Primedia Inc.

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Primedia Inc.

745 Fifth Avenue
New York, New York 10151
U.S.A.
(212) 745-0100
Fax: (212) 745-0121
Web site: http://www.k-iii.com

Public Company
Incorporated: 1989 as K-III Holdings Inc.
Employees: 7,200
Sales: $1.37 billion (1996)
Stock Exchanges: New York
SICs: 2711 Newspapers: Publishing, or Publishing & Printing; 2721 Periodicals: Publishing, or Publishing & Printing; 2731 Books: Publishing, or Publishing & Printing; 2741 Miscellaneous Publishing; 4899 Communications Services, Not Elsewhere Classified; 7375 Information Retrieval Services; 7812 Motion Picture & Video Tape Production; 8244 Business & Secretarial Schools

Primedia Inc. is a newspaper, periodical, and book publisher whose publications include consumer and trade magazines, reference books, and educational materials and services. The company also owns Channel One News, a television news program that reaches millions of students each day. In addition, Primedia owns specialized databases and database products, produces educational films, and runs a secretarial school chain. The company changed its name from K-III Communications Corporation in November 1997.

Acquisition-Fueled Growth, 1989-94

Primedia got its start in 1989 as K-III Holdings, a new venture financed by the investment group Kohlberg, Kravis, Roberts and Co. (KKR). KKR, a leveraged-buyout specialist that had managed the $25 billion buyout of RJR Nabisco Inc. in 1989, had very deep pockets and was ambitious to become a major player in publishing. It also had a willing collaborator in William F. Reilly, president of Macmillan Inc. KKR teamed with Reilly to make a bid for the publishing giant in 1988, but it was sold instead to publishing tycoon Robert Maxwell.

Under Maxwell, Macmillan began to be sold off in pieces. Reilly, while still president of Macmillan, became a partner in K-III Holdings Inc., which was organized to seek some of these properties. The “K” in “K-III” stood for KKR, and the “III” represented Reilly and two other partners, Charles G. McCurdy, Macmillan’s chief financial officer, and Beverly C. Chell, its general counsel. The three received about 13 percent of K-III Holdings’ stock between them.

In 1989 K-III purchased Macmillan’s Direct Marketing Group, which included Macmillan Book Clubs—renamed Newbridge Book Clubs—and Gryphon Editions, for $143 million. It also bought Intertec Publishing Corp., a producer of technical magazines, for $167 million. Reilly left Macmillan to become chairman and chief executive officer of K-III in February 1990. In May 1990 K-III purchased Ward’s Communications, publisher of auto industry publications, from Thomson Corp. Three months later K-III acquired Reader’s Garden Inc., a company operating special-interest book clubs, and in December 1990 it bought Field Limited Partnership and Funk & Wagnalls for about $200 million.

These acquisitions raised K-Ill’s sales volume to about $500 million a year. Its holdings included 25 trade magazines, numerous specialized directories for various industries, Field Publications’ Weekly Reader for schoolchildren, and Funk & Wag-nails’ encyclopedia and other educational materials. In 1991 the company, which had been renamed K-III Communications, purchased eight magazines, including New York, Seventeen, Premiere, Soap Opera Digest, and New Woman, and the Daily Racing Form from Rupert Murdoch’s News Corp. for $650 million. The following year was chiefly devoted to digesting its acquisitions, but the company purchased Krames Communications Co., a publisher of medical pamphlets that doctors distribute to patients, from Hachette S.A. It also purchased Musical America Publishing, Inc. and Films for the Humanities, Inc.

In 1993 K-III purchased United Media’s Pharos Books division, publisher of The World Almanac. This acquisition included World Almanac Education, a direct marketer of educational and reference works to libraries. K-III also purchased Nelson Publications, a line of child development products and directories serving the electronics market. In addition, the company bought three trade journals from Wiesner, Inc., a publisher of directories for corporate pilots and corporate flight departments, nine regional directories used by corporate purchasing agents, and the publication Soybean Digest.

K-III’s 1993 revenues came to $844.7 million, of which education accounted for 46 percent, magazine publishing for 38 percent, and information for 16 percent. Reilly’s goal, it was reported, was to raise K-III’s annual revenues to $1.5 billion to $2 billion within five years, to be followed by a public offering of stock. This objective carried a heavy price tag, however. Despite its large sales volume, K-III lost $86.5 million in 1993 (on top of $145.3 million in 1992) because of the high cost of financing its acquisitions. The company’s debt was $661.3 million at the end of the year. Investors had pumped $461 million into the company since July 1989.

Undaunted, K-III raised its stake in education in March 1994 by acquiring Katharine Gibbs Schools Inc., a chain of seven secretarial schools in the northeast, from Phillips Colleges, which had purchased it from Macmillan in 1989. Also during 1994, the company acquired Haas Publishing Companies, Inc.; a leading line of child development products from Gruner + Jahn USA Publishing; Stagebill; and the premier source of information on heavy mobile equipment serving the construction industry.

K-III’s biggest acquisition of 1994, however, was the purchase of Channel One Communications Corp. from Whittle Communications L.P. for about $250 million. Its flagship property, Channel One News, was a controversial, advertiser-supported 12-minute daily news show telecast to almost 12,000 secondary schools and nearly eight million secondary school students in 47 states. Revenues had exceeded $70 million in its most recent fiscal year, and operating profit was believed to be about $20 million. Although Channel One News won a Peabody Award for its coverage of AIDS, many educators were critical of the program. One study reported that 42 percent of air time was devoted to advertisements, a pop quiz, contests, music, and banter between the young anchors and correspondents. K-III had net sales of $964.8 million in 1994 and a net loss of $41.4 million, following an income-tax credit of $42.1 million.

More Acquisition, More Debt in 1995 and 1996

Between December 1993 and March 1995 K-III added more than 50 magazines at a cost of nearly $650 million. In January 1995 it acquired PJS Publications, publisher of such specialty magazines as McCall’s Needlework, Sew News, Shooting Times, and Crafts. A month later it sold Premiere to Hachette and New World Communications Group for about $20 million but acquired Maclean Hunter Ltd.’s U.S. publishing properties, including American Printer and Coal, for about $55 million to $60 million.

K-III’s yen for new properties continued unabated through the rest of 1995. In June it acquired McMullen & Yee Publishing, owners of such titles as Truckin’ and All Chevy, for about $55 million. Chicago, a city magazine, was purchased from Landmark Communications. The company also bought Bacon’s Information, a provider of comprehensive media information services to the public relations industry, and the newsletter Craftrends Magazine.

The K-III acquisition process was to appoint a “deal man” for each of its three divisions—publishing, education, and information—to identify targets. Each acquisition had to meet five criteria: cover a niche market, hold a dominant position in this niche, face little competition, possess management expertise, and generate high cash flow. Once acquired, a property was expected to maintain high cash flow or be sold or shut down. Magazine editors and publishers were allowed considerable leeway as long as the numbers remained favorable. In a review held every three months, they were asked for detailed budgets for circulation and sales for one year and looser projections for the next four years.

In 1995 K-III’s net sales rose to $1.05 billion, but it lost $75.4 million despite an income-tax credit of $59.6 million— chiefly because of interest expenses that came to $105.4 million on its debt of $1.1 billion. Notwithstanding its shaky numbers, K-III sold 15 million shares (one-ninth of the outstanding shares of common stock) to the public at $10 a share in November 1995. (Investors in funds put together by KKR earlier had paid an average of about $6 a share.)

The $141 million in net proceeds from the initial public offering was earmarked to reduce debt, but K-III warned in its prospectus that it did not expect to earn a net profit soon, in part because it was willing to borrow more money to finance future deals. Shortly after the stock sale the company agreed to buy 14 magazines from Cahners Consumers Magazines, including Power & Motoryacht, American Baby, Modern Bride, and Sail. And in April 1996 it acquired Westcott Communications Inc., a producer of educational and career training programs via satellite and videotapes, for $422 million. Westcott was the nation’s largest producer of national training courses broadcast by satellite.

Company Perspectives:

Primedia is an information company in an information age. As people are increasingly overwhelmed by a barrage of information, Primedia has recognized the value of being the primary source of pertinent information.

Primedia’s specialty media, education and information properties all share a distinction that reflects the Primedia mission —to be the authoritative source of specialized information for highly targeted audiences.

K-III also made a number of lesser acquisitions in 1996. These included Tri-State Publishing & Communications, Inc.; the trade magazines Lighting Dimensions, Millimeter, and Theatre Crafts International; and the news services division of Facts on File Inc. It also purchased Horticulture magazine and certain net assets of ADC of Greater Kansas City, Inc. and VSD Communications, Inc.

The most high-profile of K-III’s publications continued to be New York. According to a New York Times story published in 1996, Henry R. Kravis, a KKR partner, had killed or tried to kill articles in the weekly that were critical of Wall Street investment bankers. When its editor was fired in 1996, he and many of his colleagues blamed Kravis. K-Ill executives replied that circulation figures, although rising, had been disappointing. (New York’s circulation was some 425,000, compared with about 2.1 million for Seventeen, which had the highest circulation of any K-IH magazine.)

K-III posted revenues of $1.37 billion in 1996, of which education accounted for 45 percent, media for 35 percent, and information for 20 percent. Operating income came to $85.9 million, but the company spent $125.5 million on interest payments. The deficit before considering income tax was $45.3 million, but since K-III accumulated $53.3 million in tax credits on future profits, it ended the year with net income of $8 million. The long-term debt at year’s end was $1.57 billion. KKR owned 83 percent of the outstanding shares of common stock in March 1997.

K-III/Primedia in 1997

Reilly announced in March 1997 that K-III would sell some of the 52 businesses that it had acquired in its eight-year history and issue 12.5 million new shares of common stock. The new issue was canceled in April, however, because of a fall in the price of existing shares. The properties Reilly put on the block accounted for $260 million in revenue in 1996 and $25 million in earnings before considering debt service and taxes. On the other hand, Reilly said he expected to spend $200 million to $250 million each year for the foreseeable future to acquire businesses, focusing on “niche markets, publications that have more than a 50-percent market share and have authoritative content.”

The most valuable property up for sale was the Daily Racing Form. Although the standard source for horse racing bettors and virtually the only publication in its field, it had lost readers as the public shifted its gambling interest to the new casinos cropping up throughout the nation. By industry estimates circulation was off as much as half since its 1991 acquisition. The other properties on the block included Newbridge Book Clubs, Krames Communications, and New Woman. During the following months Times Mirror bought Krames and Rodale Press bought New Woman.

K-III was renamed Primedia in November 1997. At this time the business consisted of three units: education, information, and media. The education unit consisted of educational programming (Channel One News, The Classroom Channel, and Films for the Humanities and Sciences), periodicals/supplementary materials (periodicals and skill books for students from kindergarten through 12th grade, including Weekly Reader), professional book services (consisting of 20 scientific and professional book services), supplementary educational programs (12 continuity programs), and professional training (the Katharine Gibbs Schools). The information segment consisted of directories (69 specialized databases), apartment guides (in 50 markets, plus a publication distribution network), the Daily Racing Form database, and reference materials (Funk & Wag-nails and The World Almanac). The media segment consisted of consumer magazines (13 magazines), special interest magazines (35), and trade and technical magazines and database products (74 of these magazines and an unspecified number of database products).

Principal Subsidiaries

Channel One Communications Corporation; Daily Racing Form, Inc.; Intertec Publishing Corporation; K-III Holdings Corporation III; K-III HPC, Inc.; K-III Magazine Corporation; K-III Reference Corporation; Lifetime Learning Systems, Inc.; McMullen Argus Publishing, Inc.; Nelson Information, Inc.; Newbridge Communications, Inc.; PJS Publications, Inc.; The Katharine Gibbs Schools, Inc.; Weekly Reader Corporation; Westcott Communications, Inc.