FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For Quarter Ended: March 31, 2001
Commission file number: 1-11106
PRIMEDIA Inc.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3647573
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
745 Fifth Avenue, New York, New York
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(Address of principal executive offices)
10151
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(Zip Code)
Registrant's telephone number, including area code (212) 745-0100
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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
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Number of shares of common stock, par value $.01 per share, outstanding as of
April 30, 2001: 216,049,658
The aggregate market value of the common equity of PRIMEDIA Inc. which is held
by non-affiliates of PRIMEDIA Inc. at April 30, 2001 was approximately $603
million.
PRIMEDIA Inc.
INDEX
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets
(Unaudited) as of March 31, 2001 and
December 31, 2000 2
Condensed Statements of Consolidated
Operations (Unaudited) for the three months
ended March 31, 2001 and 2000 3
Condensed Statements of Consolidated
Cash Flows (Unaudited) for the three months
ended March 31, 2001 and 2000 4
Notes to Unaudited Condensed Consolidated
Financial Statements 5-24
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 25-30
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 31
PART II. OTHER INFORMATION:
ITEM 6. Reports on Form 8-K 32
Signatures 33
2
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31,
2001 2000
---------------------- ---------------------
(dollars in thousands, except per share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 12,135 $ 23,690
Accounts receivable, net 275,984 265,946
Inventories, net 32,196 28,681
Net assets held for sale 26,077 5,000
Prepaid expenses and other 77,707 43,630
---------------------- ---------------------
Total current assets 424,099 366,947
Property and equipment, net 193,787 175,560
Other intangible assets, net 551,000 506,156
Excess of purchase price over net assets acquired, net 1,600,717 1,141,436
Deferred income tax asset, net 135,000 135,000
Other investments 169,066 265,468
Other non-current assets 90,913 86,912
---------------------- ---------------------
$ 3,164,582 $ 2,677,479
====================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 113,396 $ 120,786
Accrued interest payable 25,543 18,822
Accrued expenses and other 223,587 222,773
Deferred revenues 217,752 235,548
Current maturities of long-term debt 114,900 115,465
---------------------- ---------------------
Total current liabilities 695,178 713,394
---------------------- ---------------------
Long-term debt 1,529,976 1,503,188
---------------------- ---------------------
Deferred revenues 66,992 112,296
---------------------- ---------------------
Other non-current liabilities 24,850 23,303
---------------------- ---------------------
Exchangeable preferred stock 561,732 561,324
---------------------- ---------------------
Shareholders' equity (deficiency):
Common stock ($.01 par value, 223,361,579 shares and
167,798,702 shares issued at March 31, 2001 and December
31, 2000, respectively) 2,224 1,678
Additional paid-in capital 2,127,197 1,366,950
Accumulated deficit (1,702,170) (1,603,096)
Accumulated other comprehensive loss (10,265) (1,558)
Unearned compensation (56,267) -
Common stock in treasury, at cost (7,467,693 shares and 0 shares
at March 31, 2001 and December 31, 2000, respectively) (74,865) -
---------------------- ---------------------
Total shareholders' equity (deficiency) 285,854 (236,026)
---------------------- ---------------------
$ 3,164,582 $ 2,677,479
====================== =====================
See notes to condensed consolidated financial statements (unaudited).
3
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
Three Months Ended
March 31,
2001 2000
------------------------ ----------------------
(dollars in thousands, except per share amounts)
Sales, net $ 427,006 $ 404,450
Operating costs and expenses:
Cost of goods sold 101,600 95,851
Marketing and selling 112,625 91,834
Distribution, circulation and fulfillment 71,000 64,522
Editorial 38,691 34,603
Other general expenses 58,312 53,385
Corporate administrative expenses (excluding $2,560 and $14,792
of non-cash compensation in 2001 and 2000, respectively) 8,215 8,112
Depreciation of property and equipment 14,816 11,288
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 42,174 34,384
Non-cash compensation 2,560 14,792
Provision for severance, closures and integration costs 6,487 6,319
Gain on sales of businesses and other, net (527) (10,992)
------------------------ ----------------------
Operating income (loss) (28,947) 352
Other expense:
Provision for the impairment of securities (3,248) -
Interest expense (33,161) (38,356)
Amortization of deferred financing costs (1,013) (939)
Other, net (19,439) (488)
------------------------ ----------------------
Net loss (85,808) (39,431)
Preferred stock dividends and related accretion (13,674) (13,266)
------------------------ ----------------------
Loss applicable to common shareholders $ (99,482) $ (52,697)
======================== ======================
Basic and diluted loss applicable to common shareholders per
common share $ (0.54) $ (0.35)
======================== ======================
Basic and diluted common shares outstanding 183,027,919 149,257,038
======================== ======================
See notes to condensed consolidated financial statements (unaudited).
4
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Three Months Ended
March 31,
2001 2000
-------------------- ------------------
(dollars in thousands)
OPERATING ACTIVITIES:
Net loss $ (85,808) $ (39,431)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 58,003 46,611
Accretion of discount on acquisition obligation
and other 66 938
Non-cash revenue related to assets-for-equity transactions (28,445) (33)
Provision for the impairment of securities 3,248 -
Non-cash compensation 2,560 14,792
Gain on sales of businesses and other, net (527) (10,992)
Other, net 17,844 (63)
Changes in operating assets and liabilities:
Increase in:
Accounts receivable, net (5,071) (9,564)
Inventories, net (3,315) (2,467)
Prepaid expenses and other (34,844) (14,611)
Increase (decrease) in:
Accounts payable (11,173) (19,703)
Accrued interest payable 6,721 4,236
Accrued expenses and other (29,630) (21,486)
Deferred revenues 7,054 6,176
Other non-current liabilities 1,487 (350)
-------------------- ------------------
Net cash used in operating activities (101,830) (45,947)
-------------------- ------------------
INVESTING ACTIVITIES:
Additions to property, equipment and other, net (14,311) (16,573)
Proceeds from sales of businesses and other, net 610 14,284
(Payments) for businesses acquired, net of cash acquired 93,672 (3,917)
Payments for other investments (4,625) (11,544)
-------------------- ------------------
Net cash provided by (used in) investing activities 75,346 (17,750)
-------------------- ------------------
FINANCING ACTIVITIES:
Borrowings under credit agreements 251,800 206,276
Repayments of borrowings under credit agreements (224,300) (113,289)
Proceeds from issuances of common stock, net of redemptions 1,825 4,715
Taxes paid associated with stock option exercises - (16,891)
Dividends paid to preferred stock shareholders (13,266) (13,266)
Deferred financing costs paid - (174)
Other (1,130) (645)
-------------------- ------------------
Net cash provided by financing activities 14,929 66,726
-------------------- ------------------
Increase (decrease) in cash and cash equivalents (11,555) 3,029
Cash and cash equivalents, beginning of period 23,690 28,661
-------------------- ------------------
Cash and cash equivalents, end of period $ 12,135 $ 31,690
==================== ==================
Supplemental information:
Cash interest paid $ 28,356 $ 32,524
==================== ==================
Businesses acquired:
Fair value of assets acquired $ 759,281 $ 4,353
Less: Liabilities assumed 42,911 436
Less: Stock and stock option consideration for About.com, Inc. acquisition 700,549 -
Less: Cash acquired in connection with the About.com, Inc. acquisition 109,493 -
-------------------- ------------------
(Payments) for businesses acquired, net of cash acquired $ 93,672 $ (3,917)
==================== ==================
Non-cash activities:
Stock option exercise transactions $ - $ 17,498
==================== ==================
Exchange of the Company's common shares and stock options for all
outstanding shares and stock options of About.com, Inc. $ 700,549 $ -
==================== ==================
Conversion of the Company's investment in About.com, Inc. common
shares held prior to the merger date into the Company's treasury
stock $ 74,865 $ -
==================== ==================
Compensatory common shares and stock options issued in connection
with About.com, Inc. acquisition $ 58,827 $ -
==================== ==================
Advertising-for-equity transactions $ 400 $ 10,152
==================== ==================
See notes to condensed consolidated financial statements (unaudited).
5
PRIMEDIA Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
1. BASIS OF PRESENTATION
PRIMEDIA Inc., together with its subsidiaries, is herein referred to as
either "PRIMEDIA" or the "Company". In the opinion of the Company's
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. All
significant intercompany accounts and transactions have been eliminated in
consolidation. These statements should be read in conjunction with the
Company's annual financial statements and related notes for the year ended
December 31, 2000, which is included in the Company's annual report on Form
10-K for the year ended December 31, 2000. The operating results for the
three-month period ended March 31 is not necessarily indicative of the
results that may be expected for a full year. Certain amounts in the prior
period consolidated financial statements have been reclassified to conform to
the presentation as of and for the three-month period ended March 31, 2001.
BARTER TRANSACTIONS
The Company trades advertisements in its traditional and online properties in
exchange for trade show space and booths and advertising in properties of
other companies. Revenue and related expenses from barter transactions are
recorded at fair value in accordance with Emerging Issues Task Force No.
99-17, "Accounting for Advertising Barter Transactions." Revenue from barter
transactions is recognized in accordance with the Company's revenue
recognition policies. Expense from barter transactions is generally
recognized as incurred. For the three months ended March 31, 2001, revenue
and expense from barter transactions were approximately $10,000. There was no
revenue and expense from barter transactions recorded during the three months
ended March 31, 2000.
2. ACQUISITIONS
On February 28, 2001, the Company completed its merger with About.com, Inc.
("About"). About is a platform comprised of a network of more than 700 highly
targeted topic-specific websites. Through the efforts of knowledgeable human
guides who manage the sites, the sites provide high-quality original
articles, moderated forums and chat rooms and links to related websites. This
merger creates an integrated traditional and new media company, providing a
vast array of marketing solutions to advertisers and niche content to users.
Under terms of the merger agreement, shareholders of About received
approximately 45,000,000 shares of the Company or 2.3409 Company shares for
each About share. This transaction is being accounted for under the purchase
method of accounting. The preliminary purchase cost allocations for the About
acquisition is subject to adjustment and will be finalized once additional
information concerning asset and liability valuations is obtained. An
independent appraisal will be completed and will be used to allocate the
purchase price to identifiable intangibles. The final asset and liability
fair values may differ from those set forth on the accompanying condensed
consolidated balance sheet at March 31, 2001; however, the changes are not
expected to have a material effect on the consolidated financial position,
results of operations or cash flows of the Company. The excess of purchase
price over net assets acquired related to the About merger will be amortized
over an estimated useful life of three years. The Company believes that a
three-year life is responsive to the rapid rate of change in the Internet
industry and is consistent with other recent mergers of a comparable nature.
The Company has determined that the value of its shares of common stock
issued is $11.81 per share, based on the weighted-average market values for
the two days prior and two days succeeding the acquisition announcement date.
The fair value of the vested and unvested options issued was determined using
a Black Scholes pricing model. The following is a summary of the calculation
of the purchase price, as well as the allocation of purchase price to the
fair value of net assets acquired:
6
Total number of shares of PRIMEDIA common stock
issued to consummate the merger 44,951,034
Fair value per share of PRIMEDIA common stock $ 11.81
-----------
Value of shares of PRIMEDIA common stock issued $ 530,872
Fair value of replacement options issued 102,404
Less: Unearned compensation relating to unvested options (7,592)
Cost of About shares acquired prior to the merger converted to
treasury stock 74,865
Direct merger costs 11,934
-----------
Total purchase price 712,483
Less: Fair value of net tangible assets of About 229,978
-----------
Excess of purchase price over net assets acquired $ 482,505
-----------
In addition, in connection with the acquisition, the Company issued shares of
restricted stock and below-market stock options to two key executives of
About which resulted in unearned compensation of $51,235 at the merger
completion date. These shares and options vest over four years and will
result in non-cash compensation expense as earned over the vesting period
(see Note 7).
The Company's consolidated results of operations includes results of
operations of About from the merger date. The results of About are included
in the Company's consumer segment. The unaudited pro forma information below
presents the consolidated results of operations as if the merger with About
had occurred as of January 1, 2000. The unaudited pro forma information has
been included for comparative purposes and is not indicative of the results
of operations of the consolidated Company had the merger occurred as of
January 1, 2000, nor is it necessarily indicative of future results.
Three Months Ended March 31,
------------------------------------------
2001 2000
------------------- -------------------
(dollars in thousands, except
per share amounts)
Sales, net $ 409,291 $ 423,740
Loss applicable to common shareholders $ (188,808) $ (110,589)
Basic and diluted loss applicable to common shareholders
per common share $ (0.88) $ (0.58)
Weighted average shares used in basic and diluted loss
applicable to common shareholders per common share 213,858,143 191,553,931
7
3. INVENTORIES, NET
Inventories consist of the following:
March 31, December 31,
2001 2000
------------------ ------------------
Finished goods $ 9,179 $ 10,556
Work in process 149 78
Raw materials 24,731 21,233
----------------- ------------------
34,059 31,867
Less: Allowance for obsolescence 1,863 3,186
----------------- ------------------
$ 32,196 $ 28,681
================= ==================
4. OTHER INVESTMENTS
Other investments consist of the following:
March 31, December 31,
2001 2000
------------------ ------------------
Cost method investments $ 81,702 $ 161,433
Equity method investments 62,057 73,703
Available-for-sale securities 8,474 19,708
Advances and other 16,833 10,624
----------------- ------------------
$ 169,066 $ 265,468
================= ==================
Available-for-sale securities consist of the following:
Unrealized Unrealized Market
Cost Gains Losses Value
--------------- -------------- ------------------ --------------
At March 31, 2001 $ 13,391 $ 742 $ 5,659 $ 8,474
=============== ============== ================== ==============
At December 31, 2000 $ 19,015 $ 693 $ - $ 19,708
=============== ============== ================== ==============
In the first quarter of 2000, the Company sold two investments in marketable
securities for total proceeds of $11,279 and realized a gain of $10,689,
which is included in gain on sales of businesses and other, net on the
accompanying condensed statement of consolidated operations. The Company
recorded an unrealized loss of $987 and $64,706 for the three months ended
March 31, 2001 and 2000, respectively, related to investments in marketable
securities. In addition, for the three months ended March 31, 2001, the
Company recorded an unrealized loss of $4,672 related to its investment in
CMGI, Inc. and an unrealized gain of $742 related to its investment in
Liberty Digital. These unrealized gains and losses are recorded as a
component of other comprehensive income (loss) ("OCI") within shareholders'
equity (deficiency) (see Note 9).
8
ASSETS-FOR-EQUITY TRANSACTIONS
During 2000, the Company began making strategic investments in companies
("Investees") which included various assets-for-equity transactions. Under
these transactions, the Company provides promotional services, such as print
advertising, content licensing, customer lists, online advertising and other
services in exchange for equity in these entities. Additionally, the Company
made cash investments in certain of these Investees. The Company's
investments in Investees, included in other investments on the accompanying
condensed consolidated balance sheets, totaled approximately $119,000
(approximately $62,000 representing cost method investments and approximately
$57,000 representing equity method investments) and $213,000 (approximately
$140,000 representing cost method investments and approximately $73,000
representing equity method investments) at March 31, 2001 and December 31,
2000, respectively. Including advances to the Investees, approximately
$41,200 and $38,600 of the investment as of March 31, 2001 and December 31,
2000, respectively, was in cash. The remainder represents advertising,
content licensing and other services to be rendered by the Company in
exchange for the equity in these entities. The Company recognizes these
amounts as revenue in accordance with the Company's revenue recognition
policies. During the three months ended March 31, 2001 and 2000, the Company
recorded revenue from these agreements approximating $28,500 and $33,
respectively. The 2001 revenue amount primarily represents revenue from the
Company's transactions with About for the first two months of 2001 as well as
revenue from the Company's equity method Investees. At March 31, 2001 and
December 31, 2000, respectively, approximately $75,000 and $146,000 relating
to these agreements is included as deferred revenues on the accompanying
condensed consolidated balance sheets.
These transactions are recorded at the fair value of the equity securities
received. As an observable market price does not exist for equity securities
of private companies, estimates of fair value of such securities are more
subjective than for securities of public companies. For significant
transactions involving equity securities in private companies, the Company
obtains and considers independent third-party valuations where appropriate.
Such valuations use a variety of methodologies to estimate fair value,
including comparing the security with the securities of publicly traded
companies in similar lines of business, comparing the nature of security,
price, and related terms of investors in the same round of financing,
applying price multiples to estimated future operating results for the
private company, and then also estimating discounted cash flows for that
company. Using these valuations and other information available to the
Company, such as the Company's knowledge of the industry and knowledge of
specific information about the Investee, the Company determines the estimated
fair value of the securities received. As required by EITF No. 00-8,
"Accounting by a Grantee for an Equity Instrument to Be Received in
Conjunction with Providing Goods and Services," the fair value of the equity
securities received is determined as of the earlier of the date a performance
commitment is reached or the vesting date.
The Company continually evaluates all of its investments for potential
impairment in accordance with Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". If an investment is deemed to be
permanently impaired, its carrying value will be reduced to fair market
value. During the three months ended March 31, 2001, the Company recorded a
provision for impairment of its investments in certain Investees of $3,248 as
the decline in value of the investments was deemed to be other than temporary.
During the three months ended March 31, 2001 and 2000, respectively, the
Company recorded approximately $18,100 and $0 of equity method losses from
Investees, which is included in other, net on the accompanying condensed
statements of consolidated operations and consolidated cash flows, and during
the
9
three months ended March 31, 2001 and 2000, respectively, the Company
recognized approximately $2,900 and $0 of revenue related to the equity
method Investees.
INVESTMENTS IN ABOUT
In 2000, the Company entered into additional business arrangements with About
whereby the Company has provided or will provide approximately $89,000 of
advertising and promotional services, over a five-year period, in exchange
for an aggregate of 2,873,595 shares of common stock of About. In addition,
prior to the merger, the Company had purchased 316,500 shares of About on the
open market for approximately $7,800. The Company and About have also entered
into certain agreements pursuant to which the Company has agreed to purchase
advertising and promotional sales on the About network. These agreements
provide for payments to About in the aggregate of $15,900. At the merger
completion date, these agreements became intercompany agreements, resulting
in the elimination of About investment and deferred revenue balances with all
future activity to be eliminated in consolidation. At December 31, 2000, the
Company's investment in About approximated $74,000.
5. LONG-TERM DEBT
Long-term debt consists of the following:
March 31, December 31,
2001 2000
------------------ -----------------
Borrowings under credit facilities $ 957,500 $ 930,000
10 1/4% Senior Notes due 2004 100,000 100,000
8 1/2% Senior Notes due 2006 299,257 299,226
7 5/8% Senior Notes due 2008 248,911 248,879
------------------ -----------------
1,605,668 1,578,105
Obligation under capital leases 30,514 31,478
Acquisition obligation payable 8,694 9,070
------------------ -----------------
1,644,876 1,618,653
Less: Current maturities of long-term debt 114,900 115,465
------------------ -----------------
$ 1,529,976 $ 1,503,188
================== =================
As of March 31, 2001, the Company had unused bank commitments of approximately
$300,000.
6. EXCHANGEABLE PREFERRED STOCK
Exchangeable Preferred Stock consists of the following:
March 31, December 31,
2001 2000
------------------ -----------------
$10.00 Series D Exchangeable Preferred Stock $ 196,270 $ 196,133
$9.20 Series F Exchangeable Preferred Stock 121,466 121,361
$8.625 Series H Exchangeable Preferred Stock 243,996 243,830
------------------ -----------------
$ 561,732 $ 561,324
================== =================
10
$10.00 SERIES D EXCHANGEABLE PREFERRED STOCK
The Company authorized 2,000,000 shares of $.01 par value $10.00 Series D
Exchangeable Preferred Stock, all of which was issued and outstanding at
March 31, 2001 and December 31, 2000. The liquidation and redemption value at
March 31, 2001 and December 31, 2000 was $200,000.
$9.20 SERIES F EXCHANGEABLE PREFERRED STOCK
The Company authorized 1,250,000 shares of $.01 par value $9.20 Series F
Exchangeable Preferred Stock, all of which was issued and outstanding at
March 31, 2001 and December 31, 2000. The liquidation and redemption value at
March 31, 2001 and December 31, 2000 was $125,000.
$8.625 SERIES H EXCHANGEABLE PREFERRED STOCK
The Company authorized 2,500,000 shares of $.01 par value $8.625 Series H
Exchangeable Preferred Stock, all of which was issued and outstanding at
March 31, 2001 and December 31, 2000. The liquidation and redemption value at
March 31, 2001 and December 31, 2000 was $250,000.
7. NON-CASH COMPENSATION
During the three months ended March 31, 2001, the Company recorded $2,560 of
non-cash compensation charges relating primarily to the retention of certain
key executives. These non-cash compensation charges consist of a $2,224
charge related to certain restricted stock and option grants to key
executives of About and a $336 charge related to the intrinsic value of
unvested "in-the-money" options issued in connection with the About merger.
During the three months ended March 31, 2000, the Company recorded $14,792 of
non-cash compensation charges relating to the hiring and retention of certain
key executives. These non-cash compensation charges consist of a $2,354
charge related to 1,380,711 shares of common stock granted to a senior
executive in 1999 and a $12,438 charge related to the extension of the
expiration period of 1,000,000 options previously granted to a senior
executive, for an additional 10 year period beyond the original expiration
date.
8. PROVISION FOR SEVERANCE, CLOSURES AND INTEGRATION COSTS
During 2000 and 2001, the Company implemented plans to integrate the Company
and consolidate many back office functions. The Company expects that these
plans will result in future savings. All integration charges were expensed as
incurred. A summary of the status of these plans as of March 31, 2001 is
presented below.
2001 PLAN
With the acquisition of About coupled with other cost initiatives, during the
first quarter of 2001, the Company announced the details of plans that would
continue to implement and expand upon the initiatives enacted during 2000.
Details of the initiatives implemented in the three months ended March 31,
2001 are presented in the following table:
11
For the Three Months Ended and as of March 31, 2001
-------------------------------------------------------------------------------
Ending
Provision Payments Liability
--------------------------- ------------------------ --------------------
Severance and closures:
Employee-related
termination costs $ 2,348 $ 208 $ 2,140
Termination of
contracts 558 290 268
Termination of leases
related to office
closures 128 99 29
--------------------------- ------------------------ --------------------
3,034 597 2,437
--------------------------- ------------------------ --------------------
Integration:
Consulting services 2,595 2,214 381
Relocation, recruiting
and other employee costs 523 406 117
Other 335 --- 335
--------------------------- ------------------------ --------------------
3,453 2,620 833
--------------------------- ------------------------ --------------------
Total severance, closures and
integration costs $ 6,487 $ 3,217 $ 3,270
=========================== ======================== ====================
A significant portion of the remaining costs are expected to be paid during
the remainder of 2001 with the balance to be paid in 2002. The Company is
currently developing additional initiatives aimed largely at the
consolidation of certain functions and the further integration of the
Company, and accordingly expects to record additional severance, closures and
integration charges during 2001.
2000 Plan
During 2000, the Company announced the implementation of a plan to integrate
the Company and consolidate many back office functions. Details of the 2001
payments related to the initiatives implemented during 2000 are presented in
the following table:
12
Payments during the
Three Months
Liability as of Ended Liability as of
December 31, 2000 March 31, 2001 March 31, 2001
--------------------------- ------------------------ ---------------------
Severance and closures:
Employee-related
termination costs $ 7,063 $ 2,166 $ 4,897
Termination of
contracts 1,519 22 1,497
Termination of leases
related to office closures 1,531 72 1,459
Other 96 9 87
--------------------------- ------------------------ ---------------------
10,209 2,269 7,940
--------------------------- ------------------------ ---------------------
Integration:
Consulting services 498 498 --
Relocation, recruiting
and other employee costs 462 94 368
--------------------------- ------------------------ ---------------------
960 592 368
--------------------------- ------------------------ ---------------------
Total severance, closures and
integration costs $ 11,169 $ 2,861 $ 8,308
=========================== ======================== =====================
The majority of the remaining costs incurred in connection with the 2000 plan
are expected to be paid by the end of 2001 with the balance to be paid
through the end of 2003.
During the three months ended March 31, 2000, the Company recorded $6,319 of
integration costs relating to a management reorganization. These integration
costs consisted of $2,814 for consultants related to sourcing and integration
initiatives, $2,102 related to severance costs and $1,403 related to
recruiting for senior executives.
As a result of the 2000 and 2001 plans already put in place, the Company will
close and consolidate in excess of fifteen office locations and will
terminate approximately 490 individuals. All individuals who will be
terminated under these plans have been notified. As of March 31, 2001,
approximately 365 of those individuals have been terminated.
During the first quarter of 1999, the Company discontinued five unprofitable
PRIMEDIA Workplace Learning product lines, as part of a program to return the
Company's focus to accreditation-oriented vocational networks and associated
products. In relation to these discontinuances, the Company recorded a
$22,000 charge including $9,000 related to transponder and office site leases
and $8,810 related to the recoverability of the related excess of purchase
price over net assets acquired and certain other assets. During the fourth
quarter of 2000, the Company reversed $3,302 of the original $22,000 charge
as the
13
liabilities ultimately settled at amounts less than originally recorded.
Through March 31, 2001, $9,704 of the cash payments have been made. The
remaining $184 is expected to be paid during the remainder of 2001.
The liabilities representing the provision for severance, closures and
integration costs are included in accrued expenses and other on the
accompanying condensed consolidated balance sheets.
9. COMPREHENSIVE LOSS
Comprehensive loss for the three months ended March 31, 2001 and 2000 is
presented in the following table:
Three Months Ended
March 31, March 31,
2001 2000
-------------- --------------
Net loss $ (85,808) $ (39,431)
Other comprehensive loss:
Unrealized loss on available-for-sale securities (5,610) (64,706)
SFAS No.133 derivative adjustments (2,566) -
Foreign currency translation adjustments (531) (55)
-------------- --------------
Total comprehensive loss $ (94,515) $ (104,192)
============== ==============
10. LOSS PER COMMON SHARE
Loss per share for the three-month periods ended March 31, 2001 and 2000 has
been determined based on net loss after preferred stock dividends and related
accretion, divided by the weighted average number of common shares
outstanding for all periods presented. The effect of the assumed exercise of
non-qualified stock options was not included in the computation of diluted
loss per share because the effect of inclusion would be antidilutive.
11. DERIVATIVE FINANCIAL INSTRUMENTS
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No.133, as amended and
interpreted, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities.
SFAS No.133 requires that all derivatives, whether designated in hedging
relationships or not, be recorded on the balance sheet at fair value
regardless of the purpose or intent for holding them. If a derivative is
designated as a fair-value hedge, changes in the fair value of the derivative
and the hedged item are recognized in earnings. If a derivative is designated
as a cash-flow hedge, changes in the fair value of the derivative are
recorded in OCI and are recognized in the condensed statements of
consolidated operations when the hedged item affects earnings. SFAS No.133
defines new requirements for designation and documentation of hedging
relationships as well as ongoing effectiveness assessments in order to use
hedge accounting. For a derivative that does not qualify as a hedge, changes
in fair value are recognized in earnings.
Effective January 1, 2001, the Company recorded approximately $27 as a
cumulative transition adjustment to earnings, which is included in other, net
on the condensed statement of consolidated operations, relating to
derivatives not designated as hedges prior to the adoption of SFAS No.133,
and approximately $1,250 in OCI as a cumulative transition adjustment for
derivatives designated as cash flow-type hedges prior to adopting SFAS No.133.
14
INTEREST RATE SWAP CONTRACTS
The Company uses derivative financial instruments, principally interest rate
swap contracts, to manage the risks associated with interest rate
fluctuations on its floating rate borrowings. Interest rate swap contracts
are used to adjust the proportion of total debt that is subject to variable
interest rates. Under the terms of its interest rate swap contracts, the
Company agrees to pay an amount equal to a specified fixed-rate of interest
times a notional principal amount, and to receive in return an amount equal
to a specified variable-rate of interest times the same notional principal
amount. The notional amounts of the contract are not exchanged. No other cash
payments are made unless the contract is terminated prior to maturity, in
which case the amount paid or received in settlement is established by
agreement at the time of termination, and usually represents the net present
value, at current rates of interest, of the remaining obligations to exchange
payments under the terms of the contract. Any gains or losses upon early
termination of the contracts are deferred and amortized over the shorter of
the remaining life of the hedged existing debt obligation or the original
life of the interest rate swap contract. Interest rate swap contracts are
entered into with major financial institutions in order to minimize credit
risk. Prior to entering into any interest rate swap contracts, the Company
considers, among other things, swap terms including the reference rate,
payment and maturity dates and the notional amount in determining if the
interest rate swap contract will be effective at modifying an existing debt
obligation.
The Company's interest rate swap contracts are considered to be a hedge
against changes in the amount of future cash flows associated with the
Company's interest payments. Accordingly, the interest rate swap contracts
are reflected at fair value on the Company's condensed consolidated balance
sheet and the related gains and losses on these contracts are deferred in
shareholders' equity (deficiency) as a component of OCI. These gains and
losses are then amortized as an adjustment to interest expense over the same
period in which the related interest payments being hedged are recognized in
operations. However, to the extent that any of these contracts are not
considered to be perfectly effective in offsetting the change in the value of
the interest payments being hedged, any changes in fair value relating to the
ineffective portion of these contracts are immediately recognized in income.
The net effect of this accounting on the Company's operating results is that
interest expense on the portion of variable-rate debt being hedged is
generally recorded based on fixed interest rates.
At March 31, 2001, the Company had interest rate swap contracts to pay
fixed-rates of interest (average rate of 6.30%) and receive variable-rates of
interest (average rate of 6.40%) on $200,000 of notional amounts of
indebtedness, which resulted in approximately 46% of the Company's total debt
being subject to variable interest rates. For the three-months ended March
31, 2001, the Company's interest rate swap contracts were considered to be
highly effective and accordingly, the change in fair value of these contracts
of $1,316 was deferred and recognized as a component of OCI. As a result of
the fact that the Company's interest rate swap contracts are expected to be
highly effective in the future, the Company does not expect to reclassify
any material amounts from OCI to earnings during the next twelve-month
period. The only transaction that would result in such a reclassification
would be the cancellation and subsequent unwinding of the interest rate swap
contracts.
NON-HEDGING DERIVATIVES
During 2000, in connection with certain of the Company's strategic
investments in Investees, the Company received options and/or warrants
representing the Company's right to acquire additional equity interests in
certain Investees in exchange for cash, additional advertising space or other
services. In accordance with SFAS No. 133, those options/warrants which
permit "net settlement" qualify as derivatives. Accordingly, those
option/warrant agreements which qualify as derivatives are reflected at fair
value on the Company's condensed consolidated balance sheet as of March 31,
2001 and the changes in fair value of these derivatives are recognized in
earnings. For the three-months ended March 31, 2001, the change in fair value
of the non-hedging derivatives was $71 and is included on the condensed
statement of consolidated operations as other, net.
15
12. NET ASSETS HELD FOR SALE
During the three months ended March 31, 2001, the Company decided to divest
certain businesses as well as discontinue certain titles including certain
titles of the youth entertainment group. The net assets held for sale,
including QWIZ, Inc., are recorded at their carrying value on the
accompanying condensed consolidated balance sheets.
13. BUSINESS SEGMENT INFORMATION
The Company's operations have been classified into two business segments:
consumer and business-to-business. The Company's consumer segment produces
and distributes magazines, guides and videos for consumers in various niche
markets. The Company's business-to-business segment produces and distributes
magazines, books, directories, databases and vocational training materials to
business professionals in such fields as communications, agriculture,
professional services, media, transportation and healthcare. These segment
results are regularly reviewed by the Company's chief operating
decision-maker to make decisions about resources to be allocated to the
segment and assess its performance. The Company's non-core businesses
("Non-Core Businesses") include QWIZ, Inc., Pictorial, Inc., certain business
directories, certain titles of the youth entertainment group and certain
other businesses to be divested. The Company has segregated the Non-Core
Businesses from the aforementioned segments because the Company's chief
operating decision-maker views these businesses separately when evaluating
and making decisions regarding ongoing operations. Information as to the
operations of the Company in different business segments is set forth below
based on the nature of the targeted audience. Corporate represents items not
allocated to other business segments. PRIMEDIA evaluates performance based on
several factors, of which the primary financial measure is segment earnings
before interest, taxes, depreciation, amortization and other (income) and
charges ("EBITDA"). Other (income) charges include non-cash compensation,
provision for severance, closures and integration costs and gain on sales of
businesses and other, net.
16
Three Months Ended
March 31,
2001 2000
----------------- -----------------
SALES, NET:
Consumer $ 298,301 $ 272,195
Business-to-business 124,520 118,807
Eliminations (744) -
Other:
Non-Core Businesses 4,929 13,448
----------------- -----------------
Total $ 427,006 $ 404,450
================= =================
EBITDA (1):
Consumer $ 30,676 $ 44,070
Business-to-business (2) 17,627 16,020
Other:
Corporate (8,230) (8,112)
Non-Core Businesses (3,510) 4,165
----------------- -----------------
Total $ 36,563 $ 56,143
================= =================
The following is a reconciliation of EBITDA to operating income (loss):
Three Months Ended
March 31,
2001 2000
---------------- ---------------
Total EBITDA (1) $ 36,563 $ 56,143
Depreciation of property and equipment (14,816) (11,288)
Amortization of intangible assets, excess
of purchase price over net assets
acquired and other (42,174) (34,384)
Non-cash compensation (2,560) (14,792)
Provision for severance, closures and
integration costs (6,487) (6,319)
Gain on sales of businesses and other, net 527 10,992
---------------- ---------------
Operating income (loss) $ (28,947) $ 352
================ ===============
(1) EBITDA represents earnings before interest, taxes, depreciation,
amortization and other (income) charges. EBITDA is not intended to represent
cash flow from operating activities and should not be considered as an
alternative to net income or loss (as determined in conformity with generally
accepted accounting principles) as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity. The Company believes
EBITDA is a standard measure commonly reported and widely used by analysts,
investors and other interested parties in the media industry. Accordingly,
this information has been disclosed herein to permit a more complete
comparative analysis of the Company's operating performance relative to other
companies in its industry. EBITDA should not be considered in isolation or as
a substitute for other measures of financial performance or liquidity. The
primary
17
difference between EBITDA and cash flow provided by (used in) operating
activities relates to changes in working capital requirements and payments
made for interest and income taxes. Additionally, EBITDA is not available for
the Company's discretionary use as there are legal requirements to pay
preferred stock dividends and repay debt, among other payments. EBITDA as
presented may not be comparable to similarly titled measures reported by
other companies, since not all companies necessarily calculate EBITDA in
identical manners, and therefore, is not necessarily an accurate measure of
comparison between companies.
(2) Includes the reversal of a $4,000 sales tax accrual that was no longer
required.
14. FINANCIAL INFORMATION FOR GUARANTORS OF THE COMPANY'S DEBT
The information that follows presents condensed consolidating financial
information as of March 31, 2001 and December 31, 2000 and for the three
months ended March 31, 2001 and 2000 for a) PRIMEDIA Inc. (as the Issuer), b)
the guarantor subsidiaries, c) the foreign non-guarantor subsidiaries, d) the
unrestricted Internet non-guarantor subsidiaries, e) elimination entries and
f) 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 financial
position, results of operations and cash flows that these entities would have
achieved on a stand-alone basis and should be read in connection with the
condensed consolidated financial statements of the Company.
18
14. FINANCIAL INFORMATION FOR GUARANTORS OF THE COMPANY'S DEBT (CONTINUED)
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(UNAUDITED)
For the Three Months Ended March 31, 2001
(dollars in thousands)
Foreign
Guarantor Non-Guarantor
Primedia Inc. Subsidiaries Subsidiaries
-----------------------------------------------------------------
Sales, net $ - $ 415,633 $ 1,164
Operating costs and expenses:
Cost of goods sold - 95,825 375
Marketing and selling - 95,875 465
Distribution, circulation and fulfillment - 69,936 253
Editorial - 36,114 75
Other general expenses - 45,478 95
Corporate administrative expenses (excluding
non-cash compensation) 7,964 - -
Depreciation of property and equipment 300 9,456 20
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 96 28,244 50
Non-cash compensation 2,560 - -
Provision for severance, closures and integration costs 2,239 3,520 -
Gain on sales of businesses and other, net - (527) -
-----------------------------------------------------------------
Operating income (loss) (13,159) 31,712 (169)
Other income (expense):
Provision for the impairment of securities (3,248) - -
Interest expense (32,661) (500) -
Amortization of deferred financing costs - (1,013) -
Equity in losses of subsidiaries (72,473) - -
Intercompany management fees and interest 54,071 (54,071) -
Other, net (18,338) (1,100) (36)
-----------------------------------------------------------------
Net loss $ (85,808) $ (24,972) $ (205)
=================================================================
Unrestricted
Internet Primedia Inc.
Non-Guarantor and
Subsidiaries Eliminations Subsidiaries
------------------------------------------------------------
Sales, net $ 26,413 $ (16,204) $ 427,006
Operating costs and expenses:
Cost of goods sold 21,589 (16,189) 101,600
Marketing and selling 16,285 - 112,625
Distribution, circulation and fulfillment 811 - 71,000
Editorial 2,502 - 38,691
Other general expenses 12,739 - 58,312
Corporate administrative expenses (excluding
non-cash compensation) 266 (15) 8,215
Depreciation of property and equipment 5,040 - 14,816
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 13,784 - 42,174
Non-cash compensation - - 2,560
Provision for severance, closures and integration costs 728 - 6,487
Gain on sales of businesses and other, net - - (527)
------------------------------------------------------------
Operating income (loss) (47,331) - (28,947)
Other income (expense):
Provision for the impairment of securities - - (3,248)
Interest expense - - (33,161)
Amortization of deferred financing costs - - (1,013)
Equity in losses of subsidiaries - 72,473 -
Intercompany management fees and interest - - -
Other, net 35 - (19,439)
------------------------------------------------------------
Net loss $ (47,296) $ 72,473 $ (85,808)
============================================================
19
14. FINANCIAL INFORMATION FOR GUARANTORS OF THE COMPANY'S DEBT (CONTINUED)
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
March 31, 2001
(dollars in thousands)
Unrestricted
Foreign
Guarantor Non-Guarantor
Primedia Inc. Subsidiaries Subsidiaries
---------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 2 $ 9,375 $ 999
Accounts receivable, net 471 260,837 859
Intercompany receivables 1,263,408 491,324 4,792
Inventories, net - 31,787 6
Net assets held for sale - 26,077 -
Prepaid expenses and other 11,621 53,749 62
---------------------------------------------------------------
Total current assets 1,275,502 873,149 6,718
Property and equipment, net 6,583 124,434 98
Investment in and advances to subsidiaries 1,685,474 - -
Other intangible assets, net 2,166 485,074 655
Excess of purchase price over net assets acquired, net (12,978) 1,137,168 3,259
Deferred income tax asset, net 135,000 - -
Other investments 144,971 1,251 -
Other non-current assets 1,279 83,786 4
---------------------------------------------------------------
$ 3,237,997 $ 2,704,862 $ 10,734
===============================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 6,038 $ 101,800 $ 198
Intercompany payables 642,704 986,448 21,101
Accrued interest payable 25,543 - -
Accrued expenses and other 57,341 122,197 292
Deferred revenues 49,351 188,924 549
Current maturities of long-term debt 105,760 9,135 -
---------------------------------------------------------------
Total current liabilities 886,737 1,408,504 22,140
---------------------------------------------------------------
Long-term debt 1,503,673 26,301 -
---------------------------------------------------------------
Intercompany notes payable - 2,246,665 -
---------------------------------------------------------------
Deferred revenues - 66,992 -
---------------------------------------------------------------
Other non-current liabilities 1 23,653 234
---------------------------------------------------------------
Exchangeable preferred stock 561,732 - -
---------------------------------------------------------------
Shareholders' equity (deficiency):
Common stock 2,224 - -
Additional paid-in capital 2,127,197 - -
Accumulated deficit (1,702,170) (1,065,250) (11,175)
Accumulated other comprehensive loss (10,265) (2,003) (465)
Unearned compensation (56,267) - -
Common stock in treasury, at cost (74,865) - -
---------------------------------------------------------------
Total shareholders' equity (deficiency) 285,854 (1,067,253) (11,640)
---------------------------------------------------------------
$ 3,237,997 $ 2,704,862 $ 10,734
===============================================================
Internet Primedia Inc.
Non-Guarantor and
Subsidiaries Eliminations Subsidiaries
-----------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,759 $ - $ 12,135
Accounts receivable, net 13,817 - 275,984
Intercompany receivables 124,929 (1,884,453) -
Inventories, net 403 - 32,196
Net assets held for sale - - 26,077
Prepaid expenses and other 12,275 - 77,707
-----------------------------------------------------------------
Total current assets 153,183 (1,884,453) 424,099
Property and equipment, net 62,672 - 193,787
Investment in and advances to subsidiaries - (1,685,474) -
Other intangible assets, net 63,105 - 551,000
Excess of purchase price over net assets acquired, net 473,268 - 1,600,717
Deferred income tax asset, net - - 135,000
Other investments 22,844 - 169,066
Other non-current assets 5,844 - 90,913
-----------------------------------------------------------------
$ 780,916 $ (3,569,927)$ 3,164,582
=================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 5,360 $ - $ 113,396
Intercompany payables 234,200 (1,884,453) -
Accrued interest payable - - 25,543
Accrued expenses and other 43,757 - 223,587
Deferred revenues (21,072) - 217,752
Current maturities of long-term debt 5 - 114,900
-----------------------------------------------------------------
Total current liabilities 262,250 (1,884,453) 695,178
-----------------------------------------------------------------
Long-term debt 2 - 1,529,976
-----------------------------------------------------------------
Intercompany notes payable 700,549 (2,947,214) -
-----------------------------------------------------------------
Deferred revenues - - 66,992
-----------------------------------------------------------------
Other non-current liabilities 962 - 24,850
-----------------------------------------------------------------
Exchangeable preferred stock - - 561,732
-----------------------------------------------------------------
Shareholders' equity (deficiency):
Common stock - - 2,224
Additional paid-in capital - - 2,127,197
Accumulated deficit (182,097) 1,258,522 (1,702,170)
Accumulated other comprehensive loss (750) 3,218 (10,265)
Unearned compensation - - (56,267)
Common stock in treasury, at cost - - (74,865)
-----------------------------------------------------------------
Total shareholders' equity (deficiency) (182,847) 1,261,740 285,854
-----------------------------------------------------------------
$ 780,916 $ (3,569,927)$ 3,164,582
=================================================================
20
14. FINANCIAL INFORMATION FOR GUARANTORS OF THE COMPANY'S DEBT (CONTINUED)
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended March 31, 2001
(dollars in thousands)
Foreign
Guarantor Non-Guarantor
Primedia Inc. Subsidiaries Subsidiaries
----------------------------------------------------------
OPERATING ACTIVITIES:
Net loss $ (85,808)$ (24,972)$ (205)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 396 38,713 70
Accretion of discount on acquisition obligation
and other 120 (54) -
Non-cash revenue related to assets-for-equity transactions - (24,302) -
Provision for the impairment of securities 3,248 - -
Non-cash compensation 2,560 - -
Gain on sales of businesses and other, net - (527) -
Equity in losses of subsidiaries 72,473 - -
Intercompany (income) expense (54,071) 54,071 -
Other, net 18,088 (172) (73)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable, net (401) (4,113) (142)
Inventories, net - (3,760) 4
Prepaid expenses and other (14,270) (24,317) 46
Increase (decrease) in:
Accounts payable (1,515) (7,582) (7)
Accrued interest payable 6,721 - -
Accrued expenses and other (5,409) (20,956) 21
Deferred revenues (3) 8,429 (40)
Other non-current liabilities 1 1,479 (12)
----------------------------------------------------------
Net cash used in operating activities (57,870) (8,063) (338)
----------------------------------------------------------
INVESTING ACTIVITIES:
Additions to property, equipment and other, net (324) (7,881) (10)
Proceeds from sales of businesses and other, net - 610 -
(Payments) for businesses acquired, net of cash acquired - (15,824) -
Payments for other investments (4,238) (387) -
----------------------------------------------------------
Net cash provided by (used in) investing activities (4,562) (23,482) (10)
----------------------------------------------------------
FINANCING ACTIVITIES:
Intercompany activity 40,925 24,923 384
Borrowings under credit agreements 251,800 - -
Repayments of borrowings under credit agreements (224,300) - -
Proceeds from issuances of common stock, net of redemptions 1,825 - -
Dividends paid to preferred stock shareholders (13,266) - -
Deferred financing costs paid - - -
Other (86) (998) -
----------------------------------------------------------
Net cash provided by (used in) financing activities 56,898 23,925 384
----------------------------------------------------------
Increase (decrease) in cash and cash equivalents (5,534) (7,620) 36
Cash and cash equivalents, beginning of period 5,536 16,995 963
----------------------------------------------------------
Cash and cash equivalents, end of period $ 2 $ 9,375 $ 999
==========================================================
Unrestricted
Internet Primedia Inc.
Non-Guarantor and
Subsidiaries Eliminations Subsidiaries
---------------------------------------------------------------
OPERATING ACTIVITIES:
Net loss $ (47,296)$ 72,473 $ (85,808)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 18,824 - 58,003
Accretion of discount on acquisition obligation
and other - - 66
Non-cash revenue related to assets-for-equity transactions (4,143) - (28,445)
Provision for the impairment of securities - - 3,248
Non-cash compensation - - 2,560
Gain on sales of businesses and other, net - - (527)
Equity in losses of subsidiaries - (72,473) -
Intercompany (income) expense - - -
Other, net 1 - 17,844
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable, net (415) - (5,071)
Inventories, net 441 - (3,315)
Prepaid expenses and other 3,697 - (34,844)
Increase (decrease) in:
Accounts payable (2,069) - (11,173)
Accrued interest payable - - 6,721
Accrued expenses and other (3,286) - (29,630)
Deferred revenues (1,332) - 7,054
Other non-current liabilities 19 - 1,487
---------------------------------------------------------------
Net cash used in operating activities (35,559) - (101,830)
---------------------------------------------------------------
INVESTING ACTIVITIES:
Additions to property, equipment and other, net (6,096) - (14,311)
Proceeds from sales of businesses and other, net - - 610
(Payments) for businesses acquired, net of cash acquired 109,496 - 93,672
Payments for other investments - - (4,625)
---------------------------------------------------------------
Net cash provided by (used in) investing activities 103,400 - 75,346
---------------------------------------------------------------
FINANCING ACTIVITIES:
Intercompany activity (66,232) - -
Borrowings under credit agreements - - 251,800
Repayments of borrowings under credit agreements - - (224,300)
Proceeds from issuances of common stock, net of redemptions - - 1,825
Dividends paid to preferred stock shareholders - - (13,266)
Deferred financing costs paid - - -
Other (46) - (1,130)
---------------------------------------------------------------
Net cash provided by (used in) financing activities (66,278) - 14,929
---------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,563 - (11,555)
Cash and cash equivalents, beginning of period 196 - 23,690
---------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,759 $ - $ 12,135
===============================================================
21
14. FINANCIAL INFORMATION FOR GUARANTORS OF THE COMPANY'S DEBT (CONTINUED)
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(UNAUDITED)
For the Three Months Ended March 31, 2000
(dollars in thousands)
Foreign
Guarantor Non-Guarantor
Primedia Inc. Subsidiaries Subsidiaries
---------------------------------------------------------------
Sales, net $ - $ 398,050 $ 1,522
Operating costs and expenses:
Cost of goods sold - 92,575 548
Marketing and selling - 83,475 478
Distribution, circulation and fulfillment - 61,639 157
Editorial - 34,151 108
Other general expenses - 47,290 243
Corporate administrative expenses (excluding
non-cash compensation) 7,936 - -
Depreciation of property and equipment 450 9,964 25
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 127 33,936 188
Non-cash compensation 14,792 - -
Provision for severance, closures and integration costs 6,319 - -
Gain on sales of businesses and other, net - (303) -
---------------------------------------------------------------
Operating income (loss) (29,624) 35,323 (225)
Other income (expense):
Interest expense (36,836) (1,427) (93)
Amortization of deferred financing costs - (938) -
Equity in losses of subsidiaries (47,837) - -
Intercompany management fees and interest 74,683 (74,683) -
Other, net 183 (425) (93)
---------------------------------------------------------------
Net loss $ (39,431)$ (42,150)$ (411)
===============================================================
Unrestricted
Internet Primedia Inc.
Non-Guarantor and
Subsidiaries Eliminations Subsidiaries
----------------------------------------------------------------
Sales, net $ 8,818 $ (3,940)$ 404,450
Operating costs and expenses:
Cost of goods sold 6,668 (3,940) 95,851
Marketing and selling 7,881 - 91,834
Distribution, circulation and fulfillment 2,726 - 64,522
Editorial 344 - 34,603
Other general expenses 5,852 - 53,385
Corporate administrative expenses (excluding
non-cash compensation) 176 - 8,112
Depreciation of property and equipment 849 - 11,288
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 133 - 34,384
Non-cash compensation - - 14,792
Provision for severance, closures and integration costs - - 6,319
Gain on sales of businesses and other, net (10,689) - (10,992)
----------------------------------------------------------------
Operating income (loss) (5,122) - 352
Other income (expense):
Interest expense - - (38,356)
Amortization of deferred financing costs (1) - (939)
Equity in losses of subsidiaries - 47,837 -
Intercompany management fees and interest - - -
Other, net (153) - (488)
----------------------------------------------------------------
Net loss $ (5,276)$ 47,837 $ (39,431)
================================================================
22
14. FINANCIAL INFORMATION FOR GUARANTORS OF THE COMPANY'S DEBT (CONTINUED)
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2000
(dollars in thousands)
Foreign
Guarantor Non-Guarantor
Primedia Inc. Subsidiaries Subsidiaries
----------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,536 $ 16,995 $ 963
Accounts receivable, net 70 257,075 717
Intercompany receivables 774,165 324,678 -
Inventories, net - 27,827 10
Net assets held for sale - 5,000 -
Prepaid expenses and other 2,253 31,913 107
----------------------------------------------------------------
Total current assets 782,024 663,488 1,797
Property and equipment, net 6,554 128,016 108
Investment in and advances to subsidiaries 950,319 - -
Other intangible assets, net 2,353 501,861 708
Excess of purchase price over net assets acquired, net (13,070) 1,146,701 3,468
Deferred income tax asset, net 135,000 - -
Other investments 248,236 914 -
Other non-current assets 1,857 84,910 5
----------------------------------------------------------------
$ 2,113,273 $ 2,525,890 $ 6,086
================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 7,552 $ 109,650 $ 205
Intercompany payables - 899,208 16,163
Accrued interest payable 18,822 - -
Accrued expenses and other 67,734 144,270 271
Deferred revenues 26,164 190,914 589
Current maturities of long-term debt 105,744 9,706 -
----------------------------------------------------------------
Total current liabilities 226,016 1,353,748 17,228
----------------------------------------------------------------
Long-term debt 1,476,128 27,051 -
----------------------------------------------------------------
Intercompany notes payable - 2,138,619 -
----------------------------------------------------------------
Deferred revenues 85,831 26,465 -
----------------------------------------------------------------
Other non-current liabilities - 22,114 246
----------------------------------------------------------------
Exchangeable preferred stock 561,324 - -
----------------------------------------------------------------
Shareholders' deficiency:
Common stock 1,678 - -
Additional paid-in capital 1,366,950 - -
Accumulated deficit (1,603,096) (1,040,278) (10,970)
Accumulated other comprehensive loss (1,558) (1,829) (418)
Unearned compensation - - -
Common stock in treasury, at cost - - -
----------------------------------------------------------------
Total shareholders' deficiency (236,026) (1,042,107) (11,388)
----------------------------------------------------------------
$ 2,113,273 $ 2,525,890 $ 6,086
================================================================
Unrestricted
Internet Primedia Inc.
Non-Guarantor and
Subsidiaries Eliminations Subsidiaries
----------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 196 $ - $ 23,690
Accounts receivable, net 8,084 - 265,946
Intercompany receivables 17,690 (1,116,533) -
Inventories, net 844 - 28,681
Net assets held for sale - - 5,000
Prepaid expenses and other 9,357 - 43,630
----------------------------------------------------------------
Total current assets 36,171 (1,116,533) 366,947
Property and equipment, net 40,882 - 175,560
Investment in and advances to subsidiaries - (950,319) -
Other intangible assets, net 1,234 - 506,156
Excess of purchase price over net assets acquired, net 4,337 - 1,141,436
Deferred income tax asset, net - - 135,000
Other investments 16,318 - 265,468
Other non-current assets 140 - 86,912
----------------------------------------------------------------
$ 99,082 $ (2,066,852)$ 2,677,479
================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 3,379 $ - $ 120,786
Intercompany payables 201,162 (1,116,533) -
Accrued interest payable - - 18,822
Accrued expenses and other 10,498 - 222,773
Deferred revenues 17,881 - 235,548
Current maturities of long-term debt 15 - 115,465
----------------------------------------------------------------
Total current liabilities 232,935 (1,116,533) 713,394
----------------------------------------------------------------
Long-term debt 9 - 1,503,188
----------------------------------------------------------------
Intercompany notes payable - (2,138,619) -
----------------------------------------------------------------
Deferred revenues - - 112,296
----------------------------------------------------------------
Other non-current liabilities 943 - 23,303
----------------------------------------------------------------
Exchangeable preferred stock - - 561,324
----------------------------------------------------------------
Shareholders' deficiency:
Common stock - - 1,678
Additional paid-in capital - - 1,366,950
Accumulated deficit (134,801) 1,186,049 (1,603,096)
Accumulated other comprehensive loss (4) 2,251 (1,558)
Unearned compensation - - -
Common stock in treasury, at cost - - -
----------------------------------------------------------------
Total shareholders' deficiency (134,805) 1,188,300 (236,026)
----------------------------------------------------------------
$ 99,082 $ (2,066,852)$ 2,677,479
================================================================
23
14. FINANCIAL INFORMATION FOR GUARANTORS OF THE COMPANY'S DEBT (CONTINUED)
PRIMEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended March 31, 2000
(dollars in thousands)
Foreign
Guarantor Non-Guarantor
Primedia Inc. Subsidiaries Subsidiaries
--------------------------------------------------
OPERATING ACTIVITIES:
Net loss $ (39,431)$ (42,150)$ (411)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 577 44,838 213
Accretion of discount on acquisition obligation
and other 157 781 -
Non-cash revenue related to assets-for-equity transactions - (33) -
Non-cash compensation 14,792 - -
Gain on sales of businesses and other, net - (303) -
Equity in losses of subsidiaries 47,837 - -
Intercompany (income) expense (74,683) 74,683 -
Other, net - (77) 14
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable, net (595) (7,458) (85)
Inventories, net - (2,468) 2
Prepaid expenses and other (63) (10,159) (15)
Increase (decrease) in:
Accounts payable (2,891) (16,762) (115)
Accrued interest payable 4,236 - -
Accrued expenses and other 1,876 (22,147) 16
Deferred revenues - 5,119 -
Other non-current liabilities (1) (353) (1)
--------------------------------------------------
Net cash provided by (used in) operating activities (48,189) 23,511 (382)
--------------------------------------------------
INVESTING ACTIVITIES:
Additions to property, equipment and other, net (159) (9,395) -
Proceeds from sales of businesses and other, net - 3,000 -
Payments for businesses acquired, net of cash acquired - (3,728) -
Payments for other investments (6,725) 71 -
--------------------------------------------------
Net cash used in investing activities (6,884) (10,052) -
--------------------------------------------------
FINANCING ACTIVITIES:
Intercompany activity (7,065) (15,619) 578
Borrowings under credit agreements 206,000 - 276
Repayments of borrowings under credit agreements (113,000) - (289)
Proceeds from issuances of common stock, net of redemptions 4,715 - -
Taxes paid associated with stock option exercises (16,891) - -
Dividends paid to preferred stock shareholders (13,266) - -
Deferred financing costs paid - (174) -
Other (53) (592) -
--------------------------------------------------
Net cash provided by (used in) financing activities 60,440 (16,385) 565
--------------------------------------------------
Increase (decrease) in cash and cash equivalents 5,367 (2,926) 183
Cash and cash equivalents, beginning of period 11,521 13,765 2,971
--------------------------------------------------
Cash and cash equivalents, end of period $ 16,888 $ 10,839 $ 3,154
==================================================
Unrestricted
Internet Primedia Inc.
Non-Guarantor and
Subsidiaries Eliminations Subsidiaries
-------------------------------------------------------
OPERATING ACTIVITIES:
Net loss $ (5,276)$ 47,837 $ (39,431)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 983 - 46,611
Accretion of discount on acquisition obligation
and other - - 938
Non-cash revenue related to assets-for-equity transactions - - (33)
Non-cash compensation - - 14,792
Gain on sales of businesses and other, net (10,689) - (10,992)
Equity in losses of subsidiaries - (47,837) -
Intercompany (income) expense - - -
Other, net - - (63)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable, net (1,426) - (9,564)
Inventories, net (1) - (2,467)
Prepaid expenses and other (4,374) - (14,611)
Increase (decrease) in:
Accounts payable 65 - (19,703)
Accrued interest payable - - 4,236
Accrued expenses and other (1,231) - (21,486)
Deferred revenues 1,057 - 6,176
Other non-current liabilities 5 - (350)
-------------------------------------------------------
Net cash provided by (used in) operating activities (20,887) - (45,947)
-------------------------------------------------------
INVESTING ACTIVITIES:
Additions to property, equipment and other, net (7,019) - (16,573)
Proceeds from sales of businesses and other, net 11,284 - 14,284
Payments for businesses acquired, net of cash acquired (189) - (3,917)
Payments for other investments (4,890) - (11,544)
-------------------------------------------------------
Net cash used in investing activities (814) - (17,750)
-------------------------------------------------------
FINANCING ACTIVITIES:
Intercompany activity 22,106 - -
Borrowings under credit agreements - - 206,276
Repayments of borrowings under credit agreements - - (113,289)
Proceeds from issuances of common stock, net of redemptions - - 4,715
Taxes paid associated with stock option exercises - - (16,891)
Dividends paid to preferred stock shareholders - - (13,266)
Deferred financing costs paid - - (174)
Other - - (645)
-------------------------------------------------------
Net cash provided by (used in) financing activities 22,106 - 66,726
-------------------------------------------------------
Increase (decrease) in cash and cash equivalents 405 - 3,029
Cash and cash equivalents, beginning of period 404 - 28,661
-------------------------------------------------------
Cash and cash equivalents, end of period $ 809 $ - $ 31,690
=======================================================
24
15. SUBSEQUENT EVENTS
In April 2001, the Company completed the sale of QWIZ, Inc. for gross
consideration of approximately $10,000, $7,000 of which was received in cash
with the remainder received in the form of preferred equity securities.
On May 8, 2001, the Company completed a private offering of $500,000
principal amount of 8.875% Senior Notes due 2011. The net proceeds of this
offering will be used to repay outstanding indebtedness under the Company's
revolving loan and term loan facilities.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
PRIMEDIA Inc., together with its subsidiaries, is herein referred to as
either "PRIMEDIA" or the "Company."
The following discussion and analysis of the Company's unaudited financial
condition and results of operations should be read in conjunction with the
unaudited condensed consolidated financial statements and notes thereto. The
Company's two segments are consumer and business-to-business The Company's
consumer segment produces and distributes magazines, guides and videos for
consumers in various niche markets. The Company's business-to-business
segment produces and distributes magazines, books, directories, databases and
vocational training materials to business professionals in such fields as
communications, agriculture, professional services, media, transportation and
healthcare. The consumer segment includes PRIMEDIA Magazines Inc., PRIMEDIA
Enthusiast Group, Channel One Communications Corporation, About.com, Inc.
("About"), Films for the Humanities & Sciences, Inc., and Haas Publishing
Companies, Inc. The business-to-business segment includes Intertec Publishing
Corporation, Bacon's Information, Inc., PRIMEDIA Workplace Learning, Inc.,
Industryclick Corporation, Kagan World Media, Inc. and affiliated companies
and certain product lines of PRIMEDIA Information Inc.
Management believes a meaningful comparison of the results of operations for
the three months ended March 31, 2001 and 2000 is obtained by using the
segment information and by presenting results from continuing businesses
("Continuing Businesses") which exclude the results of the non-core
businesses ("Non-Core Businesses"). The Non-Core Businesses include
Pictorial, Inc. (divested in June 2000), QWIZ, Inc. (divested in April 2001),
certain business directories (divested in October 2000) and certain other
businesses and titles (including certain titles of the youth entertainment
group) which are discontinued or will be divested.
EBITDA represents earnings before interest, taxes, depreciation, amortization
and other (income) charges ("EBITDA"). EBITDA is not intended to represent
cash flow from operating activities and should not be considered as an
alternative to net income or loss (as determined in conformity with generally
accepted accounting principles) as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity. The Company believes
EBITDA is a standard measure commonly reported and widely used by analysts,
investors and other interested parties in the media industry. Accordingly,
this information has been disclosed herein to permit a more complete
comparative analysis of the Company's operating performance relative to other
companies in its industry. EBITDA should not be considered in isolation or as
a substitute for other measures of financial performance or liquidity. The
primary difference between EBITDA and cash flow provided by (used in)
operating activities relates to changes in working capital requirements and
payments made for interest and income taxes. Additionally, EBITDA is not
available for the Company's discretionary use as there are legal requirements
to pay preferred stock dividends and repay debt, among other payments. EBITDA
as presented may not be comparable to similarly titled measures reported by
other companies, since not all companies necessarily calculate EBITDA in
identical manners, and therefore, is not necessarily an accurate measure of
comparison between companies.
26
Primedia Inc. and Subsidiaries
Unaudited Results of Consolidated Operations
(dollars in thousands)
Three Months Ended
March 31,
2001 2000
------------------ -------------------
Sales, Net:
Continuing Businesses:
Consumer $ 298,301 $ 272,195
Business-to-business 124,520 118,807
Eliminations (744) -
------------------ -------------------
Subtotal 422,077 391,002
Non-Core Businesses 4,929 13,448
------------------ -------------------
Total $ 427,006 $ 404,450
================== ===================
EBITDA:
Continuing Businesses:
Consumer $ 30,676 $ 44,070
Business-to-business 17,627 16,020
Corporate (8,230) (8,112)
------------------ -------------------
Subtotal 40,073 51,978
Non-Core Businesses (3,510) 4,165
------------------ -------------------
Total $ 36,563 $ 56,143
================== ===================
Operating Income (Loss):
Continuing Businesses:
Consumer $ (10,591) $ 18,537
Business-to-business (1,013) (393)
Corporate (13,426) (19,110)
------------------ -------------------
Subtotal (25,030) (966)
Non-Core Businesses (3,917) 1,318
------------------ -------------------
Total (28,947) 352
Other Expense:
Provision for the impairment of securities (3,248) -
Interest expense (33,161) (38,356)
Amortization of deferred
financing costs (1,013) (939)
Other, net (19,439) (488)
------------------ -------------------
Net Loss $ (85,808) $ (39,431)
================== ===================
27
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000:
CONSOLIDATED RESULTS:
Sales from Continuing Businesses increased 7.9% to $422,077 in 2001 from
$391,002 in 2000 due to growth in both segments. Total sales, including
Non-Core Businesses, increased 5.6% to $427,006 in the first quarter of 2001
from $404,450 in the 2000 period.
Since the first quarter of 2000, the Company has entered various
assets-for-equity transactions, some of which also included cash
consideration. The remainder represents advertising, content licensing and
other services to be rendered by the Company in exchange for the equity in
these entities. The Company recognizes these amounts as revenue in accordance
with the Company's revenue recognition policies. Revenue recognized in
connection with these assets-for-equity transactions was approximately
$28,500 and $33 during the three months ended March 31, 2001 and 2000,
respectively, and will be substantially reduced in future quarters.
EBITDA from Continuing Businesses decreased 22.9% to $40,073 in 2001 from
$51,978 in 2000 primarily due to higher investment in new media development.
Total EBITDA, including Non-Core Businesses, decreased 34.9% to $36,563 in
2001 from $56,143 in 2000. New media losses for the first quarter of 2001
were essentially flat with new media losses for the fourth quarter of 2000.
Operating loss from Continuing Businesses increased to $(25,030) in 2001
compared to $(966) in 2000. This increase in operating loss was primarily
attributable to the decrease in EBITDA as well as an increase in amortization
expense related to excess of purchase price over net assets acquired as a
result of the About acquisition. Total operating income (loss), including
Non-Core Businesses, decreased to $(28,947) in 2001 compared to $352 in 2000.
Interest expense decreased by 13.5% in the first quarter of 2001 compared to
2000. This decrease is the result of the Company's use of proceeds from the
sales of businesses, the Liberty Media investment in April 2000, and cash
acquired in connection with the About merger to repay borrowings under its
bank credit facilities.
CONSUMER:
Sales from Continuing Businesses increased 9.6% to $298,301 in the first
quarter of 2001 from $272,195 in 2000 due primarily to growth at the
Company's apartment guides and apartmentguide.com, growth in advertising at
the enthusiast magazines and related websites, growth in advertising revenues
at Channel One, and the About acquisition whose results are included in the
consumer segment for the month of March 2001. These increases were partially
offset by reduced newsstand sales at the soap opera and youth entertainment
group titles and one less issue of SEVENTEEN magazine in the first quarter of
2001 as compared to 2000 due to changes in the production schedule. New media
sales from Continuing Businesses increased 354.4% to $19,251 in 2001 from
$4,237 in 2000 due to the About acquisition, growth at apartmentguide.com and
growth in advertising at the enthusiast magazine related websites. Revenue
recognized in connection with assets-for-equity transactions was
approximately $23,700 and $33 during the three months ended March 31, 2001
and 2000, respectively.
EBITDA from Continuing Businesses decreased 30.4% to $30,676 in 2001 from
$44,070 in 2000. The EBITDA margin for Continuing Businesses decreased to
10.3% in 2001 from 16.2% in 2000. The decrease is primarily attributable to
increased Internet spending, one less issue of SEVENTEEN magazine in the
first quarter of 2001 as compared to 2000 due to changes in the production
schedule and reduced newsstand sales at the soap opera and youth
entertainment group titles. These decreases were offset by strength at the
Company's apartment guides and Channel One. New media losses for the first
quarter of 2001 were essentially flat with new media losses for the fourth
quarter of 2000. In addition, single copy
28
sales levels related to the soap opera titles for the first quarter of 2001
were consistent with sales levels for the fourth quarter of 2000.
Operating income (loss) from Continuing Businesses, decreased to $(10,591) in
2001 from $18,537 in 2000. The decrease in operating income was primarily
attributable to the decrease in EBITDA as well as an increase in amortization
expense related to excess of purchase price over net assets acquired as a
result of the About acquisition.
BUSINESS-TO-BUSINESS:
Sales from Continuing Businesses increased 4.8% to $124,520 in the first
quarter of 2001 from $118,807 in 2000 primarily due to higher new media sales
at Industryclick, sales growth at PRIMEDIA Workplace Learning and an
acquisition. New media sales from Continuing Businesses increased 40.4% to
$5,668 in 2001 from $4,038 in 2000. Revenue recognized in connection with
assets-for-equity transactions was approximately $4,800 and $0 during the
three months ended March 31, 2001 and 2000, respectively.
EBITDA from Continuing Businesses increased 10.0% to $17,627 in 2001 from
$16,020 in 2000. The EBITDA margin increased to 14.2% in 2001 from 13.5% in
2000 primarily due to the reversal of a $4,000 sales tax accrual that was no
longer required.
Operating loss from Continuing Businesses increased to $(1,013) in 2001 from
$(393) in 2000. The increase in operating loss is primarily attributable to
the provision for severance, closures and integration costs recorded in 2001,
which was partially offset by the increase in EBITDA as well as a decrease in
amortization expense related to excess of purchase price over net assets
acquired and other intangible assets as a result of certain divestitures.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated working capital, including net assets held for sale and current
portion of long-term debt, was $(271,079) at March 31, 2001 as compared to
$(346,447) at December 31, 2000. Consolidated working capital reflects
certain industry working capital practices and accounting principles,
including the recording of certain deferred revenues as a current liability
as well as the expensing of most advertising, editorial and product
development costs as incurred. Consolidated working capital increased at
March 31, 2001 due to increases in net assets held for sale as well as other
working capital changes.
Net cash used in operating activities during the three months ended March 31,
2001, after interest payments of $28,356 in 2001 and $32,524 in 2000, was
$101,830, as compared to $45,947 during the same 2000 period, due primarily
to increased new media losses, as well as other working capital changes. Net
additions to property, equipment and other were $14,311 during the three
months ended March 31, 2001 compared to $16,573 during the 2000 period due to
higher levels of spending last year relating to new office space and
capitalized internal use software expenditures. Net cash provided by (used
in) investing activities during the three months ended March 31, 2001
increased to $75,346 compared to $(17,750) in the same 2000 period primarily
due to cash acquired from the About acquisition. Net cash provided by
financing activities during the three months ended March 31, 2001 was
$14,929, compared to $66,726 in the same 2000 period. Net borrowings were
lower in 2001 primarily due to cash acquired from the About acquisition.
The Company believes its liquidity, capital resources and cash flow are
sufficient to fund planned capital expenditures, working capital
requirements, interest and principal payments on its debt, the payment of
preferred stock dividends and other anticipated expenditures for the next two
to three years.
29
PROVISION FOR SEVERANCE, CLOSURES AND INTEGRATION COSTS
During 2000 and 2001, the Company implemented plans to integrate the Company
and consolidate many back office functions. All integration costs were
expensed as incurred. A summary of the status of these plans as of March 31,
2001 is presented below.
2001 PLAN
With the acquisition of About coupled with other cost initiatives, during the
first quarter of 2001, the Company announced the details of a plan that would
continue to implement and expand upon the initiatives enacted during 2000.
During 2001, the Company recognized approximately $6,500 of severance,
closures and integration costs and paid approximately $3,200 of these costs.
These severance, closures and integration costs include charges relating to
employee termination and other employee costs, contract and lease
terminations, consulting, office relocation and recruiting.
A significant portion of the remaining costs are expected to be paid during
the remainder of 2001 with the balance to be paid in 2002. The Company is
currently developing additional initiatives aimed largely at the
consolidation of certain functions and the further integration of the
Company, and accordingly expects to record additional severance, closures and
integration costs during 2001.
2000 PLAN
During 2000, the Company announced the implementation of a plan to integrate
the Company and consolidate many back office functions. During 2001, the
Company made payments approximating $2,900 relating to the balance
outstanding as of December 31, 2000 in connection with the 2000 plan.
The majority of the remaining costs, which approximates $8,300, are expected
to be paid by the end of 2001 with the balance to be paid through the end of
2003.
As a result of the 2000 and 2001 plans already put in place, the Company will
close and consolidate in excess of fifteen office locations and will
terminate approximately 490 individuals. All individuals who will be
terminated under these plans have been notified. As of March 31, 2001,
approximately 365 of those individuals have been terminated.
Management anticipates that these plans will result in significant savings
during the remainder of 2001 and beyond.
RECENT DEVELOPMENTS
In April 2001, the Company completed the sale of QWIZ, Inc. for gross
consideration of approximately $10,000, $7,000 of which was received in cash
with the remainder received in the form of preferred equity securities.
On May 8, 2001, the Company completed a private offering of $500,000
principal amount of 8.875% Senior Notes due 2011. The net proceeds of this
offering will be used to repay outstanding indebtedness under the Company's
revolving loan and term loan facilities.
30
IMPACT OF INFLATION
The impact of inflation was immaterial during 2000 and through the first
three months of 2001. The Company's paper expense decreased approximately 2%
during the first three months of 2001. In the first three months of 2001,
paper costs represented approximately 7% of the Company's total operating
costs and expenses. Postage for product distribution and direct mail
solicitations is also a significant expense of the Company. The Company uses
the U.S. Postal Service for distribution of many of its products and
marketing materials. Postage rates increased approximately 10% in January
2001. In the past, the effects of inflation on operating expenses have
substantially been offset by PRIMEDIA's ability to increase selling prices.
No assurances can be given that the Company can pass such cost increases
through to its customers. In addition to pricing actions, the Company is
continuing to examine all aspects of the manufacturing and purchasing
processes to identify ways to offset some of these price increases.
FORWARD-LOOKING INFORMATION
This report contains certain forward-looking statements concerning the
Company's operations, economic performance and financial condition. These
statements are based upon a number of assumptions and estimates, which are
inherently subject to uncertainties and contingencies, many of which are
beyond the control of the Company, and reflect future business decisions,
which are subject to change. Some of the assumptions may not materialize and
unanticipated events will occur which can affect the Company's results.
31
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the first three-months of 2001, there were no significant changes related
to the Company's market risk exposure.
32
Item 6. REPORTS ON FORM 8-K
On March 1, 2001, PRIMEDIA Inc. filed its Current Report on Form 8-K to
announce the completion of the merger between PRIMEDIA Inc. and About.com,
Inc.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRIMEDIA Inc.
(Registrant)
Date: May 15, 2001 /s/ Thomas S. Rogers
------------------------ ----------------------------------------
(Signature)
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 2001 /s/ Lawrence R. Rutkowski
------------------------ ----------------------------------------
(Signature)
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)