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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

 

 

13



 

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



Intersegment Transactions

 

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.

 

Reclassifications due to Discontinued Operations

 

In accordance with Statement of Financial Accounting Standards (“SFAS”) 144, “Accounting for the Disposal of Long-Lived Assets”, the Company’s results have been reclassified to reflect Seventeen, Simba Information, Federal Sources, CableWorld, Sprinks, RealEstate.com, New York magazine, Kagan World Media and About Web Services, About.com’s consumer Web hosting business, as discontinued operations for the periods prior to their respective divestiture dates.  In addition, 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 properties have been classified as discontinued operations for all periods presented.

 

29



 

Segment Data:

 

The following table presents the results of the Company’s four operating segments and Corporate for the six and three months

ended June 30, 2004 and 2003, respectively:

 

 

 

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

)

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and other charges: (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Enthusiast Media

 

$

18,985

 

$

20,568

 

$

8,287

 

$

11,670

 

 

 

 

 

 

 

 

 

 

 

Consumer Guides

 

$

5,751

 

$

5,941

 

$

2,842

 

$

2,913

 

 

 

 

 

 

 

 

 

 

 

Business Information

 

$

8,318

 

$

9,789

 

$

3,065

 

$

4,789

 

 

 

 

 

 

 

 

 

 

 

Education and Training

 

$

8,596

 

$

13,614

 

$

3,972

 

$

7,274

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

$

7,830

 

$

9,239

 

$

2,906

 

$

7,186

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

 

 

Enthusiast Media

 

$

53,278

 

$

45,600

 

$

34,562

 

$

30,636

 

Consumer Guides

 

34,403

 

32,630

 

17,670

 

18,089

 

Business Information

 

6,994

 

2,890

 

7,158

 

3,177

 

Education and Training

 

(9,325

)

(7,642

)

(4,578

)

(5,634

)

Corporate

 

(21,304

)

(23,363

)

(8,890

)

(13,886

)

Total

 

64,046

 

50,115

 

45,922

 

32,382

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Provision for impairment of investments

 

(804

)

(7,727

)

(804

)

(7,727

)

Interest expense

 

(58,742

)

(65,203

)

(30,164

)

(31,750

)

Interest on shares subject to mandatory redemption (3)

 

(21,890

)

 

(10,945

)

 

Amortization of deferred financing costs (3)

 

(2,319

)

(1,244

)

(1,217

)

(503

)

Other income (expense), net

 

109

 

(3,819

)

(179

)

(3,275

)

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income tax expense

 

(19,600

)

(27,878

)

2,613

 

(10,873

)

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

(8,724

)

(7,051

)

(4,357

)

(3,333

)

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

(28,324

)

(34,929

)

(1,744

)

(14,206

)

 

 

 

 

 

 

 

 

 

 

Discontinued operations (4)

 

41,549

 

103,586

 

3,898

 

103,110

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

13,225

 

$

68,657

 

$

2,154

 

$

88,904

 

 


(1)                                  Segment EBITDA represents the segments’ earnings before interest, taxes, depreciation, amortization and other charges (income) (see Note 2 below). 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 most accurate indicator of its segments’ results, because it focuses on revenue and operating cost items driven by each

 

30



 

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. See reconciliation of Segment EBITDA to operating income for the six and three months ended June 30, 2004 and 2003 for each of the Company’s segments in their respective segment discussions below.

 

(2)                                  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.

 

(3)                                  Effective July 1, 2003, the Company prospectively adopted SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” which 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 and to classify dividends from this preferred stock as interest expense. Such stock is now collectively described as shares subject to mandatory redemption and dividends on these shares are now included in loss from continuing operations and described as interest on shares subject to mandatory redemption, whereas previously they were presented below net income 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 which represent 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 retroactively 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.

 

(4)                                  Discontinued operations include a gain on sale of businesses, net of $42,226 and $102,605 in the six months ended June 30, 2004 and 2003, respectively, and $4,192 and $103,846 in the three months ended June 30, 2004 and 2003, respectively.

 

31



 

Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003:

 

Consolidated Results:

 

Revenues, Net

 

Consolidated revenues were $342,176 in 2004 compared to $339,291 in 2003:

 

 

 

Three Months Ended
June 30,

 

Percent
Change

 

 

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

Revenues, net:

 

 

 

 

 

 

 

Advertising

 

$

213,696

 

$

211,462

 

1.1

 

Circulation

 

76,989

 

77,779

 

(1.0

)

Other

 

51,491

 

50,050

 

2.9

 

 

 

 

 

 

 

 

 

Total

 

$

342,176

 

$

339,291

 

0.9

 

 

Advertising revenues increased by $2,234 in the second quarter of 2004 compared to 2003 due to an increase of $3,834 at the Enthusiast Media segment, partially offset by a decline of $2,304 at the Education and Training segment. Circulation revenues decreased $790 in 2004, principally driven by a $669 decline in revenues at the Education and Training segment. Other revenues increased in 2004 compared to 2003 primarily due to increases at Consumer Guides of $1,410 from continued growth of its third party distribution business and at Enthusiast Media of $1,048 partially offset by a $874 decline at the Education and Training segment. Revenue trends within each segment are further detailed in the segment discussions below.

 

Operating Income (Loss)

 

Operating income increased to $45,922 in 2004 compared to $32,382 in 2003.  The improvement in operating income in 2004 was due to decreases in amortization and depreciation expenses of $5,103 and $4,178, respectively, as well as an absence of severance related to separated senior executives in 2004 compared to $5,576 recorded during the second quarter of 2003.  Amortization and depreciation expenses decreased in 2004 compared to 2003 primarily due to certain assets that have become fully amortized or depreciated subsequent to the second quarter of 2003.   These expense decreases were partially offset by higher restructuring costs recorded in 2004 compared to 2003 due primarily to the continued consolidation of operations resulting in excess real estate.

 

Net Income (Loss)

 

The Company had net income in 2004 of $2,154 compared to $88,904 in 2003. The decrease in net income was primarily due to the gain on the sale of Seventeen of $104,304 recorded in discontinued operations during the second quarter of 2003.

 

Interest expense decreased $1,586 or 5.0% in 2004 to $30,164 from $31,750 in 2003. The decrease in interest expense was due to the Company’s lower average debt levels despite the additional debt issued in May 2004.

 

In accordance with the prospective adoption, effective July 1, 2003, of SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, loss from continuing operations increased by $11,281 which represents $10,945 of interest on shares subject to mandatory redemption and $336 of amortization of issuance costs which is included in the amortization of deferred financing costs on the accompanying condensed statement of consolidated operations for the three months ended June 30, 2004. If

 

32



 

SFAS 150 was adopted retroactively on January 1, 2003, loss from continuing operations for the three months ended June 30, 2003 would have increased by $10,794.

 

SFAS 144 requires sales or disposals of long-lived assets that meet certain criteria to be classified on the statement of consolidated operations as discontinued operations and to reclassify prior periods accordingly.  During 2003, the Company completed the sale of Seventeen, Simba Information, Federal Sources, CableWorld, Sprinks and RealEstate.com and during 2004, the Company sold New York magazine, Kagan World Media and About Web Services, About.com’s consumer Web hosting business.  In accordance with SFAS 144, the financial results of these operations have been reclassified into discontinued operations on the condensed statements of consolidated operations for periods prior to their respective divestiture date. In addition, the Company is evaluating strategic partnerships regarding the Folio, Circulation Management and American Demographics properties in the Business Information segment and the operating results of these properties have been classified as discontinued operations for all periods presented. For the three months ended June 30, 2004 and 2003, discontinued operations includes a net gain on sale of businesses of $4,192 and $103,846, respectively.

 

Segment Results:

 

Enthusiast Media Segment (includes Consumer Automotive, Performance Automotive, International Automotive, Outdoors, Action Sports, Lifestyles and Home Technology magazine groups, their related Web sites, events, and About.com)

 

Revenues, Net

 

Enthusiast Media revenues were $187,955 or 54.9% and $183,420 or 54.1% of the Company’s consolidated revenues for 2004 and 2003, respectively. Enthusiast Media revenues increased $4,535 or 2.5% in 2004 compared to 2003 as follows:

 

 

 

Three Months Ended
June 30,

 

Percent
Change

 

 

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

Revenues, net:

 

 

 

 

 

 

 

Advertising

 

$

105,237

 

$

101,403

 

3.8

 

Circulation

 

66,411

 

66,512

 

(0.2

)

Other

 

15,958

 

14,910

 

7.0

 

Intersegment revenues

 

349

 

595

 

(41.3

)

Total

 

$

187,955

 

$

183,420

 

2.5

 

 

Advertising revenues increased $3,834 or 3.8% in 2004. The growth was led by an increase in online advertising of approximately $5,300, partially offset by a decrease in print advertising due to a soft quarter for automotive print advertising.

 

The Company has initiated a comprehensive new advertising tracking system with Inquiry Management Systems (“IMS”), the largest ad-tracking service in North America.  Currently, the IMS Auditor service tracks three quarters of PRIMEDIA’s enthusiast publications and the Company expects that IMS will track nearly all of its titles by the end of the third quarter 2004. Based on the titles currently tracked, IMS Auditor reports that PRIMEDIA’s and its competitors’ advertising pages were essentially flat in the second quarter, with PRIMEDIA’s advertising pages declining 0.6% and the market increasing 0.3%.  These results were negatively skewed by the performance in the automotive categories, which the Company continues to expect will improve in the

 

33



 

second half of 2004 due to the timing of new automobile model introductions.  Excluding automotive titles, PRIMEDIA’s advertising pages increased 5.2% in the quarter, compared to a market increase of 3.7%, according to IMS.

 

Circulation revenues at Enthusiast Media declined $101 or 0.2% for the three months ended June 30, 2004 with gains in single copy revenues from the Lifestyles (including the soap opera titles), Consumer Automotive and Action Sports groups, offset by weakness in other groups.  Overall, single copy units for Enthusiast Media magazines increased 0.1% for the three months ended June 30, 2004, compared to the industry average decline of 1.5%, as reported by the International Periodical Distributors Association.

 

Other revenues for Enthusiast Media, which include licensing, merchandising, list rental, events and other, increased $1,048, or 7.0%, in 2004 compared to 2003.  The increase was primarily due to growth in merchandising and the timing of certain automotive events during the second quarter of 2004 compared to 2003.

 

Key Accomplishments

 

The Company is continuing to combat industry wide circulation weakness with several initiatives, including several additional magazine titles authorized for distribution to Wal-Mart stores, and new distribution to large retail chains such as CSK Auto and Fred’s Dollar Stores in 1,180 and 550 locations, respectively.

 

The segment’s 2004 product improvement initiatives continued, highlighted by a redesigned Hot Rod issue featuring 32 additional pages of editorial content, improved paper stock and an upgraded design.  The first two redesigned Hot Rod issues are up approximately 20% in advertising revenues and newsstand sales.

 

The Company’s initiatives to extend existing brands include licensing Lowrider brand apparel to be sold by leading retailers, developing In-Fisherman branded electronic entertainment for personal computers and video consoles with Destineer, a technology leader in the video game market, and an agreement with Procter & Gamble to release Febreze AutoTM with the Motor Trend seal of approval.

 

The April 2004 launch of About 4.0, with an innovative new site design and architecture aimed at enhancing the total user experience, resulted in a 16% increase in page views and substantially higher traffic in areas of greatest value to advertisers.  A test of an online broadcast advertising platform, Unicast, on the new About platform resulted in the highest clickthrough rates of all the sites in the test, providing a strong foundation for what is expected to be one of the highest growth categories for Web-based advertising.

 

Segment EBITDA

 

Enthusiast Media Segment EBITDA increased $543 to $42,849 in 2004 from $42,306 in 2003 as increased revenues were partially offset by increased operating expenses. The Company is investing in an aggressive product improvement program, research and marketing initiatives to attract more national advertising, and the creation of an enhanced product fulfillment and database project for e-commerce and direct consumer marketing.  Segment EBITDA margin decreased to 22.8% in 2004 from 23.1% in 2003.

 

34



 

Below is a reconciliation of Enthusiast Media Segment EBITDA to operating income for the three months ended June 30, 2004 and 2003:

 

 

 

Three Months Ended
June 30,

 

 

 

2004

 

2003

 

 

 

 

 

 

 

Segment EBITDA

 

$

42,849

 

$

42,306

 

Depreciation of property and equipment

 

3,740

 

5,829

 

Amortization of intangible assets and other

 

1,316

 

3,650

 

Provision for severance, closures and restructuring related costs

 

3,231

 

2,074

 

Loss on sale of businesses and other, net

 

 

117

 

 

 

 

 

 

 

Operating income

 

$

34,562

 

$

30,636

 

 

Operating Income (Loss)

 

Operating income was $34,562 in 2004 compared to $30,636 in 2003, an increase of 12.8%.  This increase was principally driven by decreases in amortization and depreciation expenses as well as the improvement in Segment EBITDA, partially offset by an increase in restructuring related costs.

 

Discontinued Operations

 

In accordance with SFAS 144, the operating results of Seventeen, Sprinks, New York magazine and About Web Services have been reclassified to discontinued operations on the condensed statements of consolidated operations for the periods prior to their respective divestiture dates.

 

Enthusiast Media revenues exclude revenues from discontinued operations of $117 and $29,476 for the three months ended June 30, 2004 and 2003, respectively. Enthusiast Media segment operating income excludes operating income from discontinued operations of $4,583 and $105,328 for the three months ended June 30, 2004 and 2003, respectively.  For the three months ended June 30, 2004 and 2003, discontinued operations includes a net gain on sale of businesses of $4,300 and $103,748, respectively.

 

Consumer Guides Segment (includes Apartment Guide, New Home Guide and Auto Guide publications and their related Web sites, and the DistribuTech distribution business)

 

Revenues, Net

 

Consumer Guides revenues were $71,084 or 20.8% and $69,404 or 20.5% of the Company’s consolidated revenues for 2004 and 2003, respectively. Consumer Guides revenues increased $1,680 or 2.4% in 2004 compared to 2003 as follows:

 

 

 

Three Months Ended
June 30,

 

Percent
Change

 

 

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

Revenues, net:

 

 

 

 

 

 

 

Advertising

 

$

59,293

 

$

59,023

 

0.5

 

Other

 

11,791

 

10,381

 

13.6

 

Total

 

$

71,084

 

$

69,404

 

2.4

 

 

35



 

Advertising revenues for the Consumer Guides segment increased $270 to $59,293 in 2004 compared to $59,023 in 2003 primarily due to growth in premium online advertising programs and the new Auto Guide launched in March 2004.  Advertising revenue at the Apartment Guide business continues to be affected by a soft rental market due to low interest rates which is driving increased home buying and higher than normal apartment vacancy rates.

 

Consumer Guides other revenues, which relate to its distribution arm, DistribuTech, increased $1,410 during the second quarter of 2004 compared to 2003 due to continued growth of its distribution network and increased rack utilization. DistribuTech increased its average number of third party customers by 7%. Its rack utilization rate is 76%, an increase of 4 percentage points compared to first quarter 2004 and up 8 percentage points compared to a year ago.

 

Key Accomplishments

 

Apartmentguide.com delivered nearly one half million leads to advertisers in June 2004, which was its strongest performance to date and a record for the industry.

 

The Company launched the Houston New Home Guide in May 2004, becoming the 19th market served and the second New Home Guide launched this year.

 

Segment EBITDA

 

Consumer Guides Segment EBITDA decreased $490 or 2.3% in 2004 to $20,512. The decrease was primarily due to additional sales and marketing expenses related to new products, including the Charlotte Auto Guide business and the Orlando and Houston New Home Guides, as well as higher distribution expenses.  As a result, Segment EBITDA margin decreased to 28.9% in 2004 compared to 30.3% in 2003.

 

Below is a reconciliation of Consumer Guides Segment EBITDA to operating income for the three months ended June 30, 2004 and 2003:

 

 

 

Three Months Ended
June 30,

 

 

 

2004

 

2003

 

 

 

 

 

 

 

Segment EBITDA

 

$

20,512

 

$

21,002

 

Depreciation of property and equipment

 

2,018

 

2,014

 

Amortization of intangible assets and other

 

824

 

899

 

Operating income

 

$

17,670

 

$

18,089

 

 

Operating Income (Loss)

 

Operating income decreased $419 or 2.3% in 2004 due to the decrease in Segment EBITDA.

 

Discontinued Operations

 

In accordance with SFAS 144, the results of RealEstate.com have been reclassified to discontinued operations on the condensed statements of consolidated operations for three months ended June 30, 2004 and 2003.

 

Consumer Guides revenues exclude revenues from discontinued operations of $516 for the three months ended June 30, 2003. Consumer Guides segment operating income excludes operating losses from discontinued operations of $9 and $1,294 for the three months ended June 30, 2004 and 2003, respectively.

 

36



 

Business Information Segment (includes trade magazines and their related Web sites, events, directories and data products)

 

Revenues, Net

 

Business Information revenues were $58,208 or 17.0% and $57,938 or 17.1% of the Company’s consolidated revenues for 2004 and 2003, respectively. Business Information revenues increased $270 or 0.5% in 2004 compared to 2003 as follows:

 

 

 

Three Months Ended
June 30,

 

Percent
Change

 

 

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

Revenues, net:

 

 

 

 

 

 

 

Advertising

 

$

39,927

 

$

39,493

 

1.1

 

Circulation

 

4,617

 

4,637

 

(0.4

)

Other

 

13,664

 

13,807

 

(1.0

)

Intersegment revenues.

 

 

1

 

(100

)

 

 

 

 

 

 

 

 

Total

 

$

58,208

 

$

57,938

 

0.5

 

 

Overall, Business Information segment revenues are stabilizing, with approximately 37% of the segment’s revenues coming from sectors that are up, approximately 50% from sectors that are flat and approximately 13% from sectors that remain down.

 

Advertising revenues increased $434 in 2004 with strength primarily in the magazines serving the agriculture, communications and financial services sectors offset by weakness primarily in the marketing and public services sectors.

 

Circulation revenues, which consist of subscriptions to directories and data based products, were flat at $4,617 in 2004 compared to $4,637 in 2003.

 

Other revenues, which consist of events, information products and online revenues, were down $143, or 1.0%, in 2004 compared to 2003.

 

Key Accomplishments

 

The Business Information segment continued to improve as the business showed a revenue gain for the first time in twelve quarters.

 

The Company launched EquipmentWatch, a completely revamped subscription data product.  The new paid-content Web site provides integrated access to EquipmentWatch’s construction equipment valuation, ownership, operating cost and specification data.  This paid content subscription model is being extended to other markets.

 

The Company continued progress in developing electronic products. Projects such as web-based continuing education, sponsored webcasts, and custom microsites contributed to an increase of 57% in online revenue.

 

Segment EBITDA

 

Business Information Segment EBITDA increased $2,257 for the three months ended June 30, 2004 to $10,223. The improvement is predominantly due to continued cost control with expenses declining in most categories.

 

37



 

As operating expenses in this segment declined by approximately $2,000 in 2004 compared to 2003. Segment EBITDA margin improved to 17.6% for 2004 versus 13.7% for 2003.

 

Below is a reconciliation of Business Information Segment EBITDA to operating income for the three months ended June 30, 2004 and 2003:

 

 

 

Three Months Ended
June 30,

 

 

 

2004

 

2003

 

 

 

 

 

 

 

Segment EBITDA

 

$

10,223

 

$

7,966

 

Depreciation of property and equipment

 

1,376

 

1,881

 

Amortization of intangible assets and other

 

1,258

 

2,193

 

Provision for severance, closures and restructuring related costs

 

416

 

(380

)

Loss on sale of businesses and other, net

 

15

 

1,095

 

Operating income

 

$

7,158

 

$

3,177

 

 

Operating Income (Loss)

 

Business Information operating income increased $3,981 to $7,158 in 2004 compared to $3,177 in 2003.  This increase was driven by improved Segment EBITDA and decreases in depreciation and amortization expense in 2004 due to certain assets becoming fully depreciated or amortized.  In addition, loss on sale of businesses decreased in 2004 compared to 2003 as the Company recorded a loss related to the sale of the assets of Coal Age and Engineering & Mining Journal in 2003.

 

Discontinued Operations

 

In accordance with SFAS 144, the results of Simba, Federal Sources, CableWorld and Kagan World Media, which have been sold, have been reclassified to discontinued operations on the condensed statements of consolidated operations for periods prior to their respective divestiture dates.  In addition, the Company is evaluating strategic partnerships regarding the Folio, Circulation Management and American Demographics properties and the operating results of these properties have been classified as discontinued operations for all periods presented.

 

Business Information revenues exclude revenues from discontinued operations of $1,645 and $6,509 for the three months ended June 30, 2004 and 2003, respectively. Business Information segment operating results exclude the operating loss from discontinued operations of $476 and $800 for the three months ended June 30, 2004 and 2003, respectively. For the three months ended June 30, 2004 and 2003, discontinued operations include a net gain (loss) on sale of businesses of ($108) and $98, respectively.

 

Education and Training (includes Channel One, Films Media Group and Workplace Learning)

 

Revenues, Net

 

Education and Training revenues were $25,314 or 7.4% and $30,088 or 8.9% of the Company’s consolidated revenues for 2004 and 2003, respectively. Education and Training revenues decreased $4,774 or 15.9% in 2004 compared to 2003 as follows:

 

38



 

 

 

Three Months Ended
June 30,

 

Percent
Change

 

 

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

Revenues, net:

 

 

 

 

 

 

 

Advertising

 

$

9,239

 

$

11,543

 

(20.0

)

Circulation

 

5,961

 

6,630

 

(10.1

)

Other

 

10,078

 

10,952

 

(8.0

)

Intersegment revenues

 

36

 

963

 

(96.3

)

Total

 

$

25,314

 

$

30,088

 

(15.9

)

 

Education and Training advertising revenues, which are generated entirely by Channel One, decreased $2,304 in 2004 as compared to 2003. Advertising gains from movies, television networks, military recruitment and other clients were offset by reduced spending from certain food and beverage accounts.

 

Workplace Learning subscription revenue accounts for all of the segment’s circulation revenue, which decreased $669 in 2004. Lagging demand for training services from Workplace Learning continued to depress subscription revenues as well as product sale revenues which are classified in other.

 

Reduced product sales at Workplace Learning and the Films Media Group primarily accounted for the decline of $874 in other revenues in 2004. At the Films Media Group, continuing constraints on state and local school budgets were the driver of approximately $550 of declines in product sales in 2004 compared to 2003.

 

Key Action Steps to Improve Performance

 

The Company is working to improve Channel One’s sales effectiveness by focusing the sales team on industry segments instead of geography. The Company is reorganizing the Films Media Group’s marketing efforts under a newly recruited, experienced direct marketing professional. In addition, the Company is continuing a thorough review of Workplace Learning’s portfolio.

 

Segment EBITDA

 

Education and Training Segment EBITDA decreased $2,246 to ($606) for the three months ended June 30, 2004. This decrease is principally due to the declines in revenue discussed above partially offset by continued cost control during the second quarter of 2004. These factors contributed to a decrease in Segment EBITDA margin in 2004 to (2.4%) compared to 5.5% in 2003.

 

Below is a reconciliation of Education and Training Segment EBITDA to operating loss for the three months ended June 30, 2004 and 2003:

 

 

 

Three Months Ended
June 30,

 

2004

 

2003

 

 

 

 

 

 

 

Segment EBITDA

 

$

(606

)

$

1,640

 

Depreciation of property and equipment

 

2,368

 

3,846

 

Amortization of intangible assets and other

 

1,419

 

3,178

 

Provision for severance, closures and restructuring related costs

 

185

 

250

 

Operating loss

 

$

(4,578

)

$

(5,634

)

 

39



 

Operating Income (Loss)

 

Operating loss decreased $1,056 for the three months ended June 30, 2004 due to decreased amortization and depreciation as certain assets became fully amortized and fully depreciated since the second quarter of 2003, partially offset by the decrease in Segment EBITDA.

 

Corporate:

 

Corporate Overhead

 

Corporate overhead decreased to $5,984 in 2004 from $6,700 in 2003 primarily due to a reduction in general and administrative expenses.

 

Operating Income (Loss)

 

Corporate operating loss decreased $4,996 in 2004 to $8,890 from $13,886 in 2003 principally driven by the absence of severance related to separated senior executives in 2004 compared to $5,576 recorded in 2003.  This decrease was partially offset by an increase in stock-based compensation expense in 2004 to $1,567 compared to $777 in 2003 and an increase in restructuring related costs to $623 in 2004 from $44 in 2003.

 

Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003:

 

Consolidated Results:

 

Revenues, Net

 

Consolidated revenues were $667,362 in 2004 compared to $664,778 in 2003:

 

 

 

Six Months Ended
June 30,

 

Percent
Change

 

 

 

2004

 

2003

 

 

Revenues, net:

 

 

 

 

 

 

 

Advertising

 

$

418,025

 

$

414,915

 

0.7

 

Circulation

 

150,792

 

155,081

 

(2.8

)

Other

 

98,545

 

94,782

 

4.0

 

Total

 

$

667,362

 

$

664,778

 

0.4

 

 

Advertising revenues increased by $3,110 in 2004 compared to 2003 due to increases of $6,408 and $2,481 at the Enthusiast Media and Consumer Guides segments, respectively, partially offset by declines of $1,801 and $3,978 at the Business Information and Education and Training segments, respectively. Circulation revenues decreased $4,289 in 2004, principally driven by a $3,121 decline in revenues at the Enthusiast Media segment due to continued weakness in single copy sales. Other revenues increased $3,763 in 2004 compared to 2003 primarily due to increases at Consumer Guides of $2,673 from continued growth of its third party distribution business, at Enthusiast Media of $2,627 and at Business Information of $768 partially offset by a $2,305 decline at the Education and Training segment. Revenue trends within each segment are further detailed in the segment discussions below.

 

40



 

Operating Income (Loss)

 

Operating income was $64,046 in 2004 compared to $50,115 in 2003.  The improvement in operating income in 2004 was due to reduced operating expenses and a decrease in amortization and depreciation expenses. Amortization and depreciation expense decreased $9,822 and $4,557, respectively, in 2004 compared to 2003 primarily due to certain intangible assets and property and equipment that have become fully amortized or depreciated subsequent to June 30, 2003.  In addition, severance related to separated senior executives decreased $4,918 to $658 in 2004 compared to $5,576 in 2003. These expense reductions were partially offset by a provision for unclaimed property.  The Company has completed the initial phase of its internal assessment regarding compliance with escheatment requirements for unclaimed property in certain states and as a result has recorded an estimated provision of $5,500 (see Note 11 of the notes to the condensed consolidated financial statements).

 

Net Income (Loss)

 

The Company had net income in 2004 of $13,225 compared to $68,657 in 2003. The decrease in net income was primarily due to the gain on the sale of Seventeen of $104,304 recorded in discontinued operations in 2003.  The Company recorded a gain on the sale of New York magazine of $37,978 in discontinued operations in 2004.

 

Interest expense decreased $6,461, or 9.9% in 2004 to $58,742 from $65,203 in 2003. The decrease in interest expense was due to the Company’s lower average debt levels despite the additional debt issued in May 2004.

 

In accordance with the prospective adoption, effective July 1, 2003, of SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, loss from continuing operations increased by $22,562 which represents $21,890 of interest on shares subject to mandatory redemption and $672 of amortization of issuance costs which is included in the amortization of deferred financing costs on the accompanying condensed statement of consolidated operations for the six months ended June 30, 2004. If SFAS 150 was adopted retroactively on January 1, 2003, loss from continuing operations for the six months ended June 30, 2003 would have increased by $22,670.

 

SFAS 144 requires sales or disposals of long-lived assets that meet certain criteria to be classified on the statement of consolidated operations as discontinued operations and to reclassify prior periods accordingly.  During 2003, the Company completed the sale of Seventeen, Simba Information, Federal Sources, CableWorld, Sprinks and RealEstate.com and during 2004, the Company sold New York magazine, Kagan World Media and About Web Services, About.com’s consumer Web hosting business. In accordance with SFAS 144, the financial results of these operations have been reclassified into discontinued operations on the condensed statements of consolidated operations for periods prior to their respective divestiture date. In addition, 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 properties have been classified as discontinued operations for all periods presented. For the six months ended June 30, 2004 and 2003, discontinued operations includes a net gain on sale of businesses of $42,226 and $102,605, respectively.

 

41



 

Segment Results:

 

Enthusiast Media Segment (includes Consumer Automotive, Performance Automotive, International Automotive, Outdoors, Action Sports, Lifestyles and Home Technology magazine groups, their related Web sites, events, and About.com)

 

Revenues, Net

 

Enthusiast Media revenues were $360,514 or 54.0% and $355,055 or 53.4% of the Company’s consolidated revenues for 2004 and 2003, respectively. Enthusiast Media revenues increased $5,459 or 1.5% in 2004 compared to 2003 as follows:

 

 

 

Six Months Ended
June 30,

 

Percent
Change

 

2004

 

2003

 

 

 

 

 

 

 

 

 

Revenues, net:

 

 

 

 

 

 

 

Advertising

 

$

199,583

 

$

193,175

 

3.3

 

Circulation

 

129,395

 

132,516

 

(2.4

)

Other

 

30,966

 

28,339

 

9.3

 

Intersegment revenues

 

570

 

1,025

 

(44.4

)

Total

 

$

360,514

 

$

355,055

 

1.5

 

 

Advertising revenues increased $6,408 or 3.3% in 2004. The growth was led by an increase in online advertising of approximately $10,700 predominantly driven by an aggressive effort to improve the sales and marketing of the Company’s online properties.

 

The increase in online advertising revenues allows the Company to reinvest in its properties to be well positioned for the significant growth opportunities in online marketing.  In April 2004, About.com unveiled its most significant product improvement since the site’s debut in 1997 as it launched About 4.0 with an innovative new site design and architecture aimed at enhancing the total user experience.

 

The increase in online advertising was partially offset by an approximate $4,300 decrease in print advertising. Print advertising pages were down 1.3% in 2004 compared to 2003.  Specifically, advertising pages in the Company’s automotive titles declined 6.4% while advertising pages for the remainder of the segment’s properties increased 3.5%.  Industry wide advertising pages were up 2.0%, with automotive advertising pages increasing 0.2% and non-automotive advertising pages increasing 2.9%, as reported by IMS.  The Company expects automotive advertising to resume growth in the second half of 2004 as many new car models are scheduled for introduction.

 

Circulation revenues at Enthusiast Media declined $3,121 or 2.4% for the six months ended June 30, 2004 due to continued softness in single copy sales.  Newsstand revenue gains at the Lifestyles (including the soap opera titles) group partially offset declines at the other Enthusiast segment groups.  Overall, single copy units for Enthusiast Media magazines declined 2.6% for the six months ended June 30, 2004, compared to the industry average increase of 1.2%, as reported by the International Periodical Distributors Association.

 

Other revenues for Enthusiast Media, which include licensing, list rental, events and other, increased $2,627, or 9.3%, in 2004 compared to 2003.  The increase was primarily due to growth in merchandising revenue and events, including the timing of certain automotive events during 2004.

 

42



 

Segment EBITDA

 

Enthusiast Media Segment EBITDA increased 9.2% to $72,263 in 2004 from $66,168 in 2003. This increase was due predominantly to the increase in revenues as well as to reduced operating expenses of $636. As a result, Segment EBITDA margin increased to 20.0% in 2004 from 18.6% in 2003.

 

Below is a reconciliation of Enthusiast Media Segment EBITDA to operating income for the six months ended June 30, 2004 and 2003:

 

 

 

Six Months Ended
June 30,

 

 

 

2004

 

2003

 

 

 

 

 

 

 

Segment EBITDA

 

$

72,263

 

$

66,168

 

Depreciation of property and equipment

 

8,771

 

10,024

 

Amortization of intangible assets and other

 

3,703

 

7,963

 

Provision for severance, closures and restructuring related costs

 

3,315

 

2,465

 

Provision for unclaimed property

 

3,271

 

 

Gain (loss) on sale of businesses and other, net

 

(75

)

116

 

Operating income

 

$

53,278

 

$

45,600

 

 

Operating Income (Loss)

 

Operating income was $53,278 in 2004 compared to $45,600 in 2003, an increase of $7,678.  This increase was principally driven by the improvement in Segment EBITDA as well as decreases in amortization and depreciation expenses, partially offset by an increase in restructuring related costs and a provision for unclaimed property (see Note 11 of the notes to the condensed consolidated financial statements).

 

Discontinued Operations

 

In accordance with SFAS 144, the operating results of Seventeen, Sprinks, New York magazine and About Web Services have been reclassified to discontinued operations on the condensed statements of consolidated operations for the periods prior to their respective divestiture dates.

 

Enthusiast Media revenues exclude revenues from discontinued operations of $2,290 and $73,588 for the six months ended June 30, 2004 and 2003, respectively. Enthusiast Media segment operating income excludes operating income from discontinued operations of $41,850 and $109,303 for the six months ended June 30, 2004 and 2003, respectively.  For the six months ended June 30, 2004 and 2003, discontinued operations includes a net gain on sale of businesses of $41,419 and $102,770, respectively.

 

Consumer Guides Segment (includes Apartment Guide, New Home Guide and Auto Guide publications and their related Web sites, and the DistribuTech distribution business)

 

Revenues, Net

 

Consumer Guides revenues were $142,471 or 21.3% and $137,327 or 20.7% of the Company’s consolidated revenues for 2004 and 2003, respectively. Consumer Guides revenues increased $5,144 or 3.7% in 2004 compared to 2003 as follows:

 

43



 

 

 

Six Months Ended
June 30,

 

Percent
Change

 

2004

 

2003

 

 

 

 

 

 

 

 

 

Revenues, net:

 

 

 

 

 

 

 

Advertising

 

$

119,385

 

$

116,904

 

2.1

 

Other

 

23,086

 

20,413

 

13.1

 

Intersegment revenues

 

 

10

 

(100

)

Total

 

$

142,471

 

$

137,327

 

3.7

 

 

Advertising revenues for the Consumer Guides segment increased $2,481 to $119,385 in 2004 compared to $116,904 in 2003 primarily due to growth in premium online advertising programs and the new Auto Guide launched in March 2004. Advertising revenue at the Apartment Guide business continued to be affected by challenges presented by low interest rates which is driving increased home buying and higher than normal apartment vacancy rates depressing apartment owners’ advertising budgets.

 

Consumer Guides other revenues, which relate to its distribution arm, DistribuTech, increased $2,673 in 2004 compared to 2003 due to continued growth of its distribution network, increased rack utilization and an effective pricing strategy.  Since the first quarter of 2003, DistribuTech has added over 1,000 retail locations and approximately 400 additional third party publication customers and boosted its total rack utilization from 65% to 76%.  DistribuTech distributes more than 2,000 publications on behalf of other publishing organizations to many of the country’s leading supermarkets and chain stores, with whom it has exclusive distribution relationships.

 

Segment EBITDA

 

Consumer Guides Segment EBITDA increased $1,583 or 4.1% in 2004 to $40,154. The increase is due to higher revenues in 2004 partially offset by increased operating expenses, particularly sales and marketing expenses related to new product introductions (Auto Guide and new markets for New Home Guide) as well as higher distribution expenses. As a result, Segment EBITDA margin increased to 28.2% in 2004 compared to 28.1% in 2003.

 

Below is a reconciliation of Consumer Guides Segment EBITDA to operating income for the six months ended June 30, 2004 and 2003:

 

 

 

Six Months Ended
June 30,

 

2004

 

2003

 

 

 

 

 

 

Segment EBITDA

 

$

40,154

 

$

38,571

 

Depreciation of property and equipment

 

4,059

 

4,011

 

Amortization of intangible assets and other

 

1,647

 

1,798

 

Provision for severance, closures and restructuring related costs

 

38

 

 

Provision for unclaimed property

 

7

 

 

Loss on sale of businesses and other, net

 

 

132

 

Operating income

 

$

34,403

 

$

32,630

 

 

44



 

Operating Income (Loss)

 

Operating income increased $1,773 or 5.4% in 2004. This increase is primarily driven by the improvement in Segment EBITDA.

 

Discontinued Operations

 

In accordance with SFAS 144, the results of RealEstate.com have been reclassified to discontinued operations on the condensed statements of consolidated operations for six months ended June 30, 2004 and 2003.

 

Consumer Guides revenues exclude revenues from discontinued operations of $458 and $1,051 for the six months ended June 30, 2004 and 2003, respectively. Consumer Guides segment operating income excludes operating losses from discontinued operations of $252 and $1,483 for the six months ended June 30, 2004 and 2003, respectively.  In 2004, discontinued operations includes a loss on sale of business of $519 due to post closing adjustments related to the sale of RealEstate.com.

 

Business Information Segment (includes trade magazines and their related Web sites, events, directories and data products)

 

Revenues, Net

 

Business Information revenues were $113,010 or 16.9% and $114,144 or 17.2% of the Company’s consolidated revenues for 2004 and 2003, respectively. Business Information revenues decreased $1,134 or 1.0% in 2004 compared to 2003 as follows:

 

 

 

Six Months Ended
June 30,

 

Percent
Change

 

2004

 

2003

 

 

 

 

 

 

 

 

 

Revenues, net:

 

 

 

 

 

 

 

Advertising

 

$

79,844

 

$

81,645

 

(2.2

)

Circulation

 

9,157

 

9,257

 

(1.1

)

Other

 

24,009

 

23,241

 

3.3

 

Intersegment revenues

 

 

1

 

(100

)

Total

 

$

113,010

 

$

114,144

 

(1.0

)

 

Overall, Business Information segment revenues are stabilizing and the second quarter of 2004 marked the first time in twelve quarters the segment showed an increase in revenues.

 

Advertising revenues decreased $1,801 in 2004 due to continued softness in trade advertising, particularly in the power, entertainment technology, marketing and agriculture categories partially offset by strength in the communications and financial services sectors.

 

Circulation revenues, which consist of subscriptions to directories and data based products, were essentially flat in 2004 compared to 2003.

 

45



 

Other revenues, which consist of events, information products and online revenues, were up $768, or 3.3%, in 2004 compared to 2003. The focus on online initiatives in developing new electronic products contributed to the increase in online revenues.

 

Segment EBITDA

 

Business Information Segment EBITDA increased $2,633 for the six months ended June 30, 2004 to $15,312. The improvement is predominantly due to continued cost control with expenses declining in all categories, partially offset by the decline in revenues.  Operating expenses in this segment declined by approximately $3,800 in 2004 compared to 2003. These factors contributed to an improved Segment EBITDA margin of 13.5% for 2004 versus 11.1% for 2003.

 

Below is a reconciliation of Business Information Segment EBITDA to operating income for the six months ended June 30, 2004 and 2003:

 

 

 

Six Months Ended
June 30,

 

2004

 

2003

 

 

 

 

 

 

 

Segment EBITDA

 

$

15,312

 

$

12,679

 

Depreciation of property and equipment

 

2,957

 

3,998

 

Amortization of intangible assets and other

 

2,649

 

4,472

 

Provision for severance, closures and restructuring related costs

 

1,159

 

210

 

Provision for unclaimed property

 

1,538

 

 

Loss on sale of businesses and other, net

 

15

 

1,109

 

Operating income

 

$

6,994

 

$

2,890

 

 

Operating Income (Loss)

 

Business Information operating income increased $4,104 to $6,994 in 2004 compared to $2,890 in 2003.  The increase in operating income was driven by improved Segment EBITDA and decreases in depreciation and amortization expense in 2004 as certain assets became fully depreciated or amortized, partially offset by a provision for unclaimed property (see Note 11 of the notes to the condensed consolidated financial statements).

 

Discontinued Operations

 

In accordance with SFAS 144, the results of Simba, Federal Sources, CableWorld and Kagan World Media have been reclassified to discontinued operations on the condensed statements of consolidated operations for periods prior to their respective divestiture dates. In addition, the Company is evaluating strategic partnerships regarding the Folio, Circulation Management and American Demographics properties and the operating results of these properties have been classified as discontinued operations for all periods presented.

 

Business Information revenues exclude revenues from discontinued operations of $3,970 and $12,176 for the six months ended June 30, 2004 and 2003, respectively. Business Information segment operating results exclude the operating income (loss) from discontinued operations of $201 and ($4,050) for the six months ended June 30, 2004 and 2003, respectively. For the six months ended June 30, 2004 and 2003, discontinued operations include a net gain (loss) on sale of businesses of $1,326 and ($165), respectively.

 

46



 

Education and Training (includes Channel One, Films Media Group and Workplace Learning)

 

Revenues, Net

 

Education and Training revenues were $52,087 or 7.8% and $62,226 or 9.4% of the Company’s consolidated revenues for 2004 and 2003, respectively. Education and Training revenues decreased $10,139 or 16.3% in 2004 compared to 2003 as follows:

 

 

 

Six Months Ended
June 30,

 

Percent
Change

 

2004

 

2003

 

 

 

 

 

 

 

 

 

Revenues, net:

 

 

 

 

 

 

 

Advertising

 

$

19,213

 

$

23,191

 

(17.2

)

Circulation

 

12,240

 

13,308

 

(8.0

)

Other

 

20,484

 

22,789

 

(10.1

)

Intersegment revenues

 

150

 

2,938

 

(94.9

)

Total

 

$

52,087

 

$

62,226

 

(16.3

)

 

Education and Training advertising revenues, which are generated entirely by Channel One, decreased $3,978 in 2004 as compared to 2003. Channel One’s advertising revenue declined primarily as a result of reduced spending by several food and beverage accounts, partially offset by revenue gains from additional health and beauty brands, movies, military recruitment and telecommunications firms.

 

Workplace Learning subscription revenue accounts for all of the segment’s circulation revenue, which decreased $1,068 in 2004. Lagging demand for training services from Workplace Learning continued to depress subscription revenues as well as product sale revenues which are classified in other.

 

Reduced product sales at Workplace Learning and the Films Media Group primarily accounted for the decline of $2,305 in other revenues in 2004. At the Films Media Group, continuing constraints on state and local school budgets were the driver of approximately $1,500 of declines in product sales in 2004 compared to 2003.

 

Segment EBITDA

 

Education and Training Segment EBITDA decreased $6,701 to ($729) for the six months ended June 30, 2004. This decrease is principally due to the declines in revenue discussed above partially offset by continued cost control during 2004. These factors contributed to a decrease in Segment EBITDA margin in 2004 to (1.4%) compared to 9.6% in 2003.

 

Below is a reconciliation of Education and Training Segment EBITDA to operating loss for the six months ended June 30, 2004 and 2003:

 

 

 

Six Months Ended
June 30,

 

2004

 

2003

 

 

 

 

 

 

 

Segment EBITDA

 

$

(729

)

$

5,972

 

Depreciation of property and equipment

 

4,751

 

6,992

 

Amortization of intangible assets and other

 

2,784

 

6,372

 

Provision for severance, closures and restructuring related costs

 

433

 

250

 

Provision for unclaimed property

 

628

 

 

Operating loss

 

$

(9,325

)

$

(7,642

)

 

47



 

Operating Income (Loss)

 

Operating loss increased $1,683 for the six months ended June 30, 2004 due to the decrease in Segment EBITDA partially offset by decreased amortization and depreciation as certain assets became fully amortized and fully depreciated since June 30, 2003.

 

Corporate:

 

Corporate Overhead

 

Corporate overhead decreased to $13,474 in 2004 from $14,124 in 2003 primarily due to a reduction in general and administrative expenses.

 

Operating Income (Loss)

 

Corporate operating loss decreased $2,059 in 2004 to $21,304 from $23,363 in 2003 principally driven by a decrease in severance related to the separated senior executives of $4,918 to $658 in 2004 as a result of the finalization of the separation agreements of two of the executives compared to $5,576 recorded in 2003.  This was partially offset by an increase in the provision for severance, closures and restructuring related costs of $2,004 to $2,229 in 2004 and an increase in stock-based compensation expense in 2004 to $3,486 compared to $2,023 in 2003.

 

Risk Factors

 

Set forth below are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Quarterly Report.

 

General economic trends, as well as trends in advertising spending, may reduce our advertising revenues.

 

Our advertising revenues are subject to the risks arising from adverse changes in domestic and global economic conditions and possible shifting of advertising spending amongst media. A decline in the level of business activity of certain of our advertisers has had an adverse effect on our revenues and profit margins. Additionally, high apartment vacancy rates have pressured the advertising budgets of property owners, constraining growth in one of our segments.  Because of economic conditions in the United States, many advertisers, particularly business-to-business advertisers, have reduced advertising expenditures. Any further adverse impact of economic conditions and high vacancy rates on the Company is difficult to predict, but it may result in further reductions in advertising revenue. Additionally, if geopolitical events negatively impact the economy or advertising spending patterns change, our results of operations may be adversely affected.  The Company believes that the targeted nature of its products together with its diversification of advertising vehicles, including print, on-line, events and television, would minimize the effects of shifting advertising spending.

 

We have substantial indebtedness and other financial obligations, which consume a substantial portion of the cash flow that we generate.

 

A substantial portion of our cash flow is dedicated to the payment of interest on indebtedness and on shares subject to mandatory redemption which reduces funds available for capital expenditures and business opportunities and may limit our ability to respond to adverse developments in our business or in the economy.

 

48



 

Our debt instruments limit our business flexibility by imposing operating and financial restrictions on our operations.

 

The agreements and indentures governing our indebtedness impose specific operating and financial restrictions on us. These restrictions impose limitations on our ability to, among other things:

 

                  change the nature of our business;

                  incur additional indebtedness;

                  create liens on our assets;

                  sell assets;

                  issue stock;

                  engage in mergers, consolidations or transactions with our affiliates;

                  make investments in or loans to specific subsidiaries;

                  make guarantees or specific restricted payments; and

                  declare or make dividend payments on our common or preferred stock.

 

Failure to comply with the terms and covenants in our indebtedness could lead to a default under the terms of those documents, which would entitle the lenders to accelerate the indebtedness and declare all amounts owed due and payable.  Moreover, the instruments governing almost all of our indebtedness contain cross-default provisions so that a default under any of our indebtedness may result in a default under our other indebtedness.  If a cross-default occurs, the maturity of almost all of our indebtedness could be accelerated and become immediately due and payable.  If that were to happen, we would not be able to satisfy our debt obligations, which would have a material adverse effect on our ability to continue as a going concern.  We may not be able to comply with these restrictions in the future, or in order to comply with these restrictions we may have to forgo opportunities that might otherwise be beneficial to us.

 

Under the terms of our debt instruments, we have the ability to make significant additional investments in our unrestricted subsidiaries.

 

Kohlberg Kravis Roberts & Co. L.P., or KKR, has control of our common stock and has the power to elect all the members of our board of directors and to approve any action requiring stockholder approval.

 

As of June 30, 2004, approximately 60% of the shares of our common stock were held by investment partnerships, of which KKR Associates, L.P., a New York limited partnership (“KKR Associates”), and KKR GP 1996 LLC, a Delaware limited liability company (“KKR GP 1996”), each an affiliate of KKR, are the general partners. KKR Associates and KKR GP 1996 have sole voting and investment power with respect to these shares. Consequently, KKR Associates and KKR GP 1996 and their respective general partners and members, three of whom are also our directors, control us and have the power to elect all of our directors and approve any action requiring stockholder approval, including adopting amendments to our certificate of incorporation and approving mergers or sales of all or substantially all of our assets. KKR Associates and KKR GP 1996 will also be able to prevent or cause a change of control at any time.

 

Increases in paper and postage costs may have an adverse impact on our future financial results.

 

The price of paper is a significant expense relating to our print products and direct mail solicitations. Postage for product distribution and direct mail solicitations is also a significant expense. We use the U.S. Postal Service for distribution of many of our products and marketing materials. In April 2003, President Bush signed legislation that will hold postal rates stable until at least 2006. Paper and postage cost increases may have an adverse effect on our future results. We may not be able to pass these cost increases through to our customers.

 

49



 

Incompatible financial systems limit the Company’s ability to operate efficiently.

 

PRIMEDIA is the result of numerous acquisitions since its inception in 1989. Many of the companies acquired had financial systems which were incompatible. Incompatible financial systems across PRIMEDIA had negatively impacted the Company’s ability to more efficiently analyze data and respond to business opportunities on a timely basis. Despite the economic slowdown, the Company has been engaged in upgrading its key financial systems, which are designed to make the financial reporting and analysis functions more efficient. To address management’s concerns regarding the lack of compatible financial systems across the Company and the demands surrounding increased financial disclosure, the Company has installed an integrated enterprise-wide general ledger system across all business units. Despite the difficult economic environment, the Company spent approximately $15,000 on the systems upgrade, of which approximately $10,000 and $5,000 was spent during 2003 and 2002, respectively. The Company is also implementing a new integrated billing/accounts receivable system across its consumer magazine units which is scheduled for completion in the latter part of 2004 at a cost of approximately $5,000. The Company recognizes that there are inherent risks in a system implementation and has taken reasonable steps to mitigate these risks.

 

We depend on some important employees, and the loss of any of those employees may harm our business.

 

Our performance is substantially dependent on the performance of our executive officers and other key employees. In addition, our success is dependent on our ability to attract, train, retain and motivate high quality personnel, especially for our management team. The loss of the services of any of our executive officers or key employees may harm our business.

 

The past decline in revenues had necessitated cost cuts including the reduction of certain personnel at the Company. Such workforce reductions may impact the ability of remaining personnel to perform their assigned responsibilities in an efficient manner, primarily due to the increased volume of work being generated in the financial area and to the continuing process of converting certain of our financial systems. The Company believes that it has in place the necessary financial workforce to analyze data and has put in place additional resources during the period prior to the completion of the financial systems upgrade to improve the efficiency of financial analysis and mitigate the risk of employee turnover.

 

The Company’s management also is concerned about the intense competition in this economy for the hiring and retention of qualified financial personnel, the inherent risk in certain system implementations across the Company and the demands surrounding increased financial disclosure. To mitigate management’s concerns regarding the hiring and retention of qualified financial personnel and to ensure future stability in the financial workforce, the Company continues to upgrade the skill level of its back office financial personnel, consolidate certain back office functions and cross train individuals in the performance of multiple job functions. Additionally, the Company continues to aggressively recruit qualified professionals to strengthen and increase its financial personnel. The Company believes that it is currently close to being fully staffed in the finance area.

 

Liquidity, Capital and Other Resources

 

As of June 30, 2004, the Company had cash and unused credit facilities of $452,049, as further detailed below under “Financing Arrangements”, compared to $319,125 as of December 31, 2003.  On July 7, 2004, the Company redeemed all of its Series J Convertible Preferred Stock.  As of August 4, 2004, the Company had over $250,000 in cash and available unused credit facilities. The Company has also implemented and continues to implement various cost-cutting programs and cash conservation plans, which involve the limitation of capital expenditures and the control of working capital. These plans should help mitigate any future possible cash flow shortfalls.

 

50



 

The Company believes its liquidity, capital resources and cash flow from operations are sufficient to fund planned capital expenditures, working capital requirements, interest and principal payments on its debt, payment of preferred stock dividends and other anticipated expenditures for the next twelve months. The Company has no significant required debt repayments until 2008.

 

Working Capital

 

Consolidated working capital reflects certain industry working capital practices and accounting principles, including the recording of deferred revenue from subscriptions as a current liability as well as the expensing of certain advertising, editorial and product development costs as incurred. Consolidated working capital deficiency, which includes current maturities of long-term debt, was $117,835 at June 30, 2004 compared to $200,622 at December 31, 2003.

 

Cash Flow – 2004 Compared to 2003

 

Net cash used in operating activities increased $15,239 to $16,959 from $1,720 for the six months ended June 30, 2004 and 2003, respectively. This change is primarily due to payments made in 2004 related to the finalization of the separation agreements of the former CEO and the former President and Interim CEO as well as interest related to shares subject to mandatory redemption of $26,455 paid in 2004 as a result of the Company’s adoption of SFAS 150, effective July 1, 2003.  Payments on these shares prior to the adoption of SFAS 150 were classified as preferred stock dividends and are presented as part of cash flows used in financing activities in 2003.

 

Net cash provided by (used in) investing activities decreased $101,861 to $56,107 from $157,968 for the six months ended June 30, 2004 and 2003, respectively.  Proceeds from the sale of businesses were $70,277 in 2004 compared to $182,922 in 2003. Net capital expenditures decreased to $13,574 in 2004, compared to $21,166 in 2003. The Company expects capital spending in 2004 to remain consistent with 2003.

 

Net cash provided by (used in) financing activities was $18,725 in 2004 compared to $(151,226) in 2003 predominantly due to proceeds from the issuance of $175,000 Senior Floating Rate Notes and a new $100,000 term loan C credit facility offset by voluntary permanent reductions of term loans A and B of $150,000 and the pay down of all outstanding borrowings under the revolving credit facility in 2004.  In 2003, proceeds from the sale of businesses and the issuance of 8% Senior Notes were used to pay down borrowings under the Company’s credit facilities. (See further discussion below in Financing Arrangements.)

 

Financing Arrangements


Bank Credit Facilities

 

On April 29, 2004, the Company amended its credit facilities agreement with various financial institutions 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”).  The debt under the bank credit facilities agreement, including term loan C, and as otherwise permitted under the bank credit facilities agreement, and the indebtedness relating to the 7 5/8% Senior Notes, 8 7/8% Senior Notes, 8% Senior Notes and Senior Floating Rate Notes of the Company (together referred to as “Senior Notes”) is secured by a pledge of the stock of PRIMEDIA Companies Inc., an intermediate holding company, owned directly by the Company, which owns directly or indirectly all shares of PRIMEDIA subsidiaries that guarantee such debt.

 

On May 14, 2004, the Company issued $175,000 principal amount 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 Senior Floating Rate Notes bear interest equal to 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

 

51



 

Senior Floating Rate Notes offering and the term loan C credit facility 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, which was completed on July 7, 2004 (see Subsequent Event Note 17 of the notes to the condensed consolidated financial statements).

 

Substantially all proceeds from sales of businesses and other investments were used to pay down borrowings under the bank credit facilities agreement.  Amounts under the revolving loan commitment may be reborrowed and used for general corporate and working capital purposes as well as to finance certain future acquisitions.  The Company made voluntary pre-payments towards the term loans A and B and voluntary permanent reductions of the revolving loan commitment consisting of the following as of June 30, 2004:

 

 

 

Three and Six
Months Ended
June 30, 2004

 

Three and Six
Months Ended
June 30, 2003

 

 

 

 

 

 

 

Term A (cash pre-payment)

 

$

30,000

 

$

5,000

 

 

 

 

 

 

 

Term B (cash pre-payment)

 

120,000

 

21,000

 

 

 

 

 

 

 

Revolving loan (commitment reduction)

 

21,350

 

24,000

 

 

 

 

 

 

 

Total

 

$

171,350

 

$

50,000

 

 

The bank credit facilities consisted of the following as of June 30, 2004:

 

 

 

Revolver

 

Term A

 

Term B

 

Term C

 

Total

 

Bank Credit Facilities

 

$

405,650

 

$

60,000

 

$

252,906

 

$

100,000

 

$

818,556

 

Borrowings Outstanding

 

 

(60,000

)

(252,906

)

(100,000

)

(412,906

)

Letters of Credit Outstanding

 

(20,159

)

 

 

 

(20,159

)

Unused Bank Commitments

 

$

385,491

 

$

 

$

 

$

 

$

385,491

 

 

With the exception of the term loan B and 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.

 

Under the bank credit facilities, the Company has agreed to pay commitment fees at a per annum rate of either 0.375% or 0.5%, depending on its debt to EBITDA ratio, as defined in the bank credit facilities agreement, on the daily average aggregate unutilized commitment under the revolving loan commitment.  During the first and second quarters of 2004, the Company’s commitment fees were paid at a weighted average rate of 0.375%.  The Company also has agreed to pay certain fees with respect to the issuance of letters of credit and an annual administration fee.  From time to time the Company may pay amendment fees under its bank credit facilities.

 

The commitments under the revolving loan portion of the bank credit facilities are subject to mandatory reductions semi-annually on June 30 and December 31, commencing June 30, 2005, with the final reduction on June 30, 2008.  The aggregate mandatory reductions of the revolving loan commitments under the bank credit facilities are $42,700 in 2005, $64,050 in 2006, $128,100 in 2007 and a final reduction of $170,800 in 2008.  To the extent that the total revolving credit loans outstanding exceed the reduced commitment amount, these loans must be paid down to an amount equal to or less than the reduced commitment amount.  However, if the total revolving credit loans outstanding do not exceed the reduced commitment amount, then there is no requirement to pay down any of the revolving credit loans.  Remaining aggregate term loan payments under the bank credit facilities are $500 in 2004, $20,764 in 2005, 2006 and 2007, $12,192 in 2008 and $337,922 in 2009.

 

52



 

The bank credit facilities agreement, among other things, limits the Company’s ability to change the nature of its businesses, incur indebtedness, create liens, sell assets, engage in mergers, consolidations or transactions with affiliates, make investments in or loans to certain subsidiaries, issue guarantees and make certain restricted payments including dividend payments on or repurchases of the Company’s common stock in excess of $75,000 in any given year.

 

The bank credit facilities and Senior Notes agreements of the Company contain certain customary events of default which generally give the banks or the noteholders, as applicable, the right to accelerate payments of outstanding debt.  Under the bank credit facilities agreement, these events include:

 

                  failure to maintain required covenant ratios, as described below;

                  failure to make a payment of principal, interest or fees within five days of its due date;

                  default, beyond any applicable grace period, on any aggregate indebtedness of PRIMEDIA exceeding $20,000;

                  occurrence of certain insolvency proceedings with respect to PRIMEDIA or any of its material subsidiaries;

                  entry of one judgment or decree involving a liability of $15,000 or more (or more than one involving an aggregate liability of $25,000 or more); and

                  occurrence of certain events constituting a change of control of the Company.

 

The events of default contained in PRIMEDIA’s Senior Notes are similar to, but generally less restrictive than, those contained in the Company’s bank credit facilities.

 

Contractual Obligations

 

There are no required significant debt repayments until 2008.  The following are certain contractual obligations of the Company as of June 30, 2004:

 

Contractual Obligations

 

 

 

Payments Due by Period

 

 

Total

 

Less than
1 year

 

1-3 years

 

4-5 years

 

After
5 years

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt obligations (net of unamortized discount)

 

$

1,583,517

 

$

10,881

 

$

41,528

 

$

491,007

 

$

1,040,101

 

Interest on long-term debt
obligations (1)

 

794,841

 

120,977

 

255,141

 

233,182

 

185,541

 

Shares subject to mandatory redemption (Exchangeable Preferred Stock)

 

474,559

 

 

 

167,487

 

307,072

 

Interest on shares subject to mandatory redemption (Exchangeable Preferred Stock)(1)

 

211,802

 

43,782

 

87,564

 

63,836

 

16,620

 

Capital lease obligations

 

25,458

 

5,802

 

5,661

 

3,909

 

10,086

 

Interest on capital lease obligations

 

7,453

 

1,618

 

2,356

 

1,746

 

1,733

 

Operating lease obligations

 

248,968

 

43,048

 

74,039

 

51,217

 

80,664

 

Total Contractual Obligations

 

$

3,346,598

 

$

226,108

 

$

466,289

 

$

1,012,384

 

$

1,641,817

 

 


(1)                                  Interest payments are based on the Company’s projected interest rates and estimated principal amounts outstanding for the periods presented.

 

The Company currently has $0 of borrowings outstanding at June 30, 2004 under the revolving loan portion of the bank credit facilities, which expires in 2008.

 

53



 

The Company has other commitments in the form of letters of credit of $20,159 aggregate face value which expire on or before June 30, 2005.

 

Off Balance Sheet Arrangements

 

The Company has no variable interest (otherwise known as “special purpose”) entities or off balance sheet debt, other than as related to operating leases in the ordinary course of business as disclosed above.

 

Covenant Compliance

 

As defined in the amended bank credit facilities agreement, the maximum allowable debt leverage ratio was amended to 6.25 to 1 through September 30, 2005.  The maximum debt leverage ratio 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, 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.

 

The Company is herewith providing detailed information and disclosure as to the methodology used in determining compliance with the leverage ratio in the bank credit facilities agreement.  Under its bank credit facilities and Senior Note agreements, the Company is allowed to designate certain businesses as unrestricted subsidiaries to the extent that the value of those businesses does not exceed the permitted amounts, as defined in these agreements. The Company has designated certain of its businesses as unrestricted (the “Unrestricted Group”), which primarily represent Internet businesses, trademark and content licensing and service companies, new launches (including traditional start-ups), other properties under evaluation for turnaround or shutdown and foreign subsidiaries. Except for those specifically designated by the Company as unrestricted, all businesses of the Company are restricted (the “Restricted Group”).  Indebtedness under the bank credit facilities and Senior Note agreements is guaranteed by each of the Company’s domestic subsidiaries in the Restricted Group in accordance with the provisions and limitations of the Company’s bank credit facilities and Senior Note agreements.  The guarantees are full, unconditional and joint and several.  The Unrestricted Group does not guarantee the bank credit facilities or Senior Notes.  For purposes of determining compliance with certain financial covenants under the Company’s bank credit facilities agreement, the Unrestricted Group’s results (positive or negative) are not reflected in the Consolidated EBITDA of the Restricted Group which, as defined in the bank credit facilities agreement, excludes losses of the Unrestricted Group, non-cash charges and restructuring charges and is adjusted primarily for the trailing four quarters results of acquisitions and divestitures and estimated savings for acquired businesses.

 

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The following represents a reconciliation of EBITDA of the Restricted Group for purposes of the leverage ratio as defined in the bank credit facilities agreement to operating income for the three and twelve months ended June 30, 2004:

 

 

 

For the Three
Months Ended
June 30, 2004

 

For the Twelve
Months Ended
June 30, 2004

 

 

 

 

 

 

 

EBITDA of the Restricted Group

 

$

77,969

 

$

309,738

 

EBITDA loss of the Unrestricted Group

 

(11,193

)

(58,437

)

Divestiture and other adjustments

 

218

 

(5,107

)

Depreciation of property and equipment

 

(10,181

)

(50,538

)

Amortization of intangible assets and other

 

(4,817

)

(65,944

)

Severance related to separated senior executives

 

 

(4,454

)

Non-cash compensation

 

(1,567

)

(12,642

)

Provision for severance, closures and restructuring related costs

 

(4,455

)

(12,860

)

Provision for unclaimed property

 

 

(5,500

)

Income (loss) on the sales of businesses and other, net

 

(52

)

762

 

Operating income

 

$

45,922

 

$

95,018

 

 

The EBITDA loss of the Unrestricted Group, as defined in the bank credit facilities agreement, is comprised of the following categories:

 

 

 

For the Three
Months Ended
June 30, 2004

 

For the Twelve
Months Ended
June 30, 2004

 

Internet properties

 

$

3,291

 

$

21,038

 

Traditional turnaround and start-up properties

 

6,527

 

30,990

 

Related overhead and other charges

 

1,375

 

6,409

 

 

 

$

11,193

 

$

58,437

 

 

The Company has established intercompany arrangements that reflect transactions, such as leasing, licensing, sales and related services and cross-promotion, between Company businesses in the Restricted Group and the Unrestricted Group which management believes are on an arms’ length basis and as permitted by the bank credit facilities and Senior Note agreements. These intercompany arrangements afford strategic benefits across the Company’s properties and, in particular, enable the Unrestricted Group to utilize established brands and content, promote brand awareness and increase traffic and revenue to the properties of the Unrestricted Group. For company-wide consolidated financial reporting, these intercompany transactions are eliminated in consolidation.

 

The calculation of the Company’s leverage ratio, as required under the bank credit facilities agreement for covenant purposes, is defined as the Company’s consolidated debt divided by the EBITDA of the Restricted Group.  At June 30, 2004, this leverage ratio was approximately 5.1 to 1.0. Adjusting for the redemption of the Series J Convertible Preferred Stock, the pro forma leverage ratio would be approximately 5.7 times, versus the permitted maximum of 6.25 times.

 

Other Arrangements

 

During 2002, the Company’s Board of Directors authorized the exchange of up to $165,000 of the Company’s Exchangeable Preferred Stock for common stock.  As of June 30, 2004, the Company has exchanged $75,441

 

55



 

liquidation value of Series D Exchangeable Preferred Stock, Series F Exchangeable Preferred Stock and Series H Exchangeable Preferred Stock (carrying value of $73,874) for 14,360,306 shares of common stock of the Company.

 

In addition, the Company’s Board of Directors authorized the exchange by the Company of up to $50,000 of Exchangeable Preferred Stock for common stock and the subsequent repurchase of the common stock issued in connection with the exchange transactions.  As of June 30, 2004, the Company has exchanged $25,000 liquidation value of Series D Exchangeable Preferred Stock, Series F Exchangeable Preferred Stock and Series H Exchangeable Preferred Stock (carrying value of $24,597) for 8,733,842 shares of common stock of the Company and subsequently repurchased all of the common stock issued in connection with such exchanges.

 

The Series J Convertible Preferred Stock is convertible at the option of the holder after one year from the date of issuance, into approximately 25,100,000 shares of the Company’s common stock at a conversion price of $7 per share, subject to adjustment.  Dividends on the Series J Convertible Preferred Stock accrue quarterly at an annual rate of 12.5% and are payable quarterly in-kind. 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.

 

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.

 

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.

 

Critical Accounting Policies and Estimates

 

During the first six months of 2004, there were no significant changes related to the Company’s critical accounting policies and estimates as disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2003.

 

Recent Accounting Pronouncements

 

In 2003, the Company adopted an accounting change, as required by the Financial Accounting Standards Board that impacts year-over-year comparisons of financial results.  This change is summarized below:

 

SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity

 

Effective July 1, 2003, the Company prospectively adopted SFAS 150.  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 and to reclassify dividends from this preferred stock as interest expense.  As a result of the adoption by the Company of SFAS 150, the Series D Exchangeable Preferred Stock, Series F Exchangeable Preferred Stock and Series H 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 are now described as “interest on shares subject to mandatory redemption” and included in loss from continuing operations for the six and three months ended June 30, 2004, whereas previously they were presented below net

 

56



 

income as preferred stock dividends.  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.

 

Impact of Inflation and Other Costs

 

The impact of inflation was immaterial during 2003 and through the first six months of 2004. Postage for product distribution and direct mail solicitations is a significant expense of the Company.  The Company uses the U.S. Postal Service for distribution of many of its products and marketing materials.  There were no increases in postage rates in 2003 or the first six months of 2004.  In April 2003, President Bush signed legislation that will hold postal rates stable until at least 2006.  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 the future. 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.  In the first six months of 2004, paper costs were approximately 7% of the Company’s total operating costs and expenses.  The Company’s paper expense decreased approximately 1% during the first six months of 2004 as compared to the same period in 2003.  The Company attributes the decrease in paper expenses to favorable pricing offset by higher volume usage attributable to product upgrades and increased folio sizes.

 

Seasonality

 

The Company’s operations are seasonal in nature. Operating results have historically been stronger in the second half of the year with generally strongest results generated in the fourth quarter of the year. The seasonality of the Company’s business reflects (i) the relationship between advertising purchases and the retail and academic cycles and (ii) subscription promotions and the holiday season. This seasonality causes, and will likely continue to cause, a variation in the Company’s quarterly operating results. Such variations have an effect on the timing of the Company’s cash flows and the reported quarterly results.

 

57



 

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

During the first six months of 2004, there were no significant changes related to the Company’s market risk exposure.

 

Item 4.  CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

The Company’s management, with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report.  Based on such evaluation, the Company’s Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended.

 

Internal Control Over Financial Reporting

 

During the six month period ended June 30, 2004, there have not been any changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

58



 

PART II.  OTHER INFORMATION

 

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

a)              The Annual Meeting of Shareholders was held May 12, 2004.

 

b)             At the meeting, directors, Joseph Y. Bae, David Bell, Beverly C. Chell, Kelly P. Conlin, Timothy D. Dattels, Meyer Feldberg, Perry Golkin, H. John Greeniaus, Henry R. Kravis and Dean B. Nelson were elected.

 

c)              Set forth below is a description of the items that were voted upon at such meeting and the number of votes cast for, against or withheld, plus abstentions and broker non-votes, as applicable, as to each such matter and director.

 

(i) Election of Directors

 

An election of ten directors was held and the shares so present were voted for as follows for the election of each of the following:

 

 

 

Number of
Shares Voted for

 

Number of
Shares
Withheld

 

Joseph Y. Bae

 

221,505,564

 

26,135,401

 

David Bell

 

244,101,277

 

3,539,688

 

Beverly C. Chell

 

223,527,495

 

24,113,470

 

Kelly P. Conlin

 

224,485,345

 

23,155,620

 

Timothy D. Dattels

 

244,100,501

 

3,540,464

 

Meyer Feldberg

 

244,982,093

 

2,658,872

 

Perry Golkin

 

221,237,108

 

26,403,857

 

H. John Greeniaus

 

244,142,014

 

3,498,951

 

Henry R. Kravis

 

215,534,196

 

32,106,769

 

Dean B. Nelson

 

223,926,021

 

23,714,944

 

 

(ii)          The approval of Deloitte & Touche LLP as independent auditors for the Company for the fiscal year ending December 31, 2004 was ratified with 238,862,262 votes for, 2,148,589 votes against and 6,630,114 votes abstaining.

 

59



 

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

 

(a)           Exhibits

 

31.1

 

Certification by Kelly P. Conlin Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certification by Matthew A. Flynn Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.3

 

Certification by Robert J. Sforzo Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1

 

Certification by Kelly P. Conlin Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.2

 

Certification by Matthew A. Flynn Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.3

 

Certification by Robert J. Sforzo Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(b) Reports on Form 8-K during the quarter ended June 30, 2004.

 

The Company furnished a Current Report on Form 8-K, dated April 29, 2004, (a) announcing under Item 12 thereof the issuance of a press release dated April 29, 2004 regarding its financial results for the first quarter ended March 31, 2004, and (b) furnishing as exhibits under Item 7 thereof a copy of the press release.

 

The Company furnished a Current Report on Form 8-K, dated May 5, 2004, (a) announcing under Item 5 thereof the issuance of a press release dated May 5, 2004 regarding the Company’s Senior Floating Rate Notes and (ii) furnishing as an exhibit under Item 7 thereof a copy of the press release.

 

The Company furnished a Current Report on Form 8-K, dated May 10, 2004, (a) announcing under Item 5 thereof the issuance of a press release dated May 10, 2004 regarding the Company’s Senior Floating Rate Notes and entering into a term loan credit facility and (ii) furnishing as an exhibit under Item 7 thereof a copy of the press release.

 

The Company furnished a Current Report on Form 8-K, dated May 14, 2004, (a) announcing under Item 5 thereof the issuance of a press release dated May 14, 2004 regarding the Company’s Senior Floating Rate Notes and entering into a term loan credit facility and (ii) furnishing as an exhibit under Item 7 thereof a copy of the press release.

 

 

60



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

PRIMEDIA Inc.

 

 

 

 

(Registrant)

 

 

 

 

 

 

Date:

August 9, 2004

 

  /s/ Kelly P. Conlin

 

 

 

(Signature)

 

 

Chief Executive Officer and President
(Principal Executive Officer)

 

 

 

 

Date:

August 9, 2004

 

  /s/ Matthew A. Flynn

 

 

 

(Signature)

 

 

Senior Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)

 

 

Date:

August 9, 2004

 

  /s/ Robert J. Sforzo

 

 

 

(Signature)

 

 

Senior Vice President, Chief Accounting Officer and Controller
(Principal Accounting Officer)

 

61