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, 2001
Commission file number: 1-11106
PRIMEDIA INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3647573
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
745 Fifth Avenue, New York, New York
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(Address of principal executive offices)
10151
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(Zip Code)
Registrant's telephone number, including area code (212) 745-0100
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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, 2001: 217,564,802
The aggregate market value of the common equity of PRIMEDIA Inc. which is held
by non-affiliates of PRIMEDIA Inc. at July 31, 2001 was approximately $471.6
million.
PRIMEDIA Inc.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets
(Unaudited) as of June 30, 2001 and
December 31, 2000 2
Condensed Statements of Consolidated
Operations (Unaudited) for the six months
ended June 30, 2001 and 2000 3
Condensed Statements of Consolidated
Operations (Unaudited) for the three months
ended June 30, 2001 and 2000 4
Condensed Statements of Consolidated
Cash Flows (Unaudited) for the six months
ended June 30, 2001 and 2000 5
Notes to Condensed Consolidated
Financial Statements (Unaudited) 6-27
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 28-37
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 38
ITEM 4. Submission of Matters to a Vote of Security Holders 39
PART II. OTHER INFORMATION:
ITEM 6. Reports on Form 8-K 40
Signatures 41
2
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31,
2001 2000
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(dollars in thousands, except
per share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 13,300 $ 23,690
Accounts receivable, net 258,073 265,946
Inventories, net 34,351 28,681
Net assets held for sale 20,677 5,000
Prepaid expenses and other 77,309 43,630
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Total current assets 403,710 366,947
Property and equipment, net 188,349 175,560
Other intangible assets, net 528,487 506,156
Excess of purchase price over net assets acquired, net 1,561,146 1,141,436
Deferred income tax asset, net 135,000 135,000
Other investments 163,288 265,468
Other non-current assets 80,343 86,912
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$ 3,060,323 $ 2,677,479
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LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 74,787 $ 120,786
Accrued interest payable 27,165 18,822
Accrued expenses and other 220,834 222,773
Deferred revenues 215,796 235,548
Current maturities of long-term debt 8,074 115,465
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Total current liabilities 546,656 713,394
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Long-term debt 1,720,207 1,503,188
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Deferred revenues 62,486 112,296
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Other non-current liabilities 19,117 23,303
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Exchangeable preferred stock 562,141 561,324
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Shareholders' equity (deficiency):
Common stock ($.01 par value, 223,962,330 shares and 167,798,702 shares
issued at June 30, 2001 and December
31, 2000, respectively) 2,240 1,678
Additional paid-in capital 2,130,012 1,366,950
Accumulated deficit (1,855,115) (1,603,096)
Accumulated other comprehensive loss (3,967) (1,558)
Unearned compensation (48,589) --
Common stock in treasury, at cost (7,467,693 shares and 0 shares
at June 30, 2001 and December 31, 2000, respectively) (74,865) --
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Total shareholders' equity (deficiency) 149,716 (236,026)
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$ 3,060,323 $ 2,677,479
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See notes to condensed consolidated financial statements (unaudited).
3
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
Six Months Ended
June 30,
2001 2000
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(dollars in thousands, except
per share amounts)
Sales, net $ 872,284 $ 829,977
Operating costs and expenses:
Cost of goods sold 214,477 200,281
Marketing and selling 218,415 189,854
Distribution, circulation and fulfillment 138,949 123,073
Editorial 77,712 67,646
Other general expenses 124,768 104,510
Corporate administrative expenses (excluding $11,041 and $17,144
of non-cash compensation in 2001 and 2000, respectively) 16,090 16,315
Depreciation of property and equipment 30,845 26,906
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 117,738 66,422
Non-cash compensation and non-recurring charges 12,727 24,544
Provision for severance, closures and integration costs 12,502 16,718
Gain on sales of businesses and other, net (503) (28,482)
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Operating income (loss) (91,436) 22,190
Other expense:
Provision for the impairment of investments (30,807) --
Interest expense (66,854) (75,319)
Amortization of deferred financing costs (9,063) (1,939)
Other, net (27,328) 8,569
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Net loss (225,488) (46,499)
Preferred stock dividends and related accretion (27,347) (26,531)
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Loss applicable to common shareholders $ (252,835) $ (73,030)
============= =============
Basic and diluted loss applicable to common shareholders per
common share $ (1.28) $ (0.47)
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Basic and diluted common shares outstanding 198,271,477 155,145,878
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See notes to condensed consolidated financial statements (unaudited).
4
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
Three Months Ended
June 30,
2001 2000
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(dollars in thousands, except
per share amounts)
Sales, net $ 445,278 $ 425,527
Operating costs and expenses:
Cost of goods sold 112,892 104,430
Marketing and selling 105,790 98,020
Distribution, circulation and fulfillment 67,949 58,551
Editorial 39,020 33,043
Other general expenses 66,442 51,125
Corporate administrative expenses (excluding $8,482 and $2,352
of non-cash compensation in 2001 and 2000, respectively) 7,875 8,203
Depreciation of property and equipment 16,029 15,618
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 75,564 32,038
Non-cash compensation and non-recurring charges 10,168 9,752
Provision for severance, closures and integration costs 6,015 10,399
(Gain) loss on sales of businesses and other, net 24 (17,490)
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Operating income (loss) (62,490) 21,838
Other expense:
Provision for the impairment of investments (27,559) --
Interest expense (33,694) (36,963)
Amortization of deferred financing costs (8,050) (1,000)
Other, net (7,887) 9,057
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Net loss (139,680) (7,068)
Preferred stock dividends and related accretion (13,673) (13,265)
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Loss applicable to common shareholders $ (153,353) $ (20,333)
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Basic and diluted loss applicable to common shareholders per
common share $ (0.72) $ (0.13)
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Basic and diluted common shares outstanding 213,515,036 161,034,718
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See notes to condensed consolidated financial statements (unaudited).
5
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Six Months Ended
June 30,
2001 2000
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(dollars in thousands)
OPERATING ACTIVITIES:
Net loss $ (225,488) $ (46,499)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 150,399 95,267
Accretion of discount on acquisition obligation
and other 572 1,952
Write-off of deferred financing costs 7,247 --
Non-cash revenue related to assets-for-equity transactions (46,200) (3,452)
Provision for the impairment of investments 30,807 --
Non-cash compensation and non-recurring charges 11,041 24,544
Gain on sales of businesses and other, net (503) (28,482)
Other, net 28,656 412
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable, net 13,018 (15,772)
Inventories, net (5,469) (1,721)
Prepaid expenses and other (40,071) (14,922)
Increase (decrease) in:
Accounts payable (49,788) (17,580)
Accrued interest payable 8,343 (1,463)
Accrued expenses and other (38,309) (7,083)
Deferred revenues 16,255 (7,018)
Other non-current liabilities (267) (460)
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Net cash used in operating activities (139,757) (22,277)
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INVESTING ACTIVITIES:
Additions to property, equipment and other, net (26,114) (35,442)
Proceeds from sales of businesses and other, net 6,731 129,261
(Payments) for businesses acquired, net of cash acquired 86,986 (7,314)
Payments for other investments (10,397) (51,069)
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Net cash provided by investing activities 57,206 35,436
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FINANCING ACTIVITIES:
Borrowings under credit agreements 991,800 313,750
Repayments of borrowings under credit agreements (1,363,800) (475,228)
Proceeds from issuance of 8 7/8% Senior Notes, net 492,685 --
Payments of acquisition obligation (8,833) (9,834)
Proceeds from issuances of common stock, net of redemptions 5,063 206,232
Taxes paid associated with stock option exercises -- (16,891)
Dividends paid to preferred stock shareholders (26,531) (26,531)
Deferred financing costs paid (15,650) (175)
Other (2,573) (1,915)
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Net cash provided by (used in) financing activities 72,161 (10,592)
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Increase (decrease) in cash and cash equivalents (10,390) 2,567
Cash and cash equivalents, beginning of period 23,690 28,661
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Cash and cash equivalents, end of period $ 13,300 $ 31,228
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Supplemental information:
Cash interest paid $ 59,816 $ 75,829
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Businesses acquired:
Fair value of assets acquired $ 766,683 $ 4,914
Less: Liabilities assumed 42,272 (2,400)
Less: Stock and stock option consideration for About.com, Inc. acquisition 700,549 --
Less: Cash acquired in connection with the About.com, Inc. acquisition 110,848 --
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(Payments) for businesses acquired, net of cash acquired $ 86,986 $ (7,314)
=========== =========
Non-cash activities:
Stock option exercise transactions $ -- $ 17,498
=========== =========
Exchange of the Company's common shares and stock options for all
outstanding shares and stock options of About.com, Inc. $ 700,549 $ --
=========== =========
Exchange of the Company's common shares for common shares
CMGI, Inc. $ -- $ 164,000
=========== =========
Conversion of the Company's investment in About.com, Inc. common
shares held prior to the merger date into the Company's treasury
stock $ 74,865 $ --
=========== =========
Compensatory common shares and stock options issued in connection
with About.com, Inc. acquisition $ 58,827 $ --
=========== =========
Advertising-for-equity transactions $ 27,950 $ 25,483
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See notes to condensed consolidated financial statements (unaudited).
6
PRIMEDIA INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 consolidated financial statements
and related notes for the year ended December 31, 2000, which is included in the
Company's annual report on Form 10-K for the year ended December 31, 2000. The
operating results for the six and three-month periods ended June 30 are not
necessarily indicative of the results that may be expected for a full year.
Certain amounts in the prior periods' consolidated financial statements have
been reclassified to conform to the presentation as of and for the six and
three-month periods ended June 30, 2001.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2001, the Emerging Issue Task Force ("EITF") issued EITF Consensus No.
00-25, "Accounting for Consideration from a Vendor to a Retailer in Connection
with the Purchase or Promotion of a Vendor's Products," which addresses whether
consideration from a vendor to a reseller of the vendor's products is an
adjustment to the selling price or the cost of the product. The EITF consensus
must be adopted no later than January 1, 2002. The Company is currently
determining the impact of this new consensus.
On June 29, 2001, the Financial Accounting Standards Board ("FASB") unanimously
voted in favor of two new statements, Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill
and Other Intangible Assets." SFAS No. 141 requires that all business
combinations be accounted for under the purchase method of accounting,
eliminates the use of the pooling-of-interests method and requires that the
purchase method be used for business combinations initiated after June 30, 2001.
SFAS No. 142 requires that goodwill and certain intangible assets no longer be
amortized to earnings and that goodwill and intangible assets be reviewed for
impairment. Under SFAS No. 142, goodwill acquired in a business combination
completed after June 30, 2001 (that is, the date of acquisition is July 1, 2001
or later) will not be amortized. The amortization of goodwill for previous
acquisitions will cease upon adoption of the SFAS No. 142, which will be January
1, 2002. We are currently determining the impact of SFAS No. 142 on our existing
goodwill and intangible assets. Under SFAS No. 142, any goodwill arising from
the proposed acquisition of EMAP USA will not be amortized (see Note 15).
BARTER TRANSACTIONS
The Company trades advertisements in its traditional and online properties in
exchange for trade show space and booths and advertising in properties of other
companies. Revenue and related expenses from barter transactions are recorded at
fair value in accordance with Emerging Issues Task Force No. 99-17, "Accounting
for Advertising Barter Transactions." Revenue from barter transactions is
recognized in accordance with the Company's revenue recognition policies.
Expense from barter transactions is generally recognized as incurred. For the
six months ended June 30, 2001 and 2000, revenue and expense from barter
transactions were approximately $26,000 and $500, respectively.
2. ACQUISITIONS AND DIVESTITURES
On February 28, 2001, the Company completed its merger with About.com, Inc.
("About"). About is a platform comprised of a network of more than 700 highly
targeted topic-specific websites. Through the efforts of knowledgeable human
guides who manage the sites, the sites provide high-quality original articles,
moderated forums and chat rooms
7
and links to related websites. This merger creates an integrated traditional and
new media company, providing a vast array of marketing solutions to advertisers
and niche content to users.
Under terms of the merger agreement, shareholders of About received
approximately 45,000,000 shares of the Company or 2.3409 Company shares for each
About share. This transaction is being accounted for under the purchase method
of accounting. The preliminary purchase cost allocations for the About
acquisition is subject to adjustment and will be finalized once additional
information concerning asset and liability valuations is obtained. An
independent appraisal will be completed during 2001 and will be used to allocate
the purchase price to identifiable intangibles. The final asset and liability
fair values may differ from those set forth on the accompanying condensed
consolidated balance sheet at June 30, 2001; however, the changes are not
expected to have a material effect on the consolidated financial position,
results of operations or cash flows of the Company. The excess of purchase price
over net assets acquired related to the About merger is being amortized over an
estimated useful life of three years. The Company believes that a three-year
life is responsive to the rapid rate of change in the Internet industry and is
consistent with other recent mergers of a comparable nature. The Company has
determined that the value of its shares of common stock issued is $11.81 per
share, based on the weighted-average market values for the two days prior and
two days succeeding the acquisition announcement date. The fair value of the
vested and unvested options issued was determined using a Black Scholes pricing
model. The following is a summary of the calculation of the purchase price, as
well as the allocation of purchase price to the fair value of net assets
acquired:
Total number of shares of PRIMEDIA common stock
issued to consummate the merger 44,951,034
Fair value per share of PRIMEDIA common stock $ 11.81
------------
Value of shares of PRIMEDIA common stock issued $ 530,872
Fair value of replacement options issued 102,404
Less: Unearned compensation relating to unvested options (7,592)
Cost of About shares acquired prior to the merger converted to
treasury stock 74,865
Direct merger costs 11,934
------------
Total purchase price 712,483
Less: Fair value of net tangible assets of About 227,981
------------
Excess of purchase price over net assets acquired $ 484,502
------------
In addition, in connection with the acquisition, the Company issued shares of
restricted stock and below- market stock options to two key executives of About
which resulted in unearned compensation of $51,235 at the merger completion
date. These shares and options vest over four years and will result in non-cash
compensation expense as earned over the vesting period (see Note 7).
The Company's consolidated results of operations includes results of operations
of About from the merger date. The results of About are included in the
Company's consumer segment. The unaudited proforma information below presents
the consolidated results of operations as if the merger with About had occurred
as of January 1, 2000. The unaudited pro
8
forma information has been included for comparative purposes and is not
indicative of the results of operations of the consolidated Company had the
merger occurred as of January 1, 2000, nor is it necessarily indicative of
future results.
Six Months Ended June 30,
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2001 2000
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(dollars in thousands, except
per share amounts)
Sales, net $ 854,569 $ 872,987
Loss applicable to common shareholders $ (342,161) $ (191,240)
Basic and diluted loss applicable to common shareholders
per common share $ (1.60) $ (0.96)
Weighted average shares used in basic and diluted loss
applicable to common shareholders per common share 213,378,759 198,783,920
Three Months Ended June 30,
------------------------------------
2001 2000
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(dollars in thousands, except
per share amounts)
Sales, net $ 445,278 $ 449,247
Loss applicable to common shareholders $ (153,353) $ (80,651)
Basic and diluted loss applicable to common shareholders
per common share $ (0.72) $ (0.39)
Weighted average shares used in basic and diluted loss
applicable to common shareholders per common share 213,515,036 205,829,749
In addition, during the six months ended June 30, 2001, the Company completed
several other smaller acquisitions. These smaller acquisitions are not material
to the proforma disclosures above and are therefore not included therein.
In April 2001, the Company completed the sale of QWIZ, Inc. for $7,000 of cash.
As of June 30, 2001, the gain on the sale of QWIZ, Inc. approximates $300 and is
included in (gain) loss on sales of businesses and other, net on the
accompanying condensed statement of consolidated operations for the six and
three months ended June 30, 2001.
9
3. INVENTORIES, NET
Inventories consist of the following:
June 30, December 31,
2001 2000
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Finished goods $ 8,806 $10,556
Work in process 77 78
Raw materials 27,368 21,233
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36,251 31,867
Less: Allowance for obsolescence 1,900 3,186
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$34,351 $28,681
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4. OTHER INVESTMENTS
Other investments consist of the following:
June 30, December 31,
2001 2000
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Cost method investments $ 96,622 $161,433
Equity method investments 50,323 73,703
Available-for-sale securities 13,817 19,708
Advances and other 2,526 10,624
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$163,288 $265,468
======== ========
Available-for-sale securities consist of the following:
Unrealized Unrealized Market
Cost Gains Losses Value
------- ------ ------------ -------
At June 30, 2001 $11,922 $2,013 $ 118 $13,817
======= ====== ============ =======
At December 31, 2000 $19,015 $ 693 $ -- $19,708
======= ====== ============ =======
In the first quarter of 2000, the Company sold two investments in marketable
securities for total proceeds of $11,279 and realized a gain of $10,689, which
is included in gain on sales of businesses and other, net on the accompanying
condensed statement of consolidated operations for the six months ended June 30,
2000. The Company recorded an unrealized (gain) loss of $(1,202) and $172,629
for the six months ended June 30, 2001 and 2000, respectively, related to
investments in marketable securities. In addition, for the six months ended June
30, 2001, the Company recorded a realized loss of $3,969 related to its
investment in CMGI, Inc. as the decline in the market value of the investment
was deemed to be other than temporary. The unrealized gains and losses are
recorded as a component of other comprehensive income (loss) ("OCI") within
shareholders' equity (deficiency) (see Note 9).
10
ASSETS-FOR-EQUITY TRANSACTIONS
During 2000, the Company began making strategic investments in companies
("Investees") which included various assets-for-equity transactions. Under these
transactions, the Company provides promotional services, such as print
advertising, content licensing, customer lists, online advertising and other
services in exchange for equity in these entities. Additionally, the Company
made cash investments in certain of these Investees. The Company's investments
in Investees, included in other investments on the accompanying condensed
consolidated balance sheets, totaled approximately $129,000 (approximately
$79,000 representing cost method investments, approximately $47,000 representing
equity method investments and approximately $3,000 representing
available-for-sale securities) and $213,000 (approximately $140,000 representing
cost method investments and approximately $73,000 representing equity method
investments) at June 30, 2001 and December 31, 2000, respectively. At December
31, 2000, $67,000 of these cost method investments represented assets-for-equity
transactions with About which were eliminated in consolidation upon the
completion of the merger. Including advances to the Investees, approximately
$36,000 and $39,000 of the investment as of June 30, 2001 and December 31, 2000,
respectively, was in cash. The remainder represents advertising, content
licensing and other services to be rendered by the Company in exchange for the
equity in these entities. The Company recognizes these amounts as revenue in
accordance with the Company's revenue recognition policies. During the six
months ended June 30, 2001 and 2000, the Company recorded revenue from these
agreements approximating $46,000 and $3,500, respectively. The 2001 revenue
amount includes revenue from the Company's transactions with About for the first
two months of 2001 (approximately 45% of total) as well as revenue from the
Company's equity method Investees. At June 30, 2001 and December 31, 2000,
respectively, approximately $75,000 and $146,000 relating to these agreements is
included as deferred revenues on the accompanying condensed consolidated balance
sheets.
These transactions are recorded at the fair value of the equity securities
received. As an observable market price does not exist for equity securities of
private companies, estimates of fair value of such securities are more
subjective than for securities of public companies. For significant transactions
involving equity securities in private companies, the Company obtains and
considers independent third-party valuations where appropriate. Such valuations
use a variety of methodologies to estimate fair value, including comparing the
security with the securities of publicly traded companies in similar lines of
business, comparing the nature of security, price, and related terms of
investors in the same round of financing, applying price multiples to estimated
future operating results for the private company, and then also estimating
discounted cash flows for that company. Using these valuations and other
information available to the Company, such as the Company's knowledge of the
industry and knowledge of specific information about the Investee, the Company
determines the estimated fair value of the securities received. As required by
EITF No. 00-8, "Accounting by a Grantee for an Equity Instrument to Be Received
in Conjunction with Providing Goods and Services," the fair value of the equity
securities received is determined as of the earlier of the date a performance
commitment is reached or the vesting date.
The Company continually evaluates all of its investments for potential
impairment 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". If an investment is deemed to be
permanently impaired, its carrying value will be reduced to fair market value.
During the six months ended June 30, 2001, the Company recorded a provision for
impairment of its investments in certain Investees of $18,704 as the decline in
value of the investments was deemed to be other than temporary.
During the six months ended June 30, 2001 and 2000, respectively, the Company
recorded approximately $28,000 and $0 of equity method losses from Investees,
which is included in other, net on the accompanying condensed statements of
consolidated operations and consolidated cash flows, and during the six months
ended June 30, 2001 and 2000, respectively, the Company recognized approximately
$6,100 and $0 of revenue related to the equity method Investees.
11
INVESTMENTS IN ABOUT
In 2000, the Company entered into additional business arrangements with About
whereby the Company has provided or will provide approximately $89,000 of
advertising and promotional services, over a five-year period, in exchange for
an aggregate of 2,873,595 shares of common stock of About. In addition, prior to
the merger, the Company had purchased 316,500 shares of About on the open market
for approximately $7,800. The Company and About have also entered into certain
agreements pursuant to which the Company has agreed to purchase advertising and
promotional sales on the About network. These agreements provide for payments to
About in the aggregate of $15,900. At the merger completion date, these
agreements became intercompany agreements, resulting in the elimination of the
About investment and deferred revenue balances with all future activity to be
eliminated in consolidation. At December 31, 2000, the Company's total
investment in About, including assets-for-equity transactions and open market
purchases, approximated $74,000.
5. LONG-TERM DEBT
Long-term debt consists of the following:
June 30, December 31,
2001 2000
---------- ----------
Borrowings under credit facilities $ 558,000 $ 930,000
10 1/4% Senior Notes due 2004 100,000 100,000
8 1/2% Senior Notes due 2006 299,288 299,226
7 5/8% Senior Notes due 2008 248,944 248,879
8 7/8% Senior Notes due 2011 492,685 --
---------- ----------
1,698,917 1,578,105
Obligation under capital leases 29,364 31,478
Acquisition obligation payable -- 9,070
---------- ----------
1,728,281 1,618,653
Less: Current maturities of long-term debt 8,074 115,465
---------- ----------
$1,720,207 $1,503,188
========== ==========
8 7/8% SENIOR NOTES DUE 2011
On May 8, 2001, the Company completed a private offering of $500,000 of 8 7/8%
Senior Notes. Proceeds from this offering were used to repay borrowings under
the revolving credit facilities. The 8 7/8% Senior Notes mature on May 15, 2011,
with no sinking fund requirements, and have interest payable semi-annually in
May and November at an annual rate of 8 7/8%. The 8 7/8% Senior Notes are fully,
unconditionally and jointly and severally guaranteed by each of our domestic
restricted subsidiaries. The notes are secured by a pledge of stock of PRIMEDIA
Companies Inc., an intermediate holding company, owned directly by the Company,
which owns all shares of PRIMEDIA subsidiaries. Beginning in 2006, the 8 7/8%
Senior Notes are redeemable at 104.438% with annual reductions to 100% in 2009
plus accrued and unpaid interest.
If the Company becomes subject to a change of control, each holder of the notes
will have the right to require the Company to purchase any or all of the notes
at a purchase price equal to 101% of the aggregate principal amount of the notes
plus accrued and unpaid interest, if any, to the date of purchase.
12
NEW CREDIT AGREEMENT
On June 20, 2001, the Company completed a refinancing of its existing bank
credit facilities pursuant to new bank credit facilities with The Chase
Manhattan Bank, Bank of America, N.A., The Bank of New York, and The Bank of
Nova Scotia, as agents. The debt under the new credit agreement (as well as
certain of our other equally and ratably secured indebtedness) is secured by a
pledge of the stock of PRIMEDIA Companies Inc. Borrowings under the bank credit
facilities are guaranteed by each of our wholly owned domestic restricted
subsidiaries. The guarantees are full, unconditional and joint and several.
Certain of our subsidiaries, which primarily represent Internet assets and
businesses, including About.com, as well as our foreign subsidiaries, are not
guarantors of the bank credit facilities.
The borrowings under the bank credit facilities may be used for general
corporate and working capital purposes as well as to finance certain future
acquisitions. The bank credit facilities consist of the following:
o a $475,000 revolving loan facility, of which $33,000 was outstanding at
June 30, 2001;
o a term loan A, of which $100,000 was outstanding at June 30, 2001; and
o a term loan B, of which $425,000 was outstanding at June 30, 2001.
As of June 30, 2001, the Company had $558,000 borrowings outstanding, $22,000
letters of credit outstanding and unused bank commitments of approximately
$420,000 under the bank credit facilities.
With the exception of the term loan B, the amounts borrowed bear interest, at
the Company's option, at either the higher of the base rate plus an applicable
margin ranging from 0.125% to 1.5% or the Eurodollar Rate plus an applicable
margin ranging from 1.125% to 2.5%. Additionally, until the Company issues
financial statements for the period ending December 31, 2001, the applicable
margin for the amounts borrowed will be a minimum of 0.75% for the base rate
option and 1.75% for the Eurodollar rate option. The term loan B bears interest
at the base rate plus 1.75% or LIBOR plus 2.75%. At June 30, 2001, the weighted
average variable interest rate on all outstanding borrowings under the bank
credit facilities was 6.46%.
Under the bank credit facilities, the Company has agreed to pay commitment fees
at a per annum rate of either 0.375% or 0.5%, depending on its debt to EBITDA
ratio, as defined in the new credit agreement, on the daily average aggregate
unutilized commitment under the revolving loan commitment. The Company also has
agreed to pay certain fees with respect to the issuance of letters of credit and
an annual administration fee.
The commitments under the revolving loan commitment are subject to mandatory
reductions semi-annually on June 30 and December 31, commencing December 31,
2004 with the final reduction on June 30, 2008. The aggregate mandatory
reductions of the revolving loan commitments under the bank credit facilities
are $23,750 in 2004, $47,500 in 2005, $71,250 in 2006, $142,500 in 2007 and a
final reduction of $190,000 in 2008. To the extent that the total revolving
credit loans outstanding exceed the reduced commitment amount, these loans must
be paid down to an amount equal to or less than the reduced commitment amount.
However, if the total revolving credit loans outstanding do not exceed the
reduced commitment amount, then there is no requirement to pay down any of the
revolving credit loans. Aggregate term loan payments under the bank credit
facilities are $2,125 in 2001, $4,250 in 2002 and 2003, $16,750 in 2004, $29,250
in 2005, 2006 and 2007, $16,750 in 2008 and $393,125 in 2009.
The bank credit facilities, among other things, limit the Company's ability to
change the nature of its businesses, incur indebtedness, create liens, sell
assets, engage in mergers, consolidations or transactions with affiliates, make
investments in or loans to certain subsidiaries, issue guarantees and make
certain restricted payments including dividend payments on our common stock in
excess of $75,000 in any given year. Under the most restrictive debt covenants,
the Company must maintain a minimum interest coverage ratio of 1.80 to 1 and a
minimum fixed charge coverage ratio of 1.05 to 1. The Company's maximum
allowable debt leverage ratio is 6.0 to 1. The maximum leverage ratio decreases
to 5.75 to 1, 5.5
13
to 1, 5.0 to 1 and 4.5 to 1, respectively, on July 1, 2003, January 1, 2004,
January 1, 2005 and January 1, 2006. The minimum interest coverage ratio
increases to 2.0 to 1, 2.25 to 1 and 2.5 to 1, respectively, on July 1, 2003,
January 1, 2004 and January 1, 2005.
As a result of the refinancing of the Company's existing bank credit facilities,
the Company wrote-off the remaining balances of deferred financing costs
originally recorded. This amount is included in amortization of deferred
financing costs on the accompanying condensed statement of consolidated
operations for the six and three months ended June 30, 2001.
6. EXCHANGEABLE PREFERRED STOCK
Exchangeable Preferred Stock consists of the following:
June 30, December 31,
2001 2000
-------- --------
$10.00 Series D Exchangeable Preferred Stock $196,407 $196,133
$9.20 Series F Exchangeable Preferred Stock 121,571 121,361
$8.625 Series H Exchangeable Preferred Stock 244,163 243,830
-------- --------
$562,141 $561,324
======== ========
$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, 2001 and December 31, 2000. The liquidation and redemption value at June 30,
2001 and December 31, 2000 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, 2001 and December 31, 2000. The liquidation and redemption value at June 30,
2001 and December 31, 2000 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, 2001 and December 31, 2000. The liquidation and redemption value at June 30,
2001 and December 31, 2000 was $250,000.
7. NON-CASH COMPENSATION AND NON-RECURRING CHARGES
During the six months ended June 30, 2001, the Company recorded $12,727 of
non-cash compensation and non-recurring charges relating primarily to the
retention of certain key executives. These non-cash compensation charges consist
of a $8,894 charge related to certain restricted stock and option grants to key
executives of About, a $1,344 charge related to the intrinsic value of unvested
"in-the-money" options issued in connection with the About merger, an $803
charge related to the vesting of stock in connection with an acquisition and a
$1,686 charge related to certain non-recurring compensation arrangements with
certain senior executives.
During the six months ended June 30, 2000, the Company recorded $17,144 of
non-cash compensation charges relating
14
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.
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 2000 and 2001, the Company implemented plans to integrate the Company and
consolidate many back office functions. The Company expects that these plans
will continue to result in future savings. All integration charges were expensed
as incurred. $4,304 of integration costs primarily related to the About merger
and Company-wide integration efforts have been reclassified to other general
expenses in the accompanying condensed statements of consolidated operations
for the six and three months ended June 30, 2001. A summary of the status of
these plans as of June 30, 2001 is presented below.
2001 PLAN
With the acquisition of About coupled with other cost initiatives, during the
first quarter of 2001, the Company announced the details of plans that would
continue to implement and expand upon the initiatives enacted during 2000. In
the first quarter of 2001, the Company recorded a restructuring charge of $3,034
and integration costs of $3,453. The Company continued to implement these
initiatives in the second quarter of 2001, recording severance and closure
charges of $4,535 and integration costs of $5,784. Details of the initiatives
implemented in the six months ended June 30, 2001 are presented in the following
table:
For the Six Months Ended and as of June 30, 2001
------------------------------------------------
Provision Payments Ending Liability
--------- -------- ----------------
Severance and closures:
Employee-related
termination costs $ 4,661 $ 1,331 $ 3,330
Termination of leases
related to office
closures 1,391 130 1,261
Termination of
contracts 1,517 1,096 421
--------- -------- -------
7,569 2,557 5,012
--------- -------- -------
Integration:
Consulting services 4,817 4,570 247
Relocation, recruiting
and other employee costs 3,858 3,783 75
Other 562 562 --
--------- -------- -------
9,237 8,915 322
--------- -------- -------
Total severance, closures and
integration costs $ 16,806 $ 11,472 $ 5,334
========= ======== =======
A significant portion of the remaining costs are expected to be paid during the
remainder of 2001 with the balance to be paid through 2003. The Company is
currently developing additional initiatives aimed largely at the consolidation
of
15
certain functions and the further integration of the Company, including
initiatives attributable to the expected consummation of the EMAP acquisition
(see Note 15), and accordingly expects to record additional severance, closures
and integration charges during 2001.
2000 PLAN
During 2000, the Company announced the implementation of a plan to integrate the
Company and consolidate many back office functions. Details of the 2001 payments
related to the initiatives implemented during 2000 are presented in the
following table:
Payments during the
Six Months
Liability as of Ended Liability as of
December 31, 2000 June 30, 2001 June 30, 2001
----------------- ------------- -------------
Severance and closures:
Employee-related
termination contract costs $ 7,063 $ 4,637 $ 2,426
Termination of
contracts 1,519 44 1,475
Termination of leases
related to office closures 1,531 147 1,384
Other 96 9 87
----------------- ------------- -------------
10,209 4,837 5,372
----------------- ------------- -------------
Integration:
Consulting services 498 498 --
Relocation, recruiting
and other employee costs 462 455 7
----------------- ------------- -------------
960 953 7
----------------- ------------- -------------
Total severance, closures and
integration costs $11,169 $ 5,790 $ 5,379
================= ============= =============
The majority of the remaining costs incurred in connection with the 2000 plan
are expected to be paid by the end of 2001 with the balance to be paid through
the end of 2003.
During the six months ended June 30, 2000, the Company recorded approximately
$6,500 of integration costs relating to a management reorganization. These
integration costs consisted 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 related to other costs.
During the second quarter of 2000, in conjunction with these plans, the Company
recorded a pre-tax severance and closure charge of approximately $10,200. The
charge recorded on the accompanying condensed consolidated statements of
operations, is comprised of the following: approximately $6,700 of severance and
other employee costs, approximately $1,700 of lease obligations, approximately
$1,600 of contract termination costs related to pre-press and licensing
agreements and approximately $200 of other exit costs.
As a result of the 2000 and 2001 plans already put in place, the Company will
close and consolidate in excess of fifteen office locations and will terminate
approximately 630 individuals. All individuals who will be terminated under
these plans have been notified. As of June 30, 2001, approximately 550 of those
individuals have been terminated.
16
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 recorded a $22,000
charge including $9,000 related to transponder and office site leases and $8,810
related to the recoverability of the related excess of purchase price over net
assets acquired and certain other assets. During the fourth quarter of 2000, the
Company reversed $3,302 of the original $22,000 charge as the liabilities
ultimately settled at amounts less than originally recorded. Through June 30,
2001, $9,711 of the cash payments have been made. The remaining $177 is expected
to be paid during the remainder of 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.
9. COMPREHENSIVE LOSS
Comprehensive loss for the six and three months ended June 30, 2001 and 2000 is
presented in the following tables:
Six Months Ended
June 30, June 30,
2001 2000
--------- ---------
Net loss $(225,488) $ (46,499)
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale securities 1,202 (172,629)
SFAS No.133 derivative adjustments (3,186) --
Foreign currency translation adjustments (425) (208)
--------- ---------
Total comprehensive loss $(227,897) $(219,336)
========= =========
Three Months Ended
June 30, June 30,
2001 2000
--------- ---------
Net loss $(139,680) $ (7,068)
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale securities 1,704 (107,923)
SFAS No.133 derivative adjustments (620) --
Foreign currency translation adjustments 105 (153)
--------- ---------
Total comprehensive loss $(138,491) $(115,144)
========= =========
10. LOSS PER COMMON SHARE
Loss per share for the six and three-month periods ended June 30, 2001 and 2000
has been determined based on net loss after preferred stock dividends and
related accretion, 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. DERIVATIVE FINANCIAL INSTRUMENTS
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No.133, as amended and
interpreted, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities.
17
SFAS No.133 requires that all derivatives, whether designated in hedging
relationships or not, be recorded on the balance sheet at fair value regardless
of the purpose or intent for holding them. If a derivative is designated as a
fair-value hedge, changes in the fair value of the derivative and the hedged
item are recognized in earnings. If a derivative is designated as a cash-flow
hedge, changes in the fair value of the derivative are recorded in OCI and are
recognized in the condensed statements of consolidated operations when the
hedged item affects earnings. SFAS No.133 defines new requirements for
designation and documentation of hedging relationships as well as ongoing
effectiveness assessments in order to use hedge accounting. For a derivative
that does not qualify as a hedge, changes in fair value are recognized in
earnings.
Effective January 1, 2001, the Company recorded approximately $27 as a
cumulative transition adjustment to earnings, which is included in other, net on
the condensed statement of consolidated operations, relating to derivatives not
designated as hedges prior to the adoption of SFAS No.133, and approximately
$1,247 in OCI as a cumulative transition adjustment for derivatives designated
as cash flow-type hedges prior to adopting SFAS No.133.
INTEREST RATE SWAP CONTRACTS
The Company uses derivative financial instruments, principally interest rate
swap contracts, to manage the risks associated with interest rate fluctuations
on its floating rate borrowings. Interest rate swap contracts are used to adjust
the proportion of total debt that is subject to variable interest rates. Under
the terms of its interest rate swap contracts, the Company agrees to pay an
amount equal to a specified fixed-rate of interest times a notional principal
amount, and to receive in return an amount equal to a specified variable-rate of
interest times the same notional principal amount. The notional amounts of the
contract are not exchanged. No other cash payments are made unless the contract
is terminated prior to maturity, in which case the amount paid or received in
settlement is established by agreement at the time of termination, and usually
represents the net present value, at current rates of interest, of the remaining
obligations to exchange payments under the terms of the contract. Any gains or
losses upon early termination of the contracts are deferred and amortized over
the shorter of the remaining life of the hedged existing debt obligation or the
original life of the interest rate swap contract. Interest rate swap contracts
are entered into with major financial institutions in order to minimize credit
risk. Prior to entering into any interest rate swap contracts, the Company
considers, among other things, swap terms including the reference rate, payment
and maturity dates and the notional amount in determining if the interest rate
swap contract will be effective at modifying an existing debt obligation.
The Company's interest rate swap contracts are considered to be a hedge against
changes in the amount of future cash flows associated with the Company's
interest payments. Accordingly, the interest rate swap contracts are reflected
at fair value on the Company's condensed consolidated balance sheet and the
related gains and losses on these contracts are deferred in shareholders' equity
(deficiency) as a component of OCI. These gains and losses are then amortized as
an adjustment to interest expense over the same period in which the related
interest payments being hedged are recognized in operations. However, to the
extent that any of these contracts are not considered to be perfectly effective
in offsetting the change in the value of the interest payments being hedged, any
changes in fair value relating to the ineffective portion of these contracts are
immediately recognized in income. The net effect of this accounting on the
Company's operating results is that interest expense on the portion of
variable-rate debt being hedged is generally recorded based on fixed interest
rates.
At June 30, 2001, the Company had interest rate swap contracts to pay
fixed-rates of interest (average rate of 6.30%) and receive variable-rates of
interest (average rate of 4.88%) on $200,000 of notional amounts of
indebtedness, which resulted in approximately 21% of the Company's total debt
being subject to variable interest rates. For the six months ended June 30,
2001, the Company's interest rate swap contracts were considered to be highly
effective. Accordingly, the increase in fair value of these contracts of $1,939
and $620 for the six and three months ended June 30, 2001, respectively, were
deferred and recognized as a component of OCI. As a result of the fact that the
Company's interest rate swap contracts are expected to be highly effective in
the future, the Company does not expect to reclassify any material amounts from
OCI to earnings during the next twelve-month period. The only transaction that
would result in such a reclassification would be the cancellation and subsequent
unwinding of the interest rate swap contracts.
18
NON-HEDGING DERIVATIVES
During 2000, in connection with certain of the Company's strategic investments
in Investees, the Company received options and/or warrants representing the
Company's right to acquire additional equity interests in certain Investees in
exchange for cash, additional advertising space or other services. In accordance
with SFAS No. 133, those options/warrants which permit "net settlement" qualify
as derivatives. Accordingly, those option/warrant agreements which qualify as
derivatives are reflected at fair value on the Company's condensed consolidated
balance sheet as of June 30, 2001 and the change in fair value of these
derivatives are recognized in earnings. For the six and three months ended June
30, 2001, the decrease in fair value of the non-hedging derivatives were $106
and $24, respectively, and are included on the condensed statement of
consolidated operations as other, net.
12. NET ASSETS HELD FOR SALE
During the six months ended June 30, 2001, the Company decided to divest certain
businesses as well as certain titles of The Business Magazines & Media Group,
Consumer Guides, and PRIMEDIA Enthusiast Group. In addition, the Company has
restructured or consolidated several new media properties, including
IndustryClick, whose value can be realized with far greater efficiency by having
select functions absorbed by the core operations. The net assets held for sale
are recorded at their carrying value on the accompanying condensed consolidated
balance sheets.
13. BUSINESS SEGMENT INFORMATION
The Company's operations have been classified into two business segments:
consumer and business-to-business. The Company's consumer segment produces and
distributes magazines, guides and videos for consumers in various niche markets.
The Company's business-to-business segment produces and distributes magazines,
books, directories, databases and vocational training materials to business
professionals in such fields as communications, agriculture, professional
services, media, transportation and healthcare. These segment results are
regularly reviewed by the Company's chief operating decision-maker to make
decisions about resources to be allocated to the segment and assess its
performance. The Company's non-core businesses ("Non-Core Businesses") include
QWIZ, Inc., Pictorial, Inc., certain business directories, certain titles of The
Business Magazines & Media Group, Consumer Guides, PRIMEDIA Enthusiast Group and
the Youth Entertainment Group, and certain other businesses to be divested or
discontinued. In addition, the Company has restructured or consolidated several
new media properties, including IndustryClick, whose value can be realized with
far greater efficiency by having select functions absorbed by the core
operations. The Company has segregated the Non-Core Businesses from the
aforementioned segments because the Company's chief operating decision-maker
views these businesses separately when evaluating and making decisions regarding
ongoing operations. Information as to the operations of the Company in different
business segments is set forth below based on the nature of the targeted
audience. Corporate represents items not allocated to other business segments.
PRIMEDIA evaluates performance based on several factors, of which the primary
financial measure is segment earnings before interest, taxes, depreciation,
amortization and other (income) charges ("EBITDA"). Other (income) charges
include non-cash compensation and non-recurring charges, provision for
severance, closures and integration costs and gain (loss) on sales of businesses
and other, net.
19
Certain amounts in the prior periods have been reclassified to conform to the
presentation for the six and three-month periods ended June 30, 2001.
Six Months Ended Three Months Ended
June 30, June 30,
2001 2000 2001 2000
--------- --------- --------- ---------
SALES, NET:
Consumer $ 634,990 $ 545,753 $ 330,117 $ 280,675
Business-to-Business 248,783 245,550 122,570 129,400
Eliminations (31,737) (15,955) (16,540) (12,309)
Other:
Non-Core Businesses 20,248 54,629 9,131 27,761
--------- --------- --------- ---------
Total $ 872,284 $ 829,977 $ 445,278 $ 425,527
========= ========= ========= =========
EBITDA(1):
Consumer $ 81,002 $ 97,437 $ 44,691 $ 52,043
Business-to-Business(2) 44,890 53,284 22,035 34,067
Other:
Corporate (16,238) (16,315) (8,008) (8,203)
Non-Core Businesses (23,477) (6,108) (9,104) (5,752)
--------- --------- --------- ---------
Total $ 86,177 $ 128,298 $ 49,614 $ 72,155
========= ========= ========= =========
The following is a reconciliation of EBITDA to operating income (loss):
Six Months Ended Three Months Ended
June 30, June 30,
2001 2000 2001 2000
--------- --------- --------- ---------
Total EBITDA(1) $ 86,177 $ 128,298 $ 49,614 $ 72,155
Depreciation of property and equipment (30,845) (26,906) (16,029) (15,618)
Amortization of intangible assets, excess
of purchase price over net assets
acquired and other (117,738) (66,422) (75,564) (32,038)
Non-cash compensation and
non-recurring charges (12,727) (24,544) (10,168) (9,752)
Provision for severance, closures and
integration costs (12,502) (16,718) (6,015) (10,399)
Other integration costs included in
general and administrative expenses(3) (4,304) -- (4,304) --
Gain (loss) on sale of businesses and
other, net 503 28,482 (24) 17,490
--------- --------- --------- ---------
Operating income (loss) $ (91,436) $ 22,190 $ (62,490) $ 21,838
========= ========= ========= =========
(1) EBITDA represents earnings before interest, taxes, depreciation,
amortization and other (income) charges. EBITDA is not intended to
represent cash flow from operating activities 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. The
Company believes EBITDA is a
20
standard measure commonly reported and widely used by analysts, investors
and other interested parties in the media industry. Accordingly, this
information has been disclosed herein to permit a more complete
comparative analysis of the Company's operating performance relative to
other companies in its industry. EBITDA should not be considered in
isolation or as a substitute for other measures of financial performance
or liquidity. The primary difference between EBITDA and cash flow provided
by (used in) operating activities relates to changes in working capital
requirements and payments made for interest and income taxes.
Additionally, EBITDA is not available for the Company's discretionary use
as there are legal requirements to pay preferred stock dividends and repay
debt, among other payments. EBITDA as presented may not be comparable to
similarly titled measures reported by other companies, since not all
companies necessarily calculate EBITDA in identical manners, and
therefore, is not necessarily an accurate measure of comparison between
companies.
(2) Includes the reversal of a $4,000 sales tax accrual that was no longer
required. The reversal was recorded during the three months ended March
31, 2001.
(3) Includes certain integration costs primarily related to the About merger and
other Company-wide integration efforts. These costs principally represent
consultants related to the centralization of certain support functions and
implementation of certain standardized technology. They also include branding
campaigns and certain internal personnel costs specifically identified as merger
or integration related.
14. FINANCIAL INFORMATION FOR GUARANTORS OF THE COMPANY'S DEBT
The information that follows presents condensed consolidating financial
information as of June 30, 2001 and December 31, 2000 and for the six
months ended June 30, 2001 and 2000 for a) PRIMEDIA Inc. (as the Issuer), b) the
guarantor subsidiaries, c) the foreign non-guarantor subsidiaries, d) the
unrestricted non-guarantor subsidiaries, e) elimination entries and f) the
Company on a consolidated basis.
The condensed consolidating financial information includes certain allocations
of revenues, expenses, assets and liabilities based on management's best
estimates which are not necessarily indicative of financial position, results of
operations and cash flows that these entities would have achieved on a
stand-alone basis and should be read in connection with the condensed
consolidated financial statements of the Company.
21
14. 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, 2001
(dollars in thousands)
Foreign Unrestricted
Guarantor Non-Guarantor Non-Guarantor
Primedia Inc. Subsidiaries Subsidiaries Subsidiaries Eliminations
-------------------------------------------------------------------------
Sales, net $ -- $ 842,835 $ 1,074 $ 62,088 $ (33,713)
Operating costs and expenses:
Cost of goods sold -- 198,378 148 49,516 (33,565)
Marketing and selling -- 184,936 470 33,009 --
Distribution, circulation and fulfillment -- 136,951 320 1,678 --
Editorial -- 70,434 148 7,130 --
Other general expenses -- 95,695 1 29,072 --
Corporate administrative expenses (excluding
non-cash compensation) 15,636 -- -- 602 (148)
Depreciation of property and equipment 777 19,482 24 10,562 --
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 267 55,747 65 61,659 --
Non-cash compensation and non-recurring charges 11,924 803 -- -- --
Provision for severance, closures and integration costs 5,207 3,489 -- 3,806 --
Gain on sales of businesses and other, net - (786) -- 283 --
-------------------------------------------------------------------------
Operating income (loss) (33,811) 77,706 (102) (135,229) --
Other income (expense):
Provision for the impairment of investments (22,674) -- -- (8,133) --
Interest expense (65,261) (1,593) -- -- --
Amortization of deferred financing costs (73) (8,990) -- -- --
Equity in losses of subsidiaries (182,245) -- -- -- 182,245
Intercompany management fees and interest 103,781 (103,781) -- -- --
Other, net (25,205) (1,462) (23) (638) --
-------------------------------------------------------------------------
Net loss $ (225,488) $ (38,120) $ (125) $ (144,000) $ 182,245
=========================================================================
Primedia Inc.
and
Subsidiaries
---------------
Sales, net $ 872,284
Operating costs and expenses:
Cost of goods sold 214,477
Marketing and selling 218,415
Distribution, circulation and fulfillment 138,949
Editorial 77,712
Other general expenses 124,768
Corporate administrative expenses (excluding
non-cash compensation) 16,090
Depreciation of property and equipment 30,845
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 117,738
Non-cash compensation and non-recurring charges 12,727
Provision for severance, closures and integration costs 12,502
Gain on sales of businesses and other, net (503)
--------------
Operating income (loss) (91,436)
Other income (expense):
Provision for the impairment of investments (30,807)
Interest expense (66,854)
Amortization of deferred financing costs (9,063)
Equity in losses of subsidiaries -
Intercompany management fees and interest -
Other, net (27,328)
--------------
Net loss $ (225,488)
==============
22
14. FINANCIAL INFORMATION FOR GUARANTORS OF THE COMPANY'S DEBT (CONTINUED)
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
June 30, 2001
(dollars in thousands)
Foreign Unrestricted
Guarantor Non-Guarantor Non-Guarantor
Primedia Inc. Subsidiaries Subsidiaries Subsidiaries Eliminations
-------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,537 $ 8,378 $ 1,053 $ 332 $ --
Accounts receivable, net 903 243,138 241 13,791 --
Intercompany receivables 1,280,673 531,037 (812) 98,504 (1,909,402)
Inventories, net -- 34,214 -- 137 --
Net assets held for sale -- 20,677 -- -- --
Prepaid expenses and other 5,963 57,923 28 13,395 --
-------------------------------------------------------------------------
Total current assets 1,291,076 895,367 510 126,159 (1,909,402)
Property and equipment, net 6,267 116,549 54 65,479 --
Investment in and advances to subsidiaries 1,660,560 -- -- -- (1,660,560)
Other intangible assets, net 1,902 469,749 639 56,197 --
Excess of purchase price over net assets
acquired, net (12,887) 1,136,730 2,116 435,187 --
Deferred income tax asset, net 135,000 -- -- -- --
Other investments 148,261 -- -- 15,027 --
Other non-current assets 16,233 63,322 -- 788 --
-------------------------------------------------------------------------
$ 3,246,412 $2,681,717 $ 3,319 $ 698,837 $(3,569,962)
=========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 2,954 $ 67,172 $ 179 $ 4,482 $ --
Intercompany payables 694,264 946,930 3,811 264,397 (1,909,402)
Accrued interest payable 27,165 -- -- -- --
Accrued expenses and other 55,642 136,067 131 28,994 --
Deferred revenues 55,160 181,654 359 (21,377) --
Current maturities of long-term debt 4,365 3,706 -- 3 --
-------------------------------------------------------------------------
Total current liabilities 839,550 1,335,529 4,480 276,499 (1,909,402)
-------------------------------------------------------------------------
Long-term debt 1,695,005 25,201 -- 1 --
-------------------------------------------------------------------------
Intercompany notes payable -- 2,331,100 -- 700,549 (3,031,649)
-------------------------------------------------------------------------
Deferred revenues -- 62,486 -- -- --
-------------------------------------------------------------------------
Other non-current liabilities -- 17,927 243 947 --
-------------------------------------------------------------------------
Exchangeable preferred stock 562,141 -- -- -- --
-------------------------------------------------------------------------
Shareholders' equity (deficiency):
Common stock 2,240 -- -- -- --
Additional paid-in capital 2,130,012 -- -- -- --
Accumulated deficit (1,855,115) (1,088,312) (1,181) (278,801) 1,368,294
Accumulated other comprehensive loss (3,967) (2,214) (223) (358) 2,795
Unearned compensation (48,589) -- -- -- --
Common stock in treasury, at cost (74,865) -- -- -- --
-------------------------------------------------------------------------
Total shareholders' equity (deficiency) 149,716 (1,090,526) (1,404) (279,159) 1,371,089
-------------------------------------------------------------------------
$ 3,246,412 $2,681,717 $ 3,319 $ 698,837 $(3,569,962)
=========================================================================
Primedia Inc.
and
Subsidiaries
---------------
ASSETS
Current assets:
Cash and cash equivalents $ 13,300
Accounts receivable, net 258,073
Intercompany receivables -
Inventories, net 34,351
Net assets held for sale 20,677
Prepaid expenses and other 77,309
--------------
Total current assets 403,710
Property and equipment, net 188,349
Investment in and advances to subsidiaries --
Other intangible assets, net 528,487
Excess of purchase price over net assets 1,561,146
acquired, net 135,000
Deferred income tax asset, net 163,288
Other investments 80,343
Other non-current assets --------------
$ 3,060,323
==============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 74,787
Intercompany payables --
Accrued interest payable 27,165
Accrued expenses and other 220,834
Deferred revenues 215,796
Current maturities of long-term debt 8,074
--------------
Total current liabilities 546,656
--------------
Long-term debt 1,720,207
--------------
Intercompany notes payable --
--------------
Deferred revenues 62,486
--------------
Other non-current liabilities 19,117
--------------
Exchangeable preferred stock 562,141
--------------
Shareholders' equity (deficiency):
Common stock 2,240
Additional paid-in capital 2,130,012
Accumulated deficit (1,855,115)
Accumulated other comprehensive loss (3,967)
Unearned compensation (48,589)
Common stock in treasury, at cost (74,865)
--------------
Total shareholders' equity (deficiency) 149,716
--------------
$ 3,060,323
==============
23
14. 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, 2001
(dollars in thousands)
Foreign Unrestricted
Guarantor Non-Guarantor Non-Guarantor
Primedia Inc. Subsidiaries Subsidiaries Subsidiaries Eliminations
-------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net loss $ (225,488) $ (38,120) $ (125) $ (144,000) $ 182,245
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,117 76,972 89 72,221 --
Accretion of discount on acquisition obligation
and other 234 338 -- -- --
Write-off of deferred financing costs -- 7,247 -- --
Non-cash revenue related to assets-for-equity
transactions -- (38,966) -- (7,234) --
Provision for the impairment of investments 22,674 -- -- 8,133 --
Non-cash compensation and non-recurring charges 10,238 803 -- -- --
Gain on sales of businesses and other, net -- (503) -- -- --
Equity in losses of subsidiaries 182,245 -- -- -- (182,245)
Intercompany (income) expense (103,781) 103,781 -- -- --
Other, net 27,771 (242) 1 1,126 --
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable, net (833) 14,133 109 (391) --
Inventories, net -- (6,176) -- 707 --
Prepaid expenses and other (28,688) (18,048) 15 6,650 --
Increase (decrease) in:
Accounts payable (4,598) (42,220) (26) (2,944) --
Accrued interest payable 8,343 -- -- -- --
Accrued expenses and other (8,502) (9,491) 37 (20,353) --
Deferred revenues 16,877 674 (4) (1,292) --
Other non-current liabilities -- (269) (3) 5 --
-------------------------------------------------------------------------
Net cash provided by (used in) operating activities (102,391) 49,913 93 (87,372) --
-------------------------------------------------------------------------
INVESTING ACTIVITIES:
Additions to property, equipment and other, net (486) (11,150) (16) (14,462) --
Proceeds from sales of businesses and other, net -- 6,731 -- -- --
(Payments) for businesses acquired, net of cash acquired -- (23,542) -- 110,528 --
Payments for other investments (10,055) (342) -- -- --
-------------------------------------------------------------------------
Net cash provided by (used in) investing activities (10,541) (28,303) (16) 96,066 --
-------------------------------------------------------------------------
FINANCING ACTIVITIES:
Intercompany activity 30,786 (22,428) 111 (8,469) --
Borrowings under credit agreements 991,800 -- -- -- --
Repayments of borrowings under credit agreements (1,363,800) -- -- -- --
Proceeds from issuances of 8 7/8% Senior Notes, net 492,685 -- -- -- --
Payments of acquisition obligation (3,310) (5,523) -- -- --
Proceeds from issuances of common stock, net of
redemptions 5,063 -- -- -- --
Dividends paid to preferred stock shareholders (26,531) -- -- -- --
Deferred financing costs paid (15,650) -- -- -- --
Other (110) (2,374) -- (89) --
-------------------------------------------------------------------------
Net cash provided by (used in) financing activities 110,933 (30,325) 111 (8,558) --
-------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (1,999) (8,715) 188 136 --
Cash and cash equivalents, beginning of period 5,536 17,093 865 196 --
-------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 3,537 $ 8,378 $ 1,053 $ 332 $ --
=========================================================================
Primedia Inc.
and
Subsidiaries
--------------
OPERATING ACTIVITIES:
Net loss $ (225,488)
Adjustments to reconcile net loss to net cash
provided by
(used in) operating activities:
Depreciation and amortization 150,399
Accretion of discount on acquisition obligation
and other 572
Write off of deferred financing fees 7,247
Non-cash revenue related to assets-for-equity
transactions (46,200)
Provision for the impairment of investments 30,807
Non-cash compensation and non-recurring charges 11,041
Gain on sales of businesses and other, net (503)
Equity in losses of subsidiaries --
Intercompany (income) expense --
Other, net 28,656
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable, net 13,018
Inventories, net (5,469)
Prepaid expenses and other (40,071)
Increase (decrease) in:
Accounts payable (49,788)
Accrued interest payable 8,343
Accrued expenses and other (38,309)
Deferred revenues 16,255
Other non-current liabilities (267)
------------
Net cash provided by (used in) operating activities (139,757)
------------
INVESTING ACTIVITIES:
Additions to property, equipment and other, net (26,114)
Proceeds from sales of businesses and other, net 6,731
(Payments) for businesses acquired, net of cash acquired 86,986
Payments for other investments (10,397)
------------
Net cash provided by (used in) investing activities 57,206
------------
FINANCING ACTIVITIES:
Intercompany activity --
Borrowings under credit agreements 991,800
Repayments of borrowings under credit agreements (1,363,800)
Proceeds from issuances of 8 7/8% Senior Notes, net 492,685
Payments of acquisition obligation (8,833)
Proceeds from issuances of common stock, net of
redemptions 5,063
Dividends paid to preferred stock shareholders (26,531)
Deferred financing costs paid (15,650)
Other (2,573)
------------
Net cash provided by (used in) financing activities 72,161
------------
Increase (decrease) in cash and cash equivalents (10,390)
Cash and cash equivalents, beginning of period 23,690
------------
Cash and cash equivalents, end of period $ 13,300
============
24
14. 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)
Foreign Unrestricted
Guarantor Non-Guarantor Non-Guarantor
Primedia Inc. Subsidiaries Subsidiaries Subsidiaries Eliminations
-------------------------------------------------------------------------
Sales, net $ -- $ 823,522 $ 3,313 $ 19,154 $ (16,012)
Operating costs and expenses:
Cost of goods sold -- 195,360 1,069 18,085 (14,233)
Marketing and selling -- 182,102 1,001 8,530 (1,779)
Distribution, circulation and fulfillment -- 114,472 405 8,196 --
Editorial -- 65,010 215 2,421 --
Other general expenses -- 87,779 430 16,301 --
Corporate administrative expenses (excluding
non-cash compensation) 15,956 -- -- 359 --
Depreciation of property and equipment 896 24,069 49 1,892 --
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 225 65,530 394 273 --
Non-cash compensation and non-recurring charges 17,144 7,400 -- -- --
Provision for severance, closures and integration costs 11,401 5,317 -- -- --
Gain on sale of businesses and other, net -- (18,693) -- (9,789) --
-------------------------------------------------------------------------
Operating income (loss) (45,622) 95,176 (250) (27,114) --
Other income (expense):
Interest expense (72,227) (2,903) (189) -- --
Amortization of deferred financing costs -- (1,938) (1) -- --
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 --
-------------------------------------------------------------------------
Net loss $ (46,499) $ (26,223) $ (650) $ (27,106) $ 53,979
=========================================================================
Primedia Inc.
and
Subsidiaries
--------------
Sales, net $ 829,977
Operating costs and expenses:
Cost of goods sold 200,281
Marketing and selling 189,854
Distribution, circulation and fulfillment 123,073
Editorial 67,646
Other general expenses 104,510
Corporate administrative expenses (excluding
non-cash compensation) 16,315
Depreciation of property and equipment 26,906
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 66,422
Non-cash compensation and non-recurring charges 24,544
Provision for severance, closures and integration costs 16,718
Gain on sale of businesses and other, net (28,482)
------------
Operating income (loss) 22,190
Other income (expense):
Interest expense (75,319)
Amortization of deferred financing costs (1,939)
Equity in losses of subsidiaries --
Intercompany management fees and interest --
Other, net 8,569
------------
Net loss $ (46,499)
============
25
14. FINANCIAL INFORMATION FOR GUARANTORS OF THE COMPANY'S DEBT (CONTINUED)
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2000
(dollars in thousands)
Foreign Unrestricted
Guarantor Non-Guarantor Non-Guarantor
Primedia Inc. Subsidiaries Subsidiaries Subsidiaries Eliminations
-------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,536 $ 16,995 $ 963 $ 196 $ --
Accounts receivable, net 70 257,075 717 8,084 --
Intercompany receivables 774,165 324,678 -- 17,690 (1,116,533)
Inventories, net -- 27,827 10 844 --
Net assets held for sale -- 5,000 -- -- --
Prepaid expenses and other 2,253 31,913 107 9,357 --
-------------------------------------------------------------------------
Total current assets 782,024 663,488 1,797 36,171 (1,116,533)
Property and equipment, net 6,554 128,016 108 40,882 --
Investment in and advances to subsidiaries 950,319 -- -- -- (950,319)
Other intangible assets, net 2,353 501,861 708 1,234 --
Excess of purchase price over net assets acquired, net (13,070) 1,146,701 3,468 4,337 --
Deferred income tax asset, net 135,000 -- -- -- --
Other investments 248,236 914 -- 16,318 --
Other non-current assets 1,857 84,910 5 140 --
-------------------------------------------------------------------------
$ 2,113,273 $2,525,890 $ 6,086 $ 99,082 $(2,066,852)
=========================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 7,552 $ 109,650 $ 205 $ 3,379 $ --
Intercompany payables -- 899,208 16,163 201,162 (1,116,533)
Accrued interest payable 18,822 -- -- -- --
Accrued expenses and other 67,734 144,270 271 10,498 --
Deferred revenues 26,164 190,914 589 17,881 --
Current maturities of long-term debt 105,744 9,706 -- 15 --
-------------------------------------------------------------------------
Total current liabilities 226,016 1,353,748 17,228 232,935 (1,116,533)
-------------------------------------------------------------------------
Long-term debt 1,476,128 27,051 -- 9 --
-------------------------------------------------------------------------
Intercompany notes payable -- 2,138,619 -- -- (2,138,619)
-------------------------------------------------------------------------
Deferred revenues 85,831 26,465 -- -- --
-------------------------------------------------------------------------
Other non-current liabilities -- 22,114 246 943 --
-------------------------------------------------------------------------
Exchangeable preferred stock 561,324 -- -- -- --
-------------------------------------------------------------------------
Shareholders' deficiency:
Common stock 1,678 -- -- -- --
Additional paid-in capital 1,366,950 -- -- -- --
Accumulated deficit (1,603,096) (1,040,278) (10,970) (134,801) 1,186,049
Accumulated other comprehensive loss (1,558) (1,829) (418) (4) 2,251
Unearned compensation -- -- -- -- --
Common stock in treasury, at cost -- -- -- -- --
-------------------------------------------------------------------------
Total shareholders' deficiency (236,026) (1,042,107) (11,388) (134,805) 1,188,300
-------------------------------------------------------------------------
$ 2,113,273 $2,525,890 $ 6,086 $ 99,082 $(2,066,852)
=========================================================================
Primedia Inc.
and
Subsidiaries
------------
ASSETS
Current assets:
Cash and cash equivalents $ 23,690
Accounts receivable, net 265,946
Intercompany receivables --
Inventories, net 28,681
Net assets held for sale 5,000
Prepaid expenses and other 43,630
------------
Total current assets 366,947
Property and equipment, net 175,560
Investment in and advances to subsidiaries --
Other intangible assets, net 506,156
Excess of purchase price over net assets acquired, net 1,141,436
Deferred income tax asset, net 135,000
Other investments 265,468
Other non-current assets 86,912
------------
$ 2,677,479
============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 120,786
Intercompany payables --
Accrued interest payable 18,822
Accrued expenses and other 222,773
Deferred revenues 235,548
Current maturities of long-term debt 115,465
------------
Total current liabilities 713,394
------------
Long-term debt 1,503,188
------------
Intercompany notes payable --
------------
Deferred revenues 112,296
------------
Other non-current liabilities 23,303
------------
Exchangeable preferred stock 561,324
------------
Shareholders' deficiency:
Common stock 1,678
Additional paid-in capital 1,366,950
Accumulated deficit (1,603,096)
Accumulated other comprehensive loss (1,558)
Unearned compensation --
Common stock in treasury, at cost --
------------
Total shareholders' deficiency (236,026)
------------
$ 2,677,479
============
26
14. 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)
Foreign Unrestricted
Guarantor Non-Guarantor Non-Guarantor
Primedia Inc. Subsidiaries Subsidiaries Subsidiaries Eliminations
-------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net loss $ (46,499) $ (26,223) $ (650) $ (27,106) $ 53,979
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,121 91,537 444 2,165 --
Accretion of discount on acquisition obligation
and other 365 1,587 -- -- --
Non-cash revenue related to assets-for-equity
transactions -- (3,452) -- -- --
Non-cash compensation and non-recurring charges 17,144 7,400 -- -- --
Gain on sale of businesses and other, net -- (18,693) -- (9,789) --
Equity in losses of subsidiaries 53,979 -- -- -- (53,979)
Intercompany (income) expense (125,039) 125,039 -- -- --
Other, net (10) 643 (221) -- --
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable, net (580) (13,764) (119) (1,309) --
Inventories, net -- (1,994) (10) 283 --
Prepaid expenses and other (1,777) (9,529) (14) (3,602) --
Increase (decrease) in:
Accounts payable (2,971) (14,942) (128) 461 --
Accrued interest payable (1,463) -- -- -- --
Accrued expenses and other 5,411 (12,729) 106 129 --
Deferred revenues -- (8,296) (36) 1,314 --
Other non-current liabilities (1) (544) (6) 91 --
-------------------------------------------------------------------------
Net cash provided by (used in) operating activities (100,320) 116,040 (634) (37,363) --
-------------------------------------------------------------------------
INVESTING ACTIVITIES:
Additions to property, equipment and other, net (284) (22,723) (20) (12,415) --
Proceeds from sales of businesses and other, net -- 117,977 -- 11,284 --
Payments for businesses acquired -- (7,086) -- (228) --
Payments for other investments (40,225) (2,706) -- (8,138) --
-------------------------------------------------------------------------
Net cash provided by (used in) investing activities (40,509) 85,462 (20) (9,497) --
-------------------------------------------------------------------------
FINANCING ACTIVITIES:
Intercompany activity 139,359 (187,496) 1,342 46,795 --
Borrowings under credit agreements 313,750 -- -- -- --
Repayments of borrowings under credit agreements (475,000) (137) (91) -- --
Payments of acquisition obligation (3,685) (6,149) -- -- --
Proceeds from issuances of common stock, net of
redemptions 206,232 -- -- -- --
Taxes paid associated with stock option exercises (16,891) -- -- -- --
Dividends paid to preferred stock shareholders (26,531) -- -- -- --
Deferred financing costs paid -- (175) -- -- --
Other 20 (1,935) -- -- --
-------------------------------------------------------------------------
Net cash provided by (used in) financing activities 137,254 (195,892) 1,251 46,795 --
-------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (3,575) 5,610 597 (65) --
Cash and cash equivalents, beginning of period 11,521 13,765 2,971 404 --
-------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 7,946 $ 19,375 $ 3,568 $ 339 $ --
=========================================================================
Primedia Inc.
and
Subsidiaries
---------------
OPERATING ACTIVITIES: $ (46,499)
Net loss
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 95,267
Accretion of discount on acquisition obligation
and other 1,952
Non-cash revenue related to assets-for-equity
transactions (3,452)
Non-cash compensation and non-recurring charges 24,544
Gain on sale of businesses and other, net (28,482)
Equity in losses of subsidiaries --
Intercompany (income) expense --
Other, net 412
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable, net (15,772)
Inventories, net (1,721)
Prepaid expenses and other (14,922)
Increase (decrease) in:
Accounts payable (17,580)
Accrued interest payable (1,463)
Accrued expenses and other (7,083)
Deferred revenues (7,018)
Other non-current liabilities (460)
------------
Net cash provided by (used in) operating activities (22,277)
------------
INVESTING ACTIVITIES:
Additions to property, equipment and other, net (35,442)
Proceeds from sales of businesses and other, net 129,261
Payments for businesses acquired (7,314)
Payments for other investments (51,069)
------------
Net cash provided by (used in) investing activities 35,436
------------
FINANCING ACTIVITIES:
Intercompany activity --
Borrowings under credit agreements 313,750
Repayments of borrowings under credit agreements (475,228)
Payments of acquisition obligation (9,834)
Proceeds from issuances of common stock, net of
redemptions 206,232
Taxes paid associated with stock option exercises (16,891)
Dividends paid to preferred stock shareholders (26,531)
Deferred financing costs paid (175)
Other (1,915)
------------
Net cash provided by (used in) financing activities (10,592)
------------
Increase (decrease) in cash and cash equivalents 2,567
Cash and cash equivalents, beginning of period 28,661
------------
Cash and cash equivalents, end of period $ 31,228
============
27
15. SUBSEQUENT EVENTS
On July 2, 2001, the Company entered into a definitive agreement to acquire EMAP
USA (formerly known as Petersen Publishing) from EMAP plc. EMAP USA has more
than 60 consumer titles reaching over 75 million enthusiasts through a
combination of magazines, network and cable television shows, web sites and live
consumer events. Under the terms of the agreement, the Company will pay $515,000
for EMAP USA, consisting of $505,000 in cash and warrants granted to EMAP plc to
purchase 2 million of PRIMEDIA shares of common stock at $9 per share, which has
been valued at approximately $10,000. In order to finance this transaction, the
Company (1) initiated a private placement of shares of its common stock for
aggregate cash proceeds of $125,000, at least $50,000 of which the Company
expects to receive from KKR 1996 Fund L.P. The KKR 1996 Fund L.P. will purchase
the common stock at a purchase price per share equal to the price to investors
of each share sold in the common stock offering. An affiliate of Kohlberg,
Kravis, Roberts & Co. L.P. ("KKR") has agreed to make available to the Company
common equity financing up to an aggregate of $125,000. (2) expects to enter
into a $125,000 preferred equity financing with an affiliate of KKR and (3)
expects to draw upon its revolving credit facility in an amount of approximately
$270,000. The shares of the Company's common stock and preferred stock offered
in the transactions outlined above have not been registered, and at the time of
sale, will not be registered under the Securities Act of 1933. These shares may
not be offered or sold in the United States, absent subsequent registration or
an applicable exemption from registration. In connection with the equity
financings to be made available by KKR, we expect to pay a commitment fee
consisting of 1.25 million common stock warrants and a financing fee consisting
of 2.62 million common stock warrants. In addition, subject to a vesting
schedule, the Company will pay up to an additional 4 million common stock
warrants, the unvested portion of which will expire upon the Company's
redemption of the KKR preferred equity. In addition, proceeds from certain asset
sales, which are expected to be at least $250,000, will be used to deleverage
the Company. These assets are currently reported as continuing businesses. The
EMAP transaction is subject to customary closing conditions and is expected to
close during August 2001.
28
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 consolidated
financial condition and results of consolidated operations should be read in
conjunction with the unaudited condensed consolidated financial statements and
notes thereto. The Company's two segments are consumer and business-to-business
The Company's consumer segment produces and distributes magazines, guides and
videos for consumers in various niche markets. The Company's
business-to-business segment produces and distributes magazines, books,
directories, databases and vocational training materials to business
professionals in such fields as communications, agriculture, professional
services, media, transportation and healthcare. The consumer segment includes
PRIMEDIA Magazines Inc., PRIMEDIA Enthusiast Group, Channel One Communications
Corporation, About.com, Inc. ("About"), Films for the Humanities & Sciences,
Inc., and Haas Publishing Companies, Inc. The business-to-business segment
includes The Business Magazines & Media Group, Bacon's Information, Inc.,
PRIMEDIA Workplace Learning, Inc., Kagan World Media, Inc. and affiliated
companies and certain product lines of PRIMEDIA Information Inc.
Management believes a meaningful comparison of the results of operations for the
six and three months ended June 30, 2001 and 2000 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 Pictorial, Inc.
(divested in June 2000), QWIZ, Inc. (divested in April 2001), certain business
directories (divested in October 2000) and certain titles, including certain
titles of The Business Magazines & Media Group, Consumer Guides, and PRIMEDIA
Enthusiast Group which are discontinued or will be divested. In addition, the
Company has restructured or consolidated several new media properties, including
IndustryClick, whose value can be realized with far greater efficiency by having
select functions absorbed by the core operations. Certain amounts in the prior
periods have been reclassified to conform to the presentation for the
six and three-month periods ended June 30, 2001.
EBITDA represents earnings before interest, taxes, depreciation, amortization
and other (income) charges ("EBITDA"). EBITDA is not intended to represent cash
flow from operating activities 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. The Company believes EBITDA is a
standard measure commonly reported and widely used by analysts, investors and
other interested parties in the media industry. Accordingly, this information
has been disclosed herein to permit a more complete comparative analysis of the
Company's operating performance relative to other companies in its industry.
EBITDA should not be considered in isolation or as a substitute for other
measures of financial performance or liquidity. The primary difference between
EBITDA and cash flow provided by (used in) operating activities relates to
changes in working capital requirements and payments made for interest and
income taxes. Additionally, EBITDA is not available for the Company's
discretionary use as there are legal requirements to pay preferred stock
dividends and repay debt, among other payments. EBITDA as presented may not be
comparable to similarly titled measures reported by other companies, since not
all companies necessarily calculate EBITDA in identical manners, and therefore,
is not necessarily an accurate measure of comparison between companies.
29
Primedia Inc. and Subsidiaries
Unaudited Results of Consolidated Operations
(dollars in thousands)
Six Months Ended Three Months Ended
June 30, June 30,
2001 2000 2001 2000
--------- --------- --------- ---------
Sales, Net:
Continuing Businesses:
Consumer $ 634,990 $ 545,753 $ 330,117 $ 280,675
Business-to-business 248,783 245,550 122,570 129,400
Eliminations (31,737) (15,955) (16,540) (12,309)
--------- --------- --------- ---------
Subtotal 852,036 775,348 436,147 397,766
Non-Core Businesses 20,248 54,629 9,131 27,761
--------- --------- --------- ---------
Total $ 872,284 $ 829,977 $ 445,278 $ 425,527
========= ========= ========= =========
EBITDA:
Continuing Businesses:
Consumer $ 81,002 $ 97,437 $ 44,691 $ 52,043
Business-to-business 44,890 53,284 22,035 34,067
Corporate (16,238) (16,315) (8,008) (8,203)
--------- --------- --------- ---------
Subtotal 109,654 134,406 58,718 77,907
Non-Core Businesses (23,477) (6,108) (9,104) (5,752)
--------- --------- --------- ---------
Total $ 86,177 $ 128,298 $ 49,614 $ 72,155
========= ========= ========= =========
Operating Income (Loss):
Continuing Businesses:
Consumer $ (38,132) $ 39,249 $ (34,444) $ 19,102
Business-to-business 10,378 12,148 4,847 8,711
Corporate (34,697) (36,195) (21,273) (17,085)
--------- --------- --------- ---------
Subtotal (62,451) 15,202 (50,870) 10,728
Non-Core Businesses (28,985) 6,988 (11,620) 11,110
--------- --------- --------- ---------
Total (91,436) 22,190 (62,490) 21,838
Other Expense:
Provision for the impairment of investments (30,807) -- (27,559) --
Interest expense (66,854) (75,319) (33,694) (36,963)
Amortization of deferred
financing costs (9,063) (1,939) (8,050) (1,000)
Other, net (27,328) 8,569 (7,887) 9,057
--------- --------- --------- ---------
Net Loss $(225,488) $ (46,499) $(139,680) $ (7,068)
========= ========= ========= =========
30
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000:
CONSOLIDATED RESULTS:
Sales from Continuing Businesses increased 9.9% to $852,036 in 2001 from
$775,348 in 2000 due to growth in both segments. Total sales, including Non-Core
Businesses, increased 5.1% to $872,284 in the first six months of 2001 from
$829,977 in the 2000 period.
Since the first quarter of 2000, the Company has entered various
assets-for-equity transactions, some of which also included cash consideration.
The remainder represents advertising, content licensing and other services to be
rendered by the Company in exchange for the equity in these entities. The
Company recognizes these amounts as revenue in accordance with the Company's
revenue recognition policies. Revenue recognized in connection with these
assets-for-equity transactions was approximately $46,000 and $3,500 during the
six months ended June 30, 2001 and 2000, respectively, and will be substantially
reduced in future quarters. In addition, for the six months ended June 30, 2001
and 2000, revenue and expense from barter transactions were approximately
$26,000 and $500, respectively.
EBITDA from Continuing Businesses decreased 18.4% to $109,654 in 2001 from
$134,406 in 2000 primarily due to larger new media losses. Total EBITDA,
including Non-Core Businesses, decreased 32.8% to $86,177 in 2001 from $128,298
in 2000.
Operating income (loss) from Continuing Businesses was $(62,451) in 2001
compared to $15,202 in 2000. This increase in operating loss was primarily
attributable to increased operating loss in the consumer segment. Total
operating income (loss), including Non-Core Businesses, was $(91,436) in 2001
compared to $22,190 in 2000.
Interest expense decreased by 11.2% in the first six months of 2001 compared to
2000. This decrease is the result of the Company's use of proceeds from the
sales of businesses, the Liberty Media investment in April 2000, and cash
acquired in connection with the About merger to repay borrowings under its bank
credit facilities.
CONSUMER:
Sales from Continuing Businesses increased 16.4% to $634,990 in the first six
months of 2001 from $545,753 in 2000 due primarily to growth at the Company's
Consumer Guides and apartmentguide.com, growth at certain Enthusiast magazines
and the About acquisition whose results are included in the consumer segment for
four of the six months ended June 30, 2001. New media sales from Continuing
Businesses increased 411.0% to $47,386 in 2001 from $9,274 in 2000 due to the
About acquisition and growth at apartmentguide.com. Revenue recognized in
connection with assets-for-equity transactions was approximately $39,000 and
$3,200 during the six months ended June 30, 2001 and 2000, respectively.
EBITDA from Continuing Businesses decreased 16.9% to $81,002 in 2001 from
$97,437 in 2000. The EBITDA margin for Continuing Businesses decreased to 12.8%
in 2001 from 17.9% in 2000. The decrease in margin is primarily attributable to
increased Internet spending as a result of the About acquisition.
Operating income (loss) from Continuing Businesses, was $(38,132) in 2001
compared to $39,249 in 2000. The increase in operating loss was primarily
attributable to the decrease in EBITDA as well as an increase in amortization
expense related to excess of purchase price over net assets acquired as a result
of the About acquisition.
31
BUSINESS-TO-BUSINESS:
Sales from Continuing Businesses increased 1.3% to $248,783 in the first six
months of 2001 from $245,550 in 2000 primarily due to higher new media sales at
certain Internet properties and sales growth at PRIMEDIA Workplace Learning. New
media sales from Continuing Businesses increased 77.1% to $8,632 in 2001 from
$4,874 in 2000. Revenue recognized in connection with assets-for-equity
transactions was approximately $7,000 and $300 during the six months ended June
30, 2001 and 2000, respectively.
EBITDA from Continuing Businesses decreased 15.8% to $44,890 in 2001 from
$53,284 in 2000 primarily due to weakness at The Business Magazines & Media
Group. The EBITDA margin decreased to 18.0% in 2001 from 21.7% in 2000 primarily
due to softness in business-to-business advertising and continued Internet
losses.
Operating income from Continuing Businesses decreased to $10,378 in 2001 from
$12,148 in 2000. The decrease in operating income is primarily attributable to
weakness at The Business Magazines & Media Group partially offset by strength at
PRIMEDIA Workplace Learning.
32
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000:
CONSOLIDATED RESULTS:
Sales from Continuing Businesses increased 9.6% to $436,147 in 2001 from
$397,766 in 2000 due to growth in the consumer segment. Total sales, including
Non-Core Businesses, increased 4.6% to $445,278 in the second quarter of 2001
from $425,527 in the 2000 period. Revenue recognized in connection with
assets-for-equity transactions was approximately $17,900 and $3,500 during the
three months ended June 30, 2001 and 2000, respectively, and will be
substantially reduced in future quarters. In addition, for the three months
ended June 30, 2001 and 2000, revenue and expense from barter transactions were
approximately $16,000 and $500, respectively.
EBITDA from Continuing Businesses decreased 24.6% to $58,718 in 2001 from
$77,907 in 2000 primarily due to softness at the Company's Business Magazines &
Media Group and larger new media losses at certain of the Company's consumer
internet properties. Total EBITDA, including Non-Core Businesses, decreased
31.2% to $49,614 in 2001 from $72,155 in 2000.
Operating income (loss) from Continuing Businesses was $(50,870) in 2001
compared to $10,728 in 2000. This increase in operating loss was primarily
attributable to the decrease in EBITDA as well as an increase in amortization
expense related to excess of purchase price over net assets acquired as a result
of the About acquisition. Total operating income (loss), including Non-Core
Businesses, was $(62,490) in 2001 compared to $21,838 in 2000.
Interest expense decreased by 8.8% in the second quarter of 2001 compared to
2000. This decrease is the result of the Company's use of proceeds from the
sales of businesses, the Liberty Media investment in April 2000, and cash
acquired in connection with the About merger to repay borrowings under its bank
credit facilities.
CONSUMER:
Sales from Continuing Businesses increased 17.6% to $330,117 in the second
quarter of 2001 from $280,675 in 2000 due primarily to growth at the Company's
Consumer Guides and apartmentguide.com, growth at certain Enthusiast magazines
and the About acquisition whose results are included in the consumer segment for
the quarter ended June 30, 2001. New media sales from Continuing Businesses
increased 470.0% to $28,688 in 2001 from $5,037 in 2000 due primarily to the
About acquisition as well as growth at apartmentguide.com. Revenue recognized in
connection with assets-for-equity transactions was approximately $15,700 and
$3,200 during the three months ended June 30, 2001 and 2000, respectively.
EBITDA from Continuing Businesses decreased 14.1% to $44,691 in 2001 from
$52,043 in 2000. The EBITDA margin for Continuing Businesses decreased to 13.5%
in 2001 from 18.5% in 2000. The decrease is primarily attributable to increased
Internet spending.
Operating income (loss) from Continuing Businesses, was $(34,444) in 2001
compared to $19,102 in 2000. The increase in operating loss was primarily
attributable to the decrease in EBITDA as well as an increase in amortization
expense related to excess of purchase price over net assets acquired as a result
of the About acquisition.
33
BUSINESS-TO-BUSINESS:
Sales from Continuing Businesses decreased 5.3% to $122,570 in the second
quarter of 2001 from $129,400 in 2000 primarily due to softness at The Business
Magazines & Media Group. New media sales from Continuing Businesses increased
73.9% to $3,881 in 2001 from $2,232 in 2000. Revenue recognized in connection
with assets-for-equity transactions was approximately $2,200 and $300 during the
three months ended June 30, 2001 and 2000, respectively.
EBITDA from Continuing Businesses decreased 35.3% to $22,035 in 2001 from
$34,067 in 2000. The EBITDA margin decreased to 18.0% in 2001 from 26.3% in 2000
due to softness in advertising in The Business Magazines & Media Group.
Operating income from Continuing Businesses decreased to $4,847 in 2001 from
$8,711 in 2000. The decrease in operating income is primarily attributable to
weakness at The Business Magazines & Media Group partially offset by strength at
PRIMEDIA Workplace Learning.
FINANCING ARRANGEMENTS
8 7/8% SENIOR NOTES DUE 2011
On May 8, 2001, the Company completed a private offering of $500,000 of 8 7/8%
Senior Notes. Proceeds from this offering were used to repay borrowings under
the revolving credit facilities. The 8 7/8% Senior Notes mature on May 15, 2011,
with no sinking fund requirements, and have interest payable semi-annually in
May and November at an annual rate of 8 7/8%. The 8 7/8% Senior Notes are fully,
unconditionally and jointly and severally guaranteed by each of our domestic
restricted subsidiaries. The notes are secured by a pledge of stock of PRIMEDIA
Companies Inc., an intermediate holding company, owned directly by the Company,
which owns all shares of PRIMEDIA subsidiaries. Beginning in 2006, the 8 7/8%
Senior Notes are redeemable at 104.438% with annual reductions to 100% in 2009
plus accrued and unpaid interest.
If the Company becomes subject to a change of control, each holder of the notes
will have the right to require the Company to purchase any or all of the notes
at a purchase price equal to 101% of the aggregate principal amount of the notes
plus accrued and unpaid interest, if any, to the date of purchase.
NEW CREDIT AGREEMENT
On June 20, 2001, the Company completed a refinancing of its existing bank
credit facilities pursuant to new bank credit facilities with The Chase
Manhattan Bank, Bank of America, N.A., The Bank of New York, and The Bank of
Nova Scotia, as agents. The debt under the new credit agreement (as well as
certain of our other equally and ratably secured indebtedness) is secured by a
pledge of the stock of PRIMEDIA Companies Inc. Borrowings under the bank credit
facilities are guaranteed by each of our wholly owned domestic restricted
subsidiaries. The guarantees are full, unconditional and joint and several.
Certain of our subsidiaries, which primarily represent Internet assets and
businesses, including About.com, as well as our foreign subsidiaries, are not
guarantors of the bank credit facilities. The bank credit facilities rank senior
in right of payment to all our future subordinated indebtedness.
The borrowings under the bank credit facilities may be used for general
corporate and working capital purposes as well as to finance certain future
acquisitions. The bank credit facilities consist of the following:
o a $475,000 revolving loan facility, of which $33,000 was outstanding at
June 30, 2001;
o a term loan A, of which $100,000 was outstanding at June 30, 2001; and
o a term loan B, of which $425,000 was outstanding at June 30, 2001.
34
As of June 30, 2001, the Company had $558,000 outstanding, $22,000 letters of
credit outstanding and unused bank commitments of approximately $420,000 under
the bank credit facilities.
With the exception of the term loan B, the amounts borrowed bear interest, at
the Company's option, at either the higher of the base rate plus an applicable
margin ranging from 0.125% to 1.5% or the Eurodollar Rate plus an applicable
margin ranging from 1.125% to 2.5%. Additionally, until the Company issues
financial statements for the period ending December 31, 2001, the applicable
margin for the amounts borrowed will be a minimum of 0.75% for the base rate
option and 1.75% for the Eurodollar rate option. The term loan B bears interest
at the base rate plus 1.75% or LIBOR plus 2.75%. At June 30, 2001, the weighted
average variable interest rate on all outstanding borrowings under the bank
credit facilities was 6.46%.
Under the bank credit facilities, the Company has agreed to pay commitment fees
at a per annum rate of either 0.375% or 0.5%, depending on its debt to EBITDA
ratio, as defined in the new credit agreement, on the daily average aggregate
unutilized commitment under the revolving loan commitment. The Company also has
agreed to pay certain fees with respect to the issuance of letters of credit and
an annual administration fee.
The commitments under the revolving loan commitment are subject to mandatory
reductions semi-annually on June 30 and December 31, commencing December 31,
2004 with the final reduction on June 30, 2008. The aggregate mandatory
reductions of the revolving loan commitments under the bank credit facilities
are $23,750 in 2004, $47,500 in 2005, $71,250 in 2006, $142,500 in 2007 and a
final reduction of $190,000 in 2008. To the extent that the total revolving
credit loans outstanding exceed the reduced commitment amount, these loans must
be paid down to an amount equal to or less than the reduced commitment amount.
However, if the total revolving credit loans outstanding do not exceed the
reduced commitment amount, then there is no requirement to pay down any of the
revolving credit loans. Aggregate term loan payments under the bank credit
facilities are $2,125 in 2001, $4,250 in 2002 and 2003, $16,750 in 2004, $29,250
in 2005, 2006 and 2007, $16,750 in 2008 and $393,125 in 2009.
The bank credit facilities, among other things, limit the Company's ability to
change the nature of its businesses, incur indebtedness, create liens, sell
assets, engage in mergers, consolidations or transactions with affiliates, make
investments in or loans to certain subsidiaries, issue guarantees and make
certain restricted payments including dividend payments on our common stock in
excess of $75,000 in any given year. Under the most restrictive debt covenants,
the Company must maintain a minimum interest coverage ratio of 1.80 to 1 and a
minimum fixed charge coverage ratio of 1.05 to 1. The Company's maximum
allowable debt leverage ratio is 6.0 to 1. The maximum leverage ratio decreases
to 5.75 to 1, 5.5 to 1, 5.0 to 1 and 4.5 to 1, respectively, on July 1, 2003,
January 1, 2004, January 1, 2005 and January 1, 2006. The minimum interest
coverage ratio increases to 2.0 to 1, 2.25 to 1 and 2.5 to 1, respectively, on
July 1, 2003, January 1, 2004 and January 1, 2005. At June 30, 2001, the
Company's debt leverage ratio, as defined in the bank credit agreement, was 5.43
to 1.
As a result of the refinancing of the Company's existing bank credit facilities,
during the second quarter of 2001, the Company wrote-off the remaining
balances of deferred financing costs originally recorded.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated working capital, including net assets held for sale and current
portion of long-term debt, was $(142,946) at June 30, 2001 as compared to
$(346,447) at December 31, 2000. Consolidated working capital reflects certain
industry working capital practices and accounting principles, including the
recording of certain deferred revenues from subscriptions as a current liability
as well as the expensing of certain advertising, editorial and product
development costs as incurred. Consolidated working capital increased at June
30, 2001 due to increases in net assets held for sale, a reduction of current
maturities of the Company's long-term debt as a result a refinancing of the
Company's outstanding debt obligations as well as other working capital changes.
35
Net cash used in operating activities during the six months ended June 30,
2001, after interest payments of $59,816 in 2001 and $75,829 in 2000, was
$139,757, as compared to $22,277 during the same 2000 period, due primarily to
increased new media losses, as well as other working capital changes. Net
additions to property, equipment and other were $26,114 during the six months
ended June 30, 2001 compared to $35,442 during the 2000 period due to higher
levels of spending last year relating to new office space and capitalized
internal use software expenditures. Net cash provided by investing activities
during the six months ended June 30, 2001 increased to $57,206 compared to
$35,436 in the same 2000 period primarily due to cash acquired from the About
acquisition. Net cash provided by (used in) financing activities during the six
months ended June 30, 2001 was $72,161, compared to $(10,592) in the same 2000
period primarily due to additional borrowings in 2001.
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 next two to three years.
PROVISION FOR SEVERANCE, CLOSURES AND INTEGRATION COSTS
During 2000 and 2001, the Company implemented plans to integrate the Company and
consolidate many back office functions. All integration costs were expensed as
incurred. $4,304 of integration costs primarily related to the About merger and
Company-wide integration efforts have been reclassified to other general
expenses. A summary of the status of these plans as of June 30, 2001 is
presented below.
2001 PLAN
With the acquisition of About coupled with other cost initiatives, during the
first half of 2001, the Company announced the details of a plan that would
continue to implement and expand upon the initiatives enacted during 2000.
During 2001, the Company recognized approximately $16,800 of severance, closures
and integration costs and paid approximately $11,500 of these costs. These
severance, closures and integration costs include charges relating to employee
termination and other employee costs, contract and lease terminations,
consulting, office relocation and recruiting.
A significant portion of the remaining costs are expected to be paid during the
remainder of 2001 with the balance to be paid through 2003. The Company is
currently developing additional initiatives aimed largely at the consolidation
of certain functions and the further integration of the Company, including
initiatives attributable to the expected consummation of the EMAP acquisition.
Accordingly, the Company expects to record additional severance, closures and
integration costs during 2001.
2000 PLAN
During 2000, the Company announced the implementation of a plan to integrate the
Company and consolidate many back office functions. During 2001, the Company
made payments approximating $5,800 relating to the balance outstanding as of
December 31, 2000 in connection with the 2000 plan.
The majority of the remaining costs, which approximates $5,400, are expected to
be paid by the end of 2001 with the balance to be paid through the end of 2003.
As a result of the 2000 and 2001 plans already put in place, the Company will
close and consolidate in excess of fifteen office locations and will terminate
approximately 630 individuals. All individuals who will be terminated under
these plans have been notified. As of June 30, 2001, approximately 550 of those
individuals have been terminated.
36
Management anticipates that these plans will result in significant savings
during the remainder of 2001 and beyond.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2001, the Emerging Issue Task Force ("EITF") issued EITF Consensus No.
00-25, "Accounting for Consideration from a Vendor to a Retailer in Connection
with the Purchase or Promotion of a Vendor's Products," which addresses whether
consideration from a vendor to a reseller of the vendor's products is an
adjustment to the selling price or the cost of the product. The EITF consensus
must be adopted no later than January 1, 2002. The Company is currently
determining the impact of this new consensus.
On June 29, 2001, the Financial Accounting Standards Board ("FASB") unanimously
voted in favor of two new statements, Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill
and Other Intangible Assets." SFAS No. 141 requires that all business
combinations be accounted for under the purchase method of accounting,
eliminates the use of the pooling-of-interests method and requires that the
purchase method be used for business combinations initiated after June 30, 2001.
SFAS No. 142 requires that goodwill and certain intangible assets no longer be
amortized to earnings and that goodwill and intangible assets be reviewed for
impairment. Under SFAS No. 142, goodwill acquired in a business combination
completed after June 30, 2001 (that is, the date of acquisition is July 1, 2001
or later) will not be amortized. The amortization of goodwill for previous
acquisitions will cease upon adoption of the SFAS No. 142, which will be January
1, 2002. We are currently determining the impact of SFAS No. 142 on our existing
goodwill and intangible assets. Under SFAS No. 142, any goodwill arising from
the proposed acquisition of EMAP USA will not be amortized.
RECENT DEVELOPMENTS
On July 2, 2001, the Company entered into a definitive agreement to acquire EMAP
USA (formerly known as Petersen Publishing) from EMAP plc. EMAP USA has more
than 60 consumer titles reaching over 75 million enthusiasts through a
combination of magazines, network and cable television shows, web sites and live
consumer events. Under the terms of the agreement, the Company will pay $515,000
for EMAP USA, consisting of $505,000 in cash and warrants granted to EMAP plc to
purchase 2 million of PRIMEDIA shares of common stock at $9 per share, which has
been valued at approximately $10,000. In order to finance this transaction, the
Company (1) initiated a private placement of shares of its common stock for
aggregate cash proceeds of $125,000, at least $50,000 of which the Company
expects to receive from KKR 1996 Fund L.P. The KKR 1996 Fund L.P. will purchase
the common stock at a purchase price per share equal to the price to investors
of each share sold in the common stock offering. An affiliate of Kohlberg,
Kravis, Roberts & Co. L.P. ("KKR") has agreed to make available to the Company
common equity financing up to an aggregate of $125,000. (2) expects to enter
into a $125,000 preferred equity financing with an affiliate of KKR and (3)
expects to draw upon its revolving credit facility in an amount of approximately
$270,000. The shares of the Company's common stock and preferred stock offered
in the transactions outlined above have not been registered, and at the time of
sale, will not be registered under the Securities Act of 1933. These shares may
not be offered or sold in the United States, absent subsequent registration or
an applicable exemption from registration. In connection with the equity
financings to be made available by KKR, we expect to pay a commitment fee
consisting of 1.25 million common stock warrants and a financing fee consisting
of 2.62 million common stock warrants. In addition, subject to a vesting
schedule, the Company will pay up to an additional 4 million common stock
warrants, the unvested portion of which will expire upon the Company's
redemption of the KKR preferred equity. In addition, proceeds from certain asset
sales, which are expected to be at least $250,000, will be used to deleverage
the Company. These assets are currently reported as continuing businesses. The
EMAP transaction is subject to customary closing conditions and is expected to
close during August 2001.
IMPACT OF INFLATION
The impact of inflation was immaterial during 2000 and through the first six
months of 2001. Postage for product distribution and direct mail solicitations
is 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 rates increased approximately 10% in January 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
37
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. The Company's paper expense
decreased approximately 4% during the first six months of 2001 compared to 2000.
In the first six months of 2001, paper costs represented approximately 6% of the
Company's total operating costs and expenses, a decline of 1% from the prior
quarter. This decrease is a function of a softening in paper prices, favorable
paper purchase contracts and decreased paper consumption through improved
distribution and enhanced controls surrounding paper purchases and usage.
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.
38
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the first six-months of 2001, there were no significant changes related
to the Company's market risk exposure.
39
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders was held on May 17, 2001.
(b) At the meeting, directors, Thomas S. Rogers, David Bell, Henry
R. Kravis, George R. Roberts, Michael T. Tokarz, Perry Golkin, Charles G.
McCurdy, Beverly C. Chell, Meyer Feldberg, Scott Kurnit and H. John
Greeniaus were 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 eleven 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 163,169,848 3,394,757
David Bell 165,043,025 1,521,580
Beverly C. Chell 163,197,434 3,367,171
Meyer Feldberg 165,041,415 1,523,190
Perry Golkin 162,565,002 3,999,603
H. John Greeniaus 164,003,989 2,560,616
Henry R. Kravis 163,602,718 2,961,887
Scott Kurnit 165,042,825 1,521,780
Charles G. McCurdy 163,198,604 3,366,001
George R. Roberts 165,042,467 1,522,138
Michael T. Tokarz 162,565,007 3,999,598
(ii) The approval of the an amendment to the Company's Restated
Certificate of Incorporation to increase the number of authorized
shares of common stock from 250 million to 300 million was ratified
with 165,267,892 votes for, 1,276,397 votes against and 20,316 votes
abstaining.
(iii) The approval of Deloitte & Touche LLP as independent auditors for
the Company for the fiscal year ending December 31, 2001 was
ratified with 166,522,935 votes for, 41,264 votes against and 406
votes abstaining.
40
Item 6. REPORTS ON FORM 8-K
On April 26, 2001, PRIMEDIA Inc. filed its Current Report on Form 8-K/A to
announce the completion of the merger of a newly formed, wholly owned subsidiary
of the Company with and into About.com, Inc. This report included proforma
financial statements.
41
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, 2001 /s/ Thomas S. Rogers
------------------------ ----------------------------------------
(Signature)
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 2001 /s/ Lawrence R. Rutkowski
------------------------ ----------------------------------------
(Signature)
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)