-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JOsHdNAEFvZCUyPyHQSMC8nPYHFzL8AgDc79GgupgHqqKeHsHogJHyuFmE+f8bzX UOr22h/VJZBr7L73iA6qgA== 0000944209-98-001520.txt : 19980817 0000944209-98-001520.hdr.sgml : 19980817 ACCESSION NUMBER: 0000944209-98-001520 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PETERSEN COMPANIES INC CENTRAL INDEX KEY: 0001043412 STANDARD INDUSTRIAL CLASSIFICATION: PERIODICALS: PUBLISHING OR PUBLISHING AND PRINTING [2721] IRS NUMBER: 364099296 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13373 FILM NUMBER: 98689697 BUSINESS ADDRESS: STREET 1: 6420 WILSHIRE BLVD CITY: LOS ANGELES STATE: CA ZIP: 90048 BUSINESS PHONE: 2137822000 MAIL ADDRESS: STREET 1: 6420 WILSHIRE BLVD CITY: LOS ANGELES STATE: CA ZIP: 90048 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM _____ TO _____ COMMISSION FILE NUMBER 1-13373 THE PETERSEN COMPANIES, INC. (Exact name of Registrant as specified in its charter) DELAWARE 36-4099296 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 6420 WILSHIRE BOULEVARD LOS ANGELES, CALIFORNIA 90048 (Address of principal executive offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (213) 782-2000 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 (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_]. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class of Common Stock Outstanding at June 30, 1998 - -------------------------------- ---------------------------- Class A, $0.01 par value 27,070,590 Class B, $0.01 par value 7,886,290
1 THE PETERSEN COMPANIES, INC. INDEX TO FORM 10-Q
PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of December 31, 1997 and June 30, 1998 (unaudited)............................... 3 Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 1997 and 1998........ 4 Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1998.................. 5 Notes to Unaudited Condensed Consolidated Financial Statements... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 11
PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. ................................ 16 SIGNATURES.................................................................. 17
2 THE PETERSEN COMPANIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JUNE 30, DECEMBER 31, 1998 ASSETS 1997 (unaudited) ------------ ----------- Current assets: Cash and cash equivalents...................................................... $ 5,925 $ 1,122 Accounts receivable, net of allowance for doubtful accounts of $1,286 (1997) and 1,084 (1998)............................................................. 25,408 34,668 Receivable from related party.................................................. 2,420 53 Inventories.................................................................... 4,124 4,352 Current portion of deferred subscription acquisition costs..................... 39,070 41,219 Deferred direct mail advertising costs, net of accumulated amortization of $2,058 (1997) and $5,718 (1998).............................................. 5,339 7,713 Other prepaid expenses and current assets...................................... 2,795 3,515 -------- -------- Total current assets........................................................... 85,081 92,642 Deferred subscription acquisition costs........................................ 36,905 47,311 Deferred direct mail advertising costs......................................... - 5,444 Property and equipment, net of accumulated depreciation of $2,391 (1997) and $3,308 (1998)................................................................ 3,248 3,816 Goodwill, net of accumulated amortization of $30,038 (1997) and $42,977 (1998)............................................................... 334,102 383,548 Subscriber list and established work force, net of accumulated amortization of $15,000 (1997) and $21,059(1998)............................................. 105,000 105,987 Deferred financing costs, net of accumulated amortization of $11,397 (1997) and $14,870 (1998)............................................................... 3,336 3,063 Other assets................................................................... 2,075 7,566 -------- -------- Total assets................................................................... $569,747 $649,377 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities....................................... 14,299 $ 26,267 Accrued payroll and related costs.............................................. 6,414 5,040 Accrued interest on long-term debt............................................. 1,283 290 Current portion of long-term debt........................................................................... - 1,500 Customer incentives payable.................................................... 6,982 6,664 Current portion of unearned subscription revenues.............................. 71,585 77,933 Other accrued expenses and current liabilities................................. 1,705 1,315 -------- -------- Total current liabilities...................................................... 102,268 119,009 Unearned subscription revenues................................................. 46,360 60,746 Bank borrowings................................................................ 65,000 197,125 Senior subordinated notes...................................................... 75,000 - Other noncurrent liabilities................................................... 7,592 7,497 -------- -------- Total liabilities.............................................................. 296,220 384,377 Commitments and contingencies.................................................. Stockholders' equity: Class A Common Stock, $.01 par value; 75,000,000 shares authorized, 27,022,974 (1997) and 27,070,590 (1998) shares issued and outstanding.............................................................. 270 271 Class B Common Stock, $.01 par value; 25,000,000 shares authorized, 7,886,290 shares issued and outstanding...................................... 79 79 Additional paid-in capital..................................................... 330,624 330,723 Accumulated deficit............................................................ (55,696) (64,581) -------- -------- 275,277 266,492 Less: notes receivable from related parties.................................... (1,750) (1,492) Total stockholders' equity..................................................... 273,527 265,000 -------- -------- Total liabilities and stockholders' equity..................................... $569,747 $649,377 ======== ========
See accompanying notes. 3 THE PETERSEN COMPANIES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, 1997 1998 1997 1998 ----------- ---------- ----------- ----------- Net revenues: Advertising.............................................. $ 38,934 $ 45,075 $ 73,438 $ 81,353 Newsstand................................................ 10,706 12,147 21,249 25,189 Subscriptions, net of agency commissions of $14,135, $27,723, $15,509 and $30,096 for the three and six months ended June 30, 1997 and 1998, respectively...... 10,747 14,946 21,736 28,210 Other.................................................... 2,283 8,467 3,720 10,928 ---------- ----------- ----------- Total net revenues....................................... 62,670 80,635 120,143 145,680 Production, selling and other direct costs, including rent paid to a related party of $1,093, $2,186, $1,112 and $2,223 for the three and six months ended June 30, 1997 and 1998, respectively........................ 42,413 52,416 82,440 97,434 ----------- ----------- ----------- ----------- Gross profit............................................. 20,257 28,219 37,703 48,246 General and administrative expenses...................... 3,886 6,882 8,990 12,450 Amortization of goodwill and other intangible assets..... 9,125 9,995 18,151 19,170 ----------- ----------- ----------- ----------- Income from operations................................... 7,246 11,342 10,562 16,626 Other income (expense): Interest income.......................................... 183 157 355 381 Interest expense......................................... (8,188) (3,852) (15,853) (7,409) ----------- ----------- ----------- ----------- Income (loss) before extraordinary item.................. (759) 7,647 (4,936) 9,598 Extraordinary item: Loss on early extinguishment of debt................... - - - (18,483) ----------- ----------- ----------- ----------- Net income (loss)........................................ (759) 7,647 (4,936) (8,885) Preferred unit dividends................................. (15,419) - (15,419) - ----------- ----------- ----------- ----------- Net income (loss) attributable to common stockholders.... $ (16,178) $ 7,647 $ (20,355) $ (8,885) =========== =========== =========== =========== PER SHARE: Income (loss) before extraordinary items................. $ (0.03) $ 0.22 $ (0.18) $ 0.28 Loss on early extinguishment of debt..................... - - - (0.53) Preferred unit dividends................................. (0.57) - (0.58) - ----------- ----------- ----------- ----------- Net income (loss) (basic and diluted).................... $ (0.60) $ 0.22 $ (0.76) $ (0.25) =========== =========== =========== =========== Weighted average number of common shares outstanding (basic).................................... 26,859,264 34,948,745 26,806,104 34,929,113 =========== =========== =========== =========== Weighted average number of common shares outstanding (diluted).................................. 26,859,264 35,194,204 26,806,104 35,173,241 =========== =========== =========== ===========
See accompanying notes. 4 THE PETERSEN COMPANIES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 1998 OPERATING ACTIVITIES ------- ------- Net loss................................................................................ $ (4,936) $ (8,885) Adjustment to reconcile net loss to net cash provided by operating activities: Depreciation............................................................................ 941 917 Amortization............................................................................ 19,850 26,303 Allowance for doubtful accounts......................................................... 828 100 Changes in operating assets and liabilities: Accounts receivable..................................................................... (4,698) (9,360) Inventories............................................................................. 687 (228) Deferred direct mail advertising costs.................................................. (2,647) (11,478) Deferred subscription acquisition costs................................................. (388) (12,555) Accounts payable and accrued liabilities................................................ 4,385 10,657 Accrued payroll and related costs....................................................... 2,135 (1,374) Unearned subscription revenues.......................................................... 2,817 20,734 Other current and noncurrent assets, net................................................ 652 (5,634) Other current and noncurrent liabilities................................................ (1,512) (484) -------- -------- Total adjustments....................................................................... 23,050 17,598 -------- -------- Net cash provided by operating activities............................................... 18,114 8,713 -------- -------- INVESTING ACTIVITIES Purchases of property and equipment..................................................... (190) (1,486) Acquisitions, including liabilities assumed and net of costs............................ (122) (70,180) Adjustment to purchase price of assets of publishing division........................... 2,500 2,225 -------- -------- Net cash provided by (used in) investing activities..................................... 2,188 (69,441) -------- -------- FINANCING ACTIVITIES Repayment of bank borrowings............................................................ (22,250) (5,375) Proceeds from bank borrowings........................................................... - 139,000 Costs associated with the issuance of equity and IPO.................................... - 100 Proceeds from issuance of Membership Units.............................................. 910 - Repayment of Senior Subordinated Notes.................................................. - (75,000) Increase in deferred financing costs.................................................... - (3,200) Payment on notes receivable, related party including interest........................... 200 400 -------- -------- Net cash (used in) provided by financing activities..................................... (21,140) 55,925 -------- -------- Decrease in cash and cash equivalents................................................... (838) (4,803) Cash and cash equivalents at beginning of period........................................ 7,761 5,925 -------- -------- Cash and cash equivalents at end of period.............................................. $ 6,923 $ 1,122 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during period for: Interest................................................................................ $ 12,780 $ 7,901 ======== ======== Taxes................................................................................... $ 12 $ 34 ======== ========
See accompanying notes. 5 THE PETERSEN COMPANIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization BrightView Communications Group, Inc., a Delaware corporation, changed its name to The Petersen Companies, Inc. ("Petersen" or the "Company") on August 7, 1997. Prior to October 2, 1997, Petersen owned 1.0% of Petersen Holdings L.L.C. ("Holdings") and .1% of Petersen Publishing Company, L.L.C. ("Publishing"). Subsequent to October 2, 1997, Petersen owns 100% of Holdings. Petersen was organized in August 1996 for the principal purpose of investing in Holdings and Publishing and has no business operations other than the investments in Holdings and Publishing. Publishing is engaged in the publishing business with revenues generated primarily from the publication of various special interest magazines and the sale of related advertising, principally within the United States. Petersen is Holdings' sole member and as such, controls the policies and operations of Holdings and of Publishing through Holdings. In January 1998, Holdings was merged into Publishing. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring accruals considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 1998, are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. The unaudited condensed consolidated financial statements reflect the consolidated activity of Petersen, Holdings and Publishing for the three and six months ended June 30, 1997 and 1998, respectively, after elimination of intercompany transactions. Certain reclassifications have been made to the consolidated balance sheets and statements of operations for the three and six months ended June 30, 1997, to conform to the presentation for the three and six months ended June 30, 1998. For 1997, the Company has not presented separate financial statements and other disclosures concerning Holdings and Publishing because management has determined that such information is not material to investors. For 1998, all activity of Holdings and Publishing has been consolidated with that of the Company. Earnings Per Share In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. All earnings per share amounts presented have been calculated according to SFAS 128. 6 THE PETERSEN COMPANIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Comprehensive Income In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income and its components. The statement is effective for fiscal years beginning after December 15, 1997. The statement, which has been adopted for calendar year 1998, had no impact on the financial statements or disclosures of the Company. Extraordinary Item-Loss on Early Retirement of Debt On March 30, 1998, the Company redeemed the remaining $75 million of its 11 1/8% Senior Subordinated Notes due 2006 (the "Notes"). Additionally, the Company established a new Senior Credit Facility, a portion of which was used to repay the Notes (see Note 4). Accordingly, the Company recorded an extraordinary loss of $18.5 million which consisted of $14.8 million in prepayment charges in connection with the early retirement of debt, a write off of $3.2 million of unamortized deferred financing costs, and $.5 million in fees relating to the retirement of debt. There was no tax benefit recognized in the first quarter of 1998 for the extraordinary item because it generated a taxable loss position for the Company. Advertising Expenses The Company accounts for its direct response advertising costs in accordance with the American Institute of Certified Public Accountants' Statement of Position 93-7 "Reporting on Advertising Costs", pursuant to which qualified direct response advertising is capitalized and amortized over its expected period of future benefit. Such capitalized costs include primarily printing and postage to current and potential subscribers and totaled $5.3 million and $13.2 million at December 31, 1997 and June 30, 1998, respectively. The Company amortizes all capitalized advertising costs over lives ranging from 12 to 24 months. Amortization of direct response advertising costs was $307,000 and $3.7 million for the six months ended June 30, 1997 and 1998, respectively, and is included in production, selling and other direct costs. The Company expenses all other costs of advertising as incurred. Advertising expense was approximately $852,000, $946,000 $448,000 and $632,000 for the three and six months ended June 30, 1997 and 1998, respectively. Licensing agreements During the six months ended June 30, 1998, The Company entered into certain licensing agreements with third parties to license the Company's trademarks such as Hot Rod and MotorTrend. Each of these agreements includes a minimum guarantee as well as future royalties based on product sales. The Company has recorded approximately $4.3 million and $5.2 million in licensing revenues during the three months and six months ended June 30, 1998. Minimum guarantees are recorded into income at the time the Company has provided all services to the licensee and collection is reasonably assured. Royalties for licensing arrangements are reflected into income when earned. There can be no assurance that the current level of licensing sales activity will continue in future periods. Income Taxes At June 30, 1998, the Company had no provision or liability for federal or state income taxes based on the Company's taxable loss for the six months ended June 30, 1998. 7 THE PETERSEN COMPANIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITIONS During the six month period ended June 30, 1998, Petersen acquired substantially all of the assets of various magazine publishers, including all rights to certain magazines. These acquisitions were financed primarily through borrowings under the Company's credit agreement and have been accounted for by the purchase method. Cash payments for these acquisitions on an aggregate basis was $59.5 million. As a result of these acquisitions, Petersen recorded goodwill totaling approximately $62.4 million. Intangible assets are amortized using the straight- line method over lives ranging from 5 to 15 years. Amortization of goodwill and other intangibles for the three and six months ended June 30, 1997 and 1998, was approximately $9.1 million, $18.1 million, $10.0 million and $19.1 million, respectively. 3. INVENTORIES Inventories consist of (in thousands):
December 31, June 30, 1997 1998 ---- ---- Paper............. $ 824 $ 3 Work in process... 3,300 4,349 ------ ------ $4,124 $4,352 ====== ======
The Company no longer inventories its paper, but purchases it on an as needed basis, together with its printing services from one vendor. 4. LONG-TERM DEBT Senior Credit Facility: In March 1998, the Company entered into a Senior Secured Revolving Credit Facility (the "Revolving Credit Facility") with First Union National Bank and a syndicate of other financial institutions. The Revolving Credit Facility provides for up to $325 million in borrowings, comprised of a $175 million seven-year Senior Secured Revolving Loan (the "Revolver") due 2005, and a $150 million nine-year Senior Secured Term Loan (the "Term Loan") due 2007. The Revolving Credit Facility includes up to $10 million for standby letters of credit and $10 million for swingline loans. The new facilities replaced the Company's existing $175 million senior credit facility with First Union National Bank and a syndicate of other lenders. The Revolver bears interest at the Company's election of either LIBOR (5.69% at June 30, 1998) plus .625% to 1.5%, based on certain ratios defined in the Revolver agreement, or the Revolver base rate (8.5% at June 30, 1998) plus .0 % to .25%, based on certain ratios defined in the Revolver agreement. As of June 30, 1998, the Company had $49.0 million outstanding under the Revolving Credit Facility at a weighted average interest rate of 6.625%. In addition, at June 30, 1998, a $1.6 million letter of credit was outstanding, reducing the amount available under the Revolving Credit Facility. The letter of credit expires in January 1999 and is renewable annually. 8 THE PETERSEN COMPANIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Term Loan bears interest at the Company's election of either LIBOR (5.69% at June 30, 1998) plus 1.75% to 2.25%, based on certain ratios defined in the Term Loan agreement, or the Term Loan base rate (8.5% at June 30, 1998) plus .5% to 1.0%, based on certain ratios defined in the Term Loan agreement. As of June 30, 1998, the Company had $149.6 million outstanding under the Term Loan at a weighted average interest rate of 7.44%. The Revolving Credit Facility is required to be permanently reduced with (i) 100% of insurance proceeds not applied toward the repair or replacement of damaged properties within 180 days, (ii) 100% of proceeds from assets sales not reinvested within 180 days, other than assets sold in the normal course of business, and (iii) 25% of the proceeds from the issuance of any equity (excluding equity issued for acquisitions) or 100% of any debt. The Revolving Credit Facility contains certain restrictive covenants including, but not limited to, restrictions on indebtedness, liens, disposals of assets, payments of dividends and investments, as well as certain financial ratio covenants. As of June 30, 1998, the Company was in compliance with the covenants of the Revolving Credit Facility. The Revolving Credit Facility is guaranteed by the Company, Publishing and all wholly-owned subsidiaries of the Company, if any. As collateral for the Revolving Credit Facility, Publishing pledged a first priority security interest in all of its assets and all of the assets of any wholly-owned subsidiaries. The Company estimates that at June 30, 1998, the book value of the Revolving Credit Facility approximated its fair value. The Company incurred costs of approximately $3.3 million in connection with establishing the Revolving Credit Facility. These costs are included in Deferred Financing Costs and are being amortized over seven and nine years. During the three and six months ended June 30, 1998, the Company amortized approximately $137,000 and $173,000 of such deferred financing costs. 11 1/8% Senior Subordinated Notes due 2006: In March 1998, the Company completed a cash tender offer for all $75 million of its remaining outstanding Notes. The Company recorded an extraordinary loss of approximately $17.8 million, for redemption premium incurred and write-off of previously deferred finance charges in connection with the purchase of the Notes. 5. COMMITMENTS AND CONTINGENCIES Legal Matters The Company is party to various legal actions and disputes arising in the ordinary course of business. Management believes, based on the advice of counsel, that any resulting liabilities from these actions will not have a material adverse effect on the financial position of the company. 6. LOSS PER SHARE As required by SFAS 128, basic earnings per share is based upon the weighted-average number of common shares outstanding. Diluted earnings per share is based upon the weighted-average number of common shares and dilutive potential common shares outstanding. Potential common shares are outstanding options under the Company's stock option plan. 9 THE PETERSEN COMPANIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Since the Company's operations resulted in income before extraordinary items for the three and six month periods ended June 30, 1998, options to purchase 260,511 shares of common stock at $8.87 per share, which will be exercisable in periods subsequent to June 30, 1998 and could potentially dilute basic loss per share, have been included in the diluted loss per share computations, in accordance with SFAS 128.
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, 1997 1998 1997 1998 ------------ ----------- ------------ ----------- NUMERATOR: Income (loss) before extraordinary items......................... $ (759) $ 7,647 $ (4,936) $ 9,598 Loss on early extinguishment of debt............................. - - - 18,483 ----------- ----------- ----------- ----------- Net income (loss)................................................ (759) 7,647 (4,936) (8,885) Preferred stock dividends........................................ 15,419 - 15,419 - ----------- ----------- ----------- ----------- Numerator for basic and dilutive earnings per share - net income (loss) attributable to common stockholders.................................................... $ (16,178) $ 7,647 $ (20,355) $ (8,885) =========== =========== =========== =========== DENOMINATOR: Denominator for basic earnings per share - weighted-average shares ........................................ 26,859,264 34,948,745 26,806,104 34,929,113 Effect of dilutive securities: Employee stock options.......................................... - 245,459 - 244,128 ----------- ----------- ----------- ----------- Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions................. 26,859,264 35,194,204 26,806,104 35,173,241 =========== =========== =========== =========== Net income (loss) per share (basic and diluted).................. $ (0.60) $ 0.22 $ (0.76) $ (0.25) =========== =========== =========== ===========
SUBSEQUENT EVENTS Subsequent to June 30, 1998, the Company has entered into agreements to purchase other magazine titles from various publishers. The total purchase price for these acquisitions is estimated to be approximately $30 million. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. OVERVIEW The Company is a leading publisher of special-interest magazines with a diverse portfolio of more than 116 publications, including 38 monthly, 14 bimonthly and 68 single issue or annual publications. According to the latest survey by Veronis, Suhler and Associates ("VSA") of 84 general-interest and 111 special-interest magazines, special-interest magazine publishing was the fastest growing sector of the consumer magazine industry over the most recently reported five year period. The special-interest nature of the Company's magazines creates an opportunity for its advertisers to efficiently reach their target audience, as the Company's enthusiast readers value special-interest magazines for both their product information as well as editorial content. The Company is actively expanding and diversifying the scope of its media activities to enhance its revenues by providing multi-media solutions for marketers. These activities include licensing arrangements, trade shows, consumer events, databases, custom publishing, radio and television programs and retail promotions. The Company's principal sources of revenues from the publication of its magazines are derived from advertising and circulation. Circulation revenues are generated from subscription, newsstand and list rental sales. Advertising revenues of the Company, as well as those of the consumer magazine industry in general, are cyclical and dependent upon general economic conditions. As compared to general-interest magazine publishers, however, the Company believes that its advertising revenues are less susceptible to changes in general economic conditions due to the diversity of its publications and the endemic nature of its advertiser base. For the periods reported, no single advertiser has comprised more than 5.0% of the Company's advertising revenues. The Company's revenues are generated predominantly from U.S. sources. The principal components of the Company's production and selling costs are raw materials, advertising sales, distribution, printing and binding and editorial expenses. During the second quarter of 1998, the Company extended its contract with its current printer. This extension also included extending the terms on which the Company will purchase paper through 2002. The Company currently purchases all of its paper requirements on an as needed basis. As a result, the Company does not carry a significant amount of paper in inventory. With the exception of historical information (information relating to the Company's financial condition and results of operations at historical dates or for historical periods), the matters discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations are forward- looking statements that necessarily are based on certain assumptions, and are subject to certain risks and uncertainties. These forward-looking statements are based on management's expectations as of the date hereof, and the Company does not undertake any responsibility to update any of these statements in the future. Actual future performance and results could differ from that contained in or suggested by these forward-looking statements as a result of the factors set forth in this Management's Discussion and Analysis of Financial Condition and Results of Operations, various aspects of the business as described in the Company's Report on Form 10-K for the year ended December 31, 1997 and elsewhere in the Company's filings with the Securities and Exchange Commission. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) RESULTS OF OPERATIONS COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1998 WITH THE THREE MONTHS ENDED - ------------------------------------------------------------------------------ JUNE 30, 1997 - ------------- Net Revenues. Net revenues increased $17.9 million, or 28.5%, to $80.6 million for the three months ended June 30, 1998 from $62.7 million for the three months ended June 30, 1997. This increase is primarily the result of a $6.1 million, or 15.8%, increase in advertising revenues, a $1.4 million, or 13.5% increase in newsstand revenues, a $4.2 million or 39.1% increase in subscription revenues and a $6.2 million increase in other revenues over the same period in the prior year. These increases are primarily the result of: (i) an overall increase in the Company's advertising rates and higher advertising revenues from several of the Company's core magazines, and (ii) increases in subscription activity and copies of the Company's magazines sold at the newsstand, all primarily resulting from the Company's increased nationwide marketing efforts. Additionally, during the second quarter of 1998, the Company recognized revenues of $8.1 million resulting from numerous projects relating to its Enterprises and Events divisions, which included significant licensing activity, and various other events and shows. Licensing revenues will vary from period to period depending on the volume and extent of these licensing arrangements entered into during any particular period. Production, selling and other direct costs. Production, selling and other direct costs increased approximately $10.0 million, or 23.6%, to $52.4 million for the three months ended June 30, 1998, from $42.4 million for the three months ended June 30, 1997. The increase is primarily a result of: (i) a $1.5 million, or 32.3% increase in advertising sales costs related to the Company's continuing efforts to invest in and market its current and new products, (ii) a $1.7 million, or 38.1% increase in editorial costs which resulted from expanding the number and size of current products and the consolidation of acquired publications, (iii) an increase of $2.5 million in direct costs relating to shows and licensing activities, and (iv) an increase in overall distribution expenses of $1.2 million, or 20.5%. In addition, paper and printing costs increased by $2.7 million, or 19.3%, resulting from a significant increase in the number of copies produced during the second quarter of 1998, compared to the second quarter of 1997, as evidenced by a corresponding substantial increase in newsstand and subscription revenues. General and Administrative expenses. General and administrative expenses increased approximately $3.0 million, or 76.9%, to $6.9 million for the three months ended June 30, 1998, from $3.9 million for the same period of the prior year. This increase resulted primarily from the Company's continuing efforts to become a complete marketing solutions company by (i) hiring additional management and personnel relating to its various operations including the establishment of its Enterprises division and events operations and (ii) the absorption of expenses from acquired companies. Income from Operations. Income from operations increased $4.1 million, or 56.9%, to $11.3 million for the three months ended June 30, 1998 from $7.2 million for the three months ended June 30, 1997, primarily as a result of the combination of reasons stated above. Interest expense. Interest expense decreased to $3.9 million for the second quarter of 1998 compared to $8.2 million for second quarter of 1997. This decrease was the result of the Company eliminating its 11 1/8% Senior Subordinated Notes with proceeds from its initial public offering, cash from operations and proceeds from the Company's new credit facilities. In addition, the Company's interest rate on borrowed funds decreased compared to the same quarter of the prior year. (See Note 4 in the Notes to Condensed Consolidated Financial Statements herein). Net income (loss) attributable to common shareholders. Net income attributable to common shareholders for the three months ended June 30, 1998 was $7.6 million, compared to a net loss of $16.2 million for the same period of the prior year. The $23.8 million increase in net income is primarily the result of improved operations during the second quarter of 1998 as noted above, the decrease in interest expense period to period, as well as a $15.4 million preferred unit dividend issued during the second quarter of 1997. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1998 WITH THE SIX MONTHS ENDED JUNE - ------------------------------------------------------------------------------- 30, 1997 - -------- Net Revenues. Net revenues increased $25.6 million, or 21.3%, to $145.7 million for the six months ended June 30, 1998 from $120.1 million for the six months ended June 30, 1997. This increase is primarily the result of a $7.9 million, or 10.8%, increase in advertising revenues, a $3.9 million, or 18.5% increase in newsstand revenues, a $6.5 million or 29.8% increase in subscription revenues and a $7.2 million increase in other revenues over the same period in the prior year. These increases are primarily the result of: (i) an overall increase in the Company's advertising rates and higher advertising revenues from several of the Company's core magazines, and (ii) increases in subscription activity and copies of the Company's magazines sold at the newsstand, all primarily resulting from the Company's increased nationwide marketing efforts. Additionally, during the first six months of 1998, the Company recognized revenues of $10.0 million resulting from numerous projects relating to its Enterprises and Events divisions, which included significant licensing activity, and various other events and shows. Licensing revenues will vary from period to period depending on the volume and extent of these licensing arrangements entered into during any particular period. Production, selling and other direct costs. Production, selling and other direct costs increased approximately $15.0 million, or 18.2%, to $97.4 million for the six months ended June 30, 1998, from $82.4 million for the six months ended June 30, 1997. The increase is primarily a result of: (i) a $2.3 million, or 22.9% increase in advertising sales costs related to the Company's continuing efforts to invest in and market its current and new products, (ii) a $2.7 million, or 30.0% increase in editorial costs which resulted from expanding the number and size of current products and the consolidation of acquired publications, (iii) an increase of $3.2 million in direct costs relating to shows and licensing activities, and (iv) an increase in overall distribution expenses of $2.2 million, or 19.6%. In addition, paper and printing costs increased by $4.8 million, or 18.2%, resulting from a significant increase in the number of copies produced during the first six months of 1998, compared to same period in 1997, as evidenced by a corresponding substantial increase in newsstand and subscription revenues. General and Administrative expenses. General and administrative expenses increased approximately $3.5 million, or 38.9%, to $12.5 million for the six months ended June 30, 1998, from $9.0 million for the same period of the prior year. This increase resulted primarily from the Company's continuing efforts to become a complete marketing solutions company by (i) hiring additional management and personnel relating to its various operations including the establishment of its Enterprises division and events operations and (ii) the absorption of general and administrative expenses from acquired companies. Income from Operations. Income from operations increased $6.0 million, or 56.6%, to $16.6 million for the six months ended June 30, 1998 from $10.6 million for the three months ended June 30, 1997, primarily as a result of the reasons stated above. Interest expense. Interest expense decreased to $7.4 million for the first six months of 1998 compared to $15.9 million for the same period in 1997. This decrease was the result of the Company eliminating its 11 1/8% Senior Subordinated Notes with proceeds from its initial public offering, cash from operations and proceeds from the Company's new credit facilities. In addition, the Company's interest rate on borrowed funds decreased compared to the same period of the prior year. (See Note 4 in the Notes to Condensed Consolidated Financial Statements herein). Extraordinary item. During the six months ended June 30, 1998, the Company recorded a loss on early extinguishment of debt in the amount of $18.5 million resulting from one time charges relating to the repurchase of $75.0 million in its 11 1/8% Senior Subordinated Notes and establishing the new Senior Credit Facility. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) Net loss attributable to common shareholders. Net loss attributable to common shareholders for the six months ended June 30, 1998 was $8.9 million, compared to a net loss of $20.4 million for the same period of the prior year. The $11.5 million decrease in net loss is primarily the result of improved operations during the first half of 1998 as noted above, the decrease in interest expense period to period, as well as a $15.4 million preferred unit dividend issued during the first six months of 1997 and an $18.5 million loss on early extinguishment of debt which occurred in 1998. LIQUIDITY AND CAPITAL RESOURCES The Company's primary cash needs are for daily operations including the production and distribution of its publications, capital expenditures and strategic business acquisitions. Historically, the Company's primary sources of cash for its business activities have been cash flows from operations, issuing debt instruments and borrowings under its various credit facilities. Cash and cash equivalents totaled $1.1 million and working capital (excluding the current portion of unearned subscription revenue) totaled $10.3 million at June 30, 1998. At December 31, 1997, cash and cash equivalents totaled $5.9 million and working capital (excluding the current portion of unearned subscription revenue) totaled $15.3 million. The Company's net cash provided by operations was $8.7 million for the six months ended June 30, 1998 compared to $18.1 million for the six months ended June 30, 1997. Of this decrease, approximately $7.5 million was related to changes of operating asset and liability balances. EBITDA, which is a measure of cash based income, increased $7.1 million, or 23.7%, to $37.1 million for the six months ended June 30, 1998, from $30.0 million for the same period in 1997. Improved operations including an increase in revenues from the events and enterprise divisions of the Company were the primary contributing factors to the increase in EBITDA. The Company's net cash used in investing activities was $69.4 million for the six months ended June 30, 1998, compared to net cash provided by investing activities of $2.2 million for the same period of the prior year. During the first half of 1998, the Company used funds of approximately $70.2 million for acquisitions, including the purchase of nearly twenty (20) magazine titles from various publishers and a variety of other media ventures. The Company's operations are not capital intensive and at June 30, 1998, there are no material capital commitments. The Company's capital expenditures were $.2 million and $1.5 million in the six months ended June 30, 1997 and 1998, respectively. The Company's net cash provided by financing activities was $55.9 million for the six months ended June 30, 1998 and was comprised primarily of $139.0 million in proceeds from bank borrowings, offset in part by $75.0 million used to pay off the remaining 11 1/8% Senior Subordinated Notes, all of which represented an early repayment. During the six months ended June 30, 1998, the Company entered into the Revolving Credit Facility which provides for up to $325 million in borrowings, comprised of a $175 million seven-year Senior Secured Revolving Loan Facility due 2005, and a $150 million nine-year Senior Secured Term Loan due 2007. The Company believes that net cash provided by operations and funds available under the Revolving Credit Facility will be sufficient to fund its future cash requirements. Excluding any acquisition activity, the Company currently projects that it will not have to utilize the Revolving Credit Facility to fund operations. No assurances can be given, however, that this will be the case. The Company expects that future cash requirements will principally be for repayments of indebtedness, working capital requirements, capital expenditures and strategic acquisitions. The Company's future operating performance and ability to service or refinance its current indebtedness will be subject to future economic conditions and to financial, business and other factors, many of which are beyond the Company's control. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION Earnings before interest expense, taxes, depreciation and amortization ("EBITDA") is a widely used and commonly reported standard measure utilized by analysts and investors in the analysis of the media industry. EBITDA is not a measure of performance under GAAP because it excludes those items listed above which are significant components in understanding and evaluating the Company's financial performance. However, the following EBITDA information can provide additional information for determining the ability of the Company to meet its debt service requirements and for other comparative analyses of the Company's operating performance relative to other publishing companies.
Six Months Ended June 30, (unaudited and in thousands) 1997 1998 ---------- ---------- Total net revenues $120,143 $145,680 Production, selling & other direct costs (excluding depreciation of $941 and $917 for the six months ended June 30, 1997 and 1998, respectively) 81,499 96,517 -------- -------- 38,644 49,163 General & administrative expenses (8,990) (12,450) Other adjustments 376 362 -------- -------- EBITDA $ 30,030 $ 37,075 ======== ========
The Company's EBITDA increased $7.1 million, or 23.7%, to $37.1 million for the six months ended June 30, 1998 from $30.0 million for the six months ended June 30, 1997. Improved operations including an increase in revenues from the events and enterprise divisions of the Company were the primary contributing factors to the increase in EBITDA. EBITDA as a percentage of net revenues increased to 25.5% from 25.0% for the same periods. 15 PART II - OTHER INFORMATION Item 1. Legal Proceedings ----------------- Not applicable Item 2. Changes in Securities --------------------- Not applicable Item 3. Defaults Upon Senior Securities ------------------------------- Not applicable Item 4. Submission of Matters to a Vote of Security Holders ------------------------------------------------ (a) The Annual Meeting of Stockholders of the Company was held on April 22, 1998. (b) At the Annual Meeting of Stockholders, the following matters were submitted to a vote of the Stockholders of the Company: 1. The election of three (3) Class I Directors to the Board of Directors to serve until the annual meeting of stockholders in 2001 and until their successors are duly elected and qualified:
Director Votes For Votes Against -------- --------- -------------- Richard S Willis 24,720,660 24,300 Milton J. Block 24,720,024 24,940 John R. Willis 24,720,660 24,300
2. The ratification of the appointment of Ernst & Young LLP as the Company's independent public auditors for the year ending December 31, 1998:
Votes For Votes Against Votes Withheld --------- ------------- -------------- 24,744,424 405 135
Item 5. Other Information ----------------- Not applicable Item 6. Exhibits and Reports on Form 8-K. -------------------------------- (a) Exhibits: 4.1 Credit Agreement, dated as of March 31, 1998, by and among the Company, Publishing, the Lenders named therein, First Union National Bank ("First Union"), as Administrative Agent, CIBC, Inc. as Syndication Agent and Morgan Stanley Senior Funding, Inc. ("Morgan") as documentation Agent, establishing the $325,000,000 Senior Credit Facilities. (1) 4.2 Borrower Pledge and Security Agreement, dated as of March 31, 1998, made by Publishing in favor of First Union, as Administrative Agent. (1) 4.3 Parent Pledge and Security Agreement, dated as of March 31, 1998, made by the Company in favor of First Union, as Administrative Agent. (1) 4.4 Parent Guaranty, dated as of March 31, 1998, by and among the Company in favor of First Union, as Administrative Agent. (1) 27 Financial Data Schedule (b) Reports on Form 8-K: None ____________ (1) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998 (Commission file No. 1-13373). 16 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The Petersen Companies, Inc. Dated: August 13, 1998 By: /s/ Richard S Willis -------------------------- Richard S Willis Executive Vice President and Chief Accounting Officer 17 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q FOR THE PERIOD ENDED 6/30/98 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 1,122 0 34,721 1,084 4,352 92,642 7,124 3,308 649,377 119,009 0 0 0 350 264,650 649,377 145,680 145,680 97,434 97,434 31,620 0 7,409 9,598 0 9,598 0 (18,483) 0 (8,885) (0.25) (0.25)
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