UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: June 30, 2004

 

Commission file number: 1-11106

 

PRIMEDIA Inc.

(Exact name of registrant as specified in its charter)

 

Delaware		13-3647573
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer 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     ý          No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes     ý          No  o

 

Number of shares of common stock, par value $.01 per share, of PRIMEDIA Inc. outstanding as of July 30, 2004: 260,481,340.

 

 

PRIMEDIA Inc.

 

INDEX

 

Part I. Financial Information:
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets as of June 30, 2004 (Unaudited) and December 31, 2003	2
		Condensed Statements of Consolidated Operations (Unaudited) for the six months ended June 30, 2004 and 2003	3
		Condensed Statements of Consolidated Operations (Unaudited) for the three months ended June 30, 2004 and 2003	4
		Condensed Statements of Consolidated Cash Flows (Unaudited) for the six months ended June 30, 2004 and 2003	5
		Notes to Condensed Consolidated Financial Statements (Unaudited)	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	58
	Item 4.	Controls and Procedures	58
Part II. Other Information:
	Item 4.	Submission of Matters to a Vote of Security Holders	59
	Item 6.	Exhibits and Reports on Form 8-K	60
	Signatures		61

 

1

 

PRIMEDIA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		June 30, 2004			December 31, 2003
		(Unaudited)
		(dollars in thousands, except per share amounts)
ASSETS
Current assets:
Cash and cash equivalents		$	66,558		$	8,685
Accounts receivable, net		180,944			194,080
Inventories		19,095			17,500
Prepaid expenses and other		40,942			36,059
Assets held for sale		379			31,879
Total current assets		307,918			288,203
Property and equipment (net of accumulated depreciation and amortization of $301,352 in 2004 and $280,612 in 2003)		98,448			110,859
Other intangible assets, net		258,389			268,407
Goodwill		903,178			910,534
Other non-current assets		60,384			58,118
Total Assets		$	1,628,317		$	1,636,121
LIABILITIES AND SHAREHOLDERS’ DEFICIENCY
Current liabilities:
Accounts payable		$	75,293		$	78,794
Accrued expenses and other		181,144			213,934
Deferred revenues		151,336			157,853
Current maturities of long-term debt		16,683			22,195
Liabilities of businesses held for sale		1,297			16,049
Total current liabilities		425,753			488,825
Long-term debt		1,592,292			1,562,441
Shares subject to mandatory redemption		474,559			474,559
Deferred revenues		35,446			33,604
Deferred income taxes		69,970			61,364
Other non-current liabilities		25,837			28,583
Total Liabilities		2,623,857			2,649,376
Shareholders’ deficiency:
Series J convertible preferred stock ($.01 par value, 1,406,722 shares and 1,319,093 shares issued and outstanding, aggregate liquidation and redemption values of $175,841 and $164,887 at June 30, 2004 and December 31, 2003, respectively)		175,487			164,533
Common stock ($.01 par value, 350,000,000 shares authorized at June 30, 2004 and December 31, 2003 and 269,032,592 shares and 268,333,049 shares issued at June 30, 2004 and December 31, 2003, respectively)		2,690			2,683
Additional paid-in capital (including warrants of $31,690 at June 30, 2004 and December 31, 2003)		2,349,476			2,345,152
Accumulated deficit		(3,445,439		)	(3,447,710		)
Accumulated other comprehensive loss		(192		)	(176		)
Unearned compensation		—			(175		)
Common stock in treasury, at cost (8,610,491 shares at June 30, 2004 and December 31, 2003)		(77,562		)	(77,562		)
Total Shareholders’ Deficiency		(995,540		)	(1,013,255		)
Total Liabilities and Shareholders’ Deficiency		$	1,628,317		$	1,636,121

 

See notes to condensed consolidated financial statements (unaudited).

 

2

 

PRIMEDIA INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

 

		Six Months Ended June 30,
		2004			2003
		(dollars in thousands, except per share amounts)
Revenues, net:
Advertising		$	418,025		$	414,915
Circulation		150,792			155,081
Other		98,545			94,782
Total revenues, net		667,362			664,778
Operating costs and expenses:
Cost of goods sold		141,668			147,758
Marketing and selling		141,562			142,003
Distribution, circulation and fulfillment		115,566			113,841
Editorial		53,853			53,152
Other general expenses		87,824			84,705
Corporate administrative expenses (excluding $3,486 and $2,023 of non-cash compensation in 2004 and 2003, respectively)		13,363			14,053
Depreciation of property and equipment		21,902			26,459
Amortization of intangible assets and other		10,783			20,605
Severance related to separated senior executives		658			5,576
Non-cash compensation		3,486			2,023
Provision for severance, closures and restructuring related costs		7,174			3,150
Provision for unclaimed property		5,500			—
(Gain) loss on sale of businesses and other, net		(23		)	1,338
Operating income		64,046			50,115
Other income (expense):
Provision for impairment of investments		(804		)	(7,727		)
Interest expense		(58,742		)	(65,203		)
Interest on shares subject to mandatory redemption		(21,890		)	—
Amortization of deferred financing costs		(2,319		)	(1,244		)
Other income (expense), net		109			(3,819		)
Loss from continuing operations before income tax expense		(19,600		)	(27,878		)
Income tax expense		(8,724		)	(7,051		)
Loss from continuing operations		(28,324		)	(34,929		)
Discontinued operations (including gain on sale of businesses of $42,226 and $102,605 in 2004 and 2003, respectively)		41,549			103,586
Net income		13,225			68,657
Preferred stock dividends and related accretion, net		(10,954		)	(32,011		)
Income applicable to common shareholders		$	2,271		$	36,646
Per common share:
Loss from continuing operations		$	(0.15	)	$	(0.26	)
Discontinued operations		0.16			0.40
Basic and diluted income applicable to common shareholders		$	0.01		$	0.14
Basic and diluted common shares outstanding		260,100,874			258,945,403

 

See notes to condensed consolidated financial statements (unaudited).

 

3

 

PRIMEDIA INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

 

		Three Months Ended June 30,
		2004			2003
		(dollars in thousands, except per share amounts)
Revenues, net:
Advertising		$	213,696		$	211,462
Circulation		76,989			77,779
Other		51,491			50,050
Total revenues, net		342,176			339,291
Operating costs and expenses:
Cost of goods sold		74,209			75,910
Marketing and selling		66,203			66,358
Distribution, circulation and fulfillment		59,372			55,984
Editorial		26,785			26,473
Other general expenses		42,707			41,680
Corporate administrative expenses (excluding $1,567 and $777 of non-cash compensation in 2004 and 2003, respectively)		5,906			6,672
Depreciation of property and equipment		10,181			14,359
Amortization of intangible assets and other		4,817			9,920
Severance related to separated senior executives		—			5,576
Non-cash compensation		1,567			777
Provision for severance, closures and restructuring related costs		4,455			1,988
Loss on sale of businesses and other, net		52			1,212
Operating income		45,922			32,382
Other expense:
Provision for impairment of investments		(804		)	(7,727		)
Interest expense		(30,164		)	(31,750		)
Interest on shares subject to mandatory redemption		(10,945		)	—
Amortization of deferred financing costs		(1,217		)	(503		)
Other expense, net		(179		)	(3,275		)
Income (loss) from continuing operations before income tax expense		2,613			(10,873		)
Income tax expense		(4,357		)	(3,333		)
Loss from continuing operations		(1,744		)	(14,206		)
Discontinued operations (including gain on sale of businesses of $4,192 and $103,846 in 2004 and 2003, respectively)		3,898			103,110
Net income		2,154			88,904
Preferred stock dividends and related accretion, net		(5,801		)	(15,578		)
Income (loss) applicable to common shareholders		$	(3,647	)	$	73,326
Per common share:
Loss from continuing operations		$	(0.03	)	$	(0.12	)
Discontinued operations		0.02			0.40
Basic and diluted income (loss) applicable to common shareholders		$	(0.01	)	$	0.28
Basic and diluted common shares outstanding		260,307,340			259,003,962

 

See notes to condensed consolidated financial statements (unaudited).

 

4

 

PRIMEDIA INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

 

		Six Months Ended June 30,
		2004			2003
		(dollars in thousands)
Operating activities:
Net income		$	13,225		$	68,657
Adjustments to reconcile net income to net cash used in operating activities		7,197			(23,304		)
Changes in operating assets and liabilities		(37,381		)	(47,073		)
Net cash used in operating activities		(16,959		)	(1,720		)
Investing activities:
Additions to property, equipment and other, net		(13,574		)	(21,166		)
Proceeds from sale of businesses and other		70,277			182,922
Payments for businesses acquired, net of cash acquired		(1,270		)	(4,796		)
Proceeds from other investments, net		674			1,008
Net cash provided by investing activities		56,107			157,968
Financing activities:
Borrowings under credit agreements		231,500			288,400
Repayments of borrowings under credit agreements		(378,500		)	(314,312		)
Payments for repurchases of senior notes		—			(375,675		)
Proceeds from issuance of Senior Floating Rate Notes		175,000			—
Proceeds from issuance of 8% Senior Notes		—			300,000
Proceeds from issuances of common stock		701			569
Purchases of common stock for the treasury		—			(19,367		)
Dividends paid to preferred stock shareholders		—			(22,921		)
Deferred financing costs paid		(5,559		)	(5,977		)
Capital lease obligations		(4,278		)	(1,788		)
Other		(139		)	(155		)
Net cash provided by (used in) financing activities		18,725			(151,226		)
Increase in cash and cash equivalents		57,873			5,022
Cash and cash equivalents, beginning of period		8,685			18,553
Cash and cash equivalents, end of period		$	66,558		$	23,575
Supplemental information:
Cash interest paid		$	55,194		$	69,336
Cash interest paid on shares subject to mandatory redemption		$	26,455		$	—
Cash taxes paid, net of refunds		$	102		$	99
Accretion in carrying value of exchangeable and convertible preferred stock		$	—		$	781
Payments of dividends-in-kind on Series J Convertible Preferred Stock		$	10,954		$	9,254
Carrying value of exchangeable preferred stock converted to common stock		$	—		$	16,066
Fair value of common stock issued in connection with conversion of exchangeable preferred stock		$	—		$	15,122

 

See notes to condensed consolidated financial statements (unaudited).

 

5

 

PRIMEDIA Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands, except per share amounts)

 

1.     Summary of Significant Accounting Policies

 

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, the condensed consolidated financial statements present fairly the consolidated financial position of the Company as of June 30, 2004 and December 31, 2003 and the consolidated results of operations of the Company for the six and three months ended June 30, 2004 and 2003, and consolidated cash flows of the Company for the six month periods ended June 30, 2004 and 2003 and all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All 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, 2003, which are included in the Company’s annual report on Form 10-K for the year ended December 31, 2003. The operating results for the six and three month periods ended June 30, 2004 are not necessarily indicative of the results that may be expected for a full year. Certain amounts in the prior periods’ condensed consolidated financial statements and related notes have been reclassified to conform to the presentation as of and for the six and three month periods ended June 30, 2004.

 

Stock Based Compensation

 

The Company has a stock-based employee compensation plan. Effective January 1, 2003, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”, using the prospective method. Upon adoption, the Company began expensing the fair value of stock-based compensation for all grants, modifications or settlements made on or after January 1, 2003.  The adoption of SFAS 123 increased the loss from continuing operations for the six and three months ended June 30, 2004 by $1,368 and $778, respectively. The impact of the adoption of SFAS 123 was not significant for the six and three months ended June 30, 2003.

 

6

 

The following table illustrates the effect on net income (loss) applicable to common shareholders and income (loss) per common share if the Company had applied the fair value recognition provisions of SFAS 123 to all stock-based employee compensation grants:

 

		Six Months Ended June 30,						Three Months Ended June 30,
		2004			2003			2004			2003
Reported net income (loss) applicable to common shareholders		$	2,271		$	36,646		$	(3,647	)	$	73,326
Add: Stock-based employee compensation expense included in reported net income (loss)		1,543			1,313			778			472
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards		(6,438		)	(13,573		)	(3,277		)	(7,004		)
Pro forma net income (loss) applicable to common shareholders		$	(2,624	)	$	24,386		$	(6,146	)	$	66,794
Per Common Share:
Reported basic and diluted income (loss)		$	0.01		$	0.14		$	(0.01	)	$	0.28
Pro forma basic and diluted income (loss)		$	(0.01	)	$	0.09		$	(0.02	)	$	0.26

 

Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options granted on or before December 31, 2002 under the fair value method of SFAS 123. The fair value of these options was estimated at the date of grant using the Black-Scholes pricing model. The following weighted-average assumptions were used for options granted in the six months ended June 30, 2004 and 2003, respectively: risk-free interest rates of 2.81% and 3.85%; dividend yields of 0.0% and 0.0%; volatility factors of the expected market price of the Company’s common stock of 85% and 79%, and a weighted-average expected life of the options of three and five years. For the three months ended June 30, 2004 and 2003, respectively, the following weighted-average assumptions were used: risk-free interest rates of 2.83 % and 3.82%; dividend yields of 0.0% and 0.0%; volatility factors of the expected market price of the Company’s common stock of 85% and 79%, and a weighted-average expected life of the options of three and five years. The estimated fair value of options granted during the six months ended June 30, 2004 and 2003 was $318 and $18, respectively, and $310 and $8 during the three months ended June 30, 2004 and 2003, respectively.

 

The Black-Scholes pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

 

Recent Accounting Pronouncement

 

On July 1, 2003, the Company prospectively adopted SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”.  SFAS 150 requires the Company to classify as long-term liabilities its Series D Exchangeable Preferred Stock, Series F Exchangeable Preferred Stock and Series H Exchangeable Preferred Stock (collectively the “Exchangeable Preferred Stock”) and to classify dividends from this Exchangeable Preferred Stock as interest expense.

 

7

 

As a result of the adoption of SFAS 150, the Exchangeable Preferred Stock are now collectively described as “shares subject to mandatory redemption” on the accompanying condensed consolidated balance sheets as of June 30, 2004 and December 31, 2003.  Dividends on these shares, subsequent to the adoption of SFAS 150, are now described as “interest on shares subject to mandatory redemption” and are included in loss from continuing operations for the six and three months ended June 30, 2004, whereas previously they were presented below net income (loss) as preferred stock dividends. The adoption of SFAS 150 increased the loss from continuing operations for the six and three months ended June 30, 2004 by $22,562 and $11,281, respectively, which represents interest on shares subject to mandatory redemption ($10,945 per quarter) and amortization of issuance costs ($336 per quarter) which is included in the amortization of deferred financing costs on the accompanying condensed statements of consolidated operations.  If SFAS 150 was adopted on January 1, 2003, loss from continuing operations for the six and three months ended June 30, 2003 would have increased by $22,670 and $10,794, respectively.  This adoption did not have an impact on income (loss) applicable to common shareholders or income (loss) per common share for any of the periods presented on the accompanying condensed statements of consolidated operations.

 

2.     Divestitures

 

The Company has classified the results of certain divested entities as discontinued operations in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.

 

In January 2004, the Company completed the sale of New York magazine, part of the Enthusiast Media segment, the results of which have been classified as discontinued operations for all periods presented. Proceeds from the sale of $55,000, subject to standard post-closing adjustments, were used to pay down the Company’s borrowings under its bank credit facilities with JPMorgan Chase Bank, Bank of America, N.A., The Bank of New York, and The Bank of Nova Scotia, as agents (the “bank credit facilities”). Additionally, the Company finalized a working capital settlement with the purchaser of Seventeen and its companion teen properties, resulting in a payment to the purchaser of $3,379 in January 2004.

 

In February 2004, the Company completed the sale of Kagan World Media, part of the Business Information segment, the results of which have been classified as discontinued operations for all periods presented.  Proceeds from the sale were approximately $2,200, subject to standard post-closing adjustments.

 

In April 2004, the Company sold About Web Services, the Web hosting business of About Inc., part of the Enthusiast Media segment, the results of which have been classified as discontinued operations for all periods presented.  Proceeds from the sale were approximately $12,200, subject to standard post-closing adjustments.

 

Additionally, the Company is evaluating strategic partnerships regarding the Folio, Circulation Management and American Demographics properties in the Business Information segment.  The operating results of these businesses have been classified as discontinued operations for all periods presented and the related assets and liabilities have been classified as held for sale as of June 30, 2004.

 

The results of the Company’s divestiture of certain properties in 2004 and 2003 have been included in discontinued operations on the accompanying condensed statements of consolidated operations.  Discontinued operations include revenues of $6,718 and $86,815 for the six months ended June 30, 2004 and 2003, respectively, and $1,762 and $36,501 for the three months ended June 30, 2004 and 2003, respectively.

 

8

 

Balance Sheet-Held for Sale

 

The assets and liabilities of businesses that have been sold or which the Company has initiated plans to sell as of June 30, 2004 and December 31, 2003 have been reclassified to held for sale on the accompanying condensed consolidated balance sheets as follows:

 

		June 30, 2004			December 31, 2003
ASSETS
Accounts receivable, net		$	365		$	8,010
Inventories		—			391
Prepaid expenses and other		14			907
Property and equipment, net		—			297
Other intangible assets, net		—			14,056
Goodwill		—			6,747
Other non-current assets		—			1,471
Assets held for sale		$	379		$	31,879
LIABILITIES
Accounts payable		$	—		$	3,115
Accrued expenses and other		—			11,791
Deferred revenues-current		847			1,110
Deferred revenues-non current		450			—
Other non-current liabilities		—			33
Liabilities of businesses held for sale		$	1,297		$	16,049

 

Assets and liabilities classified as held for sale at December 31, 2003 have been sold as of June 30, 2004.

 

3.     Accounts Receivable, Net

 

Accounts receivable, net, consisted of the following:

 

		June 30, 2004			December 31, 2003
Accounts receivable		$	196,336		$	212,144
Less: Allowance for doubtful accounts		11,709			10,798
Allowance for returns and rebates		3,683			7,266
		$	180,944		$	194,080

 

9

 

4.               Inventories

 

Inventories consisted of the following:

 

		June 30, 2004			December 31, 2003
Finished goods		$	9,382		$	8,008
Work in process		—			230
Raw materials		9,713			9,262
		$	19,095		$	17,500

 

5.     Goodwill, Other Intangible Assets and Other

 

As required under SFAS 142, “Goodwill and Other Intangible Assets”, the Company continues to assess goodwill and indefinite lived intangible assets for impairment at least annually since its initial adoption of SFAS 142 on January 1, 2002. The Company established October 31 as the annual impairment test date.  In addition to the annual impairment test, an assessment is also required whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For the six months ended June 30, 2004, there were no events or changes in circumstances requiring the Company to perform an impairment test related to goodwill, intangible assets or other finite lived assets, and accordingly, there were no impairments recorded.

 

Historically, the Company did not need a valuation allowance for the portion of the tax effect of net operating losses equal to the amount of deferred tax liabilities related to tax-deductible goodwill and trademark amortization expected to occur during the carryforward period of the net operating losses based on the timing of the reversal of these taxable temporary differences. Upon adoption of SFAS 142, the Company recorded a valuation allowance in excess of its net deferred tax assets to the extent the difference between the book and tax basis of indefinite-lived intangible assets is not expected to reverse during the net operating loss carryforward period. With the adoption of SFAS 142, the Company no longer amortizes the book basis in the indefinite-lived intangibles, but will continue to amortize these intangibles for tax purposes. Income tax expense primarily consisted of deferred income taxes of $8,606 and $6,650 for the six months ended June 30, 2004 and 2003, respectively, and $4,317 and $3,325, for the three months ended June 30, 2004 and 2003, respectively, related to the increase in the Company’s net deferred tax liability for the tax effect of the net increase in the difference between the book and tax basis of the indefinite-lived intangible assets.

 

In addition, since amortization of tax-deductible goodwill and trademarks ceased on January 1, 2002, the Company will have deferred tax liabilities that will arise each quarter because the taxable temporary differences related to the amortization of these assets will not reverse prior to the expiration period of the Company’s deductible temporary differences unless the related assets are sold or an impairment of the assets is recorded. The Company expects that it will record a total of approximately $8,800 to increase deferred tax liabilities during the remaining six months of 2004.

 

10

 

Changes in the carrying amount of goodwill for the six months ended June 30, 2004, by operating segment, are as follows: 

 

		Enthusiast Media			Consumer Guides			Business Information			Education and Training			Total
Balance as of January 1, 2004		$	695,340		$	95,808		$	119,386		$	—		$	910,534
Purchase price allocation adjustments per final valuation reports		—			151			—			—			151
Goodwill written off related to the sale of businesses		(6,776		)	—			(731		)	—			(7,507		)
Balance as of June 30, 2004		$	688,564		$	95,959		$	118,655		$	—		$	903,178

 

Intangible assets subject to amortization in accordance with SFAS 142 consist of the following:

 

				June 30, 2004									December 31, 2003
		Range of Lives		Gross Carrying Amount			Accumulated Amortization			Net			Gross Carrying Amount			Accumulated Amortization			Net
Trademarks		3		$	20,449		$	20,449		$	—		$	21,013		$	19,845		$	1,168
Membership, subscriber and customer lists		2-20		347,325			319,641			27,684			348,346			315,860			32,486
Non-compete agreements		1-10		137,196			135,152			2,044			137,829			134,093			3,736
Trademark license agreements		2-15		2,984			2,908			76			2,984			2,899			85
Copyrights		3-20		20,550			19,800			750			20,550			19,609			941
Databases		2-12		9,353			8,823			530			9,353			8,627			726
Advertiser lists		5-20		135,978			124,770			11,208			135,978			122,852			13,126
Distribution agreements		1-7		10,410			10,410			—			10,410			10,410			—
Other		1-5		9,804			9,804			—			9,804			9,804			—
				$	694,049		$	651,757		$	42,292		$	696,267		$	643,999		$	52,268

 

11

 

Intangible assets not subject to amortization had a carrying value of $216,097 and $216,139 at June 30, 2004 and December 31, 2003, respectively, and consisted primarily of trademarks. Amortization expense for intangible assets still subject to amortization was $10,006 and $16,712 for the six months ended June 30, 2004 and 2003, respectively, and $4,403 and $7,950 for the three months ended June 30, 2004 and 2003, respectively.  Amortization of deferred wiring costs of $777 and $3,893 for the six months ended June 30, 2004 and 2003, respectively, and $414 and $1,970 for the three months ended June 30, 2004 and 2003, respectively, has also been included in amortization of intangible assets and other on the accompanying condensed statements of consolidated operations. At June 30, 2004, estimated future amortization expense of intangible assets still subject to amortization, excluding deferred wiring costs, is as follows: approximately $8,000 for the remaining six months of 2004 and approximately $11,000, $7,000, $5,000 and $4,000 for 2005, 2006, 2007 and 2008, respectively.

 

6.     Long-term Debt

 

Long-term debt consisted of the following:

 

		June 30, 2004			December 31, 2003
Borrowings under bank credit facilities		$	412,906		$	559,906
75/8% Senior Notes Due 2008		225,510			225,443
87/8% Senior Notes Due 2011		470,101			469,820
8% Senior Notes Due 2013		300,000			300,000
Senior Floating Rate Notes Due 2010		175,000			—
		1,583,517			1,555,169
Obligation under capital leases		25,458			29,467
		1,608,975			1,584,636
Less: Current maturities of long-term debt		16,683			22,195
		$	1,592,292		$	1,562,441

 

$175,000 Senior Floating Rate Notes Due 2010 and Term Loan C Credit Facility Offerings

 

On May 14, 2004, the Company issued $175,000 principal amount of Senior Floating Rate Notes Due 2010 (the “Senior Floating Rate Notes”), and entered into a new $100,000 term loan C credit facility with a maturity date of December 31, 2009.  The Senior Floating Rate Notes bear interest equal to the three-month LIBOR plus 5.375% per year and the term loan C at three-month LIBOR plus 4.375% per year.  The Company applied the combined net proceeds from the Senior Floating Rate Notes offering and the term loan C to prepay $30,000 of outstanding term loan A commitments and $120,000 of term loan B commitments, with the remainder used to temporarily pay down all outstanding advances under the revolving credit facility.  The purpose of these borrowings was to provide the ability to redeem the Company’s Series J Convertible Preferred Stock (see Subsequent Event Note 17).

 

Offering and Amendment to the Company’s Bank Credit Facilities

 

In connection with the offering of the Senior Floating Rate Notes, the Company entered into an amendment to its bank credit facilities that changed the terms of certain of the Company’s financial covenants and repayment obligations. The maximum allowable debt leverage ratio, as defined in the bank credit facilities, was amended to 6.25 to 1 through September 30, 2005 and decreases to 6.00 to 1, 5.75 to 1, 5.50 to 1, 5.25 to 1, 5.00 to 1, 4.75 to 1, and 4.50 to 1 on October 1, 2005, July 1, 2006, October 1, 2006, April 1, 2007, October 1, 2007, April 1, 2008 and July 1, 2008, respectively. The amendment to the bank credit facilities also set the minimum interest coverage ratio, as defined in the bank credit facilities, at 2.25 to 1 through maturity. The minimum fixed charge coverage ratio, as defined,

 

12

 

remains unchanged at 1.05 to 1 through maturity. The Company is in compliance with all of the financial and operating covenants of its financing arrangements.

 

With the exception of the term loan B and the term loan C, the amounts borrowed bear interest, at the Company’s option, at either the base rate plus an applicable margin ranging from 0.125% to 1.5% or LIBOR plus an applicable margin ranging from 1.125% to 2.5%. The term loan B bears interest at the base rate plus 1.75% or LIBOR plus 2.75%.  The term loan C bears interest at the base rate plus 3.375% or LIBOR plus 4.375%. At June 30, 2004 and December 31, 2003, the weighted average variable interest rate on all outstanding borrowings under the bank credit facilities was 3.8% and 3.6%, respectively.

 

7.     Series J Convertible Preferred Stock

 

As of June 30, 2004 and December 31, 2003, the Company had $175,487 and $164,533 of Series J Convertible Preferred Stock outstanding, respectively.  The Company paid dividends-in-kind of 87,629 and 46,407 shares of Series J Convertible Preferred Stock valued at $10,954 and $5,801 during the six and three months ended June 30, 2004, respectively, and 74,035 and 37,587 shares of Series J Convertible Preferred Stock valued at $9,254 and $4,698 during the six and three months ended June 30, 2003, respectively (see Subsequent Event Note 17).

 

8.     Common Stock and Related Options

 

The following table summarizes information about stock options outstanding and exercisable at June 30, 2004:

 

Range of Exercise Prices			Number Outstanding at 6/30/04		Number Exercisable at 6/30/04		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price of Outstanding Options			Weighted Average Exercise Price of Exercisable Options
$	0.08 - $ 0.43		68,610		68,610		3		$	0.29		$	0.29
$	1.01 - $ 1.80		5,270		3,395		6		1.44			1.50
$	1.85 - $ 1.98		1,096,336		610,418		7		1.85			1.85
$	2.02 - $ 2.99		2,918,949		739,824		5		2.84			2.76
$	3.09 - $ 3.65		2,082,250		41,125		7		3.09			3.20
$	4.00 - $ 5.95		7,267,077		5,686,952		6		4.73			4.77
$	6.00 - $ 9.83		4,337,931		2,874,193		7		6.82			7.05
$	10.13 - $19.81		9,408,805		9,072,228		5		13.44			13.34
$	20.00 - $28.94		184,431		180,846		6		26.05			26.15
$	30.01 - $36.52		13,066		13,066		6		34.04			34.04
Total			27,382,725		19,290,657		6		$	7.76		$	9.17

 

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9.     Non-Cash Compensation

 

		Six Months Ended June 30,						Three Months Ended June 30,
		2004			2003			2004			2003
Restricted stock (1)		$	1,943		$	47		$	789		$	47
Stock options (2)		1,368			—			778			—
Amortization of the intrinsic value of unvested “in-the-money” options issued in connection with the About acquisition (3)		175			766			—			259
Restricted stock and stock options-About (4)		—			1,210			—			471
Total		$	3,486		$	2,023		$	1,567		$	777

 

(1) The Company recognized non-cash compensation charges related to the Company’s grant of shares of restricted common stock to certain executives during 2003, as well as grants of shares of restricted common stock to certain employees in 2003 and 2004 in exchange for their options in the Company’s Internet subsidiaries of $1,943 and $47 during the six months ended June 30, 2004 and 2003, respectively, and $789 and $47 during the three months ended June 30, 2004 and 2003, respectively. These grants were valued at the date of grant and are being expensed ratably over their related vesting periods.

 

(2) As a result of the adoption of SFAS 123 effective January 1, 2003, the Company recorded a non-cash compensation charge of $1,368 and $778 for the six and three months ended June 30, 2004, respectively, relating to stock options and the PRIMEDIA Employee Stock Purchase Plan. The impact of the adoption of SFAS 123 was not significant for the six and three months ended June 30, 2003.

 

(3) In connection with the acquisition of About in 2001, the Company recorded charges related to the amortization of the intrinsic value of unvested “in the money” options of $175 and $766 for the six months ended June 30, 2004 and 2003, respectively, and $259 for the three months ended June 30, 2003.  As of March 31, 2004, these options were fully vested.

 

(4) The Company recorded charges related to the vesting of certain restricted stock and stock options granted in connection with the acquisition of About in 2001 of $1,210 and $471 for the six and three months ended June 30, 2003.

 

10.   Senior Executives Severance and Provision for Severance, Closures and Restructuring Related Costs

 

Senior Executives Severance

 

The Company recorded $658 and $5,576 during the six months ended June 30, 2004 and 2003, respectively, and $0 and $5,576 during the three months ended June 30, 2004 and 2003, respectively, of severance relating to the finalization of the separation agreements of the former Chief Executive Officer and the former President and Interim Chief Executive Officer.

 

Provision for Severance, Closures and Restructuring Related Costs

 

Through the second quarter of 2004, the Company continued cost reduction initiatives previously announced to streamline operations, reduce layers of management and consolidate real estate.

 

14

 

Details of the initiatives implemented and the payments made in furtherance of these plans during the six-months ended June 30, 2004 and 2003 are presented in the following tables:

 

		Liability as of January 1, 2004			Net Provision for the Six Months Ended June 30, 2004			Payments during the Six Months Ended June 30, 2004			Liability as of June 30, 2004
Severance and closures:
Employee-related termination costs		$	2,982		$	2,021		$	(3,301	)	$	1,702
Termination of contracts		467			—			—			467
Termination of leases related to office closures		37,063			5,153			(4,063		)	38,153
Total severance and closures		$	40,512	(1)	$	7,174	(2)	$	(7,364	)	$	40,322

 

		Liability as of January 1, 2003			Net Provision for the Six Months Ended June 30, 2003			Payments during the Six Months Ended June 30, 2003			Liability as of June 30, 2003
Severance and closures:
Employee-related termination costs		$	3,733		$	3,608		$	(3,941	)	$	3,400
Termination of contracts		575			—			(159		)	416
Termination of leases related to office closures		41,366			(458		)	(3,353		)	37,555
Total severance and closures		$	45,674	(1)	$	3,150	(2)	$	(7,453	)	$	41,371

 

(1)          Reduced for liabilities relating to discontinued operations totaling $3,302 and $3,760 at January 1, 2004 and 2003, respectively.

(2)          Adjusted to exclude net provisions related to discontinued operations totaling $9 and $596 for the six months ended June 30, 2004 and 2003, respectively.

 

The remaining costs, comprised primarily of real estate lease commitments for space that the Company no longer occupies, are expected to be paid through 2015.  To reduce the lease related costs, the Company is aggressively pursuing subleases of its available office space. These leases have been recorded at their net present value amounts and are net of estimated sublease income amounts.  If the Company is successful in subleasing the restructured office space at a different rate, or is unable to sublease the space by the prescribed date used in the initial calculation, the reserve will be adjusted accordingly. The Company evaluates the appropriateness of its reserves on a quarterly basis.

 

As a result of the implementation of these plans, the Company has closed and consolidated, to date, 23 office locations and has notified a total of 2,033 individuals that they would be terminated under these plans.  As of June 30, 2004, all of these individuals have been terminated.

 

15

 

The liabilities representing the provision for severance, closures and restructuring related costs are included in accrued expenses and other on the condensed consolidated balance sheets as of June 30, 2004 and December 31, 2003.

 

11.   Provision for Unclaimed Property

 

Based on an initial assessment at the end of 2003, the Company believed that certain business units may have had unclaimed property that should have been remitted to one or more states under their respective escheatment requirements. The property in question related primarily to unused advertising credits and outstanding accounts payable checks for which the Company had an accrual recorded in the amount of $3,600 as of December 31, 2003. The Company hired an outside consultant to assist in estimating the potential risk. It was premature to estimate the extent of the financial risk at the end of 2003, but the Company believed that the risk would not have a material impact on its results of operations or financial position. Upon completion of the initial phase of this assessment, the Company recorded an estimated provision for unclaimed property of $5,500 in the three months ended March 31, 2004, which increased the accrual to $9,100. The calculation of this provision represents the recording of a correction of an error for unclaimed property transactions which occurred during the years 1991 to 2003; however, the amount of the provision, applicable to any year within this period, is not material to the results of operations for each of the respective years, nor is the total provision in relation to the estimated results of operations for 2004 considered material.

 

The Company has entered the next phase of the assessment whereby the consultant will assist in refining the estimated provision and in negotiating settlements under voluntary compliance agreements with the relevant states.

 

12.   Comprehensive Income

 

Comprehensive income for the six and three months ended June 30, 2004 and 2003 is presented in the following table:

 

		Six Months Ended June 30,
		2004			2003
Net income		$	13,225		$	68,657
Other comprehensive income (loss):
Foreign currency translation adjustments		(16		)	24
Total comprehensive income		$	13,209		$	68,681

 

		Three Months Ended June 30,
		2004			2003
Net income		$	2,154		$	88,904
Other comprehensive income (loss):
Foreign currency translation adjustments		(6		)	—
Total comprehensive income		$	2,148		$	88,904

 

13.   Income (loss) per Common Share

 

Income (loss) per common share for the six and three months ended June 30, 2004 and 2003 has been determined based on net income (loss) applicable to common shareholders divided by the weighted average number of common shares outstanding for all periods presented. The effect of the assumed exercise of stock

 

16

 

options and warrants and the conversion of convertible preferred stock were not included in the computation of per share amounts because the effect of their inclusion would be antidilutive. If the Company had recognized income from continuing operations for the six months ended June 30, 2004 and 2003, shares attributable to these antidilutive instruments would have increased diluted shares outstanding by approximately 62,400,000 and 57,600,000, respectively.

 

14.   Contingencies

 

The Company is involved in ordinary and routine litigation incidental to its business.  In the opinion of management, there is no pending legal proceeding that would have a material adverse affect on the condensed consolidated financial statements of the Company.

 

15.   Business Segment Information

 

The Company’s strategy is to focus on its core businesses and grow through leveraging and expanding its market leading brands.  This organic growth strategy requires a segment structure that best aligns the Company’s businesses and provides a clear sense of its strategic focus and operating performance. Accordingly, the Company adopted this structure, effective in the fourth quarter of 2003, and has reclassified prior year results to reflect this operating structure into four reportable segments.  The Company’s four principal segments are Enthusiast Media, Consumer Guides, Business Information and Education and Training.

 

The Enthusiast Media segment produces and distributes content through magazines and via the Internet to consumers in various niche and enthusiast markets. It includes the Company’s consumer magazine brands, including Performance Automotive and International Automotive (formerly Enthusiast Automotive), Consumer Automotive, Outdoors, Action Sports, Lifestyles and Home Technology magazine groups, their related Web sites and events, as well as About.com.

 

The Consumer Guides segment is the nation’s largest publisher and distributor of free publications, including Apartment Guide, New Home Guide and Auto Guide, which was launched in the first quarter of 2004, their related Web sites and the DistribuTech distribution business.

 

The Business Information segment includes the Company’s trade magazines, their related Web sites, events, directories and data products with a focus on bringing sellers together with qualified buyers in numerous industries.

 

The Education and Training segment consists of the businesses that provide content to schools, universities, government and other public institutions as well as corporate training initiatives. It includes Channel One, Films Media Group and Workplace Learning.

 

Information regarding the operations of the Company by business segment is set forth below based primarily 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 earnings before interest, taxes, depreciation, amortization and other (income) charges (“Segment EBITDA”). Other (income) charges include severance related to separated senior executives, non-cash compensation, provision for severance, closures and restructuring related costs, provision for unclaimed property and (gain) loss on sale of businesses and other, net.

 

The information presented below includes certain intersegment transactions and is, therefore, not necessarily indicative of the results had the operations existed as stand-alone businesses. Intersegment transactions represent intercompany advertising and other services, which are billed at what management believes are prevailing market rates. These intersegment transactions, which represent transactions between operating units in different business segments, are eliminated in consolidation.

 

17

 

		Six Months Ended June 30,						Three Months Ended June 30,
		2004			2003			2004			2003
Revenues, net:
Enthusiast Media		$	360,514		$	355,055		$	187,955		$	183,420
Consumer Guides		142,471			137,327			71,084			69,404
Business Information		113,010			114,144			58,208			57,938
Education and Training		52,087			62,226			25,314			30,088
Intersegment Eliminations		(720		)	(3,974		)	(385		)	(1,559		)
Total		$	667,362		$	664,778		$	342,176		$	339,291
Segment EBITDA (1):
Enthusiast Media		$	72,263		$	66,168		$	42,849		$	42,306
Consumer Guides		40,154			38,571			20,512			21,002
Business Information		15,312			12,679			10,223			7,966
Education and Training		(729		)	5,972			(606		)	1,640
Corporate Overhead		(13,474		)	(14,124		)	(5,984		)	(6,700		)
Total		$	113,526		$	109,266		$	66,994		$	66,214

 

Below is a reconciliation of the Company’s Segment EBITDA to operating income:

 

		Six Months Ended June 30,						Three Months Ended June 30,
		2004			2003			2004			2003
Segment EBITDA (1):		$	113,526		$	109,266		$	66,994		$	66,214
Depreciation of property and equipment		21,902			26,459			10,181			14,359
Amortization of intangible assets and other		10,783			20,605			4,817			9,920
Severance related to separated senior executives		658			5,576			—			5,576
Non-cash compensation		3,486			2,023			1,567			777
Provision for severance, closures and  restructuring related costs		7,174			3,150			4,455			1,988
Provision for unclaimed property		5,500			—			—			—
(Gain) loss on sale of businesses and other, net		(23		)	1,338			52			1,212
Operating income		$	64,046		$	50,115		$	45,922		$	32,382

 

(1)                                  Segment EBITDA represents the segments’ earnings before interest, taxes, depreciation, amortization and other (income) charges.  Other (income) charges include severance related to separated senior executives, non-cash compensation, provision for severance, closures and restructuring related costs, provision for unclaimed property and (gain) loss on sale of businesses and other, net.  Segment EBITDA is not intended to represent cash flows from operating activities and should not be considered as an alternative to net income (as determined in conformity with accounting principles generally accepted in the United States of America), as an indicator of the Company’s operating performance or to cash flows as a measure of liquidity. Segment EBITDA is presented herein because the Company’s chief operating decision maker, who is the President and CEO, and the executive team evaluate and measure each business unit’s performance based on its Segment EBITDA results. PRIMEDIA believes that Segment EBITDA is the

 

18

 

most accurate indicator of its segments’ results, because it focuses on revenue and operating cost items driven by each operating managers’ performance, and excludes items largely outside of the operating managers’ control. Segment EBITDA may not be available for the Company’s discretionary use as there are requirements to redeem preferred stock and repay debt, among other commitments. Segment EBITDA as presented may not be comparable to similarly titled measures reported by other companies since not all companies calculate Segment EBITDA in an identical manner, and therefore, is not necessarily an accurate measure of comparison between companies.

 

16. Financial Information for Guarantors of the Company’s Debt

 

The information that follows presents condensed consolidating financial information as of June 30, 2004 and December 31, 2003 and for the six months ended June 30, 2004 and 2003 for a) PRIMEDIA Inc. (as the Issuer), b) the guarantor subsidiaries, which are with limited exceptions, the restricted subsidiaries, represent the core PRIMEDIA businesses and exclude investment and other development properties included in the unrestricted category, c) the non-guarantor subsidiaries (primarily representing Internet assets and businesses, new launches and other properties under evaluation for turnaround or shutdown and foreign subsidiaries), which are with limited exceptions, the unrestricted subsidiaries, d) elimination entries and e) the Company on a consolidated basis. During the six months ended June 30, 2004, certain businesses have been reclassified between restricted and unrestricted subsidiaries.  These reclassifications are in compliance with our debt agreements and have not had a material effect on our debt covenant ratios as defined in the bank credit facilities.

 

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 the financial position, results of operations and cash flows that these entities would have achieved on a stand-alone basis and should be read in conjunction with the consolidated financial statements of the Company. The intercompany balances in the accompanying condensed consolidating financial statements include cash management activities, management fees, cross promotional activities and other intercompany charges between Corporate and the business units and among the business units. The non-guarantor subsidiary results of operations include: Internet operations, foreign operations, certain distribution operations, certain start-up magazine businesses, revenues and related expenses derived from the licensing of certain products of guarantor subsidiaries and expenses associated with the cross promotion by the guarantor subsidiaries of the activities of the non-guarantor subsidiaries.  The transactions described above are billed, by the Company, at what the Company believes are prevailing market rates. All intercompany related activities are eliminated in consolidation.

 

19

 

PRIMEDIA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

(UNAUDITED)

 

June 30, 2004

(dollars in thousands)

 

		PRIMEDIA Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			PRIMEDIA Inc. and Subsidiaries
ASSETS
Current assets:
Cash and cash equivalents		$	59,499		$	6,700		$	359		$	—		$	66,558
Accounts receivable, net		—			167,514			13,430			—			180,944
Intercompany receivables		1,544,923			197,002			129,571			(1,871,496		)	—
Inventories		—			19,100			(5		)	—			19,095
Prepaid expenses and other		5,763			25,717			9,462			—			40,942
Assets held for sale		—			—			379			—			379
Total current assets		1,610,185			416,033			153,196			(1,871,496		)	307,918
Property and equipment, net		6,151			80,982			11,315			—			98,448
Investment in and advances to subsidiaries		581,300			—			—			(581,300		)	—
Other intangible assets, net		—			257,461			928			—			258,389
Goodwill		—			886,277			16,901			—			903,178
Other non-current assets		9,993			41,290			9,101			—			60,384
Total Assets		$	2,207,629		$	1,682,043		$	191,441		$	(2,452,796	)	$	1,628,317
LIABILITIES AND SHAREHOLDERS’ DEFICIENCY
Current liabilities:
Accounts payable		$	3,846		$	68,092		$	3,355		$	—		$	75,293
Intercompany payables		965,310			238,814			667,372			(1,871,496		)	—
Accrued expenses and other		78,900			97,930			4,314			—			181,144
Deferred revenues		1,738			135,322			14,276			—			151,336
Current maturities of long-term debt		11,831			4,852			—			—			16,683
Liabilities of businesses held for sale		—			—			1,297			—			1,297
Total current liabilities		1,061,625			545,010			690,614			(1,871,496		)	425,753
Long-term debt		1,573,882			18,410			—			—			1,592,292
Intercompany notes payable		—			2,848,198			155,681			(3,003,879		)	—
Shares subject to mandatory redemption		474,559			—			—			—			474,559
Deferred revenues		—			35,446			—			—			35,446
Deferred income taxes		69,970			—			—			—			69,970
Other non-current liabilities		23,133			2,436			268			—			25,837
Total Liabilities		3,203,169			3,449,500			846,563			(4,875,375		)	2,623,857
Shareholders’ deficiency:
Series J convertible preferred stock		175,487			—			—			—			175,487
Common stock		2,690			—			—			—			2,690
Additional paid-in capital		2,349,476			—			—			—			2,349,476
Accumulated deficit		(3,445,439		)	(1,767,451		)	(654,936		)	2,422,387			(3,445,439		)
Accumulated other comprehensive loss		(192		)	(6		)	(186		)	192			(192		)
Common stock in treasury, at cost		(77,562		)	—			—			—			(77,562		)
Total Shareholders’ Deficiency		(995,540		)	(1,767,457		)	(655,122		)	2,422,579			(995,540		)
Total Liabilities and Shareholders’ Deficiency		$	2,207,629		$	1,682,043		$	191,441		$	(2,452,796	)	$	1,628,317

 

20

 

PRIMEDIA INC. AND SUBSIDIARIES

CONDENSED STATEMENT OF CONSOLIDATING OPERATIONS

(UNAUDITED)

 

For the Six Months Ended June 30, 2004

(dollars in thousands)

 

		PRIMEDIA Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			PRIMEDIA Inc. and Subsidiaries
Revenues, net		$	—		$	613,845		$	80,423		$	(26,906	)	$	667,362
Operating costs and expenses:
Cost of goods sold		—			129,286			12,382			—			141,668
Marketing and selling		—			120,805			20,757			—			141,562
Distribution, circulation and fulfillment		—			87,019			28,547			—			115,566
Editorial		—			48,002			5,851			—			53,853
Other general expenses		111			77,746			36,873			(26,906		)	87,824
Corporate administrative expenses (excluding non-cash compensation)		10,279			—			3,084			—			13,363
Depreciation of property and equipment		1,364			16,776			3,762			—			21,902
Amortization of intangible assets and other		—			10,218			565			—			10,783
Severance related to separated senior executives		658			—			—						658
Non-cash compensation		3,486			—			—			—			3,486
Provision for severance, closures and restructuring related costs		2,229			4,697			248			—			7,174
Provision for unclaimed property		56			5,444			—			—			5,500
(Gain) loss on sale of businesses and other, net		37			(66		)	6			—			(23		)
Operating income (loss)		(18,220		)	113,918			(31,652		)	—			64,046
Other income (expense):
Provision for impairment of investments		(804		)	—			—			—			(804		)
Interest expense		(56,109		)	(2,585		)	(48		)	—			(58,742		)
Interest on shares subject to mandatory redemption		(21,890		)	—			—			—			(21,890		)
Amortization of deferred financing costs		(671		)	(1,633		)	(15		)	—			(2,319		)
Equity in income of subsidiaries		49,624			—			—			(49,624		)	—
Intercompany management fees and interest		70,027			(69,460		)	(567		)	—			—
Other income (expense), net		43			87			(21		)	—			109
Income (loss) from continuing operations before income tax expense		22,000			40,327			(32,303		)	(49,624		)	(19,600		)
Income tax expense		(8,775		)	68			(17		)	—			(8,724		)
Income (loss) from continuing operations		13,225			40,395			(32,320		)	(49,624		)	(28,324		)
Discontinued operations		—			41,652			(103		)	—			41,549
Net income (loss)		$	13,225		$	82,047		$	(32,423	)	$	(49,624	)	$	13,225

 

21

 

PRIMEDIA INC. AND SUBSIDIARIES

CONDENSED STATEMENT OF CONSOLIDATING CASH FLOWS

(UNAUDITED)

 

For the Six Months Ended June 30, 2004

(dollars in thousands)

 

		PRIMEDIA Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			PRIMEDIA Inc. and Subsidiaries
Operating activities:
Net income (loss)		$	13,225		$	82,047		$	(32,423	)	$	(49,624	)	$	13,225
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities		(104,286		)	57,599			4,260			49,624			7,197
Changes in operating assets and liabilities		(27,970		)	(912		)	(8,499		)	—			(37,381		)
Net cash provided by (used in) operating activities		(119,031		)	138,734			(36,662		)	—			(16,959		)
Investing activities:
Additions to property, equipment and other, net		(449		)	(9,492		)	(3,633		)	—			(13,574		)
Proceeds from sale of businesses and other		—			68,176			2,101			—			70,277
Payments for businesses acquired, net of cash acquired		—			(1,270		)	—			—			(1,270		)
Proceeds from (payments for) other investments, net		(10		)	684			—			—			674
Net cash provided by (used in) investing activities		(459		)	58,098			(1,532		)	—			56,107
Financing activities:
Intercompany activity		150,900			(188,981		)	38,081			—			—
Borrowings under credit agreements		231,500			—			—			—			231,500
Repayments of borrowings under credit agreements		(378,500		)	—			—			—			(378,500		)
Proceeds from issuances of Senior Floating Rate Notes		175,000			—			—			—			175,000
Proceeds from issuances of common stock		701			—			—			—			701
Deferred financing costs paid		3			(5,562		)	—						(5,559		)
Capital lease obligations		(960		)	(3,118		)	(200		)	—			(4,278		)
Other		—			(139		)	—			—			(139		)
Net cash provided by (used in) financing activities		178,644			(197,800		)	37,881			—			18,725
Increase (decrease) in cash and cash equivalents		59,154			(968		)	(313		)	—			57,873
Cash and cash equivalents, beginning of period		345			7,668			672			—			8,685
Cash and cash equivalents, end of period		$	59,499		$	6,700		$	359		$	—		$	66,558

 

22

 

PRIMEDIA INC. AND SUBSIDIARIES

CONSOLIDATING BALANCE SHEET

 

December 31, 2003

(dollars in thousands)

 

		PRIMEDIA Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			PRIMEDIA Inc. and Subsidiaries
ASSETS
Current assets:
Cash and cash equivalents		$	345		$	7,668		$	672		$	—		$	8,685
Accounts receivable, net		—			175,144			18,936			—			194,080
Intercompany receivables		1,685,986			402,428			61,271			(2,149,685		)	—
Inventories		—			17,417			83			—			17,500
Prepaid expenses and other		5,009			29,865			1,185			—			36,059
Assets held for sale		1,460			28,985			1,434			—			31,879
Total current assets		1,692,800			661,507			83,581			(2,149,685		)	288,203
Property and equipment, net		7,065			83,693			20,101			—			110,859
Investment in and advances to subsidiaries		488,986			—			—			(488,986		)	—
Other intangible assets, net		—			266,839			1,568			—			268,407
Goodwill		—			871,598			38,936			—			910,534
Other non-current assets		11,477			35,967			10,674			—			58,118
Total Assets		$	2,200,328		$	1,919,604		$	154,860		$	(2,638,671	)	$	1,636,121
LIABILITIES AND SHAREHOLDERS’ DEFICIENCY
Current liabilities:
Accounts payable		$	11,482		$	55,724		$	11,588		$	—		$	78,794
Intercompany payables		984,262			534,801			630,622			(2,149,685		)	—
Accrued expenses and other		97,694			103,725			12,515			—			213,934
Deferred revenues		1,738			147,375			8,740			—			157,853
Current maturities of long-term debt		16,232			5,963			—			—			22,195
Liabilities of businesses held for sale		—			13,500			2,549			—			16,049
Total current liabilities		1,111,408			861,088			666,014			(2,149,685		)	488,825
Long-term debt		1,542,095			20,346			—			—			1,562,441
Shares subject to mandatory redemption		474,559			—			—			—			474,559
Intercompany notes payable		—			2,210,418			753,838			(2,964,256		)	—
Deferred revenues		—			33,604			—			—			33,604
Deferred income taxes		61,364			—			—			—			61,364
Other non-current liabilities		24,157			4,497			(71		)	—			28,583
Total Liabilities		3,213,583			3,129,953			1,419,781			(5,113,941		)	2,649,376
Shareholders’ deficiency:
Series J convertible preferred stock		164,533			—			—			—			164,533
Common stock		2,683			—			—			—			2,683
Additional paid-in capital		2,345,152			—			—			—			2,345,152
Accumulated deficit		(3,447,710		)	(1,210,343		)	(1,264,751		)	2,475,094			(3,447,710		)
Accumulated other comprehensive loss		(176		)	(6		)	(170		)	176			(176		)
Unearned compensation		(175		)	—			—			—			(175		)
Common stock in treasury, at cost		(77,562		)	—			—			—			(77,562		)
Total Shareholders’ Deficiency		(1,013,255		)	(1,210,349		)	(1,264,921		)	2,475,270			(1,013,255		)
Total Liabilities and Shareholders’ Deficiency		$	2,200,328		$	1,919,604		$	154,860		$	(2,638,671	)	$	1,636,121

 

23

 

PRIMEDIA INC. AND SUBSIDIARIES

CONDENSED STATEMENT OF CONSOLIDATING OPERATIONS

(UNAUDITED)

 

For the Six Months Ended June 30, 2003

(dollars in thousands)

 

		PRIMEDIA Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			PRIMEDIA Inc. and Subsidiaries
Revenues, net		$	219		$	557,026		$	89,344		$	18,189		$	664,778
Operating costs and expenses:
Cost of goods sold		708			103,968			43,082						147,758
Marketing and selling		—			119,158			22,845						142,003
Distribution, circulation and fulfillment		—			86,333			27,508						113,841
Editorial		—			49,215			3,937						53,152
Other general expenses		268			38,813			27,435			18,189			84,705
Corporate administrative expenses (excluding non-cash compensation)		12,649			—			1,404			—			14,053
Depreciation of property and equipment		1,434			18,290			6,735			—			26,459
Amortization of intangible assets and other		—			16,767			3,838			—			20,605
Severance related to separated senior executives		5,576			—			—						5,576
Non-cash compensation		2,023			—			—			—			2,023
Provision for severance, closures and restructuring related costs		(1,210		)	4,360			—			—			3,150
Provision for unclaimed property		—			—			—			—			—
(Gain) loss on sale of businesses and other, net		(19		)	2,280			(923		)	—			1,338
Operating income (loss)		(21,210		)	117,842			(46,517		)	—			50,115
Other income (expense):
Provision for impairment of investments		(7,727		)	—			—			—			(7,727		)
Interest expense		(63,451		)	(1,738		)	(14		)	—			(65,203		)
Interest on shares subject to mandatory redemption					—			—			—			—
Amortization of deferred financing costs		1,291			(2,526		)	(9		)	—			(1,244		)
Equity in income of subsidiaries		93,653			—			—			(93,653		)	—
Intercompany management fees and interest		75,680			(75,680		)	—			—			—
Other income (expense), net		(2,858		)	(1,001		)	40			—			(3,819		)
Income (loss) from continuing operations before income tax expense		75,378			36,897			(46,500		)	(93,653		)	(27,878		)
Income tax expense		(6,721		)	(314		)	(16		)	—			(7,051		)
Income (loss) from continuing operations		68,657			36,583			(46,516		)	(93,653		)	(34,929		)
Discontinued operations		—			108,914			(5,328		)	—			103,586
Net income (loss)		$	68,657		$	145,497		$	(51,844	)	$	(93,653	)	$	68,657

 

24

 

PRIMEDIA INC. AND SUBSIDIARIES

CONDENSED STATEMENT OF CONSOLIDATING CASH FLOWS

(UNAUDITED)

 

For the Six Months Ended June 30, 2003

(dollars in thousands)

 

		PRIMEDIA Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			PRIMEDIA Inc. and Subsidiaries
Operating activities:
Net Income (loss)		$	68,657		$	145,497		$	(51,844	)	$	(93,653	)	$	68,657
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:		(145,701		)	13,344			15,400			93,653			(23,304		)
Changes in operating assets and liabilities		(12,860		)	(27,388		)	(6,825		)	—			(47,073		)
Net cash provided by (used in) operating activities		(89,904		)	131,453			(43,269		)	—			(1,720		)
Investing activities:
Additions to property, equipment and other, net		(1,001		)	(15,219		)	(4,946		)	—			(21,166		)
Proceeds from sales of businesses and other, net		19			183,528			(625		)	—			182,922
Payments related to businesses acquired		—			(4,446		)	(350		)	—			(4,796		)
Proceeds from (payments for) other investments, net		1,051			(513		)	470			—			1,008
Net cash provided by (used in) investing activities		69			163,350			(5,451		)	—			157,968
Financing activities:
Intercompany activity		242,094			(290,642		)	48,548			—			—
Borrowings under credit agreements		288,400			—			—			—			288,400
Repayments of borrowings under credit agreements		(314,312		)	—			—			—			(314,312		)
Payments for repurchases of senior notes		(375,675		)	—			—			—			(375,675		)
Proceeds from issuance of 8% Senior Notes		300,000			—			—			—			300,000
Proceeds from issuances of common stock		569			—			—			—			569
Purchases of common stock for the treasury		(19,367		)	—			—			—			(19,367		)
Dividends paid to preferred stock shareholders		(22,921		)	—			—			—			(22,921		)
Deferred financing costs paid		(5,977		)	—			—			—			(5,977		)
Capital lease obligations		(43		)	(1,676		)	(69		)	—			(1,788		)
Other		—			(155		)	—			—			(155		)
Net cash provided by (used in) financing activities		92,768			(292,473		)	48,479			—			(151,226		)
Increase (decrease) in cash and cash equivalents		2,933			2,330			(241		)	—			5,022
Cash and cash equivalents, beginning of period		4,700			12,857			996			—			18,553
Cash and cash equivalents, end of period		$	7,633		$	15,187		$	755		$	—		$	23,575

 

25

 

17.   Subsequent Event

 

The Company entered into a series of transactions with the intention to redeem its highest cost of capital security, the Series J Convertible Preferred Stock, which had an annual pay-in-kind dividend yield of approximately 13%.

 

On May 14, 2004 the Company issued $175,000 of Senior Floating Rate Notes due 2010 and entered into a new $100,000 term loan C credit facility with a maturity date of December 31, 2009.  The Company used the proceeds from these transactions to make voluntary pre-payments to the term loans A and B with the remainder used to temporarily pay down all outstanding advances under its revolving credit facility.

 

On July 7, 2004, the Company redeemed all of its outstanding Series J Convertible Preferred Stock, representing an aggregate of 1,424,306 shares for approximately $178,000, using cash on hand of approximately $33,000 and approximately $145,000 of advances under its revolving credit facility.

 

26

 

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 summarizes the financial condition and operating performance of the Company and its business segments and should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto.

 

Executive Summary

 

Our Business

 

The Company’s revenues are generated from advertising (print and online), circulation (subscriptions and single copy sales) and other sources (events, third party distribution, training services, sales of data products and directories, list rental and licensing).  PRIMEDIA’s operating expenses include cost of goods sold (principally paper and printing); marketing and selling; distribution, circulation and fulfillment; editorial; and other general and corporate administrative expenses (collectively referred to as “operating expenses”).

 

Background

 

Historically, PRIMEDIA was a broad based media enterprise built primarily from a series of acquisitions and comprised of numerous disparate assets. During the past few years, the Company sold a number of selected properties to better focus on its core businesses and reduce debt. As a result of these divestitures, the Company has transformed itself into a highly focused targeted media company poised for growth. Over the past few years, to counter the effects of the weakness in the overall advertising environment, the Company has aggressively controlled its costs. These initiatives have resulted in charges for severance, closures and restructuring related costs to integrate Company operations and consolidate many back office functions and facilities, resulting in a significant reduction in the number of employees and office space. These actions have resulted in a stronger balance sheet, improved liquidity and a more efficient and better focused organization. The asset divestiture program is essentially complete and the Company is now focused on growing organically while still diligently controlling costs.

 

Company Strategy

 

In October 2003, Kelly P. Conlin was appointed President and Chief Executive Officer (“CEO”). Mr. Conlin and the executive team reviewed the Company’s operations and formulated a strategy to enable the Company to capitalize on the full potential of its businesses and maximize its operating performance. That review resulted in a redesigned operating structure with four reportable segments to better enable the Company to execute key investment and organic growth initiatives. Those four principal segments are: Enthusiast Media, Consumer Guides, Business Information, and Education and Training. Accordingly, the Company has reclassified prior year results to reflect this redesigned operating structure.

 

The Company’s strategy is to focus on its core targeted media businesses and grow through leveraging and expanding its market-leading brands. Actions the Company is taking to organically grow revenues include introducing new products, improving and upgrading existing products, expanding into new markets, enhancing the caliber of its sales force, broadening its advertiser base, optimizing distribution, and leveraging its well known brands through extensions including events, licensing and merchandising arrangements.

 

27

 

Business Trends

 

The media industry continues to be adversely affected by an overall advertising environment that is softer than historical norms, declining single copy sales of consumer magazines, cutbacks in the demand for training services and budgetary constraints in the education markets. Additionally, high apartment vacancy rates have pressured the advertising budgets of property managers.

 

In 2004, most of PRIMEDIA’s products continued to grow, while some were affected by soft industry trends.  The Company is capitalizing on the general trend of marketers seeking to better target their advertising, the growth of free publications, strong growth in online advertising and the increasing popularity of hobbies and leisure activities, as the Company has a large presence in those markets.  Additionally, the Company has taken certain actions to lower costs and improve profitability, including consolidating, selling or shutting down certain properties.

 

Summary of Consolidated Results for the three months ended June 30, 2004

 

In 2004, revenues were $342,176 up 0.9% as compared to $339,291 in 2003.  Revenue gains in the Company’s three major business segments were partially offset by a decline in the Education and Training segment.  In 2004, operating expenses were $275,182 up 0.8% compared to 2003. In 2004, operating income was $45,922 improved from $32,382 in 2003 due to decreased depreciation and amortization expenses as well as the absence of severance related to separated senior executives in 2004.  These decreases were partially offset by higher restructuring costs in 2004.  Net income was $2,154 in 2004 compared to $88,904 in 2003, primarily due to the gain on the sale of Seventeen and its companion teen properties (“Seventeen”) in 2003 of $104,304.

 

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 external factors, 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 may affect the Company’s results.

 

Why We Use Segment EBITDA

 

Segment EBITDA represents the segment’s earnings before interest, taxes, depreciation, amortization and other charges (income) (“Segment EBITDA”). Other charges (income) include severance related to separated senior executives, non-cash compensation, provision for severance, closures and restructuring related costs, provision for unclaimed property and (gain) loss on sale of businesses and other, net. PRIMEDIA believes that Segment EBITDA is the most accurate indicator of its segments’ results, because it focuses on revenue and operating cost items driven by each operating managers’ performance, and excludes items largely outside of the operating managers’ control. Internally, the Company’s chief operating decision maker, who is the President and CEO, and the executive team measure performance primarily based on Segment EBITDA.

 

Segment EBITDA is not intended to represent cash flows from operating activities and should not be considered as an alternative to net income (as determined in conformity with accounting principles generally accepted in the United States of America), as an indicator of the Company’s operating performance or to cash flows as a measure of liquidity. Segment EBITDA may not be available for the Company’s discretionary use as there are requirements to redeem preferred stock and repay debt, among other commitments. Segment EBITDA as presented may not be comparable to similarly titled measures reported by other companies since not all companies calculate Segment EBITDA in an identical manner, and therefore, is not necessarily an accurate measure of comparison between companies. For more information, see the reconciliation of Segment EBITDA to operating income for the Company’s four segments in their respective segment discussions below.

 

28