FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13
or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For Quarter Ended: September 30, 1998
Commission file number: 1-11106
PRIMEDIA Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3647573
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
745 Fifth Avenue, New York, New York
(Address of principal executive offices)
10151
(Zip Code)
Registrant's telephone number, including area code (212) 745-0100
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
------ ------
Number of shares of common stock, par value $.01 per share, outstanding as of
October 31, 1998: 144,643,021
<PAGE>
PRIMEDIA Inc.
INDEX
PAGE
Part I. Financial Information
Item 1. Financial Statements
-------
Condensed Consolidated Balance Sheets
(Unaudited) as of September 30, 1998 and
December 31, 1997 2
Condensed Statements of Consolidated
Operations (Unaudited) for the nine months
ended September 30, 1998 and 1997 3
Condensed Statements of Consolidated
Operations (Unaudited) for the three months
ended September 30, 1998 and 1997 4
Condensed Statements of Consolidated
Cash Flows (Unaudited) for the nine months
ended September 30, 1998 and 1997 5
Notes to Condensed Consolidated
Financial Statements (Unaudited) 6-12
Item 2. Management's Discussion and Analysis of
------- Financial Condition and Results of Operations 13-23
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
-------
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 25
-------
Signatures 26
<PAGE>
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------- ---------------
(dollars in thousands, except per share amounts)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 24,215 $ 22,978
Accounts receivable, net 250,081 199,289
Inventories, net 44,289 27,597
Net assets held for sale - 38,665
Prepaid expenses and other 42,696 33,971
--------------- ---------------
Total current assets 361,281 322,500
Property and equipment, net 128,716 116,361
Other intangible assets, net 813,857 660,268
Excess of purchase price over net assets acquired, net 1,379,956 1,111,785
Deferred income tax asset, net 176,200 176,200
Other non-current assets 114,014 98,876
--------------- ---------------
$ 2,974,024 $ 2,485,990
=============== ===============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 94,914 $ 95,546
Accrued interest payable 21,818 13,622
Accrued expenses and other 321,888 204,770
Deferred revenues 204,735 140,474
Current maturities of long-term debt 22,167 14,333
--------------- ---------------
Total current liabilities 665,522 468,745
--------------- ---------------
Long-term debt 1,746,985 1,656,541
--------------- ---------------
Other non-current liabilities 55,146 48,271
--------------- ---------------
Exchangeable preferred stock 557,347 470,280
--------------- ---------------
Common stock subject to redemption ($.01 par value, 394,120 shares and 402,650
shares outstanding at September 30, 1998 and December 31, 1997, respectively) 3,772 4,376
--------------- ---------------
Shareholders' deficiency:
Common stock ($.01 par value, 146,794,301 shares and 129,797,078 shares
issued at September 30, 1998 and December 31, 1997, respectively) 1,468 1,298
Additional paid-in capital 978,792 780,191
Accumulated deficit (1,005,172) (929,011)
Accumulated other comprehensive loss (1,663) (1,543)
Common stock in treasury, at cost (2,281,200 shares and 1,048,600 shares at
September 30, 1998 and December 31, 1997, respectively) (28,173) (13,158)
--------------- ---------------
Total shareholders' deficiency (54,748) (162,223)
--------------- ---------------
$ 2,974,024 $ 2,485,990
=============== ===============
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
--------------- --------------
(dollars in thousands, except per share amounts)
Sales, net:
<S> <C> <C>
Specialty Magazines $ 672,382 $ 556,990
Education 233,117 326,480
Information 221,833 206,527
--------------- ---------------
Total sales, net 1,127,332 1,089,997
Operating costs and expenses:
Cost of goods sold 265,898 247,298
Marketing and selling 202,555 204,514
Distribution, circulation and fulfillment 192,664 195,910
Editorial 105,387 90,300
Other general expenses 119,324 120,715
Corporate administrative expenses 19,725 19,256
Depreciation and amortization of property and equipment 29,533 26,910
(Gain) loss on the sales of businesses, net and other (7,216) 138,640
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 116,983 98,784
--------------- ---------------
Operating income (loss) 82,479 (52,330)
Other income (expense):
Interest expense (105,455) (103,728)
Amortization of deferred financing costs (2,307) (2,323)
Other, net (858) 176
--------------- ---------------
Loss before income tax benefit and extraordinary charge (26,141) (158,205)
Income tax benefit - carryback claim - 1,685
--------------- ---------------
Loss before extraordinary charge (26,141) (156,520)
Extraordinary charge - extinguishment of debt - (15,401)
--------------- ---------------
Net loss (26,141) (171,921)
Preferred stock dividends:
Cash (40,879) (32,786)
Non-cash dividends in kind - (4,451)
Series B Preferred Stock redemption premium (9,141) -
--------------- ---------------
Loss applicable to common shareholders $ (76,161) $ (209,158)
=============== ===============
Basic and diluted loss applicable to common shareholders per common share
Loss before extraordinary charge $ (.54) $ (1.50)
Extraordinary charge - (0.12)
--------------- ----------------
Net loss $ (.54) $ (1.62)
=============== ================
Basic and diluted common shares outstanding 141,861,758 129,271,743
=============== ================
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1998 1997
--------------- ----------------
(dollars in thousands, except per share amounts)
Sales, net:
<S> <C> <C>
Specialty Magazines $ 230,808 $ 193,513
Education 89,651 105,125
Information 71,837 70,306
--------------- ----------------
Total sales, net 392,296 368,944
Operating costs and expenses:
Cost of goods sold 95,274 87,635
Marketing and selling 71,694 65,796
Distribution, circulation and fulfillment 63,954 68,661
Editorial 35,049 30,623
Other general expenses 42,628 39,876
Corporate administrative expenses 6,503 6,546
Depreciation and amortization of property and equipment 10,522 8,686
(Gain) loss on the sales of businesses, net and other (5,367) 138,640
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 42,256 34,807
--------------- ----------------
Operating income (loss) 29,783 (112,326)
Other income (expense):
Interest expense (37,663) (34,765)
Amortization of deferred financing costs (722) (741)
Other, net (582) 158
--------------- ----------------
Net loss (9,184) (147,674)
Preferred stock dividends:
Cash (13,333) (12,456)
--------------- ----------------
Loss applicable to common shareholders $ (22,517) $ (160,130)
=============== ================
Basic and diluted loss applicable to common shareholders per
common share $ (.15) $ (1.24)
=============== ================
Basic and diluted common shares outstanding 145,238,934 129,411,579
=============== ================
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
--------------- --------------
(dollars in thousands)
Operating activities:
<S> <C> <C>
Net loss $ (26,141) $ (171,921)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 148,823 128,017
Non cash (gain) loss on the sales of businesses, net and other (21,291) 138,640
Accretion of discount on acquisition obligation,
distribution advance and other 7,397 4,957
Extraordinary charge - extinguishment of debt - 15,401
Other, net 668 (21)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable, net (13,727) (9,798)
Inventories, net (5,503) 4,474
Prepaid expenses and other (11,473) (14,619)
Increase (decrease) in:
Accounts payable (9,568) (26,956)
Accrued interest payable 8,196 (12,483)
Accrued expenses and other (28,544) (14,232)
Deferred revenues 12,425 8,672
Other non-current liabilities (11,170) (4,014)
--------------- --------------
Net cash provided by operating activities 50,092 46,117
--------------- --------------
Investing activities:
Additions to property, equipment and other, net (27,794) (22,305)
Proceeds from sales of businesses 67,290 111,972
Payments for businesses acquired (393,122) (182,570)
Investments in joint ventures (4,871) -
--------------- --------------
Net cash used in investing activities (358,497) (92,903)
--------------- --------------
Financing activities:
Borrowings under credit agreements 697,511 739,031
Repayments of borrowings under credit agreements (848,400) (547,200)
Payments of acquisition obligation (3,000) (3,000)
Proceeds from issuances of common stock, net of redemptions 201,408 6,362
Redemptions and purchases of 10 5/8% Senior Notes - (242,787)
Redemption of Series B Preferred Stock (166,739) -
Proceeds from issuance of Series E Preferred Stock, net of issuance costs - 121,450
Proceeds from issuance of 7 5/8% Senior Notes, net of discount 248,562 -
Proceeds from issuance of Series G Preferred Stock, net of issuance costs 241,911 -
Purchases of common stock for the treasury (15,015) (6,971)
Dividends paid to preferred stock shareholders (39,754) (32,786)
Deferred financing costs paid (5,320) (1,821)
Other (1,522) (454)
--------------- --------------
Net cash provided by financing activities 309,642 31,824
--------------- --------------
Increase (decrease) in cash and cash equivalents 1,237 (14,962)
Cash and cash equivalents, beginning of period 22,978 36,655
--------------- --------------
Cash and cash equivalents, end of period $ 24,215 $ 21,693
=============== ==============
Supplemental information:
Cash interest paid $ 91,892 $ 113,215
=============== ==============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
PRIMEDIA Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except per share amounts)
1. Basis of Presentation
PRIMEDIA Inc., together with its subsidiaries, is herein referred to as either
"PRIMEDIA" or the "Company". In the opinion of the Company's management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain reclassifications
have been made to the prior year financial statements to conform to the
classifications used in the current period. The operating results for the three
and nine-month periods ended September 30 are not necessarily indicative of the
results that may be expected for a full year.
The Company's operations have been organized into three business segments:
specialty magazines, education and information. In the first quarter of 1998,
the Company reclassified PRIMEDIA Reference from the information segment to the
education segment and has restated prior periods accordingly. The Company's
management believes that the education segment is more reflective of the focus
of the PRIMEDIA Reference products.
In 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" (see Note 12). In 1998, the
Company adopted the American Institute of Certified Public Accountants'
("AICPA") Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". Under the Company's
previous accounting policy, internal use software costs, whether developed or
obtained, were generally expensed as incurred. In compliance with SOP 98-1, the
Company expenses costs incurred in the preliminary project stage and,
thereafter, capitalizes costs incurred in the developing or obtaining of
internal use software. Certain costs, such as maintenance and training, are
expensed as incurred. Capitalized costs are amortized over a period of not more
than five years and are subject to impairment evaluation in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of". The adoption of SOP 98-1 resulted
in an increase in operating income and a decrease in net loss of approximately
$2,400 ($.02 per share) and approximately $6,600 ($.05 per share) for the three
and nine months ended September 30, 1998, respectively.
On April 3, 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities" which requires that costs of start-up activities, including
organizational costs, be expensed as incurred. This SOP will be effective with
the Company's 1999 consolidated financial statements. In June 1998, the
Financial Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" which becomes effective for the
Company's 2000 consolidated financial statements. SFAS No. 133 requires that
derivative instruments be measured at fair value and recognized as assets or
liabilities in a company's statement of financial position. In the opinion of
the Company's management, it is not anticipated that the adoption of these new
accounting pronouncements will have a material effect on the consolidated
financial statements of the Company.
2. Acquisitions and Joint Ventures
During the nine-month period ended September 30, 1998, the Company completed
several acquisitions, in all segments, which were financed through borrowings
under the Company's credit agreements. The cash payments for these acquisitions
on an aggregate basis were $393,122 (net of liabilities assumed of approximately
$228,000) including certain immaterial purchase price adjustments related to
prior year acquisitions. The excess purchase price over net assets acquired was
approximately $271,000.
The preliminary purchase cost allocations for the 1998 acquisitions are subject
to adjustment when additional information concerning asset and liability
valuations is obtained. The final asset and liability fair values may differ
from those set forth in the accompanying condensed consolidated balance sheet at
September 30, 1998; however, the changes are not expected to have a material
effect on the consolidated financial statements of the Company.
These acquisitions have all been accounted for by the purchase method. The
financial statements include the operating results of these acquisitions
subsequent to their respective dates of acquisition. If the foregoing
acquisitions had occurred on January 1, 1997, they would not have had a material
impact on the results of operations for the three and nine-month periods ended
September 30, 1997 and 1998.
In the first quarter of 1998, the Company created PRIMEDIA Ventures, a fund to
invest in early-stage Internet companies and other technology opportunities such
as commerce services, enterprise software applications and advertising-related
technologies. Its investments include an on-line wedding gift registry service,
a joint venture in China to publish trade magazines in Chinese language editions
and subscription based internet services for building relationships.
3. Non-Core Businesses
In 1997, as part of its strategy to focus on areas of its business that have the
greatest potential for growth, the Company divested the following non-core
business units: Katharine Gibbs Schools, Inc. ("Katharine Gibbs"), Newbridge
Communications, Inc. (excluding Films for the Humanities and Sciences), Krames
Communications Incorporated ("Krames"), Stagebill, Intertec Mailing Services and
New Woman.
During the second quarter of 1998, the Company completed the sale of the
outstanding common stock of Nelson Publications, Inc. ("Nelson") to Thomson
Information Services Inc. During the third quarter of 1998, the Company
completed its formal divestiture program with the sale of The Daily Racing Form
to a group of investors led by the merchant banking affiliate of Alpine Capital
Group of New York and journalist Steven Crist (See Item 6 - Exhibits and Reports
on Form 8-K). In connection with the sales of Nelson and The Daily Racing Form,
the Company recorded gains which are included in (gain) loss on the sales of
businesses, net and other on the accompanying condensed statements of
consolidated operations for the nine months ended September 30, 1998.
In 1998, the Company also decided to divest and discontinue certain enthusiast
titles and Funk and Wagnall's products. All of the aforementioned divestitures
and product discontinuations are collectively referred to as Non-Core
Businesses.
Total sales for the Non-Core Businesses were $6,228 and $72,015 for the three
months ended September 30, 1998 and 1997, respectively, and $41,780 and $227,500
for the nine months ended September 30, 1998 and 1997, respectively. Operating
income (loss) for the Non-Core Businesses was $14,717 and $(131,690) for the
three months ended September 30, 1998 and 1997, respectively, and $27,015 and
$(121,595) for the nine months ended September 30, 1998 and 1997, respectively.
<PAGE>
4. Network Shutdown and Restructuring
On August 1, 1998, the Company discontinued Executive Education Network
("EXEN"), a PRIMEDIA Workplace Learning network, due to unprofitability and
increased competition in this field. As a result, the Company recorded a $4,000
provision related to expected discontinuance costs, which is recorded net of the
gains on the sales of Nelson and The Daily Racing Form. In addition, the Company
recorded a $5,800 write-down of EXEN's excess of purchase price over net assets
acquired and other intangible assets which is included in amortization expense.
During the third quarter of 1998, the Company recorded approximately $8,500 of
severance costs related to a restructuring. This charge is recorded net of the
gains on the sales of Nelson and The Daily Racing Form.
5. $9.20 Series E Exchangeable Preferred Stock Exchange Offer
On September 26, 1997, the Company completed a private offering of 1,250,000
shares of $9.20 Series E Exchangeable Preferred Stock ("Series E Preferred
Stock") at $100 per share. On February 17, 1998, the Company exchanged the
1,250,000 shares of Series E Preferred Stock for 1,250,000 shares of $9.20
Series F Exchangeable Preferred Stock ("Series F Preferred Stock"). The terms of
the Series F Preferred Stock are the same as the terms of the Series E Preferred
Stock except that the Series F Preferred Stock has been registered under the
Securities Act of 1933. The Series F Preferred Stock is exchangeable into 9.20%
Class F Subordinated Exchange Debentures due 2009, in whole but not in part, at
the option of the Company on any scheduled dividend payment date. Dividends on
the Series F Preferred Stock accrued and were cumulative from the last dividend
payment date on which dividends were paid on shares of the Series E Preferred
Stock. The Series E / Series F Preferred Stock is recorded on the accompanying
condensed consolidated balance sheets at the aggregate redemption value (net of
unamortized issuance costs) of $120,233 and $120,504 at September 30, 1998 and
December 31, 1997, respectively.
6. Offerings
$8.625 Series G / Series H Exchangeable Preferred Stock
On February 17, 1998, the Company completed a private offering of 2,500,000
shares of $8.625 Series G Exchangeable Preferred Stock ("Series G Preferred
Stock") at $99.40 per share. Annual dividends of $8.625 per share on the Series
G Preferred Stock were cumulative and payable quarterly, in cash, commencing
July 1, 1998. On June 10, 1998, the Company exchanged the 2,500,000 shares of
Series G Preferred Stock for 2,500,000 shares of $8.625 Series H Exchangeable
Preferred Stock ("Series H Preferred Stock"). The terms of the Series H
Preferred Stock are the same as the terms of the Series G Preferred Stock except
that the Series H Preferred Stock has been registered under the Securities Act
of 1933. Prior to April 1, 2001, the Company may, at its option, redeem in whole
or in part, up to $125,000 of the aggregate liquidation preference of the Series
H Preferred Stock at a price per share of $108.625 plus accrued and unpaid
dividends to the redemption date with the net proceeds of one or more public
offerings, subject to certain other restrictions. On or after April 1, 2003, the
Series H Preferred Stock may be redeemed in whole or in part, at the option of
the Company, at prices ranging from 104.313% with annual reductions to 100% in
2006 plus accrued and unpaid dividends. The Company is required to redeem the
Series H Preferred Stock on April 1, 2010 at a redemption price equal to the
liquidation preference of $100 per share, plus accrued and unpaid dividends. The
Series H Preferred Stock is exchangeable, in whole but not in part, at the
option of the Company, on any scheduled dividend payment date into 8 5/8% Class
H Subordinated Exchange Debentures due 2010. The Series H Preferred Stock is
recorded on the accompanying condensed consolidated balance sheet at the
aggregate redemption value (net of unamortized discount and issuance costs) of
$242,343 at September 30, 1998.
7 5/8% Senior Notes due 2008
On February 17, 1998, the Company completed a private offering of $250,000 7
5/8% Senior Notes due 2008, (" Old 7 5/8% Senior Notes"). The Old 7 5/8% Senior
Notes were issued at 99.425% and mature on April 1, 2008, with no sinking fund.
Interest on the Old 7 5/8% Senior Notes was payable semi-annually in April and
October at the annual rate of 7 5/8% commencing October 1, 1998. On June 10,
1998, the Company exchanged the Old 7 5/8% Senior Notes for a new series of
$250,000 7 5/8% Senior Notes due 2008 ("New 7 5/8% Senior Notes"). The terms of
the New 7 5/8% Senior Notes are the same as the terms of the Old 7 5/8% Senior
Notes except that the New 7 5/8% Notes have been registered under the Securities
Act of 1933. The New 7 5/8% Senior Notes may not be redeemed prior to April 1,
2003 other than in connection with a change of control. Beginning on April 1,
2003 and thereafter, the New 7 5/8% Senior Notes are redeemable in whole or in
part, at the option of the Company, at prices ranging from 103.813% with annual
reductions to 100% in 2006 plus accrued and unpaid interest. The New 7 5/8%
Senior Notes are recorded on the accompanying condensed consolidated balance
sheet at their aggregate redemption value (net of unamortized discount) of
$248,615 at September 30, 1998.
Net proceeds from these private offerings were used to redeem the $11.625 Series
B Exchangeable Preferred Stock ("Series B Preferred Stock") (see Note 10) and to
repay borrowings outstanding under the Bank Credit Facilities, which amounts may
be reborrowed for general corporate purposes including acquisitions.
7. Related Party Transactions
On March 18, 1998, KKR 1996 Fund L.P., a Delaware limited partnership affiliated
with Kohlberg Kravis Roberts & Co. ("KKR"), purchased 16,666,667 shares of newly
issued common stock from the Company for approximately $200,000 (the "KKR Fund
Investment"). The net proceeds (after issuance costs) from the KKR Fund
Investment were used to repay borrowings outstanding under the Bank Credit
Facilities, which amounts may be reborrowed for general corporate purposes
including acquisitions.
8. Inventories, net:
Inventories consist of the following:
September 30, December 31,
1998 1997
------------ -----------
Finished goods $ 21,717 $ 12,271
Work in process 247 3,314
Raw materials 25,828 14,494
------------ -----------
47,792 30,079
Less allowance for obsolescence 3,503 2,482
============ ===========
$ 44,289 $ 27,597
============ ===========
<PAGE>
9. Long-term debt
Long-term debt consists of the following:
September 30, December 31,
1998 1997
------------- ------------
Borrowings under Bank Credit Facilities $ 1,067,212 $ 1,218,101
10 1/4% Senior Notes due 2004 100,000 100,000
8 1/2% Senior Notes due 2006 298,976 298,902
7 5/8% Senior Notes due 2008 (see Note 6) 248,615 -
------------ ------------
1,714,803 1,617,003
Acquisition obligation payable 54,349 53,871
------------ ------------
1,769,152 1,670,874
Less current portion 22,167 14,333
------------ ------------
$ 1,746,985 $ 1,656,541
============ ============
In order to hedge its interest rate risk, the Company entered into four,
three-year and two, four-year interest rate swap agreements, which commenced on
January 2, 1998, with an aggregate notional amount of $600,000. Under these swap
agreements, the Company receives a floating rate of interest based on
three-month LIBOR, which resets quarterly, and the Company pays a fixed rate of
interest, each quarter, for the terms of the respective agreements. In May 1998,
two interest rate swap agreements, which were entered into in May 1995 and had
an aggregate notional amount of $200,000, expired. In the first nine months of
1998, the weighted average variable and weighted average fixed interest rates on
these swap agreements were 5.7% and 6.4%, respectively.
On April 20, 1998, the 364-day $150,000 credit facility with The Chase Manhattan
Bank, the Bank of New York, Bankers Trust Company and the Bank of Nova Scotia as
agents expired. As of September 30, 1998, the Company has total commitments of
$1,400,000 and can borrow up to $1,500,000 in the aggregate under its Bank
Credit Facilities.
10. Exchangeable Preferred Stock
Exchangeable Preferred Stock consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------- ----------
<S> <C> <C>
$11.625 Series B Exchangeable Preferred Stock $ - $ 155,281
$10.00 Series D Exchangeable Preferred Stock 194,771 194,495
$9.20 Series E / Series F Exchangeable Preferred Stock 120,233 120,504
$8.625 Series H Exchangeable Preferred Stock 242,343 -
--------- -----------
$ 557,347 $ 470,280
========= ===========
</TABLE>
<PAGE>
$11.625 Series B Exchangeable Preferred Stock
The Company authorized 2,000,000 shares of $.01 par value Series B Preferred
Stock, 1,576,036 shares of which were issued and outstanding at December 31,
1997. The liquidation and redemption value at December 31, 1997 was $157,604.
On March 20, 1998, the Company redeemed all outstanding shares of Series B
Preferred Stock at a price of $105.80 per share, plus accrued and unpaid
dividends, aggregating approximately $169,000 (see Note 6).
$10.00 Series D Exchangeable Preferred Stock
The Company authorized 2,000,000 shares of $.01 par value $10.00 Series D
Exchangeable Preferred Stock, all of which was issued and outstanding at
September 30, 1998 and December 31, 1997. The liquidation and redemption value
at September 30, 1998 and December 31, 1997 was $200,000.
$9.20 Series E / Series F Exchangeable Preferred Stock
The Company authorized 1,250,000 shares of $.01 par value Series E / Series F
Preferred Stock, all of which was issued and outstanding at September 30, 1998
and December 31, 1997. The liquidation and redemption value at September 30,
1998 and December 31, 1997 was $125,000 (see Note 5).
$8.625 Series H Exchangeable Preferred Stock
The Company authorized 2,500,000 shares of $.01 par value Series H Preferred
Stock, all of which was issued and outstanding at September 30, 1998. The
liquidation and redemption value at September 30, 1998 was $250,000 (see Note
6).
11. Loss per Common Share
Loss per share for the three and nine-month periods ended September 30, 1998 and
1997 has been determined based on loss before extraordinary charge after
preferred stock dividends, divided by the weighted average number of common
shares outstanding for all periods presented. The effect of the assumed exercise
of non-qualified stock options was not included in the computation of diluted
loss per share because the effect of inclusion would be antidilutive. The
adoption of SFAS No. 128, "Earnings Per Share", which became effective beginning
in the fourth quarter of 1997, did not result in the restatement of previously
reported loss per share amounts for the three and nine months ended September
30, 1997.
<PAGE>
12. Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 requires the disclosure of comprehensive
income, defined as the change in equity of a business enterprise during a period
from transactions and other events and circumstances from non-owner sources. The
adoption of this new accounting standard did not have a material effect on the
consolidated financial statements of the Company.
Comprehensive loss for the three and nine months ending September 30, 1998 and
1997 is presented in the following table:
Three Months Ended
September 30, September 30,
1998 1997
-------------- ---------------
Net loss $ (9,184) $ (147,674)
Other comprehensive loss:
Foreign currency translation adjustments (106) 204
============== ===============
Total comprehensive loss $ (9,290) $ (147,470)
============== ===============
Nine Months Ended
September 30, September 30,
1998 1997
-------------- ---------------
Net loss $ (26,141) $ (171,921)
Other comprehensive loss:
Foreign currency translation adjustments (120) (154)
============== ===============
Total comprehensive loss $ (26,261) $ (172,075)
============== ===============
13. Subsequent Events
Through November 13, 1998, the Company has completed two acquisitions in the
specialty magazines and education segments with an aggregate purchase price of
approximately $44,000.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
PRIMEDIA Inc., together with its subsidiaries, is herein referred to as either
"PRIMEDIA" or the "Company."
The following discussion and analysis of the Company's unaudited financial
condition and results of operations should be read in conjunction with the
unaudited condensed consolidated financial statements and notes thereto. The
Company organizes its businesses into three segments: specialty magazines
(specialty consumer magazines and technical and trade magazines), education
(classroom learning and workplace learning) and information (consumer
information and business information).
In the first quarter of 1998, the Company reclassified PRIMEDIA Reference from
the information segment to the education segment and has restated prior periods
accordingly. The Company's management believes that the education segment is
more reflective of the focus of the PRIMEDIA Reference products.
Management believes a meaningful comparison of the results of operations for the
three and nine months ended September 30, 1998 and 1997 is obtained by using the
segment information. In addition, the Company presents results from "continuing
businesses" which exclude the results of the Non-Core Businesses ("Continuing
Businesses"). The Non-Core Businesses include: (i) Krames, Katharine Gibbs, New
Woman, Intertec Mailing Services, Newbridge Communications, Inc. (excluding
Films for the Humanities and Sciences), Stagebill, Nelson, The Daily Racing Form
and certain enthusiast titles, which have been divested, and (ii) the Funk and
Wagnalls' products and certain enthusiast titles, which are being discontinued.
Management believes that this presentation is the most useful way to analyze the
historical trends of the businesses.
<PAGE>
PRIMEDIA INC.
Unaudited Results of Consolidated Operations
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---------------- ---------------- -------------- ----------------
Sales, Net:
Continuing Businesses:
<S> <C> <C> <C> <C>
Specialty Magazines $ 230,818 $ 180,141 $ 670,973 $ 516,177
Education 87,922 63,142 227,961 189,970
Information 67,328 53,646 186,618 156,350
---------------- ---------------- -------------- ----------------
Subtotal 386,068 296,929 1,085,552 862,497
Non-Core Businesses 6,228 72,015 41,780 227,500
---------------- ---------------- -------------- ----------------
Total $ 392,296 $ 368,944 $ 1,127,332 $ 1,089,997
================ ================ ============== ================
Operating Income (Loss):
Continuing Businesses:
Specialty Magazines $ 21,082 $ 24,063 $ 67,987 $ 72,233
Education (5,746) (3,070) (15,769) 3,266
Information 6,950 5,017 24,025 12,866
Corporate (7,220) (6,646) (20,779) (19,100)
---------------- ---------------- -------------- ----------------
Subtotal 15,066 19,364 55,464 69,265
Non-Core Businesses 14,717 (131,690) 27,015 (121,595)
---------------- ---------------- -------------- ----------------
Total 29,783 (112,326) 82,479 (52,330)
Other Income (Expense):
Interest Expense (37,663) (34,765) (105,455) (103,728)
Amortization of deferred
financing costs (722) (741) (2,307) (2,323)
Other, net (582) 158 (858) 176
---------------- ---------------- -------------- ----------------
Loss before income tax benefit
and extraordinary charge (9,184) (147,674) (26,141) (158,205)
Income tax benefit - carryback claim - - - 1,685
---------------- ---------------- -------------- ----------------
Loss before extraordinary
charge (9,184) (147,674) (26,141) (156,520)
Extraordinary charge - extinguishment
of debt - - - (15,401)
---------------- ---------------- -------------- ----------------
Net loss $ (9,184) $ (147,674) $ (26,141) $ (171,921)
================ ================ ============== ================
</TABLE>
<PAGE>
RESULTS OF OPERATIONS (dollars in thousands, except per share amounts)
Nine months Ended September 30, 1998 Compared to Nine months Ended September 30,
1997:
Consolidated Results:
Sales from Continuing Businesses increased 25.9% to $1,085,552 in the first nine
months of 1998 from $862,497 in 1997, due to sales increases in all segments.
Sales as reported, including the Non-Core Businesses, increased by 3.4% in the
first nine months of 1998 as compared to the same period in 1997.
Operating income from Continuing Businesses decreased 19.9% to $55,464 during
the first nine months of 1998 from $69,265 during the same period in 1997. This
decrease was attributable to the restructuring costs, the EXEN shutdown
provision, increased paper costs, the satellite failure at Channel One as well
as the reduced margins at Soap Opera Digest due to the change from a bi-weekly
to a weekly publication. In addition, amortization expense increased due to the
write-off of EXEN's goodwill and other intangible assets as well as
acquisitions. These factors were partially offset by the sales increases during
1998. Operating income (loss) as reported, including the Non-Core Businesses,
increased to $82,479 in the first nine months of 1998 from $(52,330) during the
same period in 1997. The change is primarily due to the $138,640 provision for
loss on the sale of certain Non-Core Businesses recorded during the third
quarter of 1997.
Interest expense increased by 1.7% during the first nine months of 1998 as
compared to the first nine months of 1997. Additional interest from increased
borrowings to fund acquisitions during the period was mitigated by interest
savings associated with the 1998 offerings.
The extraordinary charge in the first nine months of 1997 reflects the write-off
of deferred financing costs and an interest premium associated with the
redemption of the Company's 10 5/8% Senior Notes.
Specialty Magazines:
Sales from Continuing Businesses increased 30.0% to $670,973 during the first
nine months of 1998 from $516,177 during the same period in 1997, due primarily
to acquisitions as well as advertising and circulation growth at various
specialty consumer and technical and trade magazines, particularly Seventeen.
Operating income from Continuing Businesses decreased 5.9% to $67,987 during the
first nine months of 1998 from $72,233 during the same period in 1997, due to
restructuring costs, increased goodwill and other intangible amortization
expense resulting from acquisitions, the Soap Opera Digest frequency change,
Cowles acquisition integration costs and increased paper costs. These factors
were partially offset by the sales growth during the period.
Results from Continuing Businesses exclude New Woman, Stagebill, Intertec
Mailing Services and certain enthusiast titles recently sold or discontinued.
Education:
Sales from Continuing Businesses increased 20.0% to $227,961 during the first
nine months of 1998 from $189,970 during the same period in 1997 primarily
attributable to acquisitions, offset by reduced advertising revenue at Channel
One due to the failure of PanAmSat's Galaxy IV satellite, which interrupted
broadcasting for two weeks during the second quarter, and lower revenues at
certain PRIMEDIA Workplace Learning networks.
Operating income (loss) from Continuing Businesses decreased to $(15,769) during
the first nine months of 1998 from $3,266 during the same period in 1997, due
primarily to the restructuring costs, the EXEN shutdown provision, the write-off
of EXEN's goodwill and other intangible assets and the satellite failure at
Channel One.
Results from Continuing Businesses exclude Krames, Katharine Gibbs, Newbridge
(excluding Films for the Humanities and Sciences) and the Funk and Wagnalls'
products.
Information:
Sales from Continuing Businesses increased 19.4% to $186,618 during the first
nine months of 1998 from $156,350 during the same period in 1997. This increase
is primarily attributable to advertising and distribution revenue growth at
Haas, as well as strong growth at Bacon's and acquisitions, offset by one-time
telemarketing write-offs at PRIMEDIA Information.
Operating income from Continuing Businesses increased to $24,025 during the
first nine months of 1998 from $12,866 during the same period in 1997, due
largely to the strong sales growth and declining other intangible asset
amortization expense due to the use of accelerated amortization methods.
Results from Continuing Businesses exclude The Daily Racing Form and Nelson.
Non-Core Businesses:
Sales from Non-Core Businesses declined to $41,780 during the first nine months
of 1998 from $227,500 during the same period in 1997 due to the divestitures of
most of the Non-Core Businesses during 1997.
Operating income (loss) from Non-Core Businesses increased to $27,015 during the
first nine months of 1998 from $(121,595) during the same period in 1997,
largely attributable to losses on the sales of certain Non-Core Businesses in
1997.
<PAGE>
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997:
Consolidated Results:
Sales from Continuing Businesses increased 30.0% to $386,068 in the third
quarter of 1998 from $296,929 in 1997, due to sales increases in all segments.
Sales as reported , including the Non-Core Businesses, increased by 6.3% in the
third quarter of 1998 as compared to the same period in 1997.
Operating income from Continuing Businesses decreased 22.2% to $15,066 during
the third quarter of 1998 from $19,364 during the same period in 1997. This
decrease was primarily due to the restructuring costs and increased goodwill and
other intangible amortization resulting from acquisitions, which were partially
offset by sales growth during the period. Operating income (loss) as reported,
including the Non-Core Businesses, increased to $29,783 in the third quarter of
1998 compared to $(112,326) in the same period in 1997. The change is primarily
due to the $138,640 provision for loss on the sale of certain Non-Core
Businesses recorded during the third quarter of 1997.
Interest expense increased by 8.3% during the third quarter of 1998 as compared
to the third quarter of 1997 as a result of increased borrowings to fund
acquisitions.
Specialty Magazines:
Sales from Continuing Businesses increased 28.1% to $230,818 during the third
quarter of 1998 from $180,141 during the same period in 1997, due primarily to
acquisitions as well as advertising and circulation growth at various specialty
consumer and technical and trade magazines, particularly Seventeen. These
increases were offset by a decrease in circulation revenue from the soap opera
titles.
Operating income from Continuing Businesses decreased 12.4% to $21,082 during
the third quarter of 1998 from $24,063 during the same period in 1997, due
primarily to the restructuring costs, increased goodwill and other intangible
amortization resulting from acquisitions and the Soap Opera Digest frequency
change, partially offset by the growth in sales during the period.
Results from Continuing Businesses exclude New Woman, Stagebill, Intertec
Mailing Services and certain enthusiast titles recently sold or discontinued.
Education:
Sales from Continuing Businesses increased 39.2% to $87,922 during the third
quarter of 1998 from $63,142 during the same period in 1997 primarily
attributable to acquisitions as well as Channel One advertising growth.
Operating loss from Continuing Businesses increased to $5,746 during the third
quarter of 1998 from $3,070 during the same period in 1997, due primarily to the
restructuring costs.
Results from Continuing Businesses exclude Krames, Katharine Gibbs, Newbridge
(excluding Films for the Humanities and Sciences) and the Funk and Wagnalls'
products.
Information:
Sales from Continuing Businesses increased 25.5% to $67,328 during the third
quarter of 1998 from $53,646 during the same period in 1997. This increase is
primarily attributable to strong organic growth at Haas and Bacon's and
acquisitions, offset by one-time telemarketing write-offs at PRIMEDIA
Information.
Operating income from Continuing Businesses increased to $6,950 during the third
quarter of 1998 from $5,017 during the same period in 1997, due largely to the
sales growth as well as a decline in intangible asset amortization expense.
Results from Continuing Businesses exclude The Daily Racing Form and Nelson.
Non-Core Businesses:
Sales from Non-Core Businesses declined to $6,228 during the third quarter of
1998 from $72,015 during the same period in 1997, due to the divestitures of
certain Non-Core Businesses during 1997 and 1998.
Operating income (loss) from Non-Core Businesses increased to $14,717 during the
third quarter of 1998 from $(131,690) during the same period in 1997, largely
attributable to losses on the sales of certain Non-Core Businesses during the
third quarter of 1997.
Liquidity and Capital Resources
Consolidated working capital deficiency including net assets held for sale and
current maturities of long-term debt was $304,241 at September 30, 1998 as
compared to $146,245 at December 31, 1997. Consolidated working capital
deficiency reflects the expensing of editorial and product development costs
when incurred and the recording of deferred revenues as a current liability.
Advertising costs are expensed when the promotional activities occur except for
certain direct-response advertising costs which are capitalized as other
non-current assets and amortized over the estimated period of future benefit.
Earnings before interest, taxes, depreciation, amortization and provision for
one-time charges, or EBITDA, is a widely used and commonly reported standard
measure utilized by analysts, investors and other interested parties in the
analysis of the media industry. EBITDA is included in the following discussion
to provide additional information for determining the ability of the Company to
meet its future debt service requirements and to pay cash dividends on its
preferred stock. EBITDA is not intended to represent cash flow from operations
and should not be considered as an alternative to net income or loss as an
indicator of the Company's operating performance or to cash flows as a measure
of liquidity. This information is disclosed herein to permit a more complete
comparative analysis of the Company's operating performance relative to other
companies in its industry.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
EBITDA:
Continuing Businesses:
<S> <C> <C> <C> <C>
Specialty Magazines $ 46,141 $ 39,990 $ 132,352 $ 115,495
Education 21,345 14,472 58,237 55,165
Information 14,349 12,418 43,488 35,906
Corporate (6,503) (6,546) (19,725) (19,256)
--------------- --------------- --------------- ---------------
Subtotal 75,332 60,334 214,352 187,310
Non-Core Businesses 1,862 9,473 7,427 24,694
--------------- --------------- --------------- ---------------
Total $ 77,194 $ 69,807 $ 221,779 $ 212,004
=============== =============== =============== ===============
Net Cash Provided by (Used in)
Operating Activities:
Continuing Businesses:
Specialty Magazines $ 41,771 $ 40,714 $ 97,374 $ 105,454
Education 11,243 11,876 31,805 27,271
Information 15,911 16,284 43,768 35,828
Corporate (47,110) (52,251) (123,669) (131,296)
--------------- --------------- --------------- ---------------
Subtotal 21,815 16,623 49,278 37,257
Non-Core Businesses 45 4,092 814 8,860
--------------- --------------- --------------- ---------------
Total $ 21,860 $ 20,715 $ 50,092 $ 46,117
=============== =============== =============== ===============
Net Cash Provided by (Used in)
Investing Activities:
Continuing Businesses:
Specialty Magazines $ (8,007) $ (19,034) $ (303,064) $ (63,752)
Education (12,751) (3,893) (23,966) (85,695)
Information (68,494) (1,664) (91,751) (26,889)
Corporate (2,230) (544) (5,972) (1,200)
--------------- --------------- --------------- ---------------
Subtotal (91,482) (25,135) (424,753) (177,536)
Non-Core Businesses 39,460 83,703 66,256 84,633
--------------- --------------- --------------- ---------------
Total $ (52,022) $ 58,568 $ (358,497) $ (92,903)
=============== =============== =============== ===============
Net Cash Provided by (Used in)
Financing Activities:
Continuing Businesses:
Specialty Magazines $ (2,380) $ (270) $ (5,550) $ (1,876)
Education (1,894) (261) (3,061) (820)
Information 203 (174) (2,450) (1,373)
Corporate 37,523 (83,255) 320,601 35,238
--------------- --------------- --------------- ---------------
Subtotal 33,452 (83,960) 309,540 31,169
Non-Core Businesses 62 102 102 655
--------------- --------------- --------------- ---------------
Total $ 33,514 $ (83,858) $ 309,642 $ 31,824
=============== =============== =============== ===============
</TABLE>
<PAGE>
EBITDA from Continuing Businesses increased by 14.4% to $214,352 in the nine
months ended September 30, 1998 over 1997 mainly as a result of sales growth in
the all segments attributable to existing operations and product acquisitions.
EBITDA from Continuing Businesses in the specialty magazines segment increased
14.6% to $132,352 primarily due to growth from acquisitions, partially offset by
increased paper costs, reduced margins at Soap Opera Digest due to the change
from a bi-weekly to a weekly magazine and integration costs associated with the
Cowles acquisition. EBITDA from Continuing Businesses in the education segment
increased 5.6% to $58,237 largely attributable to acquisitions. EBITDA from
Continuing Businesses in the information segment increased 21.1% to $43,488 due
to sales growth at Haas as well as acquisitions. EBITDA from the Non-Core
Businesses declined to $7,427 primarily as a result of the timing of
divestitures most of which occurred in 1997.
Net cash provided by operating activities, as reported, during the nine months
ended September 30, 1998, after interest payments of $91,892, was $50,092, an
increase of 8.6% over the same 1997 period, due primarily to EBITDA growth. Net
capital expenditures were $27,794 during the nine months ended September 30,
1998 which was an increase of 24.6% from the 1997 period due to increased
capitalized software expenditures, offset by a decrease due to the timing of
divestitures most of which occurred in 1997. Payments for acquisitions of
$393,122 were made during the nine months ended September 30, 1998. Net cash
provided by financing activities, as reported, during the nine months ended
September 30, 1998 was $309,642 as compared to $31,824 in the same 1997 period.
The increase was primarily attributable to increased borrowings associated with
acquisitions.
EBITDA from Continuing Businesses increased by 24.9% to $75,332 in the three
months ended September 30, 1998 over 1997 as a result of sales growth in all
segments attributable to existing operations and product acquisitions. EBITDA
from Continuing Businesses in the specialty magazines segment increased 15.4% to
$46,141 primarily due to advertising and circulation revenue growth and certain
acquisitions, partially offset by reduced margins at Soap Opera Digest. EBITDA
from Continuing Businesses in the education segment increased 47.5% to $21,345
largely attributable to acquisitions. EBITDA from Continuing Businesses in the
information segment increased 15.6% to $14,349 due to strong organic growth at
Haas and acquisitions. EBITDA from the Non-Core Businesses declined to $1,862
primarily as a result of the timing of divestitures most of which occurred in
1997.
Net cash provided by operating activities, as reported, during the three months
ended September 30, 1998, after interest payments of $33,314 was $21,860, an
increase of 5.5% over the same 1997 period, due primarily to increased EBITDA.
Net capital expenditures were $10,811 during the three months ended September
30, 1998 which was an increase of 40.4% from the 1997 period due to increased
capitalized software expenditures, offset by a decrease due to the timing of
divestitures, most of which occurred in 1997. Payments for acquisitions of
$79,535 were made during the three months ended September 30, 1998. Net cash
provided by (used in) financing activities, as reported, during the three months
ended September 30, 1998 was $33,514 as compared to $(83,858) in the same 1997
period, due primarily to payments made on the Bank Credit Facilities in the
third quarter of 1997.
<PAGE>
Financing Arrangements
In order to hedge its interest rate risk, the Company entered into four,
three-year and two, four-year interest rate swap agreements, which commenced on
January 2, 1998, with an aggregate notional amount of $600,000. Under these swap
agreements, the Company receives a floating rate of interest based on
three-month LIBOR, which resets quarterly, and the Company pays a fixed rate of
interest, each quarter, for the terms of the respective agreements. In May 1998,
two interest rate swap agreements, which were entered into in May 1995 and had
an aggregate notional amount of $200,000, expired. In the first nine months of
1998, the weighted average variable and weighted average fixed interest rates on
these swap agreements were 5.7% and 6.4%, respectively.
On September 26, 1997, the Company completed a private offering of 1,250,000
shares of Series E Preferred Stock at $100 per share. On February 17, 1998, the
Company exchanged the 1,250,000 shares of Series E Preferred Stock for 1,250,000
shares of Series F Preferred Stock. The terms of the Series F Preferred Stock
are the same as the terms of the Series E Preferred Stock except that the Series
F Preferred Stock has been registered under the Securities Act of 1933. The
Series F Preferred Stock is exchangeable into 9.20% Class F Subordinated
Exchange Debentures due 2009, in whole but not in part, at the option of the
Company on any scheduled dividend payment date. Dividends on the Series F
Preferred Stock accrued and were cumulative from the last dividend payment date
on which dividends were paid on shares of the Series E Preferred Stock.
On February 17, 1998, the Company completed a private offering of 2,500,000
shares of Series G Preferred Stock at $99.40 per share. Annual dividends of
$8.625 per share on the Series G Preferred Stock were cumulative and payable
quarterly, in cash, commencing July 1, 1998. On June 10, 1998, the Company
exchanged the 2,500,000 shares of Series G Preferred Stock for 2,500,000 shares
of Series H Preferred Stock. The terms of the Series H Preferred Stock are the
same as the terms of the Series G Preferred Stock except that the Series H
Preferred Stock has been registered under the Securities Act of 1933. Prior to
April 1, 2001, the Company may, at its option, redeem in whole or in part, up to
$125,000 of the aggregate liquidation preference of the Series H Preferred Stock
at a price per share of $108.625 plus accrued and unpaid dividends to the
redemption date with the net proceeds of one or more public offerings, subject
to certain other restrictions. On or after April 1, 2003, the Series H Preferred
Stock may be redeemed in whole or in part, at the option of the Company, at
prices ranging from 104.313% with annual reductions to 100% in 2006 plus accrued
and unpaid dividends. The Company is required to redeem the Series H Preferred
Stock on April 1, 2010 at a redemption price equal to the liquidation preference
of $100 per share, plus accrued and unpaid dividends. The Series H Preferred
Stock is exchangeable, in whole but not in part, at the option of the Company,
on any scheduled dividend payment date into 8 5/8% Class H Subordinated Exchange
Debentures due 2010.
On February 17, 1998, the Company completed a private offering of $250,000 Old 7
5/8% Senior Notes. The Old 7 5/8% Senior Notes were issued at 99.425% and mature
on April 1, 2008, with no sinking fund. Interest on the Old 7 5/8% Senior Notes
was payable semi-annually in April and October at the annual rate of 7 5/8%
commencing October 1, 1998. On June 10, 1998, the Company exchanged the Old 7
5/8% Senior Notes for $250,000 New 7 5/8% Senior Notes. The terms of the New 7
5/8% Senior Notes are the same as the terms of the Old 7 5/8% Senior Notes
except that the New 7 5/8% Notes have been registered under the Securities Act
of 1933. The New 7 5/8% Senior Notes may not be redeemed prior to April 1, 2003
other than in connection with a change of control. Beginning on April 1, 2003
and thereafter, the New 7 5/8% Senior Notes are redeemable in whole or in part,
at the option of the Company, at prices ranging from 103.813% with annual
reductions to 100% in 2006 plus accrued and unpaid interest.
Net proceeds from these private offerings were used to redeem the Series B
Preferred Stock and to repay borrowings outstanding under the Bank Credit
Facilities, which amounts may be reborrowed for general corporate purposes
including acquisitions.
On March 18, 1998, KKR 1996 Fund L.P., a Delaware limited partnership affiliated
with KKR, purchased 16,666,667 shares of newly issued common stock from the
Company for approximately $200,000. The net proceeds (after issuance costs) from
the KKR Fund Investment were used to repay borrowings outstanding under the Bank
Credit Facilities, which amounts may be reborrowed for general corporate
purposes including acquisitions.
On April 20, 1998, the 364-day $150,000 credit facility with The Chase Manhattan
Bank, the Bank of New York, Bankers Trust Company and the Bank of Nova Scotia as
agents expired. As of September 30, 1998, the Company has total commitments of
$1,400,000 and can borrow up to $1,500,000 in the aggregate under its Bank
Credit Facilities.
Recent Developments
Through November 13, 1998, the Company has completed two acquisitions in the
specialty magazines and education segments with an aggregate purchase price of
approximately $44,000.
Impact of Inflation
The impact of inflation was immaterial during 1997 and through the first nine
months of 1998. Paper prices declined through the first nine months of 1997.
Moderate paper price increases occurred in July 1997 and in January 1998 for
most of the grades of paper used by the Company. In the first nine months of
1998, paper costs represented approximately 9% of the Company's total operating
costs and expenses. Postage for product distribution and direct mail
solicitations is also a significant expense of the Company. The Company uses the
U.S. Postal Service for distribution of many of its products and marketing
materials. Postage costs increase periodically and are expected to increase
moderately in the first quarter of 1999. In the past, the effects of inflation
on operating expenses have substantially been offset by PRIMEDIA'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.
Year 2000 Readiness Disclosure
PRIMEDIA has evaluated the potential impact of the situation commonly referred
to as the "Year 2000 problem." The Year 2000 problem potentially exists for most
companies since many computer systems in use today were designed and developed
using two digits, rather than four, to specify the year. As a result, such
systems will recognize the year 2000 as "00." This could cause many computer
applications to fail completely or to create erroneous results unless corrective
measures are taken. Although the Company does not believe that the Year 2000
problem will have a material effect on its operations or results, the Company
has undertaken certain actions described below to mitigate the results thereof.
PRIMEDIA instituted a company-wide Year 2000 Project ("Project") beginning early
1997. The Project addresses issues regarding computer infrastructure, system
software and third-party vendors. The Project has been divided into four phases:
(1) inventorying all computer systems and identifying those with Year 2000
issues; (2) assessment including prioritization; (3) remediation including
modification, upgrading and replacement; and (4) testing. The Company's senior
management and the Board of Directors receive regular updates on the status of
the Project. As of September 30, 1998, phase 1 and 2 have been completed. The
remediation and testing phases with respect to the Company's own operations are
currently being performed and are expected to be completed by July 1999.
PRIMEDIA has communicated with significant third-party vendors that provide
services to the Company's operations. This has enabled PRIMEDIA to assess the
Year 2000 readiness of the third-party vendors and, in turn, the Company's
vulnerability to their non-compliance. These vendors include paper suppliers and
service entities that provide print and distribution services. Although the
Company may not be able to assure itself as to the Year 2000 compliance by such
vendors, the Company will remain involved with the vendors' progress and is in
the process of developing contingency plans which are expected to be in place by
March 1999.
The total costs associated with required remediation by the Company are expected
to be approximately $11.0 million of which approximately $6.0 million had been
expended through September 30, 1998 through funding from existing operations.
The remaining $5.0 million is expected to be incurred by early 1999 and is not
expected to have a material effect on the Company's liquidity or results of
operations. These costs include the replacement of systems and equipment,
outside consultants and software repairs. The project has been integrated into
the Company's overall technology upgrading plans and no important information
technology plans have been deferred.
At this time, the Company believes the risks associated with the Year 2000
problem lie within third-party vendor compliance. These risks are associated
with certain production and distribution processes and could involve a loss of
revenue. While an estimate of the revenue loss cannot be determined at this
time, the Company believes that the diversity of its product lines would
mitigate such risks until such time that the problem has been remedied.
Forward-Looking Information
This report contains cetain forward-looking statements concerning the Company's
operations, economic performance, financial condition and Year 2000 problem
activities. These statements are based upon a number of assumptions and
estimates which are inherently subject to uncertainties and contingencies, many
of which are beyond the control of the Company, and reflect future business
decisions which are subject to change. Some of the assumptions may not
materialize and unanticipated events will occur which can affect the Company's
results.
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
Form 8-K was filed on or about August 31, 1998 to report the divestiture of the
Daily Racing Form, Inc. and its two wholly-owned subsidiaries, DRF Finance, Inc.
and Daily Racing Form of Canada, Ltd. The filing included Item 2 - Acquisition
or Disposition of Assets and Item 7 - Financial Statements and Exhibits.
Included in Item 7 were unaudited pro forma statements of consolidated
operations for the six months ended June 30, 1998 and for the year ended
December 31, 1997 and an unaudited consolidated balance sheet at June 30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRIMEDIA Inc.
(Registrant)
Date: November 15, 1998 /s/ William F. Reilly
----------------- ----------------------------------------------
(Signature)
Chairman, Chief Executive Officer and Director
(Principal Executive Officer)
Date: November 15, 1998 /s/ Curtis A. Thompson
----------------- ----------------------------------------------
(Signature)
Vice President and Controller
(Principal Accounting Officer)
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