SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) August 24, 2001
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
--------------
2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
(a) On August 24, 2001, PRIMEDIA Inc. ("PRIMEDIA" or the "Company") completed
the acquisition of the publishing business of EMAP, Inc. ("EMAP") for
purchase consideration of approximately $525 million.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(b) Pro forma financial information.
An introduction to the pro forma consolidated financial statements is
attached as page 3. The unaudited pro forma statements of consolidated
operations for the year ended December 31, 2000 and the six months ended
June 30, 2001, and an unaudited pro forma consolidated balance sheet at
June 30, 2001, along with a description of all pro forma adjustments, are
attached as pages 4 through 12.
(c) Audited consolidated financial statements of EMAP.
EMAP's audited consolidated financial statements as of and for the year
ended March 31, 2001 and the notes thereto and the unaudited consolidated
financial statements as of and for the three months ended June 30, 2001 and
the notes thereto are attached as pages 13 through 32.
(d) Exhibits
23.1 Consent of PricewaterhouseCoopers, LLP
3
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma statements of consolidated operations for the year ended
December 31, 2000 and the six months ended June 30, 2001 give effect to the
acquisitions of all of the outstanding common stock of About.com, Inc. ("About")
and EMAP as if they had occurred on January 1, 2000. The unaudited pro forma
statement of consolidated operations for the year ended December 31, 2000
includes adjustments to reflect the historical operating results of About for
the twelve months ended December 31, 2000 and the historical operating results
of EMAP for the twelve months ended March 31, 2001. The historical operating
results of PRIMEDIA for the six months ended June 30, 2001 include the operating
results of About subsequent to the merger date (February 28, 2001). The
unaudited pro forma statement of consolidated operations for the six months
ended June 30, 2001 includes adjustments to reflect the historical operating
results of About for the two months ended February 28, 2001 and the historical
operating results of EMAP for the six months ended June 30, 2001. The historical
balance sheet of PRIMEDIA as of June 30, 2001 includes the financial position of
About. The unaudited pro forma consolidated balance sheet as of June 30, 2001
gives effect to the acquisition of EMAP as if it had occurred on June 30, 2001,
based on the purchase method of accounting.
The Company believes the accounting used for the pro forma adjustments provides
a reasonable basis on which to present the unaudited pro forma consolidated
financial statements. The pro forma adjustments do not include any synergies
expected to be derived from the transactions. In addition, the pro forma
adjustments do not include the pro forma impact of PRIMEDIA's other acquisitions
during 2000 or 2001 because the impact of such acquisitions is not significant
to the consolidated entity. The pro forma statements of consolidated operations
and pro forma consolidated balance sheet are unaudited and were derived by
adjusting the historical consolidated financial statements of the Company, About
and EMAP. THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS ARE PROVIDED
FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED TO BE INDICATIVE OF
THE COMPANY'S CONSOLIDATED RESULTS OF OPERATIONS OR CONSOLIDATED FINANCIAL
POSITION HAD THE TRANSACTIONS BEEN CONSUMMATED ON THE DATES ASSUMED AND DO NOT
PROJECT THE COMPANY'S CONSOLIDATED RESULTS OF OPERATIONS OR CONSOLIDATED
FINANCIAL POSITION FOR ANY FUTURE DATE OR PERIOD.
The unaudited pro forma consolidated financial statements and accompanying notes
thereto should be read in conjunction with the PRIMEDIA historical consolidated
financial statements and the notes thereto included in PRIMEDIA's Annual Report
on Form 10-K for the year ended December 31, 2000 and PRIMEDIA's Quarterly
Report on Form 10-Q for the six months ended June 30, 2001, PRIMEDIA's Current
Report on Form 8-K/A dated February, 28, 2001 relating to the merger of PRIMEDIA
and About, which includes About's historical consolidated financial statements
as of December 31, 2000 and 1999 and for the three years in the period ended
December 31, 2000 and the notes thereto, as well as EMAP's historical
consolidated financial statements as of and for the year ended March 31, 2001
and as of and for the three months ended June 30, 2001 and the notes thereto
included herein.
4
PRIMEDIA INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AT JUNE 30, 2001
(dollars in thousands)
Historical EMAP
PRIMEDIA Historical Pro forma
(Including About) EMAP Adjustments
----------------- ---------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 13,300 $ - $ -
Accounts receivable, net 258,073 56,865 -
Inventories, net 34,351 14,386 -
Current portion of deferred subscription acquisition costs - 39,106 (39,106) (q)
Net assets held for sale 20,677 - -
Prepaid expenses and other 77,309 9,743 -
----------- ----------- ------------
Total current assets 403,710 120,100 (39,106)
Property and equipment, net 188,349 4,425 -
Other intangible assets, net 528,487 - 161,861 (a)
Excess of purchase price over net assets acquired, net 1,561,146 1,153,352 (1,153,352) (a)
377,677 (a)
Deferred income tax asset, net 135,000 - -
Other investments 163,288 5,296 -
Related party receivable from EMAP America Partners - 68,334 (68,334) (a)
Related party receivable from For Him Magazine - 26,083 (26,083) (a)
Deferred subscription acquisition costs - 45,526 (45,526) (q)
Other non-current assets 80,343 14,789 -
----------- ----------- ------------
$3,060,323 $1,437,905 $ (792,863)
=========== =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 74,787 $ - $ 3,647
Accrued interest payable 27,165 - 2
Accrued expenses and other 220,834 24,848 20,000 (a)
2,000 (a)
(3,649)(q)
Deferred revenues (a) 215,796 82,332 (39,106)(q)
Current maturities of long-term debt 8,074 9,000 (9,000)(a)
----------- ----------- ------------
Total current liabilities 546,656 116,180 (26,106)
----------- ----------- ------------
Long-term debt 1,720,207 - 265,000 (a)
----------- ----------- ------------
Deferred revenues 62,486 67,972 (45,526)(q)
----------- ----------- ------------
Related party payables to EMAP plc - 42,000 (42,000)(a)
----------- ----------- ------------
Other non-current liabilities 19,117 9,522 -
----------- ----------- ------------
Exchangeable preferred stock 562,141 - -
----------- ----------- ------------
Shareholders' equity:
Series J convertible preferred stock - - 114,232 (a)
Common stock 2,240 - 266 (a)
Additional paid-in capital 2,130,012 - 10,000 (a)
124,734 (a)
10,768 (a)
(2,000)(a)
5,622 (a)
(5,622)(a)
Accumulated deficit (1,855,115) (329,769) 329,769 (b)
Accumulated other comprehensive loss (3,967) - -
Unearned compensation (48,589) - -
Common stock in treasury, at cost (74,865) - -
Parent investment - 1,532,000 (1,532,000)(b)
----------- ----------- ------------
Total shareholders' equity 149,716 1,202,231 (944,231)
----------- ----------- ------------
$3,060,323 $1,437,905 $ (792,863)
=========== =========== ============
Pro forma
Consolidated
With About
and EMAP
-----------
ASSETS
Current assets:
Cash and cash equivalents $ 13,300
Accounts receivable, net 314,938
Inventories, net 48,737
Current portion of deferred subscription acquisition costs -
Net assets held for sale 20,677
Prepaid expenses and other 87,052
-----------
Total current assets 484,704
Property and equipment, net 192,774
Other intangible assets, net 690,348
Excess of purchase price over net assets acquired, net 1,938,823
Deferred income tax asset, net 135,000
Other investments 168,584
Related party receivable from EMAP America Partners -
Related party receivable from For Him Magazine -
Deferred subscription acquisition costs -
Other non-current assets 95,132
-----------
$ 3,705,365
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 78,434
Accrued interest payable 27,167
Accrued expenses and other 264,033
Deferred revenues (a) 259,022
Current maturities of long-term debt 8,074
-----------
Total current liabilities 636,730
-----------
Long-term debt 1,985,207
-----------
Deferred revenues 84,932
-----------
Related party payables to EMAP plc -
-----------
Other non-current liabilities 28,639
-----------
Exchangeable preferred stock 562,141
-----------
Shareholders' equity:
Series J convertible preferred stock 114,232
Common stock 2,506
Additional paid-in capital 2,273,514
Accumulated deficit (1,855,115)
Accumulated other comprehensive loss (3,967)
Unearned compensation (48,589)
Common stock in treasury, at cost (74,865)
Parent investment -
-----------
Total shareholders' equity 407,716
-----------
$ 3,705,365
===========
See notes to unaudited pro forma consolidated financial statements.
5
PRIMEDIA INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CONSOLIDATED OPERATIONS
YEAR ENDED DECEMBER 31, 2000
(dollars in thousands, except per share amounts)
Historical About
--------------------------- Pro forma
PRIMEDIA About Adjustments
------------- ------------ -------------
Sales, net $ 1,690,952 $ 96,968 $ (15,405)(b)
9,127 (k)
Operating costs and expenses:
Cost of goods sold (excluding $3,695 of historical non-cash
compensation) 394,494 31,086 -
Marketing and selling 386,843 52,020 (9,997)(b)
Distribution, circulation and fulfillment 255,511 - -
Editorial 137,845 - -
Product development - 18,530 -
Other general expenses (excluding $935 of historical non-cash compensation) 225,606 17,617 400 (e)
2,300 (f)
17,042 (k)
Corporate administrative expenses (excluding $27,810 of historical
non-cash compensation and $30,714 of pro forma non-cash compensation) 33,974 1,596 (1,596)(j)
Depreciation of property and equipment 52,920 6,552 -
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 128,355 39,086 125,775 (g)
Non-cash compensation and non-cash non-recurring charges 35,210 4,630 12,061 (c)
14,623 (d)
4,030 (l)
Provision for severance, closures and integration costs 20,798 - -
Gain on sale of businesses and other, net (14,438) - -
------------- ------------ ---------------
Operating income (loss) 33,834 (74,149) (170,916)
Other income (expense):
Provision for the impairment of investments (188,526) - -
Interest income (expense), net (143,988) 8,722 -
Amortization of deferred financing costs (3,836) - -
Other, net (3,110) (4,394) -
------------- ------------ ---------------
Loss before income tax expense (305,626) (69,821) (170,916)
Income tax expense (41,200) - -
------------- ------------ ---------------
Net loss (346,826) (69,821) (170,916)
Preferred stock dividends and related accretion (53,063) - -
------------- ------------ ---------------
Loss applicable to common shareholders $ (399,889) $ (69,821) $ (170,916)
============= ============ ===============
Basic and diluted loss applicable to common shareholders per
common share (h) $ (2.48) $ (3.82)
------------- ------------
Basic and diluted common shares outstanding 161,104,053 18,283,244 (18,283,244)(b)
============= ============
44,976,409 (h)
===============
Pro forma EMAP
Consolidated Historical Pro forma
With About EMAP Adjustments
------------- ---------- -----------
Sales, net $ 1,781,642 $ 362,850 $ -
Operating costs and expenses:
Cost of goods sold (excluding $3,695 of historical non-cash
compensation) 425,580 93,521 -
Marketing and selling 428,866 64,049 -
Distribution, circulation and fulfillment 255,511 56,627 -
Editorial 137,845 33,020 -
Product development 18,530 - -
Other general expenses (excluding $935 of historical non-cash compensation) 262,965 59,795 -
Corporate administrative expenses (excluding $27,810 of historical
non-cash compensation and $30,714 of pro forma non-cash compensation) 33,974 - -
Depreciation of property and equipment 59,472 2,863 -
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 293,216 145,208 (90,482)(l)
Non-cash compensation and non-cash non-recurring charges 70,554 - -
Provision for severance, closures and integration costs 20,798 - -
Gain on sale of businesses and other, net (14,438) - -
------------- --------- -------
Operating income (loss) (211,231) (92,233) 90,482
Other income (expense):
Provision for the impairment of investments (188,526) (14,073) -
Interest income (expense), net (135,266) (3,008) (21,412)(m)
Amortization of deferred financing costs (3,836) - -
Other, net (7,504) - -
------------- --------- -------
Loss before income tax expense (546,363) (109,314) 69,070
Income tax expense (41,200) (171) -
------------- --------- -------
Net loss (587,563) (109,485) 69,070
(16,373)(n)
Preferred stock dividends and related accretion (53,063) - (10,768)(p)
------------- --------- -------
Loss applicable to common shareholders $ (640,626) $(109,485) $ 41,929
============= ========= =========
Basic and diluted loss applicable to common shareholders per
common share (h) $ (3.11)
-------------
Basic and diluted common shares outstanding 206,080,462 26,595,745 (o)
============= ==============
Pro forma
Consolidated
With About
and EMAP
------------
Sales, net $ 2,144,492
Operating costs and expenses:
Cost of goods sold (excluding $3,695 of historical non-cash
compensation) 519,101
Marketing and selling 492,915
Distribution, circulation and fulfillment 312,138
Editorial 170,865
Product development 18,530
Other general expenses (excluding $935 of historical non-cash compensation) 322,760
Corporate administrative expenses (excluding $27,810 of historical
non-cash compensation and $30,714 of pro forma non-cash compensation) 33,974
Depreciation of property and equipment 62,335
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 347,942
Non-cash compensation and non-cash non-recurring charges 70,554
Provision for severance, closures and integration costs 20,798
Gain on sale of businesses and other, net (14,438)
------------
Operating income (loss) (212,982)
Other income (expense):
Provision for the impairment of investments (202,599)
Interest income (expense), net (159,686)
Amortization of deferred financing costs (3,836)
Other, net (7,504)
-------------
Loss before income tax expense (586,607)
Income tax expense (41,371)
------------
Net loss (627,978)
Preferred stock dividends and related accretion (80,204)
------------
Loss applicable to common shareholders $ (708,182)
============
Basic and diluted loss applicable to common shareholders per
common share (h) $ (3.04)
------------
Basic and diluted common shares outstanding 232,676,207
============
See notes to unaudited pro forma consolidated financial statements.
6
PRIMEDIA INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CONSOLIDATED OPERATIONS
SIX MONTHS ENDED JUNE 30, 2001
(dollars in thousands, except per share amounts)
Historical
------------------------------------------
PRIMEDIA About
(Including About (January 1, 2001
Subsequent to Through
February 28, 2001) February 28, 2001)
------------------ ------------------
Sales, net $ 872,284 $ 5,714
Operating costs and expenses:
Cost of goods sold 214,477 8,258
Marketing and selling 218,415 43,593
Distribution, circulation and fulfillment 138,949 --
Editorial 77,712 3,846
Other general expenses (excluding $856 of historical
non-cash compensation) 124,768 5,012
Corporate administrative expenses (excluding $11,042 of
historical non-cash compensation and $1,540 of
pro forma non-cash compensation) 16,090 4,830
Depreciation of property and equipment 30,845 1,357
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 117,738 8,896
Non-cash compensation and non-cash non-recurring charges 12,727 856
Provision for severance, closures and integration costs 12,502 --
Gain on sale of businesses and other, net (503) --
----------- -------
Operating income (loss) (91,436) (70,934)
Other income (expense):
Provision for the impairment of investments (30,807) --
Interest income (expense), net (66,854) 980
Amortization of deferred financing costs (9,063) --
Other, net (27,328) (3,388)
----------- -------
Loss before income tax expense (225,488) (73,342)
Income tax expense -- --
----------- -------
Net loss (225,488) (73,342)
Preferred stock dividends and related accretion (27,347) --
----------- -------
Loss applicable to common shareholders $ (252,835) $ (73,342)
============= =============
Basic and diluted loss applicable to common shareholders per
common share (h) $ (1.28)
-----------
Basic and diluted common shares outstanding 198,271,477
===========
About Pro forma
Pro forma Consolidated
Adjustments With About
----------------- -------------------
Sales, net $ (23,429)(b) $ 854,569
Operating costs and expenses:
Cost of goods sold -- 222,735
Marketing and selling (28,596)(b) 233,412
Distribution, circulation and fulfillment -- 138,949
Editorial -- 81,558
Other general expenses (excluding $856 of historical
non-cash compensation) 67 (e) 130,231
384 (f)
Corporate administrative expenses (excluding $11,042 of
historical non-cash compensation and $1,540 of
pro forma non-cash compensation) (4,830)(j) 16,090
Depreciation of property and equipment -- 32,202
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 19,160 (g) 145,794
Non-cash compensation and non-cash non-recurring charges 563 (c) 15,123
682 (d)
295 (i)
Provision for severance, closures and integration costs -- 12,502
Gain on sale of businesses and other, net -- (503)
---------- -----------
Operating income (loss) (11,154) (173,524)
Other income (expense):
Provision for the impairment of investments (30,807)
Interest income (expense), net -- (65,874)
Amortization of deferred financing costs -- (9,063)
Other, net -- (30,716)
---------- -----------
Loss before income tax expense (11,154) (309,984)
Income tax expense -- --
---------- -----------
Net loss (11,154) (309,984)
Preferred stock dividends and related accretion -- (27,347)
---------- -----------
Loss applicable to common shareholders $ (11,154) $ (337,331)
========== ===========
Basic and diluted loss applicable to common shareholders per
common share (h) $ (1.58)
-----------
Basic and diluted common shares outstanding 15,846,145 (h) 214,117,622
========== ===========
EMAP
Historical Pro forma
EMAP Adjustments
---------------- -----------------
Sales, net $ 162,808 $ --
Operating costs and expenses:
Cost of goods sold 38,461 --
Marketing and selling 31,476 --
Distribution, circulation and fulfillment 26,949 --
Editorial 17,205 --
Other general expenses (excluding $856 of historical
non-cash compensation) 26,951 --
Corporate administrative expenses (excluding $11,042 of
historical non-cash compensation and $1,540 of
pro forma non-cash compensation) -- --
Depreciation of property and equipment 1,059 --
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 87,796 (51,054)(l)
Non-cash compensation and non-cash non-recurring charges -- --
Provision for severance, closures and integration costs -- --
Gain on sale of businesses and other, net -- --
---------------- -----------
Operating income (loss) (67,089) 51,054
Other income (expense):
Provision for the impairment of investments (14,981) --
Interest income (expense), net (952) (8,891)(m)
Amortization of deferred financing costs -- --
Other, net -- --
---------------- -----------
Loss before income tax expense (83,022) 42,163
Income tax expense (358) --
---------------- -----------
Net loss (83,380) 42,163
Preferred stock dividends and related accretion -- (8,974)(n)
---------------- -----------
Loss applicable to common shareholders $ (83,380) $ 33,189
================ ===========
Basic and diluted loss applicable to common shareholders per
common share (h)
Basic and diluted common shares outstanding 26,595,745 (o)
==========
Pro forma
Consolidated
With About
and EMAP
----------------------
Sales, net $ 1,017,377
Operating costs and expenses:
Cost of goods sold 261,196
Marketing and selling 264,888
Distribution, circulation and fulfillment 165,898
Editorial 98,763
Other general expenses (excluding $856 of historical
non-cash compensation) 157,182
Corporate administrative expenses (excluding $11,042 of
historical non-cash compensation and $1,540 of
pro forma non-cash compensation) 16,090
Depreciation of property and equipment 33,261
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 182,536
Non-cash compensation and non-cash non-recurring charges 15,123
Provision for severance, closures and integration costs 12,502
Gain on sale of businesses and other, net (503)
--------------------
Operating income (loss) (189,559)
Other income (expense):
Provision for the impairment of investments (45,788)
Interest income (expense), net (75,717)
Amortization of deferred financing costs (9,063)
Other, net (30,716)
--------------------
Loss before income tax expense (350,843)
Income tax expense (358)
--------------------
Net loss (351,201)
Preferred stock dividends and related accretion (36,321)
--------------------
Loss applicable to common shareholders $ (387,522)
====================
Basic and diluted loss applicable to common shareholders per
common share (h) $ (1.61)
--------------------
Basic and diluted common shares outstanding 240,713,367
====================
See notes to unaudited pro forma consolidated financial statements.
7
PRIMEDIA Inc. and Subsidiaries
Notes to Unaudited Pro Forma Consolidated Financial Statements
(dollars in thousands, except per share amounts)
(a) On August 24, 2001, the Company acquired the publishing business of
EMAP from EMAP America Partners. The total consideration was $525,000
comprised of $515,000 in cash and a warrant to acquire 2,000,000 shares of
the Company's common stock. The fair value of the warrant was approximately
$10,000 and was determined using a Black Scholes pricing model.
The Company has financed the acquisition of EMAP by (1) issuing $125,000 of
Series J Convertible Preferred Stock to KKR 1996 Fund and (2) drawing upon
its revolving credit facility in an amount of approximately $265,000. In
addition, KKR 1996 Fund purchased from the Company $125,000 of common stock
and Series K Convertible Preferred Stock, both at a price per share equal
to $4.70. This resulted in an additional 10,800,000 shares of common stock
and 15,795,745 shares of Series K Convertible Preferred Stock. On September
27,2001, KKR 1996 Fund converted all of the issued and outstanding shares
of the Series K Convertible Preferred Stock into 15,795,745 shares of the
Company's common stock. For purposes of the pro forma statements of
consolidated operations and the pro forma consolidated balance sheet,
the Company has reflected the conversion of the Series K Convertible
Preferred Stock as of January 1, 2000 and June 30, 2001, respectively.
The Series J Convertible Preferred Stock is convertible at the option of
the holder one year from the date of issuance, into shares of the Company's
common stock at a conversion price of $125,000 divided by $7 per share,
subject to adjustment. Dividends on the Series J Convertible Preferred
Stock accrue at an annual rate of 12.5% and are payable quarterly in kind.
The Company has the option to redeem any or all of the shares of the Series
J Convertible Preferred Stock at any time for cash at 100% of the
liquidation preference of each share being redeemed. On any dividend
payment date, the Company has the option to exchange the Series J
Convertible Preferred Stock into 12.5% Class J Subordinated Notes. The
Company's ability to redeem or exchange the Series J Convertible Preferred
Stock into debt is subject to the approval of a majority of the independent
directors.
In connection with the equity financing by KKR 1996 Fund, the Company paid
KKR 1996 Fund a commitment fee consisting of warrants to purchase 1,250,000
shares of common stock of the Company at an exercise price of $7 per share,
subject to adjustment, and a funding fee consisting of warrants to purchase
an additional 2,620,000 shares of the Company's common stock at an exercise
price of $7 per share, subject to adjustment. These warrants may be
exercised after the first anniversary of the grant date. In addition, the
Company may issue to KKR 1996 Fund additional warrants to purchase up to
4,000,000 shares of the Company's common stock at an exercise price of $7
per share, subject to adjustment. The issuance of the additional 4,000,000
warrants is contingent upon the length of time that the Series J
Convertible Preferred Stock is outstanding. If the Series J Convertible
Preferred Stock is outstanding for three, six, nine or twelve months from
the date of issuance, KKR 1996 Fund will receive the warrants to purchase
250,000, 1 million, 1.25 million and 1.5 million shares of common stock,
respectively. The pro forma financial statements do not reflect the
issuance of the additional 4,000,000 contingent warrants. Upon issuance,
the Company would value these contingent warrants using the Black Scholes
pricing model and would deduct the ascribed value as a component of the
loss applicable to common shareholders.
8
The 1,250,000 warrants issued to KKR 1996 Fund represent a commitment fee
related to the financing transaction as a whole. The Company valued these
warrants at $5,622 using the Black Scholes pricing model and recorded them
as a component of additional paid-in capital.
The Company attributed the 2,620,000 funding warrants to the issuance of
the Series J Convertible Preferred Stock. The Company valued these warrants
at $10,768 using the Black Scholes pricing model and has accordingly
reduced the face value of the Series J Convertible Preferred Stock. The
Company is accreting the difference between the carrying value and the
redemption value of the Series J Convertible Preferred Stock to additional
paid in capital over a one year period as the earliest date at which the
preferred stock is convertible is one year from the date of issuance.
The following is a summary of the calculation of the purchase price, as
described above, as well as the allocation of the purchase price to the
fair value of the net assets acquired:
Purchase consideration $ 525,000
Estimated direct acquisition costs 20,000
--------------
Total estimated purchase price 545,000
Less: Fair value of net tangible assets of EMAP, net of related
party accounts and current maturities of long-term debt, which
have not been acquired 5,462
--------------
Total excess of purchase price over net assets acquired and
intangible assets 539,538
Allocated to other identifiable intangibles 161,861
--------------
Allocated to excess of purchase price over net assets acquired $ 377,677
==============
For purposes of these pro forma financial statements, the Company has
estimated $22,000 of deal related costs, $20,000 of which are directly
related to the acquisition and are therefore reflected above in the
purchase price allocation. The remaining $2,000 are attributable to the
transaction financing and are therefore reflected as a reduction to
additional paid-in capital.
PRIMEDIA's management determined that the utilization of EMAP's historical
net operating losses was not likely. Therefore, no deferred tax assets have
been recorded in connection with the acquisition.
9
The purchase price has been allocated based on management's best estimate
of the fair value of assets acquired and liabilities assumed based on the
historical financial statements of EMAP as of June 30, 2001. The excess
purchase price over the fair value of net tangible assets acquired has been
allocated to other intangibles and goodwill based on an analysis of the
Company's past experience with similar acquisitions. This adjustment is
based upon preliminary estimates to reflect the allocation of purchase
consideration to the acquired assets and liabilities of EMAP. The final
allocation of the purchase consideration will be determined based on
appraisals and a comprehensive final evaluation of the fair values and
useful lives of EMAP's tangible assets acquired, identifiable intangible
assets and excess of purchase price over net assets acquired at the time of
the acquisition. The final determination may result in asset and liability
fair values that are different than the preliminary estimates of these
amounts. For purposes of purchase price allocation, it has been assumed
that the fair value of deferred revenues approximates EMAP's historical
carrying value. At the acquisition date, the fair value of EMAP's deferred
revenues represented the fair value of the contractual performance
obligation based upon the nature of the activities to be performed and the
related costs to be incurred. No adjustment to the historical carrying
value of deferred revenues was required.
During the year ended March 31, 2001, EMAP acquired substantially all of
the assets of various magazine publishers, including all rights to certain
magazines and one automobile show. The results of operations of these
acquisitions have been consolidated with EMAP since the dates of
acquisition. If all of these acquisitions had occurred on April 1, 2000,
there would not be a material impact on the results of operations and
therefore, no additional pro forma adjustments have been reflected.
(b) To eliminate the historical equity accounts of EMAP and About and
various transactions with About.
(c) To reflect non-cash compensation expense in connection with the
employment agreements of Scott P. Kurnit, founder and former Chief
Executive Officer of About, and William C. Day, co-founder and former Chief
Operating Officer of About. In connection with their employment agreements,
Messrs. Kurnit and Day were granted options to purchase 2,605,300 shares
and 877,000 shares, respectively, of PRIMEDIA common shares at an exercise
price equal to thirty percent of the fair market value per share on that
date. Accordingly, the adjustment reflects a 70% market value discount
($6.65 per share) based on a PRIMEDIA per share market value of $9.50 which
was the closing price on February 28, 2001. These options vest at a rate of
25% per year and are subject to Messrs. Kurnit's and Day's continued
employment. Accordingly, the compensation expense adjustments reflect this
pro rata vesting on a graded basis.
(d) To reflect non-cash compensation expense in connection with the
employment agreements of Messrs. Kurnit and Day. In connection with their
employment agreements, Messrs. Kurnit and Day were granted 2,211,100 shares
and 744,350 shares, respectively, of restricted PRIMEDIA common stock.
Accordingly, the adjustment reflects a PRIMEDIA per share market value of
$9.50, which was the closing price on February 28, 2001. These shares of
restricted PRIMEDIA common stock vest at a rate of 25% per year and are
subject to Messrs. Kurnit's and Day's continued employment. Accordingly,
the compensation expense adjustments reflect this pro rata vesting on a
graded basis.
10
(e) To reflect additional compensation expense to be incurred in connection
with the employment agreements of Messrs. Kurnit and Day.
(f) To reflect additional compensation expense relating to eligible
bonuses, the amount of which is $2,300 on an annual basis.
(g) To adjust pro forma amortization expense based on the excess of
purchase price over net assets acquired related to the About merger. This
excess is amortized over an estimated useful life of three years. PRIMEDIA
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. This adjustment is based upon preliminary estimates to
reflect the allocation of purchase consideration to the acquired assets and
liabilities of About. The final allocation of the purchase consideration
will be determined based on appraisals and a comprehensive final evaluation
of the fair values and useful lives of About's tangible assets acquired,
identifiable intangible assets and excess of purchase price over net assets
acquired at the time of the merger. The final determination may result in
asset and liability fair values that are different than the preliminary
estimates of these amounts. The pro forma adjustments represent the
difference between the amortization of the $494,582 excess of purchase
price over net assets acquired over a three year period and About's
historical amortization.
(h) The pro forma adjustments reflect the additional shares issued based on
the exchange ratio used to consummate the merger and include the additional
shares of restricted PRIMEDIA common stock to be issued to Messrs. Kurnit
and Day in connection with their employment agreements that will vest in
the eighteen months after the acquisition.
Pro forma loss per share has been determined based on pro forma net loss
after preferred stock dividends and related accretion divided by the
weighted average number of shares of PRIMEDIA common shares outstanding.
Stock options were not included in the computation of pro forma loss per
share because the effect of their inclusion would be antidilutive.
The weighted average shares outstanding for the year ended December 31,
2000, is calculated as follows:
Weighted average shares of About assuming shares issued in connection
with 2000 acquisitions were outstanding for the entire year 19,383,962
Less: Weighted averages shares of About owned by PRIMEDIA 486,296
-------------
Total shares 18,897,666
11
Exchange ratio 2.3409
-------------
Subtotal 44,237,546
Shares of restricted PRIMEDIA common stock issued to Messrs. Kurnit
and Day that will vest in the first year of the acquisition (see note (d)) 738,863
-------------
Total About weighted average shares outstanding at December 31, 2000 44,976,409
=============
The adjustment to the weighted averages shares outstanding for the six
months ended June 30, 2001, is calculated as follows:
Pro forma adjustment to PRIMEDIA's weighted average shares assuming shares
issued in connection with the About acquisition were outstanding for the
six months ended June 30, 2001 14,984,078
Shares of restricted PRIMEDIA common stock issued to Messrs. Kurnit and Day
that vest during the fourteen months ended February 28, 2001 (see note (d)) 862,067
-------------
Total pro forma adjustment at June 30, 2001 15,846,145
=============
(i) The pro forma adjustments reflect the amortization of the unearned
compensation, on a graded basis relating to the intrinsic value of the
"in-the-money" unvested replacement options that were granted to About
employees on the date of the merger. On February 28, 2001, the date that
the Company granted these unvested replacement options, the intrinsic value
of the "in-the-money" unvested replacement options was $19,741. Based on a
four-year service period from the original date these options were granted,
the Company classified $7,592 as unearned compensation relating to the
unvested options. The remaining $12,148 was included within the total
purchase price of About.
(j) The pro forma adjustment reflects the elimination of merger related
costs incurred by About that were charged to operations.
(k) The pro forma adjustment reflects the pro forma impact of About's
acquisitions during 2000 for the periods prior to the date of acquisition.
12
(l) To adjust pro forma amortization expense based on the excess of
purchase price over net assets acquired and other intangible assets related
to the acquisition of EMAP. For purposes of these pro forma financial
statements, the Company has assumed that this excess of purchase price over
net assets acquired would be amortized over an estimated useful life of
fifteen years. PRIMEDIA believes that a fifteen-year life is consistent
with other mergers of a comparable nature. For purposes of these pro forma
financial statements, the Company has assumed that the identifiable
intangible assets would be amortized over an estimated useful life of
fifteen years. The final allocation of purchase price may result in
amortization expense that is different than the preliminary estimate of
this amount. The pro forma adjustments represent the difference between the
amortization of the $377,677 excess of purchase price over net assets
acquired over a fifteen year period, the amortization of the $161,861 other
intangible assets over a fifteen year period and EMAP's historical
amortization. For purposes of these pro forma financial statements, the
Company has assumed that Statement of Financial Accounting Standards No.
142 ("SFAS No. 142"), "Goodwill and Other Intangibles", which was issued by
the Financial Accounting Standards Board in June 2001, was not in effect.
SFAS No. 142, eliminates the requirement to record amortization expense on
goodwill and intangible assets with an infinite useful life.
(m) To adjust interest expense resulting from the increased level of
borrowings ($265,000) needed to finance the EMAP acquisition at an assumed
weighted average interest rate of 6.71% for the six months ended June 30,
2001 and 8.08% for the year ended December 31, 2000. The interest rates
used represent the weighted average interest rates on similar borrowings
during these periods.
(n) To reflect quarterly dividends related to the Series J convertible
preferred stock issued in connection with the EMAP acquisition. The
calculation of these dividends assumes in-kind payment of dividends at an
annual rate of 12.5%, on a perpetual basis.
(o) The pro forma adjustment represents the additional shares of common
stock issued to consummate the acquisition, including the conversion of
the Series K Convertible Preferred Stock to common stock (see note (a)).
(p) To reflect the accretion of the difference between the Series J
Convertible Preferred Stock carrying value and its redemption value. This
difference is being amortized by periodic charges to additional paid in
capital over a one-year period as the earliest date at which the preferred
stock is convertible is one year from the date of issuance.
(q) To conform EMAP's accounting classifications to those used by
PRIMEDIA.
13
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Primedia, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, parent investment and deficit and cash
flows, present fairly, in all material respects, the financial position of the
publishing business of emap, Inc. acquired by Primedia, Inc. ("the Business"),
as defined in Note 1, at March 31, 2001, and the results of its operations and
its cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America. These consolidated financial
statements are the responsibility of the Business's management; our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. We conducted our audit in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall consolidated financial statement presentation. We believe
that our audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers, LLP
Century City
California
September 28, 2001
14
PUBLISHING BUSINESS OF EMAP, INC. ACQUIRED BY PRIMEDIA, INC.
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2001
(IN THOUSANDS)
--------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,953
Accounts receivable, net of allowance for doubtful accounts of $2,575 63,171
Inventories 15,629
Current portion of deferred subscription acquisition costs 41,556
Other prepaid expenses and current assets 8,370
----------
Total current assets 130,679
----------
Investments 5,296
Related party receivable from EAP 56,874
Related party receivable from FHM 21,848
Deferred direct response advertising costs, net of accumulated amortization of $30,267 11,557
Deferred subscription acquisition costs 48,975
Property and equipment, net of accumulated depreciation of $3,533 4,871
Other assets 4,174
Excess of purchase price over net assets acquired, net of accumulated amortization of $374,871 1,181,284
---------
Total assets $1,465,558
==========
LIABILITIES AND PARENT INVESTMENT AND DEFICIT
Current liabilities:
Accounts payable $ 13,088
Accrued liabilities 13,451
Accrued payroll and related costs 7,695
Unearned revenue 16,612
Customer incentives payable 3,660
Current portion of unearned subscription revenue 74,686
Loan payable 4,000
----------
Total current liabilities 133,192
----------
Unearned subscription revenue 72,363
Related party payables to PLC 29,002
Other noncurrent liabilities 9,761
----------
Total liabilities 244,318
----------
Commitments and contingencies ( Note 10)
Parent investment and deficit:
Parent investment 1,532,000
Accumulated deficit (310,760)
----------
Total parent investment and deficit 1,221,240
---------
Total liabilities and parent investment and deficit $1,465,558
==========
The accompanying notes are an integral part of these financial statements.
15
PUBLISHING BUSINESS OF EMAP, INC. ACQUIRED BY PRIMEDIA, INC.
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 2001
(IN THOUSANDS)
--------------------------------------------------------------------------------
Net revenues:
Advertising $219,116
Newsstand 45,409
Subscriptions, net of agency commissions of $57,835 51,413
Shows 12,673
Gravity games 11,812
Other 22,427
----------
Total net revenues 362,850
Production, selling and other direct costs, including depreciation of $1,986 272,868
----------
Gross profit 89,982
General and administrative expenses 37,007
Amortization of excess purchase price over net assets acquired 126,450
Impairment of Memberships 18,758
Impairment of and equity in losses of investees 14,073
----------
Loss from operations (106,306)
Other expense:
Interest (3,008)
----------
Loss before provision for income taxes (109,314)
Provision for income taxes (171)
----------
Net loss $ (109,485)
==========
The accompanying notes are an integral part of these financial statements.
16
PUBLISHING BUSINESS OF EMAP, INC. ACQUIRED BY PRIMEDIA, INC.
CONSOLIDATED STATEMENT OF PARENT INVESTMENT AND DEFICIT FOR THE YEAR ENDED
MARCH 31, 2001
(IN THOUSANDS)
--------------------------------------------------------------------------------
TOTAL PARENT
PARENT ACCUMULATED INVESTMENT
INVESTMENT DEFICIT AND DEFICIT
---------- ----------- -----------
Balance as of March 31, 2000 $1,532,000 ($201,275) $1,330,725
Net loss -- (109,485) (109,485)
---------- --------- ----------
Balance as of March 31, 2001 $1,532,000 ($310,760) $1,221,240
========== ========= ==========
The accompanying notes are an integral part of these financial statements.
17
PUBLISHING BUSINESS OF EMAP, INC. ACQUIRED BY PRIMEDIA, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED MARCH 31, 2001
(IN THOUSANDS)
--------------------------------------------------------------------------------
Cash flow from operating activities:
Net loss $ (109,485)
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization 140,991
Depreciation 1,986
Provision for bad debt 3,099
Impairment of website development costs 837
Impairment of and equity in losses of investees 32,831
Changes in net assets and liabilities:
Accounts receivable (5,338)
Inventories (245)
Deferred subscription acquisition costs 5,620
Deferred direct response advertising costs (13,828)
Other assets 1,735
Accounts payable and accrued liabilities (11,020)
Accrued payroll and related costs 1,763
Unearned revenue (102)
Customer incentives payable (2,160)
Unearned subscription revenue (12,710)
Other non-current liabilities (2,329)
----------
Net cash provided by operating activities 31,645
----------
Cash flow used in investing activities:
Capital expenditures for property & equipment (2,920)
Acquisition of magazines (12,132)
Acquisition of Membership (16,541)
Acquisition of and advances to investees (2,286)
Other (182)
----------
Net cash used in investing activities (34,061)
----------
Cash flow from financing activities:
Borrowings under revolving line of credit 818,000
Repayment of bank borrowings (834,000)
Decrease in receivable from related party EAP 10,391
Increase in receivable from related party FHM (13,909)
Increase in related party payable to PLC 23,261
----------
Net cash provided by financing activities 3,743
----------
Increase in cash and cash equivalents 1,327
Cash and cash equivalents at beginning of year 626
----------
Cash and cash equivalents at end of year $ 1,953
==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 3,127
==========
Taxes $ 639
==========
The accompanying notes are an integral part of these financial statements.
18
PUBLISHING BUSINESS OF EMAP, INC. ACQUIRED BY PRIMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
emap, Inc. ("Inc") was incorporated in the State of Delaware in
December 1998 (inception) as a wholly owned subsidiary of emap America
Partners ("EAP"), which in turn is a wholly owned indirect subsidiary
of emap plc ("PLC"). Inc is a media company, operating in one industry
segment, that focuses on delivering information, entertainment,
targeted communication and e-commerce in high value markets. Inc's
principal operations and markets are in the United States.
On January 15, 1999, Inc consummated an agreement whereby it
effectively acquired all of the outstanding Class A Common Stock, Class
B Common Stock and outstanding stock options of the Petersen Companies,
Inc. ("Petersen") for a purchase price of $34 per share and assumption
of debt for approximately $1.5 billion in the aggregate. Subsequent to
the acquisition, the name of the Petersen Companies, Inc. was changed
to emap, USA. In addition to emap, USA, which develops and distributes
magazines in multiple markets, Inc has two other wholly owned
subsidiaries: emap Digital ("Digital"), formed in April 2000, which was
created to enhance the size and value of Inc into an e-commerce
environment; and Liberty Management Corp., acquired in May 1999, which
produces automobile shows. emap, USA has one wholly owned subsidiary:
Memberships (also known as the Affinity Development Group), acquired in
April 2000, which consists of two automobile clubs associated with
Motor Trend and Hot Rod magazines. Subsequent to March 31, 2001, the
Motor Trend and Hot Rod automobile clubs were shut down.
(See Note 9.)
On August 23, 2001 Inc. assigned all of the assets and liabilities of
For Him Magazine ("FHM") to another wholly owned indirect subsidiary of
PLC. FHM is a magazine title of PLC, which was launched in the US by
emap USA in February 2000.
On August 24, 2001 PLC sold the stock of Inc to Primedia, Inc.
("Primedia") for $505 million in cash plus warrants to purchase
2,000,000 shares of Primedia's common stock.
BASIS OF PRESENTATION
The consolidated financial statements reflect the consolidated activity
of the publishing business of Inc. acquired by Primedia (the
"Business") comprising the operations and assets and liabilities of
Inc. excluding the operations and assets and liabilities of FHM for the
year ended March 31, 2001 after elimination of intercompany
transactions.
The Business's consolidated financial statements have been prepared
using "push-down" accounting and, accordingly, reflect the acquisition
of Petersen for approximately $1.5 billion.
19
PUBLISHING BUSINESS OF EMAP, INC. ACQUIRED BY PRIMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
CASH EQUIVALENTS
Cash equivalents consist primarily of debt instruments with original
maturities of three months or less. The carrying amounts of cash and
cash equivalents reported in the balance sheet approximate fair value.
INVENTORIES
Inventories, consisting of magazines in process and paper held at a
printing company, are stated at the lower of cost, which approximates
the first-in, first-out method, or market.
INVESTMENTS
The Business's investments in 20% to 50%-owned affiliates are accounted
for using the equity method. Investments in less than 20%-owned
affiliates are accounted for using the cost method.
DEFERRED SUBSCRIPTION ACQUISITION COSTS
Deferred subscription acquisition costs consist of agency commissions
paid to obtain subscriptions and are amortized over the life of the
related subscriptions ranging from 12 to 36 months.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated over
their estimated useful lives which ranges from 3 to 5 years, using the
straight-line method. Leasehold improvements are amortized over the
lesser of ten years or the terms of the related leases.
20
PUBLISHING BUSINESS OF EMAP, INC. ACQUIRED BY PRIMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTERNAL USE SOFTWARE AND WEBSITE DEVELOPMENT COSTS
The Business has adopted the provisions of Statement of Position No.
98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires the
capitalization of certain external and internal computer software costs
incurred during the application development stage. Capitalized software
costs are included in property and equipment and are amortized using
the straight-line basis over 3 years. The Business has adopted the
provisions of Emerging Issues Task Force Issue 00-2 ("EITF 00-2") in
accounting for internal use web-site software development costs. EITF
00-2 provides that certain planning and training costs incurred in the
development of web-site software be expensed as incurred, while
application development stage costs are to be capitalized pursuant to
SOP 98-1. Capitalized web-site software costs, net of accumulated
amortization, are included in prepaid expenses and other current assets
and are amortized using the straight-line method over their estimated
useful life of one year. During the year ended March 31, 2001, the
Business recorded an impairment charge of $0.8 million associated with
its web-site development costs, which is included in production,
selling and other direct costs.
EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED
The excess of the purchase price over the fair value of net tangible
assets acquired, principally relating to the Petersen acquisition and
subsequent magazines acquired, is amortized using the straight-line
method over estimated useful lives of 10 to 15 years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Business reviews its long-lived assets and intangible assets for
impairment on a continual basis. An impairment loss would be recognized
when estimated undiscounted future cash flows attributable to an asset
are less than its carrying amount. The amount of the impairment loss
would be the amount by which the carrying amount of the impaired asset
exceeds the fair value of the asset.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Business to
concentration of credit risk consist of cash and cash equivalents and
accounts receivable. Cash and cash equivalents are deposited with major
financial institutions, and at times may be in excess of FDIC insurance
limits. The Business generally does not require collateral from its
customers. During the year ended March 31, 2001, no customer comprised
greater than 10% of the accounts receivable balance or more than 10% of
revenues.
21
PUBLISHING BUSINESS OF EMAP, INC. ACQUIRED BY PRIMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Advertising revenue, net of provisions for related rebates and
discounts, is recognized at the "on sale" date of the publication
containing the advertisement. Subscription revenue is deferred and
recognized pro rata as fulfilled over the terms of such subscriptions
and is recorded net of related agency commissions. Sales of magazines
intended for retail distribution on newsstands are recorded at the time
such publications are available for sale by distributors to the public
and are reduced by estimated provisions for returns and retail display
allowances. Revenues and costs associated with shows and the Gravity
Games are recognized on the occurrence of the event.
The Business has entered into certain agreements with third parties to
license the Business's trademarks. These agreements typically provide
that the Business will receive minimum guarantees and share in future
royalties based on product sales.
Minimum guarantees are deferred and recognized as revenue on a
straight-line basis over the term of the license agreement. Royalties
are recognized as earned. The Business recorded approximately $2.9
million in licensing revenues during the year ended March 31, 2001.
ADVERTISING EXPENSES
The Business capitalizes its direct response advertising costs, in
accordance with Statement of Position 93-7, "Reporting on Advertising
Costs," pursuant to which qualified direct response advertising is
capitalized and amortized over the expected period of future benefit of
approximately 17 months. Capitalized advertising costs are related to
three types of subscription promotion activities: renewal promotions,
inserts and gifts mainly relating to Christmas promotions. Such
capitalized costs include primarily printing and postage to current and
potential subscribers and totaled approximately $11.6 million at March
31, 2001, net of accumulated amortization. Amortization expense for
direct response advertising costs was $13.6 million for the year ended
March 31, 2001, and is included in production, selling and other direct
costs. The Business expenses all other costs of advertising as
incurred. Advertising expense was approximately $1.4 million for the
year ended March 31, 2001.
GENERAL AND ADMINISTRATIVE EXPENSES
Allocation of general and administrative expenses of emap, Inc. between
the Business and FHM has been based on the revenues of their respective
operations, which management believes is a reasonable basis for
allocation.
22
PUBLISHING BUSINESS OF EMAP, INC. ACQUIRED BY PRIMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Income taxes have been determined on a separate company basis as if the
Business was a corporation and are accounted for under Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes," ("SFAS 109") whereby deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax
basis of assets and liabilities, and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected
to reverse.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS 137 and SFAS 138 in June of 1999, to
delay the effective date of adoption to fiscal years beginning after
December 15, 2000. SFAS 133 as amended establishes new standards of
accounting and reporting for derivative instruments and hedging
activities. SFAS 133 requires that all derivatives be recognized at
fair value in the statement of financial position, and that the
corresponding gains and losses be reported either in the statement of
operations or as a component of comprehensive income, depending on the
type of hedging relationship that exists. The Business does not believe
that adoption of this statement will have a significant impact on the
Business's consolidated financial position, results of operations, or
cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"), which provides additional guidance related to
applying generally accepted accounting principles in financial
statements. In June 2000, the SEC issued Staff Accounting Bulletin No.
101B, which requires implementation of SAB 101 no later than the fourth
fiscal quarter of fiscal years beginning December 15, 1999.
Implementation of SAB 101 did not have a significant impact on the
Business's consolidated financial position, results of operations, or
cash flows.
(b) In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation - an Interpretation
of APB Opinion 25" ("FIN 44"). FIN 44 clarifies the application of APB
25 and became effective on July 1, 2000, except for the provisions
relating to repricings and the definition of an employee, which apply
to awards issued after December 31, 1998. The adoption of FIN 44 did
not have a material impact on the Business's consolidated financial
position, results of operations or cash flows.
23
PUBLISHING BUSINESS OF EMAP, INC. ACQUIRED BY PRIMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
In September 2000, the FASB issued SFAS 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities,"
which replaces SFAS 125, which revised standards for accounting for
securitizations and other transfers of financial assets and collateral.
SFAS 140 carries over most of SFAS 125's provisions without
reconsideration. To date, the Business has not engaged in any
transactions that would fall under SFAS 140 and does not believe that
adoption of SFAS 140 will have a significant impact on its consolidated
financial position, results of operations or cash flows.
In June 2001, the FASB issued SFAS 141, "Business Combinations", and
SFAS 142, "Goodwill and Other intangible Assets". SFAS 141 requires
that all business combinations be accounted for under the purchase
method of accounting, eliminates the use of the pooling-of-interests
method and requires that the purchase method be used for business
combinations initiated after June 30,2001. SFAS 142 requires that
goodwill and certain intangible assets no longer be amortized to
earnings and that goodwill and intangible assets be reviewed for
impairment. Under SFAS 142, goodwill acquired in a business combination
completed after June 30, 2001 will not be amortized. The amortization
of goodwill for previous acquisitions will cease upon adoption of the
SFAS 142, which will be April 1, 2002. The Business has not determined
the impact of SFAS 142 on its existing goodwill and intangible assets.
In August 2001, the FASB issued SFAS 144,"Accounting for Impairment or
Disposal of Long Lived Assets", which supersedes FASB 121. The Business
has not assessed the impact of SFAS 144 on its existing long-lived
assets. The provisions of SFAS 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001.
2. ACQUISITION OF MAGAZINES
During the year ended March 31, 2001, the Business acquired
substantially all of the assets of various magazine publishers,
including all rights to certain magazines and one automobile show (the
Acquisitions). The results of operations of the Acquisitions have been
included with those of the Business since the dates of acquisition. If
all these acquisitions had occurred on April 1, 2000 there would not be
a material impact on the results of operations.
The cash purchase price of the Acquisitions aggregated approximately
$15.7 million, plus the assumption of certain liabilities. As a result
of these additional acquisitions, the Business recorded goodwill of
approximately $18.2 million.
24
PUBLISHING BUSINESS OF EMAP, INC. ACQUIRED BY PRIMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
3. INVENTORIES
Inventories consisted of the following (in thousands):
Paper $ 13,497
Magazines in process 2,132
---------
$ 15,629
=========
4. PROPERTY AND EQUIPMENT
The components of property and equipment are as follows (in thousands):
Property and equipment $ 4,935
Leasehold improvements 3,469
Less accumulated depreciation and amortization (3,533)
----------
$ 4,871
==========
5. REVOLVING LINE OF CREDIT
emap, Inc. has a revolving line of credit for $20 million with a bank,
which expires in September 2001. Interest accrues at LIBOR plus 0.3%
and is payable either 7 days, 14 days, 1, 2, 3 or 6 months, as selected
by the Business. As of March 31, 2001, $4 million had been drawn under
the line of credit.
emap, Inc. has a revolving line of credit totaling $10 million with a
bank, which expires in November 2001. Interest accrues at LIBOR plus
0.3% and is payable either 7 days, 14 days, 1, 2, 3 or 6 months, as
selected by emap, Inc. In January 2001, $9 million was drawn down under
the line of credit and subsequently $4 million was repaid in February
and the remaining $5 million in March 2001.
6. INCOME TAXES
For the year ended March 31, 2001, the Business's provision for income
taxes consisted primarily of actual state taxes paid. At March 31,
2001, the Business had no liability for federal or state income taxes
based on the net loss from operations during the year. Deferred income
taxes reflect the net tax effects of the operating loss carryforwards
and temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes. Significant components of the Business's deferred
tax assets and liabilities as of March 31, 2001, are as follows (in
thousands):
25
PUBLISHING BUSINESS OF EMAP, INC. ACQUIRED BY PRIMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
6. INCOME TAXES (CONTINUED)
Deferred tax assets:
Net operating loss carryforward $33,000,000
Amortization expense 13,684,000
Impairment 18,414,000
Depreciation expense 3,385,000
Vacation pay accrual 1,135,000
Subscription revenues 1,041,000
Other accruals 630,000
-----------
Total deferred tax assets 71,289,000
-----------
Deferred tax liabilities:
Capitalized advertising costs (5,329,000)
Prepaid expenses (1,217,000)
Bad debt expense (528,000)
State income taxes (3,776,000)
Other (457,000)
-----------
Net deferred tax assets 59,982,000
Valuation allowance (59,982,000)
-----------
Net deferred tax assets $ -
===========
At March 31, 2001, the Business had net operating loss carryforwards
available to reduce future federal taxable income of approximately $88
million, which expire through 2018. In addition, at March 31, 2001, the
Business had net operating loss carryforwards available to reduce
future state taxable income. Due to the Business filing in multiple
jurisdictions, this amount and the related expiration dates and amounts
that are deductible, vary by state.
7. RELATED PARTIES
The acquisition of Petersen was funded through a combination of capital
infusion in Inc and debt held by EAP. During the year ended March 31,
2001, the Business loaned $56.8 million to EAP to pay the interest on
the related third party debt incurred in the acquisition. This loan
which is included in related party receivables at the balance sheet
date is interest-free.
The related party receivable from FHM of $21.8 million at March 31,2001
represents the funding of FHM operations and is interest free.
26
PUBLISHING BUSINESS OF EMAP, INC. ACQUIRED BY PRIMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
7. RELATED PARTIES (CONTINUED)
During the year ended March 31, 2001, the Business borrowed $29 million
from PLC. This amount, which is included in related party payables at
the balance sheet date, bears interest based on a monthly short-term
rate prevailing in the United Kingdom.
8. PARENT INVESTMENT
Parent investment represents the total amount of authorized capital
stock of Inc. consisting of 150,000 shares of common stock, par value
$0.01, of which 125,000 shares were issued and outstanding and wholly
owned by EAP at March 31, 2001, and the related additional paid-in
capital of Inc, which reflects the "push-down" accounting of the
purchase of Petersen for approximately $1.5 billion.
9. IMPAIRMENTS
MEMBERSHIP
In April 2000, the Business acquired Affinity Development Group
("Memberships") for $17 million in cash and forgiveness of an $11
million note receivable, which was advanced prior to March 31, 2000.
The acquisition was accounted for as a purchase resulting in goodwill
of approximately $28 million, which was being amortized using the
straight-line method over 3 years. During the year ended March 31, 2001
the Business recorded an impairment charge of approximately $18
million, which amounted to the unamortized balance of goodwill as it
was determined that the fair value of the division was zero.
DIGITAL INVESTMENTS
During the year ended March 31, 2001 the Business recorded an
impairment charge relating to two investments of Digital of
approximately $14 million, which represents the combined carrying value
of those investments as it was determined their fair value was zero.
10. COMMITMENTS AND CONTINGENCIES
LEASES
The Business, through Inc. leases office space under noncancelable
operating leases with various expiration dates through August 2012.
Rent expense, net of rental income, for the year ended March 31, 2001
totaled $5.1 million. The terms of the leases include renewal options
and require payments of real estate taxes, insurance and other
expenses. Rent expense is recognized on a straight-line basis over the
lease period.
27
PUBLISHING BUSINESS OF EMAP, INC. ACQUIRED BY PRIMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASES (CONTINUED)
As of March 31, 2001, minimum future annual rentals under long-term
leases are as follows (in thousands):
Year Ending
MARCH 31, TOTAL
------------- -----
2002 $ 8,198
2003 8,198
2004 8,354
2005 7,512
2006 7,020
Thereafter 22,055
-------
Total $61,337
=======
The Business, through Inc. has entered into certain subleases for a
portion of its corporate headquarters. The remaining terms of these
subleases range from one to eight years. Aggregate future minimum
rentals to be received under these subleases are approximately $2.6
million as of March 31, 2001. The Business, through Inc. has also
entered into a sublease for a portion of its New York sales office. The
term of this sublease expires in 2004 and aggregate future minimum
rentals to be received under this sublease are approximately $3.3
million.
LEGAL MATTERS
Inc. and, accordingly, the Business is subject to various legal
proceedings and claims that arise in the ordinary course of business.
In the opinion of management, the amount of any ultimate liability with
respect to these actions will not materially affect the Business's
consolidated financial position, results of operations or cash flows.
11. 401(K) PLAN
Inc. has adopted a 401(k) Profit Sharing Plan (the 401(k) Plan).
Pursuant to the 401(k) Plan, the Business makes matching contributions
equal to 50% of the first 6% of the participants' basic compensation.
The Business recorded expense of $913,000, representing its matching
contributions for the year ended March 31, 2001.
28
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
29
PUBLISHING BUSINESS OF EMAP, INC. ACQUIRED BY PRIMEDIA, INC.
UNAUDITED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 2001
(IN THOUSANDS)
--------------------------------------------------------------------------------
ASSETS
Current assets:
Accounts receivable, net of allowance for doubtful accounts of $ 2,583 $ 56,865
Inventories 14,386
Current portion of deferred subscription acquisition costs 39,106
Other prepaid expenses and current assets 9,743
----------
Total current assets 120,100
----------
Investments 5,296
Related party receivable from EAP 68,334
Related party receivable from FHM 26,083
Deferred direct response advertising costs, net of accumulated amortization of $34,168 10,184
Deferred subscription acquisition costs 45,526
Property and equipment, net of accumulated depreciation of $ 4,024 4,425
Other assets 4,605
Excess of purchase price over net assets acquired, net of accumulated amortization of $398,320 1,153,352
----------
Total assets $1,437,905
==========
LIABILITIES AND PARENT INVESTMENT AND DEFICIT
Current liabilities:
Bank overdraft $ 1,172
Accounts payable and accrued liabilities 15,319
Accrued payroll and related costs 4,291
Unearned revenue 12,260
Customer incentives payable 4,066
Current portion of unearned subscription revenue 70,072
Loan payable 9,000
----------
Total current liabilities 116,180
----------
Unearned subscription revenue 67,972
Related party payables to PLC 42,000
Other noncurrent liabilities 9,522
----------
Total liabilities 235,674
----------
Commitments and contingencies
Parent investment and deficit:
Parent investment 1,532,000
Accumulated deficit (329,769)
----------
Total parent investment and deficit 1,202,231
----------
Total liabilities and parent investment and deficit $1,437,905
==========
The accompanying notes are an integral part of these financial statements.
30
PUBLISHING BUSINESS OF EMAP, INC. ACQUIRED BY PRIMEDIA, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000
(IN THOUSANDS)
--------------------------------------------------------------------------------
2001 2000
---- ----
Net revenues:
Advertising $49,283 $58,032
Newsstand 9,688 12,312
Subscriptions, net of agency commissions of
$12,012 (2001) and $15,838 (2000) 11,407 13,265
Shows 4,577 2,958
Gravity games 135 68
Other 5,100 4,030
--------- ------------
Total net revenues 80,190 90,665
Production, selling and other direct costs, including
depreciation of $490 (2001) and $ 410 (2000) 61,272 66,370
--------- ------------
Gross profit 18,918 24,295
General and administrative expenses 9,368 10,410
Amortization of excess of purchase price over net assets acquired 28,048 28,512
--------- ------------
Loss from operations (18,498) (14,627)
Other expense:
Interest (324) (657)
--------- ------------
Loss before provision for income taxes (18,822) (15,284)
Provision for income taxes (187) --
--------- ------------
Net loss $ (19,009) $ (15,284)
========= ============
The accompanying notes are an integral part of these financial statements.
31
PUBLISHING BUSINESS OF EMAP, INC. ACQUIRED BY PRIMEDIA, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000
(IN THOUSANDS)
--------------------------------------------------------------------------------
2001 2000
---- ----
Cash flow from operating activities:
Net loss $ (19,009) $ (15,284)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Amortization 31,994 31,583
Depreciation 490 410
Provision for bad debt 786 951
Changes in net assets and liabilities:
Accounts receivable 5,520 (214)
Inventories 1,243 (6,857)
Deferred subscription acquisition costs 5,899 46
Deferred direct response advertising costs (2,576) (2,481)
Other assets (1,373) 1,863
Accounts payable and accrued liabilities (10,662) 9,188
Accrued payroll and related costs (3,404) (884)
Unearned revenue (4,351) (15,248)
Customer incentives payable 406 (395)
Unearned subscription revenue (9,005) (2,036)
Other non-current liabilities (1,245) (478)
----------- -----------
Net cash provided by operating activities (5,287) 164
----------- -----------
Cash flow from investing activities:
Capital expenditures for property & equipment (44) (255)
Acquisition of Membership - (16,541)
Acquisition of magazines (97) (10,371)
----------- -----------
Net cash used in investing activities (141) (27,167)
----------- -----------
Cash flow from financing activities:
Borrowings under revolving line of credit 87,000 197,000
Repayment of bank borrowings (82,000) (197,000)
Increase in receivable from related party EAP (11,460) (9,701)
Increase in receivable from related party FHM (4,235) (5,876)
Increase in related party payable to PLC 12,998 41,270
----------- -----------
Net cash provided by financing activities 2,303 25,693
----------- -----------
Decrease in cash and cash equivalents (3,125) (1,310)
Cash and cash equivalents at beginning of period 1,953 626
----------- -----------
Bank overdraft end of period $ (1,172) $ (684)
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 335 $ 690
=========== ===========
Taxes $ 354 $ 379
=========== ===========
The accompanying notes are an integral part of these financial statements.
32
PUBLISHING BUSINESS OF EMAP ACQUIRED BY PRIMEDIA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
In the opinion of the Business's management, all adjustments (consisting only of
normal recurring accruals) considered necessary for a fair presentation of the
accompanying unaudited financial statements have been included. All significant
inter-company accounts and transactions have been eliminated in consolidation.
These statements should be read in conjunction with the attached Business's
audited consolidated financial statements and related notes for the year ended
March 31, 2001. Operating results for the three-month period ended June 30 are
not necessarily indicative of the results that may be expected for a full year.
1. INVENTORIES
Inventories consisted of the following (in thousands):
Paper $11,102
Magazines in process 3,284
-------
$14,386
=======
2. PROPERTY AND EQUIPMENT
The components of property and equipment are as follows (in thousands):
Property and equipment $ 4,980
Leasehold improvements 3,469
Less accumulated depreciation and amortization (4,024)
--------
$ 4,425
========
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: November 7, 2001 /s/ Thomas S. Rogers
------------------- --------------------------------------
(Signature)
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: November 7, 2001 /s/ Lawrence R. Rutkowski
------------------- -------------------------------------
(Signature)
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)