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, 1999
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
April 30, 1999: 145,339,289
<PAGE>
PRIMEDIA Inc.
INDEX
PAGE
------
Part I. Financial Information
Item 1. Financial Statements:
-------
Condensed Consolidated Balance Sheets
(Unaudited) as of March 31, 1999 and
December 31, 1998 2
Condensed Statements of Consolidated
Operations (Unaudited) for the three months
ended March 31, 1999 and 1998 3
Condensed Statements of Consolidated
Cash Flows (Unaudited) for the three months
ended March 31, 1999 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 11-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
-------
Part II. Other Information:
Signatures 18
<PAGE>
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------------- -----------------
(dollars in thousands, except per share amounts)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 38,486 $ 24,538
Accounts receivable, net 263,922 247,138
Inventories, net 41,595 41,254
Prepaid expenses and other 37,115 34,212
------------------ ---------------
Total current assets 381,118 347,142
Property and equipment, net 145,685 147,658
Other intangible assets, net 727,608 730,241
Excess of purchase price over net assets acquired, net 1,533,437 1,526,503
Deferred income tax asset, net 176,200 176,200
Other non-current assets 115,535 113,330
------------------ ---------------
$ 3,079,583 $ 3,041,074
================== ===============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 102,042 $ 118,637
Accrued interest payable 22,840 20,451
Accrued expenses and other 222,473 223,801
Deferred revenues 207,664 197,131
Current maturities of long-term debt 21,167 21,167
------------------ ---------------
Total current liabilities 576,186 581,187
------------------ ---------------
Long-term debt 2,029,711 1,928,892
------------------ ---------------
Other non-current liabilities 55,196 53,893
------------------ ---------------
Exchangeable preferred stock 558,200 557,841
------------------ ---------------
Common stock subject to redemption ($.01 par value, 255,119 shares
and 294,119 shares outstanding at March 31, 1999 and December
31, 1998, respectively) 3,074 2,964
------------------ ---------------
Shareholders' deficiency:
Common stock ($.01 par value, 147,141,394 shares and 146,966,562
shares issued at March 31, 1999 and December 31, 1998,
respectively) 1,471 1,470
Additional paid-in capital 979,932 979,720
Accumulated deficit (1,089,291) (1,030,032)
Accumulated other comprehensive loss (1,755) (1,720)
Common stock in treasury, at cost ( 2,752,300 shares
outstanding at March 31, 1999 and December 31, 1998) (33,141) (33,141)
------------------ ---------------
Total shareholders' deficiency (142,784) (83,703)
------------------ ---------------
$ 3,079,583 $ 3,041,074
================== ===============
</TABLE>
See notes to condensed consolidated financial statements (unaudited).
<PAGE>
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------------------ ------------------
(dollars in thousands, except per share amounts)
<S> <C> <C>
Sales, net $ 411,136 $ 344,986
Operating costs and expenses:
Cost of goods sold 93,193 81,440
Marketing and selling 79,110 60,524
Distribution, circulation and fulfillment 73,641 63,126
Editorial 36,056 32,599
Other general expenses 46,770 36,032
Corporate administrative expenses 6,967 6,377
Depreciation of property and equipment 12,319 9,155
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 44,404 31,451
Provision for product line closures 22,000 -
------------------ ------------------
Operating income (loss) (3,324) 24,282
Other income (expense):
Interest expense (40,418) (33,421)
Amortization of deferred financing costs (708) (752)
Other, net (1,544) 159
------------------ ------------------
Net loss (45,994) (9,732)
Preferred stock dividends:
Cash (13,265) (14,344)
Preferred stock redemption premium - (9,141)
------------------ ------------------
Loss applicable to common shareholders $ (59,259) $ (33,217)
================== ==================
Basic and diluted loss applicable to common shareholders per
common share $ (.41) $ (.25)
================== ==================
Basic and diluted common shares outstanding 144,597,905 134,686,401
================== ==================
</TABLE>
See notes to condensed consolidated financial statements (unaudited).
<PAGE>
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
---------------- --------------
(dollars in thousands)
Operating activities:
<S> <C> <C>
Net loss $ (45,994) $ (9,732)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 57,431 41,358
Accretion of discount on acquisition obligation,
distribution advance and other 1,643 1,672
Non-cash provision for product line closures 8,809 -
Other, net 75 (60)
Changes in operating assets and liabilities:
Increase in:
Accounts receivable, net (17,648) (3,947)
Inventories, net (374) (1,223)
Prepaid expenses and other (5,902) (3,165)
Increase (decrease) in:
Accounts payable (16,874) (18,881)
Accrued interest payable 2,389 (1,469)
Accrued expenses and other (8,374) (22,759)
Deferred revenues 7,029 (1,021)
Other non-current liabilities 1,040 (86)
---------------- --------------
Net cash used in operating activities (16,750) (19,313)
---------------- --------------
Investing activities:
Additions to property, equipment and other, net (12,381) (5,917)
Proceeds from sales of businesses 900 750
Payments for businesses acquired (40,379) (200,151)
Investment in joint venture and other (750) (3,655)
---------------- --------------
Net cash used in investing activities (52,610) (208,973)
---------------- --------------
Financing activities:
Borrowings under credit agreements 471,064 362,946
Repayments of borrowings under credit agreements (371,500) (628,900)
Proceeds from issuances of common stock, net of redemptions 682 201,026
Redemption of Series B Preferred Stock - (166,739)
Proceeds from issuance of 7 5/8% Senior Notes, net of discount - 248,562
Proceeds from issuance of Series G (exchanged into Series H) Preferred
Stock, net of issuance costs - 242,608
Purchases of common stock for the treasury - (2,195)
Dividends paid to preferred stock shareholders (13,265) (16,099)
Deferred financing costs paid (3,181) (5,352)
Other (492) (983)
---------------- --------------
Net cash provided by financing activities 83,308 234,874
---------------- --------------
Increase in cash and cash equivalents 13,948 6,588
Cash and cash equivalents, beginning of period 24,538 22,978
---------------- --------------
Cash and cash equivalents, end of period $ 38,486 $ 29,566
================ ==============
Supplemental information:
Cash interest paid $ 35,799 $ 32,874
================ ==============
</TABLE>
See notes to condensed consolidated financial statements (unaudited).
<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. These statements should be
read in conjunction with the Company's annual financial statements and related
notes for the year ended December 31, 1998. The operating results for the
three-month periods ended March 31 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, information and education.
2. Acquisitions
------------
During the three-month period ended March 31, 1999, 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 $40,379 (net of liabilities assumed of approximately
$9,000) including certain immaterial purchase price adjustments related to prior
year acquisitions. The excess purchase price over net assets acquired was
approximately $31,000.
The preliminary purchase cost allocations for the 1999 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, 1999; 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, 1998, they would not have had a material
impact on the results of operations for the three-month periods ended March 31,
1999 and 1998.
3. Product Line Closures
---------------------
During the three months ended March 31, 1999, the Company discontinued five
unprofitable PRIMEDIA Workplace Learning product lines, as part of a program to
return the Company's focus to accreditation oriented vocational networks and
associated products. In relation to these discontinuances, the Company has
recorded a $22,000 charge primarily for severance, transponder and office site
leases and the recoverability of related goodwill and certain other assets. The
results of PRIMEDIA Workplace Learning are included in the Company's education
segment.
<PAGE>
4. Inventories, Net
----------------
Inventories consist of the following:
March 31, December 31,
1999 1998
-------------- --------------
Finished goods $ 22,417 $ 21,974
Work in process 147 223
Raw materials 22,293 22,262
-------------- --------------
44,857 44,459
Less allowance for obsolescence 3,262 3,205
-------------- --------------
$ 41,595 $ 41,254
============== ==============
5. Long-Term Debt
--------------
Long-term debt consists of the following:
March 31, December 31,
1999 1998
-------------- ---------------
Borrowings under credit facilities $ 1,357,800 $ 1,258,236
10 1/4% Senior Notes due 2004 100,000 100,000
8 1/2% Senior Notes due 2006 299,027 299,001
7 5/8% Senior Notes due 2008 248,670 248,643
-------------- ---------------
2,005,497 1,905,880
Acquisition obligation payable 45,381 44,179
-------------- ---------------
2,050,878 1,950,059
Less current portion 21,167 21,167
-------------- ---------------
$ 2,029,711 $ 1,928,892
============== ===============
On March 11, 1999, the Company completed an amendment and restatement of its
credit facilities to increase them by $250,000. The principal amount of the
additional $250,000 will be repaid semi-annually on June 30 and December 31 of
each year, with an initial payment of $1,250 on June 30, 2000, installments of
$1,250 on each payment date thereafter through December 31, 2003 and a final
payment of $240,000 on July 31, 2004. Additionally, the Company entered into a
separate $150,000 bank revolving credit facility with a final maturity on
December 30, 1999. As of March 31, 1999, the Company has unused bank commitments
of approximately $424,000.
<PAGE>
6. Exchangeable Preferred Stock
----------------------------
Exchangeable Preferred Stock consists of the following:
March 31, December 31,
1999 1998
------------ -----------
$10.00 Series D Exchangeable Preferred Stock $ 195,178 $ 195,042
$9.20 Series F Exchangeable Preferred Stock 120,379 120,306
$8.625 Series H Exchangeable Preferred Stock 242,643 242,493
------------ -----------
$ 558,200 $ 557,841
============ ===========
$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 March
31, 1999 and December 31, 1998. The liquidation and redemption value at March
31, 1999 and December 31, 1998 was $200,000.
$9.20 Series F Exchangeable Preferred Stock
The Company authorized 1,250,000 shares of $.01 par value, $9.20 Series F
Exchangeable Preferred Stock, all of which was issued and outstanding at March
31, 1999 and December 31, 1998. The liquidation and redemption value at March
31, 1999 and December 31, 1998 was $125,000.
$8.625 Series H Exchangeable Preferred Stock
The Company authorized 2,500,000 shares of $.01 par value, $8.625 Series H
Exchangeable Preferred Stock, all of which was issued and outstanding at March
31, 1999 and December 31, 1998. The liquidation and redemption value at March
31, 1999 and December 31, 1998 was $250,000.
7. Loss per Common Share
---------------------
Loss per common share for the three-month periods ended March 31, 1999 and 1998
has been determined based on net loss 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.
8. Comprehensive Income (Loss)
---------------------------
Comprehensive income (loss) for the three months ending March 31, 1999 and 1998
is presented in the following table:
Three Months Ended
March 31, March 31,
1999 1998
------------ -----------
Net loss $ (45,994) $ (9,732)
Other comprehensive income (loss):
Foreign currency translation adjustments (35) 121
------------ -----------
Total comprehensive loss $ (46,029) $ (9,611)
============ ===========
9. Business Segment Information
----------------------------
The Company's operations have been classified into three business segments:
specialty magazines, information and education. Information as to the operations
of the Company in different business segments is set forth below based on the
nature of the products offered. PRIMEDIA's chief decision maker evaluates
performance based on several factors, of which the primary financial measure is
business segment earnings before interest, taxes, depreciation, amortization and
provision for one-time charges ("EBITDA"). There were no material intersegment
sales between the reported segments.
During 1998, the Company divested or discontinued 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, New Woman, Intertec Mailing
Services, Nelson Publications, Inc. ("Nelson"), The Daily Racing Form, certain
enthusiast titles and the Funk and Wagnall's products. These divestitures and
product discontinuances are collectively referred to as Non-Core Businesses. The
Company has segregated the Non-Core Businesses from the aforementioned segments
because the Company's chief decision maker views these businesses separately
when evaluating and making decisions regarding ongoing operations.
Three Months Ended
March 31,
1999 1998
--------------- ----------------
Sales, Net:
Specialty Magazines $ 246,163 $ 193,043
Information 73,745 57,830
Education 91,228 77,650
Other:
Non-Core Businesses - 16,463
----------------- -----------------
Total $ 411,136 $ 344,986
================= =================
EBITDA (1):
Specialty Magazines $ 39,640 $ 33,506
Information 15,168 12,557
Education 27,558 23,374
Other:
Corporate (6,967) (6,377)
Non-Core Businesses - 1,828
----------------- -----------------
Total $ 75,399 $ 64,888
================= =================
- -------------------------------------------------------------------------------
(1) EBITDA represents earnings before interest, taxes, depreciation,
amortization and provision for one-time charges.
The following is a reconciliation of EBITDA to operating income (loss).
Three Months Ended
March 31,
1999 1998
---------- -----------
Total EBITDA $ 75,399 $ 64,888
Depreciation of property and equipment (12,319) (9,155)
Amortization of intangible assets, excess of
purchase price over net assets acquired
and other (44,404) (31,451)
Provision for product line closures (22,000) -
----------- -----------
Operating income (loss) $ (3,324) $ 24,282
=========== ===========
10. Subsequent Events
-----------------
On April 22, 1999, the Company announced its intention to divest its
supplemental education group, which is comprised of Weekly Reader, American
Guidance Service and PRIMEDIA Reference. The Company hopes to complete the
divestitures by the end of the third quarter of 1999. Proceeds from the sale of
the group are expected to exceed its net carrying value and will be used to pay
down borrowings under the credit facilities.
From April 1, 1999 through May 14, 1999, the Company has completed three
acquisitions in the specialty magazines and information segments. These
acquisitions, which had an aggregate purchase price of approximately $14,500,
were primarily funded through borrowings under the Company's 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 business to business magazines), information
(consumer information and business information) and education (classroom
learning and workplace learning).
Management believes a meaningful comparison of the results of operations for the
three months ended March 31, 1999 and 1998 is obtained by using the segment
information. In addition, the Company presents results from continuing
businesses ("Continuing Businesses") which exclude the results of the non-core
businesses ("Non-Core Businesses"), which are either sold businesses or product
discontinuances. The Non-Core Businesses include: (i) Katharine Gibbs, Newbridge
Communications, Inc. (excluding Films for the Humanities and Sciences), Krames,
Stagebill, New Woman, Intertec Mailing Services, 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 have been discontinued.
Management believes that this presentation is the most useful way to analyze the
historical trends of the businesses. In 1998, the Company completed the
divestitures and product discontinuances related to the Non-Core Businesses.
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>
PRIMEDIA INC.
Unaudited Results of Consolidated Operations
(dollars in thousands)
Three Months Ended
March 31,
1999 1998
-------------- --------------
Sales, Net:
Continuing Businesses:
Specialty Magazines $ 246,163 $ 193,043
Information 73,745 57,830
Education 91,228 77,650
-------------- --------------
Subtotal 411,136 328,523
Non-Core Businesses - 16,463
-------------- --------------
Total $ 411,136 $ 344,986
============== ==============
EBITDA:
Continuing Businesses:
Specialty Magazines $ 39,640 $ 33,506
Information 15,168 12,557
Education 27,558 23,374
Corporate (6,967) (6,377)
-------------- --------------
Subtotal 75,399 63,060
Non-Core Businesses - 1,828
-------------- --------------
Total $ 75,399 $ 64,888
============== ==============
Operating Income (Loss):
Continuing Businesses:
Specialty Magazines $ 14,268 $ 17,663
Information 7,642 6,641
Education (18,018) 4,760
Corporate (7,216) (6,535)
-------------- --------------
Subtotal (3,324) 22,529
Non-Core Businesses - 1,753
-------------- --------------
Total (3,324) 24,282
Other Income (Expense):
Interest expense (40,418) (33,421)
Amortization of deferred
financing costs (708) (752)
Other, net (1,544) 159
-------------- --------------
Net Loss $ (45,994) $ (9,732)
============== ==============
<PAGE>
RESULTS OF OPERATIONS (dollars in thousands, except per share amounts)
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998:
Consolidated Results:
- ---------------------
Total sales increased 19.2% to $411,136 in the first quarter of 1999 from
$344,986 in the 1998 period. Sales from Continuing Businesses increased 25.1% to
$411,136 in 1999 from $328,523 in 1998 due to growth in all segments.
Total EBITDA increased 16.2% to $75,399 in 1999 from $64,888 in 1998. EBITDA
from Continuing Businesses increased 19.6% to $75,399 in 1999 from $63,060 in
1998 due to growth in all segments.
Total operating income (loss) was $(3,324) in 1999 compared to $24,282 in 1998.
Operating income (loss) from Continuing Businesses was $(3,324) in 1999 compared
to $22,529 in 1998. This change was due primarily to the $22,000 charge related
to product line closures at PRIMEDIA Workplace Learning and increased
amortization expense resulting from acquisitions, which more than offset the
growth in EBITDA.
Interest expense increased by 20.9% in the first quarter of 1999 compared to
1998. This increase is the result of increased borrowings to fund acquisitions
made during 1998 and 1999.
Specialty Magazines:
- --------------------
Sales from Continuing Businesses increased 27.5% to $246,163 in the first
quarter of 1999 from $193,043 in 1998, due primarily to the impact of
acquisitions, such as PRIMEDIA Enthusiast Publications ("PEP", formerly known as
Cowles Enthusiast Media) and the newly formed Youth Entertainment Group. The
Company benefited from a positive advertising and circulation environment during
the first quarter of 1999.
EBITDA from Continuing Businesses increased 18.3% to $39,640 in 1999 from
$33,506 in 1998. The EBITDA margin for Continuing Businesses decreased to 16.1%
in 1999 from 17.4% in 1998. The decreased margin is reflective of the inclusion
of PEP in the first quarter of 1999 and increased advertising promotion for the
soap opera titles.
Operating income from Continuing Businesses decreased 19.2% to $14,268 in 1999
from $17,663 in 1998. The EBITDA growth during the 1999 period was more than
offset by increased amortization arising from acquisitions.
Information:
- ------------
Sales from Continuing Businesses increased 27.5% to $73,745 in the first quarter
of 1999 from $57,830 in 1998. The increase is primarily attributable to the
growth of new and resale home guides and apartment guides, as well as
acquisitions.
EBITDA from Continuing Businesses increased 20.8% to $15,168 in 1999 from
$12,557 in 1998. The EBITDA margin decreased to 20.6% in 1999 from 21.7% in
1998. The decrease in the margin is reflective of increased Internet investment
in 1999.
Operating income from Continuing Businesses increased 15.1% to $7,642 in 1999
from $6,641 in 1998. The EBITDA growth during the 1999 period was mitigated by
increased amortization arising from acquisitions.
Education:
- ----------
Sales from Continuing Businesses increased 17.5% to $91,228 in the first quarter
of 1999 from $77,650 in 1998, primarily attributable to acquisitions, such as
American Guidance Service, and strong advertising at the Channel One Network.
EBITDA from Continuing Businesses increased 17.9% to $27,558 in 1999 from
$23,374 in 1998. The EBITDA margin increased slightly to 30.2% in 1999 from
30.1% in 1998. The increase in the margin reflects the positive results of the
refocusing effort at PRIMEDIA Workplace Learning.
Operating income (loss) from Continuing Businesses was $(18,018) in 1999
compared to $4,760 in 1998. This change was due primarily to the $22,000 charge
related to product line closures at PRIMEDIA Workplace Learning.
Liquidity and Capital Resources:
- -------------------------------
Consolidated working capital deficiency including current maturities of
long-term debt was $195,068 at March 31, 1999 as compared to $234,045 at
December 31, 1998. Consolidated working capital deficiency primarily reflects
the recording of deferred revenues as a current liability. In addition,
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.
Net cash used in operating activities during the three months ended March 31,
1999, after interest payments of $35,799, was $16,750, a decrease of 13.3% over
the same 1998 period, due primarily to EBITDA growth. Net capital expenditures
were $12,381 during the three months ended March 31, 1999 compared to $5,917
during the 1998 period due primarily to increased spending on new office space.
Net cash used in investing activities during the three months ended March 31,
1999 decreased to $52,610 compared to $208,973 in the same 1998 period, due to
the higher level of acquisition spending in 1998. Net cash provided by financing
activities during the three months ended March 31, 1999 was $83,308 compared to
$234,874 in the same 1998 period. The decrease was primarily attributable to the
issuances of preferred stock, common stock and senior notes during the first
quarter of 1998.
The Company believes its liquidity, capital resources and cash flow are
sufficient to fund planned capital expenditures, working capital requirements,
interest and principal payments on its debt, the payment of preferred stock
dividends and other anticipated expenditures for the foreseeable future.
Financing Arrangements:
- ----------------------
On March 11, 1999, the Company completed an amendment and restatement of its
credit facilities to increase them by $250,000. The principal amount of the
additional $250,000 will be repaid semi-annually on June 30 and December 31 of
each year, with an initial payment of $1,250 on June 30, 2000, installments of
$1,250 on each payment date thereafter through December 31, 2003 and a final
payment of $240,000 on July 31, 2004. Additionally, the Company entered into a
separate $150,000 bank revolving credit facility with a final maturity on
December 30, 1999. As of March 31, 1999, the Company has unused bank commitments
of approximately $424,000.
Recent Developments:
- -------------------
On April 22, 1999, the Company announced its intention to divest its
supplemental education group, which is comprised of Weekly Reader, American
Guidance Service and PRIMEDIA Reference. The Company hopes to complete the
divestitures by the end of the third quarter of 1999. Proceeds from the sale of
the group are expected to exceed its net carrying value and will be used to pay
down borrowings under the credit facilities.
From April 1, 1999 through May 14, 1999, the Company has completed three
acquisitions in the specialty magazines and information segments. These
acquisitions, which had an aggregate purchase price of approximately $14,500,
were primarily funded through borrowings under the Company's credit facilities.
Impact of Inflation:
- -------------------
The impact of inflation was immaterial during 1998 and through the first three
months of 1999. Paper prices declined through the first three months of 1999. In
the first three months of 1999, paper costs represented approximately 8% of the
Company's total operating costs and expenses. Postage for product distribution
and direct mail solicitations is also a significant expense of the Company. The
Company uses the U.S. Postal Service for distribution of many of its products
and marketing materials. Postage costs increase periodically and increased
approximately 4% in January 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 March 31, 1999, 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 August 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 the 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
evaluating the need for related contingency planning.
The total costs associated with required remediation by the Company are expected
to be approximately $13,000 of which approximately $8,000 had been expended
through March 31, 1999 through funding from existing operations. The remaining
$5,000 is expected to be incurred during the second and third quarters of 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 and vendors
would mitigate such risks until such time that a problem, if any, has been
remedied.
Forward-Looking Information:
- ---------------------------
This report contains certain 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
During the first quarter of 1999, there were no significant changes related to
the Company's market risk exposure.
<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, 1999 /s/ William F. Reilly
------------ ----------------------------------------------
(Signature)
Chairman, Chief Executive Officer and Director
(Principal Executive Officer)
Date: May 14, 1999 /s/ Robert J. Sforzo
------------ ---------------------------------------------
(Signature)
Vice President and Controller
(Principal Accounting Officer)
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