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: June 30, 2000
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
July 31, 2000: 166,452,689
<PAGE>
Primedia Inc.
INDEX
PAGE
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(Unaudited) as of June 30, 2000 and
December 31, 1999 2
Condensed Statements of Consolidated
Operations (Unaudited) for the six months
ended June 30, 2000 and 1999 3
Condensed Statements of Consolidated
Operations (Unaudited) for the three months
ended June 30, 2000 and 1999 4
Condensed Statements of Consolidated
Cash Flows (Unaudited) for the six months
ended June 30, 2000 and 1999 5
Notes to Condensed Consolidated
Financial Statements (Unaudited) 6-17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18-28
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
Item 4. Submission of Matters to a Vote of Security Holders 30
Part II. Other Information:
Signatures 31
<PAGE>
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------------- -------------------
(dollars in thousands, except per share amounts)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 31,228 $ 28,661
Accounts receivable, net 244,899 235,565
Inventories, net 33,076 32,709
Net assets held for sale 51,042 -
Prepaid expenses and other 62,462 36,480
-------------------- -------------------
Total current assets 422,707 333,415
Property and equipment, net 156,225 152,343
Other intangible assets, net 531,576 619,950
Excess of purchase price over net assets acquired, net 1,102,918 1,215,406
Deferred income tax asset, net 176,200 176,200
Other non-current assets 271,344 217,238
-------------------- -------------------
$ 2,660,970 $ 2,714,552
==================== ===================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 85,201 $ 102,678
Accrued interest payable 17,916 19,379
Accrued expenses and other 222,790 217,737
Deferred revenues 203,519 171,339
Current maturities of long-term debt 21,966 22,740
-------------------- -------------------
Total current liabilities 551,392 533,873
-------------------- -------------------
Long-term debt 1,557,435 1,732,896
-------------------- -------------------
Other non-current liabilities 23,973 31,796
-------------------- -------------------
Exchangeable preferred stock 560,508 559,689
-------------------- -------------------
Common stock subject to redemption ($.01 par value, 53,310
shares outstanding at December 31, 1999) - 536
-------------------- -------------------
Shareholders' deficiency:
Common stock ($.01 par value, 166,502,717 shares and 148,346,759
shares issued at June 30, 2000 and December
31, 1999, respectively) 1,665 1,483
Additional paid-in capital 1,339,528 986,649
Accumulated deficit (1,276,237) (1,203,207)
Accumulated other comprehensive income (loss) (85,473) 87,364
Unearned stock grant compensation (10,544) (15,250)
Common stock in treasury, at cost (101,848 shares at June 30,
2000 and December 31, 1999) (1,277) (1,277)
-------------------- -------------------
Total shareholders' deficiency (32,338) (144,238)
-------------------- -------------------
$ 2,660,970 $ 2,714,552
==================== ===================
</TABLE>
See notes to condensed consolidated financial statements (unaudited).
<PAGE>
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
---------------------- --------------------
(dollars in thousands, except per share amounts)
<S> <C> <C>
Sales, net $ 829,977 $ 837,449
Operating costs and expenses:
Cost of goods sold 200,281 190,687
Marketing and selling 176,846 158,185
Distribution, circulation and fulfillment 138,654 142,828
Editorial 65,073 73,176
Other general expenses 104,510 93,097
Corporate administrative expenses (excluding $17,144 of
non-cash compensation in 2000) 16,315 13,931
Depreciation of property and equipment 26,906 24,054
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 66,422 87,034
Non-cash compensation and non-cash non-recurring charges 24,544 -
Provision for severance, closures and integration costs 16,718 22,000
Gain on sale of businesses and other, net (28,482) -
---------------------- --------------------
Operating income 22,190 32,457
Other income (expense):
Interest expense (75,319) (81,536)
Amortization of deferred financing costs (1,939) (1,571)
Other, net 8,569 (228)
---------------------- --------------------
Net loss (46,499) (50,878)
Preferred stock dividends - cash (26,531) (26,531)
---------------------- --------------------
Loss applicable to common shareholders $ (73,030) $ (77,409)
====================== ====================
Basic and diluted loss applicable to common shareholders per
common share $ (.47) $ (.53)
====================== ====================
Basic and diluted common shares outstanding 155,145,878 144,984,704
====================== ====================
</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
June 30,
2000 1999
---------------------- --------------------
(dollars in thousands, except per share amounts)
<S> <C> <C>
Sales, net $ 425,527 $ 426,313
Operating costs and expenses:
Cost of goods sold 104,430 97,494
Marketing and selling 90,371 79,075
Distribution, circulation and fulfillment 67,286 69,187
Editorial 31,957 37,120
Other general expenses 51,125 46,327
Corporate administrative expenses (excluding $2,352 of
non-cash compensation in 2000) 8,203 6,964
Depreciation of property and equipment 15,618 11,735
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 32,038 42,630
Non-cash compensation and non-cash non-recurring charges 9,752 -
Provision for severance, closures and integration costs 10,399 -
Gain on sale of businesses and other, net (17,490) -
---------------------- --------------------
Operating income 21,838 35,781
Other income (expense):
Interest expense (36,963) (41,118)
Amortization of deferred financing costs (1,000) (863)
Other, net 9,057 1,316
---------------------- --------------------
Net loss (7,068) (4,884)
Preferred stock dividends - cash (13,265) (13,266)
---------------------- --------------------
Loss applicable to common shareholders $ (20,333) $ (18,150)
====================== ====================
Basic and diluted loss applicable to common shareholders per
common share $ (.13) $ (.12)
====================== ====================
Basic and diluted common shares outstanding 161,034,718 145,371,502
====================== ====================
</TABLE>
See notes to condensed consolidated financial statements (unaudited).
<PAGE>
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
--------------- --------------
(dollars in thousands)
Operating activities:
<S> <C> <C>
Net loss $ (46,499) $ (50,878)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 95,267 112,659
Gain on sale of businesses and other, net (28,482) -
Accretion of discount on acquisition obligation
and other 1,952 2,615
Non-cash provision for severance, closures and integration costs - 8,809
Non-cash compensation and non-cash non-recurring charges 24,544 -
Other, net 412 (1,099)
Changes in operating assets and liabilities:
Increase in:
Accounts receivable, net (15,772) (12,572)
Inventories, net (1,721) (3,969)
Prepaid expenses and other (14,922) (15,516)
Increase (decrease) in:
Accounts payable (17,580) (27,695)
Accrued interest payable (1,463) 4,007
Accrued expenses and other (7,083) (20,247)
Deferred revenues (10,470) (2,098)
Other non-current liabilities (460) (4)
--------------- --------------
Net cash used in operating activities (22,277) (5,988)
--------------- --------------
Investing activities:
Additions to property, equipment and other, net (35,442) (25,018)
Proceeds from sales of businesses and other 129,261 5,370
Payments for businesses acquired (7,314) (63,806)
Payments for other investments (51,069) (4,630)
--------------- --------------
Net cash provided by (used in) investing activities 35,436 (88,084)
--------------- --------------
Financing activities:
Borrowings under credit agreements 313,750 624,227
Repayments of borrowings under credit agreements (475,228) (487,000)
Payments of acquisition obligation (9,834) (10,833)
Proceeds from issuances of common stock, net of redemptions 206,232 4,680
Taxes paid associated with stock option exercises (16,891) -
Purchases of common stock for the treasury - (315)
Dividends paid to preferred stock shareholders (26,531) (26,531)
Deferred financing costs paid (175) (3,177)
Other (1,915) (875)
--------------- --------------
Net cash provided by (used in) financing activities (10,592) 100,176
--------------- --------------
Increase in cash and cash equivalents 2,567 6,104
Cash and cash equivalents, beginning of period 28,661 24,538
--------------- --------------
Cash and cash equivalents, end of period $ 31,228 $ 30,642
=============== ==============
Supplemental information:
Cash interest paid $ 75,829 $ 77,533
=============== ==============
Non-cash activities:
Stock option exercise transactions $ 17,498 $ -
=============== ==============
Assets-for-equity transactions $ 25,483 $ -
=============== ==============
Exchange of the Company's common shares for
common shares of CMGI, Inc. $ 164,000 $ -
=============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
Primedia Inc.and Subsidiaries
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, 1999. The operating results for the three
and six-month periods ended June 30 are not necessarily indicative of the
results that may be expected for a full year.
On March 30, 2000, the Company realigned its segment reporting to conform to its
new strategic direction, including organization, management and growth
initiatives (see Note 12). The Company's two segments are consumer (including
both traditional and new media operations) and business-to-business (including
both traditional and new media operations) and previously reported results have
been restated accordingly. The consumer segment includes the Primedia Consumer
Magazine and Internet Group, Channel One Communications, Films for the
Humanities and Sciences, the Consumer Guides and related Internet operations.
The business-to-business segment includes Intertec, Bacon's, Primedia Workplace
Learning, Primedia Information, QWIZ, Inc., Pictorial, Inc. and related Internet
operations (see Note 11).
Recent pronouncements of the Financial Accounting Standards Board ("FASB"),
which are not required to be adopted at this date include Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities", which was subsequently amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
effective date of FASB Statement No. 133" and SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities - an amendment of
FASB Statement No. 133." SFAS No. 133, as amended by SFAS No. 137 and SFAS No.
138, is not expected to have a material impact on the Company's financial
statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition In Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company is required to adopt SAB 101 no later than the fourth quarter of
fiscal 2000. SAB 101 is not expected to have a material impact on the Company's
financial statements.
<PAGE>
2. Inventories, net
Inventories consist of the following:
June 30, December 31,
2000 1999
------------------ ------------------
Finished goods $ 11,437 $ 10,459
Work in process 320 315
Raw materials 24,002 23,707
------------------ ------------------
35,759 34,481
Less: Allowance for obsolescence 2,683 1,772
------------------ ------------------
$ 33,076 $ 32,709
================== ==================
3. Investments
Primedia Ventures' Investments in Marketable Securities
In the first quarter of 2000, the Company sold two of Primedia Ventures'
investments in marketable securities for total proceeds of $11,279 and realized
a gain of $10,689, which is included in gain on sale of businesses and other,
net on the accompanying condensed statement of consolidated operations. At June
30, 2000, the cost and fair value of Primedia Ventures' investment in marketable
securities was $2,217 and $18,727, respectively. At December 31, 1999, the cost
and fair value of Primedia Ventures' investments in marketable securities was
$2,807 and $91,789, respectively. These investments are included as other
non-current assets on the accompanying condensed consolidated balance sheets. In
addition, the Company recorded an unrealized loss of $72,472 for the six months
ended June 30, 2000 related to a Primedia Ventures' investment. This unrealized
loss is recorded as a component of other comprehensive loss for the six months
ended June 30, 2000 (see Note 9).
Investment in CMGI, Inc.
In May 2000, the Company acquired 1,530,000 shares of common stock of CMGI, Inc.
in exchange for 8,000,000 shares, or 5%, of the Company's common stock (par
value $.01) subject to a one year lockup. The transaction was valued at
$164,000, which represents the fair value of the Company's common stock
exchanged on the exchange date. This investment is included as other non-current
assets on the accompanying condensed consolidated balance sheet. In addition,
the Company recorded an unrealized loss of $93,907 for the six months ended June
30, 2000 related to its investment in CMGI. This unrealized loss is recorded as
a component of other comprehensive loss for the six months ended June 30, 2000
(see Note 9).
Investment in Liberty Digital
On April 20, 2000, the Company completed its purchase of 625,000 shares of
Liberty Digital Series A common stock at forty dollars per share for an
aggregate purchase price of $25,000. This investment is included as other
non-current assets on the accompanying condensed consolidated balance sheet. In
addition, the Company recorded an unrealized loss of $6,250 for the six months
ended June 30, 2000 related to its investment in Liberty Digital. This
unrealized loss is recorded as a component of other comprehensive loss for the
six months ended June 30, 2000 (see Note 9).
Assets-for-Equity Transactions
In the first six months of 2000, the Company entered various assets-for-equity
transactions, some of which also included cash consideration. Through June 30,
2000, the Company's investments totaled approximately $41,000, approximately
$15,000 of which was in cash. The remainder represents advertising, content
licensing and other services to be rendered by the Company in exchange for these
equity investments. The Company will recognize these amounts as revenue as
services are rendered. These investments are included as other non-current
assets and the related liabilities are included as deferred revenues on the
accompanying condensed consolidated balance sheet. Revenue recognized in
connection with these assets-for-equity transactions was immaterial through June
30, 2000.
4. Long-term Debt
Long-term debt consists of the following:
June 30, December 31,
2000 1999
------------------ ------------------
Borrowings under credit facilities $ 883,750 $ 1,050,525
10 1/4% Senior Notes due 2004 100,000 100,000
8 1/2% Senior Notes due 2006 299,167 299,109
7 5/8% Senior Notes due 2008 248,816 248,756
------------------ ------------------
1,531,733 1,698,390
Obligation under capital leases 30,380 31,134
Acquisition obligation payable 17,288 26,112
------------------ ------------------
1,579,401 1,755,636
Less: Current portion 21,966 22,740
------------------ ------------------
$ 1,557,435 $ 1,732,896
================== ==================
As of June 30, 2000, the Company had unused bank commitments of approximately
$514,000.
5. Exchangeable Preferred Stock
Exchangeable Preferred Stock consists of the following:
June 30, December 31,
2000 1999
------------ -----------
$10.00 Series D Exchangeable Preferred Stock $ 195,861 $ 195,588
$9.20 Series F Exchangeable Preferred Stock 121,151 120,941
$8.625 Series H Exchangeable Preferred Stock 243,496 243,160
------------ -----------
$ 560,508 $ 559,689
============ ===========
$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 June
30, 2000 and December 31, 1999. The liquidation and redemption value at June 30,
2000 and December 31, 1999 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 June
30, 2000 and December 31, 1999. The liquidation and redemption value at June 30,
2000 and December 31, 1999 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 June
30, 2000 and December 31, 1999. The liquidation and redemption value at June 30,
2000 and December 31, 1999 was $250,000.
6. Investment by Liberty Media
In April 2000, Liberty Media Corporation ("Liberty Media") invested $200,000 in
cash in exchange for 8,000,000 shares, or 5%, of the Company's issued and
outstanding shares of common stock, subject to a one-year lockup, and a warrant
to purchase an additional 1,500,000 shares of the Company's common stock. The
warrant received by Liberty Media is exercisable at $25 per share on or before
April 19, 2003. Additionally, Liberty Media has received an option to acquire a
12.5% stake in the Company's newly formed subsidiary, Primedia Digital Video, at
fair market value.
7. Non-cash Compensation and Non-cash Non-recurring Charges
During the six months ended June 30, 2000, the Company recorded $17,144 of
non-cash compensation charges relating to the hiring and retention of certain
key executives. These non-cash compensation charges consist of a $4,706 pro-rata
charge related to 1,380,711 shares of common stock granted to a senior executive
in 1999, and a $12,438 charge related to the extension of stock option
expiration periods for a senior executive during the first quarter of 2000. At
June 30, 2000 and December 31, 1999, unearned stock grant compensation balances
of $10,544 and $15,250, respectively, are recorded on the accompanying condensed
consolidated balance sheets.
During the second quarter of 2000, the Company recorded $7,400 of non-cash
non-recurring charges relating to the recoverability of certain assets of our
business-to-business segment.
8. Provision for Severance, Closures and Integration Costs
During the six months ended June 30, 2000, the Company recorded $6,468 of
integration costs relating to a management reorganization. These costs have been
charged to operations as incurred. These integration costs consist of
approximately $5,000 for consultants related to sourcing and integration
initiatives, approximately $1,400 related to recruiting for senior executives
hired during the first six months of 2000 and approximately $100 of other costs.
Through June 30, 2000, approximately $4,600 of related cash payments have been
made. The remaining costs are expected to be paid during 2000.
During the second quarter of 2000, the Company announced the details of plans
aimed largely at centralizing many support functions. As part of these plans,
the Company has consolidated many back office functions including but not
limited to certain accounting and purchasing functions. As a result, the Company
will close and consolidate thirteen office locations and has terminated
approximately 150 individuals.
During the second quarter of 2000, in conjunction with these plans, the Company
recorded a pre-tax charge of $10,250. The charge recorded on the accompanying
condensed consolidated statements of operations, is comprised of the following:
$6,728 of severance and other employee costs, $1,705 of lease obligations,
$1,584 of contract termination costs related to pre-press and licensing
agreements and $233 of other exit costs. As of June 30, 2000 approximately
$1,000 has been paid primarily relating to severance. The majority of the
remaining costs are expected to be paid by the end of 2001 with the balance to
be paid out through the end of 2003.
The Company is currently developing additional plans aimed largely at the
consolidation of certain functions, and accordingly anticipates an additional
provision for severance and closures of approximately $3,000 - $5,000 during the
third quarter of 2000.
During the first quarter of 1999, the Company discontinued five unprofitable
Primedia Workplace Learning product lines. In relation to these discontinuances,
the Company recorded a $22,000 charge for approximately $13,200 of cash payments
primarily related to transponder and office site leases and approximately $8,800
related to the recoverability of the related excess of purchase price over net
assets acquired and certain other assets. As of June 30, 2000, approximately
$9,200 of the cash payments have been made. The remaining $4,000 is expected to
be paid during 2000 and 2001.
The liabilities representing the provision for severance, closures and
integration costs are included in accrued expenses and other on the accompanying
condensed consolidated balance sheets.
<PAGE>
9. Comprehensive Loss
Comprehensive loss for the six and three months ended June 30, 2000 and 1999 is
presented in the following tables:
Six Months Ended
June 30, June 30,
2000 1999
------------ ----------
Net loss $ (46,499) $ (50,878)
Other comprehensive loss:
Unrealized loss on available-for-sale
securities, net of income taxes (172,629) -
Foreign currency translation adjustments (208) (6)
------------ ----------
Total comprehensive loss $ (219,336) $ (50,884)
============ ==========
Three Months Ended
June 30, June 30,
2000 1999
------------ ----------
Net loss $ (7,068) $ (4,884)
Other comprehensive income (loss):
Unrealized loss on available-for-sale
securities, net of income taxes (107,923) -
Foreign currency translation adjustments (153) 29
------------ ----------
Total comprehensive loss $ (115,144) $ (4,855)
============ ==========
10. Loss per Common Share
Loss per share for the six and three-month periods ended June 30, 2000 and 1999
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.
11. Divestitures
On March 30, 2000, the Company announced its intention to divest QWIZ, Inc.,
Pictorial, Inc. and 18 business directories ("the Directories") (see Note 1). 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", these businesses
ceased to depreciate their property and equipment and ceased to amortize their
intangible assets and excess of purchase price over net assets acquired.
On June 30, 2000, the Company completed the sale of Pictorial, Inc. to BISYS for
total consideration of approximately $129,000 in cash, which includes proceeds
on the sale of the business as well as payments received related to a
non-compete agreement. As of June 30, 2000, $115,000 had been received with the
remaining consideration received in July 2000. In connection with the sale, the
Company recorded a gain of approximately $18,400, net of estimated selling
costs. The Company has used the proceeds of this sale for repayment of
borrowings under its credit facilities.
On July 27, 2000, the Company announced an agreement to sell the Directories to
an acquisition group formed by Bariston Partners, LLC. The Company expects to
complete the divestiture by the end of 2000. Total proceeds from the sales of
the Directories and QWIZ, Inc. are expected to exceed their carrying values and
will primarily be used to pay down borrowings under the Company's credit
facilities. The net assets of the Directories and QWIZ, Inc. are recorded at
their carrying value as net assets held for sale on the accompanying condensed
consolidated balance sheet as of June 30, 2000. The net assets held for sale as
of June 30, 2000 are primarily comprised of approximately $54,000 of excess of
purchase price over net assets acquired and other intangible assets, net.
During the quarter ended June 30, 2000, the Company received $10,000 due to the
final settlement on a prior period divestiture. This receipt is included in
other income on the accompanying condensed statements of consolidated
operations.
12. Business Segment Information
On March 30, 2000, the Company announced a new strategic direction which
included a management reorganization and a focus on building a fully integrated
business-to-business and consumer targeted media company. Accordingly, the
Company's operations were reclassified into two new segments, consumer and
business-to-business and previously reported results have been restated
accordingly (see Note 1). Information as to the operations of the Company in
different business segments is set forth below based on the nature of the
targeted audience. Primedia's chief decision-maker evaluates performance based
on several factors, of which the primary financial measure is segment earnings
before interest, taxes, depreciation, amortization and other credits (charges)
("EBITDA"). Other credits (charges) include non-cash compensation, non-cash
non-recurring charges, provision for severance, closures and integration costs
and gain on sale of businesses and other, net. There were no material
intersegment sales between the reported segments.
During 1999, the Company divested the supplemental education group (which
includes Weekly Reader Corporation, Primedia Reference Inc. and American
Guidance Service Inc.) ("SEG"). In 2000, the Company reclassified SEG as
Non-Core Businesses and has restated prior periods accordingly. 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>
Six Months Ended Three Months Ended
June 30, June 30,
2000 1999 2000 1999
---------------- ---------------- ----------------- ----------------
Sales, Net:
<S> <C> <C> <C> <C>
Consumer $ 554,298 $ 513,660 $ 282,104 $ 260,313
Business-to-Business 275,679 262,143 143,423 137,358
Other:
Non-Core Businesses - 61,646 - 28,642
---------------- ---------------- ----------------- ----------------
Total $ 829,977 $ 837,449 $ 425,527 $ 426,313
================ ================ ================= ================
EBITDA (1):
Consumer $ 92,706 $ 108,527 $ 48,635 $ 57,707
Business-to-Business 51,908 55,649 31,724 33,268
Other:
Corporate (16,316) (13,931) (8,204) (6,964)
Non-Core Businesses - 15,300 - 6,135
---------------- ---------------- ----------------- ----------------
Total $ 128,298 $ 165,545 $ 72,155 $ 90,146
================ ================ ================= ================
</TABLE>
The following is a reconciliation of EBITDA to operating income:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
2000 1999 2000 1999
---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Total EBITDA (1) $ 128,298 $ 165,545 $ 72,155 $ 90,146
Depreciation of property and equipment (26,906) (24,054) (15,618) (11,735)
Amortization of intangible assets, excess
of purchase price over net assets
acquired and other (66,422) (87,034) (32,038) (42,630)
Non-cash compensation and non-cash
non-recurring charges (24,544) - (9,752) -
Provision for severance, closures and
integration costs (16,718) (22,000) (10,399) -
Gain on sale of businesses and other, net 28,482 - 17,490 -
---------------- ---------------- ------------------- ----------------
Operating income $ 22,190 $ 32,457 $ 21,838 $ 35,781
================ ================ =================== ================
</TABLE>
(1) EBITDA represents earnings before interest, taxes, depreciation,
amortization and other credits (charges).
<PAGE>
13. Financial Information for Guarantors of the Company's Debt
The information that follows presents condensed consolidating financial
information as of and for the six months ended June 30, 2000 for a) Primedia
Inc. (as the Issuer), b) the guarantor subsidiaries, c) the foreign
non-guarantor subsidiaries, d) the unrestricted Internet non-guarantor
subsidiaries, e) elimination entries and f) the Company on a consolidated basis.
The condensed consolidating financial information includes certain allocations
based on management's best estimates and should be read in connection with the
condensed consolidated financial statements of the Company.
<PAGE>
13. Financial Information For Guarantors of the Company's Debt (Continued)
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(UNAUDITED)
For the Six Months Ended June 30, 2000
(dollars in thousands)
<TABLE>
<CAPTION>
Unrestricted
Foreign Internet Primedia Inc.
Guarantor Non-Guarantor Non-Guarantor and
Primedia Inc. Subsidiaries Subsidiaries Subsidiaries Eliminations Subsidiaries
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales, net $ - $ 823,522 $ 3,313 $ 19,154 $ (16,012) $ 829,977
Operating costs and expenses:
Cost of goods sold - 195,360 1,069 18,085 (14,233) 200,281
Marketing and selling - 169,094 1,001 8,530 (1,779) 176,846
Distribution, circulation and fulfillment - 130,053 405 8,196 - 138,654
Editorial - 62,437 215 2,421 - 65,073
Other general expenses - 87,779 430 16,301 - 104,510
Corporate administrative expenses (excluding
non-cash compensation) 15,956 - - 359 - 16,315
Depreciation of property and equipment 896 24,069 49 1,892 - 26,906
Amortization of intangible assets, excess
of purchase price over net assets
acquired and other 225 65,530 394 273 - 66,422
Non-cash compensation and non-cash
non-recurring charges 17,144 7,400 - - - 24,544
Provision for severance, closures and
integration costs 11,401 5,317 - - - 16,718
Gain on sale of businesses and other, net - (18,693) - (9,789) - (28,482)
----------------------------------------------------------------------------------
Operating income (loss) (45,622) 95,176 (250) (27,114) - 22,190
Other income (expense):
Interest expense (72,227) (2,903) (189) - - (75,319)
Amortization of deferred financing costs - (1,938) (1) - - (1,939)
Equity in losses of subsidiaries (53,979) - - - 53,979 -
Intercompany management fees and interest 125,039 (125,039) - - - -
Other, net 290 8,481 (210) 8 - 8,569
----------------------------------------------------------------------------------
Net loss $ (46,499) $ (26,223) $ (650) $ (27,106) $ 53,979 $ (46,499)
==================================================================================
</TABLE>
<PAGE>
13. Financial Information For Guarantors of the Company's Debt (Continued)
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
June 30, 2000
(dollars in thousands)
<TABLE>
<CAPTION>
Unrestricted
Foreign Internet Primedia Inc.
Guarantor Non-Guarantor Non-Guarantor and
Primedia Inc. Subsidiaries Subsidiaries Subsidiaries Eliminations Subsidiaries
-------------------------------------------------------------------------------------
ASSETS
Current assets:
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 7,946 $ 19,375 $ 3,568 $ 339 $ - $ 31,228
Accounts receivable, net 626 239,625 723 3,925 - 244,899
Intercompany receivables 265,489 254,660 5,085 307 (525,541) -
Inventories, net - 31,225 18 1,833 - 33,076
Net assets held for sale - 50,659 383 - - 51,042
Prepaid expenses and other 3,128 58,278 88 968 - 62,462
-------------------------------------------------------------------------------------
Total current assets 277,189 653,822 9,865 7,372 (525,541) 422,707
Property and equipment, net 7,002 127,076 173 21,974 - 156,225
Investment in subsidiaries 985,980 - - - (985,980) -
Other intangible assets, net 2,732 527,059 759 1,026 - 531,576
Excess of purchase price over
net assets acquired,net (13,345) 1,107,540 3,646 5,077 - 1,102,918
Deferred income tax asset, net 176,200 - - - - 176,200
Other non-current assets 136,582 90,147 11 44,604 - 271,344
-------------------------------------------------------------------------------------
$1,572,340 $ 2,505,644 $ 14,454 $ 80,053 $ (1,511,521) $ 2,660,970
=====================================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 472 $ 83,131 $ 282 $ 1,316 $ - $ 85,201
Intercompany payables (580,954) 977,038 17,669 111,788 (525,541) -
Accrued interest payable 17,916 - - - - 17,916
Accrued expenses and other 74,447 143,912 299 4,132 - 222,790
Deferred revenues 8,530 190,072 597 4,320 - 203,519
Current maturities of long-term debt 6,886 15,054 - 26 - 21,966
-------------------------------------------------------------------------------------
Total current liabilities (472,703) 1,409,207 18,847 121,582 (525,541) 551,392
-------------------------------------------------------------------------------------
Long-term debt 1,531,557 25,853 - 25 - 1,557,435
-------------------------------------------------------------------------------------
Intercompany notes payable - 2,091,491 - - (2,091,491) -
-------------------------------------------------------------------------------------
Other non-current liabilities - 21,791 248 1,934 - 23,973
-------------------------------------------------------------------------------------
Exchangeable preferred stock 560,508 - - - - 560,508
-------------------------------------------------------------------------------------
Shareholders' deficiency:
Common stock 1,665 - - - - 1,665
Additional paid-in capital 1,339,528 - - - - 1,339,528
Accumulated deficit (1,276,237) (1,040,920) (4,595) (59,996) 1,105,511 (1,276,237)
Accumulated other comprehensive income (100,157) (1,778) (46) 16,508 - (85,473)
Unearned stock grant compensation (10,544) - - - - (10,544)
Common stock in treasury, at cost (1,277) - - - - (1,277)
------------------------------------------------------------------------------------
Total shareholders' deficiency (47,022) (1,042,698) (4,641) (43,488) 1,105,511 (32,338)
------------------------------------------------------------------------------------
$1,572,340 $ 2,505,644 $ 14,454 $ 80,053 $ (1,511,521) $ 2,660,970
====================================================================================
</TABLE>
<PAGE>
13. Financial Information For Guarantors of the Company's Debt (Continued)
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended June 30, 2000
(dollars in thousands)
<TABLE>
<CAPTION>
Unrestricted
Foreign Internet Primedia Inc.
Guarantor Non-Guarantor Non-Guarantor and
Primedia Inc. Subsidiaries Subsidiaries Subsidiaries Eliminations Subsidiaries
-------------------------------------------------------------------------------------
Operating activities:
<S> <C> <C> <C> <C> <C> <C>
Net loss $ (46,499) $ (26,223) $ (650) $ (27,106) $ 53,979 $ (46,499)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization 1,121 91,537 444 2,165 - 95,267
Gain on sale of businesses and other,
net - (18,693) - (9,789) - (28,482)
Accretion of discount on acquisition
obligation and other 365 1,587 - - - 1,952
Non-cash compensation and non-cash
non-recurring charges 17,144 7,400 - - - 24,544
Equity in losses of subsidiaries 53,979 - - - (53,979) -
Intercompany (income) expense (125,039) 125,039 - - - -
Other, net (10) 643 (221) - - 412
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable, net (580) (13,764) (119) (1,309) - (15,772)
Inventories, net - (1,994) (10) 283 - (1,721)
Prepaid expenses and other (1,777) (9,529) (14) (3,602) - (14,922)
Increase (decrease) in:
Accounts payable (2,971) (14,942) (128) 461 - (17,580)
Accrued interest payable (1,463) - - - - (1,463)
Accrued expenses and other 5,411 (12,729) 106 129 - (7,083)
Deferred revenues - (11,748) (36) 1,314 - (10,470)
Other non-current liabilities (1) (544) (6) 91 - (460)
-------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities (100,320) 116,040 (634) (37,363) - (22,277)
-------------------------------------------------------------------------------------
Investing activities:
Additions to property, equipment and
other, net (284) (22,723) (20) (12,415) - (35,442)
Proceeds from sales of businesses and other - 117,977 - 11,284 - 129,261
Payments for businesses acquired - (7,086) - (228) - (7,314)
Payments for other investments (40,225) (2,706) - (8,138) - (51,069)
-------------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities (40,509) 85,462 (20) (9,497) - 35,436
-------------------------------------------------------------------------------------
Financing activities:
Intercompany activity 139,359 (187,496) 1,342 46,795 - -
Borrowings under credit agreements 313,750 - - - - 313,750
Repayments of borrowings under credit
agreements (475,000) (137) (91) - - (475,228)
Payments of acquisition obligation (3,685) (6,149) - - - (9,834)
Proceeds from issuances of common stock,
net of redemptions 206,232 - - - - 206,232
Taxes paid associated with stock option
exercises (16,891) - - - - (16,891)
Dividends paid to preferred stock
shareholders (26,531) - - - - (26,531)
Deferred financing costs paid - (175) - - - (175)
Other 20 (1,935) - - - (1,915)
-------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 37,254 (195,892) 1,251 46,795 - (10,592)
-------------------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents (3,575) 5,610 597 (65) - 2,567
Cash and cash equivalents, beginning of period 11,521 13,765 2,971 404 - 28,661
-------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 7,946 $ 19,375 $ 3,568 $ 339 $ - $ 31,228
=====================================================================================
</TABLE>
<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. On
March 30, 2000, the Company announced a new strategic direction which included a
management reorganization and a focus on building a fully integrated
business-to-business and consumer targeted media company. Accordingly, the
Company's two new segments are consumer and business-to-business.
The Company's consumer segment includes 116 targeted magazines and associated
products with leading positions in such markets as teens - Seventeen; weddings -
Modern Bride; Child Care - American Baby; city-specific - New York; outdoors -
Fly Fisherman and Sail; automotive - Sport Compact Car; crafts - Crafts
Magazine; pets - Cats and equine - Equus; consumer guides (including 77
apartment guides and 16 new home guides); Channel One (the only daily news show
geared toward high school students) as well as its Films for the Humanities and
Sciences division, and the newly formed Primedia Digital Video (a unit focused
on delivering consumer broadband video).
The Company's business-to-business segment includes 73 business-to-business
magazines and 51 trade shows (including leading titles in such areas as
telecommunications - Telephony; media - Folio; marketing - American
Demographics; agriculture -Farm Industry News and entertainment technologies -
Cable World); workplace learning (including 15 video networks and television
series in such areas as healthcare, law enforcement and automotive); business
databases and directories (including Bacon's for the public relations industry
and Federal Sources for government information technology procurement), and
Industryclick, the Company's business-to-business Internet company.
Each segment includes traditional and new media operations. The Company is
committing significant financial resources to the development of its new media
businesses. These units leverage off of the traditional media businesses. The
current levels of spending have reduced total EBITDA in the 2000 periods as
compared to the prior year. Funding for these projects comes from the Company's
significant cash flow, proceeds from the sale of non-strategic units, and
investments from equity partners such as Liberty Media, which purchased a 5%
interest in the Company.
Results of the Company's traditional media operations exclude certain businesses
that have been divested. Results from the Company's Internet (new media)
operations reflect certain adjustments including the allocation of bundled
revenues and various intercompany expenses. The following discussion of
traditional and new media results includes certain inter-company transactions
between these businesses which are eliminated in consolidation.
Management believes a meaningful comparison of the results of operations for the
six and three months ended June 30, 2000 and 1999 is obtained by using the
segment information and by presenting results from continuing businesses
("Continuing Businesses") which exclude the results of the non-core businesses
("Non-Core Businesses"). The Non-Core Businesses include the supplemental
education group (which includes Weekly Reader Corporation, Primedia Reference
Inc. and American Guidance Service Inc.) ("SEG"), which was divested in the
fourth quarter of 1999. The Company has divested Pictorial, Inc. and plans to
divest QWIZ, Inc. and 18 business directories by the end of the year.
Accordingly, the results of operations for these businesses will be excluded
from the Company's business-to-business segment and reported as Non-Core
Businesses upon completion of these divestitures.
Prior period results have been restated to reflect the Company's new segment
reporting and reclassification of SEG as a non-core business.
Earnings before interest, taxes, depreciation, amortization and other credits
(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. Other credits (charges) include non-cash compensation,
non-cash non-recurring charges, provision for severance, closures and
integration costs and gain on sale of businesses and other, net. 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 determined in conformity with generally
accepted accounting principles) 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. This measure
may not be comparable to similarly titled measures used by other companies.
<PAGE>
Primedia Inc. and Subsidiaries
Unaudited Results of Consolidated Operations
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
2000 1999 2000 1999
------------- ------------- -------------- --------------
Sales, Net:
<S> <C> <C> <C> <C>
Continuing Businesses:
Consumer $ 554,298 $ 513,660 $ 282,104 $ 260,313
Business-to-business 275,679 262,143 143,423 137,358
------------- ------------- -------------- --------------
Subtotal 829,977 775,803 425,527 397,671
Non-Core Businesses - 61,646 - 28,642
------------- ------------- -------------- --------------
Total $ 829,977 $ 837,449 $ 425,527 $ 426,313
============= ============= ============== ==============
EBITDA:
Continuing Businesses:
Consumer $ 92,706 $ 108,527 $ 48,635 $ 57,707
Business-to-business 51,908 55,649 31,724 33,268
Corporate (16,316) (13,931) (8,204) (6,964)
------------- ------------- -------------- --------------
Subtotal 128,298 150,245 72,155 84,011
Non-Core Businesses - 15,300 - 6,135
------------- ------------- -------------- --------------
Total $ 128,298 $ 165,545 $ 72,155 $ 90,146
============= ============= ============== ==============
Operating Income (Loss):
Continuing Businesses:
Consumer $ 33,810 $ 49,106 $ 15,275 $ 26,912
Business-to-business 24,575 (9,447) 23,648 11,514
Corporate (36,195) (14,434) (17,085) (7,218)
------------- ------------- -------------- --------------
Subtotal 22,190 25,225 21,838 31,208
Non-Core Businesses - 7,232 - 4,573
------------- ------------- -------------- --------------
Total 22,190 32,457 21,838 35,781
Other Expense:
Interest expense (75,319) (81,536) (36,963) (41,118)
Amortization of deferred
financing costs (1,939) (1,571) (1,000) (863)
Other, net 8,569 (228) 9,057 1,316
------------- ------------- -------------- --------------
Net Loss $ (46,499) $ (50,878) $ (7,068) $ (4,884)
============= ============= ============== ==============
</TABLE>
<PAGE>
RESULTS OF OPERATIONS (dollars in thousands, except per share amounts)
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999:
Consolidated Results:
Traditional media sales from continuing businesses increased 7.2% to $826,834 in
2000 from $771,202 in 1999 due to growth in both segments, largely the result of
a generally robust advertising environment. New media sales from continuing
businesses increased 80.4% to $19,154 in 2000 from $10,620 in 1999 due to growth
in both segments. After the elimination of inter-company sales between the
traditional and new media businesses of $16,011 and $6,019 in 2000 and 1999,
respectively, sales from Continuing Businesses increased 7.0% to $829,977 in
2000 from $775,803 in 1999 due to growth in both segments. Total sales,
including Non-Core Businesses, decreased .9% to $829,977 in the first six months
of 2000 from $837,449 in the 1999 period.
Traditional media EBITDA from Continuing Businesses increased 2.3% to $163,036
in 2000 from $159,326 in 1999, while new media EBITDA from Continuing Businesses
decreased 282.5% to $(34,738) in 2000 from $(9,081) in 1999. EBITDA from
Continuing Businesses decreased 14.6% to $128,298 in 2000 from $150,245 in 1999
due to decreases in both segments caused by higher investment in new media
development. Total EBITDA, including Non-Core Businesses, decreased $37,247 or
22.5% to $128,298 in 2000 from $165,545 in 1999.
Operating income from Continuing Businesses, including traditional media and new
media operations, decreased 12.0% to $22,190 in 2000 compared to $25,225 in
1999. This change was due primarily to the decrease in EBITDA caused by higher
investment in new media development, non-cash compensation and non-cash
non-recurring charges, and the provision for severance, closures and integration
costs recorded during 2000. These items were partially offset by the gain on
sale of businesses and other, net recorded during the first six months of 2000
and the $22,000 charge related to product-line closures at Primedia Workplace
Learning recorded during the first six months of 1999. Total operating income,
including Non-Core Businesses, decreased 31.6% to $22,190 in 2000 compared to
$32,457 in 1999.
Interest expense decreased by 7.6% in the first six months of 2000 compared to
1999. This decrease is the result of the use of proceeds from the sale of SEG
and the use of the Liberty Media cash investment to repay borrowings under its
credit facilities.
Other income (expense) increased to $8,569 in 2000 compared to $(228) in 1999
primarily due to a $10,000 final cash settlement received on a prior period
divestiture.
Consumer:
Traditional media sales from Continuing Businesses increased 8.3% to $554,007 in
2000 from $511,714 in 1999. This increase was due primarily to double-digit
growth at the apartment guides, as well as strong advertising at certain
consumer and enthusiast magazine properties. These increases were partially
offset by lower single copy sales at the soap opera titles and certain other
products as well as lower levels of advertising by certain advertisers at
Channel One. New media sales from Continuing Businesses increased 52.5% to
$9,165 in 2000 from $6,009 in 1999 primarily due to an increase in Internet
advertising at apartmentguide.com and magazine related web-sites. After the
elimination of inter-company sales between the traditional and new media
businesses of $8,874 and $4,063 in 2000 and 1999, respectively, sales from
Continuing Businesses increased 7.9% to $554,298 in the first six months of 2000
from $513,660 in 1999.
Traditional media EBITDA from Continuing Businesses in 2000 was essentially flat
compared to 1999. The traditional media EBITDA margin from Continuing Businesses
decreased to 20.9% in 2000 from 22.5% in 1999 primarily due to reduced newsstand
sales at certain magazines, higher distribution costs at the consumer guides and
the lower levels of advertising at Channel One. EBITDA from Continuing
Businesses decreased 14.6% to $92,706 in 2000 from $108,527 in 1999. The EBITDA
margin for Continuing Businesses decreased to 16.7% in 2000 from 21.1% in 1999.
The decrease is mostly attributable to significantly increased Internet
spending, as well as reduced newsstand sales at certain magazines, higher
distribution costs at the consumer guides and lower levels of advertising at
Channel One.
Operating income from Continuing Businesses, including traditional media and new
media operations, decreased 31.1% to $33,810 in 2000 from $49,106 in 1999. The
decrease in operating income was primarily attributable to the decrease in
EBITDA.
Business-to-Business:
Traditional media sales from Continuing Businesses increased 5.1% to $272,827 in
2000 from $259,488 in 1999. The increase is primarily attributable to the growth
in advertising at certain business-to-business magazines and trade shows and due
to increased clipping revenues at Bacon's. New media sales from Continuing
Businesses increased 116.6% to $9,989 in 2000 from $4,611 in 1999 primarily due
to growth at IndustryClick, our business-to-business Internet unit, as well as
new on-line products at Bacon's. After the elimination of inter-company sales
between the traditional and new media businesses of $7,137 and $1,956 in 2000
and 1999, respectively, sales from Continuing Businesses increased 5.2% to
$275,679 in the first six months of 2000 from $262,143 in 1999.
Traditional media EBITDA from Continuing Businesses increased 8.8% to $62,453 in
2000 from $57,376 in 1999. The traditional media EBITDA margin from Continuing
Businesses increased slightly to 22.9% in 2000 from 22.1% in 1999 due primarily
to growth at Bacon's and certain cost controls. EBITDA from Continuing
Businesses decreased 6.7% to $51,908 in 2000 from $55,649 in 1999. The EBITDA
margin decreased to 18.8% in 2000 from 21.2% in 1999. The decrease is reflective
of increased Internet investment.
Operating income (loss) from Continuing Businesses, including traditional media
and new media operations, increased to $24,575 in 2000 from $(9,447) in 1999.
The increase in operating income is primarily attributable to the approximately
$18,400 gain on sale of Pictorial recorded during the second quarter of 2000 as
well as the $22,000 provision for product-line closures which was recorded
during the first quarter of 1999, partially offset by the $7,400 of non-cash
non-recurring charges recorded during the second quarter of 2000.
<PAGE>
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999:
Consolidated Results:
Traditional media sales from Continuing Businesses increased 8.1% to $427,265 in
2000 from $395,218 in 1999 due to growth in both segments, largely the result of
a generally robust advertising environment. New media sales from Continuing
Businesses increased 74.3% to $10,336 in 2000 from $5,930 in 1999 due to growth
in both segments. After the elimination of inter-company sales between the
traditional and new media businesses of $12,074 and $3,477 in 2000 and 1999,
respectively, sales from Continuing Businesses increased 7.0% to $425,527 in
2000 from $397,671 in 1999 due to growth in both segments. Total sales,
including Non-Core Businesses, decreased .2% to $425,527 in the second quarter
of 2000 from $426,313 in the 1999 period.
Traditional media EBITDA from Continuing Businesses increased 3.9% to $ 92,064
in 2000 from $ 88,582 in 1999, while new media EBITDA from Continuing Businesses
decreased 335.6% to $(19,909) in 2000 from $(4,571) in 1999. EBITDA from
Continuing Businesses decreased 14.1% to $72,155 in 2000 from $84,011 in 1999
due to decreases in both segments. The biggest factor contributing to the
decline was higher investment in new media development. Total EBITDA, including
Non-Core Businesses, decreased $17,991 or 20.0% to $72,155 in 2000 from $90,146
in 1999.
Operating income from Continuing Businesses, including traditional media and new
media operations, decreased 30.0% to $21,838 in 2000 compared to $31,208 in
1999. The decrease in operating income was primarily attributable to the
decrease in EBITDA. The non-cash compensation and non-cash non-recurring charges
and the provision for severance, closures and integration costs were
substantially offset by the gain on sale of businesses and other, net recorded
during the second quarter of 2000. Total operating income, including Non-Core
Businesses, decreased 39.0% to $21,838 in 2000 compared to $35,781 in 1999.
Interest expense decreased by 10.1% in the second quarter of 2000 compared to
1999. This decrease is the result of the use of proceeds from the sale of SEG
and the use of the Liberty Media cash investment to repay borrowings under its
credit facilities.
Other income increased to $9,057 in 2000 compared to $1,316 in 1999 primarily
due to a $10,000 final cash settlement received on a prior period divestiture.
Consumer:
Traditional media sales from Continuing Businesses increased 9.6% to $284,019 in
2000 from $259,158 in 1999. This increase was due primarily to double-digit
growth at the apartment guides, as well as strong advertising at certain
consumer and enthusiast magazine properties. These increases were partially
offset by lower single copy sales at the soap opera titles and other products.
New media sales from Continuing Businesses increased 39.6% to $4,928 in 2000
from $3,530 in 1999 primarily due to an increase in Internet advertising at
apartmentguide.com and magazine related web-sites. After the elimination of
inter-company sales between the traditional and new media businesses of $6,843
and $2,375 in 2000 and 1999, respectively, sales from Continuing Businesses
increased 8.4% to $282,104 in the second quarter of 2000 from $260,313 in 1999.
Traditional media EBITDA from Continuing Businesses increased 1.6% to $61,849 in
2000 from $60,884 in 1999. The traditional media EBITDA margin from Continuing
Businesses decreased to 21.8% in 2000 from 23.5% in 1999 primarily due to
reduced newsstand sales at certain magazines and higher distribution costs at
the consumer guides. EBITDA from Continuing Businesses decreased 15.7% to
$48,635 in 2000 from $57,707 in 1999. The EBITDA margin for Continuing
Businesses decreased to 17.2% in 2000 from 22.2% in 1999. The decrease is mostly
attributable to significantly increased Internet spending, as well as reduced
newsstand sales at certain magazines and higher distribution costs at the
consumer guides.
Operating income from Continuing Businesses, including traditional media and new
media operations, decreased 43.2% to $15,275 in 2000 from $26,912 in 1999. The
decrease in operating income was primarily attributable to the decrease in
EBITDA.
Business-to-Business:
Traditional media sales from Continuing Businesses increased 5.3% to $143,246 in
2000 from $136,060 in 1999. The increase is primarily attributable to the growth
at certain business-to-business magazines and trade shows and due to increased
clipping revenues at Bacon's. New media sales from Continuing Businesses
increased 125.3% to $5,408 in 2000 from $2,400 in 1999 primarily due to growth
at IndustryClick, our business-to-business Internet unit, as well as new on-line
products at Bacon's. After the elimination of inter-company sales between the
traditional and new media businesses of $5,231 and $1,102 in 2000 and 1999,
respectively, sales from Continuing Businesses increased 4.4% to $143,423 in the
second quarter of 2000 from $137,358 in 1999.
Traditional media EBITDA from Continuing Businesses increased 11.3% to $38,136
in 2000 from $34,277 in 1999. The traditional media EBITDA margin from
Continuing Businesses increased to 26.6% in 2000 from 25.2% in 1999 primarily
due to growth at Bacon's and certain cost controls. EBITDA from Continuing
Businesses decreased 4.6% to $31,724 in 2000 from $33,268 in 1999. The EBITDA
margin decreased to 22.1% in 2000 from 24.2% in 1999. The decrease is reflective
of increased Internet investment.
Operating income from Continuing Businesses, including traditional media and new
media operations, increased to $23,648 in 2000 from $11,514 in 1999. The
increase in operating income is primarily attributable to the $18,400 gain on
sale of Pictorial partially offset by the $7,400 of non-cash non-recurring
charges, which were recorded during the second quarter of 2000.
Internet Operations:
The following presents information related to the Company's Internet operations.
The results are pro forma for the first six months of 1999 and present these
Internet operations as if they were conducted as stand-alone businesses. Pro
forma adjustments include the allocation of bundled revenues and various
intercompany expenses.
The Company applied standard Internet industry ranges and methodologies to its
historical operating results to calculate pro forma results related to the
following on-line transactions: sales of print products, third-party commerce,
proprietary product sales, subscriptions, display and classified advertisements
and pay-per-use services.
In June 1999, intercompany agreements were put in effect and the methodology
utilized in the previous 18 months was consistent with and incorporated into
these agreements. The following pro forma information was prepared as if these
intercompany agreements were in place effective January 1, 1999.
The Company believes the accounting used for the pro forma adjustments provides
a reasonable basis on which to present the pro forma results. The pro forma
Internet information is provided for informational purposes only, should not be
construed to be indicative of the historical results had these Internet
operations been operated as stand-alone operations and is not intended to
project future results of operations of the Internet businesses.
Primedia Inc. and Subsidiaries
Internet Operations
Six Months Ended June 30,
<TABLE>
<CAPTION>
1999
2000 1999 Pro Forma 1999
Actual Actual Adjustments Pro Forma
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Internet Revenues:
Consumer $ 9,165 $ 894 $ 5,115(1) $ 6,009
Business-to-business 9,989 4,611 - 4,611
----------------- ---------------- ----------------- ----------------
Total $ 19,154 $ 5,505 $ 5,115 $ 10,620
================= ================ ================= ================
Internet EBITDA (Loss) :
Consumer $ (23,290) $ (5,521) $ (996)(2) $ (6,517)
Business-to-business (10,545) 1,201 (2,928)(2) (1,727)
Corporate (903) (551) (286)(2) (837)
----------------- ---------------- ----------------- ----------------
Total $ (34,738) $ (4,871) $ (4,210) $ (9,081)
================= ================ ================= ================
</TABLE>
Primedia Inc. and Subsidiaries
Internet Operations
Three Months Ended June 30,
<TABLE>
<CAPTION>
1999
2000 1999 Pro Forma 1999
Actual Actual Adjustments Pro Forma
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Internet Revenues:
Consumer $ 4,928 $ 527 $ 3,003 (1) $ 3,530
Business-to-business 5,408 2,400 - 2,400
----------------- ---------------- ----------------- ----------------
Total $ 10,336 $ 2,927 $ 3,003 $ 5,930
================= ================ ================= ================
Internet EBITDA (Loss) :
Consumer $ (13,214) $ (2,893) $ (284)(2) $ (3,177)
Business-to-business (6,412) 497 (1,506)(2) (1,009)
Corporate (283) (233) (152)(2) (385)
----------------- ---------------- ----------------- ----------------
Total $ (19,909) $ (2,629) $ (1,942) $ (4,571)
================= ================ ================= ================
</TABLE>
(1) Represents the allocation of the on-line portion of bundled classified ad
sales initiated by the consumer guides' traditional salesforce.
(2) Represents commissions charged by the traditional media businesses to the
Internet businesses primarily for on-line advertising and subscriptions,
intercompany advertising expense as well as general administrative services
provided.
Liquidity and Capital Resources
Consolidated working capital deficiency, including net assets held for sale and
current portion of long-term debt, was $128,685 at June 30, 2000 as compared to
$200,458 at December 31, 1999. Consolidated working capital deficiency primarily
reflects the recording of deferred revenues as a current liability as well as
the expensing of most advertising, editorial and product development costs as
incurred. Consolidated working capital deficiency decreased at June 30, 2000
primarily due to the reclassification of the assets and liabilities of QWIZ,
Inc. and 18 business directories to net assets held for sale.
Net cash used in operating activities during the six months ended June 30, 2000,
after interest payments of $75,829, was $22,277, as compared to $5,988 during
the same 1999 period, due primarily to increased new media investment, as well
as other working capital changes. Net additions to property, equipment and other
were $35,442 during the six months ended June 30, 2000 compared to $25,018
during the 1999 period due primarily to increased spending on new office space
and capitalized software expenditures associated with the Company's Internet
operations. Net cash provided by (used in) investing activities during the six
months ended June 30, 2000 increased to $35,436 compared to $(88,084) in the
same 1999 period due to the lower level of acquisition spending in 2000 as well
as proceeds from the sale of Pictorial. Net cash provided by (used in) financing
activities during the six months ended June 30, 2000 was $(10,592), compared to
$100,176 in the same 1999 period. Borrowings were higher in 1999 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.
Investments by CMGI and Liberty Media
In May 2000, the Company acquired 1,530,000 shares of common stock of CMGI, Inc.
in exchange for 8,000,000 shares, or 5%, of the Company's common stock (par
value $.01), subject to a one-year lockup. The transaction was valued at
$164,000, which represents the fair value of the Company's common stock
exchanged on the exchange date. In addition, the Company recorded an unrealized
loss of $93,907 for the six months ended June 30, 2000 related to its investment
in CMGI. This unrealized loss is recorded as a component of other comprehensive
loss for the six months ended June 30, 2000. The Company and CMGI have agreed to
partner on various business-to-business Internet alliances.
In April 2000, Liberty Media invested $200,000 in cash in exchange for 8,000,000
shares, or 5%, of the Company's issued and outstanding shares of common stock,
subject to a one-year lockup, and a warrant to purchase an additional 1,500,000
shares of the Company's common stock. The warrant received by Liberty Media is
exercisable at $25 per share on or before April 19, 2003. Additionally, Liberty
Media has received an option to acquire a 12.5% stake in the Company's newly
formed subsidiary, Primedia Digital Video, at fair market value. The Company and
Liberty Media have agreed to partner on various consumer Internet and broadband
initiatives.
<PAGE>
Provision for Severance, Closures and Integration Costs
During the six months ended June 30, 2000, the Company recorded $6,468 of
integration costs relating to a management reorganization. These costs have been
charged to operations as incurred. These integration costs consist of
approximately $5,000 for consultants related to sourcing and integration
initiatives, approximately $1,400 related to recruiting for senior executives
hired during the first six months of 2000 and approximately $100 of other costs.
Through June 30, 2000, approximately $4,600 of related cash payments have been
made. The remaining costs are expected to be paid during 2000.
During the second quarter of 2000, the Company announced the details of plans
aimed largely at centralizing many support functions. As part of these plans,
the Company has consolidated many back office functions including but not
limited to certain accounting and purchasing functions. As a result, the Company
will close and consolidate thirteen office locations and has terminated
approximately 150 individuals.
During the second quarter of 2000, in conjunction with these plans, the Company
recorded a pre-tax charge of $10,250. The charge recorded on the accompanying
condensed consolidated statements of operations, is comprised of the following;
$6,728 of severance and other employee costs, $1,705 of lease obligations,
$1,584 of contract termination costs related to pre-press and licensing
agreements and $233 of other exit costs. As of June 30, 2000, approximately
$1,000 has been paid primarily related to severance. The majority of the
remaining costs are expected to be paid by the end of 2001 with the balance to
be paid through the end of 2003.
The Company is currently developing additional plans aimed largely at the
consolidation of certain functions, and accordingly anticipates an additional
provision for severance and closures of approximately $3,000 - $5,000 during the
third quarter of 2000.
Management anticipates that these plans will result in significant savings in
2001.
Divestitures
On March 30, 2000, the Company announced its intention to divest QWIZ, Inc.,
Pictorial, Inc. and 18 business directories ("the Directories"). At that time,
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", these businesses ceased to depreciate their property and
equipment and ceased to amortize their intangible assets and excess of purchase
price over net assets acquired.
On June 30, 2000, the Company completed the sale of Pictorial, Inc. to BISYS for
total consideration of approximately $129,000 in cash, which includes proceeds
on the sale of business as well as payments received related to a non-compete
agreement. As of June 30, 2000, $115,000 had been received with the remaining
consideration received in July 2000. In connection with the sale, the Company
recorded a gain of approximately $18,400, net of estimated selling costs. The
Company has used the proceeds of this sale for repayment of borrowings under its
credit facilities.
On July 27, 2000, the Company announced an agreement to sell the Directories to
an acquisition group formed by Bariston Partners, LLC. The Company expects to
complete the divestiture by the end of 2000. Total proceeds from the sales of
the Directories and QWIZ, Inc. are expected to exceed their carrying values and
will primarily be used to pay down borrowings under the Company's credit
facilities. The net assets of the Directories and QWIZ, Inc. are recorded at
their carrying value as net assets held for sale on the accompanying condensed
consolidated balance sheet as of June 30, 2000.
Impact of Inflation
The impact of inflation was immaterial during 1999 and through the first six
months of 2000. Paper prices modestly declined through the first six months of
2000. In the first six months of 2000, 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 and is expected to increase in 2001. 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
During the first six-months of 2000, there were no significant changes related
to the Company's market risk exposure.
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders was held on May 11, 2000.
(b) At the meeting, incumbent directors, Thomas S. Rogers, Henry R. Kravis,
George R. Roberts, Michael T. Tokarz, Perry Golkin, Charles G. McCurdy, Beverly
C. Chell, Meyer Feldberg and H. John Greeniaus were re-elected.
(c) Set forth below is a description of the items that were voted upon at such
meeting and the number of votes cast for, against or withheld, plus abstentions
and broker non-votes, as to each such matter and director.
(i) Election of Directors:
An election of nine directors was held and the shares so present were voted for
as follows for the election of each of the following:
Number of Number of
Shares Voted for Shares Withheld
Thomas S. Rogers 140,160,779 439,498
Beverly C. Chell 140,160,976 439,301
Meyer Feldberg 140,162,875 437,402
Perry Golkin 138,730,050 1,870,227
H. John Greeniaus 140,163,488 436,789
Henry R. Kravis 138,825,692 1,774,585
Charles G. McCurdy 140,156,387 443,890
George R. Roberts 140,158,287 441,990
Michael T. Tokarz 138,830,352 1,769,925
(ii) The approval of the Company's Short-Term Senior Executive Non-Discretionary
Plan was ratified with 136,015,391 votes for, 167,608 votes against and 24,941
votes abstaining.
(iii) The approval of an additional 10 million shares under the Company's 1992
Stock Purchase and Option Plan (as amended) was ratified with 132,320,122 votes
for, 5,110,570 votes against and 15,604 votes abstaining.
(iv) The approval of Deloitte & Touche LLP as independent public accountants for
the Company for the fiscal year ending December 31, 2000 was ratified with
140,589,846 votes for, 5,303 votes against and 5,128 votes abstaining.
<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: August 14, 2000 /s/ Thomas S. Rogers
------------------------ --------------------------------------
(Signature)
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 2000 /s/ Lawrence R. Rutkowski
------------------------ --------------------------------------
(Signature)
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
