<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 28, 1997
FILE NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
K-III COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 13-3647573
(State of incorporation) (I.R.S. Employer Identification Number)
</TABLE>
745 FIFTH AVENUE
NEW YORK, NEW YORK 10151
(212) 745-0100
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
------------------------------
ANN M. RIPOSANU
DEPUTY GENERAL COUNSEL
745 FIFTH AVENUE
NEW YORK, NEW YORK 10151
(212) 745-0100
COPIES TO:
<TABLE>
<S> <C>
GARY I. HOROWITZ STEVEN DELLA ROCCA
SIMPSON THACHER & BARTLETT LATHAM & WATKINS
425 LEXINGTON AVENUE 885 THIRD AVENUE
NEW YORK, NEW YORK 10017 NEW YORK, NEW YORK 10022-4802
(212) 455-2000 (212) 906-1200
</TABLE>
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS PROPOSED MAXIMUM
OF SECURITIES AMOUNT TO BE PROPOSED MAXIMUM AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) OFFERING PRICE(2) PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value
$0.01 per share........ 14,375,000 $11.75 $168,906,250 $58,244
</TABLE>
(1) Includes shares that the Underwriters have the option to purchase to cover
over-allotments, if any.
(2) Estimated solely for the purposes of calculating the amount of the
registration fee pursuant to Rule 457(c) of the Securities Act of 1933, on
the basis of the average of the high and low prices of the Common Stock on
the New York Stock Exchange Composite Tape on March 26, 1997.
THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement will contain two forms of prospectus: one to be
used in connection with a United States and Canadian offering (the "U.S.
Prospectus") and one to be used in connection with a concurrent international
offering (the "International Prospectus"). The U.S. Prospectus and the
International Prospectus will be identical in all respects except for the front
cover page, the section captioned "Underwriters" and the back cover page. The
form of U.S. Prospectus is included herein and is followed by the front cover
page, the section entitled "Underwriters" and the back cover page of the
International Prospectus. Each of the pages for the International Prospectus
included herein is labeled "Alternate International Page."
Copies of each of the U.S. Prospectus and the International Prospectus in
the forms in which they are to be used after effectiveness will be filed with
the Securities and Exchange Commission pursuant to Rule 424(b) under the
Securities Act of 1933, as amended.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there by any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
Subject to Completion
March 28, 1997
PROSPECTUS
[LOGO]
12,500,000 SHARES
K-III COMMUNICATIONS CORPORATION
COMMON STOCK
($.01 PAR VALUE)
All of the shares of common stock, par value $.01 per share (the "Common
Stock"), of K-III Communications Corporation ("K-III" or the "Company") offered
hereby are being issued and sold by the Company.
Of the shares being offered, 10,000,000 shares are being offered in the United
States and Canada (the "U.S. Offering") and 2,500,000 shares are being offered
in a concurrent international offering outside the United States and Canada (the
"International Offering" and, collectively with the U.S. Offering, the
"Offerings"), subject to transfers between the U.S. Underwriters and the
International Underwriters. The Price to Public and Underwriting Discount per
share will be identical for the U.S. Offering and the International Offering.
See "Underwriting." The closings of the U.S. Offering and International Offering
are conditioned upon each other.
The Common Stock is listed on the New York Stock Exchange (the "NYSE") under the
symbol "KCC." On March 27, 1997, the last reported sale price of the Common
Stock on the NYSE was $11.50 per share. See "Price Range of Common Stock and
Dividend Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT COMPANY(1)
Per Share................................ $ $ $
Total(2)................................. $ $ $
- --------------------------------------------------------------------------------------------
</TABLE>
(1) Before deducting offering expenses payable by the Company estimated to be
$ .
(2) The Company has granted the U.S. Underwriters and the International
Underwriters 30-day options to purchase up to 1,500,000 and 375,000
additional shares of Common Stock, respectively, at the Price to Public,
less the Underwriting Discount, solely to cover over-allotments, if any. If
the Underwriters exercise such options in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
The Common Stock is offered subject to receipt and acceptance by the
Underwriters, to prior sale and to the Underwriters' right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of the shares of Common Stock will be made at the
office of Salomon Brothers Inc, Seven World Trade Center, New York, New York, or
through the facilities of The Depository Trust Company, on or about ,
1997.
SALOMON BROTHERS INC MORGAN STANLEY & CO.
INCORPORATED
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH & CO.
The date of this Prospectus is , 1997.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THESE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE STABILIZING, PURCHASING COMMON STOCK TO COVER SYNDICATE
SHORT POSITIONS AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Securities and
Exchange Commission (the "Commission") are incorporated into this Prospectus by
reference:
(a) the Annual Report on Form 10-K for the fiscal year ended December 31,
1996;
(b) Current Report on Form 8-K dated June 14, 1996; and
(c) the description of the Company's Common Stock contained in the Company's
Registration Statement on Form 8-A dated October 10, 1995 pursuant to Section 12
of the Exchange Act.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")
subsequent to the date of this Prospectus and prior to the termination of the
Offerings made hereby shall be deemed to be incorporated by reference in this
Prospectus and to be a part of this Prospectus from the date of the filing of
such documents. Any statement contained in a document incorporated or deemed to
be incorporated by reference in this Prospectus shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained in this Prospectus or in any subsequently filed document which also is
or is deemed to be incorporated by reference in this Prospectus modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, on the written or oral
request of such person, a copy of any or all of the documents which are
incorporated herein by reference (other than exhibits not specifically
incorporated by reference into the text of such documents). Written or telephone
requests should be directed to K-III Communications Corporation at its principal
executive offices at 745 Fifth Avenue, New York, New York 10151, 212-745-0615,
Attention: Warren Bimblick, Vice President, Investor Relations.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS OR INCORPORATED BY REFERENCE HEREIN. UNLESS THE
CONTEXT OTHERWISE INDICATES, (I) THE TERM "COMPANY" OR "K-III" MEANS THE
COMBINED BUSINESS OPERATIONS OF K-III COMMUNICATIONS CORPORATION (AND ITS
PREDECESSORS) AND ITS SUBSIDIARIES AND (II) THE INFORMATION CONTAINED IN THIS
PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTIONS ARE NOT
EXERCISED. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH
UNDER THE CAPTION "RISK FACTORS."
THE COMPANY
GENERAL
The Company is the authoritative source for specialized information targeted
to specific high growth segments in the education, business and special interest
consumer markets. Most of K-III's products are premier brands with leadership
positions in the specialty niche markets in which such products compete:
education (E.G., CHANNEL ONE NEWS, WEEKLY READER and WESTCOTT); information
(E.G., APARTMENT GUIDE, WARD'S, THE WORLD ALMANAC and BACON'S); and specialty
media (E.G., SEVENTEEN, AMERICAN BABY, SOAP OPERA DIGEST, TRUCKIN' and SEW
NEWS).
The Company has achieved substantial growth through the development of its
franchises, combined with its operating expertise and a successful acquisition
strategy. From 1991 through 1996, net sales have grown at a compound annual rate
of 19%, to $1,374 million. Operating income in 1996 was $86 million compared to
a net operating loss of $37 million in 1991 (after deductions for amortization
and depreciation of $191 million in 1996 and $142 million in 1991).
GROWTH STRATEGY
K-III's strategy is to address growing needs in today's information economy.
Technology has created a flood of information. Consequently, management believes
the key role of the media is shifting from making information broadly available
across all audiences to sifting out and qualifying information for the benefit
of specific audiences. The Company's products are authoritative information
sources meeting customers' particular needs in the most beneficial
formats--print, electronic, and multimedia.
K-III provides authoritative information in six areas that show superior
growth. The Company has six related growth vehicles: classroom learning and
workplace learning in the education segment; consumer directories and business
directories in the information segment; and specialty consumer magazines and
technical and trade magazines in the specialty media segment. See "--Business
Segments." In each of these six areas, the Company offers authoritative
information products that have a branded presence and leading market positions.
The Company is taking advantage of fundamental growth trends in these six
markets. In classroom and workplace learning, K-III is building on rising
elementary and secondary school enrollments, increased spending on supplementary
educational materials and the rapid growth in outsourced workplace education.
The Company's consumer and business directories are capitalizing on the trend
towards targeted marketing and away from general interest sources such as
newspapers and the increased spending by businesses for information. The
Company's specialty media products take advantage of trends in the specialty
consumer market where advertising growth has outpaced general interest magazine,
broadcast television, radio and newspaper advertising growth since 1985.
The Company seeks to maximize shareholder returns by capitalizing on its
leading position in each of these growing markets. Each of K-III's six growth
vehicles has opportunities for expansion through both internal organic
development and product line acquisitions. Organic growth results from both
market expansion and product innovation in conventional and new media formats.
Growth through
3
<PAGE>
product line acquisition is made possible by the constant availability of
leading products for sale in the myriad of niche markets in K-III's six growth
areas. To support this aspect of growth, the Company has successfully developed
a selective and disciplined process of identifying, evaluating and integrating
acquired companies. The primary source of funds for these product line
acquisitions is the cash generated by the Company's operations, which by their
nature have high operating margins and low capital requirements. Capital
expenditures were $25 million and $30 million, or 2.4% and 2.2% of net
sales, in 1995 and 1996, respectively. Additionally, cash available for
reinvestment is amplified because the Company pays virtually no income taxes as
a result of having structured most of its acquisitions to create tax-deductible
amortization of intangible assets.
MANAGEMENT
The Company was founded in 1989 by William F. Reilly, Charles G. McCurdy and
Beverly C. Chell, former members of senior management of Macmillan, Inc.
("Macmillan"), together with Kohlberg Kravis Roberts & Co. L.P. ("KKR"). At
Macmillan, Mr. Reilly served as President and Chief Operating Officer, Mr.
McCurdy served as Vice President--Corporate Finance and Ms. Chell served as Vice
President-- General Counsel. At K-III, they have recruited and developed a cadre
of strong, seasoned operating managers. All of the senior operating managers and
several of the business unit heads worked at Macmillan.
K-III's Chairman and CEO, William F. Reilly, has 27 years of experience in
operations, finance and development. Charles G. McCurdy, President, and Beverly
C. Chell, Vice Chairman and General Counsel, have 14 and 27 years, respectively,
of finance, development and operations related experience. The three Group
Presidents, Jack L. Farnsworth, Harry A. McQuillen and George Philips, have an
average of 32 years of operating experience and have served an average of 20
years as CEOs of substantial operating companies.
The interests of the Company's management are aligned with those of other
shareholders. The Company's management, including the executives named above,
have invested in excess of $23 million in the Common Stock through March 17,
1997. Assuming the exercise of all stock options and giving effect to the
Offerings, management would have owned approximately 11%, in the aggregate, of
the Company's outstanding Common Stock as of such date.
BUSINESS SEGMENTS
The Company organizes its business into three operating segments: education,
information and specialty media. These segments accounted for approximately 27%,
23% and 50%, respectively, of K-III's net sales of $1,374 million for the year
ended December 31, 1996.
EDUCATION
The Company is a leading provider of supplementary educational materials and
programming in the United States, targeting both classroom and workplace
learning. Included in the education segment are educational television and video
programming, periodicals and supplementary educational materials for the
classroom, as well as training for professionals in various disciplines. K-III's
best-known brands in the classroom learning area are CHANNEL ONE NEWS and WEEKLY
READER, and in workplace learning, WESTCOTT COMMUNICATIONS. CHANNEL ONE NEWS,
the award-winning daily news broadcast, reaches over eight million students in
approximately 12,000 secondary schools in the United States, more than any other
electronically delivered educational product. WEEKLY READER is the best-known
and highest circulation student newspaper in the United States, with over 6.8
million subscriptions for elementary school students alone. WEEKLY READER and
its related products are sold in approximately 70% of all elementary schools and
59% of all secondary schools. In workplace learning, WESTCOTT COMMUNICATIONS is
a leading provider of high quality workplace educational programming. WESTCOTT
4
<PAGE>
COMMUNICATIONS has approximately 20,000 corporate and institutional subscribers
and provides workplace learning to approximately 2.5 million professionals in
the healthcare, automotive, financial services, government, public service and
corporate fields. Its production capabilities enable it to design, produce and
deliver content targeted to over 24 different disciplines, via satellite and
video cassette.
INFORMATION
The Company produces over 140 highly targeted consumer and business
directories, most of which hold dominant positions in their niche markets. The
Company's premier consumer directories include APARTMENT GUIDE, THE WORLD
ALMANAC and such specialty reference products as FACTS ON FILE NEWS SERVICE
which is used by public and institutional libraries. Its leading business
directories include BACON'S for public relations professionals and NELSON'S for
financial professionals. Over 70 consumer directories including guides and
specialized reference products are published by the Company. These products are
distributed nationally in retail outlets and are sold to public and
institutional libraries. The Company is the leading publisher of rental
apartment guides in the United States. The Company has expanded this original
business to include new homes and computer shopping guides, as well as web sites
for all three categories. The Company's business directories target the
financial services, public relations, transportation, musical performance,
credit and collection, construction and global trade industries. Most of the
business directories published by the Company have no competition, and where
competition does exist, in most cases the Company's publication is dominant.
Management believes that the comprehensiveness and quality of its data and the
specialized focus of its publications have prevented others from launching
competing publications or competing effectively.
SPECIALTY MEDIA
The specialty media segment consists of specialty consumer magazines and
technical and trade magazines. In 1996, 60% of its 63 specialty consumer
magazines and 56% of its 63 technical and trade magazines were number one, as
measured by advertising pages or circulation, in their respective markets. The
Company's specialty consumer magazines include SOAP OPERA DIGEST, SEVENTEEN,
AMERICAN BABY, over 20 automotive magazines and numerous bridal, sewing, crafts
and other titles. The Company's technical and trade titles provide vital
information to professionals in fields such as telecommunications (TELEPHONY and
CELLULAR BUSINESS), agriculture (SOYBEAN DIGEST), transportation (FLEET OWNER)
and real estate (NATIONAL REAL ESTATE INVESTOR).
RECENT DEVELOPMENTS
NON-CORE BUSINESSES BEING SOLD
As a part of its strategy to focus on areas of its business that have the
greatest potential for growth, the Company intends to divest certain businesses
that do not fit within its growth vehicles. Those businesses are: the DAILY
RACING FORM group, which includes a national daily newspaper covering
thoroughbred horseracing and PRO FOOTBALL WEEKLY; KRAMES COMMUNICATIONS, a
leading publisher of patient information sold to healthcare providers for
distribution to patients and other healthcare users; the KATHARINE GIBBS
SCHOOLS, a chain of seven business schools; NEWBRIDGE BOOK CLUBS, the largest
book club organization for professionals in the United States; and NEW WOMAN
magazine, a guide for personal relationships and careers (collectively, the
"Non-Core Businesses"). The proceeds from these sales will be used to repay
indebtedness. These businesses represented approximately 19% of 1996 net sales
of the Company.
5
<PAGE>
The following table presents unaudited combined operating results for the
year ended December 31, 1996 and total assets at December 31, 1996 for the
Non-Core Businesses. There can be no assurance that any or all will be divested.
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Sales, net.................................................................... $ 255,000
Operating income (loss)....................................................... (3,950)
Depreciation and amortization................................................. 27,800
Total assets (1).............................................................. 304,700
</TABLE>
- ------------------------
(1) At December 31, 1996, KATHARINE GIBBS SCHOOLS is reflected as an asset held
for sale in the Company's consolidated balance sheet included elsewhere in
this Prospectus.
REDEMPTION AND REPURCHASE OF 10 5/8% SENIOR NOTES DUE 2002
In March 1997, the Company called for redemption (the "Redemption") all of
its outstanding 10 5/8% Senior Notes due 2002 (the "10 5/8% Senior Notes"). On
May 1, 1997, the Company will redeem $212,400,000 principal amount of 10 5/8%
Senior Notes at a redemption price of 104% of the outstanding principal amount
thereof, plus accrued and unpaid interest to the date of redemption. In January
1997, the Company purchased, in aggregate, $20,850,000 principal amount of
10 5/8% Senior Notes at a weighted average price of 105%, plus accrued and
unpaid interest, from various brokers on the open market (the "Repurchase"). The
Repurchase was in addition to the purchases by the Company of $16,750,000
principal amount of 10 5/8% Senior Notes during November and December of 1996
which are reflected in the Company's consolidated balance sheet at December 31,
1996.
ACQUISITIONS
Through March 12, 1997, the Company completed three product line
acquisitions consisting of specialty consumer magazines and specialized
reference products. The aggregate purchase price was approximately $56 million.
6
<PAGE>
[LOGO]
<TABLE>
<CAPTION>
EDUCATION INFORMATION SPECIALTY MEDIA
<S> <C> <C>
CLASSROOM LEARNING CONSUMER DIRECTORIES SPECIALTY CONSUMER MAGAZINES
Channel One News 70 Directories in 26 States 63 Publications
Weekly Reader (e.g., Apartment Guide, (e.g., Soap Opera Digest,
Films for the Humanities and MicroTimes, Seventeen, American Baby,
Sciences new homes guides and Automobile, Modern Bride,
Newbridge Educational computer shopping guides) New York, Chicago, Truckin',
Publishing Specialized Reference Sew News and Dog World)
Products
(e.g., The World Almanac and
Facts
on File News Service)
WORKPLACE LEARNING BUSINESS DIRECTORS TECHNICAL AND TRADE MAGAZINES
Westcott Communications 70 Specialized Directories 63 Publications
EXEN (e.g., Bacon's, Nelson's, (e.g., Telephony, Cellular
IMN Ward's Business, Soybean Digest,
IDTN Automotive Reports, Aircraft Fleet Owner and National
21 other networks Bluebook and Pacific Shipper) Real Estate Investor)
</TABLE>
7
<PAGE>
THE OFFERINGS
<TABLE>
<S> <C>
U.S. Offering................................ 10,000,000 shares
International Offering....................... 2,500,000 shares
Total.................................... 12,500,000 shares (1)
Common Stock outstanding before the Offerings 129,150,691 shares (2)
Common Stock outstanding after the Offerings 141,650,691 shares (1)(2)
Use of Proceeds.............................. The net proceeds from the Offerings will be
used to redeem all of the outstanding $2.875
Senior Exchangeable Preferred Stock (the
"Senior Preferred Stock") of the Company and
to repay borrowings outstanding under the
Company's Credit Facilities (as hereinafter
defined). See "Use of Proceeds."
New York Stock Exchange Symbol............... KCC
</TABLE>
- ------------------------
(1) Excludes 1,875,000 shares of Common Stock subject to the Underwriters'
over-allotment options.
(2) Does not include approximately 13,042,685 shares of Common Stock issuable
upon exercise of outstanding employee stock options, 8,655,781 of which were
exercisable as of March 17, 1997 (which options, if exercised in full, would
generate aggregate proceeds to the Company of $46,723,745).
8
<PAGE>
SUMMARY SELECTED FINANCIAL DATA
The following tables present summary consolidated financial data derived
from the Company's audited consolidated financial statements for the years ended
December 31, 1994, 1995 and 1996. In addition, the following tables present
summary consolidated financial data relating to (i) the Company's unaudited pro
forma consolidated operating results for the year ended December 31, 1996 and
the Company's unaudited pro forma consolidated balance sheet at December 31,
1996 and (ii) the Company's unaudited pro forma consolidated operating results
for the year ended December 31, 1996 and the Company's unaudited pro forma
consolidated balance sheet at December 31, 1996 as further adjusted to give
effect to the Offerings and the application of the estimated net proceeds
therefrom as described under "Use of Proceeds." Such pro forma consolidated
financial data do not give effect to the planned divestitures of the Non-Core
Businesses.
The summary unaudited pro forma consolidated operating data for the year
ended December 31, 1996 gives effect to the following transactions and events as
if they had occurred on January 1, 1996: (i) the acquisitions of certain net
assets or capital stock as described in Note 4 of the notes to the Company's
consolidated financial statements for the years ended December 31, 1994, 1995
and 1996 (collectively referred to as the "Acquired Businesses"); and (ii) the
Redemption and the Repurchase of the 10 5/8% Senior Notes through borrowings
under the Credit Facilities. The adjustments to reflect the acquisition of the
Acquired Businesses and the Redemption and the Repurchase are hereinafter
referred to as the "Pro Forma Adjustments." The summary unaudited pro forma
consolidated balance sheet data at December 31, 1996 gives effect to the
Redemption and the Repurchase as if they occurred on December 31, 1996.
The summary unaudited pro forma consolidated financial data do not purport
to represent what the Company's consolidated results of operations or financial
condition would actually have been if the transactions that give rise to the Pro
Forma Adjustments had in fact occurred on the dates assumed in making such
adjustments and do not purport to project the consolidated results of operations
or financial condition of the Company for any future date or period. The
following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Company's historical consolidated financial statements and the notes thereto and
the Company's unaudited pro forma consolidated financial data and the notes
thereto included elsewhere in this Prospectus.
9
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
<S> <C> <C> <C> <C>
1994 1995 1996 1996
ACTUAL ACTUAL ACTUAL PRO FORMA
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING DATA:
Sales, net...................................... $ 964,648 $ 1,046,329 $ 1,374,449 $ 1,441,547
Depreciation and amortization................... 136,866 192,276 190,702 207,089
Other charges(1)................................ 15,025 50,114 -- --
Operating income (loss)(2)...................... 10,203 (26,275) 85,901 76,078
Interest expense................................ 78,351 105,837 125,506 132,674
Income tax benefit(3)........................... 42,100 59,600 53,300 53,300
Net income (loss)(2)(4)......................... (41,403) (75,435) 8,044 1,123
Preferred stock dividends....................... 25,959 28,978 43,526 43,526
Loss applicable to common shareholders(4)....... $ (67,362) $ (104,413) $ (35,482) $ (42,403)
Loss per common and common equivalent
share(4)(5)(6)................................ $ (.65) $ (.91) $ (.27) $ (.33)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Weighted average common and common equivalent
shares outstanding(5)(6)...................... 103,642,668 115,077,498 130,007,632 130,007,632
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
PRO FORMA AS ADJUSTED DATA:
Interest expense(7)............................. $ 129,173
Income tax benefit.............................. 53,300
Net income(7)................................... 4,624
Preferred stock dividends....................... 32,026
Loss applicable to common shareholders(7)(8).... (27,402)
Loss per common and common equivalent
share(7)(8)(9)................................ $ (.19)
--------------
--------------
Weighted average common and common equivalent
shares outstanding(9)......................... 142,507,632
--------------
--------------
OTHER DATA:
EBITDA(10)...................................... $ 162,094 $ 216,115 $ 276,603 $ 283,167
Capital expenditures............................ 16,118 25,179 29,661 32,270
Net cash provided by operating activities....... 64,890 64,062 149,287 148,741
Net cash used in investing activities........... (442,126) (318,712) (721,709) (724,318)
Net cash provided by financing activities....... 383,924 263,644 581,851 596,720
Deficiency of earnings to fixed
charges(11)(12)............................... (83,503) (135,035) (45,256) (52,177)
Deficiency of earnings to fixed charges and
preferred stock dividends(11)(12)............. (109,462) (164,013) (88,782) (95,703)
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
--------------------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED(13)
------------ ------------ ----------------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents........................................... $ 36,655 $ 36,655 $ 36,655
Working capital (deficiency) (14)................................... (44,705) (40,575) (40,575)
Intangible assets, net.............................................. 1,752,981 1,752,981 1,752,981
Total assets........................................................ 2,552,215 2,545,936 2,545,936
Long-term debt (15)................................................. 1,565,686 1,579,353 1,545,153
Exchangeable preferred stock........................................ 442,729 442,729 344,463
Common stock subject to redemption.................................. 5,957 5,957 5,957
Total shareholders' equity.......................................... 81,557 65,741 198,207
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
10
<PAGE>
(1) Represents net provision in 1994 and 1995 for loss on the sales of
businesses and provision in 1995 for restructuring and other costs.
(2) The adoption of a change in method of accounting for advertising costs (the
"Accounting Change") resulted in an increase in operating income or decrease
in operating loss and a decrease in net loss of approximately $9,800 ($.09
per share), $11,800 ($.10 per share) and approximately $2,000 ($.02 per
share) for the years ended December 31, 1994, 1995 and 1996, respectively.
(3) At December 31, 1994, 1995, and 1996, management of the Company reviewed
recent operating results for the years then ended and projected future
operating results for the years through December 31, 2002 and determined
that a portion of the net deferred income tax assets at December 31, 1994,
1995 and 1996 would likely be realized. Accordingly, the Company recorded an
income tax benefit of $42,100 in 1994, $59,600 in 1995 and $53,300 in 1996.
At December 31, 1996, the Company had net operating loss carryforwards for
Federal and state income tax purposes ("NOLs") of approximately $713,000
which will be available to reduce future taxable income. In addition to the
NOLs, management estimates that approximately $757,000 of unamortized
goodwill and other intangible assets will be available as deductions from
any future taxable income.
(4) Net income (loss), loss applicable to common shareholders and loss per
common and common equivalent share would have been $(29,529), $(55,488) and
$(.54) per share for 1994 and $16,692, $(26,834) and $(.21) per share for
1996, respectively, before the write-off of the unamortized deferred
financing costs. The write-off of unamortized deferred financing costs as a
result of the refinancings in 1994 and 1996 decreased net income or
increased net loss by $11,874 and $8,648 for the years ended December 31,
1994 and 1996, respectively. In 1995, there were no write-offs of
unamortized deferred financing costs.
(5) Loss per common and common equivalent share, as well as the weighted average
common and common equivalent shares outstanding, were computed as described
in Note 3 of the notes to the consolidated financial statements for the
years ended December 31, 1994, 1995 and 1996 included elsewhere in this
Prospectus.
(6) The pro forma loss per common and common equivalent share, as well as the
weighted average common and common equivalent shares outstanding, were
computed as described in Note 4 of the notes to the unaudited pro forma
consolidated financial data included elsewhere in this Prospectus.
(7) The pro forma as adjusted interest expense, net income, loss applicable to
common shareholders and loss per common and common equivalent share reflects
the reduction of interest expense as a result of the reduced level of
borrowings and a reduction in the interest margin applicable to the Credit
Facilities of 3/8 of 1%, for the applicable period, as a result of the
application of the net proceeds of the Offerings as described under "Use of
Proceeds." Amounts repaid under the Credit Facilities may be reborrowed for
general coporate purposes, including acquisitions permitted under the Credit
Facilities.
(8) The pro forma as adjusted loss applicable to common shareholders and loss
per common and common equivalent share reflect the elimination of the
$11,500 dividends on the Senior Preferred Stock and excludes the difference
between the redemption value and carrying value of the Senior Preferred
Stock equal to $7,808 which does not have a continuing impact on the
Company.
(9) The pro forma as adjusted loss per common and common equivalent share, as
well as the pro forma as adjusted weighted average common and common
equivalent shares outstanding, were computed as described in Note 4 of the
notes to the unaudited pro forma consolidated financial data after giving
effect to the issuance of 12,500,000 shares of Common Stock in the
Offerings.
(10) Earnings before interest, taxes, depreciation, amortization and provision
for one-time charges ("EBITDA") is not intended to represent cash flow from
operations and should not be considered as an alternative to net income
(loss) as an indicator of the Company's operating performance or to cash
flows as a measure of liquidity. The Company believes EBITDA is a standard
measure commonly reported and widely used by analysts, investors and other
interested parties in the media industry. Accordingly, this information has
been disclosed herein to permit a more complete comparative analysis of the
Company's operating performance relative to other companies in its industry.
(11) The deficiency of earnings to fixed charges consists of loss before income
taxes plus fixed charges. Loss before income taxes includes (i) depreciation
and amortization of prepublication costs, deferred financing costs, property
and equipment, intangible assets and excess of purchase price over net
assets acquired, (ii) interest expense, (iii) write-off of unamortized
deferred financing costs, (iv) net provision for loss on sales of
businesses, (v) restructuring and other costs, and (vi) that portion of
operating rental expense that represents interest. Prepublication costs
include editorial, artwork, composition and printing plate costs incurred
prior to publication date. Fixed charges consist of interest expense on
long-term debt and other non-current obligations (including current
maturities of long-term debt), amortization of deferred financing costs and
that portion of operating rental expense that represents interest.
(12) The Company's earnings (defined as pretax income or loss from continuing
operations) were inadequate to cover fixed charges and fixed charges plus
preferred stock dividends by $83,503 and $109,462 for 1994, $135,035 and
$164,013 for 1995 and $45,256 and $88,782 for 1996 and $52,177 and $95,703
on a pro forma basis for the year ended December 31, 1996. Such earnings
have been reduced by non-cash charges for depreciation and amortization of
property and equipment, prepublication costs, intangible assets, excess of
purchase price over net assets acquired and deferred financing costs, write-
offs of unamortized deferred financing costs, net provision for loss on the
sales of businesses, restructuring and other costs, non-cash interest
expense on an acquisition obligation, distribution advance and other current
liability, and non-cash preferred stock dividend requirements of
approximately $187,111, $259,014 and $218,125 for the years ended December
31, 1994, 1995 and 1996, respectively, and $224,442 on a pro forma basis for
the year ended December 31, 1996. Adjusted to eliminate these non-cash
charges, earnings would have exceeded fixed charges and fixed charges plus
cash preferred stock dividends by approximately $89,149 and $77,649 for
1994, $106,501 and $95,001 for 1995 and $156,287 and $129,343 for 1996, and
$155,683 and $128,739 on a pro forma basis for the year ended December 31,
1996.
(13) The pro forma as adjusted balance sheet data reflects the application of
the net proceeds of the Offerings as described under "Use of Proceeds."
(14) Includes current maturities of long-term debt.
(15) Excludes current maturities of long-term debt.
11
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD TAKE INTO ACCOUNT THE CONSIDERATIONS SET FORTH
BELOW AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS BEFORE
PURCHASING ANY OF THE SHARES OF COMMON STOCK OFFERED HEREBY.
SUBSTANTIAL INDEBTEDNESS
The Company has substantial indebtedness. At December 31, 1996, the Company
had a ratio of consolidated debt to total equity (including all preferred stock
and Common Stock subject to redemption) of 3.0 to 1. At December 31, 1996, on a
pro forma basis, as adjusted, the Company would have had a ratio of consolidated
debt to total equity (including all preferred stock and Common Stock subject to
redemption) of 2.8 to 1. See "Capitalization" and "Selected Financial
Information." The indebtedness of the Company requires a substantial portion of
the Company's cash flow to be dedicated to the payment of principal and interest
on indebtedness, thereby reducing funds available for capital expenditures and
future business opportunities.
At December 31, 1996, on a pro forma basis, as adjusted, borrowings under
the Credit Facilities were approximately $1,097.7 million. Such borrowings bear
interest at floating rates. Increases in interest rates on indebtedness under
the Credit Facilities would increase the Company's interest payment obligations
and could have an adverse effect on the Company.
The agreements governing the Company's indebtedness impose certain operating
and financial restrictions on the Company. Such restrictions prohibit or limit,
among other things, the ability of the Company to pay dividends on or redeem
capital stock (including the Common Stock), incur additional indebtedness,
create liens on its assets, sell assets or engage in mergers or consolidations
or make investments. These restrictions, in combination with the leveraged
nature of the Company, could limit the ability of the Company to effect future
acquisitions or financings or otherwise restrict corporate activities. Failure
to comply with the terms of such restrictions could result in the acceleration
of the indebtedness governed by such agreements. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
LOSS APPLICABLE TO COMMON SHAREHOLDERS OF THE COMPANY
The Company had a loss applicable to common shareholders for the years ended
December 31, 1994, 1995 and 1996 of $67.4 million, $104.4 million and $35.5
million, respectively. Included in the loss for such periods are the
amortization of intangible assets and excess of purchase price over net assets
acquired in the aggregate amounts of $120.7 million, $166.5 million and $152.5
million for 1994, 1995 and 1996, respectively.
There can be no assurance that the Company will have net income applicable
to common shareholders in the future.
CONTROL BY KKR
After giving effect to the Offerings (but without giving effect to the
exercise of any options), approximately 75% of the shares of Common Stock will
be held by certain investment partnerships, of which KKR Associates, a New York
limited partnership and an affiliate of KKR, is the general partner (the "Common
Stock Partnerships"). KKR Associates has sole voting and investment power with
respect to such shares. Consequently, KKR Associates and its general partners,
four of whom are also directors of K-III, control the Company and have the power
to elect all of its directors and approve any action requiring stockholder
approval, including adopting amendments to K-III's Certificate of Incorporation
and approving mergers or sales of all or substantially all of the Company's
assets.
12
<PAGE>
OTHER ANTI-TAKEOVER PROVISIONS
Control by KKR of approximately 75% of the shares of Common Stock after
giving effect to the Offerings, together with certain provisions of the
Company's Certificate of Incorporation and By-Laws as well as certain provisions
of the Delaware General Corporation Law (the "DGCL"), could increase the
difficulty of effecting a change of control of the Company. These provisions
include "blank check" preferred stock, stockholder nomination procedures and the
"interested stockholders" provisions of Section 203 of DGCL. See "Description of
Capital Stock."
The Company could issue preferred stock out of its authorized "blank check"
preferred stock to persons designated by the Company and affix certain rights,
preferences and privileges, including voting rights, on such shares without any
further vote or action by stockholders. Such voting rights, if granted, could
increase the difficulty of effecting a change of control of the Company. The
Company's ability to issue such preferred stock may adversely affect the
marketability and potential market price of the Common Stock of the Company. The
Company has no current plans to issue additional shares of preferred stock.
Section 203 of DGCL is intended to delay a person who acquires shares of
Common Stock without the approval of the Board of Directors or the stockholders
from engaging in any merger, asset sale or other transactions resulting in a
financial benefit to such person.
Substantially all of the Company's outstanding indebtedness has provisions
regarding a change of control. The Credit Facilities provide for an event of
default upon a change of control. The Company's public debt instruments require
the Company to offer to repurchase all of such debt at 101% of its aggregate
principal amount plus accrued and unpaid interest upon a change of control.
Provisions of the Company's outstanding indebtedness agreements which prohibit a
change of control or require that the Company repurchase such indebtedness upon
a change of control may also deter a change of control of the Company. A change
of control would likely trigger both an event of default under the Credit
Facilities and require the Company to make an offer to purchase its public
indebtedness, but because of the Company's substantial indebtedness, it is
unlikely that the Company would have sufficient resources to repay and
repurchase all such outstanding indebtedness.
These anti-takeover provisions could have the effect of depriving
stockholders of an opportunity to receive a premium over the prevailing market
price in the event of an attempted hostile takeover.
EFFECT OF INCREASES IN PAPER AND POSTAGE COSTS
The price of paper is a significant expense of the Company relating to its
print products and direct mail solicitations and began to rise around mid-year
1994 and continued to rise more dramatically in 1995 and early 1996. In
particular, the Company's average purchase price for paper increased 8.4% in
1996 over 1995. Paper price increases may have an adverse effect on the
Company's future results but the Company has in the past been able to implement
measures to offset such increases. 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. No assurances can be given that the Company can pass
such cost increases through to its customers. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Impact of Inflation."
SHARES ELIGIBLE FOR FUTURE SALE
The 109,265,645 shares of Common Stock held by the Common Stock Partnerships
and others (excluding 7,237,442 shares of Common Stock issuable upon exercise of
options) may not be resold in the absence of registration under the Securities
Act of 1933, as amended (the "Securities Act"), or pursuant to exemptions from
such registration. The Common Stock Partnerships have certain demand
13
<PAGE>
registration rights with respect to all of the 106,886,265 shares owned by them,
and management has been granted incidental registration rights, which in the
case of senior management may only be exercised without K-III's consent if the
Common Stock Partnerships register any of their shares or at least 40% of the
Common Stock is held by the public.
In addition to the shares sold in the Offerings, 5,805,243 shares issuable
upon the exercise of stock options (of which options covering 2,264,139 shares
will be exercisable immediately following the Offerings) and approximately
1,798,268 shares of Common Stock outstanding as of March 17, 1997 will be
eligible for sale by holders without restrictions under the Securities Act.
However, 1,425,290 of such shares issuable upon the exercise of stock options
(of which options covering 693,990 shares will be exercisable immediately
following the Offerings), and 251,630 of such shares outstanding, will be
subject to the sale restrictions described in the following paragraph.
For a period of 90 days after the date of this Prospectus, the Company, each
of the Common Stock Partnerships and each executive officer of the Company have
agreed not to offer, sell, contract to sell or otherwise dispose of any shares
of Common Stock or any security convertible into or exercisable or exchangeable
for Common Stock, file or cause to be filed a registration statement with the
Commission in respect of, or establish or increase a put equivalent position or
liquidate or decrease a call equivalent position within the meaning of Section
16 of the Exchange Act with respect to any shares of Common Stock of the Company
or publicly announce the intention to effect any such transaction, in each case,
without the prior written consent of Salomon Brothers Inc, except (a) the
Company may register the Common Stock and may sell the shares of Common Stock
offered in the Offerings, and (b) the Company may issue securities pursuant to
the Company's stock option or other benefit or incentive plans maintained for
its officers, directors or employees. See "Underwriting."
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the Common Stock prevailing from time to time. Sales of substantial
amounts of Common Stock (including shares issued upon the exercise of stock
options), or the perception that such sales could occur, could adversely affect
prevailing market prices for the Common Stock. If such sales reduce the market
price of the Common Stock, the Company's ability to raise additional capital in
the equity markets could be adversely affected.
FORWARD-LOOKING STATEMENTS
Certain information included in or incorporated by reference into this
Prospectus under this section and under the captions "Prospectus Summary--Growth
Strategy," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere include "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, and is subject to the safe harbor created by that Act. There are
several important factors that could cause actual results to differ materially
from those anticipated by the forward-looking statements contained in such
discussions. Additional information on the risk factors which could affect the
Company's financial results is included in this Prospectus and in other
documents incorporated by reference herein.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offerings are estimated to be $140
million ($156 million if the over-allotment options are exercised in full),
based on an offering price of $12.00 per share and after deducting the
underwriting discount and estimated expenses of the Offerings.
The Company intends to use the net proceeds from the Offerings to redeem all
of the outstanding Senior Preferred Stock of the Company, having an aggregate
liquidation value of $100 million, at a redemption price of 105.8% of the
aggregate liquidation value and intends to use the remainder of the net proceeds
from the Offerings to repay borrowings outstanding under the Company's credit
facilities with The Chase Manhattan Bank, The Bank of New York, Bankers Trust
Company and The Bank of Nova Scotia as agents (the "Credit Facilities"), which
amounts may be reborrowed for general corporate purposes including acquisitions.
Until the redemption of the Senior Preferred Stock, the net proceeds will be
used to repay borrowings under the Credit Facilities. Such borrowings under the
Credit Facilities were incurred for general corporate purposes and bore interest
at an average rate of 7.04% for the year ended December 31, 1996.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is listed on the New York Stock Exchange under the symbol
"KCC." As of March 17, 1997, there were 2,767 holders of K-III Common Stock. The
Company has not paid and has no present intention to pay dividends on its Common
Stock at any time in the foreseeable future. The decision whether to apply
legally available funds to the payment of dividends on the Common Stock will be
made by the Board of Directors of the Company from time to time in the exercise
of its prudent business judgment, taking into account, among other things, the
Company's results of operations and financial condition, any then existing or
proposed commitments for the use by the Company of available funds, and the
Company's obligations with respect to any then outstanding class or series of
its preferred stock. K-III is restricted by the terms of the Credit Facilities
and public debt instruments from paying cash dividends on its Common Stock, and
may in the future enter into loan or other agreements or issue debt securities
or preferred stock that restrict the payment of cash dividends on Common Stock.
See Note 15 to the audited consolidated financial statements included elsewhere
herein.
Trading of the Common Stock commenced November 1, 1995. The last reported
sales price of the Common Stock on the New York Stock Exchange Composite Tape as
of a recent date is set forth on the cover page of this Prospectus. High and low
stock prices for the periods set forth below were as follows:
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL 1995
Fourth Quarter (from November 1, 1995)...................................... $ 12 5/8 $ 10 1/2
FISCAL 1996
First Quarter............................................................... 12 5/8 11 1/4
Second Quarter.............................................................. 12 7/8 10 5/8
Third Quarter............................................................... 12 5/8 10
Fourth Quarter.............................................................. 11 5/8 8 1/2
FISCAL 1997
First Quarter (through March 27, 1997)...................................... 13 1/8 10 1/2
</TABLE>
15
<PAGE>
CAPITALIZATION
The following table sets forth, at December 31, 1996 (i) the actual cash and
cash equivalents and the consolidated capitalization of the Company, (ii) the
pro forma consolidated capitalization of the Company which gives effect to the
Redemption and the Repurchase and (iii) the pro forma consolidated
capitalization of the Company as adjusted to give effect to the Offerings and
the application of the estimated net proceeds therefrom as described under "Use
of Proceeds." The information below should be read in conjunction with the
Company's historical consolidated financial statements and the notes thereto and
the unaudited pro forma consolidated financial data and the notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
-------------------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------- ------------- -------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents........................................... $ 36,655 $ 36,655 $ 36,655
------------- ------------- -------------
------------- ------------- -------------
Long-term debt:
Borrowings under Credit Facilities................................ $ 884,992 $ 1,131,909 $ 1,097,709
10 5/8% Senior Notes due 2002..................................... 233,250 -- --
10 1/4% Senior Notes due 2004..................................... 100,000 100,000 100,000
8 1/2% Senior Notes due 2006...................................... 298,811 298,811 298,811
Acquisition Obligation Payable(1)................................. 54,633 54,633 54,633
------------- ------------- -------------
Total indebtedness.............................................. 1,571,686 1,585,353 1,551,153
Less current maturities....................................... (6,000) (6,000) (6,000)
------------- ------------- -------------
Total long-term debt............................................ 1,565,686 1,579,353 1,545,153
$2.875 Senior Exchangeable Preferred Stock.......................... 98,266 98,266 --
$11.625 Series B Exchangeable Preferred Stock....................... 150,513 150,513 150,513
$10.00 Series D Exchangeable Preferred Stock........................ 193,950 193,950 193,950
Common stock subject to redemption(2)............................... 5,957 5,957 5,957
Shareholders' equity:
Common stock and additional paid-in capital(3).................... 773,925 773,925 913,925
Accumulated deficit(4)............................................ (691,098) (706,914) (714,448)
Cumulative foreign currency translation adjustments............... (1,270) (1,270) (1,270)
------------- ------------- -------------
Total shareholders' equity.................................... 81,557 65,741 198,207
------------- ------------- -------------
Total capitalization................................................ $ 2,095,929 $ 2,093,780 $ 2,093,780
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
- ------------------------
(1) Represents the present value at December 31, 1996 of the principal and
interest obligations under notes payable issued in connection with an
acquisition.
(2) Represents Common Stock that employees have the right to resell to the
Company under certain circumstances including termination of employment in
connection with the sale of the business for which they work, death,
disability or retirement after age 65. The resale feature expires five years
after the effective purchase date of the Common Stock. Since inception of
the Company, none of the employees has exercised such resale feature and the
likelihood of significant resales is considered by management to be remote.
(3) Does not include 13,211,212 shares of Common Stock issuable upon exercise of
stock options, 8,707,528 of which were then exercisable.
(4) The accumulated deficit includes non-cash expenses related to the
accumulated amortization of intangible assets, the excess of the purchase
price over the net assets acquired and other, deferred financing costs, the
write-offs of the unamortized balance of deferred financing costs
(associated with all previous financings), net provision for loss on sales
of businesses and restructuring and other costs in the aggregate amount of
approximately $924,900 at December 31, 1996 net of a non-cash income tax
benefit aggregating $155,000 through December 31, 1996.
16
<PAGE>
SELECTED FINANCIAL INFORMATION
The selected consolidated financial information is derived from the audited
consolidated financial statements of the Company. The following information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the audited consolidated
financial statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
<CAPTION>
1992 1993 1994 1995 1996
----------- ----------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Sales, net........................... $ 778,224 $ 844,748 $ 964,648 $ 1,046,329 $ 1,374,449
Depreciation and amortization........ 171,581 143,267 136,866 192,276 190,702
Other charges(1)..................... -- 2,644 15,025 50,114 --
Operating income (loss)(2)........... (46,230) (7,669) 10,203 (26,275) 85,901
Interest expense..................... 76,719 74,336 78,351 105,837 125,506
Income tax benefit(3)................ 314 -- 42,100 59,600 53,300
Net income (loss)(2)(4).............. (145,342) (86,496) (41,403) (75,435) 8,044
Preferred stock dividends............ 16,530 22,290 25,959 28,978 43,526
Loss applicable to common
shareholders....................... (161,872) (108,786) (67,362) (104,413) (35,482)
Loss per common and common equivalent
share(5)........................... $ (1.77) $ (1.18) $ (.65) $ (.91) $ (.27)
----------- ----------- ------------- ------------- -------------
----------- ----------- ------------- ------------- -------------
Weighted average common and common
equivalent shares outstanding(5)... 91,317,610 92,392,189 103,642,668 115,077,498 130,007,632
----------- ----------- ------------- ------------- -------------
----------- ----------- ------------- ------------- -------------
OTHER DATA:
EBITDA(6)............................ $ 125,351 $ 138,242 $ 162,094 $ 216,115 $ 276,603
Capital expenditures................. 14,497 13,416 16,118 25,179 29,661
Net cash provided by operating
activities......................... 16,618 27,072 64,890 64,062 149,287
Net cash used in investing
activities......................... (79,725) (95,669) (442,126) (318,712) (721,709)
Net cash provided by financing
activities......................... 60,877 63,579 383,924 263,644 581,851
Deficiency of earnings to fixed
charges(7)(8)...................... (145,656) (86,496) (83,503) (135,035) (45,256)
Deficiency of earnings to fixed
charges and preferred stock
dividends(7)(8).................... (162,186) (108,786) (109,462) (164,013) (88,782)
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------
<S> <C> <C> <C> <C>
1992 1993 1994 1995
-------------- -------------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 16,562 $ 11,544 $ 18,232 $ 27,226
Working capital (deficiency)(9)................ 1,189 3,605 1,338 (56,560)
Intangible assets, gross....................... 1,276,123 1,343,482 1,656,590 1,996,564
Less accumulated amortization.................. 383,784 504,538 602,542 762,393
-------------- -------------- ---------------- ----------------
Intangible assets, net....................... 892,339 838,944 1,054,048 1,234,171
Total assets................................... 1,197,896 1,166,502 1,589,692 1,881,416
Long-term debt(10)............................. 704,802 661,297 1,034,689 1,134,916
Exchangeable preferred stock................... 97,171 202,453 216,229 231,606
Common stock subject to redemption............. 16,746 25,287 16,552 28,022
Shareholders' equity:
Convertible preferred stock.................. 78,797 -- -- --
Common stock................................. 853 947 1,053 1,259
Additional paid-in capital................... 421,926 488,541 572,940 748,194
Accumulated deficit.......................... (375,055) (483,841) (551,203) (655,616)
Cumulative foreign currency translation
adjustments................................ (222) (1,220) (1,324) (1,275)
-------------- -------------- ---------------- ----------------
Total shareholders' equity..................... $ 126,299 $ 4,427 $ 21,466 $ 92,562
-------------- -------------- ---------------- ----------------
-------------- -------------- ---------------- ----------------
<CAPTION>
<S> <C>
1996
----------------
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 36,655
Working capital (deficiency)(9)................ (44,705)
Intangible assets, gross....................... 2,649,805
Less accumulated amortization.................. 896,824
----------------
Intangible assets, net....................... 1,752,981
Total assets................................... 2,552,215
Long-term debt(10)............................. 1,565,686
Exchangeable preferred stock................... 442,729
Common stock subject to redemption............. 5,957
Shareholders' equity:
Convertible preferred stock.................. --
Common stock................................. 1,283
Additional paid-in capital................... 772,642
Accumulated deficit.......................... (691,098)
Cumulative foreign currency translation
adjustments................................ (1,270)
----------------
Total shareholders' equity..................... $ 81,557
----------------
----------------
</TABLE>
(FOOTNOTES ON THE FOLLOWING PAGE)
17
<PAGE>
(1) Represents provision for write-down of real estate no longer utilized in
1993, net provision for loss on the sales of businesses in 1994 and 1995 and
provision for restructuring and other costs in 1995.
(2) The adoption of the Accounting Change resulted in an increase in operating
income or decrease in operating loss and a decrease in net loss of
approximately $9,800 ($.09 per share), $11,800 ($.10 per share) and
approximately $2,000 ($.02 per share) for the years ended December 31, 1994,
1995 and 1996, respectively.
(3) The income tax benefit in 1992 reflects the reversal of an overprovision for
Canadian income taxes. At December 31, 1994, 1995 and 1996, management of
the Company reviewed recent operating results for the years then ended and
projected future operating results for the years through December 31, 2002
and determined that a portion of the net deferred income tax assets at
December 31, 1994, 1995 and 1996 would likely be realized. Accordingly, the
Company recorded an income tax benefit of $42,100 in 1994, $59,600 in 1995
and $53,300 in 1996. At December 31, 1996, the Company had NOLs of
approximately $713,000 which will be available to reduce future taxable
income. In addition to the NOLs, management estimates that approximately
$757,000 of unamortized goodwill and other intangible assets will be
available as deductions from any future taxable income.
(4) The write-off of unamortized deferred financing costs as a result of the
refinancings in 1992, 1994 and 1996 decreased net income or increased net
loss by $19,814, $11,874 and $8,648 for the years ended December 31, 1992,
1994 and 1996, respectively. In 1993 and 1995, there were no write-offs of
unamortized deferred financing costs.
(5) Loss per common and common equivalent share, as well as the weighted average
common and common equivalent shares outstanding, were computed as described
in Note 3 of the notes to the audited consolidated financial statements
included elsewhere in this Prospectus.
(6) Earnings before interest, taxes, depreciation, amortization and provision
for one-time charges ("EBITDA") is not intended to represent cash flow from
operations and should not be considered as an alternative to net income
(loss) as an indicator of the Company's operating performance or to cash
flows as a measure of liquidity. The Company believes EBITDA is a standard
measure commonly reported and widely used by analysts, investors and other
interested parties in the media industry. Accordingly, this information has
been disclosed herein to permit a more complete comparative analysis of the
Company's operating performance relative to other companies in its industry.
(7) The deficiency of earnings to fixed charges consists of loss before income
taxes plus fixed charges. Loss before income taxes includes (i) depreciation
and amortization of prepublication costs, deferred financing costs, property
and equipment, intangible assets and excess of purchase price over net
assets acquired, (ii) interest expense, (iii) write-off of unamortized
deferred financing costs, (iv) provision for write-down of real estate no
longer utilized, (v) net provision for loss on sales of businesses, (vi)
restructuring and other costs, and (vii) that portion of operating rental
expense that represents interest. Prepublication costs include editorial,
artwork, composition and printing plate costs incurred prior to publication
date. Fixed charges consist of interest expense on long-term debt and other
non-current obligations (including current maturities of long-term debt),
amortization of deferred financing costs and that portion of operating
rental expense that represents interest.
(8) The Company's earnings (defined as pretax income or loss from continuing
operations) were inadequate to cover fixed charges and fixed charges plus
preferred stock dividends by $145,646 and $162,186 for 1992, $86,496 and
$108,786 for 1993, $83,503 and $109,462 for 1994, $135,035 and $164,013 for
1995, and $45,256 and $88,782 for 1996. Such earnings have been reduced by
non-cash charges for depreciation and amortization of property and
equipment, prepublication costs, intangible assets, excess of purchase price
over net assets acquired and deferred financing costs, write-offs of
unamortized deferred financing costs, provision for write-down of real
estate no longer utilized, net provision for loss on the sales of
businesses, restructuring and other costs, non-cash interest expense on an
acquisition obligation, distribution advance and other current liability,
and non-cash preferred stock dividend requirements of approximately
$210,802, $168,754, $187,111, $259,014 and $218,125 for the years ended
December 31, 1992, 1993, 1994, 1995 and 1996, respectively. Adjusted to
eliminate these non-cash charges, earnings would have exceeded fixed charges
and fixed charges plus cash preferred stock dividends by approximately
$56,761 and $48,616 for 1992, $71,468 and $59,968 for 1993, $89,149 and
$77,649 for 1994, $106,501 and $95,001 for 1995 and $156,287 and $129,343
for 1996.
(9) Includes current maturities of long-term debt.
(10) Excludes current maturities of long-term debt.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INTRODUCTION
The following discussion of the consolidated financial condition and related
results of operations of the Company should be read in conjunction with the
Company's historical consolidated financial statements and the related notes
thereto included elsewhere in this Prospectus.
SELECTED FINANCIAL DATA
The Company organizes its businesses into three segments: education,
information and specialty media. The specialty media segment has in prior years
been referred to as the media segment, but the Company believes the term
specialty media is more descriptive of the underlying businesses; the same
underlying businesses previously described as part of the media segment.
Additional selected financial data for the Company organized on the foregoing
basis are presented below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1994 1995 1996
----------- ------------- -------------
<S> <C> <C> <C>
Sales, net:
Education............................................................ $ 430,134 $ 330,414 $ 376,217
Information.......................................................... 192,732 263,542 313,891
Specialty Media...................................................... 341,782 452,373 684,341
----------- ------------- -------------
Total................................................................ $ 964,648 $ 1,046,329 $ 1,374,449
----------- ------------- -------------
----------- ------------- -------------
Depreciation, amortization and other charges(1):
Education............................................................ $ 46,426 $ 106,492 $ 63,252
Information.......................................................... 51,677 78,513 52,122
Specialty Media...................................................... 53,156 56,682 74,549
Corporate............................................................ 632 703 779
----------- ------------- -------------
Total................................................................ $ 151,891 $ 242,390 $ 190,702
----------- ------------- -------------
----------- ------------- -------------
Operating income (loss):
Education............................................................ $ 10,590 $ (32,024) $ 15,011
Information.......................................................... (2,307) (8,683) 33,473
Specialty Media...................................................... 15,877 32,169 59,693
Corporate............................................................ (13,957) (17,737) (22,276)
----------- ------------- -------------
Total................................................................ 10,203 (26,275) 85,901
Other income (expense):
Interest expense..................................................... (78,351) (105,837) (125,506)
Amortization of deferred financing and organizational costs.......... (3,080) (3,135) (3,662)
Write-off of unamortized deferred financing costs.................... (11,874) -- (8,648)
Other, net........................................................... (401) 212 6,659
----------- ------------- -------------
Loss before income tax benefit....................................... (83,503) (135,035) (45,256)
Income tax benefit................................................... 42,100 59,600 53,300
----------- ------------- -------------
Net income (loss).................................................... $ (41,403) $ (75,435) $ 8,044
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
- ------------------------
(1) Other charges includes net provision for loss on the sales of businesses and
provision for restructuring and other costs in 1994 and 1995.
19
<PAGE>
1996 COMPARED TO 1995
CONSOLIDATED RESULTS: Consolidated net sales increased by $328,120 or 31.4%
to $1,374,449 in 1996 over 1995 due to internal growth in all three segments as
well as the impact of acquisitions. Specifically, the acquisitions of Cahners
Consumer Magazines ("Cahners"), Westcott Communications, Inc. ("Westcott") and
the trade magazines of Argus Inc. ("Argus") added $199,144 to net sales growth.
Consolidated operating income was $85,901 in 1996 compared to an operating
loss of $26,275 in 1995. This improvement was driven by the increase in sales,
the impact of recent acquisitions and the effect of several one-time,
principally non-cash charges totalling $68,072 in the second quarter of 1995.
The increase occurred despite an 8.4% increase in the Company's average purchase
price for paper in 1996 and the effect of the required adoption of the
Accounting Change, which K-III adopted on July 1, 1994. The Accounting Change
had a $8,343 net positive impact on operating income in the first six months of
1995 versus 1996, predominantly within the education segment. In all periods
subsequent to June 30, 1996, the comparative effects of the adoption of the
Accounting Change are not material. The increase in corporate expenses resulted
predominantly from growth in corporate service requirements.
Interest expense increased by $19,669 or 18.6% in 1996 over 1995 primarily
due to the increased level of borrowings associated with acquisitions. During
1996, non-cash charges of $8,648 were recorded to write-off unamortized deferred
financing costs related to previous bank financings.
The Company reported an income tax benefit of $53,300 in 1996 compared to
$59,600 in 1995 associated with the partial recognition of NOLs and other
deferred income tax assets. At the end of each year, the Company reviews its
recent operating results and projected future operating results and for 1996
determined that there should be sufficient future taxable income and that a
portion of the net deferred income tax assets would likely be realized. Such
future taxable income is determined principally from management's projection of
future operating results in conjunction with scheduled reductions in intangible
asset amortization expense. The amount of the net deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced. Such reductions in
taxable income could occur as the result of many external factors including but
not limited to increased paper and postage costs and rates of interests. The
Company reported consolidated net income of $8,044 in 1996 versus a consolidated
net loss of $75,435 in 1995.
EDUCATION: The education segment's net sales increased by $45,803 or 13.9%
in 1996 over 1995. Increases at Weekly Reader Corporation ("Weekly Reader"),
Films for the Humanities and Sciences and Krames Communications Incorporated
("Krames"), and the addition of Westcott, which contributed $52,288 to the
increase in net sales, offset declines at Newbridge Communications, Inc.
("Newbridge"). At Newbridge, the book club business remained soft, but
performance indicators improved from year ago levels. The education segment's
operating profit increased to $15,011 in 1996 as compared to an operating loss
of $32,024 in 1995. This improvement is primarily due to the one-time charges in
the second quarter of 1995 for a provision for loss associated with the sale of
Newfield Publications, Inc. ("Newfield") and a restructuring charge at
Newbridge. Offsetting those charges, the Accounting Change had a $8,541 net
positive impact on operating profit in the first six months of 1995 versus 1996.
INFORMATION: The information segment's net sales increased by $50,349 or
19.1% in 1996 over 1995 primarily because of double-digit organic growth at the
apartment guides as well as the impact of recent acquisitions which contributed
$17,600 to the increase in net sales. The information segment's operating profit
increased to $33,473 in 1996 as compared to an operating loss of $8,683 in 1995
due to the increase in sales and a decrease in amortization expense. Goodwill
and intangible asset amortization expense decreased by $24,277 in 1996 over 1995
primarily as a result of an adjustment to the carrying values of goodwill and
other intangible assets totalling $17,958 in the second quarter of 1995.
20
<PAGE>
SPECIALTY MEDIA: The net sales increased by $231,968 or 51.3% in 1996 over
1995 due to growth of existing properties as well as the impact of the Cahners
and Argus acquisitions. The increases at the existing properties were primarily
due to the double-digit organic revenue growth of the specialty consumer
magazines led by SEVENTEEN, SOAP OPERA DIGEST, TRUCKIN' and CRAFTS. The full
year effect of Argus, acquired in December 1995, and Cahners, acquired in
January 1996, contributed $51,459 and $95,397 respectively to the 1996 sales
growth. Operating profit increased by $27,524 or 85.6% in 1996 over 1995. The
increase was the result of an increase in net sales partially offset by a 14.1%
increase in average paper prices for magazine operations in 1996 over 1995.
1995 COMPARED TO 1994
CONSOLIDATED RESULTS: Excluding the results of divested operations,
consolidated net sales increased by $249,420 or 31.3% to $1,046,329 in 1995 over
1994. This increase resulted from growth from existing operations, product
additions and acquisitions of businesses in all three segments. In 1995, the
Company divested Newfield in the education segment and PREMIERE magazine in the
specialty media segment. The Company's statement of consolidated operations
included the results of these businesses in 1994 but not in 1995. Consequently,
reported net sales including divested businesses increased only 8.5% from 1994
to 1995.
In the second quarter of 1995, the Company recorded several one-time,
principally non-cash, charges totalling $68,072. These included a net aggregate
provision for loss on the sales of Newfield and PREMIERE of $35,447;
restructuring and other charges of $14,667 related to a corporate restructuring
at Newbridge and the completion of manufacturing outsourcing at Daily Racing
Form, Inc., and adjustments to the carrying values of K-III Reference
Corporation ("K-III Reference"), goodwill and other intangible assets totalling
$17,958.
Partially offsetting these one-time charges was the impact of the Accounting
Change, which K-III adopted on July 1, 1994. The Accounting Change increased
operating income by approximately $2,000 more in 1995 than 1994. Including the
one-time charges and the effect of the Accounting Change, the consolidated
operating loss was $26,275 in 1995 as compared to consolidated operating profit
of $10,203 in 1994. The increase in the corporate expenses resulted
predominantly from growth in corporate service requirements.
Interest expense increased by $27,486 or 35.1% in 1995 over 1994 primarily
due to the increased level of borrowings associated with acquisitions as well as
higher short-term interest rates. As a result of the refinancing during the
second quarter of 1994, a charge of $11,874 was recorded representing the
write-off of unamortized deferred financing costs related to the previous bank
financing.
The Company recorded an income tax benefit of $59,600 in 1995 compared to
$42,100 in 1994, associated with the partial recognition of NOLs and other net
deferred income tax assets. The consolidated net loss increased by $34,032 in
1995 over 1994 mainly due to the one-time charges.
EDUCATION: Excluding the results of Newfield, the education segment's net
sales increased 17.5% over 1994, reflecting growth from product additions and
acquisitions of businesses, primarily Channel One Communications Corporation
("Channel One") which added $52,370 to the net sales growth in 1995. Reported
results, however, included Newfield's sales only in 1994, thus leading to a
reported decline in the education segment's net sales of 23.2%. The Accounting
Change favorably impacted the education segment's earnings by approximately
$4,000 more in 1995 than in 1994; however, it was offset by an increase in
goodwill, intangible and other asset amortization expenses of $15,469 and an
increase in certain one-time charges of $37,377. The education segment reported
an operating loss of $32,024 in 1995 compared to an operating profit of $10,590
in 1994.
21
<PAGE>
INFORMATION: The information segment's net sales increased by $70,810 or
36.7% in 1995 over 1994 primarily as a result of product additions at business
directories, the full year effect of the acquisition of Haas Publishing
Companies, Inc. ("Haas") and the subsequent addition of new markets for its
apartment guides. Product additions at K-III Directory Corporation included the
INTERNATIONAL TRADE GUIDE, the U.S. CUSTOM HOUSE GUIDE and the OFFICIAL EXPORT
GUIDE, all acquired in late 1994, as well as the Machinery Information Division
directories acquired in mid-1994. These product additions contributed
approximately $7,000 to the 1995 net sales growth. The Haas acquisition in
mid-1994 resulted in approximately $27,900 of the 1995 net sales growth.
Additional markets added to the Haas apartment guides in 1995 included
Washington, D.C., Baltimore, MD and Detroit, MI, which contributed approximately
$8,800 to the 1995 net sales growth. The addition of the BACON'S media relations
industry directories, clipping services and mailing services in mid-1995 added
approximately $17,900 to the 1995 net sales growth. Goodwill and intangible
asset amortization expense increased by $21,889 in 1995 over 1994 principally as
a result of the adjustments to goodwill and intangible asset values at K-III
Reference. This was the primary cause for an increase in the information
segment's operating loss of $6,376 in 1995 over 1994.
SPECIALTY MEDIA: The specialty media segment's sales increased by $110,591
or 32.4% in 1995 over 1994 due to a 32.0% increase in advertising revenue and a
31.4% increase in subscription revenue including the effect of the acquisitions
of PJS Publications, Inc., the Maclean Hunter division of Rogers Communications,
Inc. and McMullen & Yee Publishing, Inc. which contributed $40,665, $29,386 and
$21,357, respectively, to the increase in net sales, offset by the elimination
of the revenues of PREMIERE. Excluding the effects of acquisitions and
divestitures, technical and trade magazine advertising pages and rates rose 3.7%
and 5.0%, respectively, and specialty consumer magazine advertising pages and
rates rose 3.2% and 3.3%, respectively, in 1995 over 1994. Despite an average
24% increase in paper costs in addition to the Accounting Change impact which
was $2,000 less favorable in 1995 than in 1994 the specialty media segment's
operating profit increased by $16,292 in 1995 over 1994.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain information regarding the Company's
EBITDA and other net cash flow items:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
EBITDA(1):
Education............................................................. $ 57,016 $ 74,468 $ 78,263
Information........................................................... 49,370 69,830 85,595
Specialty Media....................................................... 69,033 88,851 134,242
Corporate............................................................. (13,325) (17,034) (21,497)
------------ ------------ ------------
Total................................................................. $ 162,094 $ 216,115 $ 276,603
------------ ------------ ------------
------------ ------------ ------------
Net cash provided by (used in) operating activities:
Education............................................................. $ 43,314 $ 35,963 $ 84,541
Information........................................................... 39,167 73,019 70,022
Specialty Media....................................................... 62,902 66,601 124,719
Corporate............................................................. (80,493) (111,521) (129,995)
------------ ------------ ------------
Total................................................................. $ 64,890 $ 64,062 $ 149,287
------------ ------------ ------------
------------ ------------ ------------
Net cash provided by (used in) investing activities:
Education............................................................. $ (291,501) $ 6,075 $ (439,907)
Information........................................................... (130,110) (83,632) (66,521)
Specialty Media....................................................... (20,181) (238,731) (213,546)
Corporate............................................................. (334) (2,424) (1,735)
------------ ------------ ------------
Total................................................................. $ (442,126) $ (318,712) $ (721,709)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net cash provided by (used in) financing activities:
Education............................................................. $ (2,795) $ (727) $ (3,205)
Information........................................................... 375 (2,590) (5,633)
Specialty Media....................................................... (8,081) (5,332) (10,372)
Corporate............................................................. 394,425 272,293 601,061
------------ ------------ ------------
Total................................................................. $ 383,924 $ 263,644 $ 581,851
------------ ------------ ------------
------------ ------------ ------------
Excess (Deficiency) of Earnings to Fixed Charges(2):
Education............................................................. $ 6,194 $ (33,615) $ 11,200
Information........................................................... (10,766) (13,449) 27,903
Specialty Media....................................................... 3,622 26,001 57,627
Corporate............................................................. (82,553) (113,972) (141,986)
------------ ------------ ------------
Total................................................................. $ (83,503) $ (135,035) $ (45,256)
------------ ------------ ------------
------------ ------------ ------------
Excess (Deficiency) of Earnings to Fixed Charges and Cash Preferred
Stock Dividends(2):
Education............................................................. $ 6,194 $ (33,615) $ 11,200
Information........................................................... (10,766) (13,449) 27,903
Specialty Media....................................................... 3,622 26,001 57,627
Corporate............................................................. (108,512) (142,950) (185,512)
------------ ------------ ------------
Total................................................................. $ (109,462) $ (164,013) $ (88,782)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
- ------------------------
(1) Earnings before interest, taxes, depreciation, amortization and provision
for one-time charges ("EBITDA") is not intended to represent cash flow from
operations and should not be considered as an alternative to net income
(loss) as an indicator of the Company's operating performance or to cash
flows as a measure of liquidity. The Company believes EBITDA is a standard
measure commonly reported and widely used by analysts, investors and other
interested parties in the media industry. Accordingly, this information has
been disclosed herein to permit a more complete comparative analysis of the
Company's operating performance relative to other companies in its industry.
(2) The deficiency of earnings to fixed charges consists of loss before income
taxes plus fixed charges. Loss before income taxes includes (i) depreciation
or amortization of prepublication costs, deferred financing costs, property
and equipment, intangible assets and excess of purchase price over net
assets acquired, (ii) interest expense, (iii) write-off of unamortized
deferred financing costs, (iv) net provision for loss on sales of
businesses, (v) restructuring and other costs, and (vi) that portion of
operating rental expense that represents interest. Prepublication costs
include editorial, artwork, composition and printing plate costs incurred
prior to publication date. Fixed charges consist of interest expense on
long-term debt and other non-current obligations (including current
maturities of long-term debt), amortization of deferred financing costs and
that portion of operating rental expense that represents interest.
Consolidated working capital (deficiency) including current maturities of
long-term debt was $(44,705) at December 31, 1996 compared to $(56,560) at
December 31, 1995. Consolidated working capital (deficiency) reflects certain
industry working capital practices and accounting principles, including the
expensing of editorial and product development costs when incurred and the
recording of unearned subscription income as a current liability. Advertising
costs are expensed when the promotional activities occur except for certain
direct-response advertising costs which are capitalized and amortized over the
estimated period of future benefit.
23
<PAGE>
1996 COMPARED TO 1995
Consolidated EBITDA increased by $60,488 or 28% in the year ended December
31, 1996 over 1995 mainly as a result of growth from existing operations, new
product additions and acquisitions of businesses. The net cash provided by
operating activities during the year ended December 31, 1996, after interest
payments of $112,657, was $149,287, an increase of $85,225 over 1995 resulting
mainly from EBITDA growth. Capital expenditures, net of gross proceeds from
sales of assets, were $28,790 during 1996 as compared to $23,414 for 1995. These
expenditures included data processing equipment, televisions, videocassette
recorders, satellite dishes, furniture and leasehold improvements and were
financed with net cash provided from operations. Payments of $700,990 (including
certain immaterial purchase price adjustments relating to previous acquisitions)
were made during the year ended December 31, 1996 for the acquisitions described
in Note 4 to the Company's consolidated financial statements. Net cash used in
investing activities increased as a result of increased acquisition activities,
substantially all of which were financed with borrowings under the then existing
credit agreements and funds from operations.
The Company's earnings (defined as pretax income or loss from continuing
operations) were inadequate to cover fixed charges and fixed charges plus
preferred stock dividends by $45,256 and $88,782 and $135,035 and $164,013 for
1996 and 1995, respectively. Such earnings have been reduced by non-cash charges
(including depreciation, amortization and non-cash dividends) of approximately
$218,125 and $259,014 for the years ended December 31, 1996 and 1995,
respectively. Adjusted to eliminate these non-cash charges, earnings would have
exceeded fixed charges and fixed charges plus cash preferred stock dividends by
approximately $156,287 and $129,343 and $106,501 and $95,001 for the years ended
December 31, 1996 and 1995, respectively.
1995 COMPARED TO 1994
Consolidated EBITDA increased by $54,021 or 33.3% in the year ended December
31, 1995 over 1994 mainly as a result of growth from existing operations, new
product additions, acquisitions of businesses and the Accounting Change, which
K-III adopted on July 1, 1994. The net cash provided by operating activities
during the year ended December 31, 1995, after interest payments of $102,040,
was $64,062. Net cash provided by operating activities declined by $828 during
the year ended December 31, 1995 from 1994 due primarily to the EBITDA growth
offset by higher acquisition related interest payments and growth in inventories
and prepaid expenses. Capital expenditures, net of gross proceeds from sales of
assets, were $23,414 during 1995 as compared to $14,184 for 1994. These
expenditures included data processing equipment, televisions, videocassette
recorders, satellite dishes, furniture and leasehold improvements and were
financed with net cash provided by operations. Payments of $353,954 (including
certain immaterial purchase price adjustments relating to previous acquisitions)
were made during the year ended December 31, 1995 for the acquisitions described
in Note 4 to the Company's consolidated financial statements. Net cash used in
investing activities decreased as a result of the proceeds from the sale of
Newfield and PREMIERE and the lower cost of the acquisitions in 1995 as compared
to the acquisitions in 1994, all of which were financed with borrowings under
existing credit facilities.
NET OPERATING LOSS CARRYFORWARDS
At December 31, 1996, the Company had NOLs of approximately $713,000 which
will be available to reduce future taxable income. In addition, management
estimates that approximately $757,000 of unamortized goodwill and other
intangible assets will be available as deductions from any future taxable
income.
24
<PAGE>
FINANCING ARRANGEMENTS
On January 24, 1996, the Company completed a private offering of 2,000,000
shares of $10 Series C Exchangeable Preferred Stock ("Series C Preferred Stock")
at $100 per share. Annual dividends of $10 per share on the Series C Preferred
Stock were cumulative and payable quarterly, in cash, commencing May 1, 1996. On
August 21, 1996, the Company exchanged the Series C Preferred Stock for
2,000,000 shares of $10 Series D Exchangeable Preferred Stock ("Series D
Preferred Stock"). Dividend payment terms of the Series D Preferred Stock are
the same as the Series C Preferred Stock. The Series D Preferred Stock has been
registered under the Securities Act. On and after February 1, 2001, the Series D
Preferred Stock may be redeemed in whole or in part, at the option of the
Company, at specified redemption prices plus accrued and unpaid dividends. The
Company is required to redeem the Series D Preferred Stock on February 1, 2008
at a redemption price equal to the liquidation preference of $100 per share,
plus accrued and unpaid dividends. The Series D Preferred Stock is exchangeable
in whole, but not in part, at the option of the Company, on any scheduled
dividend payment date into 10% Class D Subordinated Exchange Debentures due 2008
("Class D Subordinated Debentures") provided that no shares of the Senior
Preferred Stock are outstanding on the date of exchange. Net proceeds from the
Series C Preferred Stock offering of approximately $193,000 were primarily used
to pay down revolving credit borrowings.
On January 24, 1996, K-III completed a private offering of $300,000 of
8 1/2% Senior Notes due 2006 ("Private 8 1/2% Notes"). The Private 8 1/2% Notes
were issued at 99.578% of the aggregate principal amount thereof with related
issuance costs of approximately $7,000. On August 21, 1996, the Company
exchanged its Private 8 1/2% Notes for a new series of $300,000 of 8 1/2% Senior
Notes due 2006 ("8 1/2% Notes"). The 8 1/2% Notes have been registered under the
Securities Act. The 8 1/2% Notes mature on February 1, 2006 and have no sinking
fund. Interest on the 8 1/2% Notes is payable semi-annually in February and
August at the annual rate of 8 1/2%. The 8 1/2% Notes may not be redeemed prior
to February 1, 2001 other than in connection with a change of control. Beginning
in 2001 and thereafter, the 8 1/2% Notes are redeemable in whole or in part, at
the option of the Company, at prices declining ratably from 104.25% to 100% in
2003 plus accrued and unpaid interest. Net proceeds from the Private 8 1/2%
Notes offering of approximately $293,000 were primarily used to pay down
revolving credit borrowings. The 8 1/2% Notes are fully and unconditionally
guaranteed jointly and severally on a senior basis by each of the domestic
restricted subsidiaries.
In the fourth quarter of 1996, the Company entered into six, one-year
interest rate swap agreements with an aggregate notional amount of $600,000.
Under these new swap agreements, the Company receives a floating rate of
interest based on three-month LIBOR, which resets quarterly, and pays a fixed
rate of interest, each quarter, for the term of the agreements. As of December
31, 1996, the weighted average variable rate and weighted average fixed rate
were 5.5% and 5.8%, respectively.
At December 31, 1996, a $250,000 Term Loan ("Term Loan"), $628,000 of
Tranche A Revolving Loan Commitment ("Tranche A Revolving Loan Commitment"),
$6,992 of Canadian dollar loans and $4,850 of letters of credit were outstanding
under the Credit Facilities. Also, at December 31, 1996, K-III had outstanding
$233,250 of 10 5/8% Senior Notes, $100,000 of 10 1/4% Senior Notes due 2004
(10 1/4% Senior Notes"), $300,000 of 8 1/2% Notes, 4,000,000 shares of Senior
Preferred Stock, 1,531,526 shares of $11.625 Series B Exchangeable Preferred
Stock ("Series B Preferred Stock") and 2,000,000 shares of Series D Preferred
Stock. The Senior Preferred Stock is exchangeable, at K-III's option, for the
11 1/2% Subordinated Debentures ("Subordinated Debentures"), the Series B
Preferred Stock is exchangeable, at K-III's option, for the 11 5/8% Class B
Subordinated Exchange Debentures ("Class B Subordinated Debentures") and the
Series D Preferred Stock is exchangeable, at K-III's option, for Class D
Subordinated Debentures. Before May 1, 1998, dividends or interest, as the case
may be, on the Series B Preferred Stock or the Class B Subordinated Debentures
may be paid in cash or by issuing additional shares of the Series B Preferred
Stock or additional Class B Subordinated Debentures, as the case may be. On or
after May 1, 1998, such dividends or interest must be paid in cash.
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The above indebtedness, among other things, limits the ability of the
Company to change the nature of its businesses, incur indebtedness, create
liens, sell assets, engage in mergers, consolidations or transactions with
affiliates, make investments in or loans to certain subsidiaries, issue
guarantees and make certain restricted payments. The Company is restricted from
declaring or making dividend payments on its common and preferred stock. Under
the Company's most restrictive debt covenants, the Company must maintain a
minimum interest coverage ratio of 1.8 to 1 and a minimum fixed charge coverage
ratio of 1.05 to 1 and its maximum allowable leverage ratio is 6.0 to 1. The
Company believes it is in compliance with the financial and operating covenants
of its principal financing arrangements.
The mandatory reductions of the Tranche A Revolving Loan Commitment and the
Term Loan under the Credit Facilities are $75,000 in 1999, $200,000 per year in
2000 through 2003 with a final reduction or paydown of $125,000 in 2004. The
10 1/4% Senior Notes mature in June 2004 and the 8 1/2% Notes mature in February
2006. The per annum principal and interest payments relating to an acquisition
obligation are scheduled to be $6,000, $14,333, $21,167, $19,167 and $8,833 to
be made in semi-annual installments in 1997 through 2001, respectively. The
Company's aggregate lease obligations for 1997, 1998 and 1999 are expected to be
approximately $35,000, $32,000 and $28,000, respectively. The Company believes
its liquidity, capital resources and cash flow are sufficient to fund planned
capital expenditures, working capital requirements, interest and principal
payments on its debt, the payment of preferred stock dividends and other
anticipated expenditures for the foreseeable future.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" which
becomes effective for the Company's 1997 consolidated financial statements
beginning in the fourth quarter of 1997. SFAS No. 128 will eliminate the
disclosure of primary earnings per share which includes the dilutive effect of
stock options, warrants and other convertible securities ("Common Stock
Equivalents") and instead requires reporting of "basic" earnings per share,
which will exclude Common Stock Equivalents. Additionally, SFAS No. 128 changes
the methodology for fully diluted earnings per share. In the opinion of the
Company's management, it is not anticipated that the adoption of this new
accounting standard will have a material effect on the reported earnings per
share of the Company.
RECENT DEVELOPMENTS
Through March 12, 1997, the Company completed three product-line
acquisitions consisting of specialty consumer magazines and specialized
reference products. The aggregate purchase price was approximately $56,000.
As a part of its strategy to focus on areas of its business that have the
greatest potential for growth, the Company intends to divest certain businesses
that do not fit within its growth vehicles. Those businesses are: the DAILY
RACING FORM group, which includes a national daily newspaper covering
thoroughbred horseracing and PRO FOOTBALL WEEKLY; KRAMES COMMUNICATIONS, a
leading publisher of patient information sold to healthcare providers for
distribution to patients and other healthcare users; the KATHARINE GIBBS
SCHOOLS, a chain of seven business schools; NEWBRIDGE BOOK CLUBS, the largest
book club organization for professionals in the United States; and NEW WOMAN
magazine, a guide for personal relationships and careers. The proceeds from
these sales will be used to repay indebtedness. These businesses represented
approximately 19% of 1996 net sales of the Company. The unaudited
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combined operating results for the year ended December 31, 1996 and total assets
at December 31, 1996 of these business units are as follows:
<TABLE>
<S> <C>
Sales, net....................................................... $ 255,000
Operating income (loss).......................................... (3,950)
Depreciation and amortization.................................... 27,800
Total assets(1).................................................. 304,700
</TABLE>
- ------------------------
(1) At December 31, 1996, KATHARINE GIBBS SCHOOLS is reflected as an asset held
for sale in the accompanying consolidated balance sheet.
In January 1997, the Company purchased, in aggregate, $20,850 principal
amount of 10 5/8% Senior Notes at a weighted average price of 105%, plus accrued
and unpaid interest, from various brokers on the open market. The Repurchase was
in addition to the purchases by the Company of $16,750 principal amount of
10 5/8% Senior Notes during November and December of 1996 which are reflected in
the Company's consolidated balance sheet at December 31, 1996. In March 1997,
the Company called for redemption all of its outstanding 10 5/8% Senior Notes.
On May 1, 1997, the Company will redeem $212,400 principal amount of 10 5/8%
Senior Notes, at a redemption price of 104% of the outstanding principal amount
thereof, plus accrued and unpaid interest to the date of redemption.
IMPACT OF INFLATION
The impact of inflation was immaterial during 1996 with the exception of
paper prices. Paper prices began to rise around mid-year 1994 and continued to
rise more dramatically in 1995 and early 1996. Overall, the Company's average
purchase price for paper increased approximately 8.4% during 1996 compared to
1995. In 1996, paper costs represented approximately 10% of the Company's total
operating costs and expenses. Due to recent softening in certain segments of the
paper market, paper price increases of the magnitude experienced in 1995 and
1996 seem unlikely in the foreseeable future. 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. See "Risk
Factors--Effect of Increases in Paper and Postage Costs."
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BUSINESS
GENERAL
K-III is the authoritative source for specialized information targeted to
specific high growth segments in the education, business and special interest
consumer markets. Most of K-III's products are premier brands with leadership
positions in the specialty niche markets in which such products compete:
education (E.G., CHANNEL ONE NEWS, WEEKLY READER and WESTCOTT COMMUNICATIONS);
information (E.G., APARTMENT GUIDE, WARD'S, THE WORLD ALMANAC and BACON'S); and
specialty media (E.G., SEVENTEEN, AMERICAN BABY, SOAP OPERA DIGEST, TRUCKIN' and
SEW NEWS). The specialty media segment has in prior years been referred to as
the media segment, but the Company believes the term specialty media is more
descriptive of the underlying businesses; the same underlying businesses
previously described as part of the media segment.
The Company has achieved substantial growth through the development of its
franchises, combined with its operating expertise and successful acquisition
strategy. From 1991 through 1996, net sales have grown at a compound annual rate
of 19% to $1,374 million. Operating income in 1996 was $86 million compared to a
net operating loss of $37 million in 1991 (after deductions for amortization and
depreciation of $191 million in 1996 and $142 million in 1991).
The Company plans to focus on the areas of its business that have the
greatest potential for strong organic growth and growth through product line
acquisitions. Those areas by segment are: education-- classroom learning and
workplace learning; information--consumer directories and business directories;
and specialty media--specialty consumer and technical and trade magazines. As
part of that strategy, K-III intends to divest certain businesses that do not
fit within the Company's growth vehicles. See "--Non-Core Businesses Being
Sold."
EDUCATION
The Company is a leading provider of supplemental educational materials and
programming in the United States, targeting both classroom and workplace
learning. K-III's best-known brands in classroom learning include CHANNEL ONE
and WEEKLY READER, and in workplace learning, WESTCOTT COMMUNICATIONS. Classroom
learning takes advantage of the growth in spending on supplementary educational
materials, up 44% from 1991 to 1995, and the projected increases in elementary
and secondary school enrollments over the next decade (in particular, high
school enrollments are expected to rise 17% between 1995 and 2005). Workplace
learning focuses on the $60 billion training market of which the outsourced
segment is the fastest growing portion, rising 49% between 1991 and 1996.
CLASSROOM LEARNING
The Company operates CHANNEL ONE, WEEKLY READER, FILMS FOR THE HUMANITIES
AND SCIENCES and NEWBRIDGE EDUCATIONAL PUBLISHING.
CHANNEL ONE'S news program, CHANNEL ONE NEWS, is the only daily news program
targeted to secondary school students. CHANNEL ONE NEWS broadcasts every school
day via satellite to over eight million students in approximately 12,000
secondary schools in the United States. Established in 1990, CHANNEL ONE
pioneered the delivery of world events and educational programming into
classrooms via satellite. Its award-winning daily news broadcast reaches more
students than any other electronically delivered educational product. CHANNEL
ONE NEWS has more teen viewers than the news programs of ABC, CBS, NBC and CNN
combined.
Schools sign up for CHANNEL ONE NEWS under a three-year contract pursuant to
which they agree to show CHANNEL ONE NEWS, in its entirety, at least 90% of all
school days. CHANNEL ONE provides to schools a turnkey system of video cassette
recorders and networked televisions. These products and services are provided to
schools at no charge; sales are generated by two minutes of advertising shown
during
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the 12-minute daily newscast. All school contracts have come up for renewal and
approximately 99% have been renewed.
CHANNEL ONE NEWS is produced at the Hacienda, CHANNEL ONE'S Los Angeles
studio, using staff anchors and correspondents who report from U.S. and
international locations. CHANNEL ONE has a library of over 1,250 broadcasts
including approximately 175 single subject series, 45 of which have been
released as educational videos under the Hacienda
Productions-Registered Trademark- trademark.
CHANNEL ONE NEWS has no direct competition in the schools but does compete
for advertising dollars with other media aimed at teenagers. The Company's
primary competitive advantage is its total audience of over eight million
teenagers each school day. For 1996, approximately 65% of CHANNEL ONE'S
advertising net sales were from contracts having terms of three or more years.
The top five advertisers in 1996 by dollars were PepsiCo, M&M Mars, Nintendo,
Quaker Oats and Reebok, which together accounted for approximately 62% of
advertising net sales, and all of which are under contract through 1997 or 1998.
In addition, CHANNEL ONE'S THE CLASSROOM CHANNEL offers a range of
instructional programming to enhance the schools' curriculum. THE CLASSROOM
CHANNEL offers an average of 90 minutes of daily programming at no charge to
schools.
WEEKLY READER is the best-known and highest-circulation student newspaper in
the United States, with over 6.8 million subscriptions for elementary school
students alone. WEEKLY READER and its related products are sold in approximately
70% of all elementary schools and 59% of all secondary schools, and for the
1995-1996 school year had a 57% share of the elementary school market and a 41%
share of the secondary school market.
Eight separate editions of WEEKLY READER, each consisting of 26 issues per
year, are distributed to elementary school students. Each edition is written and
designed for a particular reading and comprehension level in order to bring
current world news to children at a level commensurate with their comprehension
abilities. A teacher's guide with background information, discussion topics and
follow-up questions is included with each edition. Other titles produced and
distributed by WEEKLY READER include READ, CURRENT EVENTS, CURRENT SCIENCE and
CURRENT HEALTH. Editorial materials for these publications are generated by
in-house writers and freelance authors. The Company's largest competitor in
these markets is Scholastic Corporation. WEEKLY READER generally competes on the
basis of editorial quality, content and price.
FILMS FOR THE HUMANITIES AND SCIENCES ("FILMS") is the exclusive distributor
of approximately 6,500 educational videos as well as videodiscs, CD-ROMs and
related products that are sold primarily by direct mail to teachers, instructors
and librarians serving grades K to 12 and college markets. FILMS is the largest
distributor of such products to colleges and high schools and competes on the
basis of quality and breadth of the subject matter it markets.
Through NEWBRIDGE EDUCATIONAL PUBLISHING, the Company develops and markets
supplementary educational programs which are marketed to teachers for use in
grades pre-K to 6. Many of these materials are sold under the "Macmillan" name.
Most of the programs are marketed on a continuity basis; at December 31, 1996,
there were approximately 132,000 subscribers to these continuity programs. The
Company is the largest provider of continuities sold for use in schools and
competes in this market primarily with Scholastic Corporation.
WORKPLACE LEARNING
WESTCOTT, acquired by the Company in June 1996, is a leading provider of
high quality workplace educational programming. WESTCOTT has approximately
20,000 corporate and institutional subscribers and provides workplace learning
to approximately 2.5 million professionals in the healthcare, automotive,
financial services, government, public service and corporate fields. The
Company's production
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capabilities enable it to design, produce and deliver content targeted to over
24 different disciplines, via satellite and video cassette.
The Company's leading networks include, the Executive Education Network
("EXEN") and the Interactive Medical Networks ("IMN"). EXEN delivers executive
education courses taught by professors from leading business schools including
Harvard University, the University of Texas and the University of Southern
California to corporate and professional clients nationwide. Participants in
EXEN interact on a real-time basis using one-way video, two-way audio and data
response keypads. IMN offers a variety of live programming, telecourses and
other video products, including graduate degree courses, in-service training and
accredited continuing education programming, designed to reach multiple target
audiences within the hospital setting. In addition, the Company's Interactive
Distance Training Network provides customized interactive programming for
corporate, professional and government clients, including Intel, EDS and Eli
Lilly.
WESTCOTT does not have any multi-industry competitors in the workplace
learning market. The Company competes with a number of businesses and
governmental agencies that provide videotaped training material, consulting
services and instruction at seminars, trade shows and conventions, or certain
television programming.
During 1996, the education segment also included KRAMES COMMUNICATIONS, the
KATHARINE GIBBS SCHOOLS and NEWBRIDGE BOOK CLUBS. See "--General" and
"--Non-Core Businesses Being Sold."
INFORMATION
The Company produces over 140 highly targeted consumer and business
directories, most of which hold dominant positions in their niche markets. The
Company's premier consumer directories include APARTMENT GUIDE, THE WORLD
ALMANAC and such specialty reference products as FACTS ON FILE NEWS SERVICE
which is used by public and institutional libraries. Its leading business
directories include BACON'S for public relations professionals and NELSON'S for
financial professionals.
Consumer directories take advantage of the trend toward more targeted
advertising. From 1990 to 1995, organic advertising revenue growth at K-III's
consumer guides has more than tripled growth of newspaper classified
advertising, the medium with which they most directly compete. Business
directories capitalize on the growth in business spending on information which
has increased 8% on a compound annual basis, or 123% from $10.2 billion to $22.7
billion, between 1985 and 1995.
CONSUMER DIRECTORIES
The Company publishes over 70 consumer directories and specialized reference
products. These products are distributed nationally in retail outlets and are
sold to public and institutional libraries. The Company publishes and
distributes consumer guides in three categories: rental apartments, new homes
and computer shopping. The Company's leading reference products include THE
WORLD ALMANAC, FACTS ON FILE NEWS SERVICE and the GARETH STEVENS line of
juvenile reference works.
The Company is the leading publisher of rental apartment guides in the
United States with 58 local versions of its apartment guide directory product,
each of which is published no less than monthly and provides informational
listings about featured apartment communities. These listings are paid for by
apartment community managers, who need to fill vacant apartments, and who
represent 100% of the apartment guide net sales. In November 1996, the Company
acquired apartment guides in Boston and Hartford, providing a strong
Northeastern presence. The Company is the dominant information provider in
apartment guides. The Company's only major competitor, FOR RENT, is present in
32 of the Company's markets. In those markets, on average, the Company captured
51% of total 1996 advertising pages, with FOR RENT capturing 41% of such
advertising pages.
In 1996, the Company added new types of consumer directories to its
portfolio with the acquisition of new homes and computer shopping guides. In
1996, the Company acquired new homes guides in
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Philadelphia, New Jersey, Raleigh-Durham and Chapel Hill, North Carolina and
Atlanta. In November 1996, the Company acquired MICROTIMES, distributed in
Northern and Southern California. MICROTIMES provides consumers with information
on computer products through paid listings, and also contains informative
articles reviewing products for both the business and home computer shopper.
The Company's DistribuTech Division is the nation's largest distributor of
free publications, including its own consumer directories and over 600 other
titles. In 1996, it managed distribution of free publications to over 15,500
grocery, convenience and drug stores in 60 U.S. cities, as well as universities,
military bases and major employers. The majority of these locations are operated
under exclusive distribution agreements. The Company's consumer directories
typically are displayed in free standing, multi-pocket racks. DistribuTech
generates substantial revenues by leasing additional distribution rack pockets
to other publications that it also distributes. DistribuTech competes on the
basis of price paid to the retail locations and service on the rack program.
The Company has established web sites in all three consumer directory
groups. The Company's WWW.APTGUIDES.COM is the most comprehensive web site in
the multi-family dwelling industry, with over 12,000 communities included in its
on-line database.
THE WORLD ALMANAC is the leading almanac in the English language ranked by
unit sales and data content with over 1.3 million copies of the 1997 edition
sold as of December 31, 1996. In 1996, the Company introduced THE WORLD ALMANAC
JOB FINDER'S GUIDE and published the second annual edition of THE WORLD ALMANAC
FOR KIDS, which sold over 300,000 copies. THE WORLD ALMANAC licenses its content
for use on four CD-ROM products and five on-line services. The Company's World
Almanac Education Division sells reference books to the school and library
market by catalog. FACTS ON FILE NEWS SERVICE, acquired in March 1996, publishes
subscription products that are sold to schools and libraries. The flagship
product, WORLD NEWS DIGEST, published weekly, is available in print, CD-ROM and
on-line formats, and has a subscriber base of approximately 7,000. GARETH
STEVENS, a publisher and distributor of juvenile reference works and a
distributor of multi-media products, was acquired by the Company in February
1997. GARETH STEVENS has a title list of approximately 700 titles and its market
focus is North America's primary and secondary school libraries and public
libraries. FUNK & WAGNALLS' NEW ENCYCLOPEDIA licenses its editorial content, for
electronic delivery, to Microsoft Corporation as the textual basis for
Microsoft's ENCARTA CD-ROM product and to The Learning Company for inclusion in
the INFOPEDIA CD-ROM as well as to three other on-line services and a classroom
computer instruction service. FUNK & WAGNALLS also sells a print verson of its
NEW ENCYCLOPEDIA. The Company experiences competition for its reference products
from other print and electronic products from a variety of publishers.
BUSINESS DIRECTORIES
The Company publishes over 70 specialized directories, as well as ancillary
products derived from its databases. The Company's business directories target
the financial services, public relations, transportation, musical performance,
credit and collection, construction and global trade industries. The databases
are compiled by an in-house editorial staff, marketed directly to subscribers
and advertisers primarily by an in-house sales staff and distributed
predominantly on a paid subscription basis. The Company's Bacon's Information,
Inc. unit publishes MEDIASOURCE, a CD-ROM directory for public relations and
media professionals, as well as print directories including BACON'S
INTERNATIONAL MEDIA DIRECTORY and BACON'S BUSINESS MEDIA DIRECTORY. To
complement its public relations directories, the Company operates a periodicals
clipping service. NELSON'S is a premier brand name in the institutional
investment industry, providing specialized investment research and management
information through products such as INSTITUTIONAL MARKETPLACE FOR WINDOWS.
The Company also publishes newsletters that provide in-depth information on
selected markets. WARD'S AUTOMOTIVE REPORTS is recognized as the authoritative
source for industry-wide statistics on automotive production and sales. In
addition, the Company publishes, in print and electronic formats,
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used vehicle valuation information. Titles include MARKET REPORTS, MARINE BLUE
BOOK and AIRCRAFT BLUE-
BOOK. Other databases include THE ELECTRONICS SOURCE BOOK, AC-U-KWIK, WATERWAY
GUIDES and equipment servicing information and manuals.
Most of the business directories published by the Company have no
competition, and where competition does exist, in most cases the Company's
publication is dominant. Competition, where present, is on the basis of price
and quality of data. Management believes that the comprehensiveness and quality
of its data and the specialized focus of its publications have prevented others
from launching competing publications or competing effectively.
During 1996, the information segment also included the DAILY RACING FORM.
See "--General" and "-- Non-Core Businesses Being Sold."
SPECIALTY MEDIA
The specialty media segment consists of specialty consumer magazines and
technical and trade magazines. In 1996, 60% of its 63 specialty consumer
magazines and 56% of its 63 technical and trade magazines, were number one as
measured by advertising pages or circulation in their respective markets. Some
of the Company's specialty consumer magazines include SOAP OPERA DIGEST,
SEVENTEEN, NEW YORK, CHICAGO, TRUCKIN' and SEW NEWS, while leading technical and
trade publications include TELEPHONY, FLEET OWNER and THE ELECTRONICS SOURCE
BOOK. Advertising in specialty consumer magazines grew at a 9% compound annual
growth rate or 136% between 1985 and 1995, outpacing advertising growth in
general interest magazines, radio, broadcast television and newspapers.
SPECIALTY CONSUMER MAGAZINES
The Company's specialty consumer magazines include SOAP OPERA DIGEST, SOAP
OPERA WEEKLY, SEVENTEEN, AMERICAN BABY, over 20 automotive magazines and
numerous bridal, sewing, crafts and other titles. The principal sources for
specialty consumer magazines' net sales are advertising and circulation. In the
year ended December 31, 1996, approximately 54% of the specialty consumer
magazines' net sales were from advertising, 41% were from circulation and 5%
were from other sources.
SOAP OPERA DIGEST and SOAP OPERA WEEKLY are the leading publications
covering soap operas aired on network television. SOAP OPERA DIGEST, which
focuses on synopses of episodes, was in 1996 a bi-weekly publication with
average circulation of 1.4 million. In the spring of 1997, SOAP OPERA DIGEST
will become a weekly publication. SOAP OPERA WEEKLY, which reports primarily on
soap opera news, had average 1996 circulation of 500,000. Both publications are
distributed mainly at supermarket, convenience store and drugstore checkout
counters. They compete for circulation on the basis of editorial content and
quality against SOAP OPERA MAGAZINE and SOAP OPERA UPDATE, both of which have
substantially lower circulation. SOAP OPERA DIGEST On-Line, launched in February
1996, has become one of the most utilized magazine sites on America Online.
SEVENTEEN is the leading young women's magazine based on both circulation
and advertising pages, with fashion, boys, beauty, talent and lifestyle
editorial targeted to girls aged 12 to 19. In 1996, SEVENTEEN had average
monthly circulation of 2.4 million, an increase of over 250,000 readers over the
prior year. Its principal competitor is YM. SEVENTEEN competes for circulation
based on the nature and quality of its editorial.
AMERICAN BABY, a baby care publication distributed monthly to approximately
1.4 million expectant and new parents in 1996, contains articles on all aspects
of pregnancy and baby care. AMERICAN BABY ranks first in baby product related
advertising pages. While the magazine competes with PARENTS, PARENTING and CHILD
for the larger childcare market, AMERICAN BABY'S principal competitor is BABY
TALK. AMERICAN BABY also offers several ancillary products including sampling
and couponing programs and a cable television show.
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The Company's other specialty consumer magazines include AUTOMOBILE, which
caters to the high-end automotive market, MODERN BRIDE, a guide to bridal
fashions, home furnishings and honeymoons, the city magazines NEW YORK and
CHICAGO, TRUCKIN', the leading truck customization publication, SEW NEWS, the
premier sewing title and DOG WORLD, the leading publication for dog breeders.
The Company's automotive titles are primarily newsstand driven, the sewing and
crafts titles are primarily sold by subscription, and the other titles have
significant sales both by subscription and on the newsstand. Subscriptions are
obtained using printed advertisements, direct mail, clearinghouses and
subscription cards in each magazine.
Readers value specialty consumer magazines for their editorial content and
also rely on them as a catalog of products in the relevant topic area. This
catalog aspect makes the specialty consumer magazines an important media buy for
advertisers. Advertising sales for the Company's specialty consumer magazines
are generated by a combination of in-house staff and outside advertising firms.
The magazines compete for advertising on the basis of circulation and the niche
markets they serve. Each of the Company's specialty consumer magazines faces
competition in its subject area from a variety of publishers, and competes for
readers on the basis of high quality, targeted editorial, which is provided by
in-house writers and freelance authors.
TECHNICAL AND TRADE MAGAZINES
The Company publishes 63 technical and trade magazines that provide vital
information to professionals in fields such as telecommunications (TELEPHONY and
CELLULAR BUSINESS), agriculture (SOYBEAN DIGEST), transportation (FLEET OWNER)
and real estate (NATIONAL REAL ESTATE INVESTOR). In 1996, 34 of these
publications ranked number one, and approximately 85% of these publications
ranked number one or two, in the fields they serve based on advertising pages.
These magazines are distributed primarily on a "controlled circulation" basis to
members of a targeted industry group and provide career and business-enhancing
technical and tutorial editorial content. Capitalizing on the centralized
circulation, fulfillment, production and other back office services, new titles
can be spun-off from existing titles or acquired and integrated.
During 1996, approximately 83% of the net sales of the technical and trade
titles were generated from advertising. Because each of the technical and trade
magazines is distributed almost exclusively to purchasing decision makers in a
targeted industry group, product and service providers are able to focus their
advertising. The advertising rates charged are based on the size of the
circulation within the target group as well as competitive factors. These
magazines compete for advertising on the basis of advertising rates,
circulation, reach, editorial content and readership commitment. Advertising
sales are made by in-house sales forces, supplemented by independent
representatives in selected regions and overseas. Classified advertising is sold
through telemarketing. Magazine editorial is provided by in-house writers and
freelance authors, well-known in their specific industry niches.
In addition to its technical and trade magazines, the Company sponsors
seminars and trade shows, including LIGHTING DIMENSIONS INTERNATIONAL,
INTERNATIONAL WIRELESS COMMUNICATIONS EXPOSITION and THE SATELLITE EXPOSITIONS
CONFERENCE, serving the advertisers and readers of the corresponding
publications.
During 1996, the specialty media segment also included NEW WOMAN magazine.
See "--General" and "--Non-Core Businesses Being Sold."
NEW PRODUCTS AND NEW MEDIA
In 1996, the Company launched over 70 new products in print, electronic and
multi-media formats. The Company had over 40 web sites at year-end 1996, all of
which can be accessed directly as well as via WWW.KIII.COM. New web sites in
1996 included the apartment guides web site (WWW.APTGUIDES.COM), WEEKLY READER
web site (WWW.WEEKLYREADER.COM), FACTS ON FILE NEWS SERVICE web site
(WWW.FACTS.COM) and NELSON'S web site (WWW.NELNET.COM). The Company released a
dozen CD-ROM products in 1996, including the BACON'S MEDIASOURCE CD-ROM for
public relations and media professionals, the JUST
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CROSS STITCH PATTERN CD-ROM and the SAIL MAGAZINE BUYERS GUIDE CD-ROM. The
Company's television programs include CHANNEL ONE'S ONEZONE, which appears on
public television stations nationwide, the SOAP OPERA DIGEST AWARDS, which
appear on network television, and AMERICAN BABY'S THE HEALTHY KIDS SHOW, which
appears on the Family Channel.
NON-CORE BUSINESSES BEING SOLD
As part of its strategy to focus on areas of its business that have the
greatest potential for growth, the Company intends to divest certain businesses
that do not fit within its growth vehicles. Those businesses are: the DAILY
RACING FORM group, which includes a national daily newspaper covering
thoroughbred horseracing and PRO FOOTBALL WEEKLY; KRAMES COMMUNICATIONS, a
leading publisher of patient information sold to healthcare providers for
distribution to patients and other healthcare users; the KATHARINE GIBBS
SCHOOLS, a chain of seven business schools; NEWBRIDGE BOOK CLUBS, the largest
book club organization for professionals in the United States; and NEW WOMAN
magazine, a guide for personal relationships and careers.
PRODUCTION AND FULFILLMENT
Virtually all of the Company's print products are printed and bound by
independent printers. The Company believes that outside printing services at
competitive prices are readily available. Electronic and video products
generally are created and mastered in-house; with the exception of WESTCOTT
COMMUNICATIONS and FILMS which produce video products in-house, all other
production and duplication of electronic and video products is performed by
third party vendors.
The principal raw material used in the Company's products is paper. The
Company has paper supply contracts and, in almost all cases, supplies paper used
by its outside printers. The Company believes that even if at some point in the
future paper is in limited supply, the existing arrangements providing for the
supply of paper will be adequate. The Company was able to meet its paper
requirements during 1996. In 1996, approximately 37% and 22% of the Company's
paper purchases were supplied by Lindenmeyr Central and Bulkley Dunton,
respectively. The Company's relationship with these suppliers is good and is
expected to continue to be good for the foreseeable future.
Many of the Company's products are packaged and delivered to the U.S. Postal
Service directly by the printer. Other products are sent from warehouses and
other facilities operated by the Company.
COMPANY ORGANIZATION
K-III was incorporated on November 22, 1991 in the State of Delaware. The
principal executive office of the Company is located at 745 Fifth Avenue, New
York, New York 10151, telephone number (212) 745-0100.
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<PAGE>
MANAGEMENT
The following table sets forth certain information regarding the senior
management and directors of K-III:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
William F. Reilly.................................... 58 Chairman of the Board and Chief Executive Officer and
Director
Charles G. McCurdy................................... 41 President and Director
Beverly C. Chell..................................... 54 Vice Chairman, General Counsel, Secretary and
Director
Meyer Feldberg....................................... 55 Director
Perry Golkin......................................... 43 Director
Henry R. Kravis...................................... 53 Director
George R. Roberts.................................... 53 Director
Michael T. Tokarz.................................... 47 Director
Harry A. McQuillen................................... 50 Executive Vice President
Jack L. Farnsworth................................... 51 Vice President
George Philips....................................... 66 Vice President
Curtis A. Thompson................................... 45 Vice President and Controller
Michaelanne C. Discepolo............................. 44 Vice President
Douglas B. Smith..................................... 36 Treasurer
</TABLE>
Mr. Reilly is Chairman of the Board, Chief Executive Officer and a Director
of K-III and has served in such capacities since November 1991. Mr. Reilly is
also a director of FMC Corporation.
Mr. McCurdy is President and a Director of K-III and has served in such
capacities since November 1991 and was also Treasurer from 1991 to August 1993.
Ms. Chell is Vice Chairman, General Counsel, Secretary and a Director of
K-III. Ms. Chell has served as Vice Chairman, General Counsel and Secretary
since November 1991 and as a Director since March 1992.
Professor Feldberg is Professor and Dean of the Columbia University Graduate
School of Business and has been since 1989. He joined the Board in January 1997.
He is also a director of Federated Department Stores, Inc. and Revlon, Inc.
Mr. Golkin became a Director of K-III in November 1991. He is a General
Partner of KKR Associates and was a General Partner of KKR from January 1, 1995
until January 1, 1996 when he became a member of the limited liability company
which serves as the general partner of KKR. Prior to 1995, Mr. Golkin was an
executive at KKR.
Mr. Kravis became a Director of K-III in November 1991. He is a Founding
Partner of KKR and KKR Associates. Effective January 1, 1996, he became a
managing member of the Executive Committee of the limited liability company
which serves as the general partner of KKR. He is also director of AutoZone,
Inc., Borden Inc., Bruno's Inc., Evenflo & Spalding Holdings Corporation,
Flagstar Companies Inc., Flagstar Corporation, The Gillette Company, IDEX
Corporation, KinderCare Learning Centers, Inc., Merit
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<PAGE>
Behavioral Care Corporation, Newquest Capital plc, Owens-Illinois Group, Inc.,
Owens-Illinois, Inc., Safeway, Inc., Sotheby's Holdings, Inc., Union Texas
Petroleum Holdings, Inc. and World Color Press, Inc.
Mr. Roberts became a Director of K-III in March 1992. He is a Founding
Partner of KKR and KKR Associates. Effective January 1, 1996 he became a
managing member of the Executive Committee of the limited liability company
which serves as the general partner of KKR. He is also director of AutoZone,
Inc., Borden Inc., Bruno's, Inc., Evenflo & Spalding Holdings Corporation,
Flagstar Companies Inc., Flagstar Corporation, IDEX Corporation, KinderCare
Learning Centers, Inc., Merit Behavioral Care Corporation, Newquest Capital plc,
Owens-Illinois Group, Inc., Owens-Illinois, Inc., Safeway Inc., Union Texas
Petroleum Holdings, Inc. and World Color Press, Inc.
Mr. Tokarz became a Director of K-III in November 1991. He is a General
Partner of KKR Associates and was a General Partner of KKR from January 1, 1993
until January 1, 1996 when he became a member of the limited liability company
which serves as the general partner of KKR. Prior to 1993, Mr. Tokarz was an
executive at KKR. He is also a director of Evenflo & Spalding Holdings
Corporation, Flagstar Companies Inc., Flagstar Corporation, IDEX Corporation and
Safeway, Inc.
Mr. McQuillen has been Executive Vice President of K-III since December
1995, President of K-III Specialty Media Group since December of 1992 and
President of K-III Magazines since November 1991. Prior thereto he was Vice
President of K-III from May 1992 through December 1995.
Mr. Farnsworth has been Vice President of K-III since May 1992, President of
K-III Information Group since May 1992 and President of Westcott Communications,
Inc. since June 1996.
Mr. Philips has been a Vice President of K-III since May 1992 and President
of the Reference Group since March 1992. Prior to that time he was President of
P.F. Collier, Inc. and a Vice President at Macmillan.
Mr. Thompson is Vice President and Controller of K-III and has served in
such capacities since November 1991.
Ms. Discepolo is a Vice President of K-III and has served in such capacity
since January 1993. She joined the Company in March 1991 as Director of Human
Resources.
Mr. Smith is Treasurer of K-III and has served in such capacity since August
1993. Prior thereto he was at The Bank of New York starting in 1982 holding
various positions. He held the position of Senior Vice President prior to
joining K-III.
Messrs. Kravis and Roberts are first cousins.
The By-Laws of K-III provide for a Board of Directors of at least one but
not more than 15 directors. In accordance with the By-Laws, the Board of
Directors has fixed the number of directors at eight. Officers serve at the
discretion of the Board of Directors.
Messrs. Reilly, Kravis, Tokarz and Golkin comprise the Executive Committee
of the Board of Directors and Messrs. Kravis, Tokarz and Golkin comprise the
Compensation Committee of the Board of Directors. The Audit Committee, which
reviews the scope and results of audit and non-audit services performed by the
Company's independent accountants, consists solely of Professor Feldberg.
36
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Certificate of Incorporation of K-III authorizes 250 million shares of
Common Stock, and 50 million shares of preferred stock, par value $0.01 per
share. The Board of Directors of K-III, in its sole discretion, may issue Common
Stock from the authorized and unissued shares of Common Stock and may designate
and issue one or more series of preferred stock from the authorized and unissued
shares of preferred stock. Subject to limitations imposed by law or the
Certificate of Incorporation, the Board of Directors is empowered to determine
the designation of and the number of shares constituting a series of preferred
stock; the dividend rate for the series; the terms and conditions of any voting,
conversion and exchange rights for the series; the amounts payable on the series
upon redemption or K-III's liquidation, dissolution or winding-up; the
provisions of any sinking fund for the redemption or purchase of shares of any
series; and the preferences and relative rights among the series of preferred
stock. Pursuant to the Certificate of Designations for the Senior Preferred
Stock, four million shares of Senior Preferred Stock, liquidation preference $25
per share, have been authorized for issuance. Of these authorized shares, all
have been issued and are outstanding. Pursuant to the Certificate of
Designations for the Series B Preferred Stock, two million shares of Series B
Preferred Stock, liquidation preference $100 per share, have been authorized for
issuance. As of March 17, 1997, 1,576,036 of such shares were issued and
outstanding, which include paid in kind dividends as of such date. Pursuant to
the Certificate of Designations for the Series D Preferred Stock, two million
shares of Series D Preferred Stock, liquidation preference $100 per share, have
been authorized for issuance. Of these authorized shares, all have been issued
and are outstanding.
THE COMMON STOCK
As of March 17, 1997, 129,150,691 shares of Common Stock were issued and
outstanding, and 13,042,685 shares were issuable upon exercise of outstanding
options, 8,655,781 of which were exercisable as of March 17, 1997 (which
options, if exercised in full, would generate aggregate proceeds to the Company
of $46,723,745).
Each share of Common Stock is entitled to one vote at all meetings of
stockholders of K-III for the election of directors and all other matters
submitted to stockholder vote. The Common Stock does not have cumulative voting
rights. Accordingly, the holders of a majority of the outstanding shares of
Common Stock can elect all the directors if they choose to do so. Dividends may
be paid to the holders of Common Stock when, as and if declared by the Board of
Directors of K-III out of funds legally available therefor. The Common Stock has
no preemptive or similar rights. Holders of Common Stock are not liable to
further call or assessment. Upon the liquidation, dissolution or winding up of
the affairs of K-III, any assets remaining after provision for payment of
creditors and holders of preferred stock would be distributed PRO RATA among
holders of Common Stock. K-III does not anticipate declaring and paying cash
dividends on the Common Stock at any time in the foreseeable future. The
decision whether to apply legally available funds to the payment of dividends on
the Common Stock will be made by the Board of Directors from time to time in the
exercise of its prudent business judgment, taking into account, among other
things, the Company's results of operations and financial condition, any then
existing or proposed commitments for the use by the Company of available funds,
and K-Ill's obligations with respect to any then outstanding class or series of
its preferred stock. In addition, K-III is restricted by the terms of the Credit
Facilities and public debt instruments from paying cash dividends on its capital
stock, and may in the future enter into loan or other agreements or issue debt
securities or preferred stock that restrict the payment of cash dividends on
K-III's capital stock. See "Price Range of Common Stock and Dividend Policy."
The Certificate of Incorporation of the Company provides that, except as
provided by the DGCL, directors of the Company shall not be personally liable to
the Company or its stockholders for monetary
37
<PAGE>
damages for breach of fiduciary duties as a director. That provision does not
exonerate the directors from liability under federal securities laws, and has no
effect on any non-monetary remedies that may be available to the Company or its
stockholders. The By-Laws of the Company provide for indemnification of the
officers and directors of the Company to the full extent permitted by applicable
law.
The Company's By-Laws provide for additional notice requirements for
stockholder nominations and proposals at annual or special meetings of the
Company. At annual meetings, stockholders will be entitled to submit nominations
for directors or other proposals only upon written notice to the Company not
less than 60 days, nor more than 90 days, prior to the annual meeting.
SECTION 203 OF THE DELAWARE LAW
Generally, Section 203 of the DGCL prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became in interested stockholder, unless (i) prior to the date
of the business combination, the transaction is approved by the board of
directors of the corporation, (ii) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of the outstanding voting stock, or (iii) on or
after such date the business combination is approved by the board and by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the interested stockholder. A "business combination" includes
mergers, asset sales, and other transactions resulting in a financial benefit to
the stockholder. An "interested stockholder" is a person who, together with
affiliates and associates, owns (or within three years, did own) 15% or more of
the corporation's voting stock.
THE SENIOR PREFERRED STOCK
The holders of Senior Preferred Stock have no preemptive rights or
cumulative voting rights and are not subject to future assessments by K-III. All
outstanding shares of Senior Preferred Stock are fully paid and nonassessable.
The Senior Preferred Stock has an aggregate liquidation preference of
$100,000,000. The Senior Preferred Stock will be redeemed with the proceeds of
the Offerings. See "Use of Proceeds."
RANK. The Senior Preferred Stock, with respect to dividend rights and
rights on liquidation, winding up and dissolution, ranks senior to the Series B
Preferred Stock, the Series D Preferred Stock and to the Common Stock.
DIVIDENDS. The holders of the shares of Senior Preferred Stock are entitled
to receive, when, as and if declared by the Board of Directors, out of funds
legally available therefor, cash dividends at an annual rate equal to 11 1/2%.
Such dividends are payable quarterly in arrears on each February 1, May 1,
August 1 and November 1. Dividends on shares of the Senior Preferred Stock
accrue and are cumulative from the date of issuance of such shares. As of the
date of this Prospectus, all such dividends have been paid.
OPTIONAL REDEMPTION. K-III may, at its option, redeem at any time on or
after May 1, 1997, from any source of funds legally available therefor, in whole
or in part, any or all of the shares of Senior Preferred Stock at redemption
prices declining ratably from 105.8% of liquidation value for the twelve months
commencing May 1, 1997 to 100.0% on and after May 1, 2002, plus in each case an
amount in cash equal to all accumulated and unpaid dividends per share
(including an amount equal to a prorated dividend from the last dividend payment
date to the redemption date).
MANDATORY REDEMPTION. The Senior Preferred Stock is subject to mandatory
redemption (subject to contractual and other restrictions with respect thereto
and to the legal availability of funds therefor). On each of May 1, 2003 and May
1, 2004, K-III is required to redeem 50% of the shares of Senior
38
<PAGE>
Preferred Stock originally issued at a price equal to the liquidation preference
thereof plus all accumulated dividends to the date of redemption. K-III will be
permitted to credit toward its mandatory redemption obligation in each year
shares of Senior Preferred Stock theretofore acquired by K-III through optional
redemption or otherwise than through mandatory redemption that have not
previously been so applied.
VOTING RIGHTS. Holders of the Senior Preferred Stock have no voting rights
with respect to general corporate matters except as provided by law or as set
forth in the Certificate of Designations for the Senior Preferred Stock. Such
Certificate of Designations provides that in the event that dividends on the
Senior Preferred Stock are in arrears and unpaid for six consecutive quarterly
periods, the Board of Directors of K-III will be increased by two directors and
the holders of the majority of the Senior Preferred Stock, voting separately as
a class, will be entitled to elect two directors of the expanded board of
directors. Such voting rights will continue until such time as all dividends in
arrears on the Senior Preferred Stock are paid in full.
In addition, the Certificate of Designations for the Senior Preferred Stock
provides that K-III will not authorize a new class of parity securities without
the affirmative vote or consent of holders of a majority of the shares of Senior
Preferred Stock and each other series of preferred stock of K-III then
outstanding which are entitled to vote thereon, voting or consenting, as the
case may be, as one class, and that K-III will not authorize a new class of
senior securities without the affirmative vote or consent of holders of at least
a majority of the shares of Senior Preferred Stock and each other series of
preferred stock of K-III then outstanding which are entitled to vote thereon,
voting or consenting, as the case may be, as one class.
In addition, K-III may not merge or consolidate with or into or transfer all
or substantially all of its assets (as an entirety in one transaction or a
series of related transactions), to any person without the consent of the
holders of a majority of the issued and outstanding shares of Senior Preferred
Stock, voting separately as a class, unless (i) K-III shall be the continuing
person, or the person (if other than K-III) formed by such consolidation or into
which K-III is merged or to which the properties and assets of K-III are
transferred shall be a corporation organized and existing under the laws of the
United States or any State thereof or the District of Columbia and the Senior
Preferred Stock shall be converted into or exchanged for and shall become shares
of such successor or resulting company, having in respect of such successor or
resulting company substantially the same powers, preferences and relative
participating, optional or other special rights, and the qualifications,
limitations or restrictions thereon, that the Senior Preferred Stock had
immediately prior to such transaction and (ii) immediately after giving effect
to such transaction on a pro forma basis, the Consolidated Net Worth of the
surviving entity is at least equal to the Consolidated Net Worth of K-III (as
defined in its Certificate of Incorporation) immediately prior to such
transaction.
Under Delaware law, holders of preferred stock are entitled to vote as a
class upon a proposed amendment, whether or not entitled to vote thereon by the
certificate of incorporation, if, among other matters, the amendment would
increase or decrease the par value of the shares of such class, or alter or
change the powers, preferences, or special rights of the shares of such class so
as to affect them adversely.
EXCHANGE. K-III may, at its option, out of any source of funds legally
available therefor, on any scheduled dividend payment date, exchange the Senior
Preferred Stock, in whole but not in part, for Subordinated Debentures. Holders
of Senior Preferred Stock so exchanged will be entitled to receive the principal
amount of Subordinated Debentures equal to $25.00 for each $25.00 of liquidation
preference of Senior Preferred Stock held by such holders at the time of
exchange plus an amount per share in cash equal to all accrued but unpaid
dividends thereon to the date of exchange (including an amount equal to a pro
rated dividend from the last dividend payment date to the exchange date).
39
<PAGE>
THE SERIES B PREFERRED STOCK
The holders of Series B Preferred Stock have no preemptive rights or
cumulative voting rights and are not subject to future assessments by K-III. All
outstanding shares of Series B Preferred Stock are fully paid and nonassessable.
As of March 17, 1997, 1,576,036 shares of the Series B Preferred Stock ($157.6
million aggregate liquidation preference), which include dividends paid in kind
from time to time thereon to such date, were issued and outstanding.
RANK. The Series B Preferred Stock, with respect to dividend rights and
rights on liquidation, winding up and dissolution, ranks junior to the Senior
Preferred Stock, PARI PASSU with the Series D Preferred Stock and senior to the
Common Stock.
DIVIDENDS. The holders of the shares of Series B Preferred Stock are
entitled to receive, when, as and if declared by the Board of Directors, out of
funds legally available therefor, cash dividends at an annual rate equal to
11 5/8%. Such dividends are payable quarterly in arrears on each February 1, May
1, August 1 and November 1. Before May 1, 1998 dividends may, at the option of
K-III, be paid in cash or by issuing fully paid and nonassessable shares of
Series B Preferred Stock with aggregate liquidation preference equal to the
amount of such dividend. On and after May 1, 1998, dividends may only be paid in
cash. Dividends on shares of the Series B Preferred Stock accrue and are
cumulative from the date of issuance of such shares. As of the date of this
Prospectus, all such dividends have been paid in additional shares of Series B
Preferred Stock.
OPTIONAL REDEMPTION. K-III may, at its option, redeem at any time on or
after February 1, 1998, from any source of funds legally available therefor, in
whole or in part, any or all of the shares of Series B Preferred Stock at
redemption prices declining ratably from 105.8% of liquidation value for the
twelve months commencing February 1, 1998 to 100.0% on and after February 1,
2003, plus in each case an amount in cash equal to all accumulated and unpaid
dividends per share (including an amount equal to a prorated dividend from the
last dividend payment date to the redemption date).
MANDATORY REDEMPTION. The Series B Preferred Stock is subject to mandatory
redemption (subject to contractual and other restrictions with respect thereto
and to the legal availability of funds therefor) on May 1, 2005 at a price equal
to the liquidation preference thereof plus all accumulated dividends to the date
of redemption.
VOTING RIGHTS. Holders of the Series B Preferred Stock have no voting
rights with respect to general corporate matters except as provided by law or as
set forth in the Certificate of Designations for the Series B Preferred Stock.
Such Certificate of Designations provides that in the event that dividends on
the Series B Preferred Stock are in arrears and unpaid for six consecutive
quarterly periods, the Board of Directors of K-III will be increased by two
directors and the holders of the majority of the Series B Preferred Stock,
voting separately as a class, will be entitled to elect two directors of the
expanded board of directors. Such voting rights will continue until such time as
all dividends in arrears on the Series B Preferred Stock are paid in full.
Unless the requisite holders of any senior security or any indebtedness of
K-III have consented to or granted a waiver with respect thereto, K-III may not
merge or consolidate with or into or transfer all or substantially all of its
assets (as an entirety in one transaction or a series of related transactions),
to any person without the consent of the holders of a majority of the issued and
outstanding shares of Series B Preferred Stock, voting separately as a class,
unless (i) K-III shall be the continuing person, or the person (if other than
K-III) formed by such consolidation or into which K-III is merged or to which
the properties and assets of K-III are transferred shall be a corporation
organized and existing under the laws of the United States or any State thereof
or the District of Columbia and the Series B Preferred Stock shall be converted
into or exchanged for and shall become shares of such successor or resulting
company, having in respect of such successor or resulting company substantially
the same powers, preferences and relative participating, optional or other
special rights, and the qualifications, limitations or restrictions
40
<PAGE>
thereon, that the Series B Preferred Stock had immediately prior to such
transaction and (ii) immediately after giving effect to such transaction on a
pro forma basis, the Consolidated Net Worth of the surviving entity is at least
equal to the Consolidated Net Worth of K-III (as defined in its Certificate of
Incorporation) immediately prior to such transaction.
Under Delaware law, holders of preferred stock are entitled to vote as a
class upon a proposed amendment, whether or not entitled to vote thereon by the
certificate of incorporation, if, among other matters, the amendment would
increase or decrease the par value of the shares of such class, or alter or
change the powers, preferences, or special rights of the shares of such class so
as to affect them adversely.
EXCHANGE. K-III may, at its option, out of any source of funds legally
available therefor, on any scheduled dividend payment date, issue Class B
Subordinated Debentures in exchange for the Series B Preferred Stock, in whole
but not in part. Holders of Series B Preferred Stock so exchanged will be
entitled to receive the principal amount of Class B Subordinated Debentures
equal to $100 for each $100 of liquidation preference of Series B Preferred
Stock held by such holders at the time of exchange plus an amount per share in
cash equal to all accrued but unpaid dividends thereon to the date of exchange
(including an amount equal to a pro rated dividend from the last dividend
payment date to the exchange date). No Class B Subordinated Debentures may be
issued so long as any Senior Preferred Stock remains outstanding. The indenture
for the 10 5/8% Senior Notes restricts the ability of K-III to issue Class B
Subordinated Debentures.
THE SERIES D PREFERRED STOCK
The holders of Series D Preferred Stock have no preemptive rights or
cumulative voting rights and are not subject to future assessments by K-III. All
outstanding shares of Series D Preferred Stock are fully paid and nonassessable.
The Series D Preferred Stock has an aggregate liquidation preference of
$200,000,000.
RANK. The Series D Preferred Stock, with respect to dividend rights and
rights on liquidation, winding up and dissolution, ranks junior to the Senior
Preferred Stock, PARI PASSU with the Series B Preferred Stock and senior to the
Common Stock.
DIVIDENDS. The holders of the shares of Series D Preferred Stock are
entitled to receive, when, as and if declared by the Board of Directors, out of
funds legally available therefor, cash dividends at an annual rate equal to 10%
. Such dividends are payable quarterly in arrears on each February 1, May 1,
August 1 and November 1. Dividends on shares of the Series D Preferred Stock
accrue and are cumulative from the date of issuance of such shares. As of the
date of this Prospectus, all such dividends have been paid.
OPTIONAL REDEMPTION. K-III may, at its option, redeem at any time on or
after February 1, 2001, from any source of funds legally available therefor, in
whole or in part, any or all of the shares of Series D Preferred Stock at
redemption prices declining ratably from 105.0% of liquidation value for the
twelve months commencing February 1, 2001 to 100.0% on and after February 1,
2006, plus in each case an amount in cash equal to all accumulated and unpaid
dividends per share (including an amount equal to a prorated dividend from the
last dividend payment date to the redemption date).
In addition, up to $100,000,000 of the Series D Preferred Stock may be
redeemed at any time on or before February 1, 1999 at a price of 110.0%, plus
accrued and unpaid dividends out of the net proceeds of one or more public
equity offerings of Common Stock, provided such redemption occurs within 180
days of such equity public offering.
MANDATORY REDEMPTION. The Series D Preferred Stock is subject to mandatory
redemption (subject to contractual and other restrictions with respect thereto
and to the legal availability of funds
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<PAGE>
therefor) on February 1, 2008 at a price equal to the liquidation preference
thereof plus all accumulated dividends to the date of redemption.
VOTING RIGHTS. Holders of the Series D Preferred Stock have no voting
rights with respect to general corporate matters except as provided by law or as
set forth in the Certificate of Designations for the Series D Preferred Stock.
Such Certificate of Designations provides that in the event that dividends on
the Series D Preferred Stock are in arrears and unpaid for six consecutive
quarterly periods, the Board of Directors of K-III will be increased by two
directors and the holders of the majority of the Series D Preferred Stock,
voting together as a class, will be entitled to elect two directors of the
expanded board of directors. Such voting rights will continue until such time as
all dividends in arrears on the Series D Preferred Stock are paid in full.
Unless the requisite holders of any senior security or any indebtedness of
K-III have consented to or granted a waiver with respect thereto, K-III may not
merge or consolidate with or into or transfer all or substantially all of its
assets (as an entirety in one transaction or a series of related transactions),
to any person without the consent of the holders of a majority of the issued and
outstanding shares of Series D Preferred Stock (together with any outstanding
shares of future parity securities entitled to vote thereon), voting together as
one class, unless (i) K-III shall be the continuing person, or the person (if
other than K-III) formed by such consolidation or into which K-III is merged or
to which the properties and assets of K-III are transferred shall be a
corporation organized and existing under the laws of the United States or any
State thereof or the District of Columbia and the Series D Preferred Stock shall
be converted into or exchanged for and shall become shares of such successor or
resulting company, having in respect of such successor or resulting company
substantially the same powers, preferences and relative participating, optional
or other special rights, and the qualifications, limitations or restrictions
thereon, that the Series D Preferred Stock had immediately prior to such
transaction and (ii) immediately after giving effect to such transaction on a
pro forma basis, the Consolidated Net Worth of the surviving entity is at least
equal to the lesser of (a) the Consolidated Net Worth of K-III (as defined in
its Certificate of Incorporation) immediately prior to such transaction and (b)
the Consolidated Net Worth of the Company on January 24, 1996.
Under Delaware law, holders of preferred stock are entitled to vote as a
class upon a proposed amendment, whether or not entitled to vote thereon by the
certificate of incorporation, if, among other matters, the amendment would
increase or decrease the aggregate number of authorized shares of such class,
increase or decrease the par value of the shares of such class, or alter or
change the powers, preferences, or special rights of the shares of such class so
as to affect them adversely.
EXCHANGE. K-III may, at its option, out of any source of funds legally
available therefor, on any scheduled dividend payment date, issue Class D
Subordinated Debentures in exchange for the Series D Preferred Stock, in whole
but not in part provided that the Senior Preferred Stock is no longer
outstanding on the exchange date. Holders of Series D Preferred Stock so
exchanged will be entitled to receive the principal amount of Class D
Subordinated Debentures equal to $100 for each $100 of liquidation preference of
Series D Preferred Stock held by such holders at the time of exchange plus an
amount per share in cash equal to all accrued but unpaid dividends thereon to
the date of exchange (including an amount equal to a pro rated dividend from the
last dividend payment date to the exchange date). No Class D Subordinated
Debentures may be issued so long as any Senior Preferred Stock remains
outstanding. The indenture for the 10 5/8% Senior Notes restricts the ability of
K-III to issue Class D Subordinated Debentures.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of March 17, 1997 and as adjusted to give
effect to the Offerings by (i) each beneficial owner of more than five percent
of the Company's outstanding Common Stock, (ii) each of the Company's directors,
(iii) certain of the Company's executive officers named in the table under
"Management" and (iv) all directors and executive officers of the Company as a
group.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED BEFORE OWNED AFTER
NAME OFFERINGS(1) PERCENTAGE OFFERINGS(1) PERCENTAGE
- ------------------------------------------------------ -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
KKR Associates(3)
9 West 57th Street
New York, New York 10019............................ 106,886,265 82.8% 106,886,265 75.5%
William F. Reilly(2)(4)............................... 4,536,653 3.4 4,536,653 3.2
Charles G. McCurdy(2)(5).............................. 2,328,612 1.8 2,328,612 1.6
Beverly C. Chell(2)................................... 2,014,357 1.5 2,014,357 1.4
Harry A. McQuillen(2)................................. 345,300 * 345,300 *
Jack L. Farnsworth(2)................................. 303,300 * 303,300 *
Henry R. Kravis(3).................................... -- -- -- --
Meyer Feldberg........................................ 6,250 * 6,250 *
Perry Golkin(3)....................................... 3,000 * 3,000 *
George R. Roberts(3).................................. -- -- -- --
Michael T. Tokarz(3).................................. 5,000 * 5,000 *
All Directors and executive officers as a group (14
persons)............................................ 9,909,392 7.3 9,909,392 7.0
</TABLE>
- ------------------------
(1) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares as of a given date which such person
has the right to acquire within 60 days after such date. For purposes of
computing the percentage of outstanding shares held by each person or group
of persons named above on a given date, any security which such person or
persons has the right to acquire within 60 days after such date is deemed to
be outstanding, but is not deemed to be outstanding for the purpose of
computing the percentage of ownership of any other person.
(2) Of the shares shown as owned, 2,987,960, 1,911,798, 1,600,484, 272,800 and
229,800 for Messrs. Reilly and McCurdy, Ms. Chell, and Messrs. McQuillen and
Farnsworth, respectively, consist of options which were either exercisable
on March 17, 1997 or become exercisable within 60 days thereafter.
(3) Shares of Common Stock shown as owned by KKR Associates are owned of record
by MA Associates, L.P., FP Associates, L.P., Magazine Associates, L.P.,
Publishing Associates, L.P., Channel One Associates, L.P. and KKR Partners
II, L.P., of which KKR Associates is the sole general partner and as to
which it possesses sole voting and investment power. Messrs. Kravis,
Roberts, Tokarz and Golkin (directors of K-III) and Robert I. MacDonnell,
Paul E. Raether, Michael W. Michelson, James H. Greene, Edward A. Gilhuly,
Clifton S. Robbins and Scott M. Stuart, as the general partners of KKR
Associates, may be deemed to share beneficial ownership of the shares shown
as beneficially owned by KKR Associates. Such persons disclaim beneficial
ownership of such shares.
(4) Disclaims beneficial ownership of 200,000 of such shares.
(5) Disclaims beneficial ownership of 160,000 of such shares.
* Less than one percent.
43
<PAGE>
CERTAIN U.S. TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock by a Non-U.S. Holder. For this purpose, a "Non-U.S. Holder" is any person
who is, for United States federal income tax purposes, a foreign corporation, a
non-resident alien individual, a foreign partnership or a foreign estate or
trust. This discussion does not address all aspects of United States federal
income and estate taxes and does not deal with foreign, state and local
consequences that may be relevant to such Non-U.S. Holders in light of their
personal circumstances. Furthermore, this discussion is based on provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), existing and
proposed regulations promulgated thereunder and administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change. EACH PROSPECTIVE PURCHASER OF COMMON STOCK IS ADVISED TO CONSULT A TAX
ADVISOR WITH RESPECT TO CURRENT AND POSSIBLE FUTURE TAX CONSEQUENCES OF
ACQUIRING, HOLDING AND DISPOSING OF COMMON STOCK AS WELL AS ANY TAX CONSEQUENCES
THAT MAY ARISE UNDER THE LAWS OF ANY U.S. STATE, MUNICIPALITY OR OTHER TAXING
JURISDICTION.
DIVIDENDS
Dividends paid to a Non-U.S. Holder of Common Stock generally will be
subject to withholding of United States federal income tax at a 30% rate or such
lower rate as may be specified by an applicable income tax treaty. However,
dividends that are effectively connected with the conduct of a trade or business
by the Non-U.S. Holder within the United States and, where a tax treaty applies,
are attributable to a United States permanent establishment of the Non-U.S.
Holder, are not subject to the withholding tax, but instead are subject to
United States federal income tax on a net income basis at applicable graduated
individual or corporate rates. Any such effectively connected dividends received
by a foreign corporation may, under certain circumstances, be subject to an
additional "branch profits tax" at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.
Under current law, dividends paid to an address outside the United States
are presumed to be paid to a resident of such country (unless the payer has
knowledge to the contrary) for purposes of the withholding tax discussed above
and, under the current interpretation of United States Treasury regulations, for
purposes of determining the applicability of a tax treaty rate. Under proposed
United States Treasury regulations not currently in effect, a Non-U.S. Holder of
Common Stock who wishes to claim the benefit of an applicable treaty rate (and
avoid back-up withholding as discussed below) would be required to satisfy
applicable certification and other requirements. Currently, certain
certification and disclosure requirements must be complied with in order to be
exempt from withholding under the effectively connected income exemption
discussed above.
A Non-U.S. Holder of Common Stock eligible for a reduced rate of United
States withholding tax pursuant to an income tax treaty may obtain a refund of
any excess amounts withheld by filing an appropriate claim for refund with the
Internal Revenue Service (the "IRS").
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
Common Stock unless (i) the gain is effectively connected with a trade or
business of the Non-U.S. Holder in the United States, and, where a tax treaty
applies, is attributable to a United States permanent establishment of the
Non-U.S. Holder (ii) in the case of a Non-U.S. Holder who is an individual and
holds the Common Stock as a capital asset, such holder is present in the United
States for 183 or more days in the taxable year of the sale or other disposition
and certain other conditions are met, or (iii) the Company is or has been a
"U.S. real property holding corporation" for United States federal income tax
purposes. The Company has determined that it is not
44
<PAGE>
and does not anticipate becoming a "U.S. real property holding corporation" for
United States federal income tax purposes.
An individual Non-U.S. Holder described in clause (i) above will be subject
to tax on the net gain derived from the sale under regular graduated United
States federal income tax rates. An individual Non-U.S. Holder described in
clause (ii) above will be subject to a flat 30% tax on the gain derived from the
sale, which may be offset by United States source capital losses (even though
the individual is not considered a resident of the United States). If a Non-U.S.
Holder that is a foreign corporation falls under clause (i) above, it will be
subject to tax on its gain under regular graduated United States federal income
tax rates and, in addition, may be subject to the branch profits tax equal to
30% of its effectively connected earnings and profits within the meaning of the
Code for the taxable year, as adjusted for certain items, unless it qualifies
for a lower rate under an applicable income tax treaty.
FEDERAL ESTATE TAX
Common Stock held by an individual Non-U.S. Holder at the time of death will
be included in such holder's gross estate for United States federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to such holder and the tax withheld with respect to
such dividends, regardless of whether withholding was required. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the Non-U.S. Holder
resides under the provisions of an applicable income tax treaty.
Under current law, backup withholding at the rate of 31% generally will not
apply to dividends paid to a Non-U.S. Holder at an address outside the United
States (unless the payer has knowledge that the payee is a U.S. person). Under
proposed United States Treasury regulations not currently in effect, however, a
Non-US Holder will be subject to back-up withholding unless applicable
certification requirements are met.
Payment of the proceeds of a sale of Common Stock by or through a United
States office of a broker is subject to both backup withholding and information
reporting unless the beneficial owner certifies under penalties of perjury that
it is a Non-U.S. Holder or otherwise establishes an exemption. In general,
backup withholding and information reporting will not apply to a payment of the
proceeds of a sale of Common Stock by or through a foreign office of a broker.
If, however, such broker is, for United States federal income tax purposes a
U.S. person, a controlled foreign corporation, or a foreign person that derives
50% or more of its gross income for a certain period from the conduct of a trade
or business in the United States, such payments will be subject to information
reporting, but not backup withholding, unless (1) such broker has documentary
evidence in its records that the beneficial owner is a Non-U.S. Holder and
certain other conditions are met, or (2) the beneficial owner otherwise
establishes an exemption.
Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.
45
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "U.S. Underwriting Agreement") among the Company and each of the
underwriters named below (the "U.S. Underwriters"), for whom Salomon Brothers
Inc, Morgan Stanley & Co. Incorporated, Credit Suisse First Boston Corporation,
Donaldson, Lufkin & Jenrette Securities Corporation and Merrill Lynch, Pierce,
Fenner & Smith Incorporated are acting as representatives (the "U.S.
Representatives"), the Company has agreed to sell each of the U.S. Underwriters,
and each such U.S. Underwriter has severally agreed to purchase from the
Company, the aggregate number of shares of Common Stock set forth opposite its
name below:
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
- ------------------------------------------------------------------------------- -------------
<S> <C>
Salomon Brothers Inc ..........................................................
Morgan Stanley & Co. Incorporated..............................................
Credit Suisse First Boston Corporation.........................................
Donaldson, Lufkin & Jenrette Securities Corporation............................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.........................................................
-------------
Total.................................................................... 10,000,000
-------------
-------------
</TABLE>
In addition, the Company has entered into an underwriting agreement (the
"International Underwriting Agreement") with the underwriters named therein (the
"International Underwriters" and, together with the U.S. Underwriters, the
"Underwriters"), for whom Salomon Brothers International Limited, Morgan Stanley
& Co. International Limited, Credit Suisse First Boston (Europe) Limited,
Donaldson, Lufkin & Jenrette International Limited and Merrill Lynch
International are acting as representatives (the "International
Representatives"), providing for the concurrent offer and sale of 2,500,000
shares of Common Stock outside the U.S. and Canada. The closing with respect to
the sale of the shares of Common Stock pursuant to the U.S. Underwriting
Agreement is a condition to the closing with respect to the sale of the shares
of Common Stock pursuant to the International Underwriting Agreement, and the
closing with respect to the sale of the shares of Common Stock pursuant to the
International Underwriting Agreement is a condition to the closing with respect
to sale of the shares of Common Stock pursuant to the U.S. Underwriting
Agreement. The public offering price and underwriting discounts and concessions
per share for the U.S. Offering and the International Offering will be
identical.
The U.S. Underwriting Agreement provides that the several U.S. Underwriters
will be obligated to purchase all the shares of Common Stock being offered
(other than the shares covered by the over-allotment option described below) if
any are purchased. In the event of default by any U.S. Underwriters, the U.S.
Underwriting Agreement provides that, in certain circumstances, the purchase
commitments of the non-defaulting U.S. Underwriters may be increased or the U.S.
Underwriting Agreement may be terminated.
The U.S. Underwriters have advised the Company that they propose initially
to offer the Common Stock directly to the public at the public offering price
set forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of $ per share. The U.S.
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share on sales to certain other dealers. After the initial
offering, the price to public and concessions to dealers may be changed.
46
<PAGE>
Each U.S. Underwriter has severally agreed that, as part of the distribution
of the U.S. Offering, (i) it is not purchasing any shares of Common Stock for
the account of anyone other than a United States or Canadian Person (as defined
below) and (ii) it has not offered or sold, and will not offer or sell, directly
or indirectly, any shares of Common Stock or distribute this Prospectus to any
person outside the United States or Canada or to anyone other than a United
States or Canadian Person. Each International Underwriter has severally agreed
that, as part of the distribution of the International Offering, (i) it is not
purchasing any shares of Common Stock for the account of any United States or
Canadian Person and (ii) it has not offered or sold, and will not offer or sell,
directly or indirectly, any shares of Common Stock or distribute any Prospectus
related to the International Offering to any person within the United States or
Canada or to any United States or Canadian Person. The foregoing limitations do
not apply to stabilization transactions or to certain other transactions
specified in the Agreement Between U.S. Underwriters and International
Underwriters described below. "United States or Canadian Person" means any
person who is a natural citizen or resident of the United States or Canada, any
corporation, partnership or other entity created or organized in or under the
laws of the United States or Canada, or any political subdivision thereof, any
estate or trust the income of which is subject to United States or Canadian
federal income taxation, regardless of the source of its income (other than a
foreign branch of any United States or Canadian Person), and includes any United
States or Canadian branch of a person other than a United States or Canadian
Person.
Each U.S. Underwriter that will offer or sell shares of Common Stock in
Canada as part of the distribution has severally agreed that such offers and
sales will be made only pursuant to an exemption from the prospectus
requirements in each jurisdiction in Canada in which such offers and sales are
made. Each International Underwriter has severally agreed that (i) it has not
offered or sold and will not offer or sell in the United Kingdom, by means of
any document, any Common Stock other than to persons whose ordinary business it
is to buy or sell shares or debentures, whether as principal or agent, or in
circumstances which do not constitute an offer to the public within the meaning
of the Companies Act 1985; (ii) it has complied with and will comply with all
applicable provisions of The Financial Services Act 1986 with respect to
anything done by it in relation to the Common Stock, in, from or otherwise
involving the United Kingdom; and (iii) it has only issued or passed on and will
only issue and pass on to any person in the United Kingdom any document received
by it in connection with the issue of the Common Stock if that person is of a
kind described in Article 9(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1992 or a person to whom the document may
otherwise lawfully be issued or passed on.
The U.S. Underwriters and the International Underwriters have entered into
an agreement that provides for the coordination of their activities (the
"Agreement Between U.S. Underwriters and International Underwriters"). Pursuant
to the Agreement Between U.S. Underwriters and International Underwriters, sales
may be made between the U.S. Underwriters and the International Underwriters of
such number of shares of Common Stock as may be mutually agreed. The per share
price of any shares of Common Stock so sold shall be the initial public offering
price set forth on the cover page of this Prospectus, less an amount not greater
than the concession to securities dealers set forth above. To the extent that
there are sales between the U.S. Underwriters and the International Underwriters
pursuant to the Agreement Between U.S. Underwriters and International
Underwriters, the number of shares initially available for sale by the U.S.
Underwriters or by the International Underwriters may be more or less than the
amount appearing on the cover page of this Prospectus.
The Company has granted to the U.S. Underwriters and International
Underwriters options to purchase up to an additional aggregate of 1,500,000 and
375,000 shares of Common Stock, respectively, at the initial public offering
price less the aggregate underwriting discounts and concessions, solely to cover
over-allotments. Such options may be exercised at any time up to 30 days after
the date of this Prospectus. To the extent that the U.S. Underwriters and
International Underwriters exercise such options, each of the U.S. Underwriters
or International Underwriters, as the case may be, will be
47
<PAGE>
committed, subject to certain conditions, to purchase a number of option shares
proportionate to such U.S. Underwriter's or International Underwriter's initial
commitment, as applicable.
For a period of 90 days after the date of this Prospectus, the Company, each
of the Common Stock Partnerships and each executive officer of the Company have
agreed not to offer, sell, contract to sell or otherwise dispose of any shares
of Common Stock or any security convertible into or exercisable or exchangeable
for Common Stock, file or cause to be filed a registration statement with the
Commission in respect of, or establish or increase a put equivalent position or
liquidate or decrease a call equivalent position within the meaning of Section
16 of the Exchange Act with respect to any shares of Common Stock of the Company
or publicly announce the intention to effect any such transaction, in each case,
without the prior written consent of Salomon Brothers Inc, except (a) the
Company may register the Common Stock and may sell the shares of Common Stock
offered in the Offerings and (b) the Company may issue securities pursuant to
the Company's stock option or other benefit or incentive plans maintained for
its officers, directors or employees.
No action has been taken or will be taken in any jurisdiction by the
Company, the U.S. Underwriters or the International Underwriters that would
permit a public offering of the shares offered hereby in any jurisdiction where
action for that purpose is required, other than the United States. Persons who
come into possession of this Prospectus are required by the Company, the U.S.
Underwriters and the International Underwriters to inform themselves about and
to observe any restrictions as to the offering of the shares offered hereby and
the distribution of this Prospectus.
In connection with these Offerings the Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offerings than
they are committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following completion of the Offerings to cover
all or a portion of such short position. The Underwriters may also cover all or
a portion of such short position, up to 1,875,000 shares of Common Stock, by
exercising the Underwriters' over-allotment options referred to above. In
addition, Salomon Brothers Inc and Salomon Brothers International Limited, on
behalf of the Underwriters, may impose "penalty bids" under contractual
arrangements with the Underwriters whereby it may reclaim from an Underwriter
(or dealer participating in the Offerings) for the account of the other
Underwriters, the selling concession with respect to Common Stock that is
distributed in the Offerings but subsequently purchased for the account of the
Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
The shares of Common Stock may not be offered or sold directly or indirectly
in Hong Kong by means of this document or any other offering material or
document other than to persons whose ordinary business it is to buy or sell
shares or debentures, whether as principal or as agent. Unless permitted to do
so by the securities laws of Hong Kong, no person may issue or cause to be
issued in Hong Kong this document or any amendment or supplement thereto or any
other information, advertisement or document relating to the shares of Common
Stock other than with respect to shares of Common Stock intended to be disposed
of to persons outside Hong Kong or to persons whose business involves the
acquisition, disposal or holding of securities, whether as principal or as
agent.
The shares of Common Stock have not been registered under the Securities and
Exchange law of Japan and are not being offered and may not be offered or sold
directly or indirectly in Japan or to residents of Japan, except pursuant to
applicable Japanese laws and regulations.
48
<PAGE>
Purchasers of the shares of Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase in addition to the offering price set forth on the cover
page hereof.
K-III engaged Donaldson, Lufkin & Jenrette Securities Corporation in March
1996 to serve as financial advisor in connection with the acquisition by K-III
of WESTCOTT COMMUNICATIONS, and Donaldson, Lufkin & Jenrette Securities
Corporation received customary compensation in connection with such services. In
addition, in connection with the sale of the Non-Core Businesses, K-III has
engaged Salomon Brothers Inc as financial advisor for the disposition of KRAMES
COMMUNICATIONS and Morgan Stanley & Co. Incorporated as financial advisor for
the disposition of the DAILY RACING FORM group. Each of Salomon Brothers Inc and
Morgan Stanley & Co. Incorporated will receive customary compensation for their
services in connection with these dispositions.
Certain affiliates of the Underwriters hold Senior Preferred Stock or are
lenders under the Credit Facilities and, as a result, may receive cash upon the
redemption of the Senior Preferred Stock with the net proceeds from the
Offerings. See "Use of Proceeds." In addition, certain of the Underwriters or
their affiliates participate on a regular basis in various general financing and
banking transactions for the Company and certain affiliates.
The Company has agreed to indemnify the U.S. Underwriters against certain
liabilities, including certain liabilities under the Securities Act, or
contribute to payments the U.S. Underwriters may be required to make in respect
thereof.
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby is being passed
upon for the Company by Simpson Thacher & Bartlett (a partnership which includes
professional corporations), New York, New York. Certain legal matters in
connection with the sale of shares of Common Stock offered hereby are being
passed upon for the underwriters by Latham & Watkins, New York, New York.
Certain partners of Latham & Watkins, members of their respective families,
related persons and others have an indirect interest, through the Common Stock
Partnerships, in less than 1% of the Common Stock. Such persons do not have the
power to vote or dispose of such shares of Common Stock. Latham & Watkins
renders legal services to the Company and KKR on a regular basis.
EXPERTS
The consolidated financial statements of K-III Communications Corporation
and subsidiaries for the years ended December 31, 1994, 1995 and 1996 included
in this Prospectus and the related financial statement schedules included
elsewhere in the registration statement have been audited by Deloitte & Touche
LLP, independent public accountants, as stated in their reports appearing herein
and elsewhere in the registration statement, and are included in reliance upon
the reports of such firm given upon their authority as experts in accounting and
auditing.
The consolidated financial statements of Westcott Communications, Inc.
appearing in K-III Communications Corporation's Current Report (Form 8-K) dated
June 14, 1996 for the years ended December 31, 1995 and 1994, have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
included therein and incorporated herein by reference. Such consolidated
financial statements are incorporated herein by reference in reliance upon the
authority of such firm as experts in accounting and auditing.
49
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, files reports, proxy and information
statements and other information with the Commission. Such reports, proxy and
information statements and other information may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington D.C. 20549 and at the Commission's
Regional Offices located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials also can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission also maintains a Web site at
http://www.sec.gov which contains reports, proxy statements and other
information regarding registrants that file electronically with the Commission.
In addition, reports, proxy statements and other information concerning the
Company may be inspected at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
This Prospectus constitutes a part of a Registration Statement on Form S-3
(the "Registration Statement") filed by the Company with the Commission under
the Securities Act. This Prospectus omits certain information contained in the
Registration Statement, and reference is hereby made to the Registration
Statement and to the exhibits relating thereto for further information with
respect to the Company and the offering made hereby. Any statements contained
herein concerning the provisions of any document are not necessarily complete
and, in each instance, reference is made to the copy of such document filed as
an exhibit to the Registration Statement or otherwise filed with the Commission.
Each such statement is qualified in its entirety by such reference.
50
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The unaudited pro forma statement of consolidated operations for the year
ended December 31, 1996 gives effect to the following transactions and events as
if they had occurred on January 1, 1996: (i) the acquisitions of certain net
assets or capital stock as described in Note 4 of the notes to the Company's
consolidated financial statements for the years ended December 31, 1994, 1995
and 1996 (collectively referred to as the "Acquired Businesses") and (ii) the
Redemption and the Repurchase of the 10 5/8% Senior Notes through borrowings
under the Credit Facilities. The adjustments to reflect the acquisition of the
Acquired Businesses and the Redemption and the Repurchase are hereinafter
referred to as the "Pro Forma Adjustments." The Pro Forma Adjustments do not
give effect to the planned divestitures of the Non-Core Businesses. The summary
unaudited pro forma consolidated balance sheet data at December 31, 1996 gives
effect to the Redemption and the Repurchase as if they occurred on December 31,
1996.
The Company believes the accounting used for the Pro Forma Adjustments
provides a reasonable basis on which to present the pro forma consolidated
financial data. The pro forma consolidated balance sheet and statement of
consolidated operations are unaudited and were derived by adjusting the
historical consolidated financial statements of the Company. THE PRO FORMA
CONSOLIDATED STATEMENTS ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD
NOT BE CONSTRUED TO BE INDICATIVE OF THE COMPANY'S CONSOLIDATED FINANCIAL
POSITION OR RESULTS OF OPERATIONS HAD THE TRANSACTIONS BEEN CONSUMMATED ON THE
DATES ASSUMED AND DO NOT PROJECT THE COMPANY'S CONSOLIDATED FINANCIAL POSITION
OR RESULTS OF OPERATIONS FOR ANY FUTURE DATE OR PERIOD.
The unaudited pro forma consolidated financial statements and accompanying
notes should be read in conjunction with the historical consolidated financial
statements of the Company and the notes thereto included elsewhere in this
Prospectus.
P-1
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF CONSOLIDATED OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
----------------------------------------------------------------
<S> <C> <C> <C> <C>
ACQUIRED REDEMPTION/ PRO FORMA
HISTORICAL BUSINESSES(1) REPURCHASE(2) CONSOLIDATED
------------- -------------- --------------- ----------------
Sales, net:
Education.................................... $ 376,217 $ 39,481 $ 415,698
Information.................................. 313,891 14,744 328,635
Specialty Media.............................. 684,341 12,873 697,214
------------- -------------- ----------------
Total sales, net............................... 1,374,449 67,098 1,441,547
Operating costs and expenses:
Cost of goods sold........................... 337,065 9,158 346,223
Marketing and selling........................ 249,301 15,556 264,857
Distribution, circulation and fulfillment.... 230,533 9,178 239,711
Editorial.................................... 104,484 11,481 115,965
Other general expenses....................... 154,966 15,161 170,127
Corporate administrative expenses............ 21,497 21,497
Depreciation and amortization of
prepublication costs, property and
equipment.................................. 38,233 1,710 39,943
Amortization of intangible assets, excess of
purchase price over net assets acquired and
other...................................... 152,469 14,677 167,146
------------- -------------- ----------------
Operating income (loss)........................ 85,901 (9,823) 76,078
Other income (expense):
Interest expense............................. (125,506) (15,858) $ 8,690 (132,674)
Amortization of deferred financing and
organizational costs..................... (3,662) 1,422 (2,240)
Write-off of unamortized deferred financing
costs.................................... (8,648) 8,648 --
Other, net................................... 6,659 6,659
------------- -------------- --------------- ----------------
Income (loss) before income taxes &
extraordinary charges........................ (45,256) (25,681) 18,760 (52,177)
Income tax benefit............................. 53,300 53,300
------------- -------------- --------------- ----------------
Income (loss) before extraordinary charges..... 8,044 (25,681) 18,760 1,123
Extraordinary charges.......................... (18,143) (18,143)
(8,648) (8,648)
------------- -------------- --------------- ----------------
Net income (loss).............................. $ 8,044 $ (25,681) $ (8,031) $ (25,668)
------------- --------------
------------- -------------- --------------- ----------------
--------------- ----------------
Income (loss) before extraordinary charges..... $ 8,044 $ (25,681) $ 18,760 $ 1,123
Less preferred stock dividends:
Non-cash..................................... 16,582 16,582
Cash......................................... 26,944 26,944
------------- -------------- --------------- ----------------
Loss before extraordinary charges applicable to
common shareholders(3)....................... $ (35,482) $ (25,681) $ 18,760 $ (42,403)
------------- --------------
------------- -------------- --------------- ----------------
--------------- ----------------
Pro forma loss before extraordinary charges per
common and common equivalent share(3)(4)..... $ (.33)
----------------
----------------
Pro forma weighted average common and common
equivalent shares outstanding(4)............. 130,007,632
----------------
----------------
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Financial Data.
P-2
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
---------------------------------------------
REDEMPTION/ PRO FORMA
HISTORICAL REPURCHASE(2) CONSOLIDATED
------------- --------------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 36,655 $ 36,655
Accounts receivable, net........................................ 233,603 233,603
Inventories, net................................................ 52,743 52,743
Net assets held for sale........................................ 18,684 18,684
Prepaid expenses and other...................................... 34,834 34,834
------------- -------------
Total current assets.......................................... 376,519 376,519
------------- -------------
Property and equipment, net....................................... 122,823 122,823
Other intangible assets, net...................................... 781,316 781,316
Excess of purchase price over net assets acquired, net............ 971,665 971,665
Deferred income tax assets, net................................... 176,200 176,200
Other non-current assets.......................................... 123,692 $ (6,279) 117,413
------------- --------------- -------------
$ 2,552,215 $ (6,279) $ 2,545,936
------------- --------------- -------------
------------- --------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 107,258 $ 107,258
Accrued interest payable........................................ 22,150 $ (4,130) 18,020
Accrued expenses and other...................................... 140,959 140,959
Deferred revenues............................................... 144,857 144,857
Current maturities of long-term debt............................ 6,000 6,000
------------- --------------- -------------
Total current liabilities..................................... 421,224 (4,130) 417,094
------------- --------------- -------------
Long-term debt.................................................... 1,565,686 13,667 1,579,353
------------- --------------- -------------
Other non-current liabilities..................................... 35,062 35,062
------------- -------------
Exchangeable Preferred Stock...................................... 442,729 442,729
------------- -------------
Common stock subject to redemption................................ 5,957 5,957
------------- -------------
Shareholders' equity:
Common stock.................................................... 1,283 1,283
Additional paid-in capital...................................... 772,642 772,642
Accumulated deficit............................................. (691,098) (15,816) (706,914)
Cumulative foreign currency translation adjustments............. (1,270) (1,270)
------------- --------------- -------------
Total shareholders' equity.................................... 81,557 (15,816) 65,741
------------- --------------- -------------
$ 2,552,215 $ (6,279) $ 2,545,936
------------- --------------- -------------
------------- --------------- -------------
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Financial Data.
P-3
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
(1) Reflects the operating results of the Acquired Businesses as if such
businesses were acquired on January 1, 1996. For those acquisitions for
which asset appraisals have not yet been finalized, pro forma amortization
expense approximates the estimated average amortization over the life of the
intangible assets. The pro forma interest expense adjustments reflect the
additional borrowings to finance the acquisitions at an assumed weighted
average rate of 7.04% for the year ended December 31, 1996.
(2) Reflects the Redemption and Repurchase of the 10 5/8% Senior Notes as if
such Redemption and Repurchase, as well as repurchases which occurred in
November and December of 1996, occurred on January 1, 1996 through
borrowings under the Credit Facilities. The pro forma interest expense
adjustments reflect the reduction of interest expense on the 10 5/8% Senior
Notes and the additional borrowings to fund the Redemption and Repurchase at
an assumed weighted average rate of 7.04% for the year ended December 31,
1996 and the reclassification of the premium of $905 associated with
purchases of the 10 5/8% Senior Notes in 1996. The pro forma amortization of
the deferred financing costs adjustment reflects the redemption of the
10 5/8% Senior Notes at January 1, 1996. The write-off of the unamortized
deferred financing costs of $8,648 has been reclassified as an extraordinary
charge. The extraordinary charge also consists of the difference between the
redemption value of $242,787 (exclusive of $4,130 of related accrued
interest payable at December 31, 1996) and the carrying value of $233,250 at
December 31, 1996 of the 10 5/8% Senior Notes which reflects a weighted
average premium of 104.99% on the Repurchase and a premium of 104% on the
Redemption (the "Premium") and the write-off of the unamortized deferred
financing costs of $7,701 associated with the 10 5/8% Senior Notes. The pro
forma adjustment to other non-current assets at December 31, 1996 reflects
the write-off of the unamortized deferred financing costs associated with
the 10 5/8% Senior Notes. The pro forma adjustment to accrued interest
payable at December 31, 1996 reflects the elimination of accrued interest on
the 10 5/8% Senior Notes. The pro-forma adjustment to long-term debt
reflects the additional borrowings under the Credit Facilities and the
Redemption and Repurchase. The pro forma adjustment to accumulated deficit
represents the write-off of unamortized deferred financing costs of $6,279
and the Premium of $9,537.
(3) The calculation of the pro forma loss applicable to common shareholders
includes noncash charges for depreciation and amortization of property and
equipment, prepublication costs, intangible assets, excess of purchase price
over net assets acquired and deferred financing costs, non-cash interest
expense on an acquisition obligation, distribution advance and other current
liability, and non-cash preferred stock dividend requirements. These
non-cash charges totaled approximately $224,442 for the year ended December
31, 1996.
(4) Pro forma loss before extraordinary charges per common and common equivalent
share for the year ended December 31, 1996 was computed using the weighted
average number of common and common equivalent shares outstanding during the
year. The weighted average number of common and common equivalent shares
outstanding includes incremental shares for nonqualified options granted to
purchase Common Stock. Such incremental shares were determined utilizing the
treasury stock method. Pro forma loss before extraordinary charges per
common share assuming full dilution is not presented because it is
antidilutive.
P-4
<PAGE>
K-III COMMUNICATIONS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Report of Independent Auditors--Deloitte & Touche LLP................................. F-2
<S> <C>
Statements of Consolidated Operations for the Years Ended
December 31, 1994, 1995 and 1996.................................................... F-3
Consolidated Balance Sheets as of December 31, 1995 and 1996.......................... F-4
Statements of Consolidated Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996.................................................... F-5
Statements of Shareholders' Equity for the Years Ended
December 31, 1994, 1995 and 1996.................................................... F-6
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1994, 1995 and 1996.................................................... F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of
K-III Communications Corporation
New York, New York:
We have audited the accompanying consolidated balance sheets of K-III
Communications Corporation and subsidiaries as of December 31, 1995 and 1996,
and the related statements of consolidated operations, shareholders' equity and
consolidated cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company and subsidiaries at
December 31, 1995 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for advertising costs to conform with Statement
of Position 93-7--"Reporting on Advertising Costs" of the American Institute of
Certified Public Accountants in 1994.
DELOITTE & TOUCHE LLP
New York, New York
January 29, 1997
(March 19, 1997 as to Note 26)
F-2
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
NOTES 1994 1995 1996
---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Sales, net:
Education......................................... $ 430,134 $ 330,414 $ 376,217
Information....................................... 192,732 263,542 313,891
Specialty Media................................... 341,782 452,373 684,341
---------------- ---------------- ----------------
Total sales, net.................................... 964,648 1,046,329 1,374,449
Operating costs and expenses:
Cost of goods sold................................ 206,390 251,347 337,065
Marketing and selling............................. 197,379 177,167 249,301
Distribution, circulation and fulfillment......... 180,962 188,147 230,533
Editorial......................................... 64,235 73,703 104,484
Other general expenses............................ 140,263 122,816 154,966
Corporate administrative expenses................. 13,325 17,034 21,497
Depreciation and amortization of prepublication
costs, property and equipment................... 11 16,190 25,761 38,233
Provision for loss on the sales of businesses,
net............................................. 6 15,025 35,447 --
Restructuring and other costs..................... 7 -- 14,667 --
Amortization of intangible assets, excess of
purchase price over net assets acquired and
other........................................... 8, 12 120,676 166,515 152,469
---------------- ---------------- ----------------
Operating income (loss)............................. 10,203 (26,275) 85,901
Other income (expense):
Interest expense.................................. (78,351) (105,837) (125,506)
Amortization of deferred financing and
organizational costs............................ 13 (3,080) (3,135) (3,662)
Write-off of unamortized deferred financing
costs........................................... (11,874) -- (8,648)
Other, net........................................ 6 (401) 212 6,659
---------------- ---------------- ----------------
Loss before income tax benefit...................... (83,503) (135,035) (45,256)
Income tax benefit.................................. 16 42,100 59,600 53,300
---------------- ---------------- ----------------
Net income (loss)................................... (41,403) (75,435) 8,044
Preferred stock dividends:
Non-cash.......................................... (14,459) (17,478) (16,582)
Cash.............................................. (11,500) (11,500) (26,944)
---------------- ---------------- ----------------
Loss applicable to common shareholders.............. $ (67,362) $ (104,413) $ (35,482)
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Loss per common and common equivalent share......... 3 $ (.65) $ (.91) $ (.27)
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Weighted average common and common equivalent shares
outstanding....................................... 3 103,642,668 115,077,498 130,007,632
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
NOTES 1995 1996
------------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 27,226 $ 36,655
Accounts receivable, net........................................... 9 173,771 233,603
Inventories, net................................................... 10 70,844 52,743
Net assets held for sale........................................... 5 5,253 18,684
Prepaid expenses and other......................................... 26,732 34,834
------------- -------------
Total current assets........................................... 303,826 376,519
Property and equipment, net.......................................... 11 112,013 122,823
Other intangible assets, net......................................... 12 699,617 781,316
Excess of purchase price over net assets acquired, net............... 12 534,554 971,665
Deferred income tax asset, net....................................... 16 113,800 176,200
Other non-current assets............................................. 13 117,606 123,692
------------- -------------
$ 1,881,416 $ 2,552,215
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 90,414 $ 107,258
Accrued interest payable........................................... 9,326 22,150
Accrued expenses and other......................................... 14 125,967 140,959
Deferred revenues.................................................. 128,679 144,857
Current maturities of long-term debt............................... 15 6,000 6,000
------------- -------------
Total current liabilities...................................... 360,386 421,224
------------- -------------
Long-term debt....................................................... 15, 26 1,134,916 1,565,686
------------- -------------
Other non-current liabilities........................................ 33,924 35,062
------------- -------------
Commitments and contingencies 22
Exchangeable preferred stock (aggregated liquidation and redemption
values of $236,571 and $453,153 at December 31, 1995 and 1996,
respectively)...................................................... 17 231,606 442,729
------------- -------------
Common stock subject to redemption ($.01 par value, 2,406,513 shares
and 643,310 shares outstanding at December 31, 1995 and 1996,
respectively)...................................................... 18 28,022 5,957
------------- -------------
Shareholders' equity:
Common stock ($.01 par value, 250,000,000 shares authorized;
125,921,221 shares and 128,349,045 shares outstanding at December
31, 1995 and 1996, respectively)................................. 18 1,259 1,283
Additional paid-in capital......................................... 18 748,194 772,642
Accumulated deficit................................................ 19 (655,616) (691,098)
Cumulative foreign currency translation adjustments................ (1,275) (1,270)
------------- -------------
Total shareholders' equity..................................... 92,562 81,557
------------- -------------
$ 1,881,416 $ 2,552,215
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
<S> <C> <C> <C>
1994 1995 1996
----------- --------- -----------
<CAPTION>
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................................ $ (41,403) $ (75,435) $ 8,044
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation, amortization and other................................... 139,946 195,411 194,364
Provision for loss on the sales of businesses, net..................... 15,025 35,447 --
Accretion of discount on acquisition obligation, distribution advance
and other............................................................ 9,617 8,147 6,398
Write-off of deferred financing costs.................................. 11,874 -- 8,648
Income tax benefit..................................................... (42,100) (59,600) (53,300)
Other, net............................................................. 177 (122) (6,213)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable, net............................................... (2,510) (2,525) (24,692)
Inventories, net....................................................... 1,329 (23,630) 24,531
Prepaid expenses and other............................................. (14,367) (13,127) (598)
Increase (decrease) in:
Accounts payable....................................................... 5,971 6,742 5,807
Accrued interest payable............................................... 877 1,131 12,824
Accrued expenses and other............................................. (13,492) (26,857) (12,674)
Deferred revenues...................................................... (4,984) 16,971 (11,201)
Other non-current liabilities.......................................... (1,070) 1,509 (2,651)
----------- --------- -----------
Net cash provided by operating activities.............................. 64,890 64,062 149,287
----------- --------- -----------
INVESTING ACTIVITIES:
Additions to property, equipment and other............................... (16,118) (25,179) (29,661)
Proceeds from sales of businesses........................................ -- 58,656 8,071
Proceeds from sales of property, equipment and other..................... 1,934 1,765 871
Payments for businesses acquired......................................... (427,942) (353,954) (700,990)
----------- --------- -----------
Net cash used in investing activities.................................. (442,126) (318,712) (721,709)
----------- --------- -----------
FINANCING ACTIVITIES:
Borrowings under credit agreements....................................... 766,329 622,459 1,683,787
Repayments of borrowings under credit agreements......................... (678,800) (522,500) (1,384,800)
Proceeds from issuance of 8 1/2% Senior Notes, net of discount........... -- -- 298,734
Payments of acquisition obligation....................................... (6,000) (6,000) (6,000)
Payments of floating rate indebtedness................................... -- -- (150,000)
Proceeds from issuance of common stock, net of redemptions............... 76,360 187,520 3,498
Proceeds from issuance of 10 1/4% Senior Notes........................... 100,000 -- --
Borrowings under BONY Term Loan.......................................... 150,000 -- --
Proceeds from issuance of Old Preferred Stock............................ 75,050 50,000 --
Proceeds from issuance of Series C (exchanged into Series D) Preferred
Stock, net of issuance costs........................................... -- -- 193,451
Redemption of Old Preferred Stock........................................ (76,324) (52,691) --
Purchases of 10 5/8% Senior Notes........................................ -- -- (16,750)
Dividends paid to preferred shareholders................................. (11,500) (11,500) (26,944)
Deferred financing costs paid............................................ (10,842) (3,204) (13,132)
Other.................................................................... (349) (440) 7
----------- --------- -----------
Net cash provided by financing activities.............................. 383,924 263,644 581,851
----------- --------- -----------
Increase in cash and cash equivalents...................................... 6,688 8,994 9,429
Cash and cash equivalents, beginning of period............................. 11,544 18,232 27,226
----------- --------- -----------
Cash and cash equivalents, end of period................................... $ 18,232 $ 27,226 $ 36,655
----------- --------- -----------
----------- --------- -----------
SUPPLEMENTAL INFORMATION:
Businesses acquired:
Fair value of assets acquired.......................................... $ 517,412 $ 429,810 $ 779,192
Liabilities assumed.................................................... 89,470 75,856 78,202
----------- --------- -----------
Cash paid for businesses acquired...................................... $ 427,942 $ 353,954 $ 700,990
----------- --------- -----------
----------- --------- -----------
Interest paid............................................................ $ 71,395 $ 102,040 $ 112,657
----------- --------- -----------
----------- --------- -----------
Non-cash investing and financing activities:
Asset acquired under a capital lease obligation........................ $ -- $ 11,738 $ --
----------- --------- -----------
----------- --------- -----------
Preferred stock dividends in kind...................................... $ 14,459 $ 17,478 $ 16,582
----------- --------- -----------
----------- --------- -----------
Accretion in carrying value of preferred stock......................... $ 590 $ 590 $ 1,090
----------- --------- -----------
----------- --------- -----------
Accretion (reduction) in carrying value of common stock subject to
redemption........................................................... $ -- $ 9,927 $ (885)
----------- --------- -----------
----------- --------- -----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
<S> <C>
Balance at January 1, 1994..................................................................
Issuances of common stock, net of issuance costs............................................
Expiration of redemption feature on common stock subject to redemption......................
$11.625 Series B Exchangeable Preferred Stock-dividends in kind.............................
$2.875 Senior Exchangeable Preferred Stock--cash dividends..................................
Old Preferred Stock--dividends in kind......................................................
Accretion of differences between carrying value and redemption value of:
$2.875 Senior Exchangeable Preferred Stock..............................................
$11.625 Series B Exchangeable Preferred Stock...........................................
Cumulative foreign currency translation adjustments.........................................
Net loss....................................................................................
Balance at December 31, 1994................................................................
Issuances of common stock, net of issuance costs............................................
Expiration of redemption feature on common stock subject to redemption......................
$11.625 Series B Exchangeable Preferred Stock--dividends in kind............................
$2.875 Senior Exchangeable Preferred Stock--cash dividends..................................
Old Preferred Stock--dividends in kind......................................................
Accretion of differences between carrying value and redemption value of:
$2.875 Senior Exchangeable Preferred Stock..............................................
$11.625 Series B Exchangeable Preferred Stock...........................................
Common stock subject to redemption......................................................
Cumulative foreign currency translation adjustments.........................................
Net loss....................................................................................
Balance at December 31, 1995................................................................
Issuances of common stock, net of issuance costs............................................
Expiration of redemption feature on common stock subject to redemption......................
$11.625 Series B Exchangeable Preferred Stock--dividends in kind............................
$2.875 Senior Exchangeable Preferred Stock--cash dividends..................................
$10.00 Series D Exchangeable Preferred Stock--cash dividends................................
Reduction (accretion) of differences between carrying value and redemption value of:
$2.875 Senior Exchangeable Preferred Stock..............................................
$11.625 Series B Exchangeable Preferred Stock...........................................
$10.00 Series D Exchangeable Preferred Stock............................................
Common stock subject to redemption......................................................
Cumulative foreign currency translation adjustments.........................................
Net income..................................................................................
Balance at December 31, 1996................................................................
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
COMMON STOCK ADDITIONAL CURRENCY
- ------------------------- PAID-IN ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENTS TOTAL
- -------------- --------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
94,705,557 $ 947 $ 488,541 $ (483,841) $ (1,220) $ 4,427
9,381,250 94 74,956 75,050
1,251,002 12 10,033 10,045
(13,185) (13,185)
(11,500) (11,500)
(1,274) (1,274)
(273) (273)
(317) (317)
(104) (104)
(41,403) (41,403)
- -------------- --------- ----------- ------------- ------------ ------------
105,337,809 1,053 572,940 (551,203) (1,324) 21,466
20,435,782 204 184,964 185,168
147,630 2 807 809
(14,787) (14,787)
(11,500) (11,500)
(2,691) (2,691)
(273) (273)
(317) (317)
(9,927) (9,927)
49 49
(75,435) (75,435)
- -------------- --------- ----------- ------------- ------------ ------------
125,921,221 1,259 748,194 (655,616) (1,275) 92,562
681,890 7 3,440 3,447
1,745,934 17 21,213 21,230
(16,582) (16,582)
(11,500) (11,500)
(15,444) (15,444)
(273) (273)
(317) (317)
(500) (500)
885 885
5 5
8,044 8,044
- -------------- --------- ----------- ------------- ------------ ------------
128,349,045 $ 1,283 $ 772,642 $ (691,098) $ (1,270) $ 81,557
- -------------- --------- ----------- ------------- ------------ ------------
- -------------- --------- ----------- ------------- ------------ ------------
</TABLE>
F-7
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS
K-III Communications Corporation (which together with its subsidiaries is
herein referred to as either "K-III" or the "Company" unless the context implies
otherwise) is the authoritative source for specialized information to targeted
markets. The Company's three business segments are education, information and
specialty media. The specialty media segment has in prior years been referred to
as the media segment, but the Company believes that the use of specialty media
is more descriptive of the underlying businesses. The education segment includes
Channel One, Westcott, Weekly Reader, Newbridge, Krames and Katharine Gibbs.
This segment specializes in providing educational materials to the classroom and
workplace learning markets. The information segment includes K-III Reference,
K-III Directory, Haas, Bacon's, a portion of Intertec, Nelson and Daily Racing
Form. The information segment produces consumer and business directories in a
variety of formats for decision makers in business, professional and special
interest consumer markets. The information is compiled and sold through
reference works, newspapers, CD-ROMs, almanacs and directories. The specialty
media segment includes K-III Magazines, PJS, McMullen Argus and the majority of
Intertec. The specialty media segment is concentrated primarily on specialty
consumer magazines, and technical and trade magazines.
2. CHANGE IN METHOD OF ACCOUNTING FOR ADVERTISING COSTS
Effective July 1, 1994, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position 93-7, "Reporting on
Advertising Costs" (the "SOP").
Under the Company's previous accounting policy, general advertising costs
were expensed as incurred; promotional and subscription acquisition costs were
capitalized prior to the launching of a direct marketing or subscription
acquisition campaign and then expensed when the promotional materials were
mailed or displayed. In compliance with the new SOP, the Company now expenses
advertising costs the first time the advertising takes place, except for
direct-response advertising qualifying for capitalization under the SOP which is
capitalized and amortized over its expected period of future benefit.
Direct-response advertising consists of product promotional mailings,
catalogues, telemarketing and subscription promotions. The capitalized costs of
advertising are amortized using a ratio of current period revenues to total
current and estimated future period revenues. The amortization periods range
from 6 months to 2 years subsequent to the promotional event. Amortization of
direct-response advertising costs is included in marketing and circulation
expenses on the accompanying statements of consolidated operations. The adoption
of this new accounting method resulted in a decrease in the net loss of
approximately $9,800 ($.09 per share), $11,800 ($.10 per share) and $2,000 ($.02
per share) for the years ended December 31, 1994, 1995 and 1996, respectively.
At December 31, 1994, 1995 and 1996, $16,895, $25,408 and $28,452 of advertising
costs, respectively, were reported as net assets and included in other
non-current assets on the accompanying consolidated balance sheets. Advertising
expense was approximately $100,357, $88,176 and $100,687, during the years ended
December 31, 1994, 1995 and 1996, respectively.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of K-III and its subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts of
assets, liabilities, revenues and expenses reported in the consolidated
financial statements.
F-8
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Significant accounting estimates used include estimates for sales returns
and allowances and estimates for the realization of deferred tax assets.
Management has exercised reasonableness in deriving these estimates. However,
actual results may differ.
Certain reclassifications have been made to the prior year consolidated
financial statements to conform with the presentation used in the current
period.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
establishes the accounting for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used, and for long-lived assets and certain identifiable intangibles to be
disposed of. The adoption of this new accounting standard did not have a
material effect on the results of operations of the Company.
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). This Statement defines a fair value
based method of accounting for an employee stock option or similar equity
instrument and encourages all entities to adopt that method of accounting for
all of their employee stock compensation plans. However, it also allows an
entity to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25").
The Company has elected to continue to account for its employee stock
compensation plans under APB No. 25. Pro forma disclosures of net income (loss)
and loss per common and common equivalent share, as if the fair value based
method of accounting defined in SFAS No. 123 had been applied, are presented in
Note 18.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share" which becomes effective for the Company's 1997
consolidated financial statements beginning in the fourth quarter of 1997. SFAS
No. 128 will eliminate the disclosure of primary earnings per share which
includes the dilutive effect of stock options, warrants and other convertible
securities ("Common Stock Equivalents") and instead requires reporting of
"basic" earnings per share, which will exclude Common Stock Equivalents.
Additionally, SFAS No. 128 changes the methodology for fully diluted earnings
per share. In the opinion of the Company's management, it is not anticipated
that the adoption of this new accounting standard will have a material effect on
the reported earnings per share of the Company.
CASH AND CASH EQUIVALENTS. Management considers all highly liquid
instruments purchased with an original maturity of 90 days or less to be cash
equivalents.
INVENTORIES. Inventories, including paper, purchased manuscripts,
photographs and art, are valued at the lower of cost or market principally on a
first-in, first-out ("FIFO") basis and include the value of inventory for which
a provision for estimated sales returns has been made.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation of property and
equipment, and the amortization of leasehold improvements are provided at rates
based on the estimated useful lives or lease terms, if shorter, using primarily
the straight-line method. Improvements are capitalized while maintenance and
repairs are expensed as incurred.
F-9
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EDITORIAL AND PRODUCT DEVELOPMENT COSTS. Editorial costs and product
development costs are generally expensed as incurred. Product development costs
include the cost of artwork, graphics, prepress, plates and photography for new
products.
ADVERTISING AND SUBSCRIPTION ACQUISITION COSTS. Advertising and
subscription acquisition costs are expensed the first time the advertising takes
place, except for direct-response advertising, the primary purpose of which is
to elicit sales from customers who can be shown to have responded specifically
to the advertising and that results in probable future economic benefits. These
direct-response advertising costs are reported as assets and amortized over the
estimated period of future benefit. Prior to July 1, 1994, direct-response
advertising costs were capitalized prior to launching a direct marketing or
subscription acquisition campaign and were expensed when the promotional
materials were mailed (see Note 2).
DEFERRED FINANCING COSTS. Deferred financing costs are being amortized by
the straight-line method over the terms of the related indebtedness.
DEFERRED WIRING AND INSTALLATION COSTS. Wiring and installation costs
incurred by Channel One and Westcott have been capitalized and are being
amortized by the straight-line method over 15 and five years, respectively, the
related estimated useful life.
$2.875 SENIOR EXCHANGEABLE PREFERRED STOCK ("SENIOR PREFERRED STOCK"),
$11.625 SERIES B EXCHANGEABLE PREFERRED STOCK ("SERIES B PREFERRED STOCK") and
the $10.00 SERIES D EXCHANGEABLE PREFERRED STOCK ("SERIES D PREFERRED
STOCK"). The Senior Preferred Stock, Series B Preferred Stock and Series D
Preferred Stock are stated at fair value on the date of issuance less issuance
costs. The difference between their carrying values and their redemption values
is being amortized (using the interest method) by periodic charges to additional
paid-in capital.
COMMON STOCK SUBJECT TO REDEMPTION. The common stock subject to redemption
is stated at redemption value which at December 31, 1995 and 1996, is equal to
quoted market value. The difference between the carrying value of such stock and
its redemption value is recorded by periodic charges to additional paid-in
capital.
COMPUTER SOFTWARE. Computer software costs are expensed as incurred.
INTEREST RATE SWAP AGREEMENTS. The Company's interest rate swap agreements
are designated and effective as modifications to existing debt obligations to
reduce the impact of changes in the interest rates on its floating rate
borrowings and, accordingly, are accounted for using the settlement method of
accounting. The differentials to be paid or received under the interest rate
swap agreements are accrued as interest rates change and are recognized as
adjustments to interest expense. The Company considers swap terms including the
reference rate, payment and maturity dates and the notional amount in
determining if an interest rate swap agreement is effective at modifying an
existing debt obligation. If the criteria for designation are no longer met or
the underlying instrument matures or is extinguished, the Company will account
for outstanding swap agreements at fair market value and any resulting gain or
loss will be recognized as other income or expense. Any gains or losses upon
early termination of the agreements will be deferred and amortized over the
shorter of the remaining life of the hedged existing debt obligation or the
original life of the interest rate swap agreement.
PURCHASE ACCOUNTING. With respect to the acquisitions, the total purchase
price has been allocated to the tangible and intangible assets and liabilities
based on their respective fair values.
F-10
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED AND INTANGIBLE
ASSETS. Intangible assets are being amortized using both accelerated and
straight-line methods over periods ranging from 1/4 of 1 year to 40 years. The
excess of purchase price over net assets acquired is being amortized on a
straight-line basis over 40 years. The recoverability of the carrying values of
the excess of the purchase price over the net assets acquired and intangible
assets is evaluated quarterly to determine if an impairment in value has
occurred. An impairment in value will be considered to have occurred when it is
determined that the undiscounted future operating cash flows generated by the
acquired businesses are not sufficient to recover the carrying values of such
intangible assets. If it has been determined that an impairment in value has
occurred, the excess of the purchase price over the net assets acquired and
intangible assets would be written down to an amount which will be equivalent to
the present value of the future operating cash flows to be generated by the
acquired businesses.
REVENUE RECOGNITION. Advertising revenues for all consumer magazines are
recognized as income at the on-sale date, net of provisions for estimated
rebates, adjustments and discounts. Other advertising revenues are generally
recognized based on the publications' cover dates. Newsstand sales are
recognized as income at the on-sale date for all publications, net of provisions
for estimated returns. Subscriptions are recorded as deferred revenue when
received and recognized as income over the term of the subscription. Westcott
subscription and broadcast fees for satellite and videotape network services are
recognized in the month services are rendered. Sales of books and other items
are recognized as revenue principally upon shipment, net of an allowance for
returns which is provided based on sales. Distribution costs charged to
customers are recognized as revenue when the related product is shipped. Tuition
is recorded as deferred revenue when received and recognized ratably as income
over the length of the school term. Channel One advertising revenue, net of
commissions, is recognized as advertisements are aired on the program. Certain
advertisers are guaranteed a minimum number of viewers per advertisement shown;
the revenue recognized is based on the actual viewers delivered not to exceed
the original contract value.
FOREIGN CURRENCY. Gains and losses on foreign currency transactions, which
are not significant, have been included in other, net. The effects of
translation of foreign currency financial statements into U.S. dollars are
included in the cumulative foreign currency translation adjustments account in
shareholders' equity.
LOSS PER COMMON AND COMMON EQUIVALENT SHARE. Loss per common and common
equivalent share for the years ended December 31, 1994, 1995 and 1996 was
computed using the weighted average number of common and common equivalent
shares outstanding during each year. The weighted average number of common and
common equivalent shares outstanding during 1994 and 1995 (for the quarters
prior to the initial filing of the registration statement), includes incremental
shares for the common stock issued and non-qualified options granted to purchase
common stock which were issued within one year prior to the initial filing of
the registration statement for an initial public offering at a purchase price
below $10.00 per share; and during the fourth quarters of 1994, 1995 and 1996,
the weighted average of common and common equivalent shares includes incremental
shares for non-qualified stock options granted to purchase common stock
(collectively, the "Incremental Shares"). Such Incremental Shares were
determined utilizing the treasury stock method. Loss per common share assuming
full dilution is not presented because such calculation is antidilutive.
F-11
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. ACQUISITIONS
The Company acquired certain net assets or stock of:
1994--Channel One, which produces and distributes a daily advertising
supported television news show for secondary school students and associated
video programming; a publisher of directories of residential apartments
available to rent; a producer and distributor of privately sponsored
supplemental educational materials; and Katharine Gibbs Schools, a network of
seven post-secondary career schools. In addition to the aforementioned, the
Company completed several other smaller acquisitions during 1994.
1995--a publisher of 13 specialty consumer magazine titles serving the
sewing, crafts, woodworking and shooting sports areas; a publisher of 11 trade
magazines in the mining, printing and packaging industries, a specialty consumer
magazine, 15 truck and automobile price guides and three marketing and sales
oriented magazines; an information provider for the public relations industry; a
publisher of 21 specialty consumer magazines serving the automobile, truck,
motorcycle and watercraft areas; a publisher of specialty consumer magazines
serving the automotive area; and a publisher of trade magazines and directories
and an operator of trade shows. In addition to the aforementioned, the Company
completed several other smaller acquisitions during 1995.
1996--Cahners Consumer Magazines, a publisher of specialty consumer
magazines including AMERICAN BABY, MODERN BRIDE, SAIL and POWER & MOTORYACHT,
along with 20 related properties and Westcott which utilizes various multi-media
technologies to provide workplace training, news, and information to
professionals and students in the corporate and professional, automotive,
banking, government and public service, education, health care, and interactive
distance training markets. In addition to the aforementioned, the Company
completed several other smaller acquisitions during 1996.
The acquisitions have been accounted for by the purchase method. The
preliminary purchase cost allocations for the above-mentioned acquisitions are
subject to adjustment when additional information concerning asset and liability
valuations are obtained. The final asset and liability fair values may differ
from those set forth in the accompanying consolidated balance sheet at December
31, 1996; however, the changes are not expected to have a material effect on the
consolidated financial position of the Company. The consolidated financial
statements include the operating results of these acquisitions subsequent to
their respective dates of acquisition. The foregoing acquisitions, except for
Channel One, Cahners and Westcott, if they had occurred on January 1 of the year
prior to acquisition, would not have had a material impact on the results of
operations.
The following unaudited pro forma information presents the results of
operations of the Company as if the acquisitions of Channel One, Cahners and
Westcott had taken place on January 1, 1994:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
<S> <C> <C> <C>
1994 1995 1996
------------- ------------- -------------
Sales, net................................................ $ 1,194,673 $ 1,238,254 $ 1,413,930
Operating income (loss)................................... 14,861 (12,563) 82,100
Net income (loss)......................................... (84,688) (106,012) (8,239)
Loss applicable to common shareholders.................... (110,647) (134,990) (51,765)
Loss per common and common equivalent share............... (1.07) (1.17) (.40)
</TABLE>
F-12
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. NET ASSETS HELD FOR SALE
In 1995, the Company decided to sell, as of the acquisition date, certain
technical and trade magazines which were originally acquired as part of a larger
acquisition (see Note 6). During September 1996, the Company decided to divest
Katharine Gibbs and expects to complete the sale in 1997. The net assets of
these operations were recorded at net realizable value and have been classified
as a current asset in net assets held for sale on the accompanying consolidated
balance sheets.
6. DIVESTITURES
In June 1995, the Company sold certain newly acquired technical and trade
magazines and PREMIERE and on July 28, 1995, the Company sold Newfield. In
connection with these sales, the Company has received aggregate cash proceeds of
$58,656 and has recorded amounts due from buyer of approximately $5,000 on the
accompanying consolidated balance sheets at December 31, 1995 and 1996. In
connection with these sales, the Company recorded net aggregate provisions for
loss on the sales of businesses of $15,025 for the year ended December 31, 1994
and $35,447 for the year ended December 31, 1995.
During the second quarter of 1996, the Company completed the sale of certain
technical and trade magazines. The differences between the proceeds received and
the carrying values of the assets held for sale were treated as adjustments to
the excess of purchase price over net assets acquired related to the retained
businesses. In addition, during the second quarter of 1996, the Company sold a
monthly tabloid targeted to electronic design engineers for consideration of a
motion picture and television production magazine and cash proceeds. During the
fourth quarter of 1996, the Company completed the sale of the Kits and Leaflets
Division of PJS and certain specialty consumer magazines. In connection with
these sales, the Company received aggregate cash proceeds of approximately
$8,100 and recorded a net gain on sale of businesses of approximately $5,800.
7. RESTRUCTURING AND OTHER COSTS
In the second quarter of 1995, the Company recorded charges of $14,667
related to a corporate restructuring effort at Newbridge, its professional book
club business, and the completion of a manufacturing outsourcing effort at Daily
Racing Form. Included in the restructuring charge of $7,272 are employee
separation costs of $1,287, litigation matters of $3,349, a write-down of
inventory and other assets of $2,086 related to the exit of a product line at
Newbridge and costs associated with the termination of a real estate lease which
is no longer needed in the operations of Daily Racing Form of $550. Included in
the other costs of $7,395 are costs incurred and associated with the correction
of customer and accounting systems and write-down of certain assets. During 1994
and early 1995, the Company experienced certain operational problems at
Newbridge relating to periodic mailings which described its then current product
offerings. These operational problems resulted in higher than normal levels of
bad debts and returns. In addition, Newbridge implemented a new customer
information processing system which inadvertently suppressed a number of
customer and product offering mailings resulting in lower than anticipated
demand for certain products and a corresponding increase in obsolete inventory.
Subsequently, the operational and new system problems were corrected. Based on
information which was then available, appropriate provisions for inventory
obsolescence of approximately $500 and for bad debts of approximately $2,500
were recorded in the first quarter of 1995. Expenses associated with the outside
consultants and systems corrections of approximately $1,400 were recorded in the
second quarter of 1995. Additional obsolescence provisions of approximately
$2,000 and bad debt provisions of approximately $1,000 were identified and
recorded in the second
F-13
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. RESTRUCTURING AND OTHER COSTS (CONTINUED)
quarter of 1995. Approximately $4,100 of the restructuring and other charges
were paid in cash in 1995 and at December 31, 1995, approximately $2,600 of
these charges is included in accrued liabilities. Approximately $1,200 of the
restructuring and other charges were paid in cash in 1996 and at December 31,
1996, $1,400 of these charges is included in accrued liabilities, which is
expected to be paid in 1997.
8. ADJUSTMENTS TO THE CARRYING VALUES OF LONG-LIVED ASSETS
In accordance with its accounting policy, during 1995, the Company recorded
aggregate write-downs of $17,958 and $5,786 to the carrying values of the
identifiable intangible assets and goodwill of K-III Reference and a product
line of Newbridge, respectively. These adjustments are included in amortization
of intangible assets, excess of purchase price over net assets acquired and
other on the accompanying statement of consolidated operations for the year
ended December 31, 1995 and affect the operating results of the information and
education segments.
9. ACCOUNTS RECEIVABLE, NET
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1995 1996
----------- -----------
Accounts receivable................................................. $ 211,150 $ 273,119
Less: Allowance for doubtful accounts............................... 14,364 15,418
Allowance for returns and rebates.............................. 23,015 24,098
----------- -----------
$ 173,771 $ 233,603
----------- -----------
----------- -----------
</TABLE>
10. INVENTORIES, NET
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1995 1996
--------- ---------
Finished goods......................................................... $ 49,026 $ 41,497
Work in process........................................................ 969 2,111
Raw materials.......................................................... 27,978 17,838
--------- ---------
77,973 61,446
Less: allowance for obsolescence....................................... 7,129 8,703
--------- ---------
$ 70,844 $ 52,743
--------- ---------
--------- ---------
</TABLE>
F-14
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. PROPERTY AND EQUIPMENT, NET
Property and equipment, including that held under capital leases, consist of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
RANGE OF LIVES ------------------------
(YEARS) 1995 1996
--------------- ----------- -----------
<S> <C> <C> <C>
Land............................................... -- $ 2,043 $ 2,022
Buildings and improvements......................... 1-40 19,296 24,219
Furniture and fixtures............................. 4-10 19,387 26,027
Machinery and equipment............................ 2-9 65,187 94,091
School equipment................................... 10 54,625 55,860
Other.............................................. 3-7 1,232 2,401
----------- -----------
161,770 204,620
Less: accumulated depreciation and amortization.... 49,757 81,797
----------- -----------
$ 112,013 $ 122,823
----------- -----------
----------- -----------
</TABLE>
Included in machinery and equipment above is an asset which was acquired
under a capital lease in the amount of $11,738 with accumulated amortization of
$434 and $1,739 at December 31, 1995 and 1996, respectively (see Note 22).
12. INTANGIBLE ASSETS AND EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED, NET
Other intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
RANGE OF LIVES ----------------------------
(YEARS) 1995 1996
--------------- ------------- -------------
<S> <C> <C> <C>
Trademarks.................................... 40 $ 416,524 $ 448,490
Membership, subscriber and customer lists..... 2-20 435,960 504,951
Non-compete agreements........................ 1-10 217,101 227,312
Trademark license agreements.................. 2-15 17,500 17,500
Copyrights.................................... 12-20 47,849 47,849
Video library................................. 1-7 14,835 14,837
Databases..................................... 4-12 128,468 121,377
Advertiser lists.............................. .25-15 80,577 133,850
Distribution agreements....................... 1-7 15,336 15,336
Other......................................... 1.5-15 20,971 63,875
------------- -------------
1,395,121 1,595,377
Less: accumulated amortization................ 695,504 814,061
------------- -------------
$ 699,617 $ 781,316
------------- -------------
------------- -------------
</TABLE>
The excess of the purchase price over the fair value of the net assets
acquired is net of accumulated amortization of $66,889 and $82,763,
respectively, at December 31, 1995 and 1996.
F-15
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
13. OTHER NON-CURRENT ASSETS
Other non-current assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1995 1996
----------- -----------
<CAPTION>
<S> <C> <C>
Deferred financing costs, net....................................... $ 19,711 $ 22,814
Deferred wiring and installation costs, net......................... 62,937 58,086
Direct-response advertising costs, net (see Note 2)................. 25,408 28,452
Prepublication and programming costs, net........................... 3,821 6,506
Other............................................................... 5,729 7,834
----------- -----------
$ 117,606 $ 123,692
----------- -----------
----------- -----------
</TABLE>
The deferred financing costs are net of accumulated amortization of $8,139
and $9,794 at December 31, 1995 and 1996, respectively. The deferred wiring and
installation costs are net of accumulated amortization of $7,163 and $12,850 at
December 31, 1995 and 1996, respectively. Direct-response advertising costs are
net of accumulated amortization of $29,569 and $70,661 at December 31, 1995 and
1996, respectively. Prepublication and programming costs are net of accumulated
amortization of $4,121 and $4,852 at December 31, 1995 and 1996, respectively.
14. ACCRUED EXPENSES AND OTHER
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1995 1996
----------- -----------
<CAPTION>
<S> <C> <C>
Payroll, commissions and related employee benefits.................. $ 43,482 $ 40,553
Systems costs....................................................... 5,661 2,991
Rent and lease liabilities.......................................... 10,027 13,502
Retail display costs and allowances................................. 10,723 8,263
Promotion costs..................................................... 2,032 2,663
Royalties........................................................... 8,067 8,362
Circulation costs................................................... 3,382 5,420
Professional fees................................................... 2,566 4,408
Taxes............................................................... 6,778 17,162
Customer advances................................................... 3,031 2,482
Other............................................................... 30,218 35,153
----------- -----------
$ 125,967 $ 140,959
----------- -----------
----------- -----------
</TABLE>
F-16
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
<S> <C> <C>
1995 1996
------------- -------------
<CAPTION>
<S> <C> <C>
Borrowings under Revolving Credit Agreement..................... $ 435,988 $ --
Borrowings under Credit Facilities.............................. -- 884,992
BONY Term Loan.................................................. 150,000 --
Chase Term Loan................................................. 150,000 --
10 5/8% Senior Notes due 2002................................... 250,000 233,250
10 1/4% Senior Notes due 2004................................... 100,000 100,000
8 1/2% Senior Notes due 2006................................... -- 298,811
------------- -------------
1,085,988 1,517,053
Acquisition obligation payable.................................. 54,928 54,633
------------- -------------
1,140,916 1,571,686
Less: current maturities of long-term debt...................... 6,000 6,000
------------- -------------
$ 1,134,916 $ 1,565,686
------------- -------------
------------- -------------
</TABLE>
On May 31, 1996, the Company replaced its existing credit facilities under
the Revolving Credit Agreement, BONY Term Loan and the Chase Term Loan through
which the Company could borrow $970,000 in the aggregate with new credit
facilities with The Chase Manhattan Bank, the Bank of New York, Bankers Trust
Company and the Bank of Nova Scotia as agents (the "Credit Facilities"). Under
the Credit Facilities, the Company has commitments of $1,250,000 and can borrow
up to $1,500,000 in the aggregate. The Company used approximately $910,000 of
the proceeds from the Credit Facilities to repay borrowings under the previously
existing credit facilities and to pay certain related fees and expenses.
The Credit Facilities are comprised of a $750,000 Tranche A Revolving Loan
Commitment ("Tranche A Loan Commitment"), a $250,000 Term Loan ("Term Loan") and
an additional $250,000 Revolving Loan Commitment, ("Revolver/Term Loan"). In
addition, the Company has the right to solicit commitments of up to $250,000
under the Tranche B Revolving Loan Facility ("Tranche B Facility"). The Tranche
A Loan Commitment may be utilized through the incurrence of Tranche A revolving
credit loans, swingline loans which may not exceed $40,000 in total, Canadian
dollar loans which may not exceed the Canadian dollar equivalent of $40,000 in
total or the issuance of letters of credit which may not exceed $40,000. The
Revolver/Term Loan may be utilized through the incurrence of revolving credit
loans. If the Company establishes commitments under the Tranche B Facility, the
Tranche B Facility may be utilized through the incurrence of Tranche B revolving
credit loans. The proceeds of the Credit Facilities may be used for general
corporate and working capital purposes as well as to finance certain future
acquisitions.
The commitments under the Tranche A Loan Commitment and the Tranche B
Facility are subject to mandatory reductions semi-annually on June 30 and
December 31 with the first reduction on June 30,
F-17
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. LONG-TERM DEBT (CONTINUED)
1999 and the final reduction on June 30, 2004. The mandatory reductions for the
Tranche A Loan Commitment are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
--------------
<S> <C>
1999.......................................................................... $ 75,000
2000.......................................................................... 150,000
2001.......................................................................... 150,000
2002.......................................................................... 150,000
2003.......................................................................... 150,000
2004.......................................................................... 75,000
--------------
$ 750,000
--------------
--------------
</TABLE>
The mandatory reductions for the Tranche B Facility are based on defined
percentages of the total Tranche B Facility. To the extent that the total
revolving credit loans outstanding exceed the reduced commitment amount, these
loans must be paid down to equal or less than the reduced commitment amount.
However, if the total revolving credit loans outstanding do not exceed the
reduced commitment amount, then there is no requirement to pay down any of the
revolving credit loans.
The principal amount of the Term Loan will be repaid semi-annually on June
30 and December 31 each year, with an initial payment of $25,000 on June 30,
2000, installments of $25,000 on each payment date thereafter through December
31, 2003 and a final payment of $50,000 on June 30, 2004.
As of December 31, 1996, the borrowings under the Credit Facilities consist
of the $634,992 under the Tranche A Loan Commitment and $250,000 under the Term
Loan.
If the Company incurs indebtedness under the Revolver/Term Loan, the
revolving loans outstanding will automatically convert to term loans on May 23,
1997 and will mature on June 30, 2004. If the Company exercises that right, then
the term loans will be repaid according to the same installment schedule as
stated for the Term Loan above. If the Company does not incur indebtedness prior
to May 23, 1997, the Revolver/Term Loan will expire.
The amounts borrowed (other than swingline loans) pursuant to the Credit
Facilities bear interest at the following rates per annum, at the Company's
option: (i) the higher of (a) the Federal Funds Effective Rate as published by
the Federal Reserve Bank of New York plus 0.5% and (b) the prime commercial
lending rate announced by the Agent from time to time (the "Base Rate"); plus,
in each case, an applicable margin of up to 1/8 of 1% as specified in the Credit
Facilities or (ii) the Eurodollar Rate plus an applicable margin ranging from
1/2 of 1% to 1 1/2% as specified in the Credit Facilities. All swingline loans
bear interest at the Base Rate plus the applicable margin of up to 1/8 of 1% as
specified in the Credit Facilities. During 1995, the weighted average interest
rates on the Revolving Credit Agreement, BONY Term Loan and Chase Term Loan,
were 7.28%, 7.94% and 7.48%, respectively. During 1996, the weighted average
interest rate on the Revolving Credit Agreement, BONY Term Loan, Chase Term Loan
and Credit Facilities were 7.04%, 7.50%, 6.94% and 7.07%. The interest rate on
the borrowings under the Revolving Credit Agreement outstanding at December 31,
1995 ranged from 6.75% to 7.44%. The interest rate on the BONY Term Loan
outstanding at December 31, 1995 was 7.81% and the interest rate on the Chase
Term Loan outstanding at December 31, 1995 was 7.63%. Interest rates on the
borrowings under the Credit Facilities outstanding at December 31, 1996 ranged
from 7.00% to 7.13%.
F-18
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. LONG-TERM DEBT (CONTINUED)
The Company has agreed to pay commitment fees equal to 3/8 of 1% per annum
on the daily average unused commitment of Tranche A Loan Commitment and Tranche
B Facility, certain fees with respect to the issuance of letters of credit and
an annual administration fee. The Company has agreed to pay a commitment fee of
1/8 of 1% per annum on the daily average unused commitment of the $250,000
revolving credit under the Revolver/Term Loan.
10 5/8% SENIOR NOTES. Interest on the 10 5/8% Senior Notes is payable
semi-annually at the annual rate of 10 5/8%. The 10 5/8% Senior Notes mature on
May 1, 2002. The 10 5/8% Senior Notes may not be redeemed prior to May 1, 1997
other than in connection with a change of control; however, a sinking fund
payment on May 1, 2001 is required to retire 50% of the 10 5/8% Senior Notes
prior to maturity. On May 1, 1997 and thereafter, the 10 5/8% Senior Notes are
redeemable at prices ranging from 104% with annual reductions to 100% in 2000
plus accrued and unpaid interest. During November and December 1996, the Company
purchased $16,750 of the 10 5/8% Senior Notes at a premium of 105.4% plus
accrued interest from various brokers on the open market (see Note 26).
10 1/4% SENIOR NOTES. The annual interest rate of 10 1/4% is payable
semi-annually in June and December. The 10 1/4% Senior Notes mature on June 1,
2004, with no sinking fund. The 10 1/4% Senior Notes are redeemable on or after
June 1, 1999; however, 35% of the aggregate principal amount of the 10 1/4%
Senior Notes may be redeemed at a price of 109 1/4% plus accrued and unpaid
interest on or prior to June 1, 1997 with net proceeds of a public equity
offering. In addition, upon a change of control, the Company may redeem the
10 1/4% Senior Notes. Beginning in 1999 and thereafter, the 10 1/4% Senior Notes
are redeemable at prices ranging from 104.95% with annual reductions to 100% in
2002 plus accrued and unpaid interest.
8 1/2% SENIOR NOTES. On January 24, 1996, the Company completed a private
offering of $300,000 of 8 1/2% Senior Notes. The 8 1/2% Senior Notes were issued
at 99.578% with related issuance costs of approximately $7,000. On August 21,
1996, the Company exchanged its 8 1/2% Senior Notes ("Old Notes") for a new
series of $300,000 8 1/2% Senior Notes due 2006 ("New Notes"). The New Notes
have been registered under the Securities Act of 1933. The New Notes mature on
February 1, 2006, with no sinking fund. Interest on the New Notes is payable
semi-annually in February and August at the annual rate of 8 1/2%. The New Notes
may not be redeemed prior to February 1, 2001 other than in connection with a
change of control. Beginning in 2001 and thereafter, the New Notes are
redeemable in whole or in part, at the option of the Company, at prices ranging
from 104.25% with annual reductions to 100% in 2003 plus accrued and unpaid
interest. Net proceeds from the Old Notes of approximately $293,000 were
primarily used to pay down borrowings under the Revolving Credit Agreement.
The 10 5/8% Senior Notes, 10 1/4% Senior Notes and 8 1/2% Senior Notes
(together referred to as the "Senior Notes"), and the Credit Facilities, all
rank senior in right of payment to all subordinated indebtedness of K-III
Communications Corporation (a holding company).
The above indebtedness, among other things, limits the ability of the
Company to change the nature of its businesses, incur indebtedness, create
liens, sell assets, engage in mergers, consolidations or transactions with
affiliates, make investments in or loans to certain subsidiaries, make
guarantees and certain restricted payments. The Company is restricted from
declaring or making dividend payments on its common and preferred stock. Under
the Company's most restrictive debt covenants, the Company must maintain a
minimum interest coverage ratio of 1.8 to 1 and a minimum fixed charge coverage
ratio of 1.05 to 1. The Company's maximum allowable leverage ratio is 6.0 to 1.
The Company believes it is in
F-19
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. LONG-TERM DEBT (CONTINUED)
compliance with the financial and operating covenants of its principal financing
arrangements. Borrowings under the above indebtedness are guaranteed by each of
the domestic wholly-owned subsidiaries of the Company. Such guarantees are full,
unconditional and joint and several. The separate financial statements of the
domestic subsidiaries are not presented because the Company believes the
separate financial statements would not be material to the shareholders and
potential investors. The Company's foreign subsidiaries are not guarantors of
the above indebtedness. The total assets, revenues, income or equity of such
foreign subsidiaries, both individually and on a combined basis, are
inconsequential in relation to the total assets, revenues, income or equity of
the Company.
ACQUISITION OBLIGATION. In connection with the acquisition of certain of
the Company's specialty consumer magazine operations and Daily Racing Form, an
obligation was recorded equivalent to the present value of the principal and
interest payments of the notes payable in the amount of $54,928 at December 31,
1995 and $54,633 at December 31, 1996. The interest rate used in calculating the
present value was 13%, which represents management's estimate of the prevailing
market rate of interest for such obligation at the time of the acquisition.
Principal and interest amounts aggregating $69,500 will be repaid from June 1997
through June 2001.
INTEREST RATE SWAP AGREEMENTS. In May 1995, the Company entered into two,
three-year interest rate swap agreements with an aggregate notional amount of
$200,000. Under these swap agreements, the Company receives a floating rate of
interest based on three-month LIBOR, which resets quarterly, and pays a fixed
rate of interest which increases each year during the terms of the respective
agreements. The weighted average variable rate and weighted average fixed rate
were 6.0% and 6.05%, respectively, in 1995 and 5.5% and 6.2%, respectively, in
1996. Also, in May 1995, the Company entered into a three-year interest rate cap
agreement. As a result of this transaction, the Company currently has the right
to receive payments based on a notional principal amount of $100,000 to the
extent that three-month LIBOR exceeds 7.75% in year one, 8.75% in year two and
9.75% in year three of the agreement. Any interest differential to be received
will be recognized as an adjustment to interest expense. The interest rate cap
fee is recognized as an adjustment to interest expense over the life of the
interest rate cap agreement.
In the fourth quarter of 1996, the Company entered into six, one-year
interest rate swap agreements with an aggregate notional amount of $600,000.
Under these new swap agreements, the Company receives a floating rate of
interest based on three-month LIBOR, which resets quarterly, and pays a fixed
rate of interest, each quarter, for the term of the agreements. As of December
31, 1996, the weighted average variable rate and weighted average fixed rate
were 5.5% and 5.8%, respectively.
The net interest differential, charged to interest expense in 1994, 1995 and
1996 was $4,258, $539 and $1,943, respectively. The Company is exposed to credit
risk in the event of nonperformance by counterparties to its interest rate swap
and cap agreements. Credit risk is limited by entering into such agreements with
primary dealers only; therefore, the Company does not anticipate that
nonperformance by counterparties will occur. Notwithstanding this, the Company's
treasury department monitors counterparty credit ratings at least quarterly
through reviewing independent credit agency reports. Both current and potential
exposure are evaluated, as necessary, by obtaining replacement cost information
from alternative dealers. Potential loss to the Company from credit risk on
these agreements is limited to amounts receivable, if any.
F-20
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
16. INCOME TAXES
At December 31, 1996, the Company had aggregate net operating loss
carryforwards for Federal and state income tax purposes ("NOLs") of
approximately $713,000 which will be available to reduce future taxable income.
The utilization of such NOLs is subject to certain limitations under Federal
income tax laws. In certain instances, such NOLs may only be used to reduce
future taxable income of the respective company which generated the NOL. The
NOLs are scheduled to expire in the following years:
<TABLE>
<S> <C>
2003............................................................. $ 24,900
2004............................................................. 60,300
2005............................................................. 121,800
2006............................................................. 93,400
2007............................................................. 82,700
2008............................................................. 83,700
2009............................................................. 68,900
2010............................................................. 156,100
2011............................................................. 21,200
---------
$ 713,000
---------
---------
</TABLE>
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b)
operating loss carryforwards. The tax effects of significant items comprising
the Company's net deferred income tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------
<S> <C> <C> <C>
FEDERAL STATE TOTAL
----------- --------- -----------
<CAPTION>
<S> <C> <C> <C>
DEFERRED INCOME TAX ASSETS:
Difference between book and tax basis of inventory.......................... $ 4,878 $ 1,429 $ 6,307
Difference between book and tax basis of accrued expenses and other......... 19,991 5,856 25,847
Reserves not currently deductible........................................... 12,872 3,771 16,643
Difference between book and tax basis of other intangible assets............ 18,875 5,530 24,405
Operating loss carryforwards................................................ 168,310 49,309 217,619
----------- --------- -----------
Total....................................................................... 224,926 65,895 290,821
----------- --------- -----------
DEFERRED INCOME TAX LIABILITIES:
Difference between book and tax basis of other intangible assets............ 24,515 7,182 31,697
Difference between book and tax basis of property and equipment............. 964 283 1,247
Other....................................................................... 7,783 2,280 10,063
----------- --------- -----------
Total....................................................................... 33,262 9,745 43,007
----------- --------- -----------
Net deferred income tax assets.............................................. 191,664 56,150 247,814
Less: Valuation allowances.................................................. 103,649 30,365 134,014
----------- --------- -----------
Net......................................................................... $ 88,015 $ 25,785 $ 113,800
----------- --------- -----------
----------- --------- -----------
</TABLE>
F-21
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
16. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------
<S> <C> <C> <C>
FEDERAL STATE TOTAL
----------- --------- -----------
<CAPTION>
<S> <C> <C> <C>
DEFERRED INCOME TAX ASSETS:
Difference between book and tax basis of inventory.......................... $ 3,550 $ 1,041 $ 4,591
Difference between book and tax basis of accrued expenses and other......... 18,583 5,444 24,027
Reserves not currently deductible........................................... 2,277 667 2,944
Difference between book and tax basis of other intangible assets............ 31,043 9,094 40,137
Operating loss carryforwards................................................ 192,267 56,326 248,593
----------- --------- -----------
Total....................................................................... 247,720 72,572 320,292
----------- --------- -----------
DEFERRED INCOME TAX LIABILITIES:
Difference between book and tax basis of other intangible assets............ 32,612 9,554 42,166
Difference between book and tax basis of property and equipment............. 11,382 3,335 14,717
Other....................................................................... 9,757 2,858 12,615
----------- --------- -----------
Total....................................................................... 53,751 15,747 69,498
----------- --------- -----------
Net deferred income tax assets.............................................. 193,969 56,825 250,794
Less: Valuation allowances.................................................. 57,692 16,902 74,594
----------- --------- -----------
Net......................................................................... $ 136,277 $ 39,923 $ 176,200
----------- --------- -----------
----------- --------- -----------
</TABLE>
At December 31, 1994, 1995 and 1996, management of the Company reviewed
recent operating results and projected future operating results. At the end of
each of the respective years, management determined that a portion of the net
deferred income tax assets would likely be realized. Accordingly, in 1994, the
Company reduced the valuation allowances by $46,100 and recorded an income tax
benefit of $42,100 ($32,600 and $9,500 related to Federal and state income tax
benefits, respectively) and a reduction of the excess of purchase price over net
assets acquired of $4,000; in 1995, the Company reduced the valuation allowances
by $67,700 and recorded an income tax benefit of $59,600 ($46,100 and $13,500
related to Federal and state income tax benefits, respectively) and a reduction
of the excess of purchase price over net assets acquired of $8,100; and in 1996,
the Company reduced the valuation allowances by $62,400 and recorded an income
tax benefit of $53,300 ($41,200 and $12,100 related to Federal and state income
tax benefits, respectively) and a reduction of the excess of purchase price over
net assets acquired of $9,100. The amount of the net deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced. During
1994, 1995 and 1996, after the reduction in the valuation allowances discussed
above, there were net decreases in the valuation allowances of approximately
$13,800, $1,404 and $59,420 respectively.
A portion of the valuation allowances in the amount of approximately $30,200
at December 31, 1996 relates to net deferred tax assets which were recorded in
accounting for the acquisitions of various entities. The recognition of such
amount in future years will be allocated to reduce the excess of the purchase
price over the net assets acquired and other non-current intangible assets.
F-22
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
17. EXCHANGEABLE PREFERRED STOCK
Exchangeable Preferred Stock consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
----------- -----------
<S> <C> <C>
$2.875 Senior Exchangeable Preferred Stock.............................................. $ 97,992 $ 98,266
$11.625 Series B Exchangeable Preferred Stock........................................... 133,614 150,513
$10.000 Series D Exchangeable Preferred Stock........................................... -- 193,950
----------- -----------
$ 231,606 $ 442,729
----------- -----------
----------- -----------
</TABLE>
$2.875 SENIOR EXCHANGEABLE PREFERRED STOCK
The Company authorized 4,000,000 shares of $.01 par value Senior Preferred
Stock, all of which was issued and outstanding at December 31, 1995 and 1996.
The liquidation and redemption value at December 31, 1995 and 1996 was $100,000.
Annual dividends of $2.875 per share on the Senior Preferred Stock are
cumulative and payable quarterly. Cash dividends of $11,500 have been paid
during each of the years 1994, 1995 and 1996. The Senior Preferred Stock may be
redeemed at the option of the Company, in whole or in part, at any time on or
after May 1, 1997 at redemption prices set at 105.8% in 1997 with annual
reductions to 100% in 2002 plus accrued and unpaid dividends to the date of
redemption. The Company is required to redeem 50% of the Senior Preferred Stock
on each of May 1, 2003 and May 1, 2004 at the liquidation preference of $25 per
share plus accrued and unpaid dividends. Upon any voluntary or involuntary
liquidation, the Senior Preferred Stock has a liquidation preference of $25 per
share plus accrued and unpaid dividends. The Senior Preferred Stock is
exchangeable, in whole but not in part, at the option of the Company, on any
scheduled dividend payment date for 11 1/2% Subordinated Debentures due 2004.
The Senior Preferred Stock is recorded on the accompanying consolidated balance
sheets at the aggregate redemption value (net of issuance costs) of $97,992 and
$98,266 at December 31, 1995 and 1996, respectively.
$11.625 SERIES B EXCHANGEABLE PREFERRED STOCK
The Company authorized 2,000,000 shares of $.01 par value Series B Preferred
Stock, 1,365,707 shares and 1,531,526 shares of which were issued and
outstanding at December 31, 1995 and 1996, respectively. The liquidation and
redemption value at December 31, 1995 and 1996 was $136,571 and $153,153,
respectively. Annual dividends of $11.625 per share on the Series B Preferred
Stock are cumulative and payable quarterly in cash or by issuing additional
shares of the Series B Preferred Stock. On and after May 1, 1998, dividends must
be paid in cash. On or after February 1, 1998, the Series B 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 B Preferred Stock on May 1, 2005 at a redemption price equal
to the liquidation preference of $100 per share, plus accrued and unpaid
dividends. The Series B Preferred Stock is exchangeable at the option of the
Company on or after an initial public offering of the Company's common stock for
its 11 5/8% Class B Subordinated Exchange Debentures due 2005 provided no shares
of the Senior Preferred Stock are then outstanding. Such debentures are
subordinate to all existing and future liabilities and obligations of the
Company and its subsidiaries. The Series B Preferred Stock is recorded on the
accompanying consolidated balance sheets at the aggregate redemption value (net
of issuance costs) of $133,614 and $150,513 at December 31, 1995 and 1996,
respectively.
F-23
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
17. EXCHANGEABLE PREFERRED STOCK (CONTINUED)
$10.00 SERIES D EXCHANGEABLE PREFERRED STOCK
On January 24, 1996, the Company completed a private offering of 2,000,000
shares of $.01 par value, $10 Series C Exchangeable Preferred Stock ("Series C
Preferred Stock") at $100 per share. Annual dividends of $10 per share on the
Series C Preferred Stock were cumulative and payable quarterly, in cash,
commencing May 1, 1996. On August 21, 1996, the Company exchanged the Series C
Preferred Stock for 2,000,000 shares of $.01 par value, Series D Preferred
Stock. Dividend payment terms of the Series D Preferred Stock are the same as
the terms of the Series C Preferred Stock. The Series D Preferred Stock has been
registered under the Securities Act of 1933. The liquidation and redemption
value at December 31, 1996 was $200,000. On and after February 1, 2001, the
Series D Preferred Stock may be redeemed in whole or in part, at the option of
the Company, at specified redemption prices plus accrued and unpaid dividends.
The Company is required to redeem the Series D Preferred Stock on February 1,
2008 at a redemption price equal to the liquidation preference of $100 per
share, plus accrued and unpaid dividends. The Series D Preferred Stock is
exchangeable in whole but not in part, at the option of the Company, on any
scheduled dividend payment date into 10% Class D Subordinated Exchange
Debentures due 2008 provided that no shares of the Senior Preferred Stock are
outstanding on the date of exchange. Net proceeds from the Series C Preferred
Stock offering of approximately $193,000 were primarily used to pay down
borrowings under the Revolving Credit Agreement. The Series D Preferred Stock is
recorded on the accompanying consolidated balance sheets at the aggregate
redemption value (net of issuance costs) of $193,950 at December 31, 1996.
18. COMMON STOCK
In October 1995, the Company increased the authorized number of shares of
common stock by 50,000,000 shares to 250,000,000 shares. During November 1995,
the Company completed public offerings of 17,250,000 shares of common stock at a
price of $10.00 per share. Proceeds from this initial public offering, net of
commissions and other related expenses of approximately $9,500, were
approximately $163,000. The Company used the net proceeds from this initial
public offering to repay borrowings outstanding under its Revolving Credit
Agreement, which could be reborrowed for general corporate purposes including
acquisitions (see Note 15).
STOCK PURCHASE AND OPTION PLAN. The K-III Stock Purchase and Option Plan
(the "Plan") authorizes sales of shares of common stock and grants of incentive
awards in the forms of, among other things, stock options to key employees and
other persons with a unique relationship with the Company. The stock options are
granted with exercise prices at quoted market value at time of issuance. For the
purpose of determining fair value prior to November 1995, it was recognized that
the Company's common stock was not readily saleable to third parties at that
time, and therefore, was valued at a discount to a publicly-traded common stock.
The common stock issued and redeemed is included in the table of the activity of
the common stock subject to redemption.
COMMON STOCK SUBJECT TO REDEMPTION. Under the following circumstances,
employees have the right to resell their shares of common stock to the Company:
termination of employment in connection with the sale of the business for which
they work, death, disability or retirement after age 65. The resale feature
expires five years after the effective purchase date of the common stock. Since
inception of the Company, none of the employees has exercised such resale
feature as a result of such sale, death,
F-24
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
18. COMMON STOCK (CONTINUED)
disability or retirement and the likelihood of significant resales is considered
by management to be remote.
The following summarizes the activity of the common stock subject to
redemption:
<TABLE>
<CAPTION>
SHARES AMOUNT
------------ ----------
<S> <C> <C>
Balance at January 1, 1994............................................................. 3,185,946 $ 25,488
Acquisitions of common stock held by management........................................ (27,436) (169)
Issuances of common stock.............................................................. 244,672 1,943
Expiration of redemption feature....................................................... (1,251,002) (10,045)
------------ ----------
Balance at December 31, 1994........................................................... 2,152,180 17,217
Acquisitions of common stock held by management........................................ (57,031) (430)
Issuances of common stock.............................................................. 458,994 3,274
Expiration of redemption feature....................................................... (147,630) (809)
Accretion in carrying value............................................................ -- 9,927
------------ ----------
Balance at December 31, 1995........................................................... 2,406,513 29,179
Acquisitions of common stock held by management........................................ (17,269) (148)
Expiration of redemption feature....................................................... (1,745,934) (21,230)
Reduction in carrying value............................................................ -- (885)
------------ ----------
Balance at December 31, 1996........................................................... 643,310 $ 6,916
------------ ----------
------------ ----------
</TABLE>
The redemption values of the common stock subject to redemption of $29,179
and $6,916 at December 31, 1995 and 1996, respectively, were based on a
repurchase price of $12.125 per share and $10.750 per share which are the quoted
market values at December 31, 1995 and 1996, respectively. Common stock subject
to redemption is recorded on the accompanying consolidated balance sheets net of
the amounts of notes receivable from employees (related to common stock
issuances) outstanding of $1,157 and $959 at December 31, 1995 and 1996,
respectively.
ACCOUNTING FOR EMPLOYEE STOCK BASED COMPENSATION The K-III Stock Purchase
and Option Plan has authorized the grant of options to management personnel for
up to 25,000,000 shares of the Company's common stock. The options are
exercisable at the rate of 20% per year over a five-year period commencing on
the effective date of the grant; however, some optionees have received credit
for periods of employment with the Company and its predecessors and subsidiaries
prior to the date the options were granted. All options granted pursuant to the
Plan will expire no later than ten years from the date the option was granted.
F-25
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
18. COMMON STOCK (CONTINUED)
A summary of the status of the Company's fixed stock option plan as of
December 31, 1994, 1995 and 1996, and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1994 1995 1996
--------------------------------------- -------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED
AVG. AVG.
EXERCISE EXERCISE
OPTIONS EXERCISE PRICE PRICE OPTIONS EXERCISE PRICE PRICE OPTIONS EXERCISE PRICE
---------- -------------- ----------- --------- -------------- ----------- ---------- --------------
Outstanding--
beginning
of
year..... 8,865,297 $ 5.00-$7.00 $ 5.05 9,610,447 $ 5.00-$8.00 $ 5.31 12,326,087 $ 5.00-$8.00
Granted.. 850,000 $ 8.00 $ 8.00 3,139,325 $ 8.00 $ 8.00 1,830,400 $10.00-$11.94
Exercised.. (13,872) $ 5.00 $ 5.00 (193,401) $ 5.00-$8.00 $ 5.19 (681,890) $ 5.00-$8.00
Forfeited.. (90,978) $ 5.00-$8.00 $ 5.26 (230,284) $ 5.00-$8.00 $ 6.28 (263,385) $ 5.00-$8.00
---------- --------- ----------
Outstanding--
end of
the
year..... 9,610,447 $ 5.00-$8.00 $ 5.31 12,326,087 $ 5.00-$8.00 $ 5.98 13,211,212 $5.00-$11.94
---------- --------- ----------
---------- --------- ----------
Exercisable
at end of
the
year..... 5,701,789 $ 5.00-$7.00 $ 5.02 7,269,817 $ 5.00-$8.00 $ 5.18 8,707,528 $ 5.00-$8.00
---------- --------- ----------
---------- --------- ----------
<CAPTION>
<S> <C>
WEIGHTED
AVG.
EXERCISE
PRICE
-----------
Outstanding
beginning
of
year..... $ 5.98
Granted.. $ 11.12
Exercised.. $ 5.36
Forfeited.. $ 7.69
Outstanding
end of
the
year..... $ 6.69
Exercisable
at end of
the
year..... $ 5.38
</TABLE>
The weighted-average fair value per option for options granted in 1995 and
1996 was $3.06 and $4.13, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
NUMBER WEIGHTED WEIGHTED
RANGE OF OUTSTANDING AVERAGE REMAINING AVERAGE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE
- --------------- ------------ ------------------------- ---------------
<S> <C> <C> <C>
$5.00-$5.44 7,638,282 5 $ 5.00
$7.00 155,400 6 $ 7.00
$8.00 3,588,730 8 $ 8.00
$10.00-$11.94 1,828,800 9 $ 11.13
------------
13,211,212 6 $ 6.69
------------
------------
</TABLE>
SFAS No. 123 provides for a fair-value based method of accounting for
employee options and measures compensation expense using an option valuation
model that takes into account, as of the grant date, the exercise price and
expected life of the option, the current price of the underlying stock and its
expected volatility, expected dividends on the stock, and the risk-free interest
rate for the expected term of the option. The Company has elected to continue
accounting for employee stock-based compensation under APB No. 25 and related
interpretations. Under APB No. 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair
F-26
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
18. COMMON STOCK (CONTINUED)
value method of SFAS No. 123. The fair value of these options was estimated at
the date of grant using the Black-Scholes option pricing model for options
granted in 1995 and 1996. The following weighted-average assumptions were used
for 1995 and 1996, respectively: risk-free interest rates of 6.34% and 6.36%,
dividend yields of 0.0% and 0.0%, volatility factors of the expected market
price of the Company's common stock of 22.59% and 20.83%; and a weighted-average
expected life of the option of 6 years. The estimated fair value of options
granted during 1995 and 1996 was $9,592 and $7,560, respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Pro forma net income (loss)................................................................. $ (76,388) $ 5,738
Pro forma loss applicable to common shareholders............................................ $(105,366) $ (37,788)
Pro forma loss per common and common equivalent share....................................... $ (.92) $ (.29)
</TABLE>
The Company had reserved 20,837,921 shares of common stock for future
issuances in connection with the plan at December 31, 1996.
19. ACCUMULATED DEFICIT
The accumulated deficit of $691,098 at December 31, 1996 includes non-cash
expenses related to the accumulated amortization of intangible assets, the
excess of the purchase price over the net assets acquired and deferred financing
costs, the write-offs of the unamortized balance of deferred financing costs
(associated with all previous financings), the restructuring and other costs and
the net provision on sales of businesses in the aggregate amount of
approximately $924,900 which is net of the non-cash income tax benefits
aggregating $155,000 through December 31, 1996.
F-27
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and the estimated fair values of the Company's
financial instruments for which it is practicable to estimate fair value are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
<S> <C> <C> <C> <C>
1995 1996
------------------------ ------------------------
<CAPTION>
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
10 5/8% Senior Notes......................................... $ 250,000 $ 267,950 $ 233,250 $ 260,950
10 1/4% Senior Notes......................................... 100,000 107,720 100,000 105,400
8 1/2% Senior Notes.......................................... -- -- 298,811 291,750
Acquisition Obligation....................................... 54,928 52,604 54,633 55,339
Senior Preferred Stock....................................... 97,992 109,000 98,266 107,500
Series B Preferred Stock..................................... 133,614 135,888 150,513 154,684
Series D Preferred Stock..................................... -- -- 193,950 196,000
Interest Rate Swap Agreements................................ 449 5,057 982 3,531
Purchased Interest Rate Cap Agreement........................ (274) (2) (159) (2)
</TABLE>
The bracketed amounts above represent assets.
The fair values of the senior notes and preferred stocks were determined
based on the quoted market prices and the fair value of the acquisition
obligation was estimated using discounted cash flow analysis, based on current
incremental borrowing rates for similar types of borrowing arrangements. The
fair value of the interest rate swap agreements was determined using discounted
cash flow models.
For instruments including cash and cash equivalents, accounts receivable and
accounts payable, the carrying amount approximates fair value because of the
short maturity of these instruments. The fair value of floating-rate long-term
debt approximates carrying value because these instruments re-price frequently
at current market prices.
21. RETIREMENT PLANS
Substantially all of the Company's employees are eligible to participate in
defined contribution plans. The expense recognized for all of these plans was
$3,693 in 1994, $5,245 in 1995 and $5,432 in 1996.
In addition, the employees at K-III Magazines and the non-union employees at
Daily Racing Form are eligible to participate in the K-III Pension Plan
("Pension Plan") which is a non-contributory defined benefit pension plan. The
benefits to be paid under the Pension Plan are based on years of service and
compensation amounts for the highest consecutive five years of service in the
most current ten years. The Pension Plan is funded by means of contributions by
the Company to the plan's trust. The pension funding policy is consistent with
the funding requirements of U.S. Federal and other governmental laws and
regulations. Plan assets consist primarily of fixed income, equity and other
short-term investments.
F-28
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
21. RETIREMENT PLANS (CONTINUED)
The components of the net periodic pension cost of the Pension Plan for the
years ended December 31, 1994, 1995 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Service cost....................................................................... $ 761 $ 755 $ 1,203
Interest cost...................................................................... 491 581 769
Actual investment (gain) or loss on plan assets.................................... 20 (812) (610)
Net amortization and deferral...................................................... 16 774 462
--------- --------- ---------
Net periodic pension cost.......................................................... $ 1,288 $ 1,298 $ 1,824
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following is a reconciliation of the funded status of the Pension Plan:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested................................................................ $ (3,700) $ (6,342)
Non-vested............................................................ (400) (617)
--------- ---------
Accumulated benefit obligation.......................................... (4,100) (6,959)
Additional liability based on projected compensation levels............. (4,841) (5,118)
--------- ---------
Projected benefit obligation............................................ (8,941) (12,077)
Plan assets at fair value............................................... 4,273 5,473
--------- ---------
Projected benefit obligation in excess of plan assets................... (4,668) (6,604)
Unrecognized net loss (gain)............................................ (1,011) 172
Obligation recorded at acquisition date................................. 3,135 2,861
--------- ---------
Accrued pension cost.................................................... $ (2,544) $ (3,571)
--------- ---------
--------- ---------
</TABLE>
The obligation recorded at the acquisition date of K-III Magazines and Daily
Racing Form is the excess of the projected benefit obligation over the plan
assets at the date of acquisition which is included in other non-current
liabilities. The weighted average discount rate and the weighted average rate of
compensation increases used in determining the actuarial present value of the
projected benefit obligation were 4.0% and 7.5% for 1995 and 1996, respectively.
The weighted average expected long-term rate of return on plan assets was 8.5%
for 1995 and 1996.
F-29
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
22. COMMITMENTS AND CONTINGENCIES
COMMITMENTS. Total rent expense under operating leases was $23,996, $24,409
and $31,561 for the years ended December 31, 1994, 1995 and 1996, respectively.
Certain leases are subject to escalation clauses and certain leases contain
renewal options. Minimum rental commitments under noncancellable operating
leases are approximately as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
---------------------------
<S> <C>
1997............................................................. $ 33,040
1998............................................................. 29,762
1999............................................................. 25,565
2000............................................................. 23,546
2001............................................................. 18,510
Thereafter....................................................... 52,340
-----------
$ 182,763
-----------
-----------
</TABLE>
Future minimum lease payments under a capital lease (see Note 11) are
approximately as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
---------------------------
<S> <C>
1997............................................................. $ 1,980
1998............................................................. 1,980
1999............................................................. 1,980
2000............................................................. 1,980
2001............................................................. 1,980
Thereafter....................................................... 5,275
----------
15,175
Less: amount representing interest............................... 4,593
----------
Present value of net minimum lease payments...................... 10,582
Less: current portion............................................ 969
----------
Long-term obligations (included in other non-current
liabilities)................................................... $ 9,613
----------
----------
</TABLE>
CONTINGENCIES. The Company is involved in ordinary and routine litigation
incidental to its business. In the opinion of management, there is no pending
legal proceeding that would have a material adverse affect on the consolidated
financial statements of the Company.
At December 31, 1996, the Company had letters of credit outstanding of
approximately $4,850.
23. RELATED PARTY TRANSACTIONS
During each of the years ended December 31, 1994, 1995 and 1996, the Company
paid $1,000 in administrative and other fees to Kohlberg Kravis Roberts & Co.
("KKR"), an affiliated party, and an aggregate of $180, in directors' fees to
certain partners of KKR. In addition, in connection with the Channel One
acquisition, the Company paid $2,500 in investment advisory fees to KKR. On
September 30, 1994, in order to finance the Channel One acquisition, the Company
issued 1,501 shares of
F-30
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
23. RELATED PARTY TRANSACTIONS (CONTINUED)
Series C Preferred Stock ("Old Preferred Stock") at $50,000 per share and
9,381,250 shares of common stock at $8.00 per share, which was the fair value at
such date, to partnerships affiliated with KKR. Gross proceeds of $150,100 were
received from these issuances. Dividends were payable at the higher of 11 3/4%
and the interest rates associated with United States Treasury bills and notes
plus applicable margins. The Old Preferred Stock was redeemed on November 21,
1994 for $76,324 which represented a redemption price of $50,000 per share plus
the accumulated and unpaid dividends of $1,274.
On March 1, 1995, 3,125,000 shares of common stock were issued to a
partnership affiliated with KKR at $8.00 per share which was the fair value per
share at such date. On March 1, 1995, pursuant to the related certificate of
designations, 2,500 shares of Old Preferred Stock were authorized for issuance
and 1,000 shares were issued to partnerships affiliated with KKR at $50,000 per
share, which was the liquidation value per share at such date. The proceeds from
both issuances were used to pay down the borrowings under the Revolving Credit
Agreement. On August 3, 1995, the Company redeemed all 1,054 shares then
outstanding (which included dividends accrued through redemption date) of the
Old Preferred Stock at $50,000 per share for a total of $52,691. This
transaction was financed with borrowings under the Revolving Credit Agreement
(see Note 15).
24. UNAUDITED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1995:
Sales, net................................ $238,664 $257,228 $265,604 $284,833 $1,046,329
Operating income (loss)................... 4,663 (50,491) 13,130 6,423 (26,275)
Net income (loss)......................... (20,701) (78,929) (14,635) 38,830 (75,435)
Income (loss) applicable to common
shareholders............................ (27,115) (87,009) (22,386) 32,097 (104,413)
Earnings (loss) per common and common
equivalent share........................ $(.25) $(.78) $(.20) $.25 $(.91)
Weighted average common and common
equivalent shares outstanding........... 109,622,179 111,371,697 110,909,810 128,406,304 115,077,498
FOR THE YEAR ENDED DECEMBER 31, 1996:
Sales, net................................ $314,953 $335,680 $344,418 $379,398 $1,374,449
Operating income.......................... 6,985 23,280 18,519 37,117 85,901
Net income (loss)......................... (20,740) (14,638) (11,895) 55,317 8,044
Income (loss) applicable to common
shareholders............................ (27,584) (27,041) (23,973) 43,116 (35,482)
Earnings (loss) per common and common
equivalent share........................ $(.21) $(.21) $(.19) $.32 $(.27)
Weighted average common and common
equivalent shares outstanding........... 128,502,847 128,787,528 128,874,002 133,866,152 130,007,632
</TABLE>
The change in method of accounting for advertising costs resulted in a
decrease to operating loss or increase to operating income and a decrease to net
loss of approximately $16,000, $1,000 and $300
F-31
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
24. UNAUDITED QUARTERLY FINANCIAL INFORMATION (CONTINUED)
in the first, second and third quarters of 1995, respectively. This accounting
change decreased operating income and net income by approximately $5,500 in the
fourth quarter of 1995. During the second quarter of 1995, the Company recorded
a provision for loss on the sales of businesses in the amount of $35,447, an
aggregate write-down of $17,958 of the carrying values of the identifiable
intangible assets and goodwill of K-III Reference and restructuring and other
costs in the amount of $14,667. In addition, in the fourth quarter of 1995, the
Company recognized income tax benefits of $59,600 and recorded a provision to
write-off $5,786 of goodwill related to a product line of Newbridge. In the
fourth quarter of 1995, the Company recorded certain catch-up adjustments to the
amortization of identifiable intangible assets and goodwill due to the receipt
of independent appraisal reports for intangible assets. For all quarters
presented prior to the initial filing of the registration statement for the
November 1995 initial public offering, the weighted average number of common
stock shares outstanding include Incremental Shares as described in Note 3.
As a result of previous bank refinancings, the Company wrote off $7,572 of
unamortized deferred financings costs in the second quarter of 1996 and $1,076
of unamortized deferred financing costs in the fourth quarter of 1996. In
addition, in the fourth quarter of 1996, the Company recognized income tax
benefits of $53,300. In the fourth quarter of 1996, the Company recorded certain
catch-up adjustments to the amortization of identifiable intangible assets and
goodwill due to the receipt of independent appraisal reports for intangible
assets.
F-32
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
25. BUSINESS SEGMENT INFORMATION
The Company's operations have been classified into three business segments:
education, information and specialty media (see Note 1). Summarized financial
information by business segment as of December 31, 1994, 1995 and 1996 and for
each of the years then ended is set forth below:
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
SALES, NET:
Education....................................... $ 430,134 $ 330,414 $ 376,217
Information..................................... 192,732 263,542 313,891
Specialty Media................................. 341,782 452,373 684,341
------------ ------------ ------------
Total........................................... $ 964,648 $ 1,046,329 $ 1,374,449
------------ ------------ ------------
------------ ------------ ------------
OPERATING INCOME (LOSS):
Education....................................... $ 10,590 $ (32,024) $ 15,011
Information..................................... (2,307) (8,683) 33,473
Specialty Media................................. 15,877 32,169 59,693
Corporate....................................... (13,957) (17,737) (22,276)
------------ ------------ ------------
Total........................................... $ 10,203 $ (26,275) $ 85,901
------------ ------------ ------------
------------ ------------ ------------
TOTAL ASSETS:
Education....................................... $ 613,897 $ 547,587 $ 939,947
Information..................................... 462,861 499,418 531,771
Specialty Media................................. 464,626 723,711 908,374
Corporate....................................... 48,308 110,700 172,123
------------ ------------ ------------
Total........................................... $ 1,589,692 $ 1,881,416 $ 2,552,215
------------ ------------ ------------
------------ ------------ ------------
DEPRECIATION, AMORTIZATION AND OTHER (1):
Education....................................... $ 47,258 $ 107,284 $ 64,228
Information..................................... 52,497 79,435 53,091
Specialty Media................................. 54,571 58,100 76,281
Corporate....................................... 645 706 764
------------ ------------ ------------
Total........................................... $ 154,971 $ 245,525 $ 194,364
------------ ------------ ------------
------------ ------------ ------------
CAPITAL EXPENDITURES:
Education....................................... $ 8,768 $ 10,896 $ 14,471
Information..................................... 4,133 6,119 4,343
Specialty Media................................. 2,839 5,737 9,107
Corporate....................................... 378 2,427 1,740
------------ ------------ ------------
Total........................................... $ 16,118 $ 25,179 $ 29,661
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
- --------------------------
(1) Other includes net provision for loss on the sales of businesses, provision
for restructuring and other costs and amortization of deferred financing and
organizational costs.
There were no significant intersegment sales or transfers during 1994, 1995
and 1996. Operating income (loss) by business segment excludes interest income
and interest expense. Corporate assets consist primarily of cash, receivables,
property and equipment and the net deferred income tax asset. Depreciation,
amortization and other does not include the write-off of unamortized deferred
financing costs of $11,874 in 1994 and $8,648 in 1996 but it does include the
net provision for loss on sale of a business of $15,025 in 1994, the net
provision for loss on sales of businesses of $35,447 in 1995 and provision for
restructuring and other costs of $14,667 in 1995.
F-33
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
25. BUSINESS SEGMENT INFORMATION (CONTINUED)
The adoption of a change in method of accounting for advertising costs
resulted in an increase in operating income in 1994 for the education and
specialty media segments of approximately $6,500 ($.06 per share) and $3,300
($.03 per share), respectively. This change in method of accounting for
advertising costs resulted in a decrease in operating loss in 1995 for the
education and information segments of approximately $10,500 ($.09 per share) and
$200, respectively, and an increase in operating income in 1995 for the
specialty media segment of approximately $1,100 ($.01 per share) (see Note 2).
In 1996, the change in method of accounting for advertising costs was immaterial
for the education and information segments and resulted in an increase in
operating income of approximately $1,700 ($.01 per share) for the specialty
media segment.
26. SUBSEQUENT EVENTS
Through March 12, 1997, the Company completed three product-line
acquisitions consisting of specialty consumer magazines and specialized
reference products. The aggregate purchase price was approximately $56,000.
On March 11, 1997, the Company announced its intention to make public
offerings of approximately 12.5 million shares of its common stock, par value
$.01 per share (the "Offerings"). The net proceeds of the Offerings will be used
to redeem the Company's outstanding Senior Preferred Stock and repay debt.
As a part of its strategy to focus on areas of its business that have the
greatest potential for growth, the Company intends to divest certain businesses
that do not fit within its growth vehicles. Those businesses are: the DAILY
RACING FORM group which includes a national daily newspaper covering
thoroughbred horseracing and PRO FOOTBALL WEEKLY; KRAMES COMMUNICATIONS, a
leading publisher of patient information sold to healthcare providers for
distribution to patients and other healthcare users; the KATHARINE GIBBS
SCHOOLS, a chain of seven business schools; NEWBRIDGE BOOK CLUBS, the largest
book club organization for professionals in the United States; and NEW WOMAN
magazine, a guide for personal relationships and careers. The proceeds of these
sales will be used to repay indebtedness. These businesses represented
approximately 19% of 1996 net sales of the Company. The unaudited combined
operating results for the years ended December 31, 1994, 1995 and 1996 and total
assets and liabilities at December 31, 1996 of these business units are as
follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
Sales, net............................................. $ 263,000 $ 259,400 $ 255,000
---------- ---------- -----------
---------- ---------- -----------
Operating income (loss)................................ $ (1,110) $ (5,330) $ (3,950)
---------- ---------- -----------
---------- ---------- -----------
Total assets (1)....................................... $ 304,700
-----------
-----------
Total liabilities...................................... $ 73,100
-----------
-----------
</TABLE>
- ------------------------
(1) At December 31, 1996, KATHARINE GIBBS SCHOOLS is reflected as an asset held
for sale in the accompanying consolidated balance sheet.
In January 1997, the Company purchased, in aggregate, $20,850 of the 10 5/8%
Senior Notes at a weighted average price of 105% of the outstanding principal
plus accrued and unpaid interest, from various brokers on the open market. In
March 1997, the Company called for redemption all of its outstanding 10 5/8%
Senior Notes. On May 1, 1997, the Company will redeem $212,400 principal amount
of the 10 5/8% Senior Notes, at a redemption price of 104% of the outstanding
principal amount thereof, plus accrued and unpaid interest to the date of
redemption.
F-34
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Incorporation
of Certain
Documents by
Reference... 2
Prospectus
Summary... 3
Risk
Factors... 12
Use
of
Proceeds... 15
Price
Range
of
Common
Stock
and
Dividend
Policy... 15
Capitalization... 16
Selected
Financial
Information... 17
Management's
Discussion
and
Analysis of
Financial
Condition
and
Results
of
Operations... 19
Business... 28
Management... 35
Description
of Capital
Stock of
the
Company.. 37
Security
Ownership
of
Certain
Beneficial
Owners
and
Management... 43
Certain
U.S.
Tax
Consequences
to Non-U.S.
Holders... 44
Underwriting... 46
Legal
Matters... 49
Experts... 49
Available
Information... 50
Unaudited
Pro
Forma
Consolidated
Financial
Data... P-1
Index
to
Financial
Statements... F-1
</TABLE>
12,500,000 SHARES
K-III
COMMUNICATIONS
CORPORATION
COMMON STOCK
($.01 PAR VALUE)
[LOGO]
SALOMON BROTHERS INC
MORGAN STANLEY & CO.
INCORPORATED
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH & CO.
PROSPECTUS
DATED , 1997
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there by any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
Subject to Completion
March 28, 1997
PROSPECTUS
[LOGO]
12,500,000 SHARES
K-III COMMUNICATIONS CORPORATION
COMMON STOCK
($.01 PAR VALUE)
All of the shares of common stock, par value $.01 per share (the "Common
Stock"), of K-III Communications Corporation ("K-III" or the "Company") offered
hereby are being issued and sold by the Company.
Of the shares being offered, 10,000,000 shares are being offered in the United
States and Canada (the "U.S. Offering") and 2,500,000 shares are being offered
in a concurrent international offering outside the United States and Canada (the
"International Offering" and, collectively with the U.S. Offering, the
"Offerings"), subject to transfers between the U.S. Underwriters and the
International Underwriters. The Price to Public and Underwriting Discount per
share will be identical for the U.S. Offering and the International Offering.
See "Underwriting." The closings of the U.S. Offering and International Offering
are conditioned upon each other.
The Common Stock is listed on the New York Stock Exchange (the "NYSE") under the
symbol "KCC." On March 27, 1997, the last reported sale price of the Common
Stock on the NYSE was $11.50 per share. See "Price Range of Common Stock and
Dividend Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT COMPANY(1)
Per Share................................ $ $ $
Total(2)................................. $ $ $
- --------------------------------------------------------------------------------------------
</TABLE>
(1) Before deducting offering expenses payable by the Company estimated to be
$ .
(2) The Company has granted the U.S. Underwriters and the International
Underwriters 30-day options to purchase up to 1,500,000 and 375,000
additional shares of Common Stock, respectively, at the Price to Public,
less the Underwriting Discount, solely to cover over-allotments, if any. If
the Underwriters exercise such options in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
The Common Stock is offered subject to receipt and acceptance by the
Underwriters, to prior sale and to the Underwriters' right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of the shares of Common Stock will be made at the
office of Salomon Brothers Inc, Seven World Trade Center, New York, New York, or
through the facilities of The Depository Trust Company, on or about ,
1997.
SALOMON BROTHERS INTERNATIONAL LIMITED MORGAN STANLEY & CO.
INTERNATIONAL
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
INTERNATIONAL LIMITED
MERRILL LYNCH INTERNATIONAL
The date of this Prospectus is , 1997.
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "International Underwriting Agreement") among the Company and each of the
underwriters named below (the "International Underwriters"), for whom Salomon
Brothers International Limited, Morgan Stanley & Co. International Limited,
Credit Suisse First Boston (Europe) Limited, Donaldson, Lufkin & Jenrette
International Limited and Merrill Lynch International are acting as
representatives (the "International Representatives"), the Company has agreed to
sell each of the International Underwriters, and each such International
Underwriter has severally agreed to purchase from the Company, the aggregate
number of shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL UNDERWRITERS SHARES
- --------------------------------------------------------------------------------- -----------
<S> <C>
Salomon Brothers International Limited...........................................
Morgan Stanley & Co. International Limited.......................................
Credit Suisse First Boston (Europe) Limited......................................
Donaldson, Lufkin & Jenrette International Limited...............................
Merrill Lynch International......................................................
-----------
Total...................................................................... 2,500,000
-----------
-----------
</TABLE>
In addition, the Company has entered into an underwriting agreement (the
"U.S. Underwriting Agreement") with the underwriters named therein (the "U.S.
Underwriters"), for whom Salomon Brothers Inc, Morgan Stanley & Co.
Incorporated, Credit Suisse First Boston Corporation, Donaldson, Lufkin &
Jenrette Securities Corporation and Merrill Lynch, Pierce, Fenner & Smith
Incorporated are acting as representatives (the "U.S. Representatives" and,
together with the International Representatives, the "Representatives"),
providing for the concurrent offer and sale of 10,000,000 shares of Common Stock
in the U.S. and Canada. The closing with respect to the sale of the shares of
Common Stock pursuant to the International Underwriting Agreement is a condition
to the closing with respect to the sale of the shares of Common Stock pursuant
to the U.S. Underwriting Agreement, and the closing with respect to the sale of
the shares of Common Stock pursuant to the U.S. Underwriting Agreement is a
condition to the closing with respect to sale of the shares of Common Stock
pursuant to the International Underwriting Agreement. The public offering price
and underwriting discounts and concessions per share for the International
Offering and the U.S. Offering will be identical.
The International Underwriting Agreement provides that the several
International Underwriters will be obligated to purchase all the shares of
Common Stock being offered (other than the shares covered by the over-allotment
option described below) if any are purchased. In the event of default by any
International Underwriters, the International Underwriting Agreement provides
that, in certain circumstances, the purchase commitments of the non-defaulting
International Underwriters may be increased or the International Underwriting
Agreement may be terminated.
The International Underwriters have advised the Company that they propose
initially to offer the Common Stock directly to the public at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share.
The International Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share on sales to certain other
dealers. After the initial offering, the price to public and concessions to
dealers may be changed.
Each U.S. Underwriter has severally agreed that, as part of the distribution
of the U.S. Offering, (i) it is not purchasing any shares of Common Stock for
the account of anyone other than a United States or Canadian Person (as defined
below) and (ii) it has not offered or sold, and will not offer or sell, directly
or
46
<PAGE>
indirectly, any shares of Common Stock or distribute this Prospectus to any
person outside the United States or Canada or to anyone other than a United
States or Canadian Person. Each International Underwriter has severally agreed
that, as part of the distribution of the International Offering, (i) it is not
purchasing any shares of Common Stock for the account of any United States or
Canadian Person and (ii) it has not offered or sold, and will not offer or sell,
directly or indirectly, any shares of Common Stock or distribute any Prospectus
related to the International Offering to any person within the United States or
Canada or to any United States or Canadian Person. The foregoing limitations do
not apply to stabilization transactions or to certain other transactions
specified in the Agreement Between U.S. Underwriters and International
Underwriters described below. "United States or Canadian Person" means any
person who is a natural citizen or resident of the United States or Canada, any
corporation, partnership or other entity created or organized in or under the
laws of the United States or Canada, or any political subdivision thereof, any
estate or trust the income of which is subject to United States or Canadian
federal income taxation, regardless of the source of its income (other than a
foreign branch of any United States or Canadian Person), and includes any United
States or Canadian branch of a person other than a United States or Canadian
Person.
Each U.S. Underwriter that will offer or sell shares of Common Stock in
Canada as part of the distribution has severally agreed that such offers and
sales will be made only pursuant to an exemption from the prospectus
requirements in each jurisdiction in Canada in which such offers and sales are
made. Each International Underwriter has severally agreed that (i) it has not
offered or sold and will not offer or sell in the United Kingdom, by means of
any document, any Common Stock other than to persons whose ordinary business it
is to buy or sell shares or debentures, whether as principal or agent, or in
circumstances which do not constitute an offer to the public within the meaning
of the Companies Act 1985; (ii) it has complied with and will comply with all
applicable provisions of The Financial Services Act 1986 with respect to
anything done by it in relation to the Common Stock, in, from or otherwise
involving the United Kingdom; and (iii) it has only issued or passed on and will
only issue and pass on to any person in the United Kingdom any document received
by it in connection with the issue of the Common Stock if that person is of a
kind described in Article 9(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1992 or a person to whom the document may
otherwise lawfully be issued or passed on.
The U.S. Underwriters and the International Underwriters have entered into
an agreement that provides for the coordination of their activities (the
"Agreement Between U.S. Underwriters and International Underwriters"). Pursuant
to the Agreement Between U.S. Underwriters and International Underwriters, sales
may be made between the U.S. Underwriters and the International Underwriters of
such number of shares of Common Stock as may be mutually agreed. The per share
price of any shares of Common Stock so sold shall be the initial public offering
price set forth on the cover page of this Prospectus, less an amount not greater
than the concession to securities dealers set forth above. To the extent that
there are sales between the U.S. Underwriters and the International Underwriters
pursuant to the Agreement Between U.S. Underwriters and International
Underwriters, the number of shares initially available for sale by the U.S.
Underwriters or by the International Underwriters may be more or less than the
amount appearing on the cover page of this Prospectus.
The Company has granted to the U.S. Underwriters and International
Underwriters options to purchase up to an additional aggregate of 1,500,000 and
375,000 shares of Common Stock, respectively, at the initial public offering
price less the aggregate underwriting discounts and concessions, solely to cover
over-allotments. Such options may be exercised at any time up to 30 days after
the date of this Prospectus. To the extent that the U.S. Underwriters and
International Underwriters exercise such options, each of the U.S. Underwriters
or International Underwriters, as the case may be, will be committed, subject to
certain conditions, to purchase a number of option shares proportionate to such
U.S. Underwriter's or International Underwriter's initial commitment, as
applicable.
47
<PAGE>
For a period of 90 days after the date of this Prospectus, the Company, each
of the Common Stock Partnerships and each executive officer of the Company have
agreed not to offer, sell, contract to sell or otherwise dispose of any shares
of Common Stock or any security convertible into or exercisable or exchangeable
for Common Stock, file or cause to be filed a registration statement with the
Commission in respect of, or establish or increase a put equivalent position or
liquidate or decrease a call equivalent position within the meaning of Section
16 of the Exchange Act with respect to any shares of Common Stock of the Company
or publicly announce the intention to effect any such transaction, in each case,
without the prior written consent of Salomon Brothers Inc, except (a) the
Company may register the Common Stock and may sell the shares of Common Stock
offered in the Offerings and (b) the Company may issue securities pursuant to
the Company's stock option or other benefit or incentive plans maintained for
its officers, directors or employees.
No action has been taken or will be taken in any jurisdiction by the
Company, the U.S. Underwriters or the International Underwriters that would
permit a public offering of the shares offered hereby in any jurisdiction where
action for that purpose is required, other than the United States. Persons who
come into possession of this Prospectus are required by the Company, the U.S.
Underwriters and the International Underwriters to inform themselves about and
to observe any restrictions as to the offering of the shares offered hereby and
the distribution of this Prospectus.
In connection with these Offerings, the Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offerings than
they are committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following completion of the Offerings to cover
all or a portion of such short position. The Underwriters may also cover all or
a portion of such short position, up to 1,875,000 shares of Common Stock, by
exercising the Underwriters' over-allotment options referred to above. In
addition, Salomon Brothers Inc and Salomon Brothers International Limited, on
behalf of the Underwriters, may impose "penalty bids" under contractual
arrangements with the Underwriters whereby it may reclaim from an Underwriter
(or dealer participating in the Offerings) for the account of the other
Underwriters, the selling concession with respect to Common Stock that is
distributed in the Offerings but subsequently purchased for the account of the
Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
The shares of Common Stock may not be offered or sold directly or indirectly
in Hong Kong by means of this document or any other offering material or
document other than to persons whose ordinary business it is to buy or sell
shares or debentures, whether as principal or as agent. Unless permitted to do
so by the securities laws of Hong Kong, no person may issue or cause to be
issued in Hong Kong this document or any amendment or supplement thereto or any
other information, advertisement or document relating to the shares of Common
Stock other than with respect to shares of Common Stock intended to be disposed
of to persons outside Hong Kong or to persons whose business involves the
acquisition, disposal or holding of securities, whether as principal or as
agent.
The shares of Common Stock have not been registered under the Securities and
Exchange law of Japan and are not being offered and may not be offered or sold
directly or indirectly in Japan or to residents of Japan, except pursuant to
applicable Japanese laws and regulations.
Purchasers of the shares of Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase in addition to the offering price set forth on the cover
page hereof.
48
<PAGE>
K-III engaged Donaldson, Lufkin & Jenrette Securities Corporation in March
1996 to serve as financial advisor in connection with the acquisition by K-III
of WESTCOTT COMMUNICATIONS, and Donaldson, Lufkin & Jenrette Securities
Corporation received customary compensation in connection with such services. In
addition, in connection with the sale of the Non-Core Businesses, K-III has
engaged Salomon Brothers Inc as financial advisor for the disposition of KRAMES
COMMUNICATIONS and Morgan Stanley & Co. Incorporated as financial advisor for
the disposition of the DAILY RACING FORM group. Each of Salomon Brothers Inc and
Morgan Stanley & Co. Incorporated will receive customary compensation for their
services in connection with these dispositions.
Certain affiliates of the Underwriters hold the Senior Preferred Stock or
are lenders under the Credit Facilities and, as a result, may receive cash upon
the redemption of the Senior Preferred Stock with the net proceeds from the
Offerings. See "Use of Proceeds." In addition, certain of the Underwriters or
their affiliates participate on a regular basis in various general financing and
banking transactions for the Company and certain affiliates.
The Company has agreed to indemnify the International Underwriters against
certain liabilities, including certain liabilities under the Securities Act, or
contribute to payments the International Underwriters may be required to make in
respect thereof.
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby is being passed
upon for the Company by Simpson Thacher & Bartlett (a partnership which includes
professional corporations), New York, New York. Certain legal matters in
connection with the sale of shares of Common Stock offered hereby are being
passed upon for the underwriters by Latham & Watkins, New York, New York.
Certain partners of Latham & Watkins, members of their respective families,
related persons and others have an indirect interest, through the Common Stock
Partnerships, in less than 1% of the Common Stock. Such persons do not have the
power to vote or dispose of such shares of Common Stock. Latham & Watkins
renders legal services to the Company and KKR on a regular basis.
EXPERTS
The consolidated financial statements of K-III Communications Corporation
and subsidiaries for the years ended December 31, 1994, 1995 and 1996 included
in this Prospectus and the related financial statement schedules included
elsewhere in the registration statement have been audited by Deloitte & Touche
LLP, independent public accountants, as stated in their report appearing herein
and elsewhere in the registration statement, and are included in reliance upon
the reports of such firm given upon their authority as experts in accounting and
auditing.
The consolidated financial statements of Westcott Communications, Inc.
appearing in K-III Communications Corporation's Current Report (Form 8-K) dated
June 14, 1996 for the years ended December 31, 1995 and 1994, have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
included therein and incorporated herein by reference. Such consolidated
financial statements are incorporated herein by reference in reliance upon the
authority of such firm as experts in accounting and auditing.
49
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, files reports, proxy and information
statements and other information with the Commission. Such reports, proxy and
information statements and other information may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington D.C. 20549 and at the Commission's
Regional Offices located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials also can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission also maintains a Web site at
http://www.sec.gov which contains reports, proxy statements and other
information regarding registrants that file electronically with the Commission.
In addition, reports, proxy statements and other information concerning the
Company may be inspected at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
This Prospectus constitutes a part of a Registration Statement on Form S-3
(the "Registration Statement") filed by the Company with the Commission under
the Securities Act. This Prospectus omits certain information contained in the
Registration Statement, and reference is hereby made to the Registration
Statement and to the exhibits relating thereto for further information with
respect to the Company and the offering made hereby. Any statements contained
herein concerning the provisions of any document are not necessarily complete
and, in each instance, reference is made to the copy of such document filed as
an exhibit to the Registration Statement or otherwise filed with the Commission.
Each such statement is qualified in its entirety by such reference.
50
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Incorporation
of Certain
Documents by
Reference... 3
Prospectus
Summary... 5
Risk
Factors... 15
Use
of
Proceeds... 17
Price
Range
of
Common
Stock
and
Dividend
Policy... 18
Capitalization... 19
Selected
Financial
Information... 20
Management's
Discussion
and
Analysis of
Financial
Condition
and
Results
of
Operations... 22
Business... 31
Management... 38
Description
of Capital
Stock of
the
Company.. 40
Security
Ownership
of
Certain
Beneficial
Owners
and
Management... 46
Certain
U.S.
Tax
Consequences
to Non-U.S.
Holders... 47
Underwriting... 46
Legal
Matters... 49
Experts... 49
Available
Information... 50
Unaudited
Pro
Forma
Consolidated
Financial
Data... P-1
Index
to
Financial
Statements... F-1
</TABLE>
12,500,000 SHARES
K-III
COMMUNICATIONS
CORPORATION
COMMON STOCK
($.01 PAR VALUE)
[LOGO]
SALOMON BROTHERS
INTERNATIONAL LIMITED
MORGAN STANLEY & CO.
INTERNATIONAL
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
INTERNATIONAL LIMITED
MERRILL LYNCH INTERNATIONAL
PROSPECTUS
DATED , 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an itemization of the estimated costs expected to be
incurred in connection with the offer and sale of the securities registered
hereby.
<TABLE>
<S> <C>
Securities Act Registration Fee.................................. $ 58,244
NASD Filing Fee.................................................. 17,400
Printing and Engraving Expenses.................................. 200,000
Legal Fees and Expenses.......................................... 250,000
Accounting Fees and Expenses..................................... 200,000
Blue Sky Fees and Expenses....................................... 10,000
Miscellaneous.................................................... 14,356
---------
Total........................................................ $ 750,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is a Delaware Corporation. Reference is made to Section
102(b)(7) of the Delaware General Corporation Law (the "DGCL"), which enables a
corporation in its original certificate of incorporation or an amendment thereto
to eliminate or limit the personal liability of a director for violations of the
director's fiduciary duty, except (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (ii) pursuant to Section 174 of the DGCL (providing for liability of
directors for unlawful payment of dividends or unlawful stock purchase or
redemptions) or (iv) for any transaction from which a director derived an
improper personal benefit.
Reference also is made to Section 145 of the DGCL, which provides that a
corporation may indemnify any persons, including officers and directors, who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person was an officer, director,
employee or agent of such corporation or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorney's fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such officer, director, employee or agent acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
corporation's best interest and, for criminal proceedings, had no reasonable
cause to believe that his conduct was unlawful. A Delaware corporation may
indemnify officers and directors in an action by or in the right of the
corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation. Where an officer or director is successful on the
merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses that such officer or
director actually and reasonably incurred.
Article 8 of the Certificate of Incorporation of K-III provides that except
as provided under the DGCL, directors of K-III shall not be personally liable to
the corporation or its stockholders for monetary damages for breach of fiduciary
duties as a director. Article 4 of the By-laws of the Company provides for
indemnification of the officers and directors of K-III to the full extent
permitted by applicable law and provides for the advancement of expenses.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<S> <C> <C>
1.1* -- Form of U.S. Underwriting Agreement
1.2* -- Form of International Underwriting Agreement
5 -- Opinion of Simpson Thacher & Bartlett regarding the legality of the Common Stock.
12 -- Statement regarding computation of earnings to fixed charges.
23.1 -- Consent of Deloitte & Touche LLP.
23.2 -- Consent of Ernst & Young LLP.
23.3 -- Consent of Simpson Thacher & Bartlett (included in their opinion filed as Exhibit
5).
24 -- Powers of Attorney (included on signature pages hereto).
</TABLE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
K-III Communications Corporation and Subsidiaries
For the Year Ended Decemer 31, 1994......................................................... S-1
For the Year Ended Decemer 31, 1995......................................................... S-2
For the Year Ended Decemer 31, 1996......................................................... S-3
Independent Auditors' Report on Schedules--Deloitte & Touche LLP.............................. S-4
</TABLE>
All schedules, except those set forth above, have been ommitted since the
information required to be submitted has been included in the Consolidated
Financial Statements or Notes thereto or has been omitted as not applicable or
not required.
- -------------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
That, for purposes of determining any liability under the Securities Act of
1933, each filing of the registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of New York, State of New York on March 28, 1997.
K-III COMMUNICATIONS CORPORATION
BY /S/ BEVERLY C. CHELL
-----------------------------------------
(Beverly C. Chell)
VICE CHAIRMAN AND SECRETARY
We, The Undersigned Officers And Directors Of K-Iii Communications
Corporation and each of us, do hereby constitute and appoint each and any of
William F. Reilly, Charles G. McCurdy and Beverly C. Chell, our true and lawful
attorney and agent, with full power of substitution and resubstitution, to do
any and all acts and things in our name and behalf in any and all capacities and
to execute any and all instruments for us in our names in any and all
capacities, which attorney and agent may deem necessary or advisable to enable
said corporation to comply with the Securities Act of 1933, as amended, and any
rules, regulations, and requirements of the Securities and Exchange Commission,
in connection with this Registration Statement, including specifically, but
without limitation, power and authority to sign for us or any of us in our names
in the capacities indicated below, any and all amendments (including post-
effective amendments) hereto and any additional Registration Statement related
hereto permitted by Rule 462(b) promulgated under the Securities Act of 1933
(and all amendments, including post-effective amendments thereto); and we do
hereby ratify and confirm all that said attorney and agent, or his substitute,
shall do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on March 28, 1997.
SIGNATURES TITLE
- ------------------------------ --------------------------
Chairman, Chief Executive
/s/ WILLIAM F. REILLY Officer and Director
- ------------------------------ (Principal Executive
(William F. Reilly) Officer)
/s/ CHARLES G. MCCURDY President and Director
- ------------------------------ (Principal Financial
(Charles G. McCurdy) Officer)
/s/ BEVERLY C. CHELL
- ------------------------------ Vice Chairman, Secretary
(Beverly C. Chell) and Director
II-3
<PAGE>
<TABLE>
<C> <S>
- ------------------------------ Director
(Meyer Feldberg)
/s/ PERRY GOLKIN
- ------------------------------ Director
(Perry Golkin)
- ------------------------------ Director
(Henry R. Kravis)
- ------------------------------ Director
(George R. Roberts)
/s/ MICHAEL T. TOKARZ
- ------------------------------ Director
(Michael T. Tokarz)
Vice President and
/s/ CURTIS A. THOMPSON Controller
- ------------------------------ (Principal Accounting
(Curtis A. Thompson) Officer)
</TABLE>
II-4
<PAGE>
SCHEDULE II
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ----------------------------------- ------------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Accounts receivable
Allowance for doubtful
accounts....................... $ 28,137 $ 46,686 $ 1,686(2) $ (45,537 (3) $ 13,482
$ 1,736(1) $ (19,226 (4)
Allowance for sales returns
and rebates.................... $ 30,421 $ 142,268 $ 35(2) $ (143,644 (3) $ 23,543
$ 495(1) $ (6,032 (4)
Inventory
Allowance for obsolescence....... $ 8,320 $ 4,519 $ 207(2) $ (4,708 (3) $ 5,138
$ 327(1) $ (3,527 (4)
Accumulated amortization
Goodwill......................... $ 20,942 $ 9,419 -- $ (1,049 (4) $ 29,312
Other intangibles................ $ 483,596 $ 109,752 -- $ (20,118 (4) $ 573,230
Deferred financing costs......... $ 5,990 $ 3,080 -- $ (4,066 (3) $ 5,004
Deferred wiring and
installation costs............. -- $ 1,505 -- $ (92 (3) $ 1,413
Prepublication and programming
costs.......................... $ 4,675 $ 2,099 -- $ (42 (3) $ 6,732
Direct-response advertising
costs.......................... -- $ 5,251 -- $ (2,125 (4) $ 3,126
</TABLE>
- ------------------------
Notes:
(1) Increases in related valuation account result from acquisitions.
(2) Increases in related valuation account result from the recovery of amounts
previously written off.
(3) Deductions from related valuation account result from write-offs and actual
returns.
(4) Deductions from related valuation account result from reclassifications and
write-offs related to net assets held for sale.
S-1
<PAGE>
SCHEDULE II
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- --------------------------------------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Accounts receivable
Allowance for doubtful
accounts........................... $ 13,482 $ 19,276 $ 1,195(1) $ (20,526)(3) $ 14,364
$ 937(2)
Allowance for sales returns
and rebates........................ $ 23,543 $ 80,859 $ 663(2) $ (82,072)(3) $ 23,015
$ 22(2)
Inventory
Allowance for obsolescence........... $ 5,138 $ 2,662 $ 622(1) $ (1,463)(3) $ 7,129
$ 170(2)
Accumulated amortization
Goodwill............................. $ 29,312 $ 37,572 $ 5(2) -- $ 66,889
Other intangibles.................... $ 573,230 $ 122,609 -- $ (335)(3) $ 695,504
Deferred financing costs............. $ 5,004 $ 3,135 -- -- $ 8,139
Deferred wiring and
installation costs................. $ 1,413 $ 6,334 -- $ (584)(3) $ 7,163
Prepublication and programming
costs.............................. $ 6,732 $ 1,954 -- $ (4,565)(3) $ 4,121
Direct-response advertising costs.... $ 3,126 $ 28,774 -- $ (2,331)(3) $ 29,569
</TABLE>
- ------------------------
Notes:
(1) Increases in related valuation account result from acquisitions.
(2) Increases in related valuation account result from the recovery of amounts
previously written off.
(3) Deductions from related valuation account result from write-offs and actual
returns.
S-2
<PAGE>
SCHEDULE II
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- --------------------------------------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Accounts receivable
Allowance for doubtful
accounts........................... $ 14,364 $ 21,438 $ 62(1) $ (21,069)(3) $ 15,418
$ 970(2)
$ (347)(4)
Allowance for sales returns and
rebates............................ $ 23,015 $ 79,819 $ -- $ (78,736)(3) $ 24,098
Inventory
Allowance for obsolescence........... $ 7,129 $ 4,423 $ 279(2) $ (3,128)(3) $ 8,703
Accumulated amortization
Goodwill............................. $ 66,889 $ 23,576 $ (640)(4) $ (7,062)(3) $ 82,763
Other intangibles.................... $ 695,504 $ 122,140 $ (2,932)(4) $ (651)(3) $ 814,061
Deferred financing costs............. $ 8,139 $ 3,662 -- $ (2,007)(3) $ 9,794
Deferred wiring and
installation costs................. $ 7,163 $ 6,753 -- $ (1,066)(3) $ 12,850
Prepublication and programming
costs.............................. $ 4,121 $ 2,847 -- $ (2,116)(3) $ 4,852
Direct-response advertising costs.... $ 29,569 $ 41,481 -- $ (389)(3) $ 70,661
</TABLE>
- ------------------------
Notes:
(1) Increases in related valuation account result from acquisitions.
(2) Increases in related valuation account result from the recovery of amounts
previously written off.
(3) Deductions from related valuation account result from write-offs and actual
returns.
(4) Deductions from related valuation account result from reclassifications and
write-offs related to net assets held for sale.
S-3
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
To the Shareholders and Board of Directors of
K-III Communications Corporation
New York, New York:
We have audited the consolidated balance sheets of K-III Communications
Corporation and subsidiaries as of December 31, 1995 and 1996, and the related
statements of consolidated operations, consolidated cash flows and shareholders'
equity for each of the three years in the period ended December 31, 1996, and
have issued our report thereon dated January 29, 1997 (March 19, 1997 as to Note
26); such report is included elsewhere in this Registration Statement. Our
audits also included the financial statement schedules of K-III Communications
Corporation and subsidiaries, listed in Item 16. These financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
New York, New York
January 29, 1997
(March 19, 1997 as to Note 26)
S-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C> <C>
1.1* -- Form of U.S. Underwriting Agreement
1.2* -- Form of International Underwriting Agreement
5 -- Opinion of Simpson Thacher & Bartlett regarding the legality of the Common Stock.
12 -- Statement regarding Computation of earnings to fixed charges.
23.1 -- Consent of Deloitte & Touche LLP.
23.2 -- Consent of Ernst & Young LLP.
23.3 -- Consent of Simpson Thacher & Bartlett (included in their opinion filed as Exhibit
5).
24 -- Powers of Attorney (included on signature pages hereto).
</TABLE>
- ------------------------
* To be filed by amendment.
<PAGE>
Exhibit 5
SIMPSON THACHER & BARTLETT
(A PARTNERSHIP WHICH INCLUDES PROFESSIONAL CORPORATIONS)
425 LEXINGTON AVENUE
NEW YORK, NY 10017-3954
March 28, 1997
K-III Communications Corporation
745 Fifth Avenue
New York, New York 10151
Ladies and Gentlemen:
We have acted as counsel to K-III Communications Corporation, a
Delaware corporation (the "Company"), in connection with the preparation and
filing by the Company with the Securities and Exchange Commission (the
"Commission") of a Registration Statement on Form S-3 (the "Registration
Statement") under the Securities Act of 1933, as amended, with respect to up to
14,375,000 shares of the Company's Common Stock, par value $.01 per share (the
"Common Stock"), and will act as counsel in connection with the preparation and
filing by the Company with the Commission of any registration statement filed
pursuant to Rule 462(b) promulgated under the Act (a "Rule 462(b) Registration
Statement") with respect to additional shares of Common Stock.
We have reviewed the corporate action of the Company in connection
with the issuance and sale of the Common Stock by the Company and have examined,
and have relied as to matters of fact upon, originals or copies certified, or
otherwise identified to our satisfaction, of such corporate records, agreements,
documents and other instruments and such certificates or comparable documents of
public officials and of
<PAGE>
K-III Communications -2- March 28, 1997
Corporation
officers and representatives of the Company, and have made such other and
further investigations as we have deemed relevant and necessary as a basis for
the opinions hereinafter set forth.
In such examination, we have assumed the genuineness of all
signatures, the legal capacity of natural persons, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified or photostatic copies, and the
authenticity of the originals of such latter documents.
Based upon the foregoing, and subject to the qualifications and
limitations stated herein, we are of the opinion that the Common Stock
registered on the Registration Statement and to be registered on a Rule 462(b)
Registration Statement has been duly authorized by the Company and upon payment
and delivery in accordance with the underwriting agreements referred to in the
Prospectus, such Common Stock will be validly issued, fully paid and
nonassessable.
We are members of the Bar of the State of New York, and we do not
express any opinion herein concerning any law other than the law of the State of
New York and the Delaware General Corporation Law.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and as an exhibit to any Rule 462(b) Registration
Statement and to the reference to this firm under the caption "Legal Matters" in
the Registration Statement.
<PAGE>
K-III Communications -3- March 28, 1997
Corporation
This opinion is rendered to you in connection with the above described
transactions. This opinion may not be relied upon by you for any other purpose,
or relied upon by, or furnished to, any other person, firm or corporation
without our prior written consent.
Very truly yours,
/s/ Simpson Thacher & Bartlett
SIMPSON THACHER & BARTLETT
<PAGE>
EXHIBIT 12
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
DEFICIENCY OF EARNINGS TO FIXED CHARGES
AND DEFICIENCY OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1994 1995 1996 1996
ACTUAL ACTUAL ACTUAL PRO FORMA
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Earnings before fixed charges:
Net income (loss)......................................... $ (41,403) $ (75,435) $ 8,044 $ 1,123
Income tax benefit........................................ (42,100) (59,600) (53,300) (53,300)
------------ ------------ ----------- -----------
Loss from continuing operations before income tax benefit... (83,503) (135,035) (45,256) (52,177)
Interest expense and amortization of deferred financing
costs..................................................... 81,431 108,972 129,168 132,674
Interest portion of rental expenses......................... 7,991 8,129 10,510 11,131
------------ ------------ ----------- -----------
Earnings (loss) before fixed charges........................ 5,919 (17,934) 94,422 91,628
------------ ------------ ----------- -----------
Fixed charges:
Interest expense and amortization of deferred financing
costs................................................... 81,431 108,972 129,168 132,674
Interest portion of rental expenses....................... 7,991 8,129 10,510 11,131
------------ ------------ ----------- -----------
Total fixed charges..................................... 89,422 117,101 139,678 143,805
------------ ------------ ----------- -----------
Deficiency of earnings to fixed charges..................... (83,503) (135,035) (45,256) (52,177)
Preferred stock dividends................................... (25,959) (28,978) (43,526) (43,526)
------------ ------------ ----------- -----------
Deficiency of earnings to fixed charges and preferred stock
dividends................................................. $ (109,462) $ (164,013) $ (88,782) $ (95,703)
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
K-III COMMUNICATIONS CORPORATION:
We consent to the use in this Registration Statement of K-III Communications
Corporation on Form S-3 of our report dated January 29, 1997 (March 19, 1997 as
to Note 26), appearing in the Prospectus, which is part of this Registration
Statement, and of our report dated January 29, 1997 (March 19, 1997 as to Note
26) relating to the financial statement schedules appearing elsewhere in this
Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
New York, New York
March 26, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference of our firm under the caption "Experts" in the
Registration Statement (Form S-3) and the related Prospectus' of K-III
Communications Corporation dated on or about March 27, 1997 for the registration
of 14,375,000 shares of its common stock and to the incorporation by reference
therein of our report dated February 16, 1996, with respect to the consolidated
financial statements of Westcott Communications, Inc. included in K-III
Communications Corporation's Current Report on Form 8-K dated June 14, 1996,
both filed with the Securities and Exchange Commission.
Ernst & Young LLP
Dallas, Texas
March 24, 1997
