FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13
or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For Quarter Ended: March 31, 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
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(Zip Code)
Registrant's telephone number, including area code (212) 745-0100
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
---- ----
Number of shares of common stock, par value $.01 per share, outstanding as of
April 30, 1998: 145,843,700
<PAGE>
PRIMEDIA Inc.
INDEX
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PAGE
------
Part I. Financial Information
Item 1. Financial Statements
-------
Condensed Consolidated Balance Sheets
(Unaudited) as of December 31, 1997 and
March 31, 1998 2
Condensed Statements of Consolidated
Operations (Unaudited) for the three months
ended March 31, 1997 and 1998 3
Condensed Statements of Consolidated
Cash Flows (Unaudited) for the three months
ended March 31, 1997 and 1998 4
Notes to Condensed Consolidated
Financial Statements (Unaudited) 5-10
Item 2. Management's Discussion and Analysis of
------- Financial Condition and Results of Operations 11-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
-------
Part II. Other Information: None
Signatures 20
<PAGE>
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------- ------------
(dollars in thousands, except per share
amounts)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 22,978 $ 29,566
Accounts receivable, net 199,289 212,215
Inventories, net 27,597 28,946
Net assets held for sale 38,665 38,605
Prepaid expenses and other 33,971 32,260
---------------- ----------------
Total current assets 322,500 341,592
Property and equipment, net 116,361 115,732
Other intangible assets, net 660,268 732,986
Excess of purchase price over net assets
acquired, net 1,111,785 1,200,806
Deferred income tax assets, net 176,200 176,200
Other non-current assets 98,876 112,181
---------------- ----------------
$ 2,485,990 $ 2,679,497
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 95,546 $ 77,533
Accrued interest payable 13,622 12,153
Accrued expenses and other 204,770 177,086
Deferred revenues 140,474 149,150
Current maturities of long-term debt 14,333 14,333
---------------- ----------------
Total current liabilities 468,745 430,255
---------------- ----------------
Long-term debt 1,656,541 1,640,335
---------------- ----------------
Other non-current liabilities 48,271 46,167
---------------- ----------------
Exchangeable preferred stock 470,280 557,430
---------------- ----------------
Common stock subject to redemption ($.01 par value, 402,650
shares and 360,319 shares outstanding at December 31,
1997 and March 31, 1998, respectively) 4,376 4,729
---------------- ----------------
Shareholders' equity (deficiency):
Common stock ($.01 par value, 129,797,078 shares and
145,481,220 shares outstanding at December 31, 1997 and
March 31, 1998, respectively) 1,298 1,455
Additional paid-in capital 780,191 978,129
Accumulated deficit (929,011) (962,228)
Accumulated other comprehensive loss (1,543) (1,422)
Common stock in treasury, at cost (1,048,600 shares and 1,218,600
shares at December 31, 1997 and March 31, 1998, respectively) (13,158) (15,353)
---------------- ----------------
Total shareholders' equity (deficiency) (162,223) 581
---------------- ----------------
$ 2,485,990 $ 2,679,497
================ ================
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1998
------- -------
(dollars in thousands, except per share amounts)
Sales, net:
<S> <C> <C>
Specialty Magazines $ 174,113 $ 194,229
Education 113,868 78,262
Information 64,310 72,495
---------------- ----------------
Total sales, net 352,291 344,986
Operating costs and expenses:
Cost of goods sold 80,098 81,440
Marketing and selling 70,202 60,524
Distribution, circulation and fulfillment 63,387 63,126
Editorial 29,310 32,599
Other general expenses 42,503 36,032
Corporate administrative expenses 6,750 6,377
Depreciation and amortization of prepublication
costs, property and equipment 9,839 9,155
Amortization of intangible assets, excess of
purchase price over net assets acquired and other 29,724 31,451
---------------- ----------------
Operating income 20,478 24,282
Other income (expense):
Interest expense (34,341) (33,421)
Amortization of deferred financing costs (842) (752)
Other, net 474 159
---------------- ----------------
Loss before income tax benefit and extraordinary charge (14,231) (9,732)
Income tax benefit - carryback claim 1,685 -
---------------- ----------------
Loss before extraordinary charge (12,546) (9,732)
Extraordinary charge - extinguishment of debt (1,554) -
---------------- ----------------
Net loss (14,100) (9,732)
Preferred stock dividends:
Cash (7,875) (14,344)
Non-cash dividends in kind (4,451) -
Series B Preferred Stock redemption premium - (9,141)
---------------- ----------------
Loss applicable to common shareholders $ (26,426) $ (33,217)
================ ================
Basic and diluted loss applicable to common shareholders per
common share:
Loss before extraordinary charge $ (0.19) $ (0.25)
Extraordinary charge (0.01) -
---------------- ----------------
Net loss $ (0.20) $ (0.25)
================ ================
Basic and diluted common shares outstanding 129,114,344 134,686,401
================ ================
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1998
-------- ---------
(dollars in thousands)
Operating activities:
<S> <C> <C>
Net loss $ (14,100) $ (9,732)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, amortization and other 40,405 41,358
Accretion of discount on acquisition obligation,
distribution advance and other 1,653 1,672
Extraordinary charge - extinguishment of debt 1,554 -
Other, net (95) (60)
Changes in operating assets and liabilities:
(Increase)Decrease in:
Accounts receivable, net 13,714 (3,947)
Inventories, net 1,408 (1,223)
Prepaid expenses and other (9,847) (3,165)
Increase (Decrease) in:
Accounts payable (22,903) (18,881)
Accrued interest payable 2,363 (1,469)
Accrued expenses and other (12,745) (22,759)
Deferred revenues (8,934) (1,021)
Other non-current liabilities (34) (86)
---------------- ----------------
Net cash used in operating activities (7,561) (19,313)
---------------- ----------------
Investing activities:
Additions to property, equipment and other, net (6,988) (5,917)
Proceeds from sales of businesses - 750
Payments for businesses acquired (66,435) (200,151)
Investments in joint ventures - (3,655)
---------------- ----------------
Net cash used in investing activities (73,423) (208,973)
---------------- ----------------
Financing activities:
Borrowings under credit agreements 174,442 362,946
Repayments of borrowings under credit agreements (70,950) (628,900)
Proceeds from issuances of common stock, net of redemptions 975 201,026
Purchases of 10 5/8% Senior Notes (21,891) -
Redemption of Series B Preferred Stock - (166,739)
Proceeds from issuance of 7 5/8% Senior Notes, net of discount - 248,562
Proceeds from the issuance of Series G Preferred Stock,
net of issuance costs - 242,608
Purchases of common stock for the treasury - (2,195)
Dividends paid to preferred stock shareholders (7,875) (16,099)
Deferred financing costs paid (83) (5,352)
Other 284 (983)
---------------- ----------------
Net cash provided by financing activities 74,902 234,874
---------------- ----------------
Increase (decrease) in cash and cash equivalents (6,082) 6,588
Cash and cash equivalents, beginning of period 36,655 22,978
---------------- ----------------
Cash and cash equivalents, end of period $ 30,573 $ 29,566
================ ================
Supplemental information:
Cash interest paid $ 30,001 $ 32,874
================ ================
</TABLE>
See notes to condensed consolidated financial statements.
<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-month periods ended March 31 is 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 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 11). 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 did not
have a material impact on the Company's consolidated financial statements for
the three-months ended March 31, 1998.
2. Acquisitions and Joint Ventures
During the three-month period ended March 31, 1998, the Company completed
several acquisitions which were financed through borrowings under the Company's
credit agreements. On March 19, 1998, the Company acquired the Cowles Enthusiast
Media and Cowles Business Media divisions (collectively "Cowles") of Cowles
Media Company from McClatchy Newspapers, Inc. This acquisition includes 25
enthusiast magazines, 11 technical and trade magazines and 15 trade shows. In
addition, the Company made two product-line acquisitions in the specialty
magazines segment and one in the information segment. Cash payments for these
acquisitions on an aggregate basis approximated $200,000 (net of liabilities
assumed of approximately $24,000) including certain immaterial purchase price
adjustments related to prior year acquisitions. The excess purchase price over
net assets acquired was approximately $96,000.
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
March 31, 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-month periods ended March 31,
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 first investment related to an on-line wedding gift registry
service. In addition, the Company entered into a joint venture in China to
publish trade magazines in Chinese language editions.
3. Divestitures and Net Assets Held for Sale
As part of its strategy to focus on areas of its business that have the greatest
potential for growth, during 1996 and 1997, the Company decided to divest 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 which have been divested and The Daily Racing
Form which is currently being held for sale.
During the first quarter of 1998, the company decided to divest Nelson
Information, Inc. ("Nelson"), and certain enthusiast titles, some of which have
already been sold. In addition, the Company decided to discontinue the Funk and
Wagnalls' products. The aforementioned divestitures and product
discontinuations, as well as the units held for sale are collectively referred
to as Non-Core Businesses.
The remaining planned divestitures of The Daily Racing Form and Nelson are
expected to be completed during 1998 (see Note 12). The net assets of these
properties have been recorded at net realizable value as net assets held for
sale on the accompanying condensed consolidated balance sheet at March 31, 1998.
Total sales for the Non-Core Businesses were $76,597 and $16,463 for the
three-month periods ended March 31, 1997 and 1998, respectively. Operating
income (loss) for the Non-Core Businesses was $(1,054) and $1,753 for the
three-month periods ended March 31, 1997 and 1998, respectively.
4. $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
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 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 will accrue and will be 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 sheet at the aggregate redemption value (net of
unamortized issuance costs) of $120,504 and $120,135 at December 31, 1997 and
March 31, 1998, respectively.
5. Private Offering
$8.625 Series G 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 are cumulative and payable quarterly, in cash, commencing July
1, 1998. Prior to April 1, 2001, the Company may, at its option, redeem in whole
or in part, up to $125 million of the aggregate liquidation preference of the
Series G Preferred Stock at a price per share of $108.625 plus accrued and
unpaid dividends to the redemption date subject to certain other restrictions.
On or after April 1, 2003, the Series G 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 G 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 G 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 G Subordinated Exchange Debentures due 2010. The
Series G Preferred Stock is recorded on the accompanying condensed consolidated
balance sheet at the aggregate redemption value (net of discount and unamortized
issuance costs) of $242,708 at March 31, 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, ("7 5/8% Senior Notes"). The 7 5/8% Senior Notes
were issued at 99.425%. The 7 5/8% Senior Notes mature on April 1, 2008, with no
sinking fund. Interest on the 7 5/8% Senior Notes is payable semi-annually in
April and October at the annual rate of 7 5/8% commencing October 1, 1998. The 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 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 7 5/8% Senior Notes are recorded on the
accompanying condensed consolidated balance sheet at their aggregate redemption
value (net of discount) of $248,570 at March 31, 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 9) and to
repay borrowings outstanding under the Bank Credit Facilities, which amounts may
be reborrowed for general corporate purposes including acquisitions.
6. 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.
7. Inventories, net:
Inventories consist of the following:
December 31, March 31,
1997 1998
---------------- ---------------
Finished goods $ 12,271 $ 10,112
Work in process 3,314 213
Raw materials 14,494 20,975
---------------- ---------------
30,079 31,300
Less allowance for obsolescence 2,482 2,354
---------------- ---------------
$ 27,597 $ 28,946
================ ================
8. Long-term debt
Long-term debt consists of the following:
December 31, March 31,
1997 1998
---------------- ---------------
Borrowings under Bank Credit Facilities $ 1,218,101 $ 952,147
10 1/4% Senior Notes due 2004 100,000 100,000
8 1/2% Senior Notes due 2006 298,902 298,926
7 5/8% Senior Notes due 2008(see Note 5) - 248,570
---------------- --------------
1,617,003 1,599,643
Acquisition obligation payable 53,871 55,025
---------------- --------------
1,670,874 1,654,668
Less current portion 14,333 14,333
---------------- --------------
$ 1,656,541 $ 1,640,335
================ ==============
In July 1997, in order to hedge its interest rate risk, the Company entered into
four, three-year and two, four-year interest rate swap agreements, with an
aggregate notional amount of $600,000. Under these new swap agreements, which
commenced on January 2, 1998, the Company receives a floating rate of interest
based on three-month LIBOR, which resets quarterly, and the Company pays a fixed
rate of interest, each quarter, for the terms of the respective agreements. In
the first quarter of 1998, the weighted average variable and weighted average
fixed interest rates on these swap agreements were 5.8% and 6.3%, respectively.
9. Exchangeable Preferred Stock
Exchangeable Preferred Stock consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
--------------- ----------------
<S> <C> <C>
$11.625 Series B Exchangeable Preferred Stock $ 155,281 $ -
$10.00 Series D Exchangeable Preferred Stock 194,495 194,587
$9.20 Series E/Series F Exchangeable Preferred Stock 120,504 120,135
$8.625 Series G Exchangeable Preferred Stock - 242,708
---------------- ----------------
$ 470,280 $ 557,430
================ ================
</TABLE>
$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 5).
$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
December 31, 1997 and March 31, 1998. The liquidation and redemption value at
December 31, 1997 and March 31, 1998 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 December 31, 1997
and March 31, 1998. The liquidation and redemption value at December 31, 1997
and March 31, 1998 was $125,000 (see Note 4).
$8.625 Series G Exchangeable Preferred Stock
The Company authorized 2,500,000 shares of $.01 par value Series G Preferred
Stock, all of which was issued and outstanding at March 31, 1998. The
liquidation and redemption value at March 31, 1998 was $250,000 (see Note 5).
10. Loss per Common Share
Loss per share for the three-month periods ended March 31, 1997 and 1998 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. Previously reported loss
per share amounts have been restated as required by the adoption of SFAS No.
128, "Earnings Per Share" which became effective beginning in the fourth quarter
of 1997.
11. 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-months ended March 31, 1997 and 1998 is
presented in the following table:
March 31, March 31,
1997 1998
------------- ------------
Net loss $ (14,100) $ (9,732)
Other comprehensive income (loss):
Foreign currency translation adjustments (281) 121
------------- ------------
Total comprehensive loss $ (14,381) (9,611)
============= ============
12. Subsequent Events
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 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 consolidated financial
statements of the Company.
On April 20, 1998, the 364-day credit facility with The Chase Manhattan Bank,
the Bank of New York, Bankers Trust Company and the Bank of Nova Scotia as
agents (the "New Credit Facility") expired. As a result, 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. On April 23, 1998, the Company entered into a
definitive stock purchase agreement to sell Nelson to Thomson Information
Services Inc.
On May 11, 1998, the Company commenced an offer to exchange its 7 5/8% Senior
Notes and its 2,500,000 shares of Series G Preferred Stock issued in the Private
Offering (see Note 5) for a new series of $250,000 7 5/8% Senior Notes due 2008
("New Notes") and 2,500,000 shares of $8.625 Series H Exchangeable Preferred
Stock ("Series H Preferred Stock"), (the "Exchange Offer"). The Exchange Offer
is valid through June 10, 1998. The terms of the New Notes and the Series H
Preferred Stock are the same as the terms of the 7 5/8% Senior Notes and Series
G Preferred Stock except that the New Notes and the Series H Preferred Stock
have been registered under the Securities Act of 1933. The Series H Preferred
Stock is exchangeable into 8.625% Class H Subordinated Exchange Debentures due
2010, in whole but not in part, at the option of the Company on any scheduled
dividend payment date. Interest on the New Notes shall accrue from the last
interest payment date on which interest was paid or, if no interest has been
paid, from the original issuance date of the 7 5/8% Senior Notes. Dividends on
the Series H Preferred Stock will accrue and will be cumulative from the last
dividend payment date on which dividends were paid on shares of the Series G
Preferred Stock.
For the period from April 1, 1998 through May 12, 1998, the Company completed
three product-line acquisitions in the specialty magazines and information
segments. The aggregate purchase price for such acquisitions was approximately
$93,000, all of which was financed through borrowings under the Company's Bank
Credit Facilities.
<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 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-months ended March 31, 1997 and 1998 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 and certain enthusiast titles,
which have been divested, (ii) The Daily Racing Form and Nelson, which are being
held for sale and (iii) 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
March 31,
1997 1998
---------------- ----------------
Sales, Net:
Continuing Businesses:
<S> <C> <C>
Specialty Magazines $ 161,107 $ 193,043
Education 65,679 77,650
Information 48,908 57,830
-------------- --------------
Subtotal 275,694 328,523
Non-Core Businesses 76,597 16,463
-------------- --------------
Total $ 352,291 $ 344,986
============== ==============
Operating Income (Loss):
Continuing Businesses:
Specialty Magazines $ 19,254 $ 17,663
Education 5,767 4,760
Information 2,909 6,641
Corporate (6,398) (6,535)
-------------- --------------
Subtotal 21,532 22,529
Non-Core Businesses (1,054) 1,753
-------------- --------------
Total 20,478 24,282
Other Income (Expense):
Interest expense (34,341) (33,421)
Amortization of deferred financing and
organizational costs (842) (752)
Other, net 474 159
-------------- --------------
Loss before income tax benefit and extraordinary
charge (14,231) (9,732)
Income tax benefit - carryback claim 1,685 -
-------------- --------------
Loss before extraordinary charge (12,546) (9,732)
Extraordinary charge - extinguishment of debt (1,554) -
============== ==============
Net loss $ (14,100) $ (9,732)
============== ==============
</TABLE>
<PAGE>
RESULTS OF OPERATIONS (dollars in thousands, except per share amounts)
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997:
Consolidated Results:
Sales from Continuing Businesses increased 19.2% to $328,523 in the first
quarter of 1998 from $275,694 in 1997, due to sales increases in all segments.
Sales as reported , including the Non-Core Businesses, decreased by 2.1% in the
first quarter of 1998 as compared to the same period in 1997.
Operating income from Continuing Businesses increased 4.6% to $22,529 during the
first quarter of 1998 from $21,532 during the same period in 1997. This increase
was primarily attributable to the sales growth which was partially offset by
increased goodwill and other intangible amortization expense resulting from
acquisitions. Operating income as reported, including the Non-Core Businesses,
increased by 18.6% in the first quarter of 1998 as compared to the same period
in 1997.
Interest expense decreased by $920 or 2.7% during the first quarter of 1998,
reflecting the Company's replacement of its higher interest rate debt.
The loss before income tax benefit and extraordinary charge decreased by $4,499
to $9,732 during the first quarter of 1998 compared to $14,231 during 1997. This
decrease is primarily attributable to the operating income growth.
The extraordinary charge in the first quarter of 1997 reflects the write-off of
deferred financing costs and an interest premium associated with the redemption
of a portion of the Company's 10 5/8% Senior Notes.
Specialty Magazines:
Results from Continuing Businesses exclude New Woman, Stagebill, Intertec
Mailing Services and certain enthusiast titles recently sold or discontinued.
Sales from Continuing Businesses increased 19.8% to $193,043 during the first
quarter of 1998 from $161,107 during the same period in 1997, due largely to the
change at Soap Opera digest from a bi-weekly to a weekly magazine, advertising
and circulation growth at Seventeen as well as advertising growth at various
specialty consumer and technical and trade magazines which aggregated
approximately $14,000. Acquisitions such as Park Avenue Publishing, Plaza
Communications, Cardinal Business Media, Lapidary Journal and Cowles also
contributed approximately $18,000 to the sales growth.
Operating income from Continuing Businesses decreased 8.3% to $17,663 during the
first quarter of 1998 from $19,254 during the same period in 1997, due primarily
to increased goodwill and other intangible amortization expense resulting from
acquisitions as well as the Soap Opera Digest frequency change.
Education:
Results from Continuing Businesses exclude Krames, Katharine Gibbs and Newbridge
(excluding Films for the Humanities and Sciences). Sales from Continuing
Businesses increased 18.2% to $77,650 during the first quarter of 1998 from
$65,679 during the same period in 1997 primarily attributable to the
acquisitions of Cover Concepts, QWIZ and Pictorial.
Operating income from Continuing Businesses decreased 17.5% to $4,760 during the
first quarter of 1998 from $5,767 during the same period in 1997, due primarily
to increased goodwill and other intangible amortization expense resulting from
acquisitions.
Information:
Results from Continuing Businesses exclude The Daily Racing Form, the Funk and
Wagnalls' products and Nelson. Sales from Continuing Businesses increased 18.2%
to $57,830 during the first quarter of 1998 from $48,908 during the same period
in 1997. This increase is primarily attributable to advertising growth at the
apartment guides approximating $6,500 as well as strong growth at Bacon's.
Operating income from Continuing Businesses increased to $6,641 during the first
quarter of 1998 from $2,909 during the same period in 1997, due largely to the
strong sales growth.
Non-Core Businesses:
Sales from Non-Core Businesses declined 78.5% to $16,463 during the first
quarter of 1998 from $76,597 during the same period in 1997. Most of this
decline resulted from the divestitures of certain Non-Core Businesses during the
second half of 1997.
Operating income from Non-Core Businesses increased to $1,753 during the first
quarter of 1998 from an operating loss of $1,054 during the same period in 1997,
largely attributable to the divestitures of underperforming businesses such as
Newbridge (excluding Films for the Humanities and Sciences), New Woman and
Stagebill in the second half of 1997.
Liquidity and Capital Resources
Consolidated working capital deficiency including net assets held for sale and
current maturities of long-term debt was $88,663 at March 31, 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
March 31,
1997 1998
---------------- ----------------
EBITDA:
Continuing Businesses:
<S> <C> <C>
Specialty Magazines $ 31,914 $ 33,506
Education 20,680 23,374
Information 10,350 12,557
Corporate (6,750) (6,377)
-------------- ---------------
Subtotal 56,194 63,060
Non-Core Businesses 3,847 1,828
-------------- ---------------
Total $ 60,041 $ 64,888
============== ===============
Net Cash Provided by (Used in) Operating Activities:
Continuing Businesses:
Specialty Magazines $ 19,842 $ 11,183
Education 4,031 4,991
Information 11,409 10,515
Corporate (38,832) (47,605)
-------------- ---------------
Subtotal (3,550) (20,916)
Non-Core Businesses (4,011) 1,603
-------------- ---------------
Total $ (7,561) $ (19,313)
============== ===============
Net Cash Provided by (Used in) Investing Activities:
Continuing Businesses:
Specialty Magazines $ (42,694) $ (185,504)
Education (18,936) (6,424)
Information (8,905) (15,112)
Corporate (338) (2,322)
-------------- ---------------
Subtotal (70,873) (209,362)
Non-Core Businesses (2,550) 389
-------------- ---------------
Total $ (73,423) $ (208,973)
============== ===============
Net Cash Provided by (Used in) Financing Activities:
Continuing Businesses:
Specialty Magazines $ (14) $ (1,545)
Education (255) (881)
Information (32) (221)
Corporate 74,662 237,521
-------------- ---------------
Subtotal 74,361 234,874
Non-Core Businesses 541 -
-------------- ---------------
Total $ 74,902 $ 234,874
============== ===============
</TABLE>
EBITDA from Continuing Businesses increased by 12.2% to $63,060 in the three
months ended March 31, 1998 over 1997 mainly as a result of growth in all
segments attributable to existing operations and product acquisitions. EBITDA
from Continuing Businesses in the specialty magazines segment increased 5.0% to
$33,506 primarily due to strong organic advertising and circulation revenue
growth and certain acquisitions, partially offset by reduced margins at Soap
Opera Digest due to the change from a bi-weekly to a weekly magazine. EBITDA
from Continuing Businesses in the education segment increased 13.0% to $23,374
largely attributable to certain product line acquisitions. EBITDA from
Continuing Businesses in the information segment increased 21.3% to $12,557 due
to increases in advertising revenue at the apartment guides and sales growth at
Bacon's. EBITDA from the Non-Core Businesses declined 52.5% to $1,828 primarily
as a result of the timing of divestitures most of which occurred in the second
half of 1997.
Net cash used in operating activities, as reported, during the three months
ended March 31, 1998, after interest payments of $32,874, was $19,313, a
decrease of $11,752 over the same 1997 period, due primarily to an increase in
accounts receivable. Net capital expenditures were $5,917 during the three
months ended March 31, 1998 which was a decrease of $1,071 from the 1997 period
due to the timing of divestitures most of which occurred in the second half of
1997. Payments for acquisitions of $200,151 were made during the three months
ended March 31, 1998 primarily for the Cowles acquisition and including certain
immaterial purchase price adjustments relating to previous acquisitions. Net
cash provided by financing activities, as reported, during the three months
ended March 31, 1998 was $234,874 as compared to $74,902 in the same 1997
period. The increase was primarily attributable to increased borrowings
associated with acquisitions.
Financing Arrangements
In July 1997, in order to hedge its interest rate risk, the Company entered into
four, three-year and two, four-year interest rate swap agreements, with an
aggregate notional amount of $600,000. Under these new swap agreements, which
commenced on January 2, 1998, the Company receives a floating rate of interest
based on three-month LIBOR, which resets quarterly, and the Company pays a fixed
rate of interest, each quarter, for the terms of the respective agreements. In
the first quarter of 1998, the weighted average variable and weighted average
fixed interest rates on these swap agreements were 5.8% and 6.3%, 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 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
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 will accrue and will be
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 are cumulative and payable
quarterly, in cash, commencing July 1, 1998. Prior to April 1, 2001, the Company
may, at its option, redeem in whole or in part, up to $125 million of the
aggregate liquidation preference of the Series G Preferred Stock at a price per
share of $108.625 plus accrued and unpaid dividends to the redemption date
subject to certain other restrictions. On or after April 1, 2003, the Series G
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
G 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 G 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
G Subordinated Exchange Debentures due 2010.
On February 17, 1998, the Company completed a private offering of $250,000 7
5/8% Senior Notes. The 7 5/8% Senior Notes were issued at 99.425%. The 7 5/8%
Senior Notes mature on April 1, 2008, with no sinking fund. Interest on the 7
5/8% Senior Notes is payable semi-annually in April and October at the annual
rate of 7 5/8% commencing October 1, 1998. The 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 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.
Recent Developments
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 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 consolidated financial
statements of the Company.
On April 20, 1998, the New Credit Facility expired. As a result, 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.
On April 23, 1998, the Company entered into a definitive stock purchase
agreement to sell Nelson to Thomson Information Services Inc.
On May 11, 1998, the Company commenced an offer to exchange its 7 5/8% Senior
Notes and its 2,500,000 shares of Series G Preferred Stock issued in the Private
Offering for $250,000 of New Notes and 2,500,000 shares of Series H Preferred
Stock. The exchange offer is valid through June 10, 1998. The terms of the New
Notes and the Series H Preferred Stock are the same as the terms of the 7 5/8%
Senior Notes and Series G Preferred Stock except that the New Notes and the
Series H Preferred Stock have been registered under the Securities Act of 1933.
The Series H Preferred Stock is exchangeable into 8.625% Class H Subordinated
Exchange Debentures due 2010, in whole but not in part, at the option of the
Company on any scheduled dividend payment date. Interest on the New Notes shall
accrue from the last interest payment date on which interest was paid or, if no
interest has been paid, from the original issuance date of the 7 5/8% Senior
Notes. Dividends on the Series H Preferred Stock will accrue and will be
cumulative from the last dividend payment date on which dividends were paid on
shares of the Series G Preferred Stock.
For the period from April 1, 1998 through May 12, 1998, the Company completed
three product-line acquisitions in the specialty magazines and information
segments. The aggregate purchase price for such acquisitions was approximately
$93,000, all of which was financed through borrowings under the Company's Bank
Credit Facilities.
Impact of Inflation
The impact of inflation was immaterial during 1997 and through the first quarter
of 1998. Paper prices declined through the first six 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 three months of 1998, paper
costs represented approximately 9.0% of the Company's total operating costs and
expenses. Postage for product distribution and direct mail solicitations is also
a significant expense of the Company. The Company uses the U.S. Postal Service
for distribution of many of its products and marketing materials. Postage costs
increase periodically and can be expected to increase in the future. In the
past, the effects of inflation on operating expenses have substantially been
offset by 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.
Forward-Looking Information
This report contains certain forward-looking statements concerning the Company's
operations, economic performance and financial condition. These statements are
based upon a number of assumptions and estimates which are inherently subject to
uncertainties and contingencies, many of which are beyond the control of the
Company, and reflect future business decisions which are subject to change. Some
of the assumptions may not materialize and unanticipated events will occur which
can affect the Company's results.
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRIMEDIA Inc.
(Registrant)
Date: May 14, 1998 /s/ William F. Reilly
------------ --------------------------------------------------
(Signature)
Chairman, Chief Executive Officer and Director
(Principal Executive Officer)
Date: May 14, 1998 /s/ Curtis A. Thompson
------------ --------------------------------------------------
(Signature)
Vice President and Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> MAR-31-1998
<CASH> 29,566
<SECURITIES> 0
<RECEIVABLES> 244,067
<ALLOWANCES> 31,852
<INVENTORY> 28,946
<CURRENT-ASSETS> 341,592
<PP&E> 218,169
<DEPRECIATION> 102,437
<TOTAL-ASSETS> 2,679,497
<CURRENT-LIABILITIES> 430,255
<BONDS> 1,640,335
557,430
0
<COMMON> 984,313
<OTHER-SE> (979,003)
<TOTAL-LIABILITY-AND-EQUITY> 2,679,497
<SALES> 344,986
<TOTAL-REVENUES> 344,986
<CGS> 81,440
<TOTAL-COSTS> 81,440
<OTHER-EXPENSES> 239,264
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,421
<INCOME-PRETAX> (9,732)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,732)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,732)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> MAR-31-1997
<CASH> 30,573
<SECURITIES> 0
<RECEIVABLES> 207,870
<ALLOWANCES> 26,938
<INVENTORY> 28,687
<CURRENT-ASSETS> 555,211
<PP&E> 174,909
<DEPRECIATION> 71,501
<TOTAL-ASSETS> 2,530,162
<CURRENT-LIABILITIES> 339,353
<BONDS> 1,649,643
447,478
0
<COMMON> 780,561
<OTHER-SE> (719,075)
<TOTAL-LIABILITY-AND-EQUITY> 2,530,162
<SALES> 352,291
<TOTAL-REVENUES> 352,291
<CGS> 80,098
<TOTAL-COSTS> 80,098
<OTHER-EXPENSES> 251,715
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,341
<INCOME-PRETAX> (14,231)
<INCOME-TAX> (1,685)
<INCOME-CONTINUING> (12,546)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,554)
<CHANGES> 0
<NET-INCOME> (14,100)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
