Under the terms of the New Credit Facility, the Company has
commitments of $150,000 which can be borrowed in the form of revolving loans.
The proceeds of all revolving loans under the New Credit Facility can be used
for general corporate and working capital purposes of the Company and its
subsidiaries, including, without limitation, the financing of permitted
acquisitions.
The amounts borrowed pursuant to the New Credit Facility bear interest at rates
per annum identical to those in the Bank Credit Facilities at the Company's
option as follows: (i) the higher of (a) the Federal Funds Effective Rate plus
1/2% and (b) the prime lending rate as in effect 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 Facility or (ii) the Eurodollar Rate plus an applicable margin
ranging from 1/2% to 1 1/2% as specified in the New Credit Facility.
Under the New Credit Facility, the Company has agreed to pay commitment fees
equal to 1/8 of 1% per annum on the daily average aggregate unutilized revolving
loan commitment.
The covenants in the New Credit Facility are identical to those in the Bank
Credit Facilities and, 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 fixed charge coverage ratio, interest coverage ratio and leverage
ratio are at certain levels as specified in the New Credit Facility.
As under the Bank Credit Facilities, borrowings under the New Credit Facility
are guaranteed by each of the domestic wholly-owned subsidiaries of the Company.
Such guarantees are full, unconditional and joint and several. 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.
In May 1997, the Company, through its Bank Credit Facilities, solicited
commitments of $150,000 under the Tranche B Revolving Loan Facility ("Tranche B
Facility"). The Company has the right to solicit additional commitments of up to
$100,000 under the Tranche B Facility. As of June 30, 1997, $150,000 was
outstanding under the Tranche B Facility.
<PAGE>
The commitments under the Tranche B Facility 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 B Facility loan commitments are as follows:
Years Ending
December 31,
-----------
1999 $ 15,000
2000 30,000
2001 30,000
2002 30,000
2003 30,000
2004 15,000
----------
$ 150,000
7. Exchangeable Preferred Stock
----------------------------
Exchangeable Preferred Stock consists of the following:
December 31, June 30,
1996 1997
---- ----
$2.875 Senior Exchangeable Preferred Stock $ 98,266 $ 98,402
$11.625 Series B Exchangeable Preferred Stock 150,513 155,122
$10.000 Series D Exchangeable Preferred Stock 193,950 194,252
---------- -----------
$ 442,729 $ 447,776
========== ===========
$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 June 30,
1997. The liquidation and redemption value at December 31, 1996 and June 30,
1997 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, 1,531,526 shares and 1,576,036 shares of which were issued and
outstanding at December 31, 1996 and June 30, 1997, respectively. The
liquidation and redemption value at December 31, 1996 and June 30, 1997 was
$153,153 and $157,604 respectively.
Commencing in the second quarter of 1997, the Company elected to satisfy its
Series B Exchangeable Preferred Stock dividend requirements in cash.
$10.000 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 June 30,
1997. The liquidation and redemption value at December 31, 1996 and June 30,
1997 was $200,000.
8. Loss per Common Share
--------------------
Loss per common share for the three and six-month periods ended June 30, 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 anti-dilutive.
Loss per common share assuming full dilution is not presented because such
calculation is antidilutive.
9. Subsequent Events
-----------------
In July 1997, the Company executed definitive agreements to sell the outstanding
capital stock of Krames Communications Incorporated and the net assets of New
Woman magazine. These sales are expected to close in August 1997. The Company
also expects to recover the carrying value of these net assets held for sale.
In July and August 1997, the Company completed two product-line acquisitions in
the specialty consumer magazines group for an aggregate purchase price of
approximately $30,100.
In July 1997, the Company entered into four, three-year and two, four-year
interest rate swap agreements, with an aggregate notional amount of $600,000.
Under these new swap agreements, which commence on January 1, 1998, the Company
receives a floating rate of interest based on three-month LIBOR, which resets
quarterly, and the Company pays a fixed rate of interest, each quarter, for the
terms of the respective agreements. The weighted average fixed rate of interest
under these agreements is 6.33%.
<PAGE>
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 (specialty consumer, technical and trade
magazines), education (classroom and workplace learning) and information
(consumer and business directories). Most of the Company's products are premier
brands with leadership positions in the specialty niche markets in which such
products compete. 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)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
1996 1997 1996 1997
---- ---- ---- ----
Sales, net:
<S> <C> <C> <C> <C>
Specialty Media $ 333,647 $ 361,174 $ 169,600 $ 187,662
Education 172,294 199,562 89,242 94,675
Information 144,692 160,317 76,838 86,425
----------- ----------- ----------- -----------
Total $ 650,633 $ 721,053 $ 335,680 $ 368,762
=========== =========== =========== ===========
Operating income (loss):
Specialty Media $ 23,810 $ 45,190 $ 15,291 $ 27,621
Education 10,037 12,611 5,126 6,774
Information 6,633 14,649 7,104 11,179
Corporate (10,215) (12,454) (4,241) (6,056)
----------- ----------- ----------- -----------
Total 30,265 59,996 23,280 39,518
Other income (expense):
Interest expense (57,597) (68,963) (29,239) (34,622)
Amortization of deferred financing
costs (1,867) (1,582) (967) (740)
Other, net 1,393 18 (140) (456)
----------- ----------- ----------- -----------
Income (loss) before income tax benefit
and extraordinary charge (27,806) (10,531) (7,066) 3,700
Income tax benefit - carryback claim - 1,685 - -
----------- ----------- ----------- -----------
Income (loss) before extraordinary charge (27,806) (8,846) (7,066) 3,700
Extraordinary charge - extinguishment
of debt (7,572) (15,401) (7,572) (13,847)
----------- ----------- ----------- -----------
Net loss $ (35,378) $ (24,247) $ (14,638) $ (10,147)
============ =========== =========== ==========
</TABLE>
<PAGE>
RESULTS OF OPERATIONS (dollars in thousands, except per share amounts)
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996:
Consolidated Results:
Consolidated sales increased by 10.8% to $721,053 in the 1997 period over 1996
due to strong growth in all segments as well as the impact of acquisitions, in
particular Westcott which added $33,052 to revenue growth. Consolidated
operating income was $59,996 in the 1997 period as compared to $30,265 in 1996.
This 98.2% improvement was driven by an increase in sales, the impact of recent
acquisitions and a decrease in amortization of intangible assets, excess of
purchase price over net assets acquired and other, partially offset by increases
in marketing and selling, distribution, circulation and fulfillment, and
editorial expenses. Paper costs, which in the first six months of 1997
represented approximately 8% of the Company's total operating costs and
expenses, were approximately 15% lower in the first six months of 1997 versus
the same period in 1996. All three segments experienced declines in paper prices
with the greatest impact occurring in the specialty media segment. As the
Company had anticipated, paper prices have increased moderately during the third
quarter of 1997. Interest expense increased by $11,366 or 19.7% in the 1997
period over 1996 primarily due to the increased level of borrowings associated
with acquisitions. The consolidated loss before income tax benefit and
extraordinary charge decreased by $17,275 to $10,531 in the first six months of
1997 versus $27,806 in the 1996 period due primarily to an increase in operating
income, offset by an increase in interest expense. The $7,829 increase in the
extraordinary charge reflects the aggregate premium paid on the redemptions of
the Company's 10 5/8% Senior Notes and an additional write-off of deferred
financing costs.
Specialty Media:
The specialty media segment's sales increased by $27,527 or 8.3% in the 1997
period over 1996 due largely to greater advertising and circulation revenue,
particularly at Seventeen, the largest teen, fashion and beauty magazine in the
United States, and Soap Opera Digest, which has become a weekly publication and
continues to gain market share. Also, strong advertising revenue growth at the
Company's telecommunications trade publications and certain acquisitions
contributed to the increase in sales. Operating income increased by $21,380 or
89.8% in the 1997 period over 1996. The increase was the result of the increase
in sales and the impact of acquisitions, as well as a decrease in paper prices.
Education:
The education segment's sales increased by $27,268 or 15.8% in the 1997
period over 1996. The increase in sales reflected gains at Channel One 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. ("Newbridge"), which the Company intends to divest by the end of 1997. The
education segment's operating income increased to $12,611 in the 1997 period as
compared to $10,037 in the 1996 period.
Information
The information segment's sales increased by $15,625 or 10.8% in the 1997
period over 1996 primarily because of organic growth at both the Haas
advertiser-sponsored apartment guides and Bacon's as well as acquisitions. The
information segment's operating income increased to $14,649 in the 1997 period
as compared to $6,633 in the 1996 period.
RESULTS OF OPERATIONS (dollars in thousands, except per share amounts)
Three Months Ended June 30, 1997 Compared to the Three Months Ended June 30,
1996:
Consolidated Results:
Consolidated sales increased by 9.9% to $368,762 in the second quarter of
1997 from $335,680 in 1996. The sales increase resulted from organic growth in
all segments, as well as the impact of recent acquisitions, in particular,
Westcott which added $10,224 to the sales growth in the second quarter of 1997.
Consolidated operating income increased to $39,518 in the second quarter of 1997
as compared to $23,280 in the same period in 1996. This 70% improvement was
primarily due to the increases in sales, a decrease in amortization of
intangible assets, excess of purchase price over net assets acquired and paper
price reductions, partially offset by increases in marketing and selling,
distribution, circulation and fulfillment, and editorial expenses. Paper costs,
which in the second quarter of 1997 represented approximately 9% of the
Company's total operating costs and expenses, were approximately 8% lower in the
1997 quarter versus 1996. All three segments experienced declines in paper
prices with the greatest impact occurring in the specialty media segment. As the
Company had anticipated, paper prices have increased moderately in the third
quarter of 1997. Interest expense increased by $5,383 or 18.4% in the second
quarter of 1997 over 1996 primarily due to the increased level of borrowing
associated with acquisitions. The consolidated income (loss) before
extraordinary charge was $3,700 in the second quarter of 1997 as compared to
$(7,066) in the 1996 period. This improvement was the result of an increase in
operating income, offset by an increase in interest expense. The $6,275 increase
in the extraordinary charge reflects the aggregate premium paid on the
redemptions of the Company's 10 5/8% Senior Notes and an additional write-off of
deferred financing costs.
Specialty Media:
The specialty media segment's sales increased by $18,062 or 10.7% in the
second quarter of 1997 versus 1996 primarily due to greater circulation and
advertising revenue, particularly at Seventeen, the largest teen, fashion and
beauty magazine in the United States, Soap Opera Digest, which has become a
weekly publication and continues to gain market share, and the Company's
telecommunications and textiles publications, plus certain acquisitions. The
specialty media segment's operating income increased to $27,621 in the second
quarter of 1997 as compared to $15,291 in the 1996 period due to the increased
sales, the impact of acquisitions and a decrease in paper prices in 1997.
Education:
The education segment's sales increased by $5,433 or 6.1% in the second quarter
of 1997 versus 1996. The increase in sales reflected gains at Channel One 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, which the
Company intends to divest by the end of 1997. The education segment's operating
income increased to $6,774 in the second quarter of 1997 as compared to $5,126
in the 1996 period.
Information:
The information segment's sales increased by $9,587 or 12.5% in the second
quarter of 1997 versus 1996. The increase in revenues was driven by a 31%
increase in the Haas advertiser-sponsored guides for apartments, computers and
homes, increased revenues at Bacon's CD-ROM database plus the effect of
acquisitions. The operating income for the information segment increased to
$11,179 in the second quarter of 1997 as compared to $7,104 in the 1996 period.
Liquidity and Capital Resources
Consolidated working capital including current maturities of long-term debt was
$219,473 at June 30, 1997 compared to a working capital deficiency of $(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 $(28,845) at June 30, 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 a widely used and commonly reported standard
measure utilized by analysts, investors and other interested parties in the
analysis of the media industry. 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. 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>
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
1996 1997 1996 1997
---- ---- ---- ----
EBITDA:
<S> <C> <C> <C> <C>
Specialty Media $ 61,684 $ 73,384 $ 34,306 $ 42,697
Education 36,293 44,940 19,272 23,079
Information 34,369 36,583 21,758 22,340
Corporate (9,851) (12,710) (4,053) (5,960)
------------ ------------ ------------ ------------
Total $ 122,495 $ 142,197 $ 71,283 $ 82,156
============ ============ ============ ============
Net Cash Provided by (Used in)
Operating Activities:
Specialty Media $ 31,078 $ 62,529 $ 24,718 $ 44,970
Education 8,695 11,567 7,998 13,494
Information 32,327 30,351 18,867 14,712
Corporate (60,985) (79,045) (39,738) (40,213)
------------ ------------ ------------ ------------
Total $ 11,115 $ 25,402 $ 11,845 $ 32,963
============ ============ =========== ============
Net Cash Used in Investing
Activities:
Specialty Media $ (194,028) $ (44,905) $ (9,184) $ (2,049)
Education (423,487) (62,400) (421,195) (58,199)
Information (35,085) (43,510) (9,081) (17,482)
Corporate (452) (656) (184) (318)
------------ ------------ ------------ ------------
Total $ (653,052) $ (151,471) $ (439,644) $ (78,048)
============ ============ =========== ============
Net Cash Provided by (Used in)
Financing Activities:
Specialty Media $ (5,526) $ (1,642) $ (2,154) $ (1,599)
Education (1,606) 53 (163) (264)
Information (2,676) (1,222) (1,046) (1,188)
Corporate 642,215 118,493 416,636 43,831
------------ ------------ ------------ ------------
Total $ 632,407 $ 115,682 $ 413,273 $ 40,780
============ ============ =========== ============
Excess (Deficiency) of Earnings
to Fixed Charges:
Specialty Media $ 23,366 $ 47,588 $ 14,886 $ 30,633
Education 8,946 11,646 4,541 6,307
Information 3,436 7,438 4,958 5,421
Corporate (63,554) (77,203) (31,451) (38,661)
------------ ------------ ------------ ------------
Total $ (27,806) $ (10,531) $ (7,066) $ 3,700
============ ============ =========== ============
Excess (Deficiency) of Earnings to
Fixed Charges and Preferred Stock
Dividends:
Specialty Media $ 23,366 $ 47,588 $ 14,886 $ 30,633
Education 8,946 11,646 4,541 6,307
Information 3,436 7,438 4,958 5,421
Corporate (82,802) (101,984) (43,854) (51,116)
------------ ------------ ------------ ------------
Total $ (47,054) $ (35,312) $ (19,469) $ (8,755)
============ ============ =========== ============
</TABLE>
<PAGE>
Consolidated EBITDA increased by $19,702 or 16.1% in the six months ended June
30, 1997 over 1996 mainly as a result of growth in existing operations, new
product additions and acquisitions of products and businesses. The EBITDA
increase in the specialty media segment was primarily due to strong organic
growth in circulation and advertising revenue as well as savings from paper
price declines. The EBITDA increase in the education segment is largely
attributable to Westcott, which was acquired in the second quarter of 1996. The
EBITDA increase in the information segment came from increases in advertising
revenue at the apartment guides, distribution revenues at the consumer
directories and new products at Bacon's. The net cash provided by operating
activities during the six months ended June 30, 1997, after interest payments of
$67,060, was $25,402. Net cash provided by operating activities increased by
$14,287 during the six months ended June 30, 1997 over 1996 due primarily to
EBITDA growth. Capital expenditures were $14,708 during the 1997 period which
was an increase of $4,550 from the 1996 period. Payments for acquisitions of
$142,291 (including certain immaterial purchase price adjustments relating to
previous acquisitions) were made during the first six months of 1997.
Consolidated EBITDA increased by $10,873 or 15.3% in the three months ended June
30, 1997 over 1996 mainly as a result of growth in existing operations, new
product additions and acquisitions of products and businesses. The EBITDA
increase in the specialty media segment was primarily due to strong organic
growth in circulation and advertising revenue as well as savings from paper
price declines. The EBITDA increase in the education segment is largely
attributable to Westcott, which was acquired in the second quarter of 1996. The
EBITDA increase in the information segment came from increases in advertising
revenue at the apartment guides, distribution revenues at the consumer
directories and new products at Bacon's. The net cash provided by operating
activities during the three months ended June 30, 1997, after interest payments
of $37,059, was $32,963. Net cash provided by operating activities increased by
$21,118 during the three months ended June 30, 1997 over 1996 due primarily to
EBITDA growth. Capital expenditures were $7,633 during the three months ended
June 30, 1997 which was an increase of $1,464 from the 1996 period. Payments for
acquisitions of $75,856 (including certain immaterial purchase price adjustments
relating to previous acquisitions) were made during the three months ended June
30, 1997.
The Company's earnings (defined as pretax income or loss from continuing
operations) are inadequate to cover (exceed) fixed charges and fixed charges
plus preferred stock dividends by $27,806 and $47,054 and $10,531 and $35,312
for the six-month periods ended June 30, 1996 and 1997, respectively, and $7,066
and $19,469 and $(3,700) and $8,755 for the three-month periods ended June 30,
1996 and 1997, 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, 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 $105,263 and $91,539 for the six-month periods ended
June 30, 1996 and 1997, respectively, and $54,486 and $44,517 for the
three-month periods ended June 30, 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 $69,403 and
$58,209 and $76,557 and $56,227 for the six-month periods ended June 30, 1996
and 1997 respectively, and $43,336 and $35,017 and $48,217 and $35,762 for the
three-month periods ended June 30, 1996 and 1997, respectively.
Financing Arrangements
- ----------------------
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. On May 1, 1997, the Company
redeemed the $212,400 remaining principal amount of the 10 5/8% Senior Notes at
104% plus accrued and unpaid interest. The aggregate premium paid and the
write-off of related deferred financing costs are classified as an extraordinary
charge and are recorded at an aggregate value of $13,847 and $15,401 on the
accompanying statements of condensed consolidated operations for the three and
six-month periods ended June 30, 1997.
The write-off of the unamortized deferred financing costs of $7,572 related to
the Company's May 1996 bank refinancing has been reclassified as an
extraordinary charge on the accompanying statements of condensed consolidated
operations for the three and six-month periods ended June 30, 1996 to conform to
the 1997 presentation.
On April 21, 1997, the Company entered into a new 364-day credit facility with
The Bank of New York, Bankers Trust Company, The Bank of Nova Scotia and The
Chase Manhattan Bank as agents (the "New Credit Facility") which expires April
20, 1998. Under the terms of the New Credit Facility, the Company has
commitments of $150,000 which can be borrowed in the form of revolving loans.
The proceeds of all revolving loans under the New Credit Facility can be used
for general corporate and working capital purposes of the Company and its
subsidiaries, including, without limitation, the financing of permitted
acquisitions.
The amounts borrowed pursuant to the New Credit Facility bear interest at rates
per annum identical to those in the Bank Credit Facilities at the Company's
option as follows: (i) the higher of (a) the Federal Funds Effective Rate plus
1/2% and (b) the prime lending rate as in effect 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 Facility or (ii) the Eurodollar Rate plus an applicable margin
ranging from 1/2% to 1 1/2% as specified in the New Credit Facility.
Under the New Credit Facility, the Company has agreed to pay commitment fees
equal to 1/8 of 1% per annum on the daily average aggregate unutilized revolving
loan commitment.
The covenants in the New Credit Facility are identical to those in the Bank
Credit Facilities and, 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 fixed charge coverage ratio, interest coverage ratio and leverage
ratio are at certain levels as specified in the New Credit Facility.
As under the Bank Credit Facilities, borrowings under the New Credit Facility
are guaranteed by each of the domestic wholly-owned subsidiaries of the Company.
Such guarantees are full, unconditional and joint and several. 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.
In May 1997, the Company, through its Bank Credit Facilities, solicited
commitments of $150,000 under the Tranche B Revolving Loan Facility ("Tranche B
Facility"). The Company has the right to solicit additional commitments of up to
$100,000 under the Tranche B Facility. As of June 30, 1997, $150,000 was
outstanding under the Tranche B Facility.
The commitments under the Tranche B Facility 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 B Facility loan commitments are as follows:
Years Ending
December 31,
------------
1999 $ 15,000
2000 30,000
2001 30,000
2002 30,000
2003 30,000
2004 15,000
----------
$ 150,000
Recent Developments
- -------------------
In July 1997, the Company executed definitive agreements to sell the outstanding
capital stock of Krames Communications Incorporated and the net assets of New
Woman magazine. These sales are expected to close in August 1997. The Company
also expects to recover the carrying value of these net assets held for sale.
In July and August 1997, the Company completed two product-line acquisitions in
the specialty consumer magazines group for an aggregate purchase price of
approximately $30,100.
In July 1997, the Company entered into four, three-year and two, four-year
interest rate swap agreements, with an aggregate notional amount of $600,000.
Under these new swap agreements, which commence on January 1, 1998, the Company
receives a floating rate of interest based on three-month LIBOR, which resets
quarterly, and the Company pays a fixed rate of interest, each quarter, for the
terms of the respective agreements. The weighted average fixed rate of interest
under these agreements is 6.33%.
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 six months of 1997. Moderate paper price
increases occurred in July 1997 for most of the grades of paper used by the
Company. In the first six months 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.
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 the assumptions may not materialize and unanticipated events may occur which
can affect the Company's results.
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders was held on May 15, 1997.
(b) At the meeting, incumbent directors William F. Reilly, Henry R.
Kravis, George R. Roberts, Michael T. Tokarz, Perry Golkin, Charles G. McCurdy,
Beverly C. Chell and Meyer Feldberg were re-elected.
(c) Set forth below is a description of the items that were voted upon at such
meeting and the number of votes cast for, against or withheld, plus abstentions
and broker non-votes, as to each such matter and each director.
(i) Election of Directors:
An election of eight directors was held and the shares so present were voted as
follows for the election of each of the following:
Number of Number of
Shares Voted For Shares Withheld
---------------- ---------------
William F. Reilly 121,861,143 605,606
Henry R. Kravis 121,862,218 604,531
George R. Roberts 119,152,419 3,314,330
Michael T. Tokarz 121,864,034 602,715
Perry Golkin 121,874,580 592,169
Charles G. McCurdy 121,864,866 601,883
Beverly C. Chell 121,861,666 605,083
Meyer Feldberg 121,874,235 572,514
(ii) The approval of Deloitte & Touche LLP as independent public accountants for
the Company for the fiscal year ending December 31, 1997 was ratified with
122,441,074 votes for, 14,442 votes against and 11,233 votes abstaining.
<PAGE>
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: August 13, 1997 /s/ William F. Reilly
-------------------- ----------------------------------------
(Signature)
Chairman, Chief Executive Officer and Director
(Principal Executive Officer)
Date: August 13, 1997 /s/ Curtis A. Thompson
-------------------- ----------------------------------------
(Signature)
Vice President and Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> JUN-30-1997
<CASH> 26,268
<SECURITIES> 0
<RECEIVABLES> 199,139
<ALLOWANCES> 26,542
<INVENTORY> 27,711
<CURRENT-ASSETS> 550,538
<PP&E> 179,599
<DEPRECIATION> 79,205
<TOTAL-ASSETS> 2,563,463
<CURRENT-LIABILITIES> 331,065
<BONDS> 1,713,057
447,776
0
<COMMON> 781,491
<OTHER-SE> (741,754)
<TOTAL-LIABILITY-AND-EQUITY> 2,563,463
<SALES> 721,053
<TOTAL-REVENUES> 721,053
<CGS> 159,663
<TOTAL-COSTS> 159,663
<OTHER-EXPENSES> 501,394
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,963
<INCOME-PRETAX> (10,531)
<INCOME-TAX> (1,685)
<INCOME-CONTINUING> (8,846)
<DISCONTINUED> 0
<EXTRAORDINARY> (15,401)
<CHANGES> 0
<NET-INCOME> (24,247)
<EPS-PRIMARY> (.38)
<EPS-DILUTED> 0
</TABLE>
