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: September 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 October 29, 2004: 260,641,303.

 

 



 

PRIMEDIA Inc.

 

INDEX

 

Part I.   Financial Information:

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets
as of September 30, 2004 (Unaudited) and
December 31, 2003

2

 

 

 

 

Condensed Statements of Consolidated Operations
(Unaudited) for the three months ended
September 30, 2004 and 2003

3

 

 

 

 

Condensed Statements of Consolidated Operations
(Unaudited) for the nine months ended
September 30, 2004 and 2003

4

 

 

 

 

Condensed Statements of Consolidated
Cash Flows (Unaudited) for the nine months
ended September 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

62

 

 

 

Item 4.

Controls and Procedures

62

 

 

 

Part II.   Other Information:

 

 

 

 

Item 6.

Exhibits

63

 

 

 

 

Signatures

65

 



 

PRIMEDIA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

September 30, 2004

 

December 31,
2003

 

 

 

(Unaudited)

 

 

 

 

 

(dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

20,033

 

$

8,685

 

Accounts receivable, net

 

183,242

 

194,080

 

Inventories

 

18,916

 

17,500

 

Prepaid expenses and other

 

33,031

 

36,059

 

Assets held for sale

 

40,017

 

31,879

 

Total current assets

 

295,239

 

288,203

 

 

 

 

 

 

 

Property and equipment (net of accumulated depreciation and amortization of $282,770 in 2004 and $280,612 in 2003)

 

79,101

 

110,859

 

Other intangible assets, net

 

254,338

 

268,407

 

Goodwill

 

902,232

 

910,534

 

Other non-current assets

 

46,432

 

58,118

 

Total Assets

 

$

1,577,342

 

$

1,636,121

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ DEFICIENCY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

82,742

 

$

78,794

 

Accrued expenses and other

 

203,646

 

213,934

 

Deferred revenues

 

167,500

 

173,607

 

Current maturities of long-term debt

 

16,222

 

22,195

 

Liabilities of businesses held for sale

 

28,041

 

16,049

 

Total current liabilities

 

498,151

 

504,579

 

 

 

 

 

 

 

Long-term debt

 

1,664,617

 

1,562,441

 

Shares subject to mandatory redemption

 

474,559

 

474,559

 

Deferred revenues

 

17,692

 

17,850

 

Deferred income taxes

 

74,288

 

61,364

 

Other non-current liabilities

 

11,195

 

28,583

 

Total Liabilities

 

2,740,502

 

2,649,376

 

 

 

 

 

 

 

Shareholders’ deficiency:

 

 

 

 

 

Series J convertible preferred stock ($.01 par value, 1,319,093 shares issued and outstanding, aggregate liquidation and redemption values of $164,887 at December 31, 2003)

 

 

164,533

 

Common stock ($.01 par value, 350,000,000 shares authorized at September 30, 2004 and December 31, 2003 and 269,156,873 shares and 268,333,049 shares issued at September 30, 2004 and December 31, 2003, respectively)

 

2,691

 

2,683

 

Additional paid-in capital (including warrants of $31,690 at September 30, 2004 and December 31, 2003)

 

2,350,754

 

2,345,152

 

Accumulated deficit

 

(3,439,767

)

(3,447,710

)

Accumulated other comprehensive loss

 

(179

)

(176

)

Unearned compensation

 

 

(175

)

Common stock in treasury, at cost (8,520,409 shares at September 30, 2004 and 8,610,491 at December 31, 2003)

 

(76,659

)

(77,562

)

Total Shareholders’ Deficiency

 

(1,163,160

)

(1,013,255

)

 

 

 

 

 

 

Total Liabilities and Shareholders’ Deficiency

 

$

1,577,342

 

$

1,636,121

 

 

See notes to condensed consolidated financial statements (unaudited).

 

2



 

PRIMEDIA INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

 

 

 

Three Months Ended
September 30,

 

 

 

2004

 

2003

 

 

 

(dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

Revenues, net:

 

 

 

 

 

Advertising

 

$

213,165

 

$

202,474

 

Circulation

 

70,233

 

72,679

 

Other

 

40,739

 

34,937

 

Total revenues, net

 

324,137

 

310,090

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

Cost of goods sold

 

70,512

 

68,608

 

Marketing and selling

 

67,405

 

61,466

 

Distribution, circulation and fulfillment

 

53,306

 

56,842

 

Editorial

 

27,788

 

25,733

 

Other general expenses

 

38,177

 

36,898

 

Corporate administrative expenses (excluding $1,344 and $770 of non-cash compensation in 2004 and 2003, respectively)

 

6,980

 

6,615

 

Depreciation of property and equipment

 

8,819

 

13,763

 

Amortization of intangible assets and other

 

4,452

 

9,537

 

Non-cash compensation

 

1,344

 

770

 

Provision for severance, closures and restructuring related costs

 

1,926

 

448

 

Gain on sale of businesses and other, net

 

(293

)

(706

)

 

 

 

 

 

 

Operating income

 

43,721

 

30,116

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Provision for impairment of investments

 

 

(1,248

)

Interest expense

 

(32,289

)

(29,884

)

Interest on shares subject to mandatory redemption

 

(10,945

)

(11,008

)

Amortization of deferred financing costs

 

(1,334

)

(1,116

)

Other income, net

 

17,680

 

519

 

 

 

 

 

 

 

Income (loss) from continuing operations before income tax expense

 

16,833

 

(12,621

)

Provision for deferred income taxes

 

(4,330

)

(3,982

)

 

 

 

 

 

 

Income (loss) from continuing operations

 

12,503

 

(16,603

)

 

 

 

 

 

 

Discontinued operations (including gain on sale of businesses, net of $999 and $2,713 in 2004 and 2003, respectively)

 

(3,763

)

(22,225

)

 

 

 

 

 

 

Net income (loss)

 

8,740

 

(38,828

)

 

 

 

 

 

 

Preferred stock dividends and related accretion, net

 

(2,551

)

(4,845

)

Income (loss) applicable to common shareholders

 

$

6,189

 

$

(43,673

)

 

 

 

 

 

 

Basic and diluted income (loss) per common share:

 

 

 

 

 

Continuing operations

 

$

0.04

 

$

(0.08

)

Discontinued operations

 

(0.02

)

(0.09

)

Income (loss) applicable to common shareholders

 

$

0.02

 

$

(0.17

)

 

 

 

 

 

 

Basic common shares outstanding

 

260,496,328

 

259,343,692

 

 

 

 

 

 

 

Diluted common shares outstanding

 

264,365,201

 

259,343,692

 

 

See notes to condensed consolidated financial statements (unaudited).

 

3



 

PRIMEDIA INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

 

 

 

Nine Months Ended
September 30,

 

 

 

2004

 

2003

 

 

 

(dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

Revenues, net:

 

 

 

 

 

Advertising

 

$

631,190

 

$

617,347

 

Circulation

 

208,785

 

214,445

 

Other

 

133,192

 

122,998

 

Total revenues, net

 

973,167

 

954,790

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

Cost of goods sold

 

205,486

 

206,308

 

Marketing and selling

 

202,975

 

196,154

 

Distribution, circulation and fulfillment

 

165,993

 

168,703

 

Editorial

 

81,443

 

77,741

 

Other general expenses

 

120,593

 

117,034

 

Corporate administrative expenses (excluding $4,830 and $2,793 of non-cash compensation in 2004 and 2003, respectively)

 

20,566

 

20,842

 

Depreciation of property and equipment

 

27,653

 

35,116

 

Amortization of intangible assets and other

 

14,999

 

29,778

 

Severance related to separated senior executives

 

658

 

5,576

 

Non-cash compensation

 

4,830

 

2,793

 

Provision for severance, closures and restructuring related costs

 

8,719

 

3,348

 

Provision for unclaimed property

 

5,500

 

 

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

 

(243

)

625

 

 

 

 

 

 

 

Operating income

 

113,995

 

90,772

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Provision for impairment of investments

 

(804

)

(8,975

)

Interest expense

 

(90,053

)

(94,443

)

Interest on shares subject to mandatory redemption

 

(32,835

)

(11,008

)

Amortization of deferred financing costs

 

(3,653

)

(2,360

)

Other income (expense), net

 

17,793

 

(3,283

)

 

 

 

 

 

 

Income (loss) from continuing operations before income tax expense

 

4,443

 

(29,297

)

Provision for deferred income taxes

 

(13,054

)

(11,033

)

 

 

 

 

 

 

Loss from continuing operations

 

(8,611

)

(40,330

)

 

 

 

 

 

 

Discontinued operations (including gain on sale of businesses, net of $43,299 and $105,310 in 2004 and 2003, respectively)

 

30,576

 

70,160

 

 

 

 

 

 

 

Net income

 

21,965

 

29,830

 

 

 

 

 

 

 

Preferred stock dividends and related accretion, net

 

(13,505

)

(36,856

)

Income (loss) applicable to common shareholders

 

$

8,460

 

$

(7,026

)

 

 

 

 

 

 

Basic and diluted income (loss) per common share:

 

 

 

 

 

Continuing operations

 

$

(0.09

)

$

(0.30

)

Discontinued operations

 

0.12

 

0.27

 

Income (loss) applicable to common shareholders

 

$

0.03

 

$

(0.03

)

 

 

 

 

 

 

Basic and diluted common shares outstanding

 

260,232,692

 

259,078,166

 

 

See notes to condensed consolidated financial statements (unaudited).

 

4



 

PRIMEDIA INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

 

 

 

Nine Months Ended September 30,

 

 

 

2004

 

2003

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

Net income

 

$

21,965

 

$

29,830

 

Adjustments to reconcile net income to net cash provided by operating activities

 

11,333

 

41,172

 

Changes in operating assets and liabilities

 

3,034

 

(27,031

)

Net cash provided by operating activities

 

36,332

 

43,971

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Additions to property, equipment and other, net

 

(23,500

)

(26,523

)

Proceeds from sale of businesses and other

 

70,277

 

183,741

 

Payments for businesses acquired, net of cash acquired

 

(1,358

)

(7,722

)

Proceeds from sale of (payments for) other investments

 

17,399

 

(3,183

)

Net cash provided by investing activities

 

62,818

 

146,313

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Borrowings under credit agreements

 

386,700

 

329,400

 

Repayments of borrowings under credit agreements

 

(461,700

)

(382,312

)

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

 

1,028

 

1,120

 

Purchases of common stock in connection with the exchange of exchangeable preferred stock

 

 

(19,367

)

Redemption of Series J Convertible Preferred Stock

 

(178,038

)

 

Dividends paid to preferred stock shareholders

 

 

(33,928

)

Deferred financing costs paid

 

(5,686

)

(6,288

)

Capital lease obligations

 

(4,920

)

(3,173

)

Other

 

(186

)

(233

)

Net cash used in financing activities

 

(87,802

)

(190,456

)

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

11,348

 

(172

)

Cash and cash equivalents, beginning of period

 

8,685

 

18,553

 

Cash and cash equivalents, end of period

 

$

20,033

 

$

18,381

 

 

 

 

 

 

 

Supplemental information:

 

 

 

 

 

Cash interest paid

 

$

64,307

 

$

75,746

 

Cash interest paid on shares subject to mandatory redemption

 

$

32,835

 

$

11,008

 

Cash taxes paid, net of refunds

 

$

171

 

$

441

 

Accretion in carrying value of exchangeable and convertible preferred stock

 

$

353

 

$

781

 

Payments of dividends-in-kind on Series J Convertible Preferred Stock

 

$

13,152

 

$

14,099

 

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 September 30, 2004 and December 31, 2003 and the consolidated results of operations of the Company for the three and nine months ended September 30, 2004 and 2003, and consolidated cash flows of the Company for the nine month periods ended September 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 (which was updated to reflect the reclassification of certain businesses as discontinued operations on a Current Report on Form 8-K dated September 13, 2004).  The operating results for the three and nine month periods ended September 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 three and nine month periods ended September 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 decreased the income from continuing operations for the three months ended September 30, 2004 by $604 and increased the loss from continuing operations for the nine months ended September 30, 2004 by $1,972, respectively. The impact of the adoption of SFAS 123 was not significant for the three and nine months ended September 30, 2003.

 

6



 

The following table illustrates the effect on net income (loss) applicable to common shareholders and basic and diluted 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:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

Reported net income (loss) applicable to common shareholders

 

$

6,189

 

$

(43,673

)

$

8,460

 

$

(7,026

)

 

 

 

 

 

 

 

 

 

 

Add: Stock-based employee compensation expense included in reported net income (loss)

 

604

 

471

 

2,147

 

1,784

 

 

 

 

 

 

 

 

 

 

 

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards

 

(3,015

)

(3,291

)

(9,453

)

(16,864

)

Pro forma net income (loss) applicable to common shareholders

 

$

3,778

 

$

(46,493

)

$

1,154

 

$

(22,106

)

 

 

 

 

 

 

 

 

 

 

Per Common Share:

 

 

 

 

 

 

 

 

 

Reported basic and diluted income (loss)

 

$

0.02

 

$

(0.17

)

$

0.03

 

$

(0.03

)

Pro forma basic and diluted income (loss)

 

$

0.01

 

$

(0.18

)

$

0.00

 

$

(0.09

)

 

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. For the three months ended September 30, 2004 and 2003, respectively, the following weighted-average assumptions were used: risk-free interest rates of 2.97 % 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 82% and 79%, and a weighted-average expected life of the options of three and five years. The following weighted-average assumptions were used for options granted in the nine months ended September 30, 2004 and 2003, respectively: risk-free interest rates of 2.85% and 4.57%; dividend yields of 0.0% and 0.0%; volatility factors of the expected market price of the Company’s common stock of 84% 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 three months ended September 30, 2004 and 2003 was $88 and $454, respectively, and $406 and $472 during the nine months ended September 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

 

In accordance with the prospective adoption, effective July 1, 2003, of SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, the Company classified 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”). Additionally, dividends from

 

7



 

this Exchangeable Preferred Stock are classified as interest expense.

 

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 September 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 income (loss) from continuing operations, whereas previously they were presented below net income (loss) as preferred stock dividends. The adoption of SFAS 150 decreased the results from continuing operations for the three and nine months ended September 30, 2004 by $11,281 and $33,843, 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.  As a result of SFAS 150 being adopted during the third quarter of 2003, loss from continuing operations increased $11,344 for the three and nine months ended September 30, 2003.  If SFAS 150 was retroactively adopted on January 1, 2003, loss from continuing operations for the nine months ended September 30, 2003 would have increased by $22,670. This adoption did not have an impact on income (loss) applicable to common shareholders or basic and diluted income (loss) per common share for any of the periods presented on the accompanying condensed statements of consolidated operations.

 

2.  Divestitures and Investment Sale

 

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 revolving credit 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, in the second quarter of 2004, the Company began evaluating strategic partnerships regarding the Folio, Circulation Management and American Demographics properties in the Business Information segment.  In August 2004, Folio and Circulation Management were contributed to a venture with a third party, under which the Company will not have a significant continuing involvement in the operations and the Company’s share of associated cash flows is not expected to be significant.  The operating results of these properties have been classified as discontinued operations for all periods presented.

 

In September 2004, the Company announced that it would explore strategic options regarding its Workplace Learning division and is actively pursuing the sale of this division, excluding the Interactive Medical Network (“IMN”), in the Education segment (formerly Education and Training, renamed to reflect the classification of

 

8



 

Workplace Learning as discontinued operations). The Company believes that there will not be a material loss relating to the sale of this division.  Workplace Learning provides integrated learning solutions for more than eight million professionals in the industrial, healthcare, banking, automotive, fire and emergency, government and law, and security markets.  The operating results of this division, excluding IMN, 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 September 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 $10,002 and $35,166 for the three months ended September 30, 2004 and 2003, respectively, and $35,052 and $142,059 for the nine months ended September 30, 2004 and 2003, respectively.

 

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 September 30, 2004 and December 31, 2003 have been reclassified to held for sale on the accompanying condensed consolidated balance sheets as follows:

 

 

 

September 30,
2004

 

December 31,
2003

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Accounts receivable, net

 

$

3,772

 

$

8,010

 

Inventories

 

1,803

 

391

 

Prepaid expenses and other

 

1,018

 

907

 

Property and equipment, net

 

19,097

 

297

 

Other intangible assets, net

 

 

14,056

 

Goodwill

 

 

6,747

 

Other non-current assets.

 

14,327

 

1,471

 

Assets held for sale

 

$

40,017

 

$

31,879

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Accounts payable

 

$

1,963

 

$

3,115

 

Accrued expenses and other

 

6,129

 

11,791

 

Deferred revenues-current

 

5,855

 

1,110

 

Other non-current liabilities

 

14,094

 

33

 

Liabilities of businesses held for sale

 

$

28,041

 

$

16,049

 

 

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

 

Investment Sale

 

In September 2004, the Company sold all of its equity investment in approximately 36% of the stock of All About Japan, Inc. for proceeds of approximately $16,700.  The investment had no carrying value at the time of the sale due to the recording of historical losses as well as impairment charges recorded in 2001.  The Company recognized a gain on the sale of approximately $16,700 recorded in other income (expense), net on the accompanying condensed statements of consolidated operations.

 

9



 

3.  Accounts Receivable, Net

 

Accounts receivable, net, consisted of the following:

 

 

 

September 30,
2004

 

December 31,
2003

 

Accounts receivable

 

$

197,664

 

$

212,144

 

Less: Allowance for doubtful accounts

 

11,459

 

10,798

 

Allowance for returns and rebates

 

2,963

 

7,266

 

 

 

$

183,242

 

$

194,080

 

 

4.  Inventories

 

Inventories consisted of the following:

 

 

 

September 30,
2004

 

December 31,
2003

 

Finished goods

 

$

6,969

 

$

8,008

 

Work in process

 

118

 

230

 

Raw materials

 

11,829

 

9,262

 

 

 

$

18,916

 

$

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 nine months ended September 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 $4,318 and $3,974 for the three months ended September 30, 2004 and 2003, respectively, and $12,924 and $10,624, for the nine months ended September 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

 

10



 

Company expects that it will record a total of approximately $4,500 to increase deferred tax liabilities during the remaining three months of 2004.

 

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

 

 

 

Enthusiast
Media

 

Consumer
Guides

 

Business
Information

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2004

 

$

695,340

 

$

95,808

 

$

119,386

 

$

910,534

 

Purchase price allocation adjustments per final valuation reports

 

 

193

 

 

193

 

Goodwill written off related to the sale of businesses

 

(6,776

)

 

(1,719

)

(8,495

)

Balance as of September 30, 2004

 

$

688,564

 

$

96,001

 

$

117,667

 

$

902,232

 

 

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

 

 

 

 

 

September 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

 

346,660

 

321,326

 

25,334

 

348,346

 

315,860

 

32,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-compete agreements

 

1-10

 

136,226

 

134,689

 

1,537

 

137,829

 

134,093

 

3,736

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademark license agreements

 

2-15

 

2,984

 

2,913

 

71

 

2,984

 

2,899

 

85

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Copyrights

 

3-20

 

17,940

 

17,267

 

673

 

20,550

 

19,609

 

941

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Databases

 

2-12

 

9,353

 

8,921

 

432

 

9,353

 

8,627

 

726

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertiser lists

 

5-20

 

135,978

 

125,728

 

10,250

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

689,804

 

$

651,507

 

$

38,297

 

$

696,267

 

$

643,999

 

$

52,268

 

 

11



 

Intangible assets not subject to amortization had a carrying value of $216,041 and $216,139 at September 30, 2004 and December 31, 2003, respectively, and consisted primarily of trademarks. Amortization expense for intangible assets still subject to amortization was $4,098 and $7,603 for the three months ended September 30, 2004 and 2003, respectively, and $14,104 and $24,161 for the nine months ended September 30, 2004 and 2003, respectively.  Amortization of deferred wiring costs of $354 and $1,934 for the three months ended September 30, 2004 and 2003, respectively, and $895 and $5,617 for the nine months ended September 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 September 30, 2004, estimated future amortization expense of intangible assets still subject to amortization, excluding deferred wiring costs, is as follows: approximately $4,000 for the remaining three 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:

 

 

 

September 30,
2004

 

December 31,
2003

 

Borrowings under bank credit facilities

 

$

484,906

 

$

559,906

 

75/8% Senior Notes Due 2008

 

225,545

 

225,443

 

87/8% Senior Notes Due 2011

 

470,245

 

469,820

 

8% Senior Notes Due 2013

 

300,000

 

300,000

 

Senior Floating Rate Notes Due 2010

 

175,000

 

 

 

 

1,655,696

 

1,555,169

 

Obligation under capital leases

 

25,143

 

29,467

 

 

 

1,680,839

 

1,584,636

 

Less: Current maturities of long-term debt

 

16,222

 

22,195

 

 

 

$

1,664,617

 

$

1,562,441

 

 

$175,000 Senior Floating Rate Notes Due 2010 and $100,000 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 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 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 redeem the Company’s Series J Convertible Preferred Stock (see Note 7 for further discussion).

 

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

 

12



 

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.

 

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 September 30, 2004 and December 31, 2003, the weighted average variable interest rate on all outstanding borrowings under the bank credit facilities was 4.3% and 3.6%, respectively.

 

7.  Series J Convertible Preferred Stock

 

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 $145,000 of advances under its revolving credit facility.

 

As of December 31, 2003, the Company had $164,533 of Series J Convertible Preferred Stock outstanding. The Company paid dividends in kind of 17,584 and 105,213 shares of Series J Convertible Preferred Stock valued at $2,198 and $13,152 during the three and nine months ended September 30, 2004, respectively, and 38,761 and 112,796 shares of Series J Convertible Preferred Stock valued at $4,845 and $14,099 during the three and nine months ended September 30, 2003, respectively.

 

8.  Common Stock and Related Options

 

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

 

Range of
Exercise Prices

 

Number
Outstanding at
9/30/04

 

Number
Exercisable at
9/30/04

 

Weighted
Average
Remaining
Contractual Life

 

Weighted
Average
Exercise Price
of Outstanding
Options

 

Weighted
Average
Exercise Price
of Exercisable
Options

 

 

 

 

 

 

 

 

 

 

 

 

 

$0.08 - $0.43

 

61,391

 

61,391

 

3

 

$

0.28

 

$

0.28

 

$1.01 - $1.80

 

4,520

 

3,645

 

6

 

1.45

 

1.48

 

$1.85 - $1.98

 

953,236

 

539,368

 

6

 

1.85

 

1.85

 

$2.02 - $2.99

 

2,698,500

 

747,875

 

5

 

2.82

 

2.77

 

$3.09 - $3.65

 

2,072,750

 

36,375

 

7

 

3.09

 

3.19

 

$4.00 - $5.95

 

7,156,077

 

5,601,265

 

6

 

4.73

 

4.77

 

$6.00 - $9.83

 

4,206,545

 

2,809,206

 

6

 

6.82

 

7.05

 

$10.13 - $19.81

 

9,079,154

 

8,762,380

 

5

 

13.40

 

13.29

 

$20.00 - $27.13

 

147,198

 

146,613

 

5

 

25.39

 

25.40

 

$34.17 - $36.52

 

11,194

 

11,194

 

5

 

34.55

 

34.55

 

Total

 

26,390,565

 

18,719,312

 

6

 

7.74

 

9.10

 

 

13



 

9.  Non-Cash Compensation

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

Restricted stock (1)

 

$

740

 

$

41

 

$

2,683

 

$

88

 

Stock options (2)

 

604

 

 

1,972

 

 

Amortization of the intrinsic value of unvested “in-the-money” options issued in connection with the About acquisition (3)

 

 

259

 

175

 

1,025

 

Restricted stock and stock options-About (4)

 

 

470

 

 

1,680

 

Total

 

$

1,344

 

$

770

 

$

4,830

 

$

2,793

 

 


(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 $740 and $41 during the three months ended September 30, 2004 and 2003, respectively, and $2,683 and $88 during the nine months ended September 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 $604 and $1,972 for the three and nine months ended September 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 three and nine months ended September 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 $259 for the three months ended September 30, 2003 and $175 and $1,025 for the nine months ended September 30, 2004 and 2003, respectively.  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 $470 and $1,680 for the three and nine months ended September 30, 2003, respectively.

 

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

 

Senior Executives Severance

 

Severance related to the finalization of the separation agreements of the former Chief Executive Officer and the former President and Interim Chief Executive Officer were $0 and $658 for the three and nine months ended September 30, 2004, respectively, and $0 and $5,576 for the three and nine months ended September 30, 2003, respectively.

 

Provision for Severance, Closures and Restructuring Related Costs

 

Through the third 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 nine-months ended September 30, 2004 and 2003 are presented in the following tables:

 

 

 

Liability as of
January 1,
2004

 

Net Provision
for the Nine
Months Ended
September 30,
2004

 

Payments during
the Nine
Months Ended
September 30,
2004

 

Liability as of
September
30, 2004

 

Severance and closures:

 

 

 

 

 

 

 

 

 

Employee-related termination costs

 

$

4,913

 

$

1,885

 

$

(4,155

)

$

2,643

 

Termination of leases related to office closures

 

37,056

 

6,834

 

(6,445

)

37,445

 

Total severance and closures

 

$

41,969

(1)

$

8,719

(2)

$

(10,600

)

$

40,088

 

 

 

 

Liability as of
January 1,
2003

 

Net Provision
for the Nine
Months Ended
September 30,
2003

 

Payments during
the Nine
Months Ended
September 30,
2003

 

Liability as of
September 30,
2003

 

Severance and closures:

 

 

 

 

 

 

 

 

 

Employee-related termination costs

 

$

5,100

 

$

3,061

 

$

(5,257

)

$

2,904

 

Termination of contracts

 

617

 

16

 

(114

)

519

 

Termination of leases related to office closures

 

41,626

 

271

 

(5,614

)

36,283

 

Total severance and closures

 

$

47,343

(1)

$

3,348

(2)

$

(10,985

)

$

39,706

 

 


(1)   Reduced for liabilities relating to discontinued operations totaling $1,256 and $2,091 at January 1, 2004 and 2003, respectively.

(2)   Adjusted to exclude net provisions related to discontinued operations totaling $388 and $883 for the nine months ended September 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, and most have been sublet. 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 2,042 individuals that they would be terminated under these plans.  As of September 30, 2004, all of these individuals have been terminated.

 

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 September 30, 2004 and December 31, 2003.

 

15



 

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 (loss)

 

Comprehensive income (loss) for the three and nine months ended September 30, 2004 and 2003 is presented in the following table:

 

 

 

Three Months Ended
September 30,

 

 

 

2004

 

2003

 

Net Income (loss)

 

$

8,740

 

$

(38,828

)

Other comprehensive income (loss):

 

 

 

 

 

Foreign currency translation adjustments

 

13

 

 

Total comprehensive income (loss)

 

$

8,753

 

$

(38,828

)

 

 

 

Nine Months Ended
September 30,

 

 

 

2004

 

2003

 

Net income

 

$

21,965

 

$

29,830

 

Other comprehensive income (loss):

 

 

 

 

 

Foreign currency translation adjustments

 

(3

)

24

 

Total comprehensive income

 

$

21,962

 

$

29,854

 

 

16



 

13.  Basic and diluted income (loss) per Common Share

 

Basic and diluted income (loss) per share have been computed as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

Basic income (loss) per share computation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

8,740

 

$

(38,828

)

$

21,965

 

$

29,830

 

Less: Preferred stock dividends and related accretion, net

 

2,551

 

4,845

 

13,505

 

36,856

 

 

 

 

 

 

 

 

 

 

 

Income (loss) applicable to common shareholders

 

$

6,189

 

$

(43,673

)

$

8,460

 

$

(7,026

)

 

 

 

 

 

 

 

 

 

 

Basic common shares outstanding

 

260,496,328

 

259,343,692

 

260,232,692

 

259,078,166

 

Basic income (loss) per share

 

$

0.02

 

$

(0.17

)

$

0.03

 

$

(0.03

)

 

 

 

 

 

 

 

 

 

 

Diluted income (loss) per share computation:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

8,740

 

$

(38,828

)

$

21,965

 

$

29,830

 

Less: Preferred stock dividends and related accretion, net

 

2,551

 

4,845

 

13,505

 

36,856

 

 

 

 

 

 

 

 

 

 

 

Income (loss) applicable to common shareholders

 

$

6,189

 

$

(43,673

)

$

8,460

 

$

(7,026

)

 

 

 

 

 

 

 

 

 

 

Basic common shares outstanding

 

260,496,328

 

259,343,692

 

260,232,692

 

259,078,166

 

Incremental shares for assumed exercise of securities

 

839,237

 

 

 

 

Unvested restricted stock

 

3,029,636

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted common shares outstanding

 

264,365,201

 

259,343,692

 

260,232,692

 

259,078,166

 

Diluted income (loss) per share

 

$

0.02

 

$

(0.17

)

$

0.03

 

$

(0.03

)

 

Stock options and warrants with exercise prices that exceeded the fair market value of the Company’s common stock had an antidilutive effect and, therefore, were excluded from the computation of diluted earnings per share. These securities that could potentially dilute basic EPS in the future consisted of approximately 36 million and 53 million stock options and warrants for the three and nine months ended September 30, 2004 and 2003, 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.

 

17



 

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 (formerly Education and Training, renamed to reflect the classification of the Workplace Learning division as discontinued operations).

 

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, events, licensing and merchandising, 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, the first of 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 segment consists of the businesses that provide content to schools, universities, government and other public institutions. It includes Channel One, a proprietary network to secondary schools, Films Media Group, a leading source in educational videos, and Interactive Medical Network, a continuing medical education business.

 

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 for each segment 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.

 

18



 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

Revenues, net:

 

 

 

 

 

 

 

 

 

Enthusiast Media

 

$

190,884

 

$

181,136

 

$

551,398

 

$

536,191

 

Consumer Guides

 

71,739

 

69,240

 

214,210

 

206,567

 

Business Information

 

48,641

 

47,281

 

161,651

 

161,326

 

Education

 

13,198

 

13,243

 

46,953

 

55,490

 

Intersegment Eliminations

 

(325

)

(810

)

(1,045

)

(4,784

)

Total

 

$

324,137

 

$

310,090

 

$

973,167

 

$

954,790

 

 

 

 

 

 

 

 

 

 

 

Segment EBITDA (1):

 

 

 

 

 

 

 

 

 

Enthusiast Media

 

$

42,560

 

$

36,580

 

$

114,823

 

$

102,748

 

Consumer Guides

 

19,747

 

20,805

 

59,901

 

59,376

 

Business Information

 

5,432

 

4,972

 

20,744

 

18,029

 

Education

 

(778

)

(1,798

)

1,332

 

8,784

 

Corporate Overhead

 

(6,992

)

(6,631

)

(20,689

)

(20,929

)

Total

 

$

59,969

 

$

53,928

 

$

176,111

 

$

168,008

 

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

Segment EBITDA (1):

 

$

59,969

 

$

53,928

 

$

176,111

 

$

168,008

 

Depreciation of property and equipment

 

8,819

 

13,763

 

27,653

 

35,116

 

Amortization of intangible assets and other

 

4,452

 

9,537

 

14,999

 

29,778

 

Severance related to separated senior executives

 

 

 

658

 

5,576

 

Non-cash compensation

 

1,344

 

770

 

4,830

 

2,793

 

Provision for severance, closures and restructuring related costs

 

1,926

 

448

 

8,719

 

3,348

 

Provision for unclaimed property

 

 

 

5,500

 

 

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

 

(293

)

(706

)

(243

)

625

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

43,721

 

$

30,116

 

$

113,995

 

$

90,772

 

 


(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

 

19



 

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 September 30, 2004 and December 31, 2003 and for the nine months ended September 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 nine months ended September 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.

 

20



 

PRIMEDIA INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

(UNAUDITED)

 

September 30, 2004

(dollars in thousands)

 

 

 

PRIMEDIA Inc.

 

Guarantor
Subsidiaries

 

Non-Guarantor
Subsidiaries

 

Eliminations

 

PRIMEDIA Inc.
and
Subsidiaries

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

7,850

 

$

12,161

 

$

22

 

$

 

$

20,033

 

Accounts receivable, net

 

 

174,673

 

8,569

 

 

183,242

 

Intercompany receivables

 

1,508,014

 

87,903

 

127,593

 

(1,723,510

)

 

Inventories

 

 

18,242

 

674

 

 

18,916

 

Prepaid expenses and other

 

3,569

 

23,802

 

5,660

 

 

33,031

 

Assets held for sale

 

 

24,152

 

15,865

 

 

40,017

 

Total current assets

 

1,519,433

 

340,933

 

158,383

 

(1,723,510

)

295,239

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

6,074

 

64,178

 

8,849

 

 

79,101

 

Investment in and advances to subsidiaries

 

508,335

 

 

 

(508,335

)

 

Other intangible assets, net

 

 

253,872

 

466

 

 

254,338

 

Goodwill

 

 

886,187

 

16,045

 

 

902,232

 

Other non-current assets

 

9,657

 

32,392

 

4,383

 

 

46,432

 

Total Assets

 

$

2,043,499

 

$

1,577,562

 

$

188,126

 

$

(2,231,845

)

$

1,577,342

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ DEFICIENCY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

6,514

 

$

73,926

 

$

2,302

 

$

 

$

82,742

 

Intercompany payables

 

864,123

 

122,078

 

737,309

 

(1,723,510

)

 

Accrued expenses and other

 

104,902

 

95,642

 

3,102

 

 

203,646

 

Deferred revenues

 

1,738

 

156,964

 

8,798