American Family Enterprises is expected to lose at least $30 million this year, the first loss in the company's 25-year history.
Time Inc., which owns 50% of the sweepstakes giant, is weighing several options, including recommending to American Family's board that the company declare bankruptcy, executives close to the situation said.
Chapter 11 protection would give American Family temporary relief from several lawsuits; it is involved in ongoing litigation in seven states.
American Family and rival Publishers Clearing House have been besieged by class action suits and cases filed by 43 state attorneys general. The lawsuits accuse the sweepstakes companies of fraudulent marketing practices.
SETBACK FOR PROFITABLE OPERATION
Executives close to Time Inc. said AFE is expected to lose money this year because of mounting legal fees. That's a big setback for a company that has in recent years generated profits of $100 million or more.
Historically, American Family's profit margins have run as high as 40%, said a former company executive. Time Inc. evenly splits American Family's profits with its partner, the Pritzker family.
Spokesmen for both Time Inc. and American Family declined to comment.
OTHER OPTIONS POSSIBLE
Time Inc. President-CEO Don Logan and Exec VP Don Elliman sit on American Family's board. Messrs. Logan and Elliman are also weighing options other than Chapter 11, publishing executives said.
The least appealing option for Time Inc. involves swallowing the losses in hopes that the business once again returns to its healthier state, said one executive.
Some executives contacted by Advertising Age said Time Inc. considered selling its share, possibly to rival Publishers Clearing House. However, another executive familiar with American Family believed that option was ruled out.
"I doubt they would want to sell it," said one insider. "It's always been a key asset. It's more likely they would try and fix it, and manage through this crisis."
Adding to American Family's woes is the severe drop-off in subscription volume.
Publishing companies typically rely on sweepstakes mailings for up to 33% of their total subscriptions.
SWEEPS SUBSCRIPTIONS FALL
Industry executives report the number of subscriptions generated from all sweepstakes mailings are down by as much as 60%, which could have severe ramifications for the magazine world.
Subscription volume from sweepstakes has been slipping for the past three years, but this year's performance is by far the worst.
As one circulation executive put it, "This is like falling off the cliff into the precipice. It's abysmal."
For now, American Family gives publishers a percentage of each subscription it sells. Time Inc. may recommend that American Family not share money from subscription sales with publishers. The magazine industry, though, would still get new subscriber names, a practice it heavily relies on for additional sales.
PUBLISHERS MAY BE AMENABLE
Desperate for names of new subscribers, publishers may be amenable to the idea. Given sweepstakes' poor performance lately, many publishers have begun to look at other sources for subscriptions. Sales agents known as "PDS"--or "paid during service"--are getting more business. Those agents do not pay any money back to publishers for selling subscriptions, but they do provide new names.
Most publishers do not make money on first-time subscribers, who typically are paying a reduced trial price.
Only when a subscriber renews the second year at a higher price does a publisher usually begin to make money.
Copyright April 1999, Crain Communications Inc.