FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13
or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For Quarter Ended: September 30, 2000
Commission file number: 1-11106
Primedia Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3647573
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
745 Fifth Avenue, New York, New York
(Address of principal executive offices)
10151
(Zip Code)
Registrant's telephone number, including area code (212) 745-0100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No ___
Number of shares of common stock, par value $.01 per share, outstanding as of
October 31, 2000: 166,903,202
The aggregate market value of the common equity of PRIMEDIA Inc. which is held
by non-affiliates of PRIMEDIA Inc. at October 31, 2000 was approximately $462.9
million.
Primedia Inc.
INDEX
PAGE
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(Unaudited) as of September 30, 2000 and
December 31, 1999 2
Condensed Statements of Consolidated
Operations (Unaudited) for the nine months
ended September 30, 2000 and 1999 3
Condensed Statements of Consolidated
Operations (Unaudited) for the three months
ended September 30, 2000 and 1999 4
Condensed Statements of Consolidated
Cash Flows (Unaudited) for the nine months
ended September 30, 2000 and 1999 5
Notes to Unaudited Condensed Consolidated
Financial Statements 6-18
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 19-30
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Part II. Other Information:
Signatures 32
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31,
2000 1999
------------------- ------------------
(dollars in thousands, except per share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 29,661 $ 28,661
Accounts receivable (net of allowances of $33,154 and
$32,746 at September 30, 2000 and December 31, 1999,
respectively) 260,751 235,565
Inventories, net 30,150 32,709
Net assets held for sale 48,596 -
Prepaid expenses and other 53,983 36,480
-------------------- ------------------
Total current assets 423,141 333,415
Property and equipment, net 160,956 ` 152,343
Other intangible assets, net 520,823 619,950
Excess of purchase price over net assets acquired, net 1,099,295 1,215,406
Deferred income tax asset, net 176,200 176,200
Other investments 191,256 107,594
Other non-current assets 89,870 109,644
------------------- ------------------
$ 2,661,541 $ 2,714,552
=================== ==================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 72,377 $ 102,678
Accrued interest payable 18,069 19,379
Accrued expenses and other 227,321 217,737
Deferred revenues 263,702 171,339
Current maturities of long-term debt 22,024 22,740
------------------- ------------------
Total current liabilities 603,493 533,873
------------------- ------------------
Long-term debt 1,605,217 1,732,896
------------------- ------------------
Other non-current liabilities 22,612 31,796
------------------- ------------------
Exchangeable preferred stock 560,916 559,689
------------------- ------------------
Common stock subject to redemption ($.01 par value, 53,310
shares outstanding at December 31, 1999) - 536
------------------- ------------------
Shareholders' deficiency:
Common stock ($.01 par value, 166,889,697 shares and 148,346,759
shares issued at September 30, 2000 and December 31, 1999,
respectively) 1,669 1,483
Additional paid-in capital 1,342,626 986,649
Accumulated deficit (1,332,522) (1,203,207)
Accumulated other comprehensive income (loss) (132,619) 87,364
Unearned stock grant compensation (8,188) (15,250)
Common stock in treasury, at cost (123,848 shares and 101,848
shares at September 30, 2000 and December 31, 1999,
respectively) (1,663) (1,277)
------------------- -------------------
Total shareholders' deficiency (130,697) (144,238)
------------------- -------------------
$ 2,661,541 $ 2,714,552
=================== ===================
See notes to unaudited condensed consolidated financial statements.
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
Nine Months Ended
September 30,
2000 1999
------------------- ------------------
(dollars in thousands, except per share amounts)
Sales, net $ 1,231,624 $ 1,260,454
Operating costs and expenses:
Cost of goods sold 299,560 296,573
Marketing and selling 289,944 270,318
Distribution, circulation and fulfillment 189,011 186,237
Editorial 94,027 101,546
Other general expenses 162,126 139,467
Corporate administrative expenses (excluding $19,500 of
non-cash compensation in 2000) 24,632 22,101
Depreciation of property and equipment 39,760 36,350
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 98,279 126,676
Non-cash compensation and non-cash non-recurring charges 26,900 -
Provision for severance, closures and integration costs 19,008 22,000
Gain on sale of businesses and other, net (26,824) -
------------------- -----------------
Operating income 15,201 59,186
Other income (expense):
Interest expense (109,434) (123,965)
Amortization of deferred financing costs (2,899) (2,426)
Other, net 7,614 (770)
------------------- -----------------
Net loss (89,518) (67,975)
Preferred stock dividends - cash (39,797) (39,796)
------------------- -----------------
Loss applicable to common shareholders $ (129,315) $ (107,771)
=================== =================
Basic and diluted loss applicable to common shareholders per
common share $ (.81) $ (.74)
=================== =================
Basic and diluted common shares outstanding 158,977,115 145,008,251
=================== =================
See notes to unaudited condensed consolidated financial statements.
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
Three Months Ended
September 30,
2000 1999
-------------------- ------------------
(dollars in thousands, except per share amounts)
Sales, net $ 401,647 $ 423,005
Operating costs and expenses:
Cost of goods sold 100,202 99,179
Marketing and selling 101,730 92,790
Distribution, circulation and fulfillment 61,662 60,969
Editorial 29,558 34,752
Other general expenses 56,152 48,478
Corporate administrative expenses (excluding $2,354 of
non-cash compensation in 2000) 8,317 8,170
Depreciation of property and equipment 12,855 12,296
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 31,857 39,642
Non-cash compensation and non-cash non-recurring charges 2,354 -
Provision for severance, closures and integration costs 2,291 -
Loss on sale of businesses and other, net 1,658 -
-------------------- ------------------
Operating income (loss) (6,989) 26,729
Other expense:
Interest expense (34,114) (42,429)
Amortization of deferred financing costs (960) (855)
Other, net (956) (542)
-------------------- ------------------
Net loss (43,019) (17,097)
Preferred stock dividends - cash (13,266) (13,265)
-------------------- ------------------
Loss applicable to common shareholders $ (56,285) $ (30,362)
==================== ==================
Basic and diluted loss applicable to common shareholders per
common share $ (.34) $ (.21)
==================== ==================
Basic and diluted common shares outstanding 166,639,589 145,055,347
==================== ==================
See notes to unaudited condensed consolidated financial statements.
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30,
2000 1999
--------------- --------------
(dollars in thousands)
Operating activities:
Net loss $ (89,518) $ (67,975)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 140,938 165,452
Gain on sale of businesses and other, net (26,824) -
Accretion of discount on acquisition obligation
and other 2,891 3,677
Non-cash provision for severance, closures and integration costs - 8,809
Non-cash compensation and non-cash non-recurring charges 26,900 -
Other, net 848 (1,037)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable, net (32,473) (23,660)
Inventories, net 1,239 (7,158)
Prepaid expenses and other (15,330) (13,684)
Increase (decrease) in:
Accounts payable (28,939) (25,609)
Accrued interest payable (1,310) 1,986
Accrued expenses and other 725 (7,844)
Deferred revenues (837) 7,756
Other non-current liabilities (319) (9)
--------------- --------------
Net cash provided by (used in) operating activities (22,009) 40,704
--------------- --------------
Investing activities:
Additions to property, equipment and other, net (53,595) (43,198)
Proceeds from sales of businesses and other 142,039 5,169
Payments for businesses acquired (24,443) (80,321)
Payments for other investments (67,413) (7,374)
--------------- --------------
Net cash used in investing activities (3,412) (125,724)
--------------- --------------
Financing activities:
Borrowings under credit agreements 436,550 702,757
Repayments of borrowings under credit agreements (549,991) (553,000)
Payments of acquisition obligation (9,933) (10,833)
Proceeds from issuances of common stock, net of redemptions 209,743 5,888
Taxes paid associated with stock option exercises (16,891) -
Purchases of common stock for the treasury (385) (10,508)
Dividends paid to preferred stock shareholders (39,797) (39,796)
Deferred financing costs paid (175) (3,442)
Other (2,700) (535)
--------------- --------------
Net cash provided by financing activities 26,421 90,531
--------------- --------------
Increase in cash and cash equivalents 1,000 5,511
Cash and cash equivalents, beginning of period 28,661 24,538
--------------- --------------
Cash and cash equivalents, end of period $ 29,661 $ 30,049
=============== ==============
Supplemental information:
Cash interest paid $ 108,191 $ 120,244
=============== ==============
Non-cash activities:
Stock option exercise transactions $ 17,498 $ -
=============== ==============
Assets-for-equity transactions $ 76,480 $ -
=============== ==============
Exchange of the Company's common shares for
common shares of CMGI, Inc. $ 164,000 $ -
=============== ==============
See notes to unaudited condensed consolidated financial statements.
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 financial statements and related
notes for the year ended December 31, 1999, which is included in the Company's
annual report on Form 10-K for the year ended December 31, 1999. The operating
results for the three and nine-month periods ended September 30 are not
necessarily indicative of the results that may be expected for a full year.
Certain amounts in the consolidated financial statements for the three and nine
month periods ended September 30, 1999 have been reclassified to conform to the
presentation for the three and nine month periods ended September 30, 2000.
On March 30, 2000, the Company realigned its segment reporting to conform to its
new strategic direction, including organization, management and growth
initiatives (see Note 12). The Company's two segments are consumer (including
both traditional and new media operations) and business-to-business (including
both traditional and new media operations) and previously reported results have
been restated accordingly. The consumer segment includes the Primedia Magazines
Inc., Primedia Enthusiast Publications, Inc., Channel One Communications
Corporation, Films for the Humanities & Sciences, Inc., and Haas Publishing
Companies, Inc. The business-to-business segment includes Intertec Publishing
Corporation, Bacon's Information, Inc., Primedia Workplace Learning, Inc.,
certain product lines of Primedia Information Inc., and related Internet
operations (see Note 11).
Recent pronouncements of the Financial Accounting Standards Board ("FASB"),
which are not required to be adopted at this date include Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities", which was subsequently amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
effective date of FASB Statement No. 133" and SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities - an amendment of
FASB Statement No. 133." The Company is in the process of evaluating the
expected impact of SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138;
however, neither is expected to have a material impact on the Company's
consolidated financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition In Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company is required to adopt SAB 101 no later than the fourth quarter of
fiscal 2000. The Company is in the process of evaluating the expected impact of
SAB 101; however, it is not expected to have a material impact on the Company's
consolidated financial statements.
2. Inventories, net
Inventories consist of the following:
September 30, December 31,
2000 1999
--------------- ---------------
Finished goods $ 10,548 $ 10,459
Work in process 518 315
Raw materials 21,390 23,707
--------------- ---------------
32,456 34,481
Less: Allowance for obsolescence 2,306 1,772
--------------- ---------------
$ 30,150 $ 32,709
=============== ===============
3. Other Investments
Primedia Ventures' Investments in Marketable Securities
In 2000, the Company sold two of Primedia Ventures' investments in marketable
securities for total proceeds of $10,367 and realized a gain of $9,777, which is
included in gain on sale of businesses and other, net on the accompanying
condensed statement of consolidated operations. At September 30, 2000, the cost
and fair value of Primedia Ventures' investment in marketable securities was
$2,217 and $5,434, respectively. At December 31, 1999, the cost and fair value
of Primedia Ventures' investments in marketable securities was $2,807 and
$91,789, respectively. In addition, the Company recorded an unrealized loss of
$85,765 for the nine months ended September 30, 2000 related to a Primedia
Ventures' investment. This unrealized loss is recorded as a component of other
comprehensive loss for the nine months ended September 30, 2000 (see Note 9).
Investment in CMGI, Inc.
In May 2000, the Company acquired 1,530,000 shares of common stock of CMGI, Inc.
in exchange for 8,000,000 shares, or 5%, of the Company's common stock (par
value $.01) subject to a one year lockup. The transaction was valued at
$164,000, which represents the fair value of the Company's common stock
exchanged on the exchange date. In addition, the Company recorded an unrealized
loss of $121,255 for the nine months ended September 30, 2000 related to its
investment in CMGI. This unrealized loss is recorded as a component of other
comprehensive loss for the nine months ended September 30, 2000 (see Note 9).
Investment in Liberty Digital
On April 20, 2000, the Company completed its purchase of 625,000 shares of
Liberty Digital Series A common stock at forty dollars per share for an
aggregate purchase price of $25,000. In addition, the Company recorded an
unrealized loss of $12,344 for the nine months ended September 30, 2000 related
to its investment in Liberty Digital. This unrealized loss is recorded as a
component of other comprehensive loss for the nine months ended September 30,
2000 (see Note 9).
Assets-for-Equity Transactions
In the first nine months of 2000, the Company entered various assets-for-equity
transactions, some of which also included cash consideration. Through September
30, 2000, the Company's investments totaled approximately $97,000, approximately
$20,000 of which was in cash. The remainder represents the fair values of
advertising, content licensing and other services to be rendered by the Company
in exchange for these equity investments. The Company will recognize these
amounts as revenue as services are rendered. The related liabilities are
included as deferred revenues on the accompanying condensed consolidated balance
sheet. Revenue recognized in connection with these assets-for-equity
transactions was approximately $10,200 through September 30, 2000.
The Company continually evaluates all of its investments for potential
impairment in accordance with 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. As of September 30, 2000, the Company's management believes that
none of its investments are permanently impaired.
4. Long-term Debt
Long-term debt consists of the following:
September 30, December 31,
2000 1999
-------------- --------------
Borrowings under credit facilities $ 931,750 $ 1,050,525
10 1/4% Senior Notes due 2004 100,000 100,000
8 1/2% Senior Notes due 2006 299,196 299,109
7 5/8% Senior Notes due 2008 248,847 248,756
-------------- --------------
1,579,793 1,698,390
Obligation under capital leases 29,727 31,134
Acquisition obligation payable 17,721 26,112
-------------- --------------
1,627,241 1,755,636
Less: Current maturities of long-term debt 22,024 22,740
-------------- --------------
$ 1,605,217 $ 1,732,896
============== ==============
As of September 30, 2000, the Company had unused bank commitments of
approximately $466,000.
5. Exchangeable Preferred Stock
Exchangeable Preferred Stock consists of the following:
September 30, December 31,
2000 1999
------------ ------------
$10.00 Series D Exchangeable Preferred Stock $ 195,997 $ 195,588
$9.20 Series F Exchangeable Preferred Stock 121,256 120,941
$8.625 Series H Exchangeable Preferred Stock 243,663 243,160
------------ ------------
$ 560,916 $ 559,689
============ ============
$10.00 Series D Exchangeable Preferred Stock
The Company authorized 2,000,000 shares of $.01 par value $10.00 Series D
Exchangeable Preferred Stock, all of which was issued and outstanding at
September 30, 2000 and December 31, 1999. The liquidation and redemption value
at September 30, 2000 and December 31, 1999 was $200,000.
$9.20 Series F Exchangeable Preferred Stock
The Company authorized 1,250,000 shares of $.01 par value $9.20 Series F
Exchangeable Preferred Stock, all of which was issued and outstanding at
September 30, 2000 and December 31, 1999. The liquidation and redemption value
at September 30, 2000 and December 31, 1999 was $125,000.
$8.625 Series H Exchangeable Preferred Stock
The Company authorized 2,500,000 shares of $.01 par value $8.625 Series H
Exchangeable Preferred Stock, all of which was issued and outstanding at
September 30, 2000 and December 31, 1999. The liquidation and redemption value
at September 30, 2000 and December 31, 1999 was $250,000.
6. Investment by Liberty Media
In April 2000, Liberty Media Corporation ("Liberty Media") invested $200,000 in
cash in exchange for 8,000,000 shares, or 5%, of the Company's issued and
outstanding shares of common stock, subject to a one-year lockup, and a warrant
to purchase an additional 1,500,000 shares of the Company's common stock. The
warrant received by Liberty Media is exercisable at $25 per share on or before
April 19, 2003. Additionally, Liberty Media has received an option to acquire a
12.5% stake in the Company's newly formed subsidiary, Primedia Digital Video.
7. Non-cash Compensation and Non-cash Non-recurring Charges
During the nine months ended September 30, 2000, the Company recorded $19,500 of
non-cash compensation charges relating to the hiring and retention of certain
key executives. These non-cash compensation charges consist of a $7,062 pro-rata
charge related to 1,380,711 shares of common stock granted to a senior executive
in 1999, and a $12,438 charge related to the extension of stock option
expiration periods for a senior executive during the first quarter of 2000. At
September 30, 2000 and December 31, 1999, unearned stock grant compensation
balances of $8,188 and $15,250, respectively, are recorded on the accompanying
condensed consolidated balance sheets.
During the second quarter of 2000, the Company recorded $7,400 of non-cash
non-recurring charges relating to the recoverability of certain assets of our
business-to-business segment.
8. Provision for Severance, Closures and Integration Costs
During the nine months ended September 30, 2000, the Company recorded $7,703 of
integration costs relating to a management reorganization. These costs have been
charged to operations as incurred. These integration costs consist of $5,506 for
consultants related to sourcing and integration initiatives, $1,478 related to
recruiting for senior executives hired during the first six months of 2000 and
$719 of other costs. Through September 30, 2000, approximately $7,100 of related
cash payments have been made. The remaining costs are expected to be paid during
2000.
During the second quarter of 2000, the Company announced the details of plans
aimed largely at centralizing many support functions. As part of these plans,
the Company has consolidated many back office functions including but not
limited to certain accounting and purchasing functions. As a result, the Company
will close and consolidate fifteen office locations and will terminate
approximately 225 individuals.
During the second and third quarters of 2000, in conjunction with these plans,
the Company has recorded pre-tax charges of $10,250 and $1,055, respectively,
for a total of $11,305. The total charge recorded on the accompanying condensed
consolidated statements of operations, is comprised of the following: $7,364 of
severance and other employee costs, $1,947 of lease obligations, $1,761 of
contract termination costs related to pre-press and licensing agreements and
$233 of other exit costs. As of September 30, 2000, approximately $1,400 has
been paid primarily relating to severance. The majority of the remaining costs
are expected to be paid by the end of 2001 with the balance to be paid through
the end of 2003.
The Company is currently developing additional plans aimed largely at the
consolidation of certain functions, and accordingly may record an additional
provision for severance and closures of approximately $2,000 - $4,000 during the
fourth quarter of 2000.
During the first quarter of 1999, the Company discontinued five unprofitable
Primedia Workplace Learning product lines. In relation to these discontinuances,
the Company recorded a $22,000 charge for approximately $13,200 of cash payments
primarily related to transponder and office site leases and approximately $8,800
related to the recoverability of the related excess of purchase price over net
assets acquired and certain other assets. As of September 30, 2000,
approximately $9,700 of the cash payments have been made. The remaining $3,500
is expected to be paid during 2000 and 2001.
The liabilities representing the provision for severance, closures and
integration costs are included in accrued expenses and other on the accompanying
condensed consolidated balance sheets.
9. Comprehensive Loss
Comprehensive loss for the nine and three months ended September 30, 2000 and
1999 is presented in the following tables:
Nine Months Ended
September 30, September 30,
2000 1999
-------------- --------------
Net loss $ (89,518) $ (67,975)
Other comprehensive income (loss):
Unrealized loss on available-for-sale
securities (219,364) -
Foreign currency translation adjustments (619) 111
-------------- --------------
Total comprehensive loss $ (309,501) $ (67,864)
============== ==============
Three Months Ended
September 30, September 30,
2000 1999
-------------- --------------
Net loss $ (43,019) $ (17,097)
Other comprehensive income (loss):
Unrealized loss on available-for-sale
securities (46,735) -
Foreign currency translation adjustments (411) 117
-------------- --------------
Total comprehensive loss $ (90,165) $ (16,980)
============== ==============
10. Loss per Common Share
Loss per share for the nine and three-month periods ended September 30, 2000 and
1999 has been determined based on net loss after preferred stock dividends,
divided by the weighted average number of common shares outstanding for all
periods presented. The effect of the assumed exercise of non-qualified stock
options was not included in the computation of diluted loss per share because
the effect of inclusion would be antidilutive.
11. Divestitures
On March 30, 2000, the Company announced its intention to divest QWIZ, Inc.,
Pictorial, Inc. and 18 business directories ("Directories") (see Note 1). At
that time, in accordance with SFAS No. 121, these businesses ceased to
depreciate their property and equipment and ceased to amortize their intangible
assets and excess of purchase price over net assets acquired.
On June 30, 2000, the Company completed the sale of Pictorial, Inc. to BISYS for
total consideration of $129,000 in cash, which includes proceeds on the sale of
the business as well as payments received related to a non-compete agreement.
The value of the non-compete agreement is approximately $25,000 and is included
in deferred revenues on the accompanying condensed consolidated balance sheet as
of September 30, 2000. The non-compete agreement is being amortized over a
15-year period. In connection with the sale, the Company recorded a gain of
approximately $17,700, net of estimated selling costs. The Company has used the
proceeds of this sale for repayment of borrowings under its credit facilities.
Total proceeds from the sales of Directories and QWIZ, Inc. are expected to
exceed their carrying values and will primarily be used to pay down borrowings
under the Company's credit facilities. The net assets of Directories and
QWIZ, Inc. are recorded at their carrying value as net assets held for sale on
the accompanying condensed consolidated balance sheet as of September 30, 2000.
The net assets held for sale as of September 30, 2000 are primarily comprised of
approximately $54,000 of excess of purchase price over net assets acquired and
other intangible assets, net.
During the quarter ended June 30, 2000, the Company received $10,000 due to the
final settlement on a prior period divestiture. This receipt is included in
other income on the accompanying condensed statements of consolidated
operations.
12. Business Segment Information
On March 30, 2000, the Company announced a new strategic direction which
included a management reorganization and a focus on building a fully integrated,
targeted business-to-business and consumer media company. Accordingly, the
Company's operations were reclassified into two new segments, consumer and
business-to-business and previously reported results have been restated
accordingly (see Note 1). Information as to the operations of the Company in
different business segments is set forth below based on the nature of the
targeted audience. Primedia's chief decision-maker evaluates performance based
on several factors, of which the primary financial measure is segment earnings
before interest, taxes, depreciation, amortization and other credits (charges)
("EBITDA"). Other credits (charges) include non-cash compensation and non-cash
non-recurring charges, provision for severance, closures and integration costs
and gain (loss) on sale of businesses and other, net.
During 1999, the Company divested the supplemental education group (which
includes Weekly Reader Corporation, Primedia Reference Inc. and American
Guidance Service Inc.) ("SEG"). In addition, during 2000, the Company divested
Pictorial and Directories and plans to divest QWIZ. Accordingly, in 2000, the
Company reclassified SEG, Pictorial, QWIZ and Directories as Non-Core
Businesses and has restated prior periods. The Company has segregated the
Non-Core Businesses from the aforementioned segments because the Company's chief
decision-maker views these businesses separately when evaluating and making
decisions regarding ongoing operations.
Nine Months Ended Three Months Ended
September 30, September 30,
2000 1999 2000 1999
--------------- ----------------- ---------------- ----------------
Sales, Net:
Consumer $ 828,830 $ 771,040 $ 274,532 $ 257,380
Business-to-business 369,545 348,419 121,098 111,056
Eliminations (800) - (800) -
Other:
Non-Core Businesses 34,049 140,995 6,817 54,569
--------------- ----------------- ---------------- ----------------
Total $ 1,231,624 $ 1,260,454 $ 401,647 $ 423,005
=============== ================= ================ ================
EBITDA (1):
Consumer $ 125,098 $ 156,622 $ 32,392 $ 48,095
Business-to-business 63,165 68,530 18,662 19,128
Other:
Corporate (24,632) (22,101) (8,316) (8,170)
Non-Core Businesses 8,693 41,161 1,288 19,614
--------------- ----------------- ---------------- ----------------
Total $ 172,324 $ 244,212 $ 44,026 $ 78,667
=============== ================= ================ ================
The following is a reconciliation of EBITDA to operating income (loss):
Nine Months Ended Three Months Ended
September 30, September 30,
2000 1999 2000 1999
---------------- --------------- ---------------- ----------------
Total EBITDA (1) $ 172,324 $ 244,212 $ 44,026 $ 78,667
Depreciation of property and equipment (39,760) (36,350) (12,855) (12,296)
Amortization of intangible assets, excess
of purchase price over net assets
acquired and other (98,279) (126,676) (31,857) (39,642)
Non-cash compensation and non-cash
non-recurring charges (26,900) - (2,354) -
Provision for severance, closures and
integration costs (19,008) (22,000) (2,291) -
Gain (loss) on sale of businesses and
other, net 26,824 - (1,658) -
---------------- --------------- ---------------- ----------------
Operating income (loss) $ 15,201 $ 59,186 $ (6,989) $ 26,729
================ =============== ================ ================
(1) EBITDA represents earnings before interest, taxes, depreciation,
amortization and other credits (charges).
Earnings before interest, taxes, depreciation, amortization and other credits
(charges), or EBITDA, is a widely used and commonly reported standard measure
utilized by analysts, investors and other interested parties in the analysis of
the media industry. Other credits (charges) include non-cash compensation and
non-cash non-recurring charges, provision for severance, closures and
integration costs and gain (loss) on sale of businesses and other, net. EBITDA
is included in the following discussion to provide additional information for
determining the ability of the Company to meet its future debt service
requirements and to pay cash dividends on its preferred stock. EBITDA is not
intended to represent cash flow from operations and should not be considered as
an alternative to net income or loss (as determined in conformity with generally
accepted accounting principles) as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity. This information is
disclosed herein to permit a more complete comparative analysis of the Company's
operating performance relative to other companies in its industry. This measure
may not be comparable to similarly titled measures used by other companies.
13. Subsequent Events
In October 2000, the Company completed the sale of Directories to an acquisition
group formed by Bariston Partners, LLC. for $34,000 in cash.
In October 2000, the Company announced that it has signed an agreement to merge
with About.com, Inc. About.com, Inc. is a platform comprised of a network of
more than 700 highly-targeted topic-specific web sites. Through the efforts of
knowledgeable human guides who manage the sites, the sites provide high-quality
original articles, moderated forums and chat rooms and links to related web
sites. About.com, Inc.'s sales were approximately $27,000 for the year ended
December 31, 1999.
This merger will create a leading targeted media company, which will provide a
vast array of marketing solutions to advertisers and niche content to users.
Under terms of the agreement, shareholders of About.com, Inc. will receive
45,200,000 shares of the Company or 2.3409 Company shares for each About.com,
Inc. share. The value of the transaction is $690,000 based on the Company's
October 27, 2000 closing price of $15.25 and About.com, Inc.'s closing price of
$23.875. This transaction will be accounted for under the purchase method of
accounting and is subject to Primedia's and About.com, Inc.'s shareholder
approval. The transaction, which is also subject to regulatory approval, is
expected to close during the first quarter of 2001.
In addition to the above merger, the Company entered into an additional business
arrangement with About.com, Inc. whereby the Company will provide approximately
$72,000 of advertising and promotional services in exchange for an aggregate of
2,016,806 shares of common stock of About.com, Inc. Except in limited
circumstances, this arrangement will remain in effect regardless of whether the
merger is completed.
Through November 14, 2000, the Company completed two acquisitions in the
business-to-business segment and acquired a controlling interest in an entity
included in the consumer segment.
14. Financial Information for Guarantors of the Company's Debt
The information that follows presents condensed consolidating financial
information as of and for the nine months ended September 30, 2000 for a)
Primedia Inc. (as the Issuer), b) the guarantor subsidiaries, c) the foreign
non-guarantor subsidiaries, d) the unrestricted Internet non-guarantor
subsidiaries, e) elimination entries and f) the Company on a consolidated basis.
The condensed financial statements of the guarantor subsidiaries as of and for
the nine months ended September 30, 1999 are omitted because the Company
believes the separate financial statements would not be material to the
shareholders and potential investors. The total assets, revenues, income or
equity of non-guarantor subsidiaries, both individually and on a combined basis
as of and for the nine months ended September 30, 1999 were inconsequential in
relation to the total assets, revenues, income or equity of the Company.
The condensed consolidating financial information includes certain allocations
based on management's best estimates and should be read in connection with the
condensed consolidated financial statements of the Company.
14. Financial Information For Guarantors of the Company's Debt (Continued)
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(UNAUDITED)
For the Nine Months Ended September 30, 2000
(dollars in thousands)
Unrestricted
Foreign Internet Primedia Inc.
Guarantor Non-Guarantor Non-Guarantor and
Primedia Inc. Subsidiaries Subsidiaries Subsidiaries Eliminations Subsidiaries
----------------------------------------------------------------------------------
Sales, net $ - $ 1,225,386 $ 4,938 $ 31,463 $ (30,163) $ 1,231,624
Operating costs and expenses:
Cost of goods sold - 289,790 1,679 38,254 (30,163) 299,560
Marketing and selling - 276,184 1,435 12,325 - 289,944
Distribution, circulation and fulfillment - 174,570 584 13,857 - 189,011
Editorial - 90,886 313 2,828 - 94,027
Other general expenses - 133,761 752 27,613 - 162,126
Corporate administrative expenses (excluding
non-cash compensation) 23,945 - - 687 - 24,632
Depreciation of property and equipment 1,377 34,330 75 3,978 - 39,760
Amortization of intangible assets, excess
of purchase price over net assets
acquired and other 322 97,044 529 384 - 98,279
Non-cash compensation and non-cash
non-recurring charges 19,500 7,400 - - - 26,900
Provision for severance, closures and
integration costs 12,739 6,165 - 104 - 19,008
Gain on sale of businesses and other, net - (17,947) - (8,877) - (26,824)
----------------------------------------------------------------------------------
Operating income (loss) (57,883) 133,203 (429) (59,690) - 15,201
Other income (expense):
Interest expense (104,869) (4,284) (281) - - (109,434)
Amortization of deferred financing costs - (2,897) (2) - - (2,899)
Equity in losses of subsidiaries (107,396) - - - 107,396 -
Intercompany management fees and interest 180,296 (180,296) - - - -
Other, net 334 7,512 (291) 59 - 7,614
----------------------------------------------------------------------------------
Net loss $ (89,518) $ (46,762) $ (1,003) $ (59,631) $ 107,396 $ (89,518)
==================================================================================
14. Financial Information For Guarantors of the Company's Debt (Continued)
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
September 30, 2000
(dollars in thousands)
Unrestricted
Foreign Internet Primedia Inc.
Guarantor Non-Guarantor Non-Guarantor and
Primedia Inc. Subsidiaries Subsidiaries Subsidiaries Eliminations Subsidiaries
-----------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,892 $ 16,838 $ 3,836 $ 95 $ - $ 29,661
Accounts receivable, net 367 255,806 736 3,842 - 260,751
Intercompany receivables 257,100 334,327 - 3,772 (595,199) -
Inventories, net - 29,067 12 1,071 - 30,150
Net assets held for sale - 48,347 249 - - 48,596
Prepaid expenses and other 8,524 42,466 107 2,886 - 53,983
-----------------------------------------------------------------------------------
Total current assets 274,883 726,851 4,940 11,666 (595,199) 423,141
Property and equipment, net 7,274 122,296 153 31,233 - 160,956
Investment in subsidiaries 981,029 - - - (981,029) -
Other intangible assets, net 2,543 516,619 712 949 - 520,823
Excess of purchase price over
net assets acquired, net (13,254) 1,103,974 3,531 5,044 - 1,099,295
Deferred income tax asset, net 176,200 - - - - 176,200
Other investments 152,440 1,089 - 37,727 - 191,256
Other non-current assets 4,779 84,954 13 124 - 89,870
-----------------------------------------------------------------------------------
$1,585,894 $ 2,555,783 $ 9,349 $ 86,743 $(1,576,228) $ 2,661,541
===================================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 450 $ 69,770 $ 284 $ 1,873 $ - $ 72,377
Intercompany payables (550,608) 970,950 13,046 161,811 (595,199) -
Accrued interest payable 18,069 - - - - 18,069
Accrued expenses and other 76,275 145,771 251 5,024 - 227,321
Deferred revenues 25,834 230,910 553 6,405 - 263,702
Current maturities of long-term debt 6,891 15,121 - 12 - 22,024
-----------------------------------------------------------------------------------
Total current liabilities (423,089) 1,432,522 14,134 175,125 (595,199) 603,493
-----------------------------------------------------------------------------------
Long-term debt 1,579,744 25,466 - 7 - 1,605,217
-----------------------------------------------------------------------------------
Intercompany notes payable - 2,139,960 - - (2,139,960) -
-----------------------------------------------------------------------------------
Other non-current liabilities - 21,427 246 939 - 22,612
-----------------------------------------------------------------------------------
Exchangeable preferred stock 560,916 - - - - 560,916
-----------------------------------------------------------------------------------
Shareholders' deficiency:
Common stock 1,669 - - - - 1,669
Additional paid-in capital 1,342,626 - - - - 1,342,626
Accumulated deficit (1,332,522) (1,061,532) (4,857) (92,542) 1,158,931 (1,332,522)
Accumulated other comprehensive
income (loss) (133,599) (2,060) (174) 3,214 - (132,619)
Unearned stock grant compensation (8,188) - - - - (8,188)
Common stock in treasury, at cost (1,663) - - - - (1,663)
-----------------------------------------------------------------------------------
Total shareholders' deficiency (131,677) (1,063,592) (5,031) (89,328) 1,158,931 (130,697)
-----------------------------------------------------------------------------------
$1,585,894 $ 2,555,783 $ 9,349 $ 86,743 $ (1,576,228) $ 2,661,541
===================================================================================
14. Financial Information For Guarantors of the Company's Debt (Continued)
----------------------------------------------------------------------
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended September 30, 2000
(dollars in thousands)
Unrestricted
Foreign Internet Primedia Inc.
Guarantor Non-Guarantor Non-Guarantor and
Primedia Inc. Subsidiaries Subsidiaries Subsidiaries Eliminations Subsidiaries
---------------------------------------------------------------------------------
Operating activities:
Net loss $ (89,518) $ (46,762) $ (1,003) $ (59,631) $ 107,396 $ (89,518)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization 1,699 134,271 606 4,362 - 140,938
Gain on sale of businesses and other, net - (17,947) - (8,877) - (26,824)
Accretion of discount on acquisition obligation
and other 577 2,314 - - - 2,891
Non-cash compensation and non-cash
non-recurring charges 19,500 7,400 - - - 26,900
Equity in losses of subsidiaries 107,396 - - - (107,396) -
Intercompany (income) expense (180,296) 180,296 - - - -
Other, net (11) 830 29 - - 848
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable, net (322) (30,825) (100) (1,226) - (32,473)
Inventories, net - 198 (4) 1,045 - 1,239
Prepaid expenses and other (5,046) (8,366) (45) (1,873) - (15,330)
Increase (decrease) in:
Accounts payable (2,992) (26,876) (89) 1,018 - (28,939)
Accrued interest payable (1,310) - - - - (1,310)
Accrued expenses and other 1,238 (1,693) 75 1,105 - 725
Deferred revenues - (4,142) (94) 3,399 - (837)
Other non-current liabilities (50,649) 50,312 (8) 26 - (319)
---------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities (199,734) 239,010 (633) (60,652) - (22,009)
---------------------------------------------------------------------------------
Investing activities:
Additions to property, equipment and other, net (1,037) (33,188) (17) (19,353) - (53,595)
Proceeds from sales of businesses and other - 131,667 - 10,372 - 142,039
Payments for businesses acquired - (23,201) - (1,242) - (24,443)
Payments for other investments (45,428) (3,660) - (18,325) - (67,413)
---------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities (46,465) 71,618 (17) (28,548) - (3,412)
---------------------------------------------------------------------------------
Financing activities:
Intercompany activity 207,833 (298,529) 1,805 88,891 - -
Borrowings under credit agreements 436,550 - - - - 436,550
Repayments of borrowings under credit agreements (549,800) 99 (290) - - (549,991)
Payments of acquisition obligation (3,685) (6,248) - - - (9,933)
Proceeds from issuances of common stock,
net of redemptions 209,743 - - - - 209,743
Taxes paid associated with stock option exercises (16,891) - - - - (16,891)
Purchases of common stock for the treasury (385) - - - - (385)
Dividends paid to preferred stock shareholders (39,797) - - - - (39,797)
Deferred financing costs paid - (175) - - - (175)
Other 2 (2,702) - - - (2,700)
---------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 243,570 (307,555) 1,515 88,891 - 26,421
---------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (2,629) 3,073 865 (309) - 1,000
Cash and cash equivalents, beginning of period 11,521 13,765 2,971 404 - 28,661
---------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 8,892 $ 16,838 $ 3,836 $ 95 $ - $ 29,661
=================================================================================
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
Primedia Inc., together with its subsidiaries, is herein referred to as either
"Primedia" or the "Company."
The following discussion and analysis of the Company's unaudited financial
condition and results of operations should be read in conjunction with the
unaudited condensed consolidated financial statements and notes thereto. On
March 30, 2000, the Company announced a new strategic direction, which included
a management reorganization and a focus on building a fully integrated targeted
business-to-business and consumer media company. Accordingly, the Company's two
new segments are consumer and business-to-business.
Management believes a meaningful comparison of the results of operations for the
nine and three months ended September 30, 2000 and 1999 is obtained by using the
segment information and by presenting results from continuing businesses
("Continuing Businesses") which exclude the results of the non-core businesses
("Non-Core Businesses"). The Non-Core Businesses include the supplemental
education group (which includes Weekly Reader Corporation, Primedia Reference
Inc. and American Guidance Service Inc.) ("SEG"), which was divested in the
fourth quarter of 1999. The Company has divested Pictorial, Inc. and 18 business
directories and plans to divest QWIZ, Inc. by the end of the year. Accordingly,
the results of operations for these businesses have been excluded from the
Company's business-to-business segment and reported as Non-Core Businesses.
The Company's consumer segment includes 124 targeted magazines and associated
products with leading positions in such markets as teens - Seventeen; weddings -
Modern Bride; child care - American Baby; city-specific - New York; outdoors -
Fly Fisherman and Sail; automotive - Sport Compact Car; crafts - Crafts
Magazine; pets - Cats and equine - Equus; consumer guides (including 79
apartment guides and 26 new home guides); Channel One (the only daily news show
geared toward high school students) as well as its Films for the Humanities and
Sciences division, and the newly formed Primedia Digital Video (a unit focused
on delivering consumer broadband video).
The Company's business-to-business segment includes 92 business-to-business
magazines and 47 trade shows (including leading titles in such areas as
telecommunications - Telephony; media - Folio; marketing - American
Demographics; agriculture -Farm Industry News and entertainment technologies -
Cable World); workplace learning (including 15 video networks and television
series in such areas as healthcare, law enforcement and automotive); business
databases and directories (including Bacon's for the public relations industry
and Federal Sources for government information technology procurement), and
IndustryClick, the Company's business-to-business Internet company.
The results from continuing businesses for each segment include traditional and
new media operations. Starting in 1998, the Company has committed significant
financial resources to the development of its new media businesses. These units
leverage off of the traditional media businesses. The current levels of spending
have reduced total EBITDA in the 2000 periods as compared to the prior year.
Funding for these projects comes from the Company's cash flow and proceeds from
the sale of non-strategic units.
Results from the Company's new media operations reflect certain adjustments
including the allocation of bundled revenues and various intercompany expenses
based on certain Internet industry ranges and methodologies. All intercompany
transactions between the traditional and new media operations are eliminated in
consolidation.
Prior period results have been restated to reflect the Company's new segment
reporting and reclassification of SEG, Pictorial, QWIZ, Inc. and 18 business
directories as Non-Core Businesses.
Earnings before interest, taxes, depreciation, amortization and other credits
(charges), or EBITDA, is a widely used and commonly reported standard measure
utilized by analysts, investors and other interested parties in the analysis of
the media industry. Other credits (charges) include non-cash compensation and
non-cash non-recurring charges, provision for severance, closures and
integration costs and gain (loss) on sale of businesses and other, net. EBITDA
is included in the following discussion to provide additional information for
determining the ability of the Company to meet its future debt service
requirements and to pay cash dividends on its preferred stock. EBITDA is not
intended to represent cash flow from operations and should not be considered as
an alternative to net income or loss (as determined in conformity with generally
accepted accounting principles) as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity. This information is
disclosed herein to permit a more complete comparative analysis of the Company's
operating performance relative to other companies in its industry. This measure
may not be comparable to similarly titled measures used by other companies.
Primedia Inc. and Subsidiaries
Unaudited Results of Consolidated Operations
(dollars in thousands)
Nine Months Ended Three Months Ended
September 30, September 30,
2000 1999 2000 1999
--------------- -------------- ------------- -------------
Sales, Net:
Continuing Businesses:
Consumer $ 828,830 $ 771,040 $ 274,532 $ 257,380
Business-to-business 369,545 348,419 121,098 111,056
Eliminations (800) - (800) -
--------------- -------------- ------------- -------------
Subtotal 1,197,575 1,119,459 394,830 368,436
Non-Core Businesses 34,049 140,995 6,817 54,569
--------------- -------------- ------------- -------------
Total $ 1,231,624 $ 1,260,454 $ 401,647 $ 423,005
=============== ============== ============= =============
EBITDA:
Continuing Businesses:
Consumer $ 125,098 $ 156,622 $ 32,392 $ 48,095
Business-to-business 63,165 68,530 18,662 19,128
Corporate (24,632) (22,101) (8,316) (8,170)
--------------- -------------- ------------- -------------
Subtotal 163,631 203,051 42,738 59,053
Non-Core Businesses 8,693 41,161 1,288 19,614
--------------- -------------- ------------- -------------
Total $ 172,324 $ 244,212 $ 44,026 $ 78,667
=============== ============== ============= =============
Operating Income (Loss):
Continuing Businesses:
Consumer $ 37,400 $ 66,930 $ 3,590 $ 17,824
Business-to-business 4,914 (8,598) 2,606 837
Corporate (49,696) (22,850) (13,501) (8,416)
--------------- -------------- ------------- -------------
Subtotal (7,382) 35,482 (7,305) 10,245
Non-Core Businesses 22,583 23,704 316 16,484
--------------- -------------- ------------- -------------
Total 15,201 59,186 (6,989) 26,729
Other Income (Expense):
Interest expense (109,434) (123,965) (34,114) (42,429)
Amortization of deferred
financing costs (2,899) (2,426) (960) (855)
Other, net 7,614 (770) (956) (542)
--------------- -------------- ------------- -------------
Net Loss $ (89,518) $ (67,975) $ (43,019) $ (17,097)
=============== ============== ============= =============
RESULTS OF OPERATIONS (dollars in thousands, except per share amounts)
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999:
Consolidated Results:
Traditional media sales from Continuing Businesses increased 7.7% to $1,197,619
in 2000 from $1,112,281 in 1999 due to growth in both segments. New media sales
from Continuing Businesses increased 82.1% to $30,119 in 2000 from $16,536 in
1999 due to growth in both segments. After the elimination of inter-company
sales between the traditional and new media businesses of $30,163 and $9,358 in
2000 and 1999, respectively, sales from Continuing Businesses increased 7.0% to
$1,197,575 in 2000 from $1,119,459 in 1999 due to growth in both segments. Total
sales, including Non-Core Businesses, decreased 2.3% to $1,231,624 in the first
nine months of 2000 from $1,260,454 in the 1999 period.
Traditional media EBITDA from Continuing Businesses increased 4.0% to $227,538
in 2000 from $218,720 in 1999, while new media EBITDA from Continuing Businesses
decreased 307.9% to $(63,907) in 2000 from $(15,669) in 1999. EBITDA from
Continuing Businesses decreased 19.4% to $163,631 in 2000 from $203,051 in 1999
due to decreases in both segments caused by higher investment in new media
development. Total EBITDA, including Non-Core Businesses, decreased $71,888 or
29.4% to $172,324 in 2000 from $244,212 in 1999.
Operating income (loss) from Continuing Businesses, including traditional media
and new media operations, decreased to $(7,382) in 2000 compared to $35,482 in
1999. This change was due primarily to the decrease in EBITDA caused by higher
investment in new media development. The non-cash compensation and non-cash
non-recurring charges recorded in 2000 were offset by the decreased amortization
expense and the gain on sale of businesses and other, net recorded during the
first nine months of 2000. Total operating income, including Non-Core
Businesses, decreased 74.3% to $15,201 in 2000 compared to $59,186 in 1999.
Interest expense decreased by 11.7% in the first nine months of 2000 compared to
1999. This decrease is the result of the Company's use of proceeds from the sale
of SEG and Pictorial and from the Liberty Media investment to repay borrowings
under its credit facilities.
Other income (expense) increased to $7,614 in 2000 compared to $(770) in 1999
primarily due to a $10,000 final cash settlement received on a prior period
divestiture.
Consumer:
Traditional media sales from Continuing Businesses increased 8.3% to $831,259 in
2000 from $767,234 in 1999. This increase was due primarily to double-digit
growth at the apartment guides, as well as strong growth in advertising and
circulation revenues at the enthusiast magazines. These increases were partially
offset by lower single copy sales at the soap opera and youth entertainment
group titles. New media sales from Continuing Businesses increased 51.1% to
$15,587 in 2000 from $10,317 in 1999 primarily due to an increase in Internet
advertising at apartmentguide.com and magazine related web-sites. After the
elimination of inter-company sales between the traditional and new media
businesses of $18,016 and $6,511 in 2000 and 1999, respectively, sales from
Continuing Businesses increased 7.5% to $828,830 in the first nine months of
2000 from $771,040 in 1999.
Traditional media EBITDA from Continuing Businesses increased 2.2% to $171,793
in 2000 from $168,050 in 1999. The traditional media EBITDA margin from
Continuing Businesses decreased to 20.7% in 2000 from 21.9% in 1999 primarily
due to reduced newsstand sales at the soap opera and youth entertainment group
titles, as well as higher paper prices. New media EBITDA from Continuing
Businesses decreased 308.6% to $(46,695) in 2000 from $(11,428) in 1999.
EBITDA from Continuing Businesses decreased 20.1% to $125,098 in 2000 from
$156,622 in 1999. The EBITDA margin for Continuing Businesses decreased to 15.1%
in 2000 from 20.3% in 1999. The decrease is mostly attributable to significantly
increased Internet spending, as well as reduced newsstand sales at the soap
opera and youth entertainment group titles and increased paper prices.
Operating income from Continuing Businesses, including traditional media and new
media operations, decreased 44.1% to $37,400 in 2000 from $66,930 in 1999. The
decrease in operating income was primarily attributable to the decrease in
EBITDA. The provision for severance, closures and integration costs recorded
during 2000 was offset by a decrease in amortization expense in 2000 as compared
to 1999.
Business-to-Business:
Traditional media sales from Continuing Businesses increased 6.2% to $366,360 in
2000 from $345,047 in 1999. The increase is primarily attributable to the growth
in advertising at certain business-to-business magazines and trade shows and
increased clipping revenues at Bacon's. New media sales from Continuing
Businesses increased 133.7% to $14,532 in 2000 from $6,219 in 1999 primarily due
to growth at IndustryClick, our business-to-business Internet unit, as well as
new on-line products at Bacon's. After the elimination of inter-company sales
between the traditional and new media businesses of $11,347 and $2,847 in 2000
and 1999, respectively, sales from Continuing Businesses increased 6.1% to
$369,545 in the first nine months of 2000 from $348,419 in 1999.
Traditional media EBITDA from Continuing Businesses increased 10.8% to $79,344
in 2000 from $71,620 in 1999. The traditional media EBITDA margin from
Continuing Businesses increased slightly to 21.7% in 2000 from 20.8% in 1999 due
primarily to strength at certain business-to-business titles. New media EBITDA
from Continuing Businesses decreased 423.6% to $(16,179) in 2000 from $(3,090)
in 1999. EBITDA from Continuing Businesses decreased 7.8% to $63,165 in 2000
from $68,530 in 1999. The EBITDA margin decreased to 17.1% in 2000 from 19.7% in
1999. The decrease is reflective of increased Internet investment.
Operating income (loss) from Continuing Businesses, including traditional media
and new media operations, increased to $4,914 in 2000 from $(8,598) in 1999. The
increase in operating income is primarily attributable to reduced amortization
expense in 2000 compared to 1999 as well as the $22,000 provision for
product-line closures which was recorded during 1999. These increases were
partially offset by the decrease in EBITDA and $7,400 of non-cash non-recurring
charges recorded during 2000.
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999:
Consolidated Results:
Traditional media sales from Continuing Businesses increased 8.6% to $396,878 in
2000 from $365,568 in 1999 due to growth in both segments. New media sales from
Continuing Businesses increased 91.1% to $12,104 in 2000 from $6,333 in 1999 due
to growth in both segments. After the elimination of inter-company sales between
the traditional and new media businesses of $14,152 and $3,465 in 2000 and 1999,
respectively, sales from Continuing Businesses increased 7.2% to $394,830 in
2000 from $368,436 in 1999 due to growth in both segments. Total sales,
including Non-Core Businesses, decreased 5.0% to $401,647 in the third quarter
of 2000 from $423,005 in the 1999 period.
Traditional media EBITDA from Continuing Businesses increased 9.3% to $ 72,039
in 2000 from $ 65,939 in 1999, due to growth in both segments, while new media
EBITDA from Continuing Businesses decreased 325.5% to $(29,301) in 2000 from
$(6,886) in 1999. EBITDA from Continuing Businesses decreased 27.6% to $42,738
in 2000 from $59,053 in 1999 due to decreases in both segments. The biggest
factor contributing to the decline was higher investment in new media
development. Total EBITDA, including Non-Core Businesses, decreased $34,641 or
44.0% to $44,026 in 2000 from $78,667 in 1999.
Operating income (loss) from Continuing Businesses, including traditional media
and new media operations, decreased to $(7,305) in 2000 compared to $10,245 in
1999. The decrease in operating income was primarily attributable to the
decrease in EBITDA. The non-cash compensation and the provision for severance,
closures and integration costs recorded during the third quarter of 2000 were
substantially offset by reduced amortization expense during the period due to
accelerated amortization methods. Total operating income (loss), including
Non-Core Businesses, decreased to $(6,989) in 2000 compared to $26,729 in 1999.
Interest expense decreased by 19.6% in the third quarter of 2000 compared to
1999. This decrease is the result of the Company's use of proceeds from the sale
of SEG and Pictorial and from the Liberty Media investment to repay borrowings
under its credit facilities.
Consumer:
Traditional media sales from Continuing Businesses increased 8.5% to $277,252 in
2000 from $255,520 in 1999. This increase was due primarily to double-digit
growth at the apartment guides, as well as strong growth in advertising and
circulation revenues at the enthusiast magazines. These increases were partially
offset by lower single copy sales at the soap opera and youth entertainment
group titles. New media sales from Continuing Businesses increased 49.1% to
$6,422 in 2000 from $4,308 in 1999 primarily due to an increase in Internet
advertising at apartmentguide.com. After the elimination of inter-company sales
between the traditional and new media businesses of $9,142 and $2,448 in 2000
and 1999, respectively, sales from Continuing Businesses increased 6.7% to
$274,532 in the third quarter of 2000 from $257,380 in 1999.
Traditional media EBITDA from Continuing Businesses increased 5.3% to $55,797 in
2000 from $53,006 in 1999. The traditional media EBITDA margin from Continuing
Businesses decreased to 20.1% in 2000 from 20.7% in 1999 primarily due to
reduced newsstand sales at the soap opera and youth entertainment group titles
as well as higher paper prices. New media EBITDA from Continuing Businesses
decreased 376.6% to $(23,405) in 2000 from $(4,911) in 1999.
EBITDA from Continuing Businesses decreased 32.6% to $32,392 in 2000 from
$48,095 in 1999. The EBITDA margin for Continuing Businesses decreased to 11.8%
in 2000 from 18.7% in 1999. The decrease is mostly attributable to significantly
increased Internet spending, as well as reduced newsstand sales at the soap
opera and youth entertainment group titles and higher paper prices.
Operating income from Continuing Businesses, including traditional media and new
media operations, decreased 79.9% to $3,590 in 2000 from $17,824 in 1999. The
decrease in operating income was primarily attributable to the decrease in
EBITDA.
Business-to-Business:
Traditional media sales from Continuing Businesses increased 8.7% to $119,626 in
2000 from $110,048 in 1999. The increase is primarily attributable to the growth
at certain business-to-business magazines and trade shows. New media sales from
Continuing Businesses increased 180.6% to $5,682 in 2000 from $2,025 in 1999
primarily due to growth at IndustryClick, our business-to-business Internet
unit, as well as new on-line products at Bacon's. After the elimination of
inter-company sales between the traditional and new media businesses of $4,210
and $1,017 in 2000 and 1999, respectively, sales from Continuing Businesses
increased 9.0% to $121,098 in the third quarter of 2000 from $111,056 in 1999.
Traditional media EBITDA from Continuing Businesses increased 17.5% to $24,428
in 2000 from $20,789 in 1999. The traditional media EBITDA margin from
Continuing Businesses increased to 20.4% in 2000 from 18.9% in 1999 primarily
due to strength at certain business-to-business titles. New media EBITDA from
Continuing Businesses decreased 247.1% to $(5,766) in 2000 from $(1,661) in
1999. EBITDA from Continuing Businesses decreased 2.4% to $18,662 in 2000 from
$19,128 in 1999. The EBITDA margin decreased to 15.4% in 2000 from 17.2% in
1999. The decrease is reflective of increased Internet investment.
Operating income from Continuing Businesses, including traditional media and new
media operations, increased to $2,606 in 2000 from $837 in 1999. The increase in
operating income is primarily attributable to a decrease in amortization expense
during the third quarter of 2000 as compared to the similar period in 1999.
New Media Operations for Continuing Businesses:
The following presents information related to the Company's new media operations
for Continuing Businesses as if they were conducted as stand-alone businesses.
In June 1999, intercompany agreements were put in effect between the traditional
and new media operations. The following pro forma information was prepared as if
these intercompany agreements were in place effective January 1, 1999. The
Company applied certain Internet industry ranges and methodologies to its
historical operating results to calculate pro forma results related to revenue
sharing between the traditional and new media businesses for the following
on-line transactions: sales of print products, third-party commerce, proprietary
product sales, subscriptions, display and classified advertisements and
pay-per-use services. Pro forma adjustments include the allocation of bundled
revenues and various intercompany expenses based on certain Internet industry
ranges and methodologies.
The Company believes the accounting used for the pro forma adjustments provides
a reasonable basis on which to present the pro forma results. The pro forma
adjustments relate to the period January 1, 1999 through June 30, 1999. The pro
forma new media information is provided for informational purposes only, should
not be construed to be indicative of the historical results had these new media
businesses been operated as stand-alone operations and is not intended to
project future results of operations of the new media businesses.
Primedia Inc. and Subsidiaries
New Media Operations for Continuing Businesses
Nine Months Ended September 30,
1999
2000 1999 Pro Forma 1999
Actual Actual Adjustments Pro Forma
------------------ ---------------- --------------- ---------------
New Media Revenues:
Consumer $ 15,587 $ 5,202 $ 5,115(1) $ 10,317
Business-to-business 14,532 6,219 - 6,219
------------------ ---------------- --------------- ---------------
Total $ 30,119 $ 11,421 $ 5,115 $ 16,536
================== ================ =============== ===============
New Media EBITDA (Loss) :
Consumer $ (46,695) $ (10,432) $ (996)(2) $ (11,428)
Business-to-business (16,179) (389) (2,701)(2) (3,090)
Corporate (1,033) (865) (286)(2) (1,151)
------------------ ---------------- --------------- ---------------
Total $ (63,907) $ (11,686) $ (3,983) $ (15,669)
================== ================ =============== ===============
Primedia Inc. and Subsidiaries
New Media Operations for Continuing Businesses
Three Months Ended September 30,
2000 1999
Actual Actual
------------------ ----------------
New Media Revenues:
Consumer $ 6,422 $ 4,308
Business-to-business 5,682 2,025
------------------ ----------------
Total $ 12,104 $ 6,333
================== ================
New Media EBITDA (Loss) :
Consumer $ (23,405) $ (4,911)
Business-to-business (5,766) (1,661)
Corporate (130) (314)
------------------ ----------------
Total $ (29,301) $ (6,886)
================== ================
(1) Represents the allocation of the on-line portion of bundled classified ad
sales initiated by the consumer guides' traditional salesforce.
(2) Represents commissions charged by the traditional media businesses to the
new media businesses primarily for on-line advertising and subscriptions,
intercompany advertising expense as well as general administrative services
provided.
Liquidity and Capital Resources
Consolidated working capital deficiency, including net assets held for sale and
current portion of long-term debt, was $180,352 at September 30, 2000 as
compared to $200,458 at December 31, 1999. Consolidated working capital
deficiency primarily reflects the recording of deferred revenues as a current
liability as well as the expensing of most advertising, editorial and product
development costs as incurred. Consolidated working capital deficiency decreased
at September 30, 2000 primarily due to the reclassification of the assets and
liabilities of QWIZ, Inc. and 18 business directories to net assets held for
sale.
Net cash provided by (used in) operating activities during the nine months ended
September 30, 2000, after interest payments of $108,191 in 2000 and $120,244 in
1999, was $(22,009), as compared to $40,704 during the same 1999 period, due
primarily to increased new media investment, as well as other working capital
changes. Net additions to property, equipment and other were $53,595 during the
nine months ended September 30, 2000 compared to $43,198 during the 1999 period
due primarily to increased spending on new office space and capitalized software
expenditures associated with the Company's new media operations. Net cash used
in investing activities during the nine months ended September 30, 2000
decreased to $3,412 compared to $125,724 in the same 1999 period due to the
lower level of acquisition spending in 2000 as well as proceeds from the sale of
Pictorial in 2000. Net cash provided by financing activities during the nine
months ended September 30, 2000 was $26,421, compared to $90,531 in the same
1999 period. Borrowings were higher in 1999 to fund greater acquisition
spending.
The Company believes its liquidity, capital resources and cash flow are
sufficient to fund planned capital expenditures, working capital requirements,
interest and principal payments on its debt, the payment of preferred stock
dividends and other anticipated expenditures for the foreseeable future.
Other Investments
CMGI, Inc.
In May 2000, the Company acquired 1,530,000 shares of common stock of CMGI, Inc.
in exchange for 8,000,000 shares, or 5%, of the Company's common stock (par
value $.01) subject to a one year lockup. The transaction was valued at
$164,000, which represents the fair value of the Company's common stock
exchanged on the exchange date. In addition, the Company recorded an unrealized
loss of $121,255 for the nine months ended September 30, 2000 related to its
investment in CMGI. This unrealized loss is recorded as a component of other
comprehensive loss for the nine months ended September 30, 2000. The Company and
CMGI have agreed to partner on various business-to-business Internet alliances.
Liberty Media
In April 2000, Liberty Media invested $200,000 in cash in exchange for 8,000,000
shares, or 5%, of the Company's issued and outstanding shares of common stock,
subject to a one-year lockup, and a warrant to purchase an additional 1,500,000
shares of the Company's common stock. The warrant received by Liberty Media is
exercisable at $25 per share on or before April 19, 2003. Additionally, Liberty
Media has received an option to acquire a 12.5% stake in the Company's newly
formed subsidiary, Primedia Digital Video, at fair market value. On April 20,
2000, the Company completed its purchase of 625,000 shares of Liberty Digital
Series A common stock at forty dollars per share for an aggregate purchase price
of $25,000. In addition, the Company recorded an unrealized loss of $12,344 for
the nine months ended September 30, 2000 related to its investment in Liberty
Digital. This unrealized loss is recorded as a component of other comprehensive
loss for the nine months ended September 30, 2000. The Company and Liberty Media
have agreed to partner on various consumer Internet and broadband initiatives.
Assets-for-Equity Transactions
In the first nine months of 2000, the Company entered various assets-for-equity
transactions, some of which also included cash consideration. Through September
30, 2000, the Company's investments totaled approximately $97,000, approximately
$20,000 of which was in cash. The remainder represents the fair values of
advertising, content licensing and other services to be rendered by the Company
in exchange for these equity investments. The Company will recognize these
amounts as revenue as services are rendered. Revenue recognized in connection
with these assets-for-equity transactions was approximately $10,200 through
September 30, 2000.
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.
As of September 30, 2000, the Company's management believes that none of its
investments are permanently impaired.
Provision for Severance, Closures and Integration Costs
During the nine months ended September 30, 2000, the Company recorded $7,703 of
integration costs relating to a management reorganization. These costs have been
charged to operations as incurred. These integration costs consist of
approximately $5,506 for consultants related to sourcing and integration
initiatives, approximately $1,478 related to recruiting for senior executives
hired during the first six months of 2000 and approximately $719 of other costs.
Through September 30, 2000, approximately $7,100 of related cash payments have
been made. The remaining costs are expected to be paid during 2000.
During the second quarter of 2000, the Company announced the details of plans
aimed largely at centralizing many support functions. As part of these plans,
the Company has consolidated many back office functions including but not
limited to certain accounting and purchasing functions. As a result, the Company
will close and consolidate fifteen office locations and will terminate
approximately 225 individuals.
During the second and third quarters of 2000, in conjunction with these plans,
the Company has recorded pre-tax charges of $10,250 and $1,055, respectively,
for a total of $11,305. The total charge is comprised of the following: $7,364
of severance and other employee costs, $1,947 of lease obligations, $1,761 of
contract termination costs related to pre-press and licensing agreements and
$233 of other exit costs. As of September 30, 2000 approximately $1,400 has been
paid primarily relating to severance. The majority of the remaining costs are
expected to be paid by the end of 2001 with the balance to be paid through the
end of 2003.
The Company is currently developing additional plans aimed largely at the
consolidation of certain functions, and accordingly may record an additional
provision for severance and closures of approximately $2,000 - $4,000 during the
fourth quarter of 2000.
Management anticipates that these plans will result in significant savings in
2001.
Divestitures
On March 30, 2000, the Company announced its intention to divest QWIZ, Inc.,
Pictorial, Inc. and 18 business directories ("Directories"). At that time, in
accordance with SFAS No. 121, these businesses ceased to depreciate their
property and equipment and ceased to amortize their intangible assets and excess
of purchase price over net assets acquired.
On June 30, 2000, the Company completed the sale of Pictorial, Inc. to BISYS for
total consideration of $129,000 in cash, which includes proceeds on the sale of
the business as well as payments received related to a non-compete agreement.
The value of the non-compete agreement is approximately $25,000 as of September
30, 2000. The non-compete agreement is being amortized over a 15-year period. In
connection with the sale, the Company recorded a gain of approximately $17,700,
net of estimated selling costs. The Company has used the proceeds of this sale
for repayment of borrowings under its credit facilities.
Total proceeds from the sales of Directories and QWIZ, Inc. are expected to
exceed their carrying values and will primarily be used to pay down borrowings
under the Company's credit facilities. The net assets of Directories and QWIZ,
Inc. are recorded at their carrying value as net assets held for sale as of
September 30, 2000. The net assets held for sale as of September 30, 2000 are
primarily comprised of approximately $54,000 of excess of purchase price over
net assets acquired and other intangible assets, net.
Recent Developments
In October 2000, the Company completed the sale of Directories to an acquisition
group formed by Bariston Partners, LLC. for $34,000 in cash.
In October 2000, the Company announced that it has signed an agreement to merge
with About.com, Inc.. About.com, Inc. is a platform comprised of a network of
more than 700 highly-targeted topic-specific web sites. Through the efforts of
knowledgeable human guides who manage the sites, the sites provide high-quality
original articles, moderated forums and chat rooms and links to related web
sites. About.com, Inc.'s sales were approximately $27,000 for the year ended
December 31, 1999.
This merger will create a leading targeted media company, which will provide a
vast array of marketing solutions to advertisers and niche content to users.
Under terms of the agreement, shareholders of About.com, Inc. will receive
45,200,000 shares of the Company or 2.3409 Company shares for each About.com,
Inc. share. The value of the transaction is $690,000 based on the Company's
October 27, 2000 closing price of $15.25 and About.com, Inc.'s closing price of
$23.875. This transaction will be accounted for under the purchase method of
accounting and is subject to Primedia's and About.com, Inc.'s shareholder
approval. The transaction, which is also subject to regulatory approval, is
expected to close during the first quarter of 2001.
In addition to the above merger, the Company entered into an additional business
arrangement with About.com, Inc. whereby the Company will provide approximately
$72,000 of advertising and promotional services in exchange for an aggregate of
2,016,806 shares of common stock of About.com, Inc. Except in limited
circumstances, this arrangement will remain in effect regardless of whether the
merger is completed.
Through November 14, 2000, the Company completed two acquisitions in the
business-to-business segment and acquired a controlling interest in an entity
included in the consumer segment.
Impact of Inflation
The impact of inflation was immaterial during 1999 and through the first nine
months of 2000. Paper prices increased significantly through the first nine
months of 2000. In the first nine months of 2000, paper costs represented
approximately 8% of the Company's total operating costs and expenses. Postage
for product distribution and direct mail solicitations is also a significant
expense of the Company. The Company uses the U.S. Postal Service for
distribution of many of its products and marketing materials. Postage costs
increased approximately 4% in January 1999 and is expected to increase in 2001.
In the past, the effects of inflation on operating expenses have substantially
been offset by Primedia's ability to increase selling prices. No assurances can
be given that the Company can pass such cost increases through to its customers.
In addition to pricing actions, the Company is continuing to examine all aspects
of the manufacturing and purchasing processes to identify ways to offset some of
these price increases.
Forward-Looking Information
This report contains certain forward-looking statements concerning the Company's
operations, economic performance and financial condition. These statements are
based upon a number of assumptions and estimates, which are inherently subject
to uncertainties and contingencies, many of which are beyond the control of the
Company, and reflect future business decisions, which are subject to change.
Some of the assumptions may not materialize and unanticipated events will occur
which can affect the Company's results.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the first nine-months of 2000, there were no significant changes related
to the Company's market risk exposure.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Primedia Inc.
(Registrant)
Date: November 14, 2000 /s/ Thomas S. Rogers
------------------------ --------------------------------------
(Signature)
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2000 /s/ Lawrence R. Rutkowski
------------------------ --------------------------------------
(Signature)
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)