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, 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
October 31, 1997: 129,518,488
<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
September 30, 1997 2
Condensed Statements of Consolidated
Operations (Unaudited) for the nine months
ended September 30, 1996 and 1997 3
Condensed Statements of Consolidated
Operations (Unaudited) for the three months
ended September 30, 1996 and 1997 4
Condensed Statements of Consolidated
Cash Flows (Unaudited) for the nine months
ended September 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 12-22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
-------
Part II. Other Information: None
Signatures 24
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
------ ------
(dollars in thousands, except per share amounts)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 36,655 $ 21,693
Accounts receivable, net 233,603 211,258
Inventories, net 52,743 28,809
Net assets held for sale 18,684 65,008
Prepaid expenses and other 34,834 55,940
-------------------- ------------------
Total current assets 376,519 382,708
Property and equipment, net 122,823 99,062
Other intangible assets, net 781,316 649,371
Excess of purchase price over net assets
acquired, net 971,665 992,586
Deferred income tax asset, net 176,200 176,200
Other non-current assets 123,692 104,386
-------------------- ------------------
$ 2,552,215 $ 2,404,313
==================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 107,258 $ 67,365
Accrued interest payable 22,150 9,667
Accrued expenses and other 140,959 161,831
Deferred revenues 144,857 157,580
Current maturities of long-term debt 6,000 6,000
-------------------- ------------------
Total current liabilities 421,224 402,443
-------------------- ------------------
Long-term debt 1,565,686 1,525,223
-------------------- ------------------
Other non-current liabilities 35,062 29,618
-------------------- ------------------
Exchangeable preferred stock 442,729 569,527
-------------------- ------------------
Common stock subject to redemption ($.01 par value, 643,310
shares and 413,750 shares outstanding at December 31,
1996 and September 30, 1997, respectively) 5,957 4,234
-------------------- ------------------
Shareholders' equity (deficiency):
Common stock ($.01 par value, 128,349,045 shares and
129,002,389 shares outstanding at December 31, 1996 and
September 30, 1997, respectively) 1,283 1,290
Additional paid-in capital 772,642 780,629
Accumulated deficit (691,098) (900,256)
Common stock in treasury, at cost (569,100 shares at
September 30, 1997) - (6,971)
Cumulative foreign currency translation adjustments (1,270) (1,424)
-------------------- ------------------
Total shareholders' equity (deficiency) 81,557 (126,732)
-------------------- ------------------
$ 2,552,215 $ 2,404,313
==================== ==================
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1997
---- ----
(dollars in thousands, except per share amounts)
Sales, net:
<S> <C> <C>
Specialty Magazines $ 505,090 $ 553,409
Education 268,277 289,702
Information 221,684 246,886
------------ ------------
Total sales, net 995,051 1,089,997
Operating costs and expenses:
Cost of goods sold 250,806 247,298
Marketing and selling 183,937 204,514
Distribution, circulation and fulfillment 169,444 195,910
Editorial 74,804 90,300
Other general expenses 111,996 120,715
Corporate administrative expenses 15,336 19,256
Depreciation and amortization of prepublication
costs, property and equipment 27,182 26,910
Provision for loss on the sales of businesses, net and other - 138,640
Amortization of intangibles assets, excess of
purchase price over net assets acquired and other 112,762 98,784
------------ ------------
Operating income (loss) 48,784 (52,330)
Other income (expense):
Interest expense (91,313) (103,728)
Amortization of deferred financing costs (2,784) (2,323)
Other, net 5,612 176
------------ ------------
Loss before income tax benefit and extraordinary charge (39,701) (158,205)
Income tax benefit - carryback claim - 1,685
------------ ------------
Loss before extraordinary charge (39,701) (156,520)
Extraordinary charge - extinguishment of debt (7,572) (15,401)
------------ ------------
Net loss (47,273) (171,921)
Preferred stock dividends:
Non-cash (12,257) (4,451)
Cash (19,069) (32,786)
------------ ------------
Loss applicable to common shareholders $ (78,599) $ (209,158)
============ ============
Loss applicable to common shareholders per
common share:
Loss before extraordinary charge $ (0.55) $ (1.50)
Extraordinary charge (0.06) (0.12)
------------ ------------
Net loss $ (0.61) $ (1.62)
============ ============
Weighted average common shares outstanding 128,721,459 129,271,743
============ ============
</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
September 30,
1996 1997
---- ----
(dollars in thousands, except per share amounts)
Sales, net:
<S> <C> <C>
Specialty Magazines $ 171,443 $ 192,235
Education 95,983 90,140
Information 76,992 86,569
--------------- -----------------
Total sales, net 344,418 368,944
Operating costs and expenses:
Cost of goods sold 84,345 87,635
Marketing and selling 61,794 65,796
Distribution, circulation and fulfillment 59,392 68,661
Editorial 27,715 30,623
Other general expenses 39,454 39,876
Corporate administrative expenses 5,485 6,546
Depreciation and amortization of prepublication
costs, property and equipment 10,529 8,686
Provision for loss on the sales of businesses, net and other - 138,640
Amortization of intangible assets, excess of
purchase price over net assets acquired and other 37,185 34,807
--------------- -----------------
Operating income (loss) 18,519 (112,326)
Other income (expense):
Interest expense (33,716) (34,765)
Amortization of deferred financing costs (917) (741)
Other, net 4,219 158
--------------- -----------------
Net loss (11,895) (147,674)
Preferred stock dividends:
Non-cash (4,203) -
Cash (7,875) (12,456)
--------------- -----------------
Loss applicable to common shareholders $ (23,973) $ (160,130)
=============== =================
Loss per common share $ (0.19) $ (1.24)
=============== =================
Weighted average common shares outstanding 128,874,002 129,411,579
=============== =================
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1997
---- ----
(dollars in thousands)
Operating activities:
<S> <C> <C>
Net loss $ (47,273) $ (171,921)
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 142,728 128,017
Provision for loss on the sales of businesses, net and other - 138,640
Accretion of discount on acquisition obligation,
distribution advance and other 3,631 4,957
Other, net (5,258) (21)
Changes in operating assets and liabilities:
(Increase) Decrease in:
Accounts receivable, net (28,170) (9,798)
Inventories, net 20,971 4,474
Prepaid expenses and other (6,423) (14,619)
Increase (Decrease) in:
Accounts payable (17,477) (26,956)
Accrued interest payable 15,645 (12,483)
Accrued expenses and other (24,744) (14,232)
Deferred revenues 3,393 8,672
Other non-current liabilities (759) (4,014)
--------------- ---------------
Net cash provided by operating activities 63,836 46,117
--------------- ---------------
Investing activities:
Additions to property, equipment and other, net (18,103) (22,305)
Proceeds from sales of businesses and other 5,788 111,972
Payments for businesses acquired (671,023) (182,570)
--------------- ---------------
Net cash used in investing activities (683,338) (92,903)
--------------- ---------------
Financing activities:
Borrowings under credit agreements 1,685,910 739,031
Repayments of borrowings under credit agreements (1,218,800) (547,200)
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 2,951 6,362
Proceeds from the issuance of Series C (exchanged into Series D)
Preferred Stock, net of issuance costs 193,720 -
Proceeds from the issuance of Series E Preferred Stock, net of
issuance costs - 121,450
Redemptions of 10 5/8% Senior Notes - (242,787)
Purchases of common stock for the treasury - (6,971)
Dividends paid to preferred shareholders (19,069) (32,786)
Deferred financing costs paid (14,926) (1,821)
Other (740) (454)
--------------- ---------------
Net cash provided by financing activities 624,780 31,824
--------------- ---------------
Increase (decrease) in cash and cash equivalents 5,278 (14,962)
Cash and cash equivalents, beginning of period 27,226 36,655
--------------- ---------------
Cash and cash equivalents, end of period $ 32,504 $ 21,693
=============== ===============
Supplemental information:
Cash interest paid $ 73,420 $ 113,215
=============== ===============
</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 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:
specialty magazines, education and information. The specialty magazines segment
has in prior periods been referred to as the specialty media segment, but the
Company believes that the term specialty magazines is more reflective of the
focus of the segment.
In February 1997, the Financial Accounting Standards Board ("FASB") 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 calculating 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 FASB 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 FASB 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 nine-month period ended September 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 $182,570 (net of liabilities assumed of approximately $33,540) and includes
certain immaterial purchase price adjustments related to prior year
acquisitions. The excess purchase price over net assets acquired was
approximately $113,137.
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
September 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 nine-month periods ended
September 30, 1996 and 1997.
3. Net Assets Held for Sale and Divestitures
-----------------------------------------
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.
On May 30, 1997, the Company sold Katharine Gibbs pursuant to a stock purchase
agreement and received a portion of the purchase price. 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 nine-month periods ended
September 30, 1996 and through the date of divestiture for the nine-month period
ended September 30, 1997.
On March 11, 1997, the Company announced its intention to divest the following
four non-core business units: The Daily Racing Form, Newbridge Communications,
Inc. (excluding Films for the Humanities and Sciences), New Woman magazine and
Krames Communications Incorporated ("Krames"). Subsequently, the Company decided
to sell Stagebill and Intertec Mailing Services. These planned divestitures are
part of the Company's plan to focus on six key growth vehicles in markets that
have dynamic growth opportunities.
During the third quarter, the Company completed the sale of the outstanding
stock of Krames, certain net assets of New Woman magazine and the net assets of
Intertec Mailing Services. The operating results of these divestitures prior to
their sale were not material to the consolidated operations of the Company and
are included in the accompanying statements of condensed consolidated operations
for the three and nine-month periods ended September 30, 1996 and 1997.
The remaining planned divestitures, Newbridge Communications, Inc. (excluding
Films for the Humanities and Sciences), The Daily Racing Form and Stagebill are
expected to be completed and have been classified under the caption net assets
held for sale and are recorded at their aggregate carrying value of $65,008 on
the accompanying condensed consolidated balance sheet at September 30, 1997.
Katharine Gibbs, Newbridge Communications, Inc. (excluding Films for the
Humanities and Sciences), The Daily Racing Form, Stagebill, Krames, New Woman
magazine and Intertec Mailing Services are collectively referred to as the
Non-Core Businesses ("Non-Core Businesses"). The Company recorded a provision
aggregating $138,640 for the reduction of the carrying values of the Non-Core
Businesses to the estimated realizable value of the net assets of such
businesses. The operating results of the Non-Core Businesses are included in the
accompanying statements of condensed consolidated operations for the three and
nine-month periods ended September 30, 1996 and 1997. Total sales for the
Non-Core Businesses were $79,614 and $63,226 for the three-month periods ended
September 30, 1996 and 1997, respectively and $233,076 and $205,145 for the
nine-month periods ended September 30, 1996 and 1997, respectively. Excluding
the provision for the reduction of the carrying values, operating income (loss)
for the Non-Core Businesses was $4,424 and $6,264 for the three-month periods
ended September 30, 1996 and 1997, respectively and $(1,362) and $15,093 for the
nine-month periods ended September 30, 1996 and 1997 respectively.
4. Private Offering
----------------
On September 26, 1997, the Company completed a private offering of 1,250,000
shares of $9.20 Series E Exchangeable Preferred Stock ("Series E Preferred
Stock") at $100 per share, all of which are issued and outstanding at September
30, 1997. Annual dividends of $9.20 per share on the Series E Preferred Stock
are cumulative and payable quarterly, in cash, commencing February 1, 1998.
Prior to November 1, 2002, the Series E Preferred Stock may be redeemed in whole
or in part, at the option of the Company, at a redemption price equal to the sum
of the aggregate liquidation preference plus accrued and unpaid dividends to the
redemption date and the applicable make-whole premium as defined in the private
offering prospectus. On or after November 1, 2002, the Series E 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 E Preferred Stock on November 1, 2009 at a redemption price
equal to the liquidation preference of $100 per share, plus accrued and unpaid
dividends. The Series E Preferred Stock is exchangeable, in whole but not in
part, at the option of the Company, on any scheduled dividend payment date into
9.20% Class E Subordinated Debentures. The Series E Preferred Stock is recorded
on the accompanying condensed consolidated balance sheet at the aggregate
redemption value (net of unamortized issuance costs) of $121,450 at September
30, 1997. Net proceeds from this private offering were used to pay down
borrowings under the bank credit facilities. (See Note 10 - Subsequent Events).
5. Inventories
-----------
Inventories consist of the following:
December 31, September 30,
1996 1997
---- ----
Finished Goods $ 41,497 $ 13,293
Work in Process 2,111 3,053
Raw Materials 17,838 15,230
--------- ----------
61,446 31,576
Less allowance for obsolescence 8,703 2,767
--------- ----------
$ 52,743 $ 28,809
========= ==========
6. Long-term debt
--------------
Long-term debt consists of the following:
December 31, September 30,
1996 1997
---- ----
Borrowings under bank credit facilities $ 884,992 $ 1,076,833
8 1/2% Senior Notes due 2006, net 298,811 298,879
10 1/4% Senior Notes due 2004 100,000 100,000
10 5/8% Senior Notes due 2002 233,250 -
----------- ------------
Total 1,517,053 1,475,712
Acquisition obligation payable 54,633 55,511
----------- ------------
1,571,686 1,531,223
Less current portion 6,000 6,000
----------- -----------
$ 1,565,686 $ 1,525,223
=========== ===========
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 $15,401 on the accompanying
statement of condensed consolidated operations for the nine-month period ended
September 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 statement of condensed consolidated
operations for the nine-month period ended September 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 September 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
==========
In July 1997, the Company repaid the $80,000 outstanding borrowings under the
New Credit Facility and subsequently borrowed an equivalent amount under the
bank credit facilities.
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%.
7. Exchangeable Preferred Stock
----------------------------
Exchangeable Preferred Stock consists of the following:
December 31, September 30,
1996 1997
---- ----
$2.875 Senior Exchangeable Preferred Stock $ 98,266 $ 98,471
$11.625 Series B Exchangeable Preferred Stock 150,513 155,202
$10.00 Series D Exchangeable Preferred Stock 193,950 194,404
$9.20 Series E Exchangeable Preferred Stock - 121,450
--------- ----------
$ 442,729 $ 569,527
========= ==========
$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
September 30, 1997. The liquidation and redemption value at December 31, 1996
and September 30, 1997 was $100,000. In September 1997, the Company gave notice
to call all outstanding shares of the Senior Preferred Stock effective November
3, 1997 (See Note 10 - Subsequent Events).
$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 September 30, 1997, respectively. The
liquidation and redemption value at December 31, 1996 and September 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.
$10.00 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
September 30, 1997. The liquidation and redemption value at December 31, 1996
and September 30, 1997 was $200,000.
$9.20 Series E Exchangeable Preferred Stock
The Company authorized 1,250,000 shares of $.01 par value Series E Preferred
Stock, all of which was issued and outstanding at September 30, 1997. The
liquidation and redemption value at September 30, 1997 was $125,000. (See Note 4
- - Private Offering).
8. Common Stock
------------
On September 9, 1997, the Board of Directors authorized the Company to purchase
up to $15,000 of its outstanding common shares for cash from time to time on the
open market and through privately negotiated transactions (the "Repurchase
Program"). In September 1997, in accordance with the Repurchase Program, the
Company purchased 46,100 shares of its outstanding common stock which was
recorded at a cost (including commissions) of $549 and classified as common
stock in treasury on the condensed consolidated balance sheet at September 30,
1997.
On September 16, 1997, the Company purchased a block of 523,000 shares of the
Company's common stock at a price of $12 1/4 per share. The shares were
purchased in the open market through the New York Stock Exchange. The purchase
of these shares was not part of the Repurchase Program. The shares are
classified as common stock in treasury and are recorded at a cost (including
commissions) of $6,422 on the condensed consolidated balance sheet at September
30, 1997.
9. Loss per Common Share
---------------------
Loss per common share for the three and nine-month periods ended September 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.
10. Subsequent Events
-----------------
On October 30, 1997, the Company announced that on November 18, 1997 it is
changing its name to PRIMEDIA Inc. to better reflect the "prime" positioning the
Company has in six areas of specialized "media." On November 18, 1997 the
Company's New York Stock Exchange symbol will change from KCC to PRM.
On November 3, 1997 the Company redeemed all 4,000,000 outstanding shares of
$2.875 Senior Exchangeable Preferred Stock at a price of $26.45 per share, plus
accrued and unpaid dividends, aggregating $105,864.
<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." On October 30, 1997, the
Company announced that on November 18, 1997 it is changing its name to PRIMEDIA
Inc. to better reflect the "prime" positioning the Company has in six areas of
specialized "media."
The following discussion and analysis of the Company'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 magazines
(specialty consumer and technical and trade magazines), education (classroom and
workplace learning) and information (consumer and business). The specialty
magazines segment has in prior periods been referred to as the specialty media
segment, but the Company believes the new name is more reflective of the focus
of the segment. Most of the Company's products are premier brands with
leadership positions in the specialty niche markets in which such products
compete.
Management believes a meaningful comparison of the results of operations for
1996 and 1997 is obtained by using this segment information. This quarter, the
Company begins presenting results from "continuing businesses" which exclude the
results of the Non-Core Businesses, ("Continuing Businesses"). The Non-Core
Businesses include Krames, Katharine Gibbs, New Woman and Intertec Mailing
Services which have been divested; Newbridge Communications, Inc. (excluding
Films for the Humanities and Sciences), for which there is an agreement in
principle for sale, and The Daily Racing Form and Stagebill which are being held
for sale. Management believes that this presentation is the most useful way to
analyze the historical trends of the businesses.
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,
1996 1997 1996 1997
---- ---- ---- ----
Sales, net from:
<S> <C> <C> <C> <C>
Continuing Businesses:
Specialty Magazines $ 468,177 $ 519,512 $ 158,891 $ 180,665
Education 121,097 165,769 47,142 54,593
Information 172,701 199,571 58,771 70,460
----------- ----------- ----------- -----------
Subtotal 761,975 884,852 264,804 305,718
Non-Core Businesses 233,076 205,145 79,614 63,226
----------- ----------- ----------- -----------
Total $ 995,051 $ 1,089,997 $ 344,418 $ 368,944
=========== =========== =========== ===========
Operating income (loss) from:
Continuing Businesses:
Specialty Magazines $ 46,845 $ 70,393 $ 20,009 $ 23,098
Education 2,079 3,287 (7,858) (3,280)
Information 17,127 16,637 7,634 6,878
Corporate (15,905) (19,100) (5,690) (6,646)
----------- ---------- ----------- -----------
Subtotal 50,146 71,217 14,095 20,050
Non-Core Businesses (1,362) (123,547) 4,424 (132,376)
----------- ---------- ----------- -----------
Total 48,784 (52,330) 18,519 (112,326)
Other income (expense):
Interest expense (91,313) (103,728) (33,716) (34,765)
Amortization of deferred financing
costs (2,784) (2,323) (917) (741)
Other, net 5,612 176 4,219 158
----------- ---------- ----------- -----------
Loss before income tax benefit
and extraordinary charge (39,701) (158,205) (11,895) (147,674)
Income tax benefit - carryback claim - 1,685 - -
----------- ---------- ----------- -----------
Loss before extraordinary charge (39,701) (156,520) (11,895) (147,674)
Extraordinary charge - extinguishment
of debt (7,572) (15,401) - -
----------- ---------- ----------- -----------
Net loss $ (47,273) $ (171,921) $ (11,895) $ (147,674)
=========== ========== =========== ===========
</TABLE>
<PAGE>
RESULTS OF OPERATIONS (dollars in thousands, except per share amounts)
Nine months Ended September 30, 1997 Compared to Nine Months ended September 30,
1996:
Consolidated Results:
Sales from Continuing Businesses increased 16.1% to $884,852 in the 1997 period
over 1996 sales of $761,975. Sales increased in all segments, with the greatest
percentage increase coming from the education segment due to the 1996
acquisition of Westcott, which added $29,396. Consolidated sales as reported,
including the Non-Core Businesses, increased by 9.5% to $1,089,997 in the 1997
period over 1996 reflecting the impact of the divestitures prior to the end of
the 1997 period.
Operating income from Continuing Businesses increased by 42.0% to $71,217 in the
1997 period over 1996 due to operating income increases in the specialty
magazines and education segments, with the larger increase coming from the
specialty magazines segment. In 1997, the Company recorded a provision for loss
on the sales of businesses of $138,640, primarily attributable to The Daily
Racing Form. Consolidated operating income, including the Non-Core Businesses,
before this provision in the 1997 period was $86,310, up 76.9% from the year ago
period. This increase was driven by an increase in sales, the impact of
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 nine months of 1997
represented approximately 9% of the Company's total operating costs and
expenses, were approximately 10% lower in the first nine months of 1997 versus
the same period in 1996. Paper prices have been relatively stable in recent
months. Consolidated operating loss as reported, including the Non-Core
Businesses and after deducting the provision for the loss on the sales of
businesses, was $52,330 in the 1997 period as compared to operating income of
$48,784 in 1996.
Interest expense increased by $12,415, or 13.6% in the 1997 period over 1996
primarily due to the increased level of borrowings associated with acquisitions.
The increase in the level of borrowings has slowed due to the Company's focus on
smaller acquisitions.
The consolidated loss before income tax benefit and extraordinary charge
increased by $118,504 to $158,205 in the first nine months of 1997 versus 1996
due primarily to the provision for loss on the sales of businesses, offset by an
increase in operating income before the provision. 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 related
deferred financing costs.
Specialty Magazines:
Sales from Continuing Businesses increased 11.0% to $519,512 from $468,177 in
1996 due largely to internal growth. Growth was led by Seventeen, which achieved
newsstand sales of over one million copies in August, Soap Opera Digest, which
became a weekly publication during the period and strong advertising and
circulation growth at many of the Company's magazines. The sales increase was
also impacted by advertising revenue growth, particularly in technical and trade
magazines and various acquisitions. Excluded from Continuing Businesses in both
periods are New Woman, Stagebill and Intertec Mailing Services. Operating income
from Continuing Businesses increased 50.3% to $70,393 from $46,845 in 1996 due
to the sales increases as well as the decline in paper prices in 1997.
Education:
Sales from Continuing Businesses increased 36.9% to $165,769 from $121,097 in
1996. The increase in sales reflects the advertising growth at Channel One, and
acquisitions, particularly Westcott, which the company acquired in May 1996.
Excluded from Continuing Businesses in both periods are Krames, Katharine Gibbs
and Newbridge Communications, Inc. (excluding Films for the Humanities and
Sciences). Operating income from Continuing Businesses increased 58.1% to $3,287
from $2,079 in 1996 due largely to new advertising and acquisitions.
Information:
Sales from Continuing Businesses increased 15.6% to $199,571 from $172,701 in
1996. The increase is largely attributable to strong growth at the apartment
guides, including the start-up of new guides, acquisitions and strong
performances at Bacon's and the directories units. Excluded from Continuing
Businesses in both periods is The Daily Racing Form. Operating income from
Continuing Businesses decreased 2.9% to $16,637 from $17,127 in 1996 due largely
to an increase in amortization of intangible assets associated with
acquisitions.
Non-Core Businesses:
Sales from the Non-Core Businesses declined 12.0% to $205,145 from $233,076 in
1996. The majority of this decline resulted from the divestitures of Krames,
Katharine Gibbs and New Woman prior to the end of the 1997 period. The operating
loss from Non-Core Businesses increased to $123,547 from $1,362 in 1996 due to
the provision for loss on the sales of businesses of $138,640 in 1997, partially
offset by a reduction in the amortization of intangible assets and excess of
purchase price over net assets acquired associated with the Non-Core Businesses.
<PAGE>
Three months Ended September 30, 1997 Compared to Three Months ended September
30, 1996:
Consolidated Results:
Sales from Continuing Businesses increased 15.5% to $305,718 in the 1997 period
over 1996 sales of $264,804. Sales increased in all segments, with greater
growth coming from existing operations than from acquisitions. Consolidated
sales as reported, including the Non-Core Businesses, increased by 7.1% to
$368,944 in the 1997 period over 1996 reflecting the impact of the divestitures
prior to the end of the 1997 period.
Operating income from Continuing Businesses increased by 42.2% to $20,050 in the
1997 period over 1996 due to the operating income increases in the specialty
magazines and education segments with the larger increase coming from the
education segment. In the third quarter of 1997, the Company recorded a
provision for loss on sales of businesses of $138,640, primarily attributable to
The Daily Racing Form. Consolidated operating income, including the Non-Core
Businesses, before this provision in the 1997 period was $26,314, up 42.1% from
the year ago period. This increase was driven by an increase in sales, the
impact of 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 1997 quarter represented
approximately 9% of the Company's total operating costs and expenses, were
approximately 5% lower in the 1997 quarter versus the same period in 1996. Paper
prices have been relatively stable in recent months. Consolidated operating loss
as reported, including the Non-Core Businesses, and after deducting the
provision for loss on the sales of businesses was $112,326 in the 1997 period as
compared to operating income of $18,519 in 1996.
Interest expense increased by $1,049, or 3.1% in the 1997 period over 1996
primarily due to the increased level of borrowings associated with acquisitions.
The consolidated loss increased by $135,779 to $147,674 in the 1997 period
versus 1996 due primarily to the provision for loss on the sales of businesses.
Specialty Magazines:
Sales from Continuing Businesses increased 13.7% to $180,665 from $158,891 in
1996 due largely to internal growth. Growth was led by Seventeen which achieved
newsstand sales of over one million copies in August, Soap Opera Digest, which
continues to show revenue and circulation growth due to increased circulation
frequency, and strong advertising and circulation growth at Horticulture, Sport
Compact Car, Super Chevy, Modern Bride, Automobile and others. Acquisitions,
particularly in the automotive enthusiast field, added to sales during the
quarter. The Company is now the largest publisher of automotive enthusiast
magazines, publishing 40 titles including the top-selling automotive magazine on
the newsstand, Low Rider. Technical and trade magazines experienced advertising
revenue growth, particularly Electrical Power & Transmission, International
Construction and Global Telephony. Excluded from Continuing Businesses in both
periods are New Woman, Stagebill and Intertec Mailing Services. Operating income
from Continuing Businesses increased 15.4% to $23,098 from $20,009 in 1996 due
largely to the sales increases as well as to the decline in paper prices in
1997.
Education:
Sales from Continuing Businesses increased 15.8% to $54,593 from $47,142 in
1996. The increase in sales reflects the advertising growth at Channel One and
acquisitions such as Cover Concepts and QWIZ. Westcott's sales were modestly
lower than year ago levels reflecting the discontinuation of certain networks.
Excluded from Continuing Businesses in both periods are Krames, Katharine Gibbs
and Newbridge Communications, Inc. (excluding Films for the Humanities and
Sciences). Operating loss from Continuing Businesses decreased 58.3% to $3,280
from $7,858 due largely to new advertising and acquisitions.
Information:
Sales from Continuing Businesses increased 19.9% to $70,460 from $58,771 in
1996. The increase is largely attributable to strong growth at the apartment
guides, which continue to add new advertisers and directories and increase
distribution. Strong performances at Bacon's and the directories units and
certain acquisitions added to the sales increase. Excluded from Continuing
Businesses in both periods is The Daily Racing Form. Operating income from
Continuing Businesses decreased 9.9% to $6,878 from $7,634 in 1996 due largely
to an increase in amortization of intangible assets associated with
acquisitions.
Non-Core Businesses:
Sales from the Non-Core Businesses declined 20.6% to $63,226 from $79,614 in
1996. The majority of this decline resulted from the divestitures of Krames,
Katharine Gibbs and New Woman prior to the end of the 1997 period. The operating
loss from the Non-Core Businesses was $132,376 compared to operating income of
$4,424 in 1996 due to the provision for loss on the sales of businesses of
$138,640 in 1997, partially offset by a reduction in the amortization of
intangible assets and excess of purchase price over net assets acquired
associated with the Non-Core Businesses.
Liquidity and Capital Resources
Consolidated working capital (deficiency) including current maturities of
long-term debt was $(19,735) at September 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
$(76,491) at September 30, 1997 compared to $(69,317) at December 31, 1996.
Consolidated working capital (deficiency) 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>
Nine Months Ended Three Months Ended
September 30, September 30,
1996 1997 1996 1997
---- ---- ---- ----
EBITDA from:
<S> <C> <C> <C> <C>
Continuing Businesses:
Specialty Magazines $ 96,374 $ 113,854 $ 33,875 $ 39,141
Education 41,109 49,724 10,774 12,585
Information 44,834 47,986 15,711 18,189
Corporate (15,336) (19,256) (5,485) (6,546)
----------- ------------ ----------- -----------
Subtotal 166,981 192,308 54,875 63,369
Non-Core Businesses 21,747 19,696 11,358 6,438
----------- ------------ ----------- -----------
Total $ 188,728 $ 212,004 $ 66,233 $ 69,807
=========== ============ =========== ===========
Net Cash Provided by (Used in)
Operating Activities from:
Continuing Businesses:
Specialty Magazines $ 72,488 $ 103,596 $ 39,454 $ 39,675
Education 22,038 20,541 15,298 13,237
Information 40,891 43,133 10,347 15,126
Corporate (88,738) (131,296) (27,753) (52,251)
----------- ------------ ----------- -----------
Subtotal 46,679 35,974 37,346 15,787
Non-Core Businesses 17,157 10,143 15,375 4,928
----------- ------------ ----------- -----------
Total $ 63,836 $ 46,117 $ 52,721 $ 20,715
=========== ============ =========== ===========
Net Cash Provided by (Used in)
Investing Activities from:
Continuing Businesses:
Specialty Magazines $ (200,415) $ (63,654) $ (6,420) $ (19,015)
Education (432,470) (68,088) (11,271) (3,861)
Information (39,474) (47,168) (4,791) (3,988)
Corporate (877) (1,200) (425) (544)
----------- ------------ ----------- -----------
Subtotal (673,236) (180,110) (22,907) (27,408)
Non-Core Businesses (10,102) 87,207 (7,379) 85,976
----------- ------------ ----------- -----------
Total $ (683,338) $ (92,903) $ (30,286) $ 58,568
=========== ============ =========== ===========
Net Cash Provided by (Used in)
Financing Activities from:
Continuing Businesses:
Specialty Magazines $ (5,493) $ (1,876) $ (46) $ (292)
Education (1,528) (813) (230) (260)
Information (1,022) (256) 68 (174)
Corporate 634,878 35,238 (7,337) (83,255)
----------- ------------ ----------- -----------
Subtotal 626,835 32,293 (7,545) (83,981)
Non-Core Businesses (2,055) (469) (82) 123
----------- ------------ ----------- -----------
Total $ 624,780 $ 31,824 $ (7,627) $ (83,858)
=========== ============ =========== ===========
<PAGE>
Nine Months Ended Three Months Ended
September 30, September 30,
1996 1997 1996 1997
---- ---- ---- ----
Excess (Deficiency) of Earnings
to Fixed Charges from:
Continuing Businesses:
Specialty Magazines $ 48,852 $ 68,481 $ 22,405 $ 18,759
Education 1,034 2,057 (8,139) (3,723)
Information 14,732 12,076 8,050 9,229
Corporate (102,277) (116,583) (38,723) (39,380)
----------- ------------ ----------- -----------
Subtotal (37,659) (33,969) (16,407) (15,115)
Non-Core Businesses (2,042) (124,236) 4,512 (132,559)
----------- ------------ ----------- -----------
Total $ (39,701) $ (158,205) $ (11,895) $ (147,674)
=========== ============ =========== ===========
Excess (Deficiency) of Earnings to
Fixed Charges and Preferred Stock
Dividends from:
Continuing Businesses:
Specialty Magazines $ 48,852 $ 68,481 $ 22,405 $ 18,759
Education 1,034 2,057 (8,139) (3,723)
Information 14,732 12,076 8,050 9,229
Corporate (133,603) (153,820) (50,801) (51,836)
----------- ------------ ----------- -----------
Subtotal (68,985) (71,206) (28,485) (27,571)
Non-Core Businesses (2,042) (124,236) 4,512 (132,559)
----------- ------------ ----------- -----------
Total $ (71,027) $ (195,442) $ (23,973) $ (160,130)
=========== ============ =========== ===========
</TABLE>
EBITDA from Continuing Businesses increased 15.2% to $192,308 in the nine months
ended September 30, 1997 over 1996 mainly as a result of growth in existing
operations, new product additions and acquisitions of products and businesses.
EBITDA from Continuing Businesses in the specialty magazines segment increased
18.1% to $113,854 primarily due to strong organic growth in circulation and
advertising revenue as well as savings from paper price declines. EBITDA from
Continuing Businesses in the education segment increased 21.0% to $49,724
largely attributable to Westcott, which was acquired in the second quarter of
1996, other acquisitions and strong performance at the existing units. EBITDA
from Continuing Businesses in the information segment increased 7.0% to $47,986
primarily due to increases in advertising revenue at the apartment guides and
distribution revenues at the consumer directories. EBITDA from the Non-Core
Businesses declined 9.4% to $19,696 in 1997 primarily as a result of the
divestitures during the period. Net cash provided by operating activities during
the nine months ended September 30, 1997, after interest payments of $113,215,
was $46,117, a decrease of $17,719 over the same 1996 period, due primarily to
an increase in interest payments. Net capital expenditures were $22,305 during
the 1997 period which was an increase of $4,202 from the 1996 period. Payments
for acquisitions of $182,570 (including certain immaterial purchase price
adjustments relating to previous acquisitions) were made during the first nine
months of 1997.
EBITDA from Continuing Businesses increased by 15.5% to $63,369 in the three
months ended September 30, 1997 over 1996 mainly as a result of growth in
existing operations, new product additions and acquisitions of products and
businesses. EBITDA from Continuing Businesses in the specialty magazines segment
increased 15.6% to $39,141 primarily due to strong organic growth in circulation
and advertising revenues as well as savings from paper price declines. EBITDA
from Continuing Businesses in the education segment increased 16.8% to $12,585
largely attributable to continued strong performance at Channel One and certain
acquisitions. EBITDA from Continuing Businesses in the information segment
increased 15.8% to $18,189 mainly attributable to increases in advertising
revenue at the apartment guides, distribution revenues at the consumer
directories and new product introductions at various units. EBITDA from the
Non-Core Businesses declined 43.3% to $6,438 in the third quarter of 1997
primarily as a result of the divestitures as well as from declines at Newbridge
and The Daily Racing Form. Net cash provided by operating activities during the
three months ended September 30, 1997, after interest payments of $46,155, was
$20,715, a decrease of $32,006 over the same 1996 period, due primarily to an
increase in interest payments. Net capital expenditures were $7,702 during the
three months ended September 30, 1997 which was a decrease of $772 from the 1996
period. Payments for acquisitions of $40,279 (including certain immaterial
purchase price adjustments relating to previous acquisitions) were made during
the three months ended September 30, 1997.
The Company's earnings (defined as pretax income or loss from continuing
operations) are inadequate to cover fixed charges by $39,701 and $158,205 for
the nine-month periods ended September 30, 1996 and 1997, respectively, and
$11,895 and $147,674 for the three-month periods ended September 30, 1996 and
1997, respectively. The Company's earnings (defined as pretax income or loss
from continuing operations) are inadequate to cover fixed charges plus preferred
stock dividends by $71,027 and $195,442 for the nine-month periods ended
September 30, 1996 and 1997, respectively and $23,973 and $160,130 for the
three-month periods ended September 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, provision for loss on the sales of
businesses and non-cash dividends) of approximately $158,616 and $276,065 for
the nine-month periods ended September 30, 1996 and 1997, respectively, and
$53,353 and $184,526 for the three-month periods ended September 30, 1996 and
1997, respectively. Adjusted to eliminate these non-cash charges, earnings would
have exceeded fixed charges by approximately $106,658 and $113,409 for the
nine-month periods ended September 30, 1996 and 1997, respectively, and $37,255
and $36,852 for the three-month periods ended September 30, 1996 and 1997,
respectively. Adjusted to eliminate these non-cash charges, earnings would have
exceeded fixed charges plus preferred stock dividends by approximately $87,589
and $80,623 for the nine-month periods ended September 30, 1996 and 1997,
respectively, and $29,380 and $24,396 for the three-month periods ended
September 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 $15,401 on the accompanying
statement of condensed consolidated operations for the nine-month period ended
September 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 statement of condensed consolidated
operations for the nine-month period ended September 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 September 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
==========
In July 1997, the Company repaid the $80,000 outstanding borrowings under the
New Credit Facility and subsequently borrowed an equivalent amount under the
bank credit facilities.
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%.
Recent Developments
- -------------------
On October 30, 1997, the Company announced that on November 18, 1997 it is
changing its name to PRIMEDIA Inc. to better reflect the "prime" positioning the
Company has in six areas of specialized "media." On November 18, 1997 the
Company's New York Stock Exchange symbol will change from KCC to PRM.
On November 3, 1997 the Company redeemed all 4,000,000 outstanding shares of
$2.875 Senior Exchangeable Preferred Stock at a price of $26.45 per share, plus
accrued and unpaid dividends, aggregating $105,864.
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 nine months of 1997, paper costs represented approximately
9% 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
<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: November 14, 1997 /s/ William F. Reilly
----------------- --------------------------------------------
(Signature)
Chairman, Chief Executive Officer and Director
(Principal Executive Officer)
Date: November 14, 1997 /s/ Curtis A. Thompson
----------------- --------------------------------------------
(Signature)
Vice President and Controller
(Principal Accounting Officer)
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