UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


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

For the quarterly period ended: June 30, 2006

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    o

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

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  
o    No  x

Number of shares of common stock, par value $.01 per share, of PRIMEDIA Inc. outstanding as of July 31, 2006: 264,125,126

 




PRIMEDIA Inc.

INDEX

Part I. Financial Information:

 

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

Condensed Consolidated Balance Sheets (Unaudited) as of June 30, 2006 and December 31, 2005

 

2

 

 

 

 

Condensed Statements of Consolidated Operations (Unaudited) for the three months ended June 30, 2006 and 2005

 

3

 

 

 

 

Condensed Statements of Consolidated Operations (Unaudited) for the six months ended June 30, 2006 and 2005

 

4

 

 

 

 

Condensed Statements of Consolidated Cash Flows (Unaudited) for the six months ended June 30, 2006 and 2005

 

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

 

51

 

 

Item 4.

 

Controls and Procedures

 

51

Part II. Other Information:

 

 

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

52

 

 

Item 6.

 

Exhibits

 

52

 

 

 

 

Signatures

 

53

 

 

1




PRIMEDIA INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except share and per share amounts)

 

 

June, 30

 

December 31,

 

 

 

2006

 

2005

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,233

 

 

$

7,255

 

 

Accounts receivable, net

 

127,003

 

 

134,773

 

 

Inventories

 

16,795

 

 

21,212

 

 

Prepaid expenses and other

 

44,854

 

 

29,722

 

 

Assets held for sale

 

89,565

 

 

109,129

 

 

Total current assets

 

282,450

 

 

302,091

 

 

Property and equipment (net of accumulated depreciation and amortization of $235,057 in 2006 and $226,600 in 2005)

 

53,843

 

 

56,868

 

 

Intangible assets, net

 

226,489

 

 

231,404

 

 

Goodwill

 

780,817

 

 

763,177

 

 

Other non-current assets

 

31,586

 

 

35,928

 

 

Total Assets

 

$

1,375,185

 

 

$

1,389,468

 

 

LIABILITIES AND SHAREHOLDERS’ DEFICIENCY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

56,112

 

 

$

52,984

 

 

Accrued expenses and other

 

113,759

 

 

122,319

 

 

Deferred revenues

 

112,183

 

 

107,940

 

 

Current maturities of long-term debt

 

3,866

 

 

7,677

 

 

Liabilities of businesses held for sale

 

21,491

 

 

33,203

 

 

Total current liabilities

 

307,411

 

 

324,123

 

 

Long-term debt

 

1,455,951

 

 

1,456,770

 

 

Deferred revenues

 

13,600

 

 

14,447

 

 

Deferred income taxes

 

88,991

 

 

87,655

 

 

Other non-current liabilities

 

72,664

 

 

78,202

 

 

Total Liabilities

 

1,938,617

 

 

1,961,197

 

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

Shareholders’ deficiency:

 

 

 

 

 

 

 

Common stock ($.01 par value, 350,000,000 shares authorized at June 30, 2006 and December 31, 2005; 272,384,069 and 272,158,878 shares issued at June 30, 2006 and December 31, 2005, respectively)

 

2,724

 

 

2,722

 

 

Additional paid-in capital (including warrants of $31,690

 

 

 

 

 

 

 

at June 30, 2006 and December 31, 2005)

 

2,365,519

 

 

2,363,071

 

 

Accumulated deficit

 

(2,855,798

)

 

(2,861,645

)

 

Common stock in treasury, at cost (8,442,409

 

 

 

 

 

 

 

shares at June 30, 2006 and December 31, 2005)

 

(75,877

)

 

(75,877

)

 

Total Shareholders’ Deficiency

 

(563,432

)

 

(571,729

)

 

Total Liabilities and Shareholders’ Deficiency

 

$

1,375,185

 

 

$

1,389,468

 

 

 

See notes to condensed consolidated financial statements (unaudited).

2




PRIMEDIA INC. AND SUBSIDIARIES
Condensed Statements of Consolidated Operations (Unaudited)
(in thousands, except share and per share amounts)

 

 

Three Months Ended June 30,

 

 

 

2006

 

2005

 

Revenues, net:

 

 

 

 

 

Advertising

 

$

161,795

 

$

167,468

 

Circulation

 

50,328

 

51,237

 

Other

 

41,344

 

36,897

 

Total revenues, net

 

253,467

 

255,602

 

Operating costs and expenses:

 

 

 

 

 

Cost of goods sold (exclusive of depreciation of property and equipment)

 

59,551

 

56,454

 

Marketing and selling

 

46,603

 

46,939

 

Distribution, circulation and fulfillment

 

48,842

 

47,140

 

Editorial

 

17,299

 

17,531

 

Other general expenses

 

30,898

 

31,419

 

Corporate administrative expenses (including non-cash compensation of $1,619 and $1,203 in 2006 and 2005, respectively)

 

9,129

 

8,326

 

Depreciation of property and equipment

 

7,674

 

6,845

 

Amortization of intangible assets and other

 

3,070

 

2,363

 

Provision for severance, closures and restructuring related costs

 

1,541

 

267

 

Loss on sale of businesses, net

 

28

 

 

Operating income

 

28,832

 

38,318

 

Other income (expense):

 

 

 

 

 

Interest expense

 

(21,457

)

(32,705

)

Interest on shares subject to mandatory redemption

 

 

(6,409

)

Amortization of deferred financing costs

 

(657

)

(1,184

)

Other income (expense), net

 

164

 

(4,840

)

Income (loss) from continuing operations before provision for income taxes

 

6,882

 

(6,820

)

Provision for income taxes

 

(3,277

)

(2,104

)

Income (loss) from continuing operations

 

3,605

 

(8,924

)

Discontinued operations, net of tax (including loss on sale of businesses, net of tax, of $40 and $716 in 2006 and 2005, respectively)

 

(5,720

)

13,935

 

Net income (loss)

 

$

(2,115

)

$

5,011

 

Basic income (loss) per common share:

 

 

 

 

 

Continuing operations

 

$

0.01

 

$

(0.03

)

Discontinued operations

 

(0.02

)

0.05

 

Net income (loss)

 

$

(0.01

)

$

0.02

 

Diluted income (loss) per common share:

 

 

 

 

 

Continuing operations

 

$

0.01

 

$

(0.03

)

Discontinued operations

 

(0.02

)

0.05

 

Net income (loss)

 

$

(0.01

)

$

0.02

 

Basic common shares outstanding (weighted average)

 

263,941,660

 

262,973,160

 

Diluted common shares outstanding (weighted average)

 

264,803,298

 

262,973,160

 

 

See notes to condensed consolidated financial statements (unaudited).

3




PRIMEDIA INC. AND SUBSIDIARIES
Condensed Statements of Consolidated Operations (Unaudited)
(in thousands, except share and per share amounts)

 

 

Six Months Ended June 30,

 

 

 

2006

 

2005

 

Revenues, net:

 

 

 

 

 

Advertising

 

$

315,926

 

$

318,345

 

Circulation

 

99,333

 

100,605

 

Other

 

85,130

 

71,091

 

Total revenues, net

 

500,389

 

490,041

 

Operating costs and expenses:

 

 

 

 

 

Cost of goods sold (exclusive of depreciation of property and equipment)

 

117,415

 

104,468

 

Marketing and selling

 

96,550

 

96,235

 

Distribution, circulation and fulfillment

 

97,897

 

93,500

 

Editorial

 

34,679

 

34,560

 

Other general expenses

 

64,397

 

63,523

 

Corporate administrative expenses (including non-cash compensation of $2,537 and $2,404 in 2006 and 2005, respectively)

 

16,474

 

16,043

 

Depreciation of property and equipment

 

14,613

 

13,131

 

Amortization of intangible assets and other

 

6,099

 

4,654

 

Provision for severance, closures and restructuring related costs

 

1,916

 

1,300

 

Loss on sale of businesses, net

 

28

 

 

Operating income

 

50,321

 

62,627

 

Other income (expense):

 

 

 

 

 

Interest expense

 

(52,281

)

(65,826

)

Interest on shares subject to mandatory redemption

 

 

(17,354

)

Amortization of deferred financing costs

 

(1,316

)

(2,518

)

Other income (expense), net

 

315

 

(4,178

)

Loss from continuing operations before provision for income taxes

 

(2,961

)

(27,249

)

Provision for income taxes

 

(2,128

)

(5,751

)

Loss from continuing operations

 

(5,089

)

(33,000

)

Discontinued operations, net of tax (including gain on sale of businesses, net of tax, of $13,668 and $382,462 in 2006 and 2005, respectively)

 

10,914

 

403,524

 

Cumulative effect of change in accounting principle (from the adoption of Statement of Financial Accoutning Standards No. 123 (R))

 

22

 

 

Net income

 

$

5,847

 

$

370,524

 

Basic and diluted income (loss) per common share:

 

 

 

 

 

Continuing operations

 

$

(0.02

)

$

(0.13

)

Discontinued operations

 

0.04

 

1.54

 

Net income

 

$

0.02

 

$

1.41

 

Basic and diluted common shares outstanding (weighted average)

 

263,857,382

 

262,817,408

 

 

See notes to condensed consolidated financial statements (unaudited).

4




PRIMEDIA INC. AND SUBSIDIARIES
Condensed Statements of Consolidated Cash Flows (Unaudited)
(in thousands)

 

 

Six Months Ended June 30,

 

 

 

2006

 

2005

 

Operating activities:

 

 

 

 

 

Net income

 

$

5,847

 

$

370,524

 

Cumulative effect of change in accounting principle

 

(22

)

 

Adjustments to reconcile net income to net cash provided by

 

928

 

(341,072

)

operating activities

 

 

 

 

 

Changes in operating assets and liabilities

 

3,621

 

(55,570

)

Net cash provided by (used in) operating activities

 

10,374

 

(26,118

)

Investing activities:

 

 

 

 

 

Additions to property, equipment and other

 

(10,767

)

(13,505

)

Proceeds from sales of businesses

 

17,000

 

431,306

 

Payments for businesses acquired, net of cash acquired

 

(15,813

)

(26,961

)

Net cash (used in) provided by investing activities

 

(9,580

)

390,840

 

Financing activities:

 

 

 

 

 

Borrowings under credit agreements

 

202,500

 

196,150

 

Repayments of borrowings under credit agreements

 

(142,500

)

(219,136

)

Payments for repurchases of senior notes

 

(62,094

)

(81,017

)

Proceeds from issuances of common stock

 

265

 

1,320

 

Redemption of Series D and F Exchangeable Preferred Stock

 

 

(264,494

)

Deferred financing costs paid

 

 

(62

)

Capital lease payments

 

(1,879

)

(2,697

)

Other

 

(108

)

(101

)

Net cash used in financing activities

 

(3,816

)

(370,037

)

Decrease in cash and cash equivalents

 

(3,022

)

(5,315

)

Cash and cash equivalents, beginning of period

 

7,255

 

13,000

 

Cash and cash equivalents, end of period

 

$

4,233

 

$

7,685

 

Supplemental information:

 

 

 

 

 

Cash interest paid, including interest on capital and restructured leases

 

$

64,718

 

$

68,740

 

Cash interest paid on shares subject to mandatory redemption

 

$

 

$

23,735

 

Cash taxes paid, net of refunds received

 

$

4,740

 

$

232

 

Cash paid for severence, closures and restructuring related costs

 

$

2,715

 

$

5,986

 

Businesses acquired:

 

 

 

 

 

Fair value of assets acquired

 

$

15,544

 

$

27,151

 

(Liabilities assumed) net of deferred purchase price payments

 

269

 

(190

)

Payments for businesses acquired, net of cash acquired

 

$

15,813

 

$

26,961

 

 

See notes to condensed consolidated financial statements (unaudited).

5




PRIMEDIA INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and 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” unless the context implies otherwise. In the opinion of the Company’s management, the condensed consolidated financial statements present fairly the consolidated financial position of the Company as of June 30, 2006 and December 31, 2005 the results of consolidated operations of the Company for the three and six months ended June 30, 2006 and 2005 and consolidated cash flows of the Company for the six months ended June 30, 2006 and 2005. The adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The condensed consolidated balance sheet as of December 31, 2005 has been derived from the Company’s audited consolidated balance sheet included in the Company’s annual report on Form 10-K for the year ended December 31, 2005. 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, 2005, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. The operating results for the three and six months ended June 30, 2006 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 due to discontinued operations to conform to the presentation as of and for the three and six months ended June 30, 2006.

Stock-Based Compensation

The Company has a stock based employee compensation plan which is described in Note 9. Prior to January 1, 2006, the Company accounted for stock based compensation using the Financial Accounting Standards Board’s Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148, “Accounting for Stock Based Compensation Transition and Disclosure”, under 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. Effective January 1, 2006, the Company adopted the provisions of, and account for stock-based compensation in accordance with SFAS No. 123—revised 2004 (“SFAS No. 123(R)”), “Share-Based Payment”, which replaced SFAS No. 123 and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. The Company elected the modified prospective method, under which prior periods are not revised for comparative purposes. The modified prospective transition method requires recognition of compensation expense from the beginning of the fiscal period in which the recognition provisions are first applied as if the fair-value-based accounting method had been used to account for all employees awards granted, modified, or settled after the effective date and to any awards that were not fully vested as of the effective date. The adoption of SFAS No. 123(R) did not have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

6




Recent Accounting Pronouncements

In July of 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, effective for fiscal years beginning after December 15, 2006. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also requires entities to make further disclosures about uncertainties in their income tax position, and to include a rollforward of the tax benefits taken that do not qualify for financial statement recognition. The Company is in the process of assessing the impact of this Interpretation on its financial statements.

2.   Divestitures

The Company has classified the results of certain divested entities as discontinued operations in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.

On March 18, 2005, the Company completed the sale of About.com, part of the Enthusiast Media segment, the results of which have been classified as discontinued operations for the period up to the date of sale. Gross proceeds from the sale of approximately $410,600 were used to reduce the Company’s borrowings under its revolving bank credit facilities and for general corporate purposes. The Company recorded a net gain on the sale of About.com of $378,906 included in discontinued operations for the six months ended June 30, 2005.

On March 31, 2005, the Company completed the sale of Bankers Training & Consulting Company, the financial services division of Workplace Learning in the Education segment. On April 1, 2005, the Company sold the remaining net assets of Workplace Learning for the assumption of liabilities. The Company recorded a net gain/(loss) of $(740) and $3,558 included in discontinued operations for the three and six months ended June 30, 2005, respectively. The operating results of Workplace Learning have been classified as discontinued operations for the period up to the date of sale.

On September 30, 2005, the Company sold its Business Information Segment for approximately $385,000, and during the fourth quarter of 2005, the Company sold Ward’s Automotive Group (“Ward’s”). The operating results of the Business Information segment, including Ward’s, have been classified as discontinued operations for the periods up to the date of sale. Additionally, during the third quarter of 2005, the Company discontinued the operations of two magazines in the Enthusiast Media segment. Their operating results have been classified as discontinued operations for the period up to the date the two magazines were discontinued. The net proceeds from these sales are subject to routine post-closing adjustments.

During the fourth quarter of 2005, the Company decided to pursue the sales of its Crafts and History groups, part of the Enthusiast Media segment, and discontinue the operations of its Software on Demand division, part of the Education segment. The operating results of these operations have been classified as discontinued operations for all periods presented.

In February of 2006, the Company completed the sale of the History group for $17,000, resulting in a net gain of approximately $13,700. The sale of this group reflects the Company’s increased focus on growing its properties that reach the valuable 18-34 male demographic. The net proceeds from this sale are subject to routine post-closing adjustments.

In the first quarter 2006, the Company decided to actively pursue the sale of its Films Media Group (“FMG”) included in the Education Segment. The operations of FMG were classified as discontinued operations for all periods presented. Subsequently, the Company actively solicited, but ultimately did not receive any reasonable offers to purchase FMG. The Company concluded that the offers did not reflect

7




FMG’s financial potential and as a result, decided to hold and continue to operate FMG. In addition, the Company hired new management to operate FMG. Consequently, in the second quarter of 2006, the operations of FMG have been reclassified to continuing operations for all periods presented and are included in the Education Segment results.

Total revenues, net, and income before provision for income taxes included in discontinued operations on the accompanying condensed statements of consolidated operations are as follows:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Total revenues, net

 

$

15,787

 

$

83,994

 

$

29,884

 

$

171,656

 

Income (loss) before provision for income taxes

 

$

(3,747

)

$

14,939

 

$

(2,417

)

$

21,614

 

 

Income (loss) before provision for income taxes above excludes losses on sale of businesses, net of tax, of $40 and $716 for the three months ended June 30, 2006 and 2005, respectively. Income (loss) before provision for income taxes above excludes gains on sale of businesses, net of tax, of $13,668 and $382,462 for the six months ended June 30, 2006 and 2005, respectively.

Held for Sale

The assets and liabilities of businesses which the Company has initiated plans to sell, but had not sold, as of June 30, 2006 and December 31, 2005, have been reclassified to held for sale on the accompanying condensed consolidated balance sheets. As of June 30, 2006, this represents the assets and liabilities of the Crafts group. As of December 31, 2005, this represents the assets and liabilities of the Crafts and History groups.

 

 

June 30,
2006

 

December 31,
2005

 

ASSETS

 

 

 

 

 

 

 

Accounts receivable, net

 

$

8,363

 

 

$

12,994

 

 

Inventories

 

1,236

 

 

1,273

 

 

Prepaid expenses and other

 

1,706

 

 

883

 

 

Property and equipment, net

 

365

 

 

1,617

 

 

Intangible assets

 

2,532

 

 

5,148

 

 

Goodwill

 

74,291

 

 

87,214

 

 

Other non-current assets

 

1,072

 

 

 

 

Assets held for sale

 

$

89,565

 

 

$

109,129

 

 

LIABILITIES

 

 

 

 

 

 

 

Accounts payable

 

$

4,194

 

 

$

3,929

 

 

Accrued expenses and other

 

1,149

 

 

1,085

 

 

Deferred revenues—current

 

16,131

 

 

28,189

 

 

Other non-current liabilities

 

17

 

 

 

 

Liabilities of businesses held for sale

 

$

21,491

 

 

$

33,203

 

 

 

3.   Acquisitions

Automotive.com—Forward Agreement

On November 15, 2005, the Company purchased Automotive.com, Inc. (“Automotive.com”). PRIMEDIA and the minority shareholders entered into a forward agreement through which PRIMEDIA will purchase the remaining 20% of Automotive.com’s stock within a short period of time after the 2008 audit date, or if the forward agreement is extended, the 2009 audit date (early 2010). The settlement price

8




of the forward agreement is based on a measure of Automotive.com’s earnings in the fiscal year prior to settlement.

For accounting purposes, the forward agreement was bifurcated into the components relating to the Chief Executive Officer (“CEO”) of Automotive.com and the other minority shareholders. The estimated fair value of the deferred purchase price is measured quarter-to-quarter as a charge or credit to interest expense, except for the estimated amount payable to Automotive.com’s CEO, which is shown as non-cash compensation included in Enthusiast Media Segment EBITDA.

The component relating to the CEO was measured at intrinsic value for the one and one half months remaining in 2005 following the transaction date. On January 1, 2006, PRIMEDIA adopted the provisions of SFAS No. 123(R) (see Note 9), which requires that the portion of the forward agreement relating to the CEO be recorded as a liability and measured at fair value. The initial recognition of the liability, as of January 1, 2006, totaling $330, was recorded as a portion of the cumulative effect of an accounting change (due to the adoption of SFAS No. 123(R)). The liability measured on June 30, 2006 was $811 resulting in a reduction of compensation expense of $138 for the three months ended June 30, 2006, and an increase of compensation expense of $481 for the six months ended June 30, 2006.

The component of the forward agreement relating to the other minority shareholders was recorded as a liability at fair value as of the transaction date and an adjustment to the purchase price. On June 30, 2006, fair value of this liability was $11,639, resulting in a reduction to interest expense of $11,059 and $12,041 for the three and six months ended June 30, 2006, respectively.

RentClicks

In January 2006, the Consumer Guides segment acquired the assets of RentClicks for approximately $12,700 in cash and a potential earnout consideration. The amount of the earnout consideration will be charged to goodwill when and if it is earned and is based on a measure of RentClicks’ earnings for 2006. The Company is in the process of finalizing the purchase price allocation.

4.   Accounts Receivable, Net

Accounts receivable, net, consisted of the following:

 

 

June 30,

 

December 31,

 

 

 

2006

 

2005

 

Accounts receivable

 

$

137,542

 

 

$

146,289

 

 

Allowance for doubtful accounts

 

(7,662

)

 

(8,256

)

 

Allowance for returns and rebates

 

(2,877

)

 

(3,260

)

 

 

 

$

127,003

 

 

$

134,773

 

 

 

5.   Inventories

Inventories consisted of the following:

 

 

June 30,

 

December 31,

 

 

 

2006

 

2005

 

Raw materials

 

$

12,016

 

 

$

17,895

 

 

Work in process

 

47

 

 

125

 

 

Finished goods

 

4,732

 

 

3,192

 

 

 

 

$

16,795

 

 

$

21,212

 

 

 

9




6.   Goodwill, Other Intangible Assets and Other

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, the Company assesses goodwill and indefinite lived intangible assets for impairment at least once a year. The Company has established October 31 as its annual impairment test date. In addition to the annual impairment test, an assessment is also required whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For the six months ended June 30, 2006 and 2005, 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.

With the adoption of SFAS No. 142, the Company no longer amortizes the book basis in the indefinite-lived intangibles, but continues to amortize these intangibles for tax purposes. For the three months ended June 30, 2006 and 2005, provision for income taxes primarily consisted of deferred income taxes of $3,905 and $2,019, respectively, and for the six months ended June 30, 2006 and 2005, $6,674 and $5,597, respectively. The Company expects that it will record a total of approximately $7,800, to increase deferred tax liabilities during the remainder of 2006.

Changes in the carrying amount of goodwill for the six months ended June 30, 2006, by operating segment, are as follows:

 

 

Enthusiast
Media

 

Consumer
Guides

 

Total

 

Balance as of January 1, 2006

 

 

$

650,510

 

 

$

112,667

 

$

763,177

 

Purchase price adjustments for valuation reports

 

 

11

 

 

651

 

662

 

Adjustment to goodwill allocated to assets held for sale

 

 

5,477

 

 

 

5,477

 

Goodwill acquired related to the acquisition of businesses

 

 

 

 

13,624

 

13,624

 

Goodwill written off related to the sale of businesses

 

 

(2,123

)

 

 

(2,123

)

Balance as of June 30, 2006

 

 

$

653,875

 

 

$

126,942

 

$

780,817

 

 

Intangible assets subject to amortization in accordance with SFAS No. 142 consist of the following:

 

 

 

 

June 30, 2006

 

December 31, 2005

 

 

 

Range
of Lives

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net

 

Membership, subscriber and customer lists

 

 

2-20

 

 

$

194,366

 

 

$

168,143

 

 

$

26,223

 

$

194,926

 

 

$

166,553

 

 

$

28,373

 

Advertiser lists

 

 

4-20

 

 

95,234

 

 

79,026

 

 

16,208

 

96,065

 

 

79,418

 

 

16,647

 

Other

 

 

1-20

 

 

92,421

 

 

82,798

 

 

9,623

 

109,894

 

 

97,945

 

 

11,949

 

 

 

 

 

 

 

$

382,021

 

 

$

329,967

 

 

$

52,054

 

$

400,885

 

 

$

343,916

 

 

$

56,969

 

 

Intangible assets not subject to amortization had a carrying value of $174,435 (excluding intangible assets classified as assets held for sale) at June 30, 2006 and December 31, 2005, and consisted primarily of trademarks. Amortization expense for other intangible assets still subject to amortization was $2,906 and $2,013 for the three months ended June 30, 2006 and 2005, respectively, and $5,775 and $3,959 for the six months ended June 30, 2006 and 2005, respectively. Amortization of deferred wiring costs of $164 and $350 for the three months ended June 30, 2006 and 2005, respectively, and $324 and $695 for the six months ended June 30, 2006 and 2005, respectively, is also included in amortization of intangible assets and other on the accompanying condensed statements of consolidated operations. At June 30, 2006, estimated future amortization expenses of other intangible assets still subject to amortization, excluding deferred wiring costs, are as follows: approximately $6,000 for the remainder of 2006 and approximately $10,000, $7,000, $5,000 and $5,000 for 2007, 2008, 2009 and 2010, respectively.

10




7.   Accrued Expenses and Other

Accrued expenses and other current liabilities consisted of the following:

 

 

June 30,

 

December 31,

 

 

 

2006

 

2005

 

Payroll, commissions and related employee benefits

 

$

22,944

 

 

$

30,333

 

 

Rent and lease liabilities

 

6,661

 

 

5,643

 

 

Retail display costs and allowances

 

9,324

 

 

11,450

 

 

Royalties

 

1,981

 

 

2,337

 

 

Circulation costs

 

3,891

 

 

5,399

 

 

Professional fees

 

3,145

 

 

2,943

 

 

Taxes

 

17,956

 

 

19,475

 

 

Deferred purchase price

 

2,690

 

 

2,724

 

 

Interest payable

 

13,010

 

 

13,794

 

 

Other

 

32,157

 

 

28,221

 

 

 

 

$

113,759

 

 

$

122,319

 

 

 

8.   Long-term Debt

Long-term debt consisted of the following:

 

 

June 30,

 

December 31,

 

 

 

2006

 

2005

 

Borrowings under bank credit facilities

 

$

573,000

 

 

$

513,000

 

 

87¤8% Senior Notes Due 2011

 

408,262

 

 

471,013

 

 

8% Senior Notes Due 2013

 

300,000

 

 

300,000

 

 

Senior Floating Rate Notes Due 2010

 

175,000

 

 

175,000

 

 

 

 

1,456,262

 

 

1,459,013

 

 

Obligation under capital leases

 

3,555

 

 

5,434

 

 

 

 

1,459,817

 

 

1,464,447

 

 

Less: Current maturities of long-term debt

 

3,866

 

 

7,677

 

 

 

 

$

1,455,951

 

 

$

1,456,770

 

 

 

In the first quarter of 2006, the Company redeemed $7,025 principal amount of its 87¤8% Senior Notes due May 15, 2011 in three different transactions for $6,832 plus $200 of accrued interest.  In the second quarter of 2006, the Company redeemed $56,615 principal amount of its 87¤8% Senior Notes due May 15, 2011 in six different transactions for $55,262 plus $400 of accrued interest. As a result of these transactions, the Company recorded a gain of $282 and $336 net of the write-off of unamortized deferred financing costs and bond discount for the three and six months ended June 30, 2006, respectively. This gain is included in the other income (expense), net line on the accompanying condensed statements of consoldiated operations.

Under the most restrictive covenants as defined in the bank credit facilities agreement, as amended on September 30, 2005, the Company must maintain a minimum interest coverage ratio, as defined, of 1.75 to 1 and a minimum fixed charge coverage ratio, as defined, of 1.05 to 1. The maximum allowable debt leverage ratio, as defined in the bank credit facilities, is 6.25 to 1 and decreases to 6.00 to 1 on October 1, 2007. The Company is in compliance with all of the financial and operating covenants of its financing arrangements.

The Senior Floating Rate Notes bear interest equal to the three-month LIBOR plus 5.375% per year. The interest rate of the Senior Floating Rate Notes was 10.545% at June 30, 2006.

9.   Share-Based Compensation Plans

Accounting Prior to Adoption of SFAS No. 123(R)

Prior to January 1, 2006, the Company accounted for stock based compensation using SFAS No. 123 under the prospective method. Upon adoption on January 1, 2003, the Company began expensing the fair

11




value of stock-based compensation for all grants, modifications or settlements made on or after January 1, 2003. The company adopted SFAS No. 123(R) on January 1, 2006.

The PRIMEDIA Inc. 1992 Stock Purchase and Option Plan, as amended (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 45,000,000 shares of the Company’s common stock or options to management personnel.

Stock options are generally granted with exercise prices at or above quoted market value at time of issuance. Most of the options are exercisable at the rate of 20%-33% per year commencing on the effective date of the grant. Options granted pursuant to the Stock Option Plan will expire no later than ten years from the date the option was granted. The grant date fair value is calculated using the Black-Scholes pricing model.

Summary of Impact of SFAS No. 123(R)

Under the fair value recognition provisions of SFAS No. 123(R), stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. The Company elected the modified prospective method, under which prior periods are not revised for comparative purposes. The modified prospective transition method requires recognition of compensation expense from the beginning of the fiscal period in which the recognition provisions are first applied as if the fair-value-based accounting method had been used to account for all employees awards granted, modified, or settled after the effective date and to any awards that were not fully vested as of the effective date.

Upon adoption of SFAS No. 123(R), the Company recorded an increase in net income of $352 as a portion of the cumulative effect of change in accounting principle due to SFAS No. 123(R)’s requirement to apply an estimated forfeiture rate to unvested awards (previously the Company recognized forfeitures when occurred) and a reduction to net income of $330 as a portion of the cumulative effect of change in accounting principle as described in Note 3.  The adoption of SFAS No. 123(R) did not have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

Pro Forma Disclosure for the Three and Six Months Ended June 30, 2005

Pro forma information regarding net income and earnings per share is required by SFAS No. 123(R), 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. The fair value of these options was estimated at the date of grant using the Black-Scholes pricing model with assumptions noted in the Stock Options section below.

 

 

Three Months

 

Six Months

 

 

 

Ended

 

Ended

 

 

 

June 30, 2005

 

June 30, 2005

 

Reported net income

 

 

$

5,011

 

 

 

$

370,524

 

 

Add: stock-based employee compensation expense included in reported net income

 

 

586

 

 

 

1,152

 

 

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

 

 

(1,701

)

 

 

(3,471

)

 

Pro forma net income

 

 

$

3,896

 

 

 

$

368,205

 

 

Per common share:

 

 

 

 

 

 

 

 

 

Reported basic and diluted income

 

 

$

0.02

 

 

 

$

1.41

 

 

Pro forma basic and diluted income

 

 

$

0.01

 

 

 

$

1.40

 

 

 

12




Fair Value Calculations by Award

Stock Options

The fair value of each option award was estimated at the date of grant using the Black-Scholes pricing model that uses the assumptions noted in the following table. Because the Black-Scholes pricing model incorporates ranges of assumptions for inputs, those ranges are disclosed. Expected volatilities are based on historical volatilities of the Company’s stock. The Company uses historical data to estimate option exercises and employee terminations within the valuation model. The expected term of options granted is derived from the historical exercise behavior of employees and represents the period of time that options granted are expected to be outstanding. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2006

 

2005

 

Expected volatility

 

63.63

%

72.31%–75.3

0%

Weighted-average volatility

 

63.63

%

72.39

%

Expected dividends

 

 

 

Expected term (in years)

 

3

 

3

 

Risk-free rate

 

4.95

%

3.63%–3.9

6%

 

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. The Company’s employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate of its employee stock options.

A summary of the company’s stock options award activity as of June 30, 2006 and changes during the six months ended June 30, 2006 is presented below:

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

Weighted Average

 

remaining

 

 

 

Options

 

    Exercise Price    

 

Contractual Term

 

Outstanding at January 1, 2006

 

20,712,058

 

 

$

7.65

 

 

 

 

 

 

 

Granted

 

4,000

 

 

1.89

 

 

 

 

 

 

 

Exercised

 

(19,000

)

 

1.85

 

 

 

 

 

 

 

Expired

 

(265,949

)

 

3.24

 

 

 

 

 

 

 

Forfeited

 

(127,332

)

 

6.07

 

 

 

 

 

 

 

Outstanding at June 30, 2006

 

20,303,777

 

 

7.70

 

 

 

4

 

 

 

Exercisable at June 30, 2006

 

18,775,165

 

 

7.93

 

 

 

4

 

 

 

 

The weighted-average fair value per option for options granted during the six months ended June 30, 2006 was $0.87. Cash received from the exercise of stock options during the six months ended June 30, 2006 was $35. No options were settled in cash during the three and six months ended June 30, 2006.

The Company’s policy for attributing the value of graded vested share-based compensation awards is on a straight-line basis over the requisite service period for the entire award. As of June 30, 2006, there was $760 of total unrecognized compensation cost related to unvested stock options. The cost is expected to be recognized over a weighted average period of less than 1 year.

13




Nonvested shares

The weighted average fair value of nonvested shares granted in the six months ended June 30, 2005 was $3.48.

A summary of the Company’s nonvested shares award activity as of June 30, 2006 and changes during the six months ended June 30, 2006 is presented below:

 

 

 

 

Weighted Average

 

 

 

Number of

 

Grant-Date

 

 

 

Shares

 

Fair Value

 

Nonvested Shares at January 1, 2006

 

 

804,500

 

 

 

$

2.95

 

 

Vested

 

 

(43,963

)

 

 

$

2.97

 

 

Forfeited

 

 

(3,333

)

 

 

$

2.90

 

 

Nonvested Shares at June 30, 2006

 

 

757,204

 

 

 

$

2.95

 

 

 

As of June 30, 2006, there were $1,322 of total unrecognized compensation cost related to nonvested shares. The cost is expected to be recognized over a weighted average period of 1 year.

The total fair value of shares vested during the six months ended June 30, 2006 was $131.

The Company had reserved approximately 9,791,921 shares of the Company’s common stock for future grants in connection with the Stock Option Plan at June 30, 2006.

Employee Stock Purchase Plan (“ESPP”)

Effective January 1, 2006, the ESPP was amended to provide that the purchase price of shares through the ESPP is 95% of the closing stock price on the last day of the offering period. Due to the amendment, the ESPP became non-compensatory and thus no charges were recorded for the three and six months ended June 30, 2006. ESPP non-cash compensation for the three and six months ended June 30, 2005 did not have a material impact on the Company’s statements of consolidated operations. In January 2006, the Company issued 170,054 shares purchased under the ESPP during the offering period of the six months ended December 31, 2005.

The Company had reserved approximately 2,564,000 shares of the Company’s common stock for future grants in connection with the ESPP at June 30, 2006.

Non-Cash Compensation

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Nonvested shares(1)

 

 

$

345

 

 

 

$

617

 

 

$

737

 

$

1,252

 

Share Based Compensation (SFAS 123(R) and SFAS 123)(2)

 

 

1,274

 

 

 

586

 

 

1,800

 

1,152

 

Total

 

 

$

1,619

 

 

 

$

1,203

 

 

$

2,537

 

$

2,404

 


(1)          The Company recognized non-cash compensation charges related to the Company’s grants of nonvested shares to certain executives during 2003, 2004 and 2005. These grants are being expensed ratably over their related vesting periods.

(2)          In accordance with SFAS No. 123R in 2006 and SFAS No. 123 in 2005, the Company recorded a non-cash compensation charge relating to stock options in both 2006 and 2005 and the PRIMEDIA ESPP in 2005.

14




10.   Provision for Severance, Closures and Restructuring Related Costs

In 2006, the Company began new cost reduction initiatives to streamline operations, reduce layers of management and consolidate real estate.

Details of the new initiatives implemented and the payments made related to both the new and previously implemented plans during the six months ended June 30, 2006 and 2005 are presented in the following tables:

 

 

 

 

Net Provision

 

Payments

 

 

 

 

 

 

 

for the Six

 

during the Six

 

 

 

 

 

Liability as of

 

Months Ended

 

Months Ended

 

Liability as of

 

 

 

January 1,

 

June 30,

 

June 30,

 

June 30,

 

 

 

2006

 

2006

 

2006

 

2006

 

Severance and closures:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee-related termination costs

 

 

$

245

 

 

 

$

1,577

 

 

 

$

(771

)

 

 

$

1,051

 

 

Termination of leases related to office
closures

 

 

29,228

 

 

 

339

 

 

 

(1,944

)

 

 

27,623

 

 

Total severance and closures

 

 

$

29,473

 

 

 

$

1,916

 

 

 

$

(2,715

)

 

 

$

28,674

 

 

 

 

 

 

 

Net Provision

 

Payments

 

 

 

 

 

 

 

for the Six

 

during the Six

 

 

 

 

 

Liability as of

 

Months Ended

 

Months Ended

 

Liability as of

 

 

 

January 1,

 

June 30,

 

June 30,

 

June 30,

 

 

 

2005

 

2005

 

2005

 

2005

 

Severance and closures:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee-related
termination costs

 

 

$

1,501

 

 

 

$

1,381

 

 

 

$

(2,052

)

 

 

$

830

 

 

Termination of leases related to office closures

 

 

34,450

 

 

 

(81

)

 

 

(2,985

)

 

 

31,384

 

 

Total severance and closures

 

 

$

35,951

(1)

 

 

$

1,300

(2)

 

 

$

(5,037

)

 

 

$

32,214

 

 


(1) Reduced for liabilities relating to discontinued operations totaling $1,874 at January 1, 2005.

(2) Adjusted to exclude net provisions related to discontinued operations totaling $7 for the six months ended June 30, 2005.

The remaining liability related to real estate lease commitments for space that the Company no longer occupies, is expected to be paid through 2015. To reduce the lease related costs, the Company has aggressively pursued subleases of its available office space. These leases have been recorded at their net present value amounts and are net of sublease income amounts. The Company evaluates the appropriateness of its reserves on a quarterly basis.

As a result of the implementation of this new plan, the Company has closed 3 office location and has terminated a total of 67 individuals.

Liabilities of $4,992 and $3,972 representing the current portion of the provision for severance, closures and restructuring related costs are included in accrued expenses and other on the condensed consolidated balance sheets as of June 30, 2006 and December 31, 2005, respectively. Liabilities of $23,682 and $25,501 representing the non-current portion of the provision for severance, closures and restructuring related costs are included in other non-current liabilities on the condensed consolidated balance sheets as of June 30, 2006 and December 31, 2005, respectively.

15




For purposes of the Company’s bank credit facility and Senior Note agreements, the provision for severance, closures and restructuring related costs is excluded from the Company’s calculation of consolidated EBITDA.

11.   Income (Loss) per Common Share

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

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Basic income (loss) per share computation:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(2,115

)

$

5,011

 

$

5,847

 

$

370,524

 

Weighted average number of common shares outstanding

 

263,941,660

 

262,973,160

 

263,857,382

 

262,817,408

 

Basic income (loss) per share

 

$

(0.01

)

$

0.02

 

$

0.02

 

$

1.41

 

Diluted income (loss) per share computation:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(2,115

)

$

5,011

 

$

5,847

 

$

370,524

 

Weighted average number of common shares outstanding

 

263,941,660

 

262,973,160

 

263,857,382

 

262,817,408

 

Incremental shares for assumed exercise of securities

 

104,434

 

 

 

 

Unvested restricted stock

 

757,204

 

 

 

 

Total shares

 

264,803,298

 

262,973,160

 

263,857,382

 

262,817,408

 

Diluted income (loss) per share

 

$

(0.01

)

$

0.02

 

$

0.02

 

$

1.41

 

 

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 shares. The securities that could potentially dilute basic earnings per share in the future consist of approximately 9,870,000 warrants and 20,303,777 stock options at June 30, 2006.

12.   Commitments and 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 effect on the condensed consolidated financial statements of the Company.

In 2005, the Company sold the remaining net assets of Workplace Learning for the assumption of liabilities, however, the Company retained a secondary liability regarding the Carrolton, TX building lease and a lease for satellite time. At the time of the sale the Company received a third party guarantee of up to $10,000 against those lease obligations to reimburse the Company for lease payments made.

In 2006, the Company made certain lease payments on behalf of Workplace Learning pursuant to its secondary liability. During the second quarter of 2006, the Company determined that it was probable that the Company would be responsible for the lease payments. As a result, as of June 30, 2006, the Company recorded a receivable of $10,000 included in prepaid expenses and other current assets for the amount due from the third party guarantor, and a total liability of $15,584 for the fair value of the future lease payments, net of estimated sublease income, on the accompanying condensed consolidated balance sheet.

16




During the second quarter of 2006, the Company recorded a related provision in discontinued operations of $5,584 and a charge to discontinued operations of $1,643 for the net lease payments made by the Company prior to June 30, 2006.

13.   Business Segment Information

The Company’s products compete primarily in the United States, in three principal segments: Enthusiast Media, Consumer Guides and Education. PRIMEDIA believes that this structure aligns its businesses to provide a clearer sense of its strategic focus and operating performance.

The Enthusiast Media segment produces and distributes content through magazines and via the Internet to consumers in various niche and enthusiast markets. It connects buyers and sellers through the Company’s consumer magazine brands, Internet, events, television, radio, licensing and merchandising.

The Consumer Guides segment is the nation’s largest publisher and distributor of free publications, including Apartment Guide, New Home Guide and Auto Guide and operates related Internet sites.

The Education segment consists of Channel One, a proprietary network to secondary schools, Films Media Group and PRIMEDIA Healthcare, a continuing medical education business.

The following information 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.

Information regarding the operations of the Company in different business segments is set forth below based primarily on the nature of the targeted audience. Corporate represents items not allocated to other business segments. PRIMEDIA evaluates performance based on several factors, of which the primary financial measure is segment earnings before interest, taxes, depreciation, amortization and other charges (income) (“Segment EBITDA”). Other charges (income) include non-cash compensation, provision for severance, closures and restructuring related costs and loss on sale of businesses and other, net.

17




 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

       2006       

 

       2005       

 

       2006       

 

       2005       

 

Revenues, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Enthusiast Media

 

 

$

157,706

 

 

 

$

157,849

 

 

 

$

307,834

 

 

 

$

297,854

 

 

Consumer Guides

 

 

81,283

 

 

 

79,471

 

 

 

162,685

 

 

 

155,119

 

 

Education

 

 

14,516

 

 

 

18,352

 

 

 

29,985

 

 

 

37,235

 

 

Intersegment Eliminations

 

 

(38

)

 

 

(70

)

 

 

(115

)

 

 

(167

)

 

Total

 

 

$

253,467

 

 

 

$

255,602

 

 

 

$

500,389

 

 

 

$

490,041

 

 

Segment EBITDA: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Enthusiast Media

 

 

$

32,635

 

 

 

$

35,115

 

 

 

$

53,682

 

 

 

$

55,917

 

 

Consumer Guides

 

 

18,175

 

 

 

17,912

 

 

 

35,910

 

 

 

36,155

 

 

Education

 

 

(522

)

 

 

3,105

 

 

 

(111

)

 

 

5,708

 

 

Corporate Overhead

 

 

(7,524

)

 

 

(7,136

)

 

 

(13,967

)

 

 

(13,664

)

 

Total Segment EBITDA

 

 

$

42,764

 

 

 

$

48,996

 

 

 

$

75,514

 

 

 

$

84,116

 

 

Depreciation, amortization and other charges:(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Enthusiast Media

 

 

$

5,991

 

 

 

$

4,696

 

 

 

$

11,914

 

 

 

$

9,231

 

 

Consumer Guides

 

 

3,965

 

 

 

2,707

 

 

 

7,093

 

 

 

5,254

 

 

Education

 

 

2,047

 

 

 

1,958

 

 

 

3,002

 

 

 

3,904

 

 

Corporate overhead

 

 

1,929

 

 

 

1,317

 

 

 

3,184

 

 

 

3,100

 

 

 

 

 

$

13,932

 

 

 

$

10,678

 

 

 

$

25,193

 

 

 

$

21,489

 

 

Operating income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Enthusiast Media

 

 

$

26,644

 

 

 

$

30,419

 

 

 

$

41,768

 

 

 

$

46,686

 

 

Consumer Guides

 

 

14,210

 

 

 

15,205

 

 

 

28,817

 

 

 

30,901

 

 

Education

 

 

(2,569

)

 

 

1,147

 

 

 

(3,113

)

 

 

1,804

 

 

Corporate

 

 

(9,453

)

 

 

(8,453

)

 

 

(17,151

)

 

 

(16,764

)

 

Total

 

 

$

28,832

 

 

 

$

38,318

 

 

 

$

50,321

 

 

 

$

62,627

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense (3)

 

 

(21,457

)

 

 

(32,705

)

 

 

(52,281

)

 

 

(65,826

)

 

Interest on shares subject to mandatory redemption (4)

 

 

 

 

 

(6,409

)

 

 

 

 

 

(17,354

)

 

Amortization of deferred financing costs

 

 

(657

)

 

 

(1,184

)

 

 

(1,316

)

 

 

(2,518

)

 

Other income (expense), net

 

 

164

 

 

 

(4,840

)

 

 

315

 

 

 

(4,178

)

 

Income (loss) from continuing operations before provision for income taxes

 

 

6,882

 

 

 

(6,820

)

 

 

(2,961

)

 

 

(27,249

)

 

Provision for income taxes

 

 

(3,277

)

 

 

(2,104

)

 

 

(2,128

)

 

 

(5,751

)

 

Discontinued operations (5)

 

 

(5,720

)

 

 

13,935

 

 

 

10,914

 

 

 

403,524

 

 

Cumulative effect of change in accounting principle (from the adoption of SFAS 123(R))

 

 

 

 

 

 

 

 

22

 

 

 

 

 

Net income (loss)

 

 

$

(2,115

)

 

 

$

5,011

 

 

 

$

5,847

 

 

 

$

370,524

 

 


(1)          Segment EBITDA represents the segments’ earnings before interest, taxes, depreciation, amortization and other charges (income) (see Note 2 below). Segment EBITDA is not intended to be 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. Segment EBITDA is presented herein because the Company’s chief operating decision maker evaluates and measures each business unit’s performance based on its Segment EBITDA results. PRIMEDIA believes that Segment EBITDA is an accurate indicator of its segments’ results, because it focuses on

18




revenue and operating cost items driven by each operating managers’ performance, and excludes items largely outside of the operating managers’ control. 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 an identical manner, and therefore, is not necessarily an accurate measure of comparison between companies.

(2)          Other charges include non-cash compensation, provision for severance, closures and restructuring related costs and loss on sale of businesses and other, net.

(3)          Interest expense for the three and six months ended June 30, 2006 was reduced by $11,059 and $12,041, respectively, due to the quarterly fair value measurement of the deferred purchase price liability arising from the forward agreement related to the Automotive.com acquisition. (See Note 3).

(4)          During 2005, the Company redeemed all of its outstanding shares subject to mandatory redemption (liquidation preference of approximately $475,000).

(5)          Discontinued operations include a gain/(loss) on sale of businesses, net of $(40) and $(716) for the three months ended June 30, 2006 and 2005, respectively, and $13,668 and $382,462 for the six months ended June 30, 2006 and 2005, respectively .

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

The information that follows presents condensed consolidating financial information as of June 30, 2006 and December 31, 2005 and for the six months ended June 30, 2006 and 2005 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), which are with limited exceptions, the unrestricted subsidiaries, d) elimination entries and e) the Company on a consolidated basis.

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 subsidiaries results of operations include: Internet 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.

The Company is herewith providing detailed information and disclosure as to the methodology used in determining compliance with the leverage ratio in the credit facilities agreement and Senior Note agreements. Under its bank credit facilities and Senior Note agreements, the Company is allowed to designate certain businesses as unrestricted subsidiaries to the extent that the value of those businesses does not exceed the permitted amounts, as defined in these agreements. The Company has designated certain of its businesses as unrestricted (the “Unrestricted Group”), which primarily represent Internet businesses, trademark and content licensing and service companies, new launches (including traditional start-ups), other properties under evaluation for turnaround or shutdown and foreign subsidiaries. Except

19




for those specifically designated by the Company as unrestricted, all businesses of the Company are restricted (the “Restricted Group”). Indebtedness under the bank credit facilities and Senior Note agreements is guaranteed by each of the Company’s 100%-owned domestic subsidiaries in the Restricted Group in accordance with the provisions and limitations of the Company’s bank credit facilities and Senior Note agreements. The guarantees are full, unconditional and joint and several. The Unrestricted Group does not guarantee the bank credit facilities or Senior Notes. Although Automotive.com is included in the Restricted Group under the bank credit facilities agreement it does not guarantee the debt. For purposes of determining compliance with certain financial covenants under the Company’s bank credit facilities, the Unrestricted Group’s results (positive or negative), are not reflected in the Consolidated EBITDA of the Restricted Group which, as defined in the bank credit facilities agreement, excludes losses of the Unrestricted Group, non-cash charges and restructuring charges and is adjusted primarily for the trailing four quarters results of acquisitions and divestitures and estimated savings for acquired business.

20




PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
June 30, 2006
(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Primedia Inc.

 

 

 

 

 

Guarantor

 

Non-Guarantor

 

 

 

and

 

 

 

Primedia Inc.

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Subsidiaries

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

117

 

$

3,868

 

 

$

248

 

 

$

 

$

4,233

 

Accounts receivable, net

 

 

108,274

 

 

18,729

 

 

 

127,003

 

Inventories

 

 

13,824

 

 

2,971

 

 

 

16,795

 

Prepaid expenses and other

 

16,934

 

17,058

 

 

10,862

 

 

 

44,854

 

Assets held for sale

 

 

89,565

 

 

 

 

 

89,565

 

Total current assets

 

17,051

 

232,589

 

 

32,810

 

 

 

282,450

 

Property and equipment, net

 

2,524

 

40,800

 

 

10,519

 

 

 

53,843

 

Investment in and advances to subsidiaries

 

1,321,866

 

 

 

 

 

(1,321,866

)

 

Intangible assets, net

 

 

186,428

 

 

40,061

 

 

 

226,489

 

Goodwill

 

 

664,617

 

 

116,200

 

 

 

780,817

 

Other non-current assets

 

4,570

 

25,248

 

 

1,768

 

 

 

31,586

 

 

 

$

1,346,011

 

$

1,149,682

 

 

$

201,358

 

 

$

(1,321,866

)

$

1,375,185

 

LIABILITIES AND SHAREHOLDERS’ DEFICIENCY

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

7,717

 

$

44,815

 

 

$

3,580

 

 

$

 

$

56,112

 

Intercompany payables

 

257,871

 

(892,993

)

 

635,122

 

 

 

 

Accrued expenses and other

 

44,576

 

62,558

 

 

6,625

 

 

 

113,759

 

Deferred revenues

 

1,738

 

102,836

 

 

7,609

 

 

 

112,183

 

Current maturities of long-term debt

 

2,557

 

1,286

 

 

23

 

 

 

3,866

 

Liabilities of businesses held for sale

 

 

21,491

 

 

 

 

 

21,491

 

Total current liabilities

 

314,459

 

(660,007

)

 

652,959

 

 

 

307,411

 

Long-term debt

 

1,453,896

 

1,950

 

 

105

 

 

 

1,455,951

 

Intercompany notes payable

 

 

2,235,142

 

 

 

 

(2,235,142

)

 

Deferred revenues

 

13,600

 

 

 

 

 

 

13,600

 

Deferred income taxes

 

88,991

 

 

 

 

 

 

88,991

 

Other non-current liabilities

 

38,497

 

18,952

 

 

15,215

 

 

 

72,664

 

Total liabilities

 

1,909,443

 

1,596,037

 

 

668,279

 

 

(2,235,142

)

1,938,617

 

Shareholders’ deficiency:

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

2,724

 

 

 

 

 

 

2,724

 

Additional paid-in capital

 

2,365,519

 

 

 

 

 

 

2,365,519

 

Accumulated deficit

 

(2,855,798

)

(446,355

)

 

(466,921

)