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, 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
October 31, 1999: 145,252,102
<PAGE>
PRIMEDIA Inc.
INDEX
PAGE
----
Part I. Financial Information
Item 1. Financial Statements
------
Condensed Consolidated Balance Sheets
(Unaudited) as of September 30, 1999 and
December 31, 1998 2
Condensed Statements of Consolidated
Operations (Unaudited) for the nine months
ended September 30, 1999 and 1998 3
Condensed Statements of Consolidated
Operations (Unaudited) for the three months
ended September 30, 1999 and 1998 4
Condensed Statements of Consolidated
Cash Flows (Unaudited) for the nine months
ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated
Financial Statements (Unaudited) 6-11
Item 2. Management's Discussion and Analysis of
------ Financial Condition and Results of Operations 12-19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
------
Part II. Other Information:
Item 5. Other Information 21
------
Signatures 22
<PAGE>
2
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------------- ------------------
(dollars in thousands, except per share amounts)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 30,049 $ 24,538
Accounts receivable, net 229,718 247,138
Inventories, net 33,256 41,254
Net assets held for sale 161,530 -
Prepaid expenses and other 44,202 34,212
--------------------- ------------------
Total current assets 498,755 347,142
Property and equipment, net 138,702 147,658
Other intangible assets, net 628,060 730,241
Excess of purchase price over net assets acquired, net 1,494,526 1,526,503
Deferred income tax asset, net 176,200 176,200
Other non-current assets 118,281 113,330
--------------------- ------------------
$ 3,054,524 $ 3,041,074
===================== ==================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 78,168 $ 118,637
Accrued interest payable 22,437 20,451
Accrued expenses and other 248,862 220,571
Deferred revenues 184,720 197,131
Current maturities of long-term debt 23,529 24,397
--------------------- ------------------
Total current liabilities 557,716 581,187
--------------------- ------------------
Long-term debt 2,098,888 1,956,997
--------------------- ------------------
Other non-current liabilities 32,248 25,788
--------------------- ------------------
Exchangeable preferred stock 558,969 557,841
--------------------- ------------------
Common stock subject to redemption ($.01 par value, 106,160 shares
and 294,119 shares outstanding at September 30, 1999
and December 31, 1998, respectively) 1,112 2,964
--------------------- ------------------
Shareholders' deficiency:
Common stock ($.01 par value, 148,162,879 shares and 146,966,562
shares issued at September 30, 1999
and December 31, 1998, respectively) 1,482 1,470
Additional paid-in capital 986,320 979,720
Accumulated deficit (1,137,803) (1,030,032)
Accumulated other comprehensive loss (1,609) (1,720)
Common stock in treasury, at cost (3,429,088 shares and 2,752,300
shares at September 30, 1999 and December 31, 1998,
respectively) (42,799) (33,141)
--------------------- ------------------
Total shareholders' deficiency (194,409) (83,703)
--------------------- ------------------
$ 3,054,524 $ 3,041,074
===================== ==================
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
3
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
----------------------- --------------------
(dollars in thousands, except per share amounts)
<S> <C> <C>
Sales, net $ 1,260,454 $ 1,127,332
Operating costs and expenses:
Cost of goods sold 289,487 265,898
Marketing and selling 232,236 202,555
Distribution, circulation and fulfillment 224,319 192,664
Editorial 108,632 105,387
Other general expenses 139,467 119,324
Corporate administrative expenses 22,101 19,725
Depreciation of property and equipment 36,350 29,533
Gain on the sales of businesses, net and other - (7,216)
Provision for product line closures 22,000 -
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 126,676 116,983
----------------------- --------------------
Operating income 59,186 82,479
Other expense:
Interest expense (123,965) (105,455)
Amortization of deferred financing costs (2,426) (2,307)
Other, net (770) (858)
----------------------- --------------------
Net loss (67,975) (26,141)
Preferred stock dividends:
Cash (39,796) (40,879)
Series B Preferred Stock redemption premium - (9,141)
----------------------- --------------------
Loss applicable to common shareholders $ (107,771) $ (76,161)
======================= ====================
Basic and diluted loss applicable to common shareholders
per common share:
Net loss $ (.74) $ (.54)
======================= ====================
Basic and diluted common shares outstanding 145,008,251 141,861,758
======================= ====================
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
4
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
------------------------ -------------------
(dollars in thousands, except per share amounts)
<S> <C> <C>
Sales, net $ 423,005 $ 392,296
Operating costs and expenses:
Cost of goods sold 98,800 95,274
Marketing and selling 74,051 71,694
Distribution, circulation and fulfillment 81,491 63,954
Editorial 35,456 35,049
Other general expenses 46,370 42,628
Corporate administrative expenses 8,170 6,503
Depreciation of property and equipment 12,296 10,522
Gain on the sales of businesses, net and other - (5,367)
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 39,642 42,256
------------------------ -------------------
Operating income 26,729 29,783
Other expense:
Interest expense (42,429) (37,663)
Amortization of deferred financing costs (855) (722)
Other, net (542) (582)
------------------------ -------------------
Net loss (17,097) (9,184)
Preferred stock dividends:
Cash (13,265) (13,333)
------------------------ -------------------
Loss applicable to common shareholders $ (30,362) $ (22,517)
======================== ===================
Basic and diluted loss applicable to common shareholders per
common share $ (.21) $ (.15)
======================== ===================
Basic and diluted common shares outstanding 145,055,347 145,238,934
======================== ===================
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
5
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---------------- --------------
(dollars in thousands)
Operating activities:
<S> <C> <C>
Net loss $ (67,975) $ (26,141)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 165,452 148,823
Gain on the sales of businesses, net and other - (21,291)
Accretion of discount on acquisition obligation,
distribution advance and other 3,677 7,397
Non-cash provision for product line closures 8,809 -
Other, net (1,037) 668
Changes in operating assets and liabilities:
Increase in:
Accounts receivable, net (23,660) (13,727)
Inventories, net (7,158) (5,503)
Prepaid expenses and other (13,684) (11,473)
Increase (decrease) in:
Accounts payable (25,609) (9,568)
Accrued interest payable 1,986 8,196
Accrued expenses and other (7,844) (28,544)
Deferred revenues 7,756 12,425
Other non-current liabilities (9) (11,170)
---------------- --------------
Net cash provided by operating activities 40,704 50,092
---------------- --------------
Investing activities:
Additions to property, equipment and other, net (43,198) (27,794)
Proceeds from sales of businesses 5,169 67,290
Payments for businesses acquired (80,321) (393,122)
Investments in joint ventures (7,374) (4,871)
---------------- --------------
Net cash used in investing activities (125,724) (358,497)
---------------- --------------
Financing activities:
Borrowings under credit agreements 702,757 697,511
Repayments of borrowings under credit agreements (553,000) (848,400)
Payments of acquisition obligation (10,833) (3,000)
Proceeds from issuances of common stock, net of redemptions 5,888 201,408
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) - 241,911
Preferred Stock, net of issuance costs
Purchases of common stock for the treasury (10,508) (15,015)
Dividends paid to preferred stock shareholders (39,796) (39,754)
Deferred financing costs paid (3,442) (5,320)
Other (535) (1,522)
---------------- --------------
Net cash provided by financing activities 90,531 309,642
---------------- --------------
Increase in cash and cash equivalents 5,511 1,237
Cash and cash equivalents, beginning of period 24,538 22,978
---------------- --------------
Cash and cash equivalents, end of period $ 30,049 $ 24,215
================ ==============
Supplemental information:
Cash interest paid $ 120,244 $ 91,892
================ ==============
</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's condensed consolidated financial statements
to conform to the presentation used in the current period. 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 and nine month periods ended September 30 are not necessarily
indicative of the results that may be expected for a full year.
2. Inventories, net
----------------
Inventories consist of the following:
September 30, December 31,
1999 1998
------------------ ------------------
Finished goods $ 11,320 $ 21,974
Work in process 337 223
Raw materials 23,253 22,262
------------------ ------------------
34,910 44,459
Less: Allowance for obsolescence 1,654 3,205
------------------ ------------------
$ 33,256 $ 41,254
================== ==================
3. Long-term debt
--------------
Long-term debt consists of the following:
September 30, December 31,
1999 1998
------------------ ------------------
Borrowings under credit facilities $ 1,407,993 $ 1,258,236
10 1/4% Senior Notes due 2004 100,000 100,000
8 1/2% Senior Notes due 2006 299,081 299,001
7 5/8% Senior Notes due 2008 248,727 248,643
------------------ ------------------
2,055,801 1,905,880
Obligation under capital leases 30,898 31,335
Acquisition obligation payable 35,718 44,179
------------------ ------------------
2,122,417 1,981,394
Less: Current portion 23,529 24,397
------------------ ------------------
$ 2,098,888 $ 1,956,997
================== ==================
On March 11, 1999, the Company completed an amendment and restatement of its
borrowings under 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 and there are currently no borrowings
outstanding under this facility. As of September 30, 1999, the Company had
unused bank commitments of approximately $331,000.
4. Exchangeable Preferred Stock
----------------------------
Exchangeable Preferred Stock consists of the following:
September 30, December 31,
1999 1998
--------------- --------------
$10.00 Series D Exchangeable Preferred Stock $ 195,451 $ 195,042
$9.20 Series F Exchangeable Preferred Stock 120,524 120,306
$8.625 Series H Exchangeable Preferred Stock 242,994 242,493
--------------- --------------
$ 558,969 $ 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
September 30, 1999 and December 31, 1998. The liquidation and redemption value
at September 30, 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 Series F Exchangeable
Preferred Stock, all of which was issued and outstanding at September 30, 1999
and December 31, 1998. The liquidation and redemption value at September 30,
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 Series H Exchangeable
Preferred Stock, all of which was issued and outstanding at September 30, 1999
and December 31, 1998. The liquidation and redemption value at September 30,
1999 and December 31, 1998 was $250,000.
<PAGE>
5. Comprehensive Income (Loss)
---------------------------
Comprehensive income (loss) for the nine and three months ended September 30,
1999 and 1998 is presented in the following tables:
Nine Months Ended
September 30, September 30,
1999 1998
--------------- ---------------
Net loss $ (67,975) $ (26,141)
Other comprehensive income (loss):
Foreign currency translation adjustments 111 (120)
=============== ===============
Total comprehensive loss $ (67,864) $ (26,261)
=============== ===============
Three Months Ended
September 30, September 30,
1999 1998
--------------- ---------------
Net loss $ (17,097) $ (9,184)
Other comprehensive income (loss):
Foreign currency translation adjustments 117 (106)
=============== ===============
Total comprehensive loss $ (16,980) $ (9,290)
=============== ===============
6. Loss per Common Share
---------------------
Loss per share for the nine and three-month periods ended September 30, 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.
7. Acquisitions
------------
During the nine-month period ended September 30, 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 $80,321 (net of liabilities assumed of approximately
$67,600) and the excess purchase price over net assets acquired was
approximately $125,200. These amounts include certain purchase price adjustments
related to prior year acquisitions.
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
September 30, 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 nine or three-month periods ended
September 30, 1999 and 1998.
8. Divestitures
------------
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. At that time, in accordance with SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", the supplemental education group ceased to depreciate
its property and equipment and ceased to amortize its intangible assets and
excess of purchase price over net assets acquired. On August 16, 1999, the
Company and Ripplewood Holdings L.L.C. announced that they had signed a purchase
agreement for the Company to sell its supplemental education group to a company
controlled by Ripplewood. The Company expects to complete the divestiture by the
end of 1999. Proceeds from the sale of the group are expected to exceed its net
carrying value and will primarily be used to pay down borrowings under the
credit facilities. The net assets of the supplemental education group are
recorded at their carrying value as net assets held for sale on the accompanying
condensed consolidated balance sheet as of September 30, 1999.
9. Product Line Closures
---------------------
During the first quarter of 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.
10. 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: Nelson Publications, Inc. ("Nelson"), The Daily Racing Form,
certain enthusiast titles and the Funk and Wagnalls' 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.
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
1999 1998 1999 1998
------------------ ---------------- ------------------ ----------------
Sales, Net:
<S> <C> <C> <C> <C>
Specialty Magazines $ 772,399 $ 670,973 $ 256,408 $ 230,818
Information 228,987 186,618 78,929 67,328
Education 259,068 227,961 87,668 87,922
Other:
Non-Core Businesses - 41,780 - 6,228
================== ================ ================== ================
Total $ 1,260,454 $ 1,127,332 $ 423,005 $ 392,296
================== ================ ================== ================
EBITDA (1):
Specialty Magazines $ 143,569 $ 132,352 $ 46,185 $ 46,141
Information 48,551 43,488 16,266 14,349
Education 73,230 58,237 23,423 21,345
Other:
Corporate (21,138) (19,725) (7,207) (6,503)
Non-Core Businesses - 7,427 - 1,862
================== ================ ================== ================
Total $ 244,212 $ 221,779 $ 78,667 $ 77,194
================== ================ ================== ================
</TABLE>
(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:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
1999 1998 1999 1998
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total EBITDA $ 244,212 $ 221,779 $ 78,667 $ 77,194
Depreciation of property and equipment (36,350) (29,533) (12,296) (10,522)
Amortization of intangible assets, excess
of purchase price over net assets
acquired and other (126,676) (116,983) (39,642) (42,256)
Gain on sale of business, net and other - 7,216 - 5,367
Provision for product line closures (22,000) - - -
================ =============== ================ ================
Operating income 59,186 $ 82,479 $ 26,729 $ 29,783
================ =============== ================ ================
</TABLE>
<PAGE>
11. Subsequent Events
-----------------
From October 1, 1999 through November 12, 1999, the Company has completed two
acquisitions in the specialty magazines and education segments. These
acquisitions, which had an aggregate purchase price of approximately $43,000,
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
nine and three months ended September 30, 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 Nelson, The Daily Racing Form,
certain enthusiast titles and Funk and Wagnalls' products which have been
divested or discontinued in 1998. Management believes that this presentation is
the most useful way to analyze the historical trends of the 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. It is also the primary financial measure used by
the Company's chief decision maker when evaluating performance. 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>
PRIMEDIA INC.
Unaudited Results of Consolidated Operations
(dollars in thousands)
Nine Months Ended Three Months Ended
September 30, September 30,
1999 1998 1999 1998
------------------- ------------------- ----------------- -----------------
Sales, Net:
<S> <C> <C> <C> <C>
Continuing Businesses:
Specialty Magazines $ 772,399 $ 670,973 $ 256,408 $ 230,818
Information 228,987 186,618 78,929 67,328
Education 259,068 227,961 87,668 87,922
------------------- ------------------- ----------------- ----------------
Subtotal 1,260,454 1,085,552 423,005 386,068
Non-Core Businesses - 41,780 - 6,228
------------------- ------------------- ----------------- ----------------
Total $ 1,260,454 $ 1,127,332 $ 423,005 $ 392,296
=================== =================== ================= ================
EBITDA:
Continuing Businesses:
Specialty Magazines $ 143,569 $ 132,352 $ 46,185 $ 46,141
Information 48,551 43,488 16,266 14,349
Education 73,230 58,237 23,423 21,345
Corporate (21,138) (19,725) (7,207) (6,503)
------------------- ------------------- ----------------- ----------------
Subtotal 244,212 214,352 78,667 75,332
Non-Core Businesses - 7,427 - 1,862
------------------- ------------------- ----------------- ----------------
Total $ 244,212 $ 221,779 $ 78,667 $ 77,194
=================== =================== ================= ================
Operating Income (Loss):
Continuing Businesses:
Specialty Magazines $ 65,653 $ 67,987 $ 20,365 $ 21,082
Information 22,597 24,025 7,395 6,950
Education (7,177) (15,769) 6,422 (5,746)
Corporate (21,887) (20,779) (7,453) (7,220)
------------------- ------------------- ----------------- ----------------
Subtotal 59,186 55,464 26,729 15,066
Non-Core Businesses - 27,015 - 14,717
------------------- ------------------- ----------------- ----------------
Total 59,186 82,479 26,729 29,783
Other Expense:
Interest expense (123,965) (105,455) (42,429) (37,663)
Amortization of deferred
financing costs (2,426) (2,307) (855) (722)
Other, net (770) (858) (542) (582)
------------------- ------------------- ----------------- ----------------
Net Loss $ (67,975) $ (26,141) $ (17,097) $ (9,184)
=================== =================== ================= ================
</TABLE>
RESULTS OF OPERATIONS (dollars in thousands, except per share amounts)
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998:
Consolidated Results:
- --------------------
Total sales increased 11.8% to $1,260,454 in the first nine months of 1999 from
$1,127,332 in the 1998 period. Sales from Continuing Businesses increased 16.1%
to $1,260,454 in 1999 from $1,085,552 in 1998 due to growth in all segments.
Total EBITDA increased $22,433 or 10.1% to $244,212 in 1999 from $221,779 in
1998. EBITDA from Continuing Businesses increased 13.9% to $244,212 in 1999 from
$214,352 in 1998 due to growth in all segments.
Total operating income decreased 28.2% to $59,186 in 1999 compared to $82,479 in
1998. Operating income from Continuing Businesses increased 6.7% to $59,186 in
1999 compared to $55,464 in 1998. This increase was due primarily to the growth
in EBITDA partially offset by the $22,000 non-recurring charge related to
product line closures at PRIMEDIA Workplace Learning and increased depreciation
and amortization expense.
Interest expense increased by $18,510 or 17.6% in the first nine months of 1999
compared to 1998. This increase is the result of increased borrowings to fund
acquisitions made during 1999 and 1998.
Specialty Magazines:
- -------------------
Sales from Continuing Businesses increased 15.1% to $772,399 in the first nine
months of 1999 from $670,973 in 1998, due primarily to the impact of
acquisitions, such as PRIMEDIA Enthusiast Publications ("PEP", formerly known as
Cowles Enthusiast Media), the Youth Entertainment Group and several
business-to-business titles and trade shows. The Company's consumer titles such
as Modern Bride, American Baby and Chicago generally benefited from a positive
advertising environment during the first nine months of 1999, while certain
business-to-business titles in the international construction and capital
equipment areas experienced softness.
EBITDA from Continuing Businesses increased 8.5% to $143,569 in 1999 from
$132,352 in 1998. The EBITDA margin for Continuing Businesses decreased to 18.6%
in 1999 from 19.7% in 1998. The decrease in the margin is reflective of
increased spending on Internet site development, weakness in certain
business-to-business publications, and increased circulation costs at Seventeen
and the soap opera titles.
Operating income from Continuing Businesses decreased 3.4% to $65,653 in 1999
from $67,987 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 22.7% to $228,987 in the first nine
months of 1999 from $186,618 in 1998. The increase is primarily attributable to
the growth of apartment guides advertising revenue as well as acquisitions.
EBITDA from Continuing Businesses increased 11.6% to $48,551 in 1999 from
$43,488 in 1998. The EBITDA margin decreased to 21.2% in 1999 from 23.3% in
1998. The decrease in the margin is reflective of increased Internet investment
in 1999.
Operating income from Continuing Businesses decreased 5.9% to $22,597 in 1999
from $24,025 in 1998. The EBITDA growth during the 1999 period was more than
offset by increased amortization arising from acquisitions.
Education:
- ---------
Sales from Continuing Businesses increased 13.6% to $259,068 in the first nine
months of 1999 from $227,961 in 1998, primarily attributable to the acquisition
of American Guidance Service, and due to the improved operating results at
PRIMEDIA Reference and Weekly Reader, whose results reflect strong market
conditions. These increases are partially offset by lower sales at PRIMEDIA
Workplace Learning where unprofitable product lines were closed.
EBITDA from Continuing Businesses increased 25.7% to $73,230 in 1999 from
$58,237 in 1998. The EBITDA margin increased to 28.3% in 1999 from 25.5% in
1998. The increase in the margin reflects the positive results of the refocusing
effort at PRIMEDIA Workplace Learning and the improved operating results at
PRIMEDIA Reference and Weekly Reader.
Operating loss from Continuing Businesses decreased 54.5% to $7,177 in 1999 from
$15,769 in 1998. This change was due primarily to EBITDA growth during the 1999
period which was partially offset by certain non-recurring charges at PRIMEDIA
Workplace Learning.
<PAGE>
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998:
Consolidated Results:
- --------------------
Total sales increased 7.8% to $423,005 in the third quarter of 1999 from
$392,296 in the 1998 period. Sales from Continuing Businesses increased 9.6% to
$423,005 in the third quarter of 1999 from $386,068 in the third quarter of 1998
due to growth in the specialty magazines and information segments.
Total EBITDA increased $1,473 or 1.9% to $78,667 in the third quarter of 1999
from $77,194 in the third quarter of 1998. EBITDA from Continuing Businesses
increased 4.4% to $78,667 in the third quarter of 1999 from $75,332 in the third
quarter of 1998 primarily due to growth in the information and education
segments.
Total operating income decreased 10.3% to $26,729 in the third quarter of 1999
compared to $29,783 in the third quarter of 1998. Operating income from
Continuing Businesses increased 77.4% to $26,729 in the third quarter of 1999
compared to $15,066 in the third quarter of 1998. This change was due partially
to the growth in EBITDA. In addition, certain non-recurring charges were
recorded in the third quarter of 1998.
Interest expense increased by $4,766 or 12.7% in the third quarter of 1999
compared to 1998. This increase is the result of increased borrowings to fund
acquisitions made during 1999 and 1998.
Specialty Magazines:
- -------------------
Sales from Continuing Businesses increased 11.1% to $256,408 in the third
quarter of 1999 from $230,818 in 1998, due primarily to the impact of
acquisitions, such as the Youth Entertainment Group and business-to-business
titles and trade shows. The Company's consumer titles such as Modern Bride,
American Baby and Chicago generally benefited from a positive advertising
environment during 1999, while certain business-to-business titles in the
international construction and capital equipment areas experienced softness.
EBITDA from Continuing Businesses remained flat at $46,185 in the third quarter
of 1999 compared to $46,141 in the third quarter of 1998. The EBITDA margin for
Continuing Businesses decreased to 18.0% in the third quarter of 1999 from 20.0%
in the same period of 1998. The decrease in the margin is reflective of
increased spending on Internet site development, weakness in certain
business-to-business publications, and increased circulation costs at Seventeen
and the soap opera titles.
Operating income from Continuing Businesses decreased 3.4% to $20,365 in the
third quarter of 1999 from $21,082 in the third quarter of 1998. The decrease
was the result of increased amortization arising from acquisitions.
Information:
- -----------
Sales from Continuing Businesses increased 17.2% to $78,929 in the third quarter
of 1999 from $67,328 in the same period of 1998. The increase is primarily
attributable to the growth of apartment guides advertising revenue as well as
acquisitions.
EBITDA from Continuing Businesses increased 13.4% to $16,266 in the third
quarter of 1999 from $14,349 in the same period of 1998. The EBITDA margin
decreased to 20.6% in the third quarter of 1999 from 21.3% in the same period of
1998. The decrease in the margin is reflective of increased Internet investment
in 1999.
Operating income from Continuing Businesses increased 6.4% to $7,395 in the
third quarter of 1999 from $6,950 in the same period of 1998. The EBITDA growth
during the 1999 period more than offset increased amortization arising from
acquisitions.
Education:
- ---------
Sales from Continuing Businesses remained flat at $87,668 in the third quarter
of 1999 from $87,922 in the same period of 1998.
EBITDA from Continuing Businesses increased 9.7% to $23,423 in the third quarter
of 1999 from $21,345 in the same period of 1998. The EBITDA margin increased to
26.7% in the third quarter of 1999 from 24.3% in the third quarter of 1998. The
increase in the margin reflects the positive results of the refocusing effort at
PRIMEDIA Workplace Learning and the improved operating results at PRIMEDIA
Reference, American Guidance Service and Weekly Reader. The improvement in the
margin was partially offset by lower results at Channel One due to increased
development costs in 1999, as well as softness at Qwiz and Pictorial due to new
product introduction costs and some softness in the insurance industry.
Operating income (loss) from Continuing Businesses was $6,422 in the third
quarter of 1999 compared to $(5,746) in the third quarter of 1998. This change
was due partially to the growth in EBITDA in 1999. In addition, certain
non-recurring charges primarily related to PRIMEDIA Workplace Learning were
recorded in 1998.
Liquidity and Capital Resources
- -------------------------------
Consolidated working capital deficiency, including net assets held for sale and
current portion of long-term debt, was $58,961 at September 30, 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. Consolidated working capital deficiency has decreased at September 30,
1999 primarily due to the reclassification of the assets and liabilities of the
Company's supplemental education group to net assets held for sale.
Net cash provided by operating activities during the nine months ended September
30, 1999, after interest payments of $120,244, was $40,704, as compared to
$50,092 during the same 1998 period, primarily due to higher interest payments
which more than offset EBITDA growth. Net capital expenditures were $43,198
during the nine months ended September 30, 1999 compared to $27,794 during the
1998 period due primarily to increased spending on new office space and computer
systems. Net cash used in investing activities during the nine months ended
September 30, 1999 decreased to $125,724 compared to $358,497 in the same 1998
period due to the lower level of acquisition spending in 1999. Net cash provided
by financing activities during the nine months ended September 30, 1999 was
$90,531, compared to $309,642 in the same 1998 period. Borrowings were higher in
1998 to fund greater acquisition spending.
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
borrowings under 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 and there are currently no borrowings
outstanding under this facility. As of September 30, 1999, the Company had
unused bank commitments of approximately $331,000.
Divestitures
- ------------
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. On August 16, 1999, the Company and
Ripplewood Holdings L.L.C. announced that they had signed a purchase agreement
for the Company to sell its supplemental education group to a company controlled
by Ripplewood. The Company expects to complete the divestitures by the end of
1999. Proceeds from the sale of the group are expected to exceed its net
carrying value and will primarily be used to pay down borrowings under the
credit facilities.
Recent Developments
- -------------------
From October 1, 1999 through November 12, 1999, the Company has completed two
acquisitions in the specialty magazines and education segments. These
acquisitions, which had an aggregate purchase price of approximately $43,000,
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 nine
months of 1999. Paper prices modestly declined through the first nine months of
1999. In the first nine 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 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 September 30, 1999, substantially all of the Company's
critical systems have been remediated and tested.
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 has developed contingency plans as needed.
The total cost of approximately $13,000 is attributable to the on-going system
improvements of the Company and addresses the Year 2000 Problem at the same
time. As of September 30, 1999, substantially all of the $13,000 has been
expended through funding from existing operations and such costs have not had 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 can occur which can affect the Company's
results.
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the first nine-months of 1999, there were no significant changes related
to the Company's market risk exposure.
<PAGE>
Item 5. OTHER INFORMATION
Thomas S. Rogers was elected Chairman and Chief Executive Officer effective
October 27, 1999.
<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 12, 1999 /s/ Thomas S. Rogers
-------------------- ----------------------------------------------
(Signature)
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 1999 /s/ Robert J. Sforzo
-------------------- ----------------------------------------------
(Signature)
Vice President and Controller
(Principal Accounting Officer)
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