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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For Quarter Ended: March 31, 2003
Commission file number: 1-11106
PRIMEDIA INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3647573
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
745 Fifth Avenue, New York, New York
----------------------------------------
(Address of principal executive offices)
10151
-----
(Zip Code)
Registrant's telephone number, including area code (212) 745-0100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes /X/ No / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes /X/ No / /
Number of shares of common stock, par value $.01 per share, of PRIMEDIA Inc.
outstanding as of April 30, 2003: 259,286,092.
PRIMEDIA Inc.
INDEX
PAGE
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PART I. FINANCIAL INFORMATION:
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets
as of March 31, 2003 (Unaudited) and
December 31, 2002 2
Condensed Statements of Consolidated
Operations (Unaudited) for the three months
ended March 31, 2003 and 2002 3
Condensed Statements of Consolidated
Cash Flows (Unaudited) for the three months
ended March 31, 2003 and 2002 4
Notes to Condensed Consolidated
Financial Statements (Unaudited) 5-34
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 35-56
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 57
ITEM 4. Controls and Procedures 58
PART II. OTHER INFORMATION:
ITEM 2. Changes in Securities and Use of Proceeds 59
ITEM 6. Exhibits and Reports on Form 8-K 60
Signatures 61
Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 62-65
Exhibit Index 66
2
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2003 December 31,
(Unaudited) 2002
------------- -------------
(dollars in thousands, except per share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 21,650 $ 18,553
Accounts receivable, net 218,464 219,177
Inventories, net 23,596 24,321
Prepaid expenses and other 49,458 42,620
------------- -------------
Total current assets 313,168 304,671
Property and equipment, net 122,124 127,950
Other intangible assets, net 341,815 351,021
Goodwill, net 972,955 972,539
Other investments 20,598 21,268
Other non-current assets 56,838 58,171
------------- -------------
$ 1,827,498 $ 1,835,620
============= =============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 88,949 $ 109,911
Accrued interest payable 34,269 25,835
Accrued expenses and other 214,382 224,423
Deferred revenues 191,345 185,121
Current maturities of long-term debt 7,708 7,661
------------- -------------
Total current liabilities 536,653 552,951
------------- -------------
Long-term debt 1,764,687 1,727,677
------------- -------------
Deferred revenues 36,241 41,466
------------- -------------
Deferred income taxes 52,825 49,500
------------- -------------
Other non-current liabilities 26,167 23,359
------------- -------------
Exchangeable preferred stock (aggregated liquidation and redemption
value of $493,409 at March 31, 2003 and December 31, 2002) 484,814 484,465
------------- -------------
Shareholders' deficiency:
Series J convertible preferred stock ($.01 par value, 1,202,772 shares and
1,166,324 shares issued and outstanding, aggregate liquidation and
redemption values of $150,347 and $145,791 at March 31, 2003
and December 31, 2002, respectively) 149,907 145,351
Common stock ($.01 par value, 350,000,000
shares authorized at March 31, 2003 and December 31, 2002 and
267,878,014 shares and 267,505,223 shares issued at March 31, 2003
and December 31, 2002, respectively) 2,679 2,675
Additional paid-in capital (including warrants of $31,690
at March 31, 2003 and December 31, 2002) 2,336,185 2,336,091
Accumulated deficit (3,481,281) (3,445,083)
Accumulated other comprehensive loss (223) (247)
Unearned compensation (3,484) (4,730)
Common stock in treasury, at cost (8,610,491 shares and
8,639,775 shares at March 31, 2003 and December 31, 2002,
respectively) (77,672) (77,855)
------------- -------------
Total shareholders' deficiency (1,073,889) (1,043,798)
------------- -------------
$ 1,827,498 $ 1,835,620
============= =============
See notes to condensed consolidated financial statements (unaudited).
3
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
Three Months Ended
March 31,
2003 2002
------------- -------------
(dollars in thousands, except per share amounts)
Sales, net $ 375,801 $ 388,929
Operating costs and expenses:
Cost of goods sold 85,971 93,356
Marketing and selling 86,540 93,799
Distribution, circulation and fulfillment 64,781 68,955
Editorial 34,252 37,986
Other general expenses 50,905 56,558
Corporate administrative expenses (excluding $1,246 and $5,685
of non-cash compensation and non-recurring charges in 2003
and 2002, respectively) 7,381 8,362
Depreciation of property and equipment 12,915 14,842
Amortization of intangible assets and other (including
$4,844 of provision for impairments in 2002) 10,782 22,642
Non-cash compensation and non-recurring charges 1,246 5,685
Provision for severance, closures and restructuring related costs 1,390 10,531
Loss (gain) on sales of businesses and other, net 351 (555)
------------- -------------
Operating income (loss) 19,287 (23,232)
Other expense:
Provision for impairment of investments - (3,459)
Interest expense (33,457) (35,569)
Amortization of deferred financing costs (741) (950)
Other, net (603) (1,851)
------------- -------------
Loss from continuing operations before income tax expense (15,514) (65,061)
Income Tax Expense (3,718) (57,987)
------------- -------------
Loss from continuing operations (19,232) (123,048)
Discontinued operations (including (loss) gain on sales of businesses
of ($1,015) and $6,509 in 2003 and 2002, respectively) (1,015) 5,050
Cumulative effect of a change in accounting principle (from the
adoption of Statement of Financial Accounting Standards
No. 142) - (388,508)
------------- -------------
Net loss (20,247) (506,506)
Preferred stock dividends and related accretion, net (including $2,978
gain on exchange of exchangeable preferred stock in 2002) (16,433) (19,430)
------------- -------------
Loss applicable to common shareholders $ (36,680) $ (525,936)
============= =============
Per Common Share:
Loss from continuing operations $ (0.14) $ (0.59)
Discontinued operations - 0.03
Cumulative effect of a change in accounting principle - (1.60)
------------- -------------
Basic and diluted loss applicable to common shareholders $ (0.14) $ (2.16)
============= =============
Basic and diluted common shares outstanding 258,886,845 243,184,081
============= =============
See notes to condensed consolidated financial statements (unaudited).
4
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Three Months Ended March 31,
2003 2002
------------- -------------
(dollars in thousands)
OPERATING ACTIVITIES:
Net loss $ (20,247) $ (506,506)
Adjustments to reconcile net loss to net cash used in
operating activities 34,609 485,876
Changes in operating assets and liabilities (21,514) 13,305
------------- -------------
Net cash used in operating activities (7,152) (7,325)
------------- -------------
INVESTING ACTIVITIES:
Additions to property, equipment and other, net (8,986) (4,882)
Proceeds from sales of businesses and other, net 44 50,141
Payments for businesses acquired, net of cash acquired (2,186) (1,664)
Payments for other investments (132) (287)
------------- -------------
Net cash provided by (used in) investing activities (11,260) 43,308
------------- -------------
FINANCING ACTIVITIES:
Borrowings under credit agreements 169,500 116,425
Repayments of borrowings under credit agreements (47,500) (137,425)
Payments for repurchases of senior notes (84,175) -
Proceeds from issuances of common stock, net 493 888
Purchases of common stock for the treasury (4,244) -
Dividends paid to preferred stock shareholders (11,527) (13,392)
Other (1,038) (1,140)
------------- -------------
Net cash provided by (used in) financing activities 21,509 (34,644)
------------- -------------
Increase in cash and cash equivalents 3,097 1,339
Cash and cash equivalents, beginning of period 18,553 33,588
------------- -------------
Cash and cash equivalents, end of period $ 21,650 $ 34,927
============= =============
SUPPLEMENTAL INFORMATION:
Cash interest paid $ 22,268 $ 25,171
============= =============
Cash taxes paid, net of refunds $ 423 $ 98
============= =============
Businesses acquired:
Fair value of assets acquired $ 128 $ -
Less: Liabilities assumed (2,058) (1,664)
------------- -------------
Payments for businesses acquired, net of cash acquired $ 2,186 $ 1,664
============= =============
Non-cash activities:
Issuance of warrants in connection with Emap acquisition and
related financing $ - $ 2,160
============= =============
Accretion in carrying value of exchangeable and convertible
preferred stock $ 349 $ 2,828
============= =============
Payments of dividends-in-kind on Series J Convertible Preferred Stock $ 4,556 $ 4,028
============= =============
Carrying value of exchangeable preferred stock converted
to common stock $ - $ 6,911
============= =============
Fair value of common stock issued in connection with conversion of
exchangeable preferred stock $ $ 3,933
============= =============
Asset-for-equity investments $ - $ 2,690
============= =============
See notes to condensed consolidated financial statements (unaudited).
5
PRIMEDIA INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
PRIMEDIA Inc., together with its subsidiaries, is herein referred to as
either "PRIMEDIA" or the "Company." In the opinion of the Company's
management, the financial statements present fairly the financial position
of the Company as of March 31, 2003 and December 31, 2002 and the results
of operations and cash flows of the Company for the three month periods
ended March 31, 2003 and 2002 and all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. All significant intercompany accounts and transactions have been
eliminated in consolidation. These statements should be read in conjunction
with the Company's annual consolidated financial statements and related
notes for the year ended December 31, 2002, which are included in the
Company's annual report on Form 10-K for the year ended December 31, 2002.
The operating results for the three month period ended March 31, 2003 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 have been reclassified to conform to the presentation
as of and for the three month period ended March 31, 2003.
RECENT ACCOUNTING PRONOUNCEMENTS
In 2002 and 2003, the Company adopted a series of accounting pronouncements, as
required by the Financial Accounting Standards Board ("FASB") and Emerging
Issues Task Force ("EITF"). These changes are summarized below.
ADOPTION OF EITF 00-25, "VENDOR INCOME STATEMENT CHARACTERIZATION OF
CONSIDERATION PAID TO A RESELLER OF THE VENDOR'S PRODUCTS," AND EITF 01-9
"ACCOUNTING FOR CONSIDERATION GIVEN BY A VENDOR TO A CUSTOMER (INCLUDING A
RESELLER OF THE VENDOR'S PRODUCTS)"
In April 2001, the EITF issued Consensus No. 00-25, which addresses whether
consideration from a vendor to a reseller of the vendor's products is an
adjustment to the selling price or the cost of the product. This issue was
further addressed by EITF Consensus No. 01-9, issued in September 2001. The
Company adopted EITF 00-25 and EITF 01-9 effective January 1, 2002. The adoption
of EITF 00-25 and EITF 01-9 resulted in a net reclassification of product
placement costs relating to single copy sales, previously classified as
distribution, circulation and fulfillment expense on the accompanying statements
of consolidated operations, to reductions of sales from such activities. The
change in classifications is industry-wide and had no impact on the Company's
results of operations, cash flows or financial position.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS ("SFAS") 142, "GOODWILL AND OTHER
INTANGIBLE ASSETS"
In July 2001, the FASB issued SFAS 142, which changes the method by which
companies may recognize intangible assets in purchase business combinations
and generally requires identifiable intangible assets to be recognized
separately from goodwill. In addition, it eliminates the amortization of
all existing and newly acquired goodwill and indefinite lived intangible
assets on a prospective basis and requires companies to assess goodwill and
indefinite lived intangible assets for impairment, at least annually. The
Company adopted certain provisions of SFAS 142 in connection with the EMAP,
Inc. ("EMAP") acquisition in 2001. The Company fully adopted the SFAS 142
accounting rules on January 1, 2002. (See Note 5)
6
SFAS 143, "ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS"
In August 2001, the FASB issued SFAS 143 which requires entities to record the
fair value of a liability for an asset retirement obligation in the period in
which it is incurred. When the liability is initially recorded, the entity
capitalizes a cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the obligation
for its recorded amount or incurs a gain or loss upon settlement. The Company
adopted SFAS 143 effective January 1, 2003 and the adoption has not had a
material impact on the Company's results of operations or financial position.
SFAS 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS"
In August 2001, the FASB issued SFAS 144 which superseded SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". This statement also supersedes accounting and reporting provisions of
Accounting Principles Board ("APB") Opinion 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,"
relating to the disposal of a segment of a business. SFAS 121 did not address
the accounting for business segments accounted for as discontinued operations
under APB Opinion 30 and therefore two accounting models existed for long-lived
assets to be disposed of. SFAS 144 established one accounting model for
long-lived assets to be held and used, long-lived assets (including those
accounted for as a discontinued operation) to be disposed of by sale and
long-lived assets to be disposed of other than by sale, and resolved certain
implementation issues related to SFAS 121. The Company adopted SFAS 144 on
January 1, 2002, and as a result, the results of the Modern Bride Group,
ExitInfo, DOLL READER, CHICAGO, HORTICULTURE, IN NEW YORK and the American Baby
Group, which were sold during 2002, were recorded as discontinued operations for
the periods prior to their respective divestiture dates. Discontinued operations
includes sales of $27,587 and income of $5,050 (including a gain on sale of
$6,509) for the three months ended March 31, 2002. The discontinued operations
include expenses related to certain centralized functions that are shared by
multiple titles, such as production, circulation, advertising, human resource
and information technology costs but exclude general overhead costs. These costs
were allocated to the discontinued entities based upon relative revenues for the
related periods. The allocation methodology is consistent with that used across
the Company. These allocations amounted to $1,143 for the three months ended
March 31, 2002. No tax provision was associated with the discontinued
operations as the Company had available net operating loss carryforwards. For
the three months ended March 31, 2003, discontinued operations includes a loss
on sale of businesses of $1,015 related to the finalization of certain 2002
divestiture transactions.
In accordance with SFAS 144, the Company reclassified amounts from sales, net to
discontinued operations for the three months ended March 31, 2002, as follows:
Three Months Ended
March 31, 2002
------------------
Sales, net (as originally reported, which reflects a
reclassification of $4,426 related to the sale of Modern Bride
Group which occurred in the first quarter of 2002) $ 412,090
Less: Effect of SFAS 144 23,161
--------------
Sales, net (as reclassified) $ 388,929
==============
7
SFAS 145, "RESCISSION OF FASB STATEMENTS NO. 4, 44 AND 64, AMENDMENT OF FASB
STATEMENT NO. 13 AND TECHNICAL CORRECTIONS"
In April 2002, the FASB issued SFAS 145 which for most companies will require
gains and losses on extinguishments of debt to be classified within income or
loss from continuing operations rather than as extraordinary items as previously
required under SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt
(an Amendment of APB Opinion No. 30)." Extraordinary treatment will be required
for certain extinguishments as provided under APB Opinion 30. In 2002, the
Company early adopted SFAS 145 in accordance with the provisions of the
statement.
SFAS 146, "ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES"
In June 2002, the FASB issued SFAS 146 which superseded EITF 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". SFAS 146 affects the timing of the recognition of costs
associated with an exit or disposal plan by requiring them to be recognized
when incurred rather than at the date of a commitment to an exit or
disposal plan. SFAS 146 has been applied prospectively to exit or disposal
activities initiated after December 31, 2002.
SFAS 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE -
AN AMENDMENT OF FASB STATEMENT NO. 123"
In December 2002, the FASB issued SFAS 148 which amends SFAS 123, "Accounting
for Stock-Based Compensation" to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS 148 is
effective for annual periods ending after December 15, 2002 and interim periods
beginning after December 15, 2002. On January 1, 2003, the Company adopted
certain provisions of SFAS 148, which did not have a material impact on the
Company's results of operations or financial position.
SFAS 123 provides for a fair-value based method of accounting for employee
options and measures compensation expense using an option valuation model that
takes into account, as of the grant date, the exercise price and expected life
of the option, the current price of the underlying stock and its expected
volatility, expected dividends on the stock, and the risk-free interest rate for
the expected term of the option. The Company has elected to continue accounting
for employee stock-based compensation under APB 25, "Accounting for Stock Issued
to Employees." Under APB 25, when the exercise price of the Company's employee
stock options equals or exceeds the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
The PRIMEDIA Inc. 1992 Stock Purchase and Option Plan (the "Stock Option Plan")
authorizes sales of shares of common stock and grants of incentive awards in the
form of, among other things, stock options to key employees and other persons
with a unique relationship with the Company. The Stock Option Plan has
authorized grants of up to 35,000,000 shares of the Company's common stock or
options to management personnel.
Most of the Company's options are exercisable at the rate of 20% - 25% per year
over a four to five-year period commencing on the effective date of the grant.
Most options granted will expire no later than ten years from the date the
option was granted. In general, no stock-based employee compensation cost is
reflected in net income, as most options granted under the plan had an exercise
price equal to or greater than the market value of the underlying common stock
on the date of grant.
8
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation.
Three Months Ended March 31,
----------------------------
2003 2002
------------ -------------
Reported Net Loss Applicable to Common Shareholders $ (36,680) $ (525,936)
Deduct: Total stock-based employee compensation expense
determined under fair value based methods for all awards, net of
related tax effects (6,569) (9,276)
------------ -------------
Pro Forma Net Loss Applicable to Common Shareholders $ (43,249) $ (535,212)
------------ -------------
Loss Per Common Share:
Reported Basic and diluted loss per share $ (0.14) $ (2.16)
Pro Forma Basic and diluted loss per share $ (0.17) $ (2.20)
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 the three months ended March 31, 2003 and 2002, respectively: risk-free
interest rates of 3.91% and 4.61%; dividend yields of 0.0% and 0.0%; volatility
factors of the expected market price of the Company's common stock of 122% and
122%; and a weighted -average expected life of the options of ten years. The
estimated fair value of options granted during the three months ended March 31,
2003 and 2002 was $14 and $331, respectively.
The Black-Scholes pricing model was developed for use in estimating the fair
value of traded options which have no vesting restriction 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.
FASB INTERPRETATION NO. 45, "GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS
FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS, AN
INTERPRETATION OF FASB STATEMENTS NO. 5, 57 AND 107 AND RESCISSION OF FASB
INTERPRETATION NO. 34"
In November 2002, the FASB approved FASB Interpretation No. 45 ("FIN 45").
FIN 45 clarifies the requirements of SFAS 5, "Accounting for Contingencies",
relating to a guarantor's accounting for, and disclosure of, the issuance of
certain types of guarantees. Specifically, FIN 45 requires a guarantor to
recognize a liability for the non-contingent component of certain guarantees,
representing the obligation to stand ready to perform in the event that
specified triggering events or conditions occur. Effective January 1, 2003,
the Company adopted FIN 45 which has not had a material impact on the
Company's results of operations or financial position.
FASB INTERPRETATION NO. 46, "CONSOLIDATION OF VARIABLE INTEREST ENTITIES"
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"). FIN 46
clarifies the application of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements", to certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties.
9
Effective January 31, 2003, the Company has adopted FIN 46 which has not
had a material impact on the Company's results of operations or financial
position.
SFAS 149, "AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES"
In April 2003, the FASB issued SFAS 149, which amends and clarifies
accounting for derivative instruments, and for hedging activities under SFAS
133. Specifically, SFAS 149 requires that contracts with comparable
characteristics be accounted for similarly. Additionally, SFAS 149 clarifies
the circumstances in which a contract with an initial net investment meets
the characteristics of a derivative and when a derivative contains a
financing component that requires special reporting in the statement of cash
flows. This Statement is generally effective for contracts entered into or
modified after June 30, 2003 and is not expected to have a material impact on
the Company's financial results.
BARTER TRANSACTIONS
The Company trades advertisements in its traditional and online properties in
exchange for advertising in properties of other companies and trade show space
and booths. Revenue and related expenses from barter transactions are recorded
at fair value in accordance with EITF 99-17, "Accounting for Advertising Barter
Transactions." Revenue from barter transactions is recognized in accordance with
the Company's revenue recognition policies. Expense from barter transactions is
recognized as incurred. Revenue from barter transactions was approximately
$4,200 and $5,500 for the three months ended March 31, 2003 and 2002,
respectively, with equal related expense amounts in each three month period.
2. DIVESTITURES
On February 28, 2002, the Company completed the sale of the Modern Bride
Group, the results of which have been included in discontinued operations
in accordance with SFAS 144. The related gain on sale of the Modern Bride
Group of $6,509 for the three months ended March 31, 2002 has been included
in discontinued operations on the accompanying condensed statement of
consolidated operations. In connection with this divestiture, the Company
agreed to provide certain services to the purchasers including space rental
and finance staff support, sales and systems support at negotiated rates
over specified terms. Proceeds from the sale were approximately $50,000 and
were used to pay down the Company's borrowings under the credit facilities.
During the remaining nine months of 2002, the Company completed several other
divestitures whose results have been reclassified as discontinued operations
in accordance with SFAS 144. These divestitures include ExitInfo, DOLL
READER, CHICAGO, HORTICULTURE, IN NEW YORK and the American Baby Group.
Certain amounts in the prior periods' condensed consolidated financial
statements have been reclassified to conform to the current year presentation.
During the three months ended March 31, 2003, the Company finalized certain
aspects of the dispositions which were classified as discontinued operations in
2002 and recognized a loss of $1,015.
In addition, during the three months ended March 31, 2003 and 2002, the Company
completed the sale of several other properties which did not qualify as
discontinued operations under SFAS 144 since they had been previously classified
as non-core businesses. The related net loss (gain) on the sale of these
businesses were $351 and ($555) and are included in loss (gain) on sale of
businesses and other, net on the accompanying
10
condensed statement of consolidated operations for the three months ended March
31, 2003 and 2002, respectively.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consist of the following:
March 31, December 31,
2003 2002
------------- ------------
Accounts Receivable $ 246,002 $ 246,234
Less: Allowance for doubtful accounts 17,282 17,629
Allowance for returns and rebates 10,256 9,428
------------- ------------
$ 218,464 $ 219,177
============= ============
4. INVENTORIES, NET
Inventories, net, consist of the following:
March 31, December 31,
2003 2002
------------- ------------
Finished goods $ 7,849 $ 7,897
Work in process 64 73
Raw materials 17,943 19,165
------------- ------------
25,856 27,135
Less: Allowance for obsolescence 2,260 2,814
------------- ------------
$ 23,596 $ 24,321
============= ============
5. GOODWILL, OTHER INTANGIBLE ASSETS AND OTHER
As required under SFAS 142, the Company reviewed its goodwill and indefinite
lived intangible assets (primarily trademarks) for impairment upon adoption on
January 1, 2002 and determined that certain of these assets were impaired. As a
result, the Company recorded an impairment charge within cumulative effect of a
change in accounting principle of $388,508, of which $219,314 relates to the
Consumer segment and $169,194 relates to the Business-to-Business segment.
Previously issued financial statements as of March 31, 2002 and for the three
months then ended have been restated to reflect the cumulative effect of this
accounting change at the beginning of the year of adoption.
The Company's SFAS 142 evaluations have been performed by an independent
valuation firm, utilizing reasonable and supportable assumptions and projections
and reflect management's best estimate of projected future cash flows. The
Company's discounted cash flow evaluation used a range of discount rates that
represented the Company's weighted-average cost of capital and included an
evaluation of other companies in each reporting unit's industry. The assumptions
utilized by the Company in the evaluations are consistent with those utilized in
the Company's annual planning process. If the assumptions and estimates
underlying these goodwill and trademark impairment evaluations are not achieved,
the ultimate amount of the impairment could be adversely
11
affected. Future impairment tests will be performed at least annually (as of
October 31) in conjunction with the Company's annual budgeting and forecasting
process, with any impairment classified as an operating expense.
Historically, the Company did not need a valuation allowance for the portion of
the net operating losses equal to the amount of 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. As a result of the adoption of SFAS 142, the reversal
will not occur during the carryforward period of the net operating losses.
Therefore, the Company recorded a non-cash deferred income tax expense of
$52,000 on January 1, 2002 and $3,325 and $6,000 during the three months ended
March 31, 2003 and 2002, respectively, each of which would not have been
required prior to the adoption of SFAS 142.
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.
Changes in the carrying amount of goodwill for the three months ended March 31,
2003, by operating segment, are as follows:
March 31, 2003
-------------------------------------------------
Business-to-
Consumer Business
Segment Segment Total
-------------------------------------------------
Balance as of January 1, 2003 $ 830,748 $ 141,791 $ 972,539
Acquisitions and finalization of purchase
price allocations 177 140 317
Other (57) 156 99
--------- --------- ---------
Balance as of March 31, 2003 $ 830,868 $ 142,087 $ 972,955
========= ========= =========
12
Intangible assets subject to amortization after the adoption of SFAS 142 consist
of the following:
March 31, 2003 December 31, 2002
-------------------------------------- --------------------------------------
Range Gross Gross
of Carrying Accumulated Carrying Accumulated
Lives Amount Amortization Net Amount Amortization Net
----- -------------------------------------- --------------------------------------
Trademarks 3 $ 21,013 $ 14,592 $ 6,421 $ 21,013 $ 12,841 $ 8,172
Subscriber and customer
lists 2-20 433,577 390,454 43,123 433,584 387,201 46,383
Non-compete agreements 1-10 209,824 201,606 8,218 209,827 199,941 9,886
Trademark license
agreements 2-15 2,967 2,884 83 2,967 2,880 87
Copyrights 3-20 20,550 19,078 1,472 20,550 18,901 1,649
Databases 2-12 13,583 12,553 1,030 13,583 12,141 1,442
Advertiser lists .5-20 142,564 130,405 12,159 142,564 129,182 13,382
Distribution agreements 1-7 11,745 11,745 - 11,745 11,731 14
Other 1-5 9,804 9,804 - 10,099 10,099 -
--------- ---------- -------- --------- --------- --------
$ 865,627 $ 793,121 $ 72,506 $ 865,932 $ 784,917 $ 81,015
========= ========== ======== ========= ========= ========
Intangible assets not subject to amortization had a net carrying value of
$269,309 and $270,006 at March 31, 2003 and December 31, 2002, respectively, and
consisted of trademarks. Amortization expense for intangible assets still
subject to amortization (excluding provision for impairment) was $8,859 and
$15,084 for the three months ended March 31, 2003 and 2002, respectively.
Amortization of deferred wiring costs of $1,923 and $2,714 for the three months
ended March 31, 2003 and 2002, respectively, has also been included in
amortization of intangible assets and other on the accompanying condensed
statements of consolidated operations. At March 31, 2003, estimated future
amortization expense of other intangible assets still subject to amortization is
as follows: approximately $23,000 for the remaining nine months of 2003 and
approximately $18,000, $11,000, $7,000, $5,000 and $4,000 for 2004, 2005, 2006,
2007 and 2008, respectively.
13
6. OTHER INVESTMENTS
Other investments consist of the following:
March 31, December 31,
2003 2002
---------- ------------
Cost method investments $ 18,783 $ 18,706
Equity method investments 1,815 2,562
---------- ----------
$ 20,598 $ 21,268
========== ==========
The Company's cost method investments consist primarily of the PRIMEDIA
Ventures' investments and the assets-for-equity investments, detailed below.
PRIMEDIA's equity method investments represent PRIMEDIA's investment in certain
companies where PRIMEDIA has the ability to exercise significant influence over
the operations (including financial and operational policies).
PRIMEDIA VENTURES' INVESTMENTS
In 1998, the Company created PRIMEDIA Ventures, Inc. ("PRIMEDIA Ventures") to
invest in early-stage Internet companies and other technology opportunities such
as e-commerce services, enterprise software applications and advertising-related
technologies.
For the three months ended March 31, 2002, the Company recorded its provision
for impairment of PRIMEDIA Ventures' investments of $750 as a component of
provision for impairment of investments on the accompanying condensed statement
of consolidated operations. No provision for impairment of PRIMEDIA Ventures'
investments was recorded for the three months ended March 31, 2003.
The Company sold certain PRIMEDIA Ventures investments for proceeds of $323 and
realized a gain on the sales of $28 for the three months ended March 31, 2002.
ASSETS-FOR-EQUITY TRANSACTIONS
Since 2000, the Company has made strategic investments in companies
("Investees") which included various assets-for-equity transactions. During
the three months ended March 31, 2002, the Company entered one such
transaction. As part of these transactions, the Company agreed to provide
promotional services, such as print advertising, content licensing, customer
lists, online advertising and other services in exchange for equity in these
entities. Additionally, the Company has made cash investments in certain of
these Investees. In January 2003, the Company purchased additional shares in
one such investment for $110. The Company's investments in Investees,
included in other investments on the accompanying condensed consolidated
balance sheets, totaled $16,592 ($16,033 representing cost method investments
and $559 representing equity method investments) and $16,870 ($15,956
representing cost method investments and $914 representing equity method
investments) at March 31, 2003 and December 31, 2002, respectively. At March
31, 2003 and December 31, 2002, respectively, $4,715 and $4,963 relating to
these arrangements is included as deferred revenues on the accompanying
condensed consolidated balance sheets. This deferred revenue represents
advertising, content licensing and other services to be rendered by the
Company in exchange for the equity in these entities. The Company recognizes
these amounts as revenue in accordance with the Company's revenue recognition
policies. The Company recorded revenue from these agreements of $73 and
$2,838 for the three months ended March 31, 2003 and 2002, respectively.
14
These transactions are recorded at the fair value of the equity securities
received, which are typically based on cash consideration for like
securities. For any significant transactions involving equity securities in
private companies, the Company obtains and considers independent
third-party valuations where appropriate. Such valuations use a variety of
methodologies to estimate fair value, including comparing the security with
the securities of publicly traded companies in similar lines of business,
comparing the nature of security, price, and related terms of investors in
the same round of financing, applying price multiples to estimated future
operating results for the private company, and then also estimating
discounted cash flows for that company. Using these valuations and other
information available to the Company, such as the Company's knowledge of
the industry and knowledge of specific information about the Investee, the
Company determines the estimated fair value of the securities received. As
required by EITF 00-8, "Accounting by a Grantee for an Equity Instrument to
Be Received in Conjunction with Providing Goods and Services," the fair
value of the equity securities received is determined as of the earlier of
the date a performance commitment is reached or the vesting date.
The Company continually evaluates all of its investments for potential
impairment in accordance with APB Opinion 18, "The Equity Method of
Accounting for Investments in Common Stock". If an investment is deemed to
be other than temporarily impaired, its carrying value will be reduced to
fair market value. The Company recorded a net provision for impairment of
its investments in certain Investees of $2,709 for the three months ended
March 31, 2002, as the decline in value of the investments was deemed to be
other than temporary. No provision for impairment was recorded for
asset-for-equity investments for the three months ended March 31, 2003.
The Company recorded $355 and $2,031 of equity method losses from Investees
during the three months ended March 31, 2003 and 2002, respectively. These
equity method losses from Investees are included in other, net on the
accompanying condensed statements of consolidated operations. The Company
recognized $0 and $437 of revenue related to the equity method Investees during
the three months ended March 31, 2003 and 2002, respectively.
7. OTHER NON-CURRENT ASSETS
Other non-current assets consist of the following:
March 31, December 31,
2003 2002
----------- -----------
Deferred financing costs, net $ 17,060 $ 18,144
Deferred wiring and installation costs, net 6,878 8,468
Direct-response advertising costs, net 14,994 14,709
Video mastering and programming costs, net 15,014 13,791
Other 2,892 3,059
----------- -----------
$ 56,838 $ 58,171
=========== ===========
The deferred financing costs are net of accumulated amortization of $14,007 and
$12,923 at March 31, 2003 and December 31, 2002, respectively. The deferred
wiring and installation costs are net of accumulated amortization of $70,986 and
$69,063 at March 31, 2003 and December 31, 2002, respectively. Direct-response
advertising costs are net of accumulated amortization of $82,147 and $81,621 at
March 31, 2003 and December 31, 2002, respectively. Video mastering and
programming costs are net of accumulated amortization of $43,954 and $42,223 at
March 31, 2003 and December 31, 2002, respectively.
15
8. LONG-TERM DEBT
Long-term debt consists of the following:
March 31, December 31,
2003 2002
------------ ------------
Borrowings under bank credit facilities $ 762,731 $ 640,731
10 1/4% Senior Notes due 2004 - 84,175
8 1/2% Senior Notes due 2006 291,042 291,007
7 5/8% Senior Notes due 2008 225,343 225,312
8 7/8% Senior Notes due 2011 469,425 469,299
------------ ------------
1,748,541 1,710,524
Obligation under capital leases 23,854 24,814
------------ ------------
1,772,395 1,735,338
Less: Current maturities of long-term debt 7,708 7,661
------------ ------------
$ 1,764,687 $ 1,727,677
============ ============
CREDIT FACILITIES
The Company has bank credit facilities with The Chase Manhattan Bank, Bank of
America, N.A., The Bank of New York, and The Bank of Nova Scotia, as agents. The
debt under the credit agreement and as otherwise permitted under the credit
agreement and the indebtedness relating to the Senior Notes of the Company 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 (as well
as certain of the Company's other equally and ratably secured indebtedness).
Substantially all proceeds from sales of businesses and other investments were
used to pay down borrowings under the credit agreement. Amounts under the bank
credit facilities may be reborrowed and used for general corporate and working
capital purposes as well as to finance certain future acquisitions. The bank
credit facilities consist of the following:
Revolver Term A Term B Total
------------- ------------ ------------- ------------
Credit Facility......................... $ 451,000 $ 95,000 $ 397,731 $ 943,731
Borrowings Outstanding.................. (270,000) (95,000) (397,731) (762,731)
Letters of Credit Outstanding........... (19,099) - - (19,099)
------------ ----------- ------------ ------------
Unused Bank Commitments................. $ 161,901 $ - $ - $ 161,901
============ =========== ============ ============
With the exception of the term loan B, 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 the Eurodollar Rate 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 the Eurodollar Rate plus 2.75%. At March 31, 2003, the weighted average
variable interest rate on all outstanding borrowings under the bank credit
facilities was 4.2%.
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 credit agreement, on the daily average aggregate
unutilized commitment under the revolving loan commitment. During the first
three months
16
of 2003, the Company's commitment fees were paid at a weighted average rate of
0.5%. The Company also has agreed to pay certain fees with respect to the
issuance of letters of credit and an annual administration fee.
The commitments under the revolving loan facility are subject to mandatory
reductions semi-annually on June 30 and December 31, commencing December 31,
2004, with the final reduction on June 30, 2008. The aggregate mandatory
reductions of the revolving loan commitments under the bank credit facilities
are $22,550 in 2004, $45,100 in 2005, $67,650 in 2006, $135,300 in 2007 and a
final reduction of $180,400 in 2008. To the extent that the total revolving
credit loans outstanding exceed the reduced commitment amount, these loans must
be paid down to an amount equal to or less than the reduced commitment amount.
However, if the total revolving credit loans outstanding do not exceed the
reduced commitment amount, then there is no requirement to pay down any of the
revolving credit loans. Aggregate term loan payments under the bank credit
facilities are $4,038 in 2003, $15,913 in 2004, $27,788 in 2005, 2006 and 2007,
$15,913 in 2008 and $373,503 in 2009. In the fourth quarter of 2002, the Company
made voluntary pre-payments towards the term loans A and B in the amounts of
$5,000 and $21,000, respectively.
The bank credit facilities, among other things, limit the Company's ability to
change the nature of its businesses, incur indebtedness, create liens, sell
assets, engage in mergers, consolidations or transactions with affiliates, make
investments in or loans to certain subsidiaries, issue guarantees and make
certain restricted payments including dividend payments on or repurchases of the
Company's common stock in excess of $75,000 in any given year.
The bank credit facilities and senior notes of the Company contain certain
customary events of default which generally give the banks or the note holders,
as applicable, the right to accelerate payments of outstanding debt. Under the
bank credit facilities, 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.
8 1/2% SENIOR NOTES. Interest is payable semi-annually in February and August at
an annual rate of 8 1/2%. The 8 1/2% Senior Notes mature on February 1, 2006,
with no sinking fund requirements. The 8 1/2% Senior Notes are redeemable in
whole or in part, at the option of the Company, at 100% in 2003 plus accrued and
unpaid interest. The unamortized discount for these notes totaled $458 and $493
at March 31, 2003 and December 31, 2002, respectively.
7 5/8% SENIOR NOTES. Interest is payable semi-annually in April and October at
the annual rate of 7 5/8%. The 7 5/8% Senior Notes mature on April 1, 2008, with
no sinking fund requirements. The 7 5/8% Senior Notes may not be redeemed prior
to April 1, 2003 other than in connection with a change of control. Beginning on
April 1, 2003 and thereafter, the 7 5/8% Senior Notes are redeemable in whole or
in part, at the option of the Company, at prices ranging from 103.813% in 2003
with annual reductions to 100% in 2006 and thereafter, plus accrued and unpaid
17
interest. The unamortized discount for these notes totaled $772 and $803 at
March 31, 2003 and December 31, 2002, respectively.
8 7/8% SENIOR NOTES. Interest is payable semi-annually in May and November at an
annual rate of 8 7/8%. The 8 7/8% Senior Notes mature on May 15, 2011, with no
sinking fund requirements. Beginning in 2006, the 8 7/8% Senior Notes are
redeemable at 104.438% with annual reductions to 100% in 2009 plus accrued and
unpaid interest. The unamortized discount for these notes totaled $6,075 and
$6,201 at March 31, 2003 and December 31, 2002, respectively.
If the Company becomes subject to a change of control, each holder of the notes
will have the right to require the Company to purchase any or all of the notes
at a purchase price equal to 101% of the aggregate principal amount of the notes
plus accrued and unpaid interest, if any, to the date of purchase.
The 8 1/2% Senior Notes, 7 5/8% Senior Notes, and the 8 7/8% Senior Notes
(together referred to as the "Senior Notes"), and the credit facilities, all
rank senior in right of payment to all subordinated obligations which PRIMEDIA
Inc. (a holding company) may incur. The Senior Notes are secured by a pledge of
stock of PRIMEDIA Companies Inc.
SENIOR NOTE REPURCHASES
On March 5, 2003, the Company redeemed the remaining $84,175 of the 10 1/4%
Senior Notes at the carrying value of $84,175, plus accrued interest. These
notes were redeemed 15 months ahead of maturity. The Company funded this
transaction with additional borrowings under its credit facilities. The
redemption resulted in a write-off of unamortized issuance costs of $343 which
is recorded in other, net on the accompanying condensed statement of
consolidated operations for the three months ended March 31, 2003.
COVENANT COMPLIANCE
Under the most restrictive debt covenants as defined in the Company's credit
agreement, the Company must maintain a minimum interest coverage ratio, as
defined, of 1.80 to 1 and a minimum fixed charge coverage ratio, as defined, of
1.05 to 1. The Company's maximum allowable debt leverage ratio, as defined, is
6.0 to 1. The maximum leverage ratio decreases to 5.75 to 1, 5.5 to 1, 5.0 to 1
and 4.5 to 1, respectively, on July 1, 2003, January 1, 2004, January 1, 2005
and January 1, 2006. The minimum interest coverage ratio increases to 2.0 to 1,
2.25 to 1 and 2.5 to 1, respectively, on July 1, 2003, January 1, 2004 and
January 1, 2005. The Company is in compliance with 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 credit agreement. The purpose of providing this information is to
provide more clarity to the substantial amount of disclosure already
provided. Under its various credit 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. Indebtedness under the bank credit facilities and senior note
agreements is guaranteed by each of the Company's domestic restricted
subsidiaries in accordance with the provisions and limitations of the
Company's credit 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. The Unrestricted
Group's results (positive or negative) are not reflected in the EBITDA of
the Restricted Group, as defined in the Company's credit agreement
18
for purposes of determining compliance with certain financial covenants
under this agreement. Under the Company's credit agreement, for purposes of
the leverage ratio, EBITDA of the Restricted Group is defined as the EBITDA
for Restricted Subsidiaries which excludes losses of our Unrestricted
subsidiaries, 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. The Company has
established intercompany arrangements that implement transactions, such as
leasing, licensing, sales and related services and cross-promotion, between
restricted and unrestricted subsidiaries, which management believes is on
an arms length basis and as permitted by the credit 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 Company's new media properties. For
company-wide consolidated financial reporting, these intercompany
transactions are eliminated in consolidation.
The scheduled repayments of all debt outstanding, net of unamortized discounts,
including capital leases, as of March 31, 2003, are as follows:
Capital Lease
Twelve Months Ended March 31, Debt Obligations Total
--------------- --------------- ---------------
2004 ............................................. $ 4,038 $ 3,670 $ 7,708
2005 ............................................. 15,913 2,789 18,702
2006 ............................................. 318,830 1,540 320,370
2007 ............................................. 27,788 1,590 29,378
2008 ............................................. 117,388 1,704 119,092
Thereafter ....................................... 1,264,584 12,561 1,277,145
--------------- --------------- ---------------
$ 1,748,541 $ 23,854 $ 1,772,395
=============== =============== ===============
9. EXCHANGEABLE PREFERRED STOCK
Exchangeable Preferred Stock consists of the following:
March 31, December 31,
2003 2002
--------------- ---------------
$10.00 Series D Exchangeable Preferred Stock $ 174,652 $ 174,531
$9.20 Series F Exchangeable Preferred Stock 100,070 99,984
$8.625 Series H Exchangeable Preferred Stock 210,092 209,950
--------------- ---------------
$ 484,814 $ 484,465
=============== ===============
$10.00 SERIES D EXCHANGEABLE PREFERRED STOCK
The Company authorized 2,000,000 shares of $.01 par value, $10.00 Series D
Exchangeable Preferred Stock, of which 1,769,867 shares were issued and
outstanding at March 31, 2003 and December 31, 2002. The liquidation and
redemption value was $176,987 at March 31, 2003 and December 31, 2002.
$9.20 SERIES F EXCHANGEABLE PREFERRED STOCK
19
The Company authorized 1,250,000 shares of $.01 par value, $9.20 Series F
Exchangeable Preferred Stock, of which 1,023,328 shares were issued and
outstanding at March 31, 2003 and December 31, 2002. The liquidation and
redemption value was $102,333 at March 31, 2003 and December 31, 2002.
$8.625 SERIES H EXCHANGEABLE PREFERRED STOCK
The Company authorized 2,500,000 shares of $.01 par value, $8.625 Series H
Exchangeable Preferred Stock, of which 2,140,891 shares were issued and
outstanding at March 31, 2003 and December 31, 2002. The liquidation and
redemption value was $214,089 at March 31, 2003 and December 31, 2002.
During 2002, the Board of Directors authorized the exchange by the Company of up
to $165,000 of exchangeable preferred stock. During the three months ended March
31, 2002, the Company exchanged $7,066 liquidation value of Series H
Exchangeable Preferred Stock, with a carrying value of $6,911, for 1,144,778
shares of common stock. The gain of $2,978 for the three months ended March 31,
2002 is included in the calculation of basic and diluted loss applicable to
common shareholders per common share on the condensed statement of consolidated
operations.
The exchangeable preferred stock may be redeemed in whole or in part, at
the option of the Company at specified redemption prices, plus accrued and
unpaid dividends.
10. SERIES J CONVERTIBLE PREFERRED STOCK
As of March 31, 2003 and December 31, 2002, the Company had $149,907 and
$145,351 of Series J Convertible Preferred Stock outstanding, respectively.
These shares are convertible at the option of the holder into approximately
17,900,000 shares of the Company's common stock (excluding dividends) at a
conversion price of $7 per share, subject to adjustment. Dividends on the Series
J Convertible Preferred Stock accrue at an annual rate of 12.5% and are payable
quarterly in-kind. The Company paid dividends-in-kind (36,448 shares of Series J
Convertible Preferred Stock) valued at $4,556 during the three months ended
March 31, 2003 and (32,227 shares of Series J Convertible Preferred Stock)
valued at $4,028 during the three months ended March 31, 2002. The Company has
the option to redeem any or all of the shares of the Series J Convertible
Preferred Stock at any time for cash at 100% of the liquidation preference of
each share being redeemed. On any dividend payment date, the Company has the
option to exchange, in whole but not in part, the Series J Convertible Preferred
Stock into 12.5% Class J Subordinated Notes. The Company's ability to redeem or
exchange the Series J Convertible Preferred Stock into debt is subject to the
approval of a majority of the independent directors.
11. COMMON STOCK AND RELATED OPTIONS AND WARRANTS
During the second quarter of 2002, the Board of Directors approved and the
shareholders ratified an amendment to the Company's Certificate of
Incorporation, which increased the number of authorized shares of the Company's
common stock from 300,000,000 to 350,000,000.
Under its share repurchase program, the Company's board of directors
authorized the repurchase of up to $50,000 of its outstanding common stock
from time to time in the open market and through privately negotiated
transactions. In connection with the exchange of $6,150 of Series H
Preferred Stock in December 2002, the Company repurchased the related
2,860,465 common shares exchanged for Series H Preferred Stock for $1.48
per share. The transaction settled in January 2003.
In connection with PRIMEDIA's acquisition of EMAP in 2001, the Company issued
warrants to purchase 2,000,000 shares of common stock at an exercise of $9 per
share to EMAP. In addition, the Company paid KKR 1996 Fund a commitment fee
consisting of warrants to purchase 1,250,000 shares of common stock ("commitment
warrants") of the Company at an exercise price of $7 per share, subject to
adjustment, and a funding fee consisting of warrants to purchase an additional
2,620,000 shares of the Company's common stock ("funding warrants") at an
exercise price of $7 per share, subject to adjustment. These warrants may be
exercised after the first anniversary of the grant date and expire on August 24,
2011 or upon a change in control, as defined.
As the Series J Convertible Preferred Stock was outstanding for twelve months
from the date of issuance, KKR 1996 Fund received additional warrants to
purchase 4,000,000 shares of common stock during 2001 and 2002.
20
The Company ascribed a value of $6,389 to these warrants using the Black Scholes
pricing model. These warrants expire ten years from the date of issuance or upon
a change in control.
In April 2002, the Company granted certain executives an aggregate total of
6,630,000 options to purchase shares of the Company's common stock. The exercise
prices of these options range from $4.00 per share to $6.00 per share. The
options granted at $4.00 per share vest over a four-year period following the
date of the grant. The remaining options vest in 2010 unless the Company
achieves certain earnings targets. Upon the achievement of these targets, the
vesting of the respective options is accelerated upon the financial statements
for the relevant period being finalized.
12. NON-CASH COMPENSATION AND NON-RECURRING CHARGES
In connection with the merger with About in 2001, outstanding options to
purchase shares of About common stock held by certain individuals were
converted into 13,383,579 options to purchase shares of PRIMEDIA common
stock. The fair value of the vested and unvested options issued by PRIMEDIA
was $102,404 determined using a Black Scholes pricing model. On February 28,
2001, the date that the Company granted these unvested replacement options,
the intrinsic value of the "in-the-money" unvested replacement options was
$19,741. Based on a four-year service period from the original date that
these options were granted, the Company classified $7,592 as unearned
compensation relating to unvested options. The remaining $12,149 is included
within the total purchase price. The Company recorded non-cash charges
related to the amortization of the intrinsic value of unvested "in-the-money"
options of $507 and $882 during the three months ended March 31, 2003 and
2002, respectively. As of March 31, 2003, a number of these options have been
forfeited or expired unexercised. Most of these remaining outstanding options
have an exercise price which exceeded the Company's share price on March 31,
2003.
Also in connection with the About merger, certain senior executives were granted
2,955,450 shares of restricted PRIMEDIA common stock and options to purchase
3,482,300 shares of PRIMEDIA common stock. These shares and options vest at a
rate of 25% per year and are subject to the executives' continued employment.
Related non-cash compensation of $739 and $1,411 was recorded for the three
months ended March 31, 2003 and 2002, respectively. This non-cash compensation
reflects pro rata vesting on a graded basis.
Two senior executives of About also entered into share lockup agreements with
the Company, pursuant to which they agreed to specific restrictions regarding
the transferability of their shares of PRIMEDIA common stock issued in the
merger. Under the terms of those agreements, during the first year after the
closing of the merger, the executives could sell a portion of their shares of
the Company's common stock, subject to the Company's right of first refusal
with respect to any sale. In the event that the gross proceeds received on
sale were less than $33,125 (assuming all shares are sold), the Company
agreed to pay the executives the amount of such shortfall. During the three
months ended March 31, 2002, the Company recorded a $3,037 non-recurring
charge related to these share lockup agreements. In 2002, the Company paid
approximately $21,000 related to these agreements.
As a result of one of these executives leaving the Company, effective December
2001, half of his restricted shares (1,105,550 shares) and options (1,302,650
options) were accelerated and the remainder were forfeited. The accelerated
options expired unexercised during the first quarter of 2002.
Also during the three months ended March 31, 2002, the Company recorded a
non-cash charge of $329 related to the issuance of stock in connection with an
acquisition and a non-recurring charge of $26 related to certain non-recurring
compensation arrangements with certain senior executives.
For the three months ended March 31, 2003 and 2002, these non-cash charges
totaled $1,246 and $2,622, respectively, and these non-recurring charges
totaled $0 and $3,063, respectively.
21
13. PROVISION FOR SEVERANCE, CLOSURES AND RESTRUCTURING RELATED COSTS
During 2002 and 2003, the Company announced additional cost initiatives that
would continue to implement and expand upon the cost initiatives enacted during
2001 and 2000. These initiatives were enacted to integrate the operations of the
Company and consolidate many back office functions. Effective January 1,
2003, the Company has accounted for all severance, closures and restructuring
related costs in accordance SFAS 146.
Details of the initiatives implemented and the payments made in furtherance of
these plans during the three-month periods ended March 31, 2003 and 2002 are
presented in the following tables:
Net Provision for Payments
the during the
Three Months Three Months
Liability as of Ended Ended Liability as of
January 1, 2003 March 31, 2003 March 31, 2003 March 31, 2003
------------------ ------------------ ------------------ ------------------
Employee related
termination costs ....... $ 5,199 $ 1,244 $ (1,453) $ 4,990
Termination of
contracts ............... 1,729 - (177) 1,552
Termination of
leases related to
office closures ......... 42,506 146 (2,273) 40,379
------------------ ------------------ ------------------ ------------------
Total severance and
closures ................ $ 49,434 $ 1,390 $ (3,903) $ 46,921
================== ================== ================== ==================
22
Net Provision for Payments
the during the
Three Months Three Months
Liability as of Ended Ended Liability as of
January 1, 2003 March 31, 2003 March 31, 2003 March 31, 2003
------------------ ------------------ ------------------ ------------------
Severance and closures:
Employee related
termination costs ....... $ 9,043 $ 2,079 $ (4,433) $ 6,689
Termination of
contracts ............... 2,318 - (1,071) 1,247
Termination of leases
related to office
closures ................ 13,037 8,321 (1,708) 19,650
------------------ ------------------ ------------------ ------------------
24,398 10,400 (7,212) 27,586
------------------ ------------------ ------------------ ------------------
Restructuring related:
Relocation and other
employee costs - 131 (131) -
------------------ ------------------ ------------------ ------------------
- 131 (131) -
------------------ ------------------ ------------------ ------------------
Total severance,
closures and
restructuring related
costs ................... $ 24,398 $ 10,531 $ (7,343) $ 27,586
================== ================== ================== ==================
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. The leases have been recorded at their
net present value amounts and are net of estimated sublease income amounts.
As a result of the implementation of these plans, the Company has closed and
consolidated in excess of twenty office locations and has notified a total of
1,812 individuals that they would be terminated under these plans, of which 56
individuals were notified during the three month period ended March 31, 2003. As
of March 31, 2003, all but seven of those individuals have been terminated.
The Company expects to realize sufficient savings from its plans to integrate
the operations of the Company and to recover the costs associated with
employee terminations within approximately a one-year period. Savings from
terminations of contracts and leases will be realized over the estimated life
of the contract or lease.
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 their respective dates.
14. COMPREHENSIVE INCOME (LOSS)
23
Comprehensive income (loss) for the three months ended March 31, 2003 and 2002
is presented in the following tables:
Three Months Ended
March 31, March 31,
2003 2002
--------------- ---------------
Net loss $ (20,247) $ (506,506)
Other comprehensive income (loss):
Change in fair value of derivative instruments -- 1,897
Foreign currency translation adjustments 24 (35)
--------------- ---------------
Total comprehensive loss $ (20,223) $ (504,644)
=============== ===============
15. LOSS PER COMMON SHARE
Loss per share for the three month periods ended March 31, 2003 and 2002 has
been determined based on net loss after preferred stock dividends, related
accretion, gain on the exchange of exchangeable preferred stock for common
shares and the issuance of contingent warrants associated with the Series J
Convertible Preferred Stock (see Note 11) divided by the weighted average number
of common shares outstanding for all periods presented. The effect of the
assumed exercise of non-qualified stock options and warrants and the conversion
of convertible preferred stock was not included in the computation of diluted
loss per share because the effect of inclusion would be antidilutive.
16. 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.
During 2002, PRIMEDIA contributed the Gravity Games, a product previously
acquired from EMAP, to a limited liability company (the "LLC") formed jointly by
PRIMEDIA, on one hand, and Octagon Marketing and Athlete Representation, Inc.,
on the other hand, with each party owning 50%. The LLC has entered into an
agreement with NBC Sports, a division of National Broadcasting Company, Inc.,
which requires the LLC to pay specified fees to NBC for certain production
services performed by NBC and network air time provided by NBC during 2003.
Under the terms of this agreement and a related guarantee, PRIMEDIA could be
responsible for the payment of a portion of such fees, in the event that the LLC
failed to satisfy its payment obligations to NBC. The LLC satisfied all of its
payment obligations due NBC in 2002. The maximum amounts for which PRIMEDIA
could be liable would be $2,200 in 2003. As this liability will be contingent on
the LLC's failure to pay and the occurrence of certain other events and
existence of certain other conditions, the Company has not recorded a liability
on the accompanying condensed consolidated balance sheet as of March 31, 2003;
however, the asset representing the Company's 50% investment in the LLC as well
as the Company's share of the LLC's losses are reflected in the Company's
condensed consolidated financial statements. The Company's investment in the LLC
of $1,134 is reflected as a component of other investments on the accompanying
condensed consolidated balance sheet at March 31, 2003. The Company's share of
the LLC's losses ($392) is reflected as a component of other, net on the
accompanying condensed statements of consolidated operations for the three
months ended March 31, 2003.
24
As of and for the three months ended March 31, 2003, no officers or directors of
the Company have been granted loans by the Company, nor has the Company
guaranteed any obligations of such persons.
17. BUSINESS SEGMENT INFORMATION
The Company's operations have been classified into two business segments:
consumer and business-to-business. PRIMEDIA groups its businesses into these two
segments based on the nature of the products and services they provide and the
type or class of customer for these products or services. The Company's consumer
segment produces and distributes magazines, guides, videos and Internet products
for consumers in various niche markets. The Company's business-to-business
segment produces and distributes magazines, books, directories, databases,
vocational training materials and Internet products to business professionals in
such fields as communications, agriculture, professional services, media,
transportation and healthcare. These segment results are regularly reviewed by
the Company's chief operating decision-maker and the remainder of the executive
team to make decisions about resources to be allocated to each segment and
assess its performance. The information presented below includes certain
intercompany transactions and is therefore, not necessarily indicative of the
results had the operations existed as stand-alone businesses. Intercompany
eliminations include intercompany content and brand licensing, advertising and
other services, which are billed at what management believes are prevailing
market rates. These intercompany transactions, which represent transactions
between operating units in different business segments, are eliminated in
consolidation. For 2003, the Company has eliminated Intrasegment transactions
within the segment results and has restated the prior period accordingly.
These Intrasegment transactions totaled $10,489 and $32,964 for the three
months ended March 31, 2003 and 2002, respectively.
The Non-Core Businesses include certain titles of The Business Magazines & Media
Group and The Consumer Magazines & Media Group which are discontinued or
divested. In addition, during 2001, the Company restructured or consolidated
several new media properties, whose value can be realized with far greater
efficiency by having select functions absorbed by the core operations and has
included these properties in Non-Core Businesses. The Company has segregated the
Non-Core Businesses from the aforementioned segments because the Company's chief
operating decision-maker and the remainder of the executive team view these
businesses separately when evaluating and making decisions regarding ongoing
operations. In the ordinary course of business, corporate administrative costs
of approximately $900 were allocated to the Non-Core Businesses during the three
months ended March 31, 2002. Effective June 30, 2002, the Company has not
classified any additional businesses as Non-Core Businesses nor will any
additional balances be allocated to the Non-Core Businesses subsequent to June
30, 2002.
Information as to the operations of the Company in different business segments
is set forth below based on the nature of the targeted audience. Corporate
represents items not allocated to other business segments. PRIMEDIA evaluates
performance based on several factors, of which the primary financial measure is
segment earnings before interest, taxes, depreciation, amortization and other
(income) charges ("Segment EBITDA"). Other (income) charges include non-cash
compensation and non-recurring charges, provision for severance, closures and
restructuring related costs and (gain) loss on sales of businesses and other,
net.
25
Three Months Ended
March 31,
2003 2002
--------------- ---------------
Sales, Net:
Consumer $ 303,531 $ 298,357
Business-to-Business 73,534 80,888
Intercompany eliminations and other (1,264) (1,290)
Other:
Non-Core Businesses - 10,974
--------------- ---------------
Total $ 375,801 $ 388,929
=============== ===============
Segment EBITDA (1)(2):
Consumer $ 51,530 $ 39,733
Business-to-Business 2,301 862
Other:
Corporate (7,860) (8,810)
Non-Core Businesses - (1,872)
--------------- ---------------
Total $ 45,971 $ 29,913
=============== ===============
The following is a reconciliation of Segment EBITDA to operating income (loss):
Three Months Ended
March 31,
2003 2002
--------------- ---------------
Total Segment EBITDA (1) $ 45,971 $ 29,913
Depreciation of property and
equipment (12,915) (14,842)
Amortization of intangible assets
and other (10,782) (22,642)
Non-cash compensation and
non-recurring charges (1,246) (5,685)
Provision for severance, closures
and restructuring related costs (1,390) (10,531)
Gain (loss) on sales of businesses
and other, net (351) 555
--------------- ---------------
Operating income (loss) $ 19,287 $ (23,232)
=============== ===============
(1) Segment EBITDA represents earnings before interest, taxes, depreciation,
amortization and other (income) charges including non-cash compensation and
non-recurring charges of $1,246 and $5,685 for the three months ended March
31, 2003 and 2002, respectively, a provision for severance, closures and
restructuring related costs of $1,390 and $10,531 for the three months
ended March 31, 2003 and 2002, respectively, and loss (gain) on sales of
businesses and other, net of $351 and ($555) for the three months ended
March 31, 2003 and 2002, respectively. Segment EBITDA is not intended to
represent cash flow from operating activities and should not be considered
as an alternative to net income or loss (as determined in conformity with
generally accepted accounting principles) as an indicator of the Company's
operating performance
26
or to cash flows as a measure of liquidity. It is presented herein as the
Company evaluates and measures each business unit's performance based on
its Segment EBITDA results. 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 payments. Segment EBITDA as presented may
not be comparable to similarly titled measures reported by other companies,
since not all companies necessarily calculate Segment EBITDA in identical
manners, and therefore, is not necessarily an accurate measure of
comparison between companies.
(2) 2003 includes reversals of accrued employee incentive compensation due to a
change in estimate of $550 related to the Consumer segment, $1,235 related
to the Business-to-Business segment and $2,635 related to Corporate.
18. FINANCIAL INFORMATION FOR GUARANTORS OF THE COMPANY'S DEBT
The information that follows presents condensed consolidating financial
information as of March 31, 2003 and December 31, 2002 and for the three months
ended March 31, 2003 and 2002 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. Certain businesses which were included as either guarantor
or non-guarantor subsidiaries as of March 31, 2002 have been reclassified as of
March 31, 2003.
The condensed consolidating financial information includes certain allocations
of revenues, expenses, assets and liabilities based on management's best
estimates which are not necessarily indicative of financial position, results of
operations and cash flows that these entities would have achieved on a
stand-alone basis and should be read in 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 transactions described above are billed, by the Company, at
what the Company believes are market rates. All intercompany related activities
are eliminated in consolidation.
27
18. FINANCIAL INFORMATION FOR GUARANTORS OF THE COMPANY'S DEBT (CONTINUED)
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
March 31, 2003
(dollars in thousands)
Primedia Inc.
Guarantor Non-Guarantor and
Primedia Inc. Subsidiaries Subsidiaries Eliminations Subsidiaries
--------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,404 $ 14,946 $ 1,300 $ - $ 21,650
Accounts receivable, net 314 200,640 17,510 - 218,464
Intercompany receivables 1,535,402 652,756 (46,079) (2,142,079) -
Inventories, net - 23,312 284 - 23,596
Prepaid expenses and other 5,072 21,737 22,649 - 49,458
--------------------------------------------------------------------------------------
Total current assets 1,546,192 913,391 (4,336) (2,142,079) 313,168
Property and equipment, net 9,757 80,357 32,010 - 122,124
Investment in and advances to subsidiaries 688,365 - - (688,365) -
Other intangible assets, net - 334,321 7,494 - 341,815
Goodwill, net - 929,209 43,746 - 972,955
Other investments 19,164 1,084 350 - 20,598
Other non-current assets 952 53,144 2,742 - 56,838
--------------------------------------------------------------------------------------
$ 2,264,430 $ 2,311,506 $ 82,006 $ (2,830,444) $ 1,827,498
======================================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 7,025 $ 65,013 $ 16,911 $ - $ 88,949
Intercompany payables 919,869 762,889 459,321 (2,142,079) -
Accrued interest payable 34,269 - - - 34,269
Accrued expenses and other 86,880 111,386 16,116 - 214,382
Deferred revenues 1,427 172,304 17,614 - 191,345
Current maturities of long-term debt 4,138 3,570 - - 7,708
--------------------------------------------------------------------------------------
Total current liabilities 1,053,608 1,115,162 509,962 (2,142,079) 536,653
--------------------------------------------------------------------------------------
Long-term debt 1,744,664 20,023 - - 1,764,687
--------------------------------------------------------------------------------------
Intercompany notes payable - 2,469,867 776,480 (3,246,347) -
--------------------------------------------------------------------------------------
Deferred revenues - 36,241 - - 36,241
--------------------------------------------------------------------------------------
Deferred income taxes 52,825 - - - 52,825
--------------------------------------------------------------------------------------
Other non-current liabilities 2,408 23,388 371 - 26,167
--------------------------------------------------------------------------------------
Exchangeable preferred stock 484,814 - - - 484,814
--------------------------------------------------------------------------------------
Shareholders' deficiency:
Series J convertible preferred stock 149,907 - - 149,907
Common stock 2,679 - - - 2,679
Additional paid-in capital 2,336,185 - - - 2,336,185
Accumulated deficit (3,481,281) (1,353,169) (1,204,590) 2,557,759 (3,481,281)
Accumulated other comprehensive loss (223) (6) (217) 223 (223)
Unearned compensation (3,484) - - - (3,484)
Common stock in treasury, at cost (77,672) - - - (77,672)
--------------------------------------------------------------------------------------
Total shareholders' deficiency (1,073,889) (1,353,175) (1,204,807) 2,557,982 (1,073,889)
--------------------------------------------------------------------------------------
$ 2,264,430 $ 2,311,506 $ 82,006 $ (2,830,444) $ 1,827,498
======================================================================================
28
18. FINANCIAL INFORMATION FOR GUARANTORS OF THE COMPANY'S DEBT (CONTINUED)
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(UNAUDITED)
For the Quarter Ended March 31, 2003
(dollars in thousands)
Primedia Inc.
Guarantor Non-Guarantor and
Primedia Inc. Subsidiaries Subsidiaries Eliminations Subsidiaries
--------------------------------------------------------------------------------------
Sales, net $ 121 $ 329,486 $ 56,683 $ (10,489) $ 375,801
Operating costs and expenses:
Cost of goods sold - 70,924 25,536 (10,489) 85,971
Marketing and selling - 72,799 13,741 - 86,540
Distribution, circulation and
fulfillment - 49,003 15,778 - 64,781
Editorial - 28,231 6,021 - 34,252
Other general expenses 600 34,968 15,337 - 50,905
Corporate administrative expenses
(excluding non-cash compensation) 4,958 - 2,423 - 7,381
Depreciation of property and equipment 644 8,031 4,240 - 12,915
Amortizatio