**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-Q**

 

----

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

For the quarterly period ended: **June30, 2004**

 

**Commission file number: 1-11106**

 

**PRIMEDIA Inc.**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                                                    | ** ** | **13-3647573**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**745 Fifth Avenue, New York, New York**

(Address of principal executive offices)

 

**10151**

(Zip Code)

 

Registrant’stelephone number, including area code    **(212) 745-0100**

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months,and (2) has been subject to such filing requirements for the past 90 days.

Yes     ý          No  o

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

Yes     ý          No  o

 

Number of shares of commonstock, par value $.01 per share, of PRIMEDIA Inc. outstanding as of July 30,2004: 260,481,340.

 

 

----

 

**PRIMEDIA Inc.**

 

**INDEX**

 
| **Part I.  Financial Information:** |       |
|-------------------------------------|------------|
|                                |       |   |   |
|                                | Item 1.    | Financial Statements |   |
|                                |       |   |   |
|                                |       | Condensed  Consolidated Balance Sheets as of June 30, 2004 (Unaudited) and December 31,  2003 | 2 |
|                                |       |   |   |
|                                |       | Condensed  Statements of Consolidated Operations (Unaudited) for the six months ended  June 30, 2004 and 2003 | 3 |
|                                |       |   |   |
|                                |       | Condensed  Statements of Consolidated Operations (Unaudited) for the three months ended  June 30, 2004 and 2003 | 4 |
|                                |       |   |   |
|                                |       | Condensed  Statements of Consolidated Cash Flows (Unaudited) for the six months ended  June 30, 2004 and 2003 | 5 |
|                                |       |   |   |
|                                |       | Notes to Condensed  Consolidated Financial Statements (Unaudited) | 6 |
|                                |       |   |   |
|                                | Item 2.    | Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 27 |
|                                |       |   |   |
|                                | Item 3.    | Quantitative and Qualitative Disclosures About  Market Risk | 58 |
|                                |       |   |   |
|                                | Item 4.    | Controls and Procedures | 58 |
|                                |       |   |   |
| **Part II. Other Information:**     |       |
|                                |       |   |   |
|                                | Item 4.    | Submission of Matters to a Vote of Security  Holders | 59 |
|                                |       |   |   |
|                                | Item 6.    | Exhibits and Reports on Form 8-K | 60 |
|                                |       |   |   |
|                                | Signatures |   | 61 |

 

1

----

 

**PRIMEDIA INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCESHEETS**

 
| ** **                                                                                                                                                                                                                                        | ** ** | **June 30, 2004**                                    | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                                                                        | ** ** | **(Unaudited)**                                      | ** ** | ** **             | ** ** |
| ** **                                                                                                                                                                                                                                        | ** ** | **(dollars in thousands, except per share amounts)** | ** ** |
|                                                                                                                                                                                                                                              |       |                                                 |       |                   |       |
| **ASSETS**                                                                                                                                                                                                                                        |       |                                                 |       |                   |       |
| Current assets:                                                                                                                                                                                                                                   |       |                                                 |       |                   |       |
| Cash and cash equivalents                                                                                                                                                                                                                         |       | $                                                    | 66,558     |                   | $          | 8,685 |   |
| Accounts receivable, net                                                                                                                                                                                                                          |       | 180,944                                              |       | 194,080                |       |
| Inventories                                                                                                                                                                                                                                       |       | 19,095                                               |       | 17,500                 |       |
| Prepaid expenses and other                                                                                                                                                                                                                        |       | 40,942                                               |       | 36,059                 |       |
| Assets held for sale                                                                                                                                                                                                                              |       | 379                                                  |       | 31,879                 |       |
| Total current assets                                                                                                                                                                                                                              |       | 307,918                                              |       | 288,203                |       |
|                                                                                                                                                                                                                                              |       |                                                 |       |                   |       |
| Property and equipment (net of accumulated  depreciation and amortization of $301,352 in 2004 and $280,612 in 2003)                                                                                                                               |       | 98,448                                               |       | 110,859                |       |
| Other intangible assets, net                                                                                                                                                                                                                      |       | 258,389                                              |       | 268,407                |       |
| Goodwill                                                                                                                                                                                                                                          |       | 903,178                                              |       | 910,534                |       |
| Other non-current assets                                                                                                                                                                                                                          |       | 60,384                                               |       | 58,118                 |       |
| Total Assets                                                                                                                                                                                                                                      |       | $                                                    | 1,628,317  |                   | $          | 1,636,121 |   |
|                                                                                                                                                                                                                                              |       |                                                 |       |                   |       |
| **LIABILITIES AND SHAREHOLDERS’ DEFICIENCY**                                                                                                                                                                                                 |       |                                                 |       |                   |       |
| Current liabilities:                                                                                                                                                                                                                              |       |                                                 |       |                   |       |
| Accounts payable                                                                                                                                                                                                                                  |       | $                                                    | 75,293     |                   | $          | 78,794 |   |
| Accrued expenses and other                                                                                                                                                                                                                        |       | 181,144                                              |       | 213,934                |       |
| Deferred revenues                                                                                                                                                                                                                                 |       | 151,336                                              |       | 157,853                |       |
| Current maturities of long-term debt                                                                                                                                                                                                              |       | 16,683                                               |       | 22,195                 |       |
| Liabilities of businesses held for sale                                                                                                                                                                                                           |       | 1,297                                                |       | 16,049                 |       |
| Total current liabilities                                                                                                                                                                                                                         |       | 425,753                                              |       | 488,825                |       |
|                                                                                                                                                                                                                                              |       |                                                 |       |                   |       |
| Long-term debt                                                                                                                                                                                                                                    |       | 1,592,292                                            |       | 1,562,441              |       |
| Shares subject to mandatory redemption                                                                                                                                                                                                            |       | 474,559                                              |       | 474,559                |       |
| Deferred revenues                                                                                                                                                                                                                                 |       | 35,446                                               |       | 33,604                 |       |
| Deferred income taxes                                                                                                                                                                                                                             |       | 69,970                                               |       | 61,364                 |       |
| Other non-current liabilities                                                                                                                                                                                                                     |       | 25,837                                               |       | 28,583                 |       |
| Total Liabilities                                                                                                                                                                                                                                 |       | 2,623,857                                            |       | 2,649,376              |       |
|                                                                                                                                                                                                                                              |       |                                                 |       |                   |       |
| Shareholders’ deficiency:                                                                                                                                                                                                                    |       |                                                 |       |                   |       |
| Series J convertible preferred stock ($.01  par value, 1,406,722 shares and 1,319,093 shares issued and outstanding,  aggregate liquidation and redemption values of $175,841 and $164,887 at June  30, 2004 and December 31, 2003, respectively) |       | 175,487                                              |       | 164,533                |       |
| Common stock ($.01 par value, 350,000,000  shares authorized at June 30, 2004 and December 31, 2003 and 269,032,592  shares and 268,333,049 shares issued at June 30, 2004 and December 31, 2003,  respectively)                                  |       | 2,690                                                |       | 2,683                  |       |
| Additional paid-in capital (including warrants  of $31,690 at June 30, 2004 and December 31, 2003)                                                                                                                                                |       | 2,349,476                                            |       | 2,345,152              |       |
| Accumulated deficit                                                                                                                                                                                                                               |       | (3,445,439                                           | )          | (3,447,710             | )          |
| Accumulated other comprehensive loss                                                                                                                                                                                                              |       | (192                                                 | )          | (176                   | )          |
| Unearned compensation                                                                                                                                                                                                                             |       | —                                               |       | (175                   | )          |
| Common stock in treasury, at cost (8,610,491  shares at June 30, 2004 and December 31, 2003)                                                                                                                                                      |       | (77,562                                              | )          | (77,562                | )          |
| Total Shareholders’ Deficiency                                                                                                                                                                                                               |       | (995,540                                             | )          | (1,013,255             | )          |
|                                                                                                                                                                                                                                              |       |                                                 |       |                   |       |
| Total Liabilities and Shareholders’  Deficiency                                                                                                                                                                                              |       | $                                                    | 1,628,317  |                   | $          | 1,636,121 |   |

 

See notes to condensed consolidated financial statements (unaudited).

 

2

----

 

**PRIMEDIA INC. AND SUBSIDIARIES**

**CONDENSED STATEMENTS OFCONSOLIDATED OPERATIONS (UNAUDITED)**

 
| ** **                                                                                                                | ** ** | **Six Months Ended  June 30,**                       | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                                | ** ** | **2004**                                             | ** ** | **2003** | ** ** |
| ** **                                                                                                                | ** ** | **(dollars in thousands, except per share amounts)** | ** ** |
|                                                                                                                      |       |                                                 |       |   |   |
| Revenues, net:                                                                                                            |       |                                                 |       |   |   |
| Advertising                                                                                                               |       | $                                                    | 418,025    |   | $ | 414,915 |   |
| Circulation                                                                                                               |       | 150,792                                              |       | 155,081 |   |
| Other                                                                                                                     |       | 98,545                                               |       | 94,782 |   |
| Total revenues, net                                                                                                       |       | 667,362                                              |       | 664,778 |   |
|                                                                                                                      |       |                                                 |       |   |   |
| Operating costs and expenses:                                                                                             |       |                                                 |       |   |   |
| Cost of goods sold                                                                                                        |       | 141,668                                              |       | 147,758 |   |
| Marketing and selling                                                                                                     |       | 141,562                                              |       | 142,003 |   |
| Distribution, circulation and fulfillment                                                                                 |       | 115,566                                              |       | 113,841 |   |
| Editorial                                                                                                                 |       | 53,853                                               |       | 53,152 |   |
| Other general expenses                                                                                                    |       | 87,824                                               |       | 84,705 |   |
| Corporate administrative expenses  (excluding $3,486 and $2,023 of non-cash compensation in 2004 and 2003,  respectively) |       | 13,363                                               |       | 14,053 |   |
| Depreciation of property and equipment                                                                                    |       | 21,902                                               |       | 26,459 |   |
| Amortization of intangible assets and other                                                                               |       | 10,783                                               |       | 20,605 |   |
| Severance related to separated senior executives                                                                          |       | 658                                                  |       | 5,576 |   |
| Non-cash compensation                                                                                                     |       | 3,486                                                |       | 2,023 |   |
| Provision for severance, closures and  restructuring related costs                                                        |       | 7,174                                                |       | 3,150 |   |
| Provision for unclaimed property                                                                                          |       | 5,500                                                |       | — |   |
| (Gain) loss on sale of businesses and  other, net                                                                         |       | (23                                                  | )          | 1,338 |   |
|                                                                                                                      |       |                                                 |       |   |   |
| Operating income                                                                                                          |       | 64,046                                               |       | 50,115 |   |
| Other income (expense):                                                                                                   |       |                                                 |       |   |   |
| Provision for impairment of investments                                                                                   |       | (804                                                 | )          | (7,727 | ) |
| Interest expense                                                                                                          |       | (58,742                                              | )          | (65,203 | ) |
| Interest on shares subject to mandatory  redemption                                                                       |       | (21,890                                              | )          | — |   |
| Amortization of deferred financing costs                                                                                  |       | (2,319                                               | )          | (1,244 | ) |
| Other income (expense), net                                                                                               |       | 109                                                  |       | (3,819 | ) |
|                                                                                                                      |       |                                                 |       |   |   |
| Loss from continuing operations before  income tax expense                                                                |       | (19,600                                              | )          | (27,878 | ) |
| Income tax expense                                                                                                        |       | (8,724                                               | )          | (7,051 | ) |
|                                                                                                                      |       |                                                 |       |   |   |
| Loss from continuing operations                                                                                           |       | (28,324                                              | )          | (34,929 | ) |
|                                                                                                                      |       |                                                 |       |   |   |
| Discontinued operations (including gain on  sale of businesses of $42,226 and $102,605 in 2004 and 2003, respectively)    |       | 41,549                                               |       | 103,586 |   |
|                                                                                                                      |       |                                                 |       |   |   |
| Net income                                                                                                                |       | 13,225                                               |       | 68,657 |   |
|                                                                                                                      |       |                                                 |       |   |   |
| Preferred stock dividends and related  accretion, net                                                                     |       | (10,954                                              | )          | (32,011 | ) |
| Income applicable to common shareholders                                                                                  |       | $                                                    | 2,271      |   | $ | 36,646 |   |
|                                                                                                                      |       |                                                 |       |   |   |
| Per common share:                                                                                                         |       |                                                 |       |   |   |
| Loss from continuing operations                                                                                           |       | $                                                    | (0.15      | ) | $ | (0.26 | ) |
| Discontinued operations                                                                                                   |       | 0.16                                                 |       | 0.40 |   |
| Basic and diluted income applicable to  common shareholders                                                               |       | $                                                    | 0.01       |   | $ | 0.14 |   |
|                                                                                                                      |       |                                                 |       |   |   |
| Basic and diluted common shares outstanding                                                                               |       | 260,100,874                                          |       | 258,945,403 |   |

 

See notes to condensed consolidated financial statements (unaudited).

 

3

----

 

**PRIMEDIA INC. AND SUBSIDIARIES**

**CONDENSED STATEMENTS****OF CONSOLIDATED OPERATIONS (UNAUDITED)**

 
| ** **                                                                                                              | ** ** | **Three Months Ended  June 30,**                     | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2004**                                             | ** ** | **2003** | ** ** |
| ** **                                                                                                              | ** ** | **(dollars in thousands, except per share amounts)** | ** ** |
|                                                                                                                    |       |                                                 |       |   |   |
| Revenues, net:                                                                                                          |       |                                                 |       |   |   |
| Advertising                                                                                                             |       | $                                                    | 213,696    |   | $ | 211,462 |   |
| Circulation                                                                                                             |       | 76,989                                               |       | 77,779 |   |
| Other                                                                                                                   |       | 51,491                                               |       | 50,050 |   |
| Total revenues, net                                                                                                     |       | 342,176                                              |       | 339,291 |   |
|                                                                                                                    |       |                                                 |       |   |   |
| Operating costs and expenses:                                                                                           |       |                                                 |       |   |   |
| Cost of goods sold                                                                                                      |       | 74,209                                               |       | 75,910 |   |
| Marketing and selling                                                                                                   |       | 66,203                                               |       | 66,358 |   |
| Distribution, circulation and fulfillment                                                                               |       | 59,372                                               |       | 55,984 |   |
| Editorial                                                                                                               |       | 26,785                                               |       | 26,473 |   |
| Other general expenses                                                                                                  |       | 42,707                                               |       | 41,680 |   |
| Corporate administrative expenses  (excluding $1,567 and $777 of non-cash compensation in 2004 and 2003,  respectively) |       | 5,906                                                |       | 6,672 |   |
| Depreciation of property and equipment                                                                                  |       | 10,181                                               |       | 14,359 |   |
| Amortization of intangible assets and other                                                                             |       | 4,817                                                |       | 9,920 |   |
| Severance related to separated senior  executives                                                                       |       | —                                               |       | 5,576 |   |
| Non-cash compensation                                                                                                   |       | 1,567                                                |       | 777 |   |
| Provision for severance, closures and  restructuring related costs                                                      |       | 4,455                                                |       | 1,988 |   |
| Loss on sale of businesses and other, net                                                                               |       | 52                                                   |       | 1,212 |   |
|                                                                                                                    |       |                                                 |       |   |   |
| Operating income                                                                                                        |       | 45,922                                               |       | 32,382 |   |
| Other expense:                                                                                                          |       |                                                 |       |   |   |
| Provision for impairment of investments                                                                                 |       | (804                                                 | )          | (7,727 | ) |
| Interest expense                                                                                                        |       | (30,164                                              | )          | (31,750 | ) |
| Interest on shares subject to mandatory  redemption                                                                     |       | (10,945                                              | )          | — |   |
| Amortization of deferred financing costs                                                                                |       | (1,217                                               | )          | (503 | ) |
| Other expense, net                                                                                                      |       | (179                                                 | )          | (3,275 | ) |
|                                                                                                                    |       |                                                 |       |   |   |
| Income (loss) from continuing operations  before income tax expense                                                     |       | 2,613                                                |       | (10,873 | ) |
| Income tax expense                                                                                                      |       | (4,357                                               | )          | (3,333 | ) |
|                                                                                                                    |       |                                                 |       |   |   |
| Loss from continuing operations                                                                                         |       | (1,744                                               | )          | (14,206 | ) |
|                                                                                                                    |       |                                                 |       |   |   |
| Discontinued operations (including gain on  sale of businesses of $4,192 and $103,846 in 2004 and 2003, respectively)   |       | 3,898                                                |       | 103,110 |   |
|                                                                                                                    |       |                                                 |       |   |   |
| Net income                                                                                                              |       | 2,154                                                |       | 88,904 |   |
|                                                                                                                    |       |                                                 |       |   |   |
| Preferred stock dividends and related  accretion, net                                                                   |       | (5,801                                               | )          | (15,578 | ) |
| Income (loss) applicable to common  shareholders                                                                        |       | $                                                    | (3,647     | ) | $ | 73,326 |   |
|                                                                                                                    |       |                                                 |       |   |   |
| Per common share:                                                                                                       |       |                                                 |       |   |   |
| Loss from continuing operations                                                                                         |       | $                                                    | (0.03      | ) | $ | (0.12 | ) |
| Discontinued operations                                                                                                 |       | 0.02                                                 |       | 0.40 |   |
| Basic and diluted income (loss) applicable  to common shareholders                                                      |       | $                                                    | (0.01      | ) | $ | 0.28 |   |
|                                                                                                                    |       |                                                 |       |   |   |
| Basic and diluted common shares outstanding                                                                             |       | 260,307,340                                          |       | 259,003,962 |   |

 

See notes to condensed consolidated financial statements (unaudited).

 

4

----

 

**PRIMEDIA INC. AND SUBSIDIARIES**

**CONDENSED STATEMENTS OFCONSOLIDATED CASH FLOWS****(UNAUDITED)**

 
| ** **                                                                                       | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                       | ** ** | **2004**                      | ** ** | **2003** | ** ** |
| ** **                                                                                       | ** ** | **(dollars in thousands)**    | ** ** |
|                                                                                             |       |                          |       |   |   |
| **Operating activities:**                                                                        |       |                          |       |   |   |
| Net income                                                                                       |       | $                             | 13,225     |   | $ | 68,657 |   |
| Adjustments to reconcile net income to net  cash used in operating activities                    |       | 7,197                         |       | (23,304 | ) |
| Changes in operating assets and liabilities                                                      |       | (37,381                       | )          | (47,073 | ) |
| Net cash used in operating activities                                                            |       | (16,959                       | )          | (1,720 | ) |
|                                                                                             |       |                          |       |   |   |
| **Investing activities:**                                                                        |       |                          |       |   |   |
| Additions to property, equipment and other,  net                                                 |       | (13,574                       | )          | (21,166 | ) |
| Proceeds from sale of businesses and other                                                       |       | 70,277                        |       | 182,922 |   |
| Payments for businesses acquired, net of  cash acquired                                          |       | (1,270                        | )          | (4,796 | ) |
| Proceeds from other investments, net                                                             |       | 674                           |       | 1,008 |   |
| Net cash provided by investing activities                                                        |       | 56,107                        |       | 157,968 |   |
|                                                                                             |       |                          |       |   |   |
| **Financing activities:**                                                                        |       |                          |       |   |   |
| Borrowings under credit agreements                                                               |       | 231,500                       |       | 288,400 |   |
| Repayments of borrowings under credit  agreements                                                |       | (378,500                      | )          | (314,312 | ) |
| Payments for repurchases of senior notes                                                         |       | —                        |       | (375,675 | ) |
| Proceeds from issuance of Senior Floating  Rate Notes                                            |       | 175,000                       |       | — |   |
| Proceeds from issuance of 8% Senior Notes                                                        |       | —                        |       | 300,000 |   |
| Proceeds from issuances of common stock                                                          |       | 701                           |       | 569 |   |
| Purchases of common stock for the treasury                                                       |       | —                        |       | (19,367 | ) |
| Dividends paid to preferred stock  shareholders                                                  |       | —                        |       | (22,921 | ) |
| Deferred financing costs paid                                                                    |       | (5,559                        | )          | (5,977 | ) |
| Capital lease obligations                                                                        |       | (4,278                        | )          | (1,788 | ) |
| Other                                                                                            |       | (139                          | )          | (155 | ) |
| Net cash provided by (used in) financing  activities                                             |       | 18,725                        |       | (151,226 | ) |
|                                                                                             |       |                          |       |   |   |
| Increase in cash and cash equivalents                                                            |       | 57,873                        |       | 5,022 |   |
| Cash and cash equivalents, beginning of  period                                                  |       | 8,685                         |       | 18,553 |   |
| Cash and cash equivalents, end of period                                                         |       | $                             | 66,558     |   | $ | 23,575 |   |
|                                                                                             |       |                          |       |   |   |
| **Supplemental information:**                                                                    |       |                          |       |   |   |
| Cash interest paid                                                                               |       | $                             | 55,194     |   | $ | 69,336 |   |
| Cash interest paid on shares subject to  mandatory redemption                                    |       | $                             | 26,455     |   | $ | — |   |
| Cash taxes paid, net of refunds                                                                  |       | $                             | 102        |   | $ | 99 |   |
| Accretion in carrying value of exchangeable  and convertible preferred stock                     |       | $                             | —     |   | $ | 781 |   |
| Payments of dividends-in-kind on Series J  Convertible Preferred Stock                           |       | $                             | 10,954     |   | $ | 9,254 |   |
| Carrying value of exchangeable preferred  stock converted to common stock                        |       | $                             | —     |   | $ | 16,066 |   |
| Fair value of common stock issued in  connection with conversion of exchangeable preferred stock |       | $                             | —     |   | $ | 15,122 |   |

 

See notes to condensed consolidated financialstatements (unaudited).

 

5

----

 

**PRIMEDIA Inc.**

**NOTES TO CONDENSED CONSOLIDATED****FINANCIAL STATEMENTS(UNAUDITED)**

**(dollars in thousands, except per share amounts)**

 

1.     Summary of Significant Accounting Policies

 

Basisof Presentation

 

PRIMEDIA Inc., together with its subsidiaries, isherein referred to as either “PRIMEDIA” or the “Company.”  In the opinion of the Company’s management,the condensed consolidated financial statements present fairly the consolidatedfinancial position of the Company as of June 30, 2004 and December 31, 2003 andthe consolidated results of operations of the Company for the six and threemonths ended June 30, 2004 and 2003, and consolidated cash flows of the Companyfor the six month periods ended June 30, 2004 and 2003 and all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation have been included. All intercompany accounts and transactionshave been eliminated in consolidation. These statements should be read inconjunction with the Company’s annual consolidated financial statements andrelated notes for the year ended December 31, 2003, which are included in theCompany’s annual report on Form 10-K for the year ended December 31, 2003. Theoperating results for the six and three month periods ended June 30, 2004 arenot necessarily indicative of the results that may be expected for a full year.Certain amounts in the prior periods’ condensed consolidated financialstatements and related notes have been reclassified to conform to thepresentation as of and for the six and three month periods ended June 30, 2004.

 

StockBased Compensation

 

The Company has a stock-based employeecompensation plan. Effective January 1, 2003, the Company adoptedStatement of Financial Accounting Standards (“SFAS”) No. 123, “Accountingfor Stock-Based Compensation”, as amended by SFAS 148, “Accounting forStock-Based Compensation—Transition and Disclosure”, using the prospectivemethod. Upon adoption, the Company began expensing the fair value of stock-basedcompensation for all grants, modifications or settlements made on or afterJanuary 1, 2003.  The adoption of SFAS 123 increased the lossfrom continuing operations for the six and three months ended June 30, 2004 by$1,368 and $778, respectively. The impact of the adoption of SFAS 123 was notsignificant for the six and three months ended June 30, 2003.

 

6

----

 

The following tableillustrates the effect on net income (loss) applicable to common shareholdersand income (loss) per common share if the Company had applied the fair valuerecognition provisions of SFAS 123 to all stock-based employee compensationgrants:

 
| ** **                                                                                                       | ** ** | **Six Months Ended June 30,** | ** ** | **Three Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                       | ** ** | **2004**                      | ** ** | **2003**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| Reported net income (loss) applicable to  common shareholders                                                    |       | $                             | 2,271      |                            | $          | 36,646 |   | $ | (3,647 | ) | $ | 73,326 |   |
|                                                                                                             |       |                          |       |                            |       |   |   |   |   |
| Add: Stock-based employee compensation  expense included in reported net income (loss)                           |       | 1,543                         |       | 1,313                           |       | 778 |   | 472 |   |
|                                                                                                             |       |                          |       |                            |       |   |   |   |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards |       | (6,438                        | )          | (13,573                         | )          | (3,277 | ) | (7,004 | ) |
| Pro forma net income (loss) applicable to  common shareholders                                                   |       | $                             | (2,624     | )                               | $          | 24,386 |   | $ | (6,146 | ) | $ | 66,794 |   |
|                                                                                                             |       |                          |       |                            |       |   |   |   |   |
| Per Common Share:                                                                                                |       |                          |       |                            |       |   |   |   |   |
| Reported basic and diluted income (loss)                                                                         |       | $                             | 0.01       |                            | $          | 0.14 |   | $ | (0.01 | ) | $ | 0.28 |   |
| Pro forma basic and diluted income (loss)                                                                        |       | $                             | (0.01      | )                               | $          | 0.09 |   | $ | (0.02 | ) | $ | 0.26 |   |

 

Pro forma information regarding net income and earnings pershare is required by SFAS 123, and has been determined as if the Companyhad accounted for its employee stock options granted on or before December 31,2002 under the fair value method of SFAS 123. The fair value of theseoptions was estimated at the date of grant using the Black-Scholes pricingmodel. The following weighted-average assumptions were used for options grantedin the six months ended June 30, 2004 and 2003, respectively: risk-freeinterest rates of 2.81% and 3.85%; dividend yields of 0.0% and 0.0%; volatilityfactors of the expected market price of the Company’s common stock of 85% and79%, and a weighted-average expected life of the options of three and fiveyears. For the three months ended June 30, 2004 and 2003, respectively, thefollowing weighted-average assumptions were used: risk-free interest rates of2.83 % and 3.82%; dividend yields of 0.0% and 0.0%; volatility factors of theexpected market price of the Company’s common stock of 85% and 79%, and aweighted-average expected life of the options of three and five years. Theestimated fair value of options granted during the six months ended June 30,2004 and 2003 was $318 and $18, respectively, and $310 and $8 during the threemonths ended June 30, 2004 and 2003, respectively.

 

The Black-Scholes pricing model was developed for use inestimating the fair value of traded options which have no vesting restrictionsand are fully transferable. In addition, option valuation models require theinput of highly subjective assumptions including the expected stock pricevolatility. Because the Company’s employee stock options have characteristicssignificantly different from those of traded options, and because changes inthe subjective input assumptions can materially affect the fair value estimate,in management’s opinion, the existing models do not necessarily provide areliable single measure of the fair value of its employee stock options.

 

RecentAccounting Pronouncement 

 

On July1, 2003, the Company prospectively adopted**SFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity”.  SFAS 150 requires theCompany to classify as long-term liabilities its Series D ExchangeablePreferred Stock, Series F Exchangeable Preferred Stock and Series HExchangeable Preferred Stock (collectively the “Exchangeable Preferred Stock”)and to classify dividends from this Exchangeable Preferred Stock as interestexpense.

 

7

----

 

As a result of the adoption of SFAS 150, the Exchangeable PreferredStock are now collectively described as “shares subject to mandatoryredemption” on the accompanying condensed consolidated balance sheets as ofJune 30, 2004 and December 31, 2003.  Dividendson these shares, subsequent to the adoption of SFAS 150, are now described as“interest on shares subject to mandatory redemption” and are included in lossfrom continuing operations for the six and three months ended June 30, 2004,whereas previously they were presented below net income (loss) as preferredstock dividends. The adoption of SFAS 150 increased the loss from continuingoperations for the six and three months ended June 30, 2004 by $22,562 and$11,281, respectively, which represents interest on shares subject to mandatoryredemption ($10,945 per quarter) and amortization of issuance costs ($336 perquarter) which is included in the amortization of deferred financing costs onthe accompanying condensed statements of consolidated operations.  If SFAS 150 was adopted on January 1, 2003,loss from continuing operations for the six and three months ended June 30,2003 would have increased by $22,670 and $10,794, respectively.  This adoption did not have an impact onincome (loss) applicable to common shareholders or income (loss) per commonshare for any of the periods presented on the accompanying condensed statementsof consolidated operations.

 

2.**    **Divestitures 

 

TheCompany has classified the results of certain divested entities as discontinuedoperations in accordance with SFAS 144, “Accounting for the Impairment orDisposal of Long-Lived Assets”.

 

InJanuary 2004, the Company completed the sale of *New York* magazine, part of the Enthusiast Media segment, theresults of which have been classified as discontinued operations for all periodspresented. Proceeds from the sale of $55,000, subject to standard post-closingadjustments, were used to pay down the Company’s borrowings under its bankcredit facilities with JPMorgan Chase Bank, Bank of America, N.A., The Bank ofNew York, and The Bank of Nova Scotia, as agents (the “bank creditfacilities”). Additionally, the Company finalized a working capital settlementwith the purchaser of *Seventeen*and its companion teen properties, resulting in a payment to the purchaser of$3,379 in January 2004.

 

InFebruary 2004, the Company completed the sale of Kagan World Media, part of theBusiness Information segment, the results of which have been classified asdiscontinued operations for all periods presented.  Proceeds from the sale were approximately$2,200, subject to standard post-closing adjustments.

 

In April 2004, the Companysold About Web Services, the Web hosting business of About Inc., part of theEnthusiast Media segment, the results of which have been classified asdiscontinued operations for all periods presented.  Proceeds from the sale were approximately$12,200, subject to standard post-closing adjustments.

 

Additionally,the Company is evaluating strategic partnerships regarding the *Folio*, *CirculationManagement* and *American Demographics*properties in the Business Information segment. The operating results of these businesses have been classified asdiscontinued operations for all periods presented and the related assets andliabilities have been classified as held for sale as of June 30, 2004.

 

The results of the Company’s divestiture ofcertain properties in 2004 and 2003 have been included in discontinuedoperations on the accompanying condensed statements of consolidatedoperations.  Discontinued operationsinclude revenues of $6,718 and $86,815 for the six months ended June 30, 2004and 2003, respectively, and $1,762 and $36,501 for the three months ended June30, 2004 and 2003, respectively.

 

8

----

 

*Balance Sheet-Held for Sale*

 

Theassets and liabilities of businesses that have been sold or which the Companyhas initiated plans to sell as of June 30, 2004 and December 31, 2003 have beenreclassified to held for sale on the accompanying condensed consolidatedbalance sheets as follows:

 
| ** **                              | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------------------------------|------------|--------------------|------------|------------------------|------------|
|                                    |       |               |       |                   |       |
| **ASSETS**                              |       |               |       |                   |       |
| Accounts receivable, net                |       | $                  | 365        |                   | $          | 8,010 |   |
| Inventories                             |       | —             |       | 391                    |       |
| Prepaid expenses and other              |       | 14                 |       | 907                    |       |
| Property and equipment, net             |       | —             |       | 297                    |       |
| Other intangible assets, net            |       | —             |       | 14,056                 |       |
| Goodwill                                |       | —             |       | 6,747                  |       |
| Other non-current assets                |       | —             |       | 1,471                  |       |
| Assets held for sale                    |       | $                  | 379        |                   | $          | 31,879 |   |
|                                    |       |               |       |                   |       |
| **LIABILITIES**                         |       |               |       |                   |       |
| Accounts payable                        |       | $                  | —     |                   | $          | 3,115 |   |
| Accrued expenses and other              |       | —             |       | 11,791                 |       |
| Deferred revenues-current               |       | 847                |       | 1,110                  |       |
| Deferred revenues-non current           |       | 450                |       | —                 |       |
| Other non-current liabilities           |       | —             |       | 33                     |       |
| Liabilities of businesses held for sale |       | $                  | 1,297      |                   | $          | 16,049 |   |

 

Assetsand liabilities classified as held for sale at December 31, 2003 have been soldas of June 30, 2004.

 

3.     AccountsReceivable, Net

 

Accounts receivable, net, consisted of thefollowing:

 
| ** **                            | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------|------------|--------------------|------------|------------------------|------------|
| Accounts receivable                   |       | $                  | 196,336    |                   | $          | 212,144 |   |
| Less: Allowance for doubtful accounts |       | 11,709             |       | 10,798                 |       |
| Allowance for returns and rebates     |       | 3,683              |       | 7,266                  |       |
|                                  |       | $                  | 180,944    |                   | $          | 194,080 |   |

 

9

----

 

4.               Inventories

 

Inventories consisted of thefollowing:

 
| ** **      | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------|------------|--------------------|------------|------------------------|------------|
| Finished goods  |       | $                  | 9,382      |                   | $          | 8,008 |   |
| Work in process |       | —             |       | 230                    |       |
| Raw materials   |       | 9,713              |       | 9,262                  |       |
|            |       | $                  | 19,095     |                   | $          | 17,500 |   |

 

# **5.    **Goodwill, Other Intangible Assets and Other

 

Asrequired under SFAS 142, “Goodwill and Other Intangible Assets”, theCompany continues to assess goodwill and indefinite lived intangible assets forimpairment at least annually since its initial adoption of SFAS 142 on January1, 2002. The Company established October 31 as the annual impairment testdate.  In addition to the annualimpairment test, an assessment is also required whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. For the six months ended June 30, 2004, there were no events orchanges in circumstances requiring the Company to perform an impairment testrelated to goodwill, intangible assets or other finite lived assets, andaccordingly, there were no impairments recorded.

 

Historically,the Company did not need a valuation allowance for the portion of the taxeffect of net operating losses equal to the amount of deferred tax liabilitiesrelated to tax-deductible goodwill and trademark amortization expected to occurduring the carryforward period of the net operating losses based on the timingof the reversal of these taxable temporary differences. Upon adoption ofSFAS 142, the Company recorded a valuation allowance in excess of its netdeferred tax assets to the extent the difference between the book and tax basisof indefinite-lived intangible assets is not expected to reverse during the netoperating loss carryforward period. With the adoption of SFAS 142, theCompany no longer amortizes the book basis in the indefinite-lived intangibles,but will continue to amortize these intangibles for tax purposes. Income taxexpense primarily consisted of deferred income taxes of $8,606 and $6,650 forthe six months ended June 30, 2004 and 2003, respectively, and $4,317 and$3,325, for the three months ended June 30, 2004 and 2003, respectively,related to the increase in the Company’s net deferred tax liability for the taxeffect of the net increase in the difference between the book and tax basis ofthe indefinite-lived intangible assets.

 

Inaddition, since amortization of tax-deductible goodwill and trademarks ceasedon January 1, 2002, the Company will have deferred tax liabilities thatwill arise each quarter because the taxable temporary differences related tothe amortization of these assets will not reverse prior to the expirationperiod of the Company’s deductible temporary differences unless the relatedassets are sold or an impairment of the assets is recorded. The Company expectsthat it will record a total of approximately $8,800 to increase deferred taxliabilities during the remaining six months of 2004.

 

10

----

 

Changes in the carrying amount of goodwill for the sixmonths ended June 30, 2004, by operating segment, are as follows:  

 
| ** **                                                        | ** ** | **Enthusiast  Media** | ** ** | **Consumer  Guides** | ** ** | **Business  Information** | ** ** | **Education  and  Training** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|---------------------------|------------|------------------------------|------------|-----------|------------|
|                                                              |       |                  |       |                 |       |                      |       |                         |       |      |       |
| Balance as of January 1, 2004                                |       | $                     | 695,340    |                 | $          | 95,808                    |       | $                            | 119,386    |      | $          | — |   | $ | 910,534 |   |
| Purchase price allocation adjustments per final valuation reports |       | —                |       | 151                  |       | —                    |       | —                       |       | 151       |       |
| Goodwill written off related to the sale of businesses            |       | (6,776                | )          | —               |       | (731                      | )          | —                       |       | (7,507    | )          |
| Balance as of June 30, 2004                                       |       | $                     | 688,564    |                 | $          | 95,959                    |       | $                            | 118,655    |      | $          | — |   | $ | 903,178 |   |

 

Intangible assets subject toamortization in accordance with SFAS 142 consist of the following:

 
| ** **                                | ** ** | ** **           | ** ** | **June 30, 2004**           | ** ** | **December 31, 2003**         | ** ** |
|-------------------------------------------|------------|----------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                                | ** ** | **Range  of  Lives** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Trademarks                                |       | 3                    |       | $                           | 20,449     |                          | $          | 20,449 |   | $ | — |   | $ | 21,013 |   | $ | 19,845 |   | $ | 1,168 |   |
| Membership, subscriber and customer lists |       | 2-20                 |       | 347,325                     |       | 319,641                       |       | 27,684 |   | 348,346 |   | 315,860 |   | 32,486 |   |
| Non-compete agreements                    |       | 1-10                 |       | 137,196                     |       | 135,152                       |       | 2,044 |   | 137,829 |   | 134,093 |   | 3,736 |   |
| Trademark license agreements              |       | 2-15                 |       | 2,984                       |       | 2,908                         |       | 76 |   | 2,984 |   | 2,899 |   | 85 |   |
| Copyrights                                |       | 3-20                 |       | 20,550                      |       | 19,800                        |       | 750 |   | 20,550 |   | 19,609 |   | 941 |   |
| Databases                                 |       | 2-12                 |       | 9,353                       |       | 8,823                         |       | 530 |   | 9,353 |   | 8,627 |   | 726 |   |
| Advertiser lists                          |       | 5-20                 |       | 135,978                     |       | 124,770                       |       | 11,208 |   | 135,978 |   | 122,852 |   | 13,126 |   |
| Distribution agreements                   |       | 1-7                  |       | 10,410                      |       | 10,410                        |       | — |   | 10,410 |   | 10,410 |   | — |   |
| Other                                     |       | 1-5                  |       | 9,804                       |       | 9,804                         |       | — |   | 9,804 |   | 9,804 |   | — |   |
|                                      |       |                 |       | $                           | 694,049    |                          | $          | 651,757 |   | $ | 42,292 |   | $ | 696,267 |   | $ | 643,999 |   | $ | 52,268 |   |

 

11

----

 

Intangibleassets not subject to amortization had a carrying value of $216,097 and$216,139 at June 30, 2004 and December 31, 2003, respectively, and consistedprimarily of trademarks. Amortization expense for intangible assets stillsubject to amortization was $10,006 and $16,712 for the six months ended June30, 2004 and 2003, respectively, and $4,403 and $7,950 for the three months endedJune 30, 2004 and 2003, respectively. Amortization of deferred wiring costs of $777 and $3,893 for the sixmonths ended June 30, 2004 and 2003, respectively, and $414 and $1,970 for thethree months ended June 30, 2004 and 2003, respectively, has also been includedin amortization of intangible assets and other on the accompanying condensedstatements of consolidated operations. At June 30, 2004, estimated futureamortization expense of intangible assets still subject to amortization,excluding deferred wiring costs, is as follows: approximately $8,000 for theremaining six months of 2004 and approximately $11,000, $7,000, $5,000 and$4,000 for 2005, 2006, 2007 and 2008, respectively.

 

6.     Long-term Debt

 

Long-term debt consisted ofthe following:

 
| ** **                                 | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------------|------------|--------------------|------------|------------------------|------------|
| Borrowings under bank credit facilities    |       | $                  | 412,906    |                   | $          | 559,906 |   |
| 75/8% Senior Notes  Due 2008               |       | 225,510            |       | 225,443                |       |
| 87/8% Senior Notes  Due 2011               |       | 470,101            |       | 469,820                |       |
| 8% Senior Notes Due 2013                   |       | 300,000            |       | 300,000                |       |
| Senior Floating Rate Notes Due 2010        |       | 175,000            |       | —                 |       |
|                                       |       | 1,583,517          |       | 1,555,169              |       |
| Obligation under capital leases            |       | 25,458             |       | 29,467                 |       |
|                                       |       | 1,608,975          |       | 1,584,636              |       |
| Less: Current maturities of long-term debt |       | 16,683             |       | 22,195                 |       |
|                                       |       | $                  | 1,592,292  |                   | $          | 1,562,441 |   |

 

*$175,000 Senior Floating Rate Notes Due 2010 and TermLoan C Credit Facility Offerings*

 

On May 14, 2004, the Companyissued $175,000 principal amount of Senior Floating Rate Notes Due 2010 (the“Senior Floating Rate Notes”), and entered into a new $100,000 term loan Ccredit facility with a maturity date of December 31, 2009.  The Senior Floating Rate Notes bear interestequal to the three-month LIBOR plus 5.375% per year and the term loan C atthree-month LIBOR plus 4.375% per year. The Company applied the combined net proceeds from the Senior FloatingRate Notes offering and the term loan C to prepay $30,000 of outstanding termloan A commitments and $120,000 of term loan B commitments, with the remainderused to temporarily pay down all outstanding advances under the revolvingcredit facility.  The purpose of theseborrowings was to provide the ability to redeem the Company’s Series JConvertible Preferred Stock (see SubsequentEvent Note 17).

 

*Offering and Amendment to the Company’s Bank CreditFacilities*

 

In connection with the offering of the Senior Floating Rate Notes, theCompany entered into an amendment to its bank credit facilities that changedthe terms of certain of the Company’s financial covenants and repaymentobligations. The maximum allowable debt leverage ratio, as defined in the bankcredit facilities, was amended to 6.25 to 1 through September 30, 2005 anddecreases to 6.00 to 1, 5.75 to 1, 5.50 to 1, 5.25 to 1, 5.00 to 1, 4.75 to 1,and 4.50 to 1 on October 1, 2005, July 1, 2006, October 1, 2006, April 1, 2007,October 1, 2007, April 1, 2008 and July 1, 2008, respectively. The amendment tothe bank credit facilities also set the minimum interest coverage ratio, asdefined in the bank credit facilities, at 2.25 to 1 through maturity. Theminimum fixed charge coverage ratio, as defined,

 

12

----

 

remains unchanged at 1.05 to 1through maturity. The Company is in compliance with all of the financial andoperating covenants of its financing arrangements.

 

With the exception ofthe term loan B and the term loan C, the amounts borrowed bear interest, at theCompany’s option, at either the base rate plus an applicable margin rangingfrom 0.125% to 1.5% or LIBOR plus an applicable margin ranging from 1.125% to2.5%. The term loan B bears interest at the base rate plus 1.75% or LIBOR plus2.75%.  The term loan C bears interest atthe base rate plus 3.375% or LIBOR plus 4.375%. At June 30, 2004 and December31, 2003, the weighted average variable interest rate on all outstandingborrowings under the bank credit facilities was 3.8% and 3.6%, respectively.

 

**7.     Series JConvertible Preferred Stock**

 

As ofJune 30, 2004 and December 31, 2003, the Company had $175,487 and $164,533of Series J Convertible Preferred Stock outstanding, respectively.  The Company paid dividends-in-kind of 87,629and 46,407 shares of Series J Convertible Preferred Stock valued at$10,954 and $5,801 during the six and three months ended June 30, 2004,respectively, and 74,035 and 37,587 shares of Series J ConvertiblePreferred Stock valued at $9,254 and $4,698 during the six and three monthsended June 30, 2003, respectively (see Subsequent Event Note 17).

 

8.     Common Stock and Related Options 

 

Thefollowing table summarizes information about stock options outstanding andexercisable at June 30, 2004:

 
| **Range of  Exercise Prices** | ** **               | **Number  Outstanding at  6/30/04** | ** ** | **Number  Exercisable at  6/30/04** | ** ** | **Weighted  Average  Remaining  Contractual Life** | ** ** | **Weighted  Average  Exercise Price  of Outstanding  Options** | ** ** | **Weighted  Average  Exercise Price  of Exercisable  Options** | ** ** |
|-------------------------------|--------------------------|-------------------------------------|------------|-------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
|                          |                     |                                |       |                                |       |                                               |       |                                                           |       |                                                           |       |
| $                             |  0.08 - $ 0.43 |                                | 68,610     |                                | 68,610     |                                               | 3          |                                                           | $          | 0.29                                                           |       | $ | 0.29 |   |
| $                             |  1.01 - $ 1.80 |                                | 5,270      |                                | 3,395      |                                               | 6          |                                                           | 1.44       |                                                           | 1.50       |   |
| $                             |  1.85 - $ 1.98 |                                | 1,096,336  |                                | 610,418    |                                               | 7          |                                                           | 1.85       |                                                           | 1.85       |   |
| $                             |  2.02 - $ 2.99 |                                | 2,918,949  |                                | 739,824    |                                               | 5          |                                                           | 2.84       |                                                           | 2.76       |   |
| $                             |  3.09 - $ 3.65 |                                | 2,082,250  |                                | 41,125     |                                               | 7          |                                                           | 3.09       |                                                           | 3.20       |   |
| $                             |  4.00 - $ 5.95 |                                | 7,267,077  |                                | 5,686,952  |                                               | 6          |                                                           | 4.73       |                                                           | 4.77       |   |
| $                             |  6.00 - $ 9.83 |                                | 4,337,931  |                                | 2,874,193  |                                               | 7          |                                                           | 6.82       |                                                           | 7.05       |   |
| $                             | 10.13  - $19.81          |                                | 9,408,805  |                                | 9,072,228  |                                               | 5          |                                                           | 13.44      |                                                           | 13.34      |   |
| $                             | 20.00  - $28.94          |                                | 184,431    |                                | 180,846    |                                               | 6          |                                                           | 26.05      |                                                           | 26.15      |   |
| $                             | 30.01  - $36.52          |                                | 13,066     |                                | 13,066     |                                               | 6          |                                                           | 34.04      |                                                           | 34.04      |   |
| Total                         |                     | 27,382,725                          |       | 19,290,657                          |       | 6                                                  |       | $                                                              | 7.76       |                                                           | $          | 9.17 |   |

 

13

----

 

9.     Non-Cash Compensation

 
| ** **                                                                                                                            | ** ** | **Six Months Ended  June 30,** | ** ** | **Three Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                            | ** ** | **2004**                       | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Restricted stock (1)                                                                                                                  |       | $                              | 1,943      |                             | $          | 47 |   | $ | 789 |   | $ | 47 |   |
| Stock options (2)                                                                                                                     |       | 1,368                          |       | —                           |       | 778 |   | — |   |
| Amortization of the intrinsic value of unvested “in-the-money”  options issued in connection with the About acquisition (3) |       | 175                            |       | 766                              |       | — |   | 259 |   |
| Restricted stock and stock options-About (4)                                                                                          |       | —                         |       | 1,210                            |       | — |   | 471 |   |
|                                                                                                                                  |       |                           |       |                             |       |   |   |   |   |
| Total                                                                                                                                 |       | $                              | 3,486      |                             | $          | 2,023 |   | $ | 1,567 |   | $ | 777 |   |

 

----

(1) The Company recognized non-cash compensation chargesrelated to the Company’s grant of shares of restricted common stock to certainexecutives during 2003, as well as grants of shares of restricted common stockto certain employees in 2003 and 2004 in exchange for their options in theCompany’s Internet subsidiaries of $1,943 and $47 during the six months endedJune 30, 2004 and 2003, respectively, and $789 and $47 during the three monthsended June 30, 2004 and 2003, respectively. These grants were valued at thedate of grant and are being expensed ratably over their related vestingperiods.

 

(2) As a result of the adoption of SFAS 123effective January 1, 2003, the Company recorded a non-cash compensation chargeof $1,368 and $778 for the six and three months ended June 30, 2004,respectively, relating to stock options and the PRIMEDIA Employee StockPurchase Plan. The impact of the adoption of SFAS 123 was not significant forthe six and three months ended June 30, 2003.

 

(3) Inconnection with the acquisition of About in 2001, the Company recorded chargesrelated to the amortization of the intrinsic value of unvested “in the money”options of $175 and $766 for the six months ended June 30, 2004 and 2003,respectively, and $259 for the three months ended June 30, 2003.** **As of March 31, 2004, these options were fully vested.

 

(4) TheCompany recorded charges related to the vesting of certain restricted stock andstock options granted in connection with the acquisition of About in 2001 of$1,210 and $471 for the six and three months ended June 30, 2003.

 

10.   Senior Executives Severance and Provisionfor Severance, Closures and Restructuring Related Costs

 

*Senior Executives Severance*

 

TheCompany recorded $658 and $5,576 during the six months ended June 30, 2004 and2003, respectively, and $0 and $5,576 during the three months ended June 30,2004 and 2003, respectively, of severance relating to the finalization of theseparation agreements of the former Chief Executive Officer and the formerPresident and Interim Chief Executive Officer.

 

*Provision for Severance, Closures and Restructuring RelatedCosts*

 

Throughthe second quarter of 2004, the Company continued cost reduction initiativespreviously announced to streamline operations, reduce layers of management andconsolidate real estate.

 

14

----

 

Detailsof the initiatives implemented and the payments made in furtherance of theseplans during the six-months ended June 30, 2004 and 2003 are presented in thefollowing tables: 

 
| ** **                                        | ** ** | **Liability as of  January 1,  2004** | ** ** | **Net Provision  for the Six  Months Ended  June 30, 2004** | ** ** | **Payments during  the Six  Months Ended  June 30, 2004** | ** ** | **Liability as of  June 30, 2004** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|------------------------------------|------------|
| Severance and closures:                           |       |                                  |       |                                                        |       |                                                      |       |                               |       |
| Employee-related termination costs                |       | $                                     | 2,982      |                                                        | $          | 2,021                                                     |       | $                                  | (3,301     | ) | $ | 1,702 |   |
| Termination of contracts                          |       | 467                                   |       | —                                                      |       | —                                                    |       | 467                                |       |
| Termination of leases related to office  closures |       | 37,063                                |       | 5,153                                                       |       | (4,063                                                    | )          | 38,153                             |       |
| Total severance and closures                      |       | $                                     | 40,512     | (1)                                                         | $          | 7,174                                                     | (2)        | $                                  | (7,364     | ) | $ | 40,322 |   |

 
| ** **                                        | ** ** | **Liability as of  January 1,  2003** | ** ** | **Net Provision  for the Six  Months Ended  June 30, 2003** | ** ** | **Payments during  the Six  Months Ended  June 30, 2003** | ** ** | **Liability as of  June 30, 2003** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|------------------------------------|------------|
| Severance and closures:                           |       |                                  |       |                                                        |       |                                                      |       |                               |       |
| Employee-related termination costs                |       | $                                     | 3,733      |                                                        | $          | 3,608                                                     |       | $                                  | (3,941     | ) | $ | 3,400 |   |
| Termination of contracts                          |       | 575                                   |       | —                                                      |       | (159                                                      | )          | 416                                |       |
| Termination of leases related to office  closures |       | 41,366                                |       | (458                                                        | )          | (3,353                                                    | )          | 37,555                             |       |
| Total severance and closures                      |       | $                                     | 45,674     | (1)                                                         | $          | 3,150                                                     | (2)        | $                                  | (7,453     | ) | $ | 41,371 |   |

 

----

(1)          Reduced for liabilities relating to discontinued operations totaling$3,302 and $3,760 at January 1, 2004 and 2003, respectively.

(2)          Adjusted to exclude net provisions related to discontinued operationstotaling $9 and $596 for the six months ended June 30, 2004 and 2003,respectively.

 

The remaining costs, comprisedprimarily of real estate lease commitments for space that the Company no longeroccupies, are expected to be paid through 2015.  To reduce the leaserelated costs, the Company is aggressively pursuing subleases of its availableoffice space. These leases have been recorded at their net present valueamounts and are net of estimated sublease income amounts.  If the Company is successful in subleasingthe restructured office space at a different rate, or is unable to sublease thespace by the prescribed date used in the initial calculation, the reserve willbe adjusted accordingly. The Company evaluates the appropriateness of itsreserves on a quarterly basis.

 

As a result of the implementation of these plans, the Company hasclosed and consolidated, to date, 23 office locations and has notified a totalof 2,033 individuals that they would be terminated under these plans.  As of June 30, 2004, all of these individualshave been terminated.

 

15

----

 

The liabilities representing the provision for severance, closures andrestructuring related costs are included in accrued expenses and other on thecondensed consolidated balance sheets as of June 30, 2004 and December 31,2003.

 

11.   Provision for UnclaimedProperty

 

Basedon an initial assessment at the end of 2003, the Company believed that certainbusiness units may have had unclaimed property that should have been remittedto one or more states under their respective escheatment requirements. Theproperty in question related primarily to unused advertising credits andoutstanding accounts payable checks for which the Company had an accrualrecorded in the amount of $3,600 as of December 31, 2003. The Company hired anoutside consultant to assist in estimating the potential risk. It was prematureto estimate the extent of the financial risk at the end of 2003, but theCompany believed that the risk would not have a material impact on its resultsof operations or financial position. Upon completion of the initial phase ofthis assessment, the Company recorded an estimated provision for unclaimedproperty of $5,500 in the three months ended March 31, 2004, which increasedthe accrual to $9,100. The calculation of this provision represents therecording of a correction of an error for unclaimed property transactions whichoccurred during the years 1991 to 2003; however, the amount of the provision,applicable to any year within this period, is not material to the results ofoperations for each of the respective years, nor is the total provision inrelation to the estimated results of operations for 2004 considered material.

 

The Company has entered the next phase of the assessment whereby theconsultant will assist in refining the estimated provision and in negotiatingsettlements under voluntary compliance agreements with the relevant states.

 

12.   Comprehensive Income 

 

Comprehensive income for the six and threemonths ended June 30, 2004 and 2003 is presented in the following table:

 
| ** **                               | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------|------------|--------------------------------|------------|
| ** **                               | ** ** | **2004**                       | ** ** | **2003** | ** ** |
| Net income                               |       | $                              | 13,225     |   | $ | 68,657 |   |
| Other comprehensive income (loss):       |       |                           |       |   |   |
| Foreign currency translation adjustments |       | (16                            | )          | 24 |   |
| Total comprehensive income               |       | $                              | 13,209     |   | $ | 68,681 |   |

 
| ** **                               | ** ** | **Three Months Ended  June 30,** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|
| ** **                               | ** ** | **2004**                         | ** ** | **2003** | ** ** |
| Net income                               |       | $                                | 2,154      |   | $ | 88,904 |   |
| Other comprehensive income (loss):       |       |                             |       |   |   |
| Foreign currency translation adjustments |       | (6                               | )          | — |   |
| Total comprehensive income               |       | $                                | 2,148      |   | $ | 88,904 |   |

 

13.   Income (loss) per Common Share

 

Income (loss) per common share for the six and three months ended June30, 2004 and 2003 has been determined based on net income (loss) applicable tocommon shareholders divided by the weighted average number of common sharesoutstanding for all periods presented. The effect of the assumed exercise of stock

 

16

----

 

options and warrants and the conversion of convertible preferred stockwere not included in the computation of per share amounts because the effect oftheir inclusion would be antidilutive. If the Company had recognized incomefrom continuing operations for the six months ended June 30, 2004 and 2003,shares attributable to these antidilutive instruments would have increaseddiluted shares outstanding by approximately 62,400,000 and 57,600,000, respectively.

 

14.   Contingencies 

 

The Company is involved in ordinary and routine litigation incidentalto its business.  In the opinion ofmanagement, there is no pending legal proceeding that would have a materialadverse affect on the condensed consolidated financial statements of theCompany.

 

15.   Business Segment Information

 

TheCompany’s strategy is to focus on its core businesses and grow throughleveraging and expanding its market leading brands.  This organic growth strategy requires asegment structure that best aligns the Company’s businesses and provides aclear sense of its strategic focus and operating performance. Accordingly, theCompany adopted this structure, effective in the fourth quarter of 2003, andhas reclassified prior year results to reflect this operating structure intofour reportable segments.  The Company’sfour principal segments are Enthusiast Media, Consumer Guides, BusinessInformation and Education and Training.

 

TheEnthusiast Media segment produces and distributes content through magazines andvia the Internet to consumers in various niche and enthusiast markets. Itincludes the Company’s consumer magazine brands, including PerformanceAutomotive and International Automotive (formerly Enthusiast Automotive),Consumer Automotive, Outdoors, Action Sports, Lifestyles and Home Technologymagazine groups, their related Web sites and events, as well as About.com.

 

TheConsumer Guides segment is the nation’s largest publisher and distributor offree publications, including *Apartment Guide,New Home Guide* and *Auto Guide,*which was launched in the first quarter of 2004, their related Web sites andthe DistribuTech distribution business*.*

 

TheBusiness Information segment includes the Company’s trade magazines, theirrelated Web sites, events, directories and data products with a focus onbringing sellers together with qualified buyers in numerous industries.

 

TheEducation and Training segment consists of the businesses that provide contentto schools, universities, government and other public institutions as well ascorporate training initiatives. It includes Channel One, Films Media Group andWorkplace Learning.

 

Informationregarding the operations of the Company by business segment is set forth belowbased primarily on the nature of the targeted audience. Corporate representsitems not allocated to other business segments. PRIMEDIA evaluates performancebased on several factors, of which the primary financial measure is earningsbefore interest, taxes, depreciation, amortization and other (income) charges(“Segment EBITDA”). Other (income) charges include severance related toseparated senior executives, non-cash compensation, provision for severance,closures and restructuring related costs, provision for unclaimed property and(gain) loss on sale of businesses and other, net.

 

Theinformation presented below includes certain intersegment transactions and is,therefore, not necessarily indicative of the results had the operations existedas stand-alone businesses. Intersegment transactions represent intercompanyadvertising and other services, which are billed at what management believesare prevailing market rates. These intersegment transactions, which representtransactions between operating units in different business segments, are eliminatedin consolidation.

 

17

----

 
| ** **                | ** ** | **Six Months Ended  June 30,** | ** ** | **Three Months Ended  June 30,** | ** ** |
|---------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **2004**                       | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues, net:            |       |                           |       |                             |       |   |   |   |   |
| Enthusiast Media          |       | $                              | 360,514    |                             | $          | 355,055 |   | $ | 187,955 |   | $ | 183,420 |   |
| Consumer Guides           |       | 142,471                        |       | 137,327                          |       | 71,084 |   | 69,404 |   |
| Business Information      |       | 113,010                        |       | 114,144                          |       | 58,208 |   | 57,938 |   |
| Education and Training    |       | 52,087                         |       | 62,226                           |       | 25,314 |   | 30,088 |   |
| Intersegment Eliminations |       | (720                           | )          | (3,974                           | )          | (385 | ) | (1,559 | ) |
| Total                     |       | $                              | 667,362    |                             | $          | 664,778 |   | $ | 342,176 |   | $ | 339,291 |   |
|                      |       |                           |       |                             |       |   |   |   |   |
| Segment EBITDA (1):       |       |                           |       |                             |       |   |   |   |   |
| Enthusiast Media          |       | $                              | 72,263     |                             | $          | 66,168 |   | $ | 42,849 |   | $ | 42,306 |   |
| Consumer Guides           |       | 40,154                         |       | 38,571                           |       | 20,512 |   | 21,002 |   |
| Business Information      |       | 15,312                         |       | 12,679                           |       | 10,223 |   | 7,966 |   |
| Education and Training    |       | (729                           | )          | 5,972                            |       | (606 | ) | 1,640 |   |
| Corporate Overhead        |       | (13,474                        | )          | (14,124                          | )          | (5,984 | ) | (6,700 | ) |
| Total                     |       | $                              | 113,526    |                             | $          | 109,266 |   | $ | 66,994 |   | $ | 66,214 |   |

 

Below is a reconciliation ofthe Company’s Segment EBITDA to operating income:

 
| ** **                                                               | ** ** | **Six Months Ended  June 30,** | ** ** | **Three Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| ** **                                                               | ** ** | **2004**                       | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Segment EBITDA (1):                                                      |       | $                              | 113,526    |                             | $          | 109,266 |   | $ | 66,994 |   | $ | 66,214 |   |
| Depreciation of property and equipment                                   |       | 21,902                         |       | 26,459                           |       | 10,181 |   | 14,359 |   |
| Amortization of intangible assets and other                              |       | 10,783                         |       | 20,605                           |       | 4,817 |   | 9,920 |   |
| Severance related to separated senior executives                         |       | 658                            |       | 5,576                            |       | — |   | 5,576 |   |
| Non-cash compensation                                                    |       | 3,486                          |       | 2,023                            |       | 1,567 |   | 777 |   |
| Provision for severance, closures and   restructuring related costs |       | 7,174                          |       | 3,150                            |       | 4,455 |   | 1,988 |   |
| Provision for unclaimed property                                         |       | 5,500                          |       | —                           |       | — |   | — |   |
| (Gain) loss on sale of businesses and other, net                         |       | (23                            | )          | 1,338                            |       | 52 |   | 1,212 |   |
|                                                                     |       |                           |       |                             |       |   |   |   |   |
| Operating income                                                         |       | $                              | 64,046     |                             | $          | 50,115 |   | $ | 45,922 |   | $ | 32,382 |   |

 

----

(1)                                  Segment EBITDArepresents the segments’ earnings before interest, taxes, depreciation,amortization and other (income) charges. Other (income) charges include severance related to separated seniorexecutives, non-cash compensation, provision for severance, closures andrestructuring related costs, provision for unclaimed property and (gain) losson sale of businesses and other, net. Segment EBITDA is not intended to represent cash flows from operatingactivities and should not be considered as an alternative to net income (asdetermined in conformity with accounting principles generally accepted in theUnited States of America), as an indicator of the Company’s operatingperformance or to cash flows as a measure of liquidity. Segment EBITDA ispresented herein because the Company’s chief operating decision maker, who isthe President and CEO, and the executive team evaluate and measure eachbusiness unit’s performance based on its Segment EBITDA results. PRIMEDIAbelieves that Segment EBITDA is the

 

18

----

 

most accurate indicator of its segments’ results, becauseit focuses on revenue and operating cost items driven by each operatingmanagers’ performance, and excludes items largely outside of the operatingmanagers’ control. Segment EBITDA may not be available for the Company’sdiscretionary use as there are requirements to redeem preferred stock and repaydebt, among other commitments. Segment EBITDA as presented may not becomparable to similarly titled measures reported by other companies since notall companies calculate Segment EBITDA in an identical manner, and therefore,is not necessarily an accurate measure of comparison between companies.

 

16.Financial Information for Guarantors of the Company’s Debt

 

The information that followspresents condensed consolidating financial information as of June 30, 2004 andDecember 31, 2003 and for the six months ended June 30, 2004 and 2003 for a)PRIMEDIA Inc. (as the Issuer), b) the guarantor subsidiaries, which are with limitedexceptions, the restricted subsidiaries, represent the core PRIMEDIA businessesand exclude investment and other development properties included in theunrestricted category, c) the non-guarantor subsidiaries (primarilyrepresenting Internet assets and businesses, new launches and other propertiesunder evaluation for turnaround or shutdown and foreign subsidiaries), whichare with limited exceptions, the unrestricted subsidiaries, d) eliminationentries and e) the Company on a consolidated basis. During the six months endedJune 30, 2004, certain businesses have been reclassified between restricted andunrestricted subsidiaries.  Thesereclassifications are in compliance with our debt agreements and have not had amaterial effect on our debt covenant ratios as defined in the bank creditfacilities.

 

Thecondensed consolidating financial information includes certain allocations ofrevenues, expenses, assets and liabilities based on management’s best estimateswhich are not necessarily indicative of the financial position, results ofoperations and cash flows that these entities would have achieved on astand-alone basis and should be read in conjunction with the consolidatedfinancial statements of the Company. The intercompany balances in the accompanyingcondensed consolidating financial statements include cash managementactivities, management fees, cross promotional activities and otherintercompany charges between Corporate and the business units and among thebusiness units. The non-guarantor subsidiary results of operations include:Internet operations, foreign operations, certain distribution operations,certain start-up magazine businesses, revenues and related expenses derivedfrom the licensing of certain products of guarantor subsidiaries and expensesassociated with the cross promotion by the guarantor subsidiaries of theactivities of the non-guarantor subsidiaries. The transactions described above are billed, by the Company, at what theCompany believes are prevailing market rates. All intercompany relatedactivities are eliminated in consolidation.

 

19

----

 

**PRIMEDIA INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATING BALANCE SHEET**

**(UNAUDITED)**

 

June30, 2004

(dollarsin thousands)

 
| ** **                                          | ** ** | **PRIMEDIA Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **PRIMEDIA Inc.****and  Subsidiaries** | ** ** |
|-----------------------------------------------------|------------|-------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|----------------------------------------|------------|
| **ASSETS**                                          |       |              |       |                        |       |                            |       |             |       |                                   |       |
| Current assets:                                     |       |              |       |                        |       |                            |       |             |       |                                   |       |
| Cash and cash equivalents                           |       | $                 | 59,499     |                        | $          | 6,700                           |       | $                | 359        |                                   | $          | — |   | $ | 66,558 |   |
| Accounts receivable, net                            |       | —            |       | 167,514                     |       | 13,430                          |       | —           |       | 180,944                                |       |
| Intercompany receivables                            |       | 1,544,923         |       | 197,002                     |       | 129,571                         |       | (1,871,496       | )          | —                                 |       |
| Inventories                                         |       | —            |       | 19,100                      |       | (5                              | )          | —           |       | 19,095                                 |       |
| Prepaid expenses and other                          |       | 5,763             |       | 25,717                      |       | 9,462                           |       | —           |       | 40,942                                 |       |
| Assets held for sale                                |       | —            |       | —                      |       | 379                             |       | —           |       | 379                                    |       |
| Total current assets                                |       | 1,610,185         |       | 416,033                     |       | 153,196                         |       | (1,871,496       | )          | 307,918                                |       |
|                                                |       |              |       |                        |       |                            |       |             |       |                                   |       |
| Property and equipment, net                         |       | 6,151             |       | 80,982                      |       | 11,315                          |       | —           |       | 98,448                                 |       |
| Investment in and advances to subsidiaries          |       | 581,300           |       | —                      |       | —                          |       | (581,300         | )          | —                                 |       |
| Other intangible assets, net                        |       | —            |       | 257,461                     |       | 928                             |       | —           |       | 258,389                                |       |
| Goodwill                                            |       | —            |       | 886,277                     |       | 16,901                          |       | —           |       | 903,178                                |       |
| Other non-current assets                            |       | 9,993             |       | 41,290                      |       | 9,101                           |       | —           |       | 60,384                                 |       |
| Total Assets                                        |       | $                 | 2,207,629  |                        | $          | 1,682,043                       |       | $                | 191,441    |                                   | $          | (2,452,796 | ) | $ | 1,628,317 |   |
|                                                |       |              |       |                        |       |                            |       |             |       |                                   |       |
| **LIABILITIES AND SHAREHOLDERS’ DEFICIENCY**   |       |              |       |                        |       |                            |       |             |       |                                   |       |
| Current liabilities:                                |       |              |       |                        |       |                            |       |             |       |                                   |       |
| Accounts payable                                    |       | $                 | 3,846      |                        | $          | 68,092                          |       | $                | 3,355      |                                   | $          | — |   | $ | 75,293 |   |
| Intercompany payables                               |       | 965,310           |       | 238,814                     |       | 667,372                         |       | (1,871,496       | )          | —                                 |       |
| Accrued expenses and other                          |       | 78,900            |       | 97,930                      |       | 4,314                           |       | —           |       | 181,144                                |       |
| Deferred revenues                                   |       | 1,738             |       | 135,322                     |       | 14,276                          |       | —           |       | 151,336                                |       |
| Current maturities of long-term debt                |       | 11,831            |       | 4,852                       |       | —                          |       | —           |       | 16,683                                 |       |
| Liabilities of businesses held for sale             |       | —            |       | —                      |       | 1,297                           |       | —           |       | 1,297                                  |       |
| Total current liabilities                           |       | 1,061,625         |       | 545,010                     |       | 690,614                         |       | (1,871,496       | )          | 425,753                                |       |
|                                                |       |              |       |                        |       |                            |       |             |       |                                   |       |
| Long-term debt                                      |       | 1,573,882         |       | 18,410                      |       | —                          |       | —           |       | 1,592,292                              |       |
| Intercompany notes payable                          |       | —            |       | 2,848,198                   |       | 155,681                         |       | (3,003,879       | )          | —                                 |       |
| Shares subject to mandatory redemption              |       | 474,559           |       | —                      |       | —                          |       | —           |       | 474,559                                |       |
| Deferred revenues                                   |       | —            |       | 35,446                      |       | —                          |       | —           |       | 35,446                                 |       |
| Deferred income taxes                               |       | 69,970            |       | —                      |       | —                          |       | —           |       | 69,970                                 |       |
| Other non-current liabilities                       |       | 23,133            |       | 2,436                       |       | 268                             |       | —           |       | 25,837                                 |       |
| Total Liabilities                                   |       | 3,203,169         |       | 3,449,500                   |       | 846,563                         |       | (4,875,375       | )          | 2,623,857                              |       |
|                                                |       |              |       |                        |       |                            |       |             |       |                                   |       |
| Shareholders’ deficiency:                      |       |              |       |                        |       |                            |       |             |       |                                   |       |
| Series J convertible preferred stock                |       | 175,487           |       | —                      |       | —                          |       | —           |       | 175,487                                |       |
| Common stock                                        |       | 2,690             |       | —                      |       | —                          |       | —           |       | 2,690                                  |       |
| Additional paid-in capital                          |       | 2,349,476         |       | —                      |       | —                          |       | —           |       | 2,349,476                              |       |
| Accumulated deficit                                 |       | (3,445,439        | )          | (1,767,451                  | )          | (654,936                        | )          | 2,422,387        |       | (3,445,439                             | )          |
| Accumulated other comprehensive loss                |       | (192              | )          | (6                          | )          | (186                            | )          | 192              |       | (192                                   | )          |
| Common stock in treasury, at cost                   |       | (77,562           | )          | —                      |       | —                          |       | —           |       | (77,562                                | )          |
| Total Shareholders’ Deficiency                 |       | (995,540          | )          | (1,767,457                  | )          | (655,122                        | )          | 2,422,579        |       | (995,540                               | )          |
|                                                |       |              |       |                        |       |                            |       |             |       |                                   |       |
| Total Liabilities and Shareholders’ Deficiency |       | $                 | 2,207,629  |                        | $          | 1,682,043                       |       | $                | 191,441    |                                   | $          | (2,452,796 | ) | $ | 1,628,317 |   |

 

20

----

 

**PRIMEDIA INC. AND SUBSIDIARIES**

**CONDENSED STATEMENT OF CONSOLIDATING OPERATIONS**

**(UNAUDITED)**

 

Forthe Six Months Ended June 30, 2004

(dollarsin thousands)

 
| ** **                                                          | ** ** | **PRIMEDIA Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **PRIMEDIA Inc.****and  Subsidiaries** | ** ** |
|---------------------------------------------------------------------|------------|-------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|----------------------------------------|------------|
|                                                                |       |              |       |                        |       |                            |       |             |       |                                   |       |
| Revenues, net                                                       |       | $                 | —     |                        | $          | 613,845                         |       | $                | 80,423     |                                   | $          | (26,906 | ) | $ | 667,362 |   |
| Operating costs and expenses:                                       |       |              |       |                        |       |                            |       |             |       |                                   |       |
| Cost of goods sold                                                  |       | —            |       | 129,286                     |       | 12,382                          |       | —           |       | 141,668                                |       |
| Marketing and selling                                               |       | —            |       | 120,805                     |       | 20,757                          |       | —           |       | 141,562                                |       |
| Distribution, circulation and fulfillment                           |       | —            |       | 87,019                      |       | 28,547                          |       | —           |       | 115,566                                |       |
| Editorial                                                           |       | —            |       | 48,002                      |       | 5,851                           |       | —           |       | 53,853                                 |       |
| Other general expenses                                              |       | 111               |       | 77,746                      |       | 36,873                          |       | (26,906          | )          | 87,824                                 |       |
| Corporate administrative expenses (excluding non-cash compensation) |       | 10,279            |       | —                      |       | 3,084                           |       | —           |       | 13,363                                 |       |
| Depreciation of property and equipment                              |       | 1,364             |       | 16,776                      |       | 3,762                           |       | —           |       | 21,902                                 |       |
| Amortization of intangible assets and other                         |       | —            |       | 10,218                      |       | 565                             |       | —           |       | 10,783                                 |       |
| Severance related to separated senior executives                    |       | 658               |       | —                      |       | —                          |       |             |       | 658                                    |       |
| Non-cash compensation                                               |       | 3,486             |       | —                      |       | —                          |       | —           |       | 3,486                                  |       |
| Provision for severance, closures and restructuring related costs   |       | 2,229             |       | 4,697                       |       | 248                             |       | —           |       | 7,174                                  |       |
| Provision for unclaimed property                                    |       | 56                |       | 5,444                       |       | —                          |       | —           |       | 5,500                                  |       |
| (Gain) loss on sale of businesses and other, net                    |       | 37                |       | (66                         | )          | 6                               |       | —           |       | (23                                    | )          |
|                                                                |       |              |       |                        |       |                            |       |             |       |                                   |       |
| Operating income (loss)                                             |       | (18,220           | )          | 113,918                     |       | (31,652                         | )          | —           |       | 64,046                                 |       |
| Other income (expense):                                             |       |              |       |                        |       |                            |       |             |       |                                   |       |
| Provision for impairment of investments                             |       | (804              | )          | —                      |       | —                          |       | —           |       | (804                                   | )          |
| Interest expense                                                    |       | (56,109           | )          | (2,585                      | )          | (48                             | )          | —           |       | (58,742                                | )          |
| Interest on shares subject to mandatory redemption                  |       | (21,890           | )          | —                      |       | —                          |       | —           |       | (21,890                                | )          |
| Amortization of deferred financing costs                            |       | (671              | )          | (1,633                      | )          | (15                             | )          | —           |       | (2,319                                 | )          |
| Equity in income of subsidiaries                                    |       | 49,624            |       | —                      |       | —                          |       | (49,624          | )          | —                                 |       |
| Intercompany management fees and interest                           |       | 70,027            |       | (69,460                     | )          | (567                            | )          | —           |       | —                                 |       |
| Other income (expense), net                                         |       | 43                |       | 87                          |       | (21                             | )          | —           |       | 109                                    |       |
|                                                                |       |              |       |                        |       |                            |       |             |       |                                   |       |
| Income (loss) from continuing operations before income tax expense  |       | 22,000            |       | 40,327                      |       | (32,303                         | )          | (49,624          | )          | (19,600                                | )          |
| Income tax expense                                                  |       | (8,775            | )          | 68                          |       | (17                             | )          | —           |       | (8,724                                 | )          |
|                                                                |       |              |       |                        |       |                            |       |             |       |                                   |       |
| Income (loss) from continuing operations                            |       | 13,225            |       | 40,395                      |       | (32,320                         | )          | (49,624          | )          | (28,324                                | )          |
|                                                                |       |              |       |                        |       |                            |       |             |       |                                   |       |
| Discontinued operations                                             |       | —            |       | 41,652                      |       | (103                            | )          | —           |       | 41,549                                 |       |
|                                                                |       |              |       |                        |       |                            |       |             |       |                                   |       |
| Net income (loss)                                                   |       | $                 | 13,225     |                        | $          | 82,047                          |       | $                | (32,423    | )                                      | $          | (49,624 | ) | $ | 13,225 |   |

 

21

----

 

**PRIMEDIA INC. AND SUBSIDIARIES**

**CONDENSED STATEMENT OF CONSOLIDATING CASH FLOWS**

**(UNAUDITED)**

 

Forthe Six Months Ended June 30, 2004

(dollarsin thousands)

 
| ** **                                                                                         | ** ** | **PRIMEDIA Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **PRIMEDIA Inc.  and  Subsidiaries** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|--------------------------------------|------------|
| **Operating activities:**                                                                          |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Net income (loss)                                                                                  |       | $                 | 13,225     |                        | $          | 82,047                          |       | $                | (32,423    | )                                    | $          | (49,624 | ) | $ | 13,225 |   |
|                                                                                               |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities |       | (104,286          | )          | 57,599                      |       | 4,260                           |       | 49,624           |       | 7,197                                |       |
| Changes in operating assets and liabilities                                                        |       | (27,970           | )          | (912                        | )          | (8,499                          | )          | —           |       | (37,381                              | )          |
|                                                                                               |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Net cash provided by (used in) operating  activities                                               |       | (119,031          | )          | 138,734                     |       | (36,662                         | )          | —           |       | (16,959                              | )          |
|                                                                                               |       |              |       |                        |       |                            |       |             |       |                                 |       |
| **Investing activities:**                                                                          |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Additions to property, equipment and other,  net                                                   |       | (449              | )          | (9,492                      | )          | (3,633                          | )          | —           |       | (13,574                              | )          |
| Proceeds from sale of businesses and other                                                         |       | —            |       | 68,176                      |       | 2,101                           |       | —           |       | 70,277                               |       |
| Payments for businesses acquired, net of  cash acquired                                            |       | —            |       | (1,270                      | )          | —                          |       | —           |       | (1,270                               | )          |
| Proceeds from (payments for) other  investments, net                                               |       | (10               | )          | 684                         |       | —                          |       | —           |       | 674                                  |       |
|                                                                                               |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Net cash provided by (used in) investing  activities                                               |       | (459              | )          | 58,098                      |       | (1,532                          | )          | —           |       | 56,107                               |       |
|                                                                                               |       |              |       |                        |       |                            |       |             |       |                                 |       |
| **Financing activities:**                                                                          |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Intercompany activity                                                                              |       | 150,900           |       | (188,981                    | )          | 38,081                          |       | —           |       | —                               |       |
| Borrowings under credit agreements                                                                 |       | 231,500           |       | —                      |       | —                          |       | —           |       | 231,500                              |       |
| Repayments of borrowings under credit  agreements                                                  |       | (378,500          | )          | —                      |       | —                          |       | —           |       | (378,500                             | )          |
| Proceeds from issuances of Senior Floating  Rate Notes                                             |       | 175,000           |       | —                      |       | —                          |       | —           |       | 175,000                              |       |
| Proceeds from issuances of common stock                                                            |       | 701               |       | —                      |       | —                          |       | —           |       | 701                                  |       |
| Deferred financing costs paid                                                                      |       | 3                 |       | (5,562                      | )          | —                          |       |             |       | (5,559                               | )          |
| Capital lease obligations                                                                          |       | (960              | )          | (3,118                      | )          | (200                            | )          | —           |       | (4,278                               | )          |
| Other                                                                                              |       | —            |       | (139                        | )          | —                          |       | —           |       | (139                                 | )          |
|                                                                                               |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Net cash provided by (used in) financing  activities                                               |       | 178,644           |       | (197,800                    | )          | 37,881                          |       | —           |       | 18,725                               |       |
|                                                                                               |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Increase (decrease) in cash and cash  equivalents                                                  |       | 59,154            |       | (968                        | )          | (313                            | )          | —           |       | 57,873                               |       |
| Cash and cash equivalents, beginning of  period                                                    |       | 345               |       | 7,668                       |       | 672                             |       | —           |       | 8,685                                |       |
| Cash and cash equivalents, end of period                                                           |       | $                 | 59,499     |                        | $          | 6,700                           |       | $                | 359        |                                 | $          | — |   | $ | 66,558 |   |

 

22

----

 

**PRIMEDIA INC. AND SUBSIDIARIES**

**CONSOLIDATING BALANCE SHEET**

 

December31, 2003

(dollarsin thousands)

 
| ** **                                           | ** ** | **PRIMEDIA Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **PRIMEDIA Inc.  and  Subsidiaries** | ** ** |
|------------------------------------------------------|------------|-------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|--------------------------------------|------------|
| **ASSETS**                                           |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Current assets:                                      |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Cash and cash equivalents                            |       | $                 | 345        |                        | $          | 7,668                           |       | $                | 672        |                                 | $          | — |   | $ | 8,685 |   |
| Accounts receivable, net                             |       | —            |       | 175,144                     |       | 18,936                          |       | —           |       | 194,080                              |       |
| Intercompany receivables                             |       | 1,685,986         |       | 402,428                     |       | 61,271                          |       | (2,149,685       | )          | —                               |       |
| Inventories                                          |       | —            |       | 17,417                      |       | 83                              |       | —           |       | 17,500                               |       |
| Prepaid expenses and other                           |       | 5,009             |       | 29,865                      |       | 1,185                           |       | —           |       | 36,059                               |       |
| Assets held for sale                                 |       | 1,460             |       | 28,985                      |       | 1,434                           |       | —           |       | 31,879                               |       |
| Total current assets                                 |       | 1,692,800         |       | 661,507                     |       | 83,581                          |       | (2,149,685       | )          | 288,203                              |       |
|                                                 |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Property and equipment, net                          |       | 7,065             |       | 83,693                      |       | 20,101                          |       | —           |       | 110,859                              |       |
| Investment in and advances to subsidiaries           |       | 488,986           |       | —                      |       | —                          |       | (488,986         | )          | —                               |       |
| Other intangible assets, net                         |       | —            |       | 266,839                     |       | 1,568                           |       | —           |       | 268,407                              |       |
| Goodwill                                             |       | —            |       | 871,598                     |       | 38,936                          |       | —           |       | 910,534                              |       |
| Other non-current assets                             |       | 11,477            |       | 35,967                      |       | 10,674                          |       | —           |       | 58,118                               |       |
| Total Assets                                         |       | $                 | 2,200,328  |                        | $          | 1,919,604                       |       | $                | 154,860    |                                 | $          | (2,638,671 | ) | $ | 1,636,121 |   |
|                                                 |       |              |       |                        |       |                            |       |             |       |                                 |       |
| **LIABILITIES AND SHAREHOLDERS’ DEFICIENCY**    |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Current liabilities:                                 |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Accounts payable                                     |       | $                 | 11,482     |                        | $          | 55,724                          |       | $                | 11,588     |                                 | $          | — |   | $ | 78,794 |   |
| Intercompany payables                                |       | 984,262           |       | 534,801                     |       | 630,622                         |       | (2,149,685       | )          | —                               |       |
| Accrued expenses and other                           |       | 97,694            |       | 103,725                     |       | 12,515                          |       | —           |       | 213,934                              |       |
| Deferred revenues                                    |       | 1,738             |       | 147,375                     |       | 8,740                           |       | —           |       | 157,853                              |       |
| Current maturities of long-term debt                 |       | 16,232            |       | 5,963                       |       | —                          |       | —           |       | 22,195                               |       |
| Liabilities of businesses held for sale              |       | —            |       | 13,500                      |       | 2,549                           |       | —           |       | 16,049                               |       |
| Total current liabilities                            |       | 1,111,408         |       | 861,088                     |       | 666,014                         |       | (2,149,685       | )          | 488,825                              |       |
|                                                 |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Long-term debt                                       |       | 1,542,095         |       | 20,346                      |       | —                          |       | —           |       | 1,562,441                            |       |
| Shares subject to mandatory redemption               |       | 474,559           |       | —                      |       | —                          |       | —           |       | 474,559                              |       |
| Intercompany notes payable                           |       | —            |       | 2,210,418                   |       | 753,838                         |       | (2,964,256       | )          | —                               |       |
| Deferred revenues                                    |       | —            |       | 33,604                      |       | —                          |       | —           |       | 33,604                               |       |
| Deferred income taxes                                |       | 61,364            |       | —                      |       | —                          |       | —           |       | 61,364                               |       |
| Other non-current liabilities                        |       | 24,157            |       | 4,497                       |       | (71                             | )          | —           |       | 28,583                               |       |
| Total Liabilities                                    |       | 3,213,583         |       | 3,129,953                   |       | 1,419,781                       |       | (5,113,941       | )          | 2,649,376                            |       |
|                                                 |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Shareholders’ deficiency:                       |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Series J convertible preferred stock                 |       | 164,533           |       | —                      |       | —                          |       | —           |       | 164,533                              |       |
| Common stock                                         |       | 2,683             |       | —                      |       | —                          |       | —           |       | 2,683                                |       |
| Additional paid-in capital                           |       | 2,345,152         |       | —                      |       | —                          |       | —           |       | 2,345,152                            |       |
| Accumulated deficit                                  |       | (3,447,710        | )          | (1,210,343                  | )          | (1,264,751                      | )          | 2,475,094        |       | (3,447,710                           | )          |
| Accumulated other comprehensive loss                 |       | (176              | )          | (6                          | )          | (170                            | )          | 176              |       | (176                                 | )          |
| Unearned compensation                                |       | (175              | )          | —                      |       | —                          |       | —           |       | (175                                 | )          |
| Common stock in treasury, at cost                    |       | (77,562           | )          | —                      |       | —                          |       | —           |       | (77,562                              | )          |
| Total Shareholders’ Deficiency                  |       | (1,013,255        | )          | (1,210,349                  | )          | (1,264,921                      | )          | 2,475,270        |       | (1,013,255                           | )          |
|                                                 |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Total Liabilities and Shareholders’  Deficiency |       | $                 | 2,200,328  |                        | $          | 1,919,604                       |       | $                | 154,860    |                                 | $          | (2,638,671 | ) | $ | 1,636,121 |   |

 

23

----

 

**PRIMEDIA INC. AND SUBSIDIARIES**

**CONDENSED STATEMENT OF CONSOLIDATING OPERATIONS**

**(UNAUDITED)**

 

Forthe Six Months Ended June 30, 2003

(dollarsin thousands)

 
| ** **                                                          | ** ** | **PRIMEDIA Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **PRIMEDIA Inc.****and  Subsidiaries** | ** ** |
|---------------------------------------------------------------------|------------|-------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|----------------------------------------|------------|
|                                                                |       |              |       |                        |       |                            |       |             |       |                                   |       |
| Revenues, net                                                       |       | $                 | 219        |                        | $          | 557,026                         |       | $                | 89,344     |                                   | $          | 18,189 |   | $ | 664,778 |   |
| Operating costs and expenses:                                       |       |              |       |                        |       |                            |       |             |       |                                   |       |
| Cost of goods sold                                                  |       | 708               |       | 103,968                     |       | 43,082                          |       |             |       | 147,758                                |       |
| Marketing and selling                                               |       | —            |       | 119,158                     |       | 22,845                          |       |             |       | 142,003                                |       |
| Distribution, circulation and fulfillment                           |       | —            |       | 86,333                      |       | 27,508                          |       |             |       | 113,841                                |       |
| Editorial                                                           |       | —            |       | 49,215                      |       | 3,937                           |       |             |       | 53,152                                 |       |
| Other general expenses                                              |       | 268               |       | 38,813                      |       | 27,435                          |       | 18,189           |       | 84,705                                 |       |
| Corporate administrative expenses (excluding non-cash compensation) |       | 12,649            |       | —                      |       | 1,404                           |       | —           |       | 14,053                                 |       |
| Depreciation of property and equipment                              |       | 1,434             |       | 18,290                      |       | 6,735                           |       | —           |       | 26,459                                 |       |
| Amortization of intangible assets and other                         |       | —            |       | 16,767                      |       | 3,838                           |       | —           |       | 20,605                                 |       |
| Severance related to separated senior executives                    |       | 5,576             |       | —                      |       | —                          |       |             |       | 5,576                                  |       |
| Non-cash compensation                                               |       | 2,023             |       | —                      |       | —                          |       | —           |       | 2,023                                  |       |
| Provision for severance, closures and restructuring related costs   |       | (1,210            | )          | 4,360                       |       | —                          |       | —           |       | 3,150                                  |       |
| Provision for unclaimed property                                    |       | —            |       | —                      |       | —                          |       | —           |       | —                                 |       |
| (Gain) loss on sale of businesses and other, net                    |       | (19               | )          | 2,280                       |       | (923                            | )          | —           |       | 1,338                                  |       |
|                                                                |       |              |       |                        |       |                            |       |             |       |                                   |       |
| Operating income (loss)                                             |       | (21,210           | )          | 117,842                     |       | (46,517                         | )          | —           |       | 50,115                                 |       |
| Other income (expense):                                             |       |              |       |                        |       |                            |       |             |       |                                   |       |
| Provision for impairment of investments                             |       | (7,727            | )          | —                      |       | —                          |       | —           |       | (7,727                                 | )          |
| Interest expense                                                    |       | (63,451           | )          | (1,738                      | )          | (14                             | )          | —           |       | (65,203                                | )          |
| Interest on shares subject to mandatory redemption                  |       |              |       | —                      |       | —                          |       | —           |       | —                                 |       |
| Amortization of deferred financing costs                            |       | 1,291             |       | (2,526                      | )          | (9                              | )          | —           |       | (1,244                                 | )          |
| Equity in income of subsidiaries                                    |       | 93,653            |       | —                      |       | —                          |       | (93,653          | )          | —                                 |       |
| Intercompany management fees and interest                           |       | 75,680            |       | (75,680                     | )          | —                          |       | —           |       | —                                 |       |
| Other income (expense), net                                         |       | (2,858            | )          | (1,001                      | )          | 40                              |       | —           |       | (3,819                                 | )          |
|                                                                |       |              |       |                        |       |                            |       |             |       |                                   |       |
| Income (loss) from continuing operations before income tax expense  |       | 75,378            |       | 36,897                      |       | (46,500                         | )          | (93,653          | )          | (27,878                                | )          |
| Income tax expense                                                  |       | (6,721            | )          | (314                        | )          | (16                             | )          | —           |       | (7,051                                 | )          |
|                                                                |       |              |       |                        |       |                            |       |             |       |                                   |       |
| Income (loss) from continuing operations                            |       | 68,657            |       | 36,583                      |       | (46,516                         | )          | (93,653          | )          | (34,929                                | )          |
|                                                                |       |              |       |                        |       |                            |       |             |       |                                   |       |
| Discontinued operations                                             |       | —            |       | 108,914                     |       | (5,328                          | )          | —           |       | 103,586                                |       |
|                                                                |       |              |       |                        |       |                            |       |             |       |                                   |       |
| Net income (loss)                                                   |       | $                 | 68,657     |                        | $          | 145,497                         |       | $                | (51,844    | )                                      | $          | (93,653 | ) | $ | 68,657 |   |

 

24

----

 

**PRIMEDIA INC. AND SUBSIDIARIES**

**CONDENSED STATEMENT OF CONSOLIDATING CASH FLOWS**

**(UNAUDITED)**

 

Forthe Six Months Ended June 30, 2003

(dollarsin thousands)

 
| ** **                                                                                          | ** ** | **PRIMEDIA Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **PRIMEDIA Inc.  and  Subsidiaries** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|--------------------------------------|------------|
| **Operating activities:**                                                                           |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Net Income (loss)                                                                                   |       | $                 | 68,657     |                        | $          | 145,497                         |       | $                | (51,844    | )                                    | $          | (93,653 | ) | $ | 68,657 |   |
|                                                                                                |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities: |       | (145,701          | )          | 13,344                      |       | 15,400                          |       | 93,653           |       | (23,304                              | )          |
| Changes in operating assets and liabilities                                                         |       | (12,860           | )          | (27,388                     | )          | (6,825                          | )          | —           |       | (47,073                              | )          |
|                                                                                                |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Net cash provided by (used in) operating  activities                                                |       | (89,904           | )          | 131,453                     |       | (43,269                         | )          | —           |       | (1,720                               | )          |
|                                                                                                |       |              |       |                        |       |                            |       |             |       |                                 |       |
| **Investing activities:**                                                                           |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Additions to property, equipment and other,  net                                                    |       | (1,001            | )          | (15,219                     | )          | (4,946                          | )          | —           |       | (21,166                              | )          |
| Proceeds from sales of businesses and  other, net                                                   |       | 19                |       | 183,528                     |       | (625                            | )          | —           |       | 182,922                              |       |
| Payments related to businesses acquired                                                             |       | —            |       | (4,446                      | )          | (350                            | )          | —           |       | (4,796                               | )          |
| Proceeds from (payments for) other  investments, net                                                |       | 1,051             |       | (513                        | )          | 470                             |       | —           |       | 1,008                                |       |
|                                                                                                |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Net cash provided by (used in) investing  activities                                                |       | 69                |       | 163,350                     |       | (5,451                          | )          | —           |       | 157,968                              |       |
|                                                                                                |       |              |       |                        |       |                            |       |             |       |                                 |       |
| **Financing activities:**                                                                           |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Intercompany activity                                                                               |       | 242,094           |       | (290,642                    | )          | 48,548                          |       | —           |       | —                               |       |
| Borrowings under credit agreements                                                                  |       | 288,400           |       | —                      |       | —                          |       | —           |       | 288,400                              |       |
| Repayments of borrowings under credit  agreements                                                   |       | (314,312          | )          | —                      |       | —                          |       | —           |       | (314,312                             | )          |
| Payments for repurchases of senior notes                                                            |       | (375,675          | )          | —                      |       | —                          |       | —           |       | (375,675                             | )          |
| Proceeds from issuance of 8% Senior Notes                                                           |       | 300,000           |       | —                      |       | —                          |       | —           |       | 300,000                              |       |
| Proceeds from issuances of common stock                                                             |       | 569               |       | —                      |       | —                          |       | —           |       | 569                                  |       |
| Purchases of common stock for the treasury                                                          |       | (19,367           | )          | —                      |       | —                          |       | —           |       | (19,367                              | )          |
| Dividends paid to preferred stock  shareholders                                                     |       | (22,921           | )          | —                      |       | —                          |       | —           |       | (22,921                              | )          |
| Deferred financing costs paid                                                                       |       | (5,977            | )          | —                      |       | —                          |       | —           |       | (5,977                               | )          |
| Capital lease obligations                                                                           |       | (43               | )          | (1,676                      | )          | (69                             | )          | —           |       | (1,788                               | )          |
| Other                                                                                               |       | —            |       | (155                        | )          | —                          |       | —           |       | (155                                 | )          |
|                                                                                                |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Net cash provided by (used in) financing  activities                                                |       | 92,768            |       | (292,473                    | )          | 48,479                          |       | —           |       | (151,226                             | )          |
|                                                                                                |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Increase (decrease) in cash and cash  equivalents                                                   |       | 2,933             |       | 2,330                       |       | (241                            | )          | —           |       | 5,022                                |       |
| Cash and cash equivalents, beginning of  period                                                     |       | 4,700             |       | 12,857                      |       | 996                             |       | —           |       | 18,553                               |       |
| Cash and cash equivalents, end of period                                                            |       | $                 | 7,633      |                        | $          | 15,187                          |       | $                | 755        |                                 | $          | — |   | $ | 23,575 |   |

 

25

----

 

17.   Subsequent Event

 

The Company entered into aseries of transactions with the intention to redeem its highest cost of capitalsecurity, the Series J Convertible Preferred Stock, which had an annualpay-in-kind dividend yield of approximately 13%.

 

On May 14, 2004 the Companyissued $175,000 of Senior Floating Rate Notes due 2010 and entered into a new$100,000 term loan C credit facility with a maturity date of December 31, 2009.  The Company used the proceeds from thesetransactions to make voluntary pre-payments to the term loans A and B with theremainder used to temporarily pay down all outstanding advances under itsrevolving credit facility.

 

On July 7, 2004, the Company redeemedall of its outstanding Series J Convertible Preferred Stock, representing anaggregate of 1,424,306 shares for approximately $178,000, using cash on hand ofapproximately $33,000 and approximately $145,000 of advances under itsrevolving credit facility.

 

26

----

 

**Item 2.****        MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Introduction**

 

PRIMEDIA Inc., together withits subsidiaries, is herein referred to as either “PRIMEDIA” or the “Company.”

 

The following discussion and analysis summarizes the financialcondition and operating performance of the Company and its business segmentsand should be read in conjunction with the unaudited condensed consolidatedfinancial statements and notes thereto.

 

**Executive Summary**

 

*Our Business*

 

TheCompany’s revenues are generated from advertising (print and online),circulation (subscriptions and single copy sales) and other sources (events,third party distribution, training services, sales of data products anddirectories, list rental and licensing). PRIMEDIA’s operating expenses include cost of goods sold (principallypaper and printing); marketing and selling; distribution, circulation andfulfillment; editorial; and other general and corporate administrative expenses(collectively referred to as “operating expenses”).

 

*Background*

 

Historically,PRIMEDIA was a broad based media enterprise built primarily from a series ofacquisitions and comprised of numerous disparate assets. During the past fewyears, the Company sold a number of selected properties to better focus on itscore businesses and reduce debt. As a result of these divestitures, the Companyhas transformed itself into a highly focused targeted media company poised forgrowth. Over the past few years, to counter the effects of the weakness in theoverall advertising environment, the Company has aggressively controlled itscosts. These initiatives have resulted in charges for severance, closures andrestructuring related costs to integrate Company operations and consolidatemany back office functions and facilities, resulting in a significant reductionin the number of employees and office space. These actions have resulted in astronger balance sheet, improved liquidity and a more efficient and betterfocused organization. The asset divestiture program is essentially complete andthe Company is now focused on growing organically while still diligentlycontrolling costs.

 

*Company Strategy*

 

In October 2003, Kelly P. Conlin was appointedPresident and Chief Executive Officer (“CEO”). Mr. Conlin and theexecutive team reviewed the Company’s operations and formulated a strategy toenable the Company to capitalize on the full potential of its businesses andmaximize its operating performance. That review resulted in a redesignedoperating structure with four reportable segments to better enable the Companyto execute key investment and organic growth initiatives. Those four principalsegments are: Enthusiast Media, Consumer Guides, Business Information, andEducation and Training. Accordingly, the Company has reclassified prior yearresults to reflect this redesigned operating structure.

 

TheCompany’s strategy is to focus on its core targeted media businesses and growthrough leveraging and expanding its market-leading brands. Actions the Companyis taking to organically grow revenues include introducing new products,improving and upgrading existing products, expanding into new markets,enhancing the caliber of its sales force, broadening its advertiser base,optimizing distribution, and leveraging its well known brands throughextensions including events, licensing and merchandising arrangements.

 

27

----

 

*Business Trends*

 

Themedia industry continues to be adversely affected by an overall advertisingenvironment that is softer than historical norms, declining single copy salesof consumer magazines, cutbacks in the demand for training services andbudgetary constraints in the education markets. Additionally, high apartmentvacancy rates have pressured the advertising budgets of property managers.

 

In 2004, most of PRIMEDIA’sproducts continued to grow, while some were affected by soft industrytrends.  The Company is capitalizing onthe general trend of marketers seeking to better target their advertising, thegrowth of free publications, strong growth in online advertising and theincreasing popularity of hobbies and leisure activities, as the Company has alarge presence in those markets.  Additionally,the Company has taken certain actions to lower costs and improve profitability,including consolidating, selling or shutting down certain properties.

 

*Summary of Consolidated Results for thethree months ended June 30, 2004*

 

In 2004, revenues were $342,176 up 0.9% ascompared to $339,291 in 2003.  Revenuegains in the Company’s three major business segments were partially offset by adecline in the Education and Training segment. In 2004, operating expenses were $275,182 up 0.8% compared to 2003. In2004, operating income was $45,922 improved from $32,382 in 2003 due todecreased depreciation and amortization expenses as well as the absence ofseverance related to separated senior executives in 2004.  These decreases were partially offset byhigher restructuring costs in 2004.  Netincome was $2,154 in 2004 compared to $88,904 in 2003, primarily due to thegain on the sale of *Seventeen* andits companion teen properties (“Seventeen”)in 2003 of $104,304.

 

*Forward-Looking Information*

 

This report contains certain forward-lookingstatements concerning the Company’s operations, economic performance andfinancial condition.  These statementsare based upon a number of assumptions and estimates, which are inherently subjectto uncertainties and external factors, many of which are beyond the control ofthe Company, and reflect future business decisions, which are subject tochange.  Some of the assumptions may notmaterialize and unanticipated events will occur which may affect the Company’sresults.

 

*Why We Use Segment EBITDA*

 

Segment EBITDA represents the segment’s earnings beforeinterest, taxes, depreciation, amortization and other charges (income)(“Segment EBITDA”). Other charges (income) include severance related toseparated senior executives, non-cash compensation, provision for severance,closures and restructuring related costs, provision for unclaimed property and(gain) loss on sale of businesses and other, net. PRIMEDIA believes thatSegment EBITDA is the most accurate indicator of its segments’ results, becauseit focuses on revenue and operating cost items driven by each operatingmanagers’ performance, and excludes items largely outside of the operatingmanagers’ control. Internally, the Company’s chief operating decision maker,who is the President and CEO, and the executive team measure performanceprimarily based on Segment EBITDA.

 

Segment EBITDA is not intended to represent cash flowsfrom operating activities and should not be considered as an alternative to netincome (as determined in conformity with accounting principles generallyaccepted in the United States of America), as an indicator of the Company’soperating performance or to cash flows as a measure of liquidity. SegmentEBITDA may not be available for the Company’s discretionary use as there arerequirements to redeem preferred stock and repay debt, among other commitments.Segment EBITDA as presented may not be comparable to similarly titled measuresreported by other companies since not all companies calculate Segment EBITDA inan identical manner, and therefore, is not necessarily an accurate measure ofcomparison between companies. For more information, see the reconciliation ofSegment EBITDA to operating income for the Company’s four segments in theirrespective segment discussions below.

 

28

----

*Intersegment Transactions*

 

The information presented belowincludes certain intersegment transactions and is, therefore, not necessarilyindicative of the results had the operations existed as stand-alonebusinesses. Intersegment transactions represent intercompany advertising andother services which are billed at what management believes are prevailingmarket rates. These intersegment transactions, which represent transactionsbetween operating units in different business segments, are eliminated in consolidation.

 

*Reclassifications due to Discontinued Operations*

 

In accordance with Statement ofFinancial Accounting Standards (“SFAS”) 144, “Accounting for the Disposalof Long-Lived Assets”, the Company’s results have been reclassified to reflectSeventeen, Simba Information, Federal Sources, *CableWorld*,Sprinks, RealEstate.com, *New York*magazine, Kagan World Media and About Web Services, About.com’s consumer Webhosting business, as discontinued operations for the periods prior to theirrespective divestiture dates.  Inaddition, the Company is evaluating strategic partnerships regarding the *Folio*, *CirculationManagement*and*American Demographics* propertiesin the Business Information segment.  Theoperating results of these properties have been classified as discontinuedoperations for all periods presented.

*** ***

29

----

 

***Segment Data:***

 

Thefollowing table presents the results of the Company’s four operating segmentsand Corporate for the six and three months

endedJune 30, 2004 and 2003, respectively:

 
| ** **                                                          | ** ** | **Six Months Ended June 30,** | ** ** | **Three Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------|------------|---------------------------------|------------|
| ** **                                                          | ** ** | **2004**                      | ** ** | **2003**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues, net:                                                      |       |                          |       |                            |       |   |   |   |   |
| Enthusiast Media                                                    |       | $                             | 360,514    |                            | $          | 355,055 |   | $ | 187,955 |   | $ | 183,420 |   |
| Consumer Guides                                                     |       | 142,471                       |       | 137,327                         |       | 71,084 |   | 69,404 |   |
| Business Information                                                |       | 113,010                       |       | 114,144                         |       | 58,208 |   | 57,938 |   |
| Education and Training                                              |       | 52,087                        |       | 62,226                          |       | 25,314 |   | 30,088 |   |
| Intersegment Eliminations                                           |       | (720                          | )          | (3,974                          | )          | (385 | ) | (1,559 | ) |
| Total                                                               |       | $                             | 667,362    |                            | $          | 664,778 |   | $ | 342,176 |   | $ | 339,291 |   |
|                                                                |       |                          |       |                            |       |   |   |   |   |
| Segment EBITDA: (1)                                                 |       |                          |       |                            |       |   |   |   |   |
|                                                                |       |                          |       |                            |       |   |   |   |   |
| Enthusiast Media                                                    |       | $                             | 72,263     |                            | $          | 66,168 |   | $ | 42,849 |   | $ | 42,306 |   |
|                                                                |       |                          |       |                            |       |   |   |   |   |
| Consumer Guides                                                     |       | $                             | 40,154     |                            | $          | 38,571 |   | $ | 20,512 |   | $ | 21,002 |   |
|                                                                |       |                          |       |                            |       |   |   |   |   |
| Business Information                                                |       | $                             | 15,312     |                            | $          | 12,679 |   | $ | 10,223 |   | $ | 7,966 |   |
|                                                                |       |                          |       |                            |       |   |   |   |   |
| Education and Training                                              |       | $                             | (729       | )                               | $          | 5,972 |   | $ | (606 | ) | $ | 1,640 |   |
|                                                                |       |                          |       |                            |       |   |   |   |   |
| Corporate Overhead                                                  |       | $                             | (13,474    | )                               | $          | (14,124 | ) | $ | (5,984 | ) | $ | (6,700 | ) |
|                                                                |       |                          |       |                            |       |   |   |   |   |
| Depreciation, amortization and other  charges: (2)                  |       |                          |       |                            |       |   |   |   |   |
|                                                                |       |                          |       |                            |       |   |   |   |   |
| Enthusiast Media                                                    |       | $                             | 18,985     |                            | $          | 20,568 |   | $ | 8,287 |   | $ | 11,670 |   |
|                                                                |       |                          |       |                            |       |   |   |   |   |
| Consumer Guides                                                     |       | $                             | 5,751      |                            | $          | 5,941 |   | $ | 2,842 |   | $ | 2,913 |   |
|                                                                |       |                          |       |                            |       |   |   |   |   |
| Business Information                                                |       | $                             | 8,318      |                            | $          | 9,789 |   | $ | 3,065 |   | $ | 4,789 |   |
|                                                                |       |                          |       |                            |       |   |   |   |   |
| Education and Training                                              |       | $                             | 8,596      |                            | $          | 13,614 |   | $ | 3,972 |   | $ | 7,274 |   |
|                                                                |       |                          |       |                            |       |   |   |   |   |
| Corporate                                                           |       | $                             | 7,830      |                            | $          | 9,239 |   | $ | 2,906 |   | $ | 7,186 |   |
|                                                                |       |                          |       |                            |       |   |   |   |   |
| Operating income (loss):                                            |       |                          |       |                            |       |   |   |   |   |
| Enthusiast Media                                                    |       | $                             | 53,278     |                            | $          | 45,600 |   | $ | 34,562 |   | $ | 30,636 |   |
| Consumer Guides                                                     |       | 34,403                        |       | 32,630                          |       | 17,670 |   | 18,089 |   |
| Business Information                                                |       | 6,994                         |       | 2,890                           |       | 7,158 |   | 3,177 |   |
| Education and Training                                              |       | (9,325                        | )          | (7,642                          | )          | (4,578 | ) | (5,634 | ) |
| Corporate                                                           |       | (21,304                       | )          | (23,363                         | )          | (8,890 | ) | (13,886 | ) |
| Total                                                               |       | 64,046                        |       | 50,115                          |       | 45,922 |   | 32,382 |   |
|                                                                |       |                          |       |                            |       |   |   |   |   |
| Other income (expense):                                             |       |                          |       |                            |       |   |   |   |   |
| Provision for impairment of investments                             |       | (804                          | )          | (7,727                          | )          | (804 | ) | (7,727 | ) |
| Interest expense                                                    |       | (58,742                       | )          | (65,203                         | )          | (30,164 | ) | (31,750 | ) |
| Interest on shares subject to mandatory  redemption (3)             |       | (21,890                       | )          | —                          |       | (10,945 | ) | — |   |
| Amortization of deferred financing costs  (3)                       |       | (2,319                        | )          | (1,244                          | )          | (1,217 | ) | (503 | ) |
| Other income (expense), net                                         |       | 109                           |       | (3,819                          | )          | (179 | ) | (3,275 | ) |
|                                                                |       |                          |       |                            |       |   |   |   |   |
| Income (loss) from continuing operations  before income tax expense |       | (19,600                       | )          | (27,878                         | )          | 2,613 |   | (10,873 | ) |
|                                                                |       |                          |       |                            |       |   |   |   |   |
| Income tax expense                                                  |       | (8,724                        | )          | (7,051                          | )          | (4,357 | ) | (3,333 | ) |
|                                                                |       |                          |       |                            |       |   |   |   |   |
| Loss from continuing operations                                     |       | (28,324                       | )          | (34,929                         | )          | (1,744 | ) | (14,206 | ) |
|                                                                |       |                          |       |                            |       |   |   |   |   |
| Discontinued operations (4)                                         |       | 41,549                        |       | 103,586                         |       | 3,898 |   | 103,110 |   |
|                                                                |       |                          |       |                            |       |   |   |   |   |
| Net income                                                          |       | $                             | 13,225     |                            | $          | 68,657 |   | $ | 2,154 |   | $ | 88,904 |   |

 

----

(1)                                  Segment EBITDArepresents the segments’ earnings before interest, taxes, depreciation,amortization and other charges (income) (see Note 2 below). Segment EBITDAis not intended to represent cash flows from operating activities and shouldnot be considered as an alternative to net income (as determined in conformitywith accounting principles generally accepted in the United States of America),as an indicator of the Company’s operating performance or to cash flows as ameasure of liquidity. Segment EBITDA is presented herein because the Company’schief operating decision maker, who is the President and CEO, and the executiveteam evaluate and measure each business unit’s performance based on its SegmentEBITDA results. PRIMEDIA believes that Segment EBITDA is the most accurateindicator of its segments’ results, because it focuses on revenue and operatingcost items driven by each

 

30

----

 

operating managers’ performance, and excludes itemslargely outside of the operating managers’ control. Segment EBITDA may not beavailable for the Company’s discretionary use as there are requirements toredeem preferred stock and repay debt, among other commitments. Segment EBITDAas presented may not be comparable to similarly titled measures reported byother companies since not all companies calculate Segment EBITDA in anidentical manner, and therefore, is not necessarily an accurate measure ofcomparison between companies. See reconciliation of Segment EBITDA to operatingincome for the six and three months ended June 30, 2004 and 2003 for each ofthe Company’s segments in their respective segment discussions below.

 

(2)                                  Other charges (income)include severance related to separated senior executives, non-cashcompensation, provision for severance, closures and restructuring relatedcosts, provision for unclaimed property and (gain) loss on sale of businessesand other, net.

 

(3)                                  Effective July 1,2003, the Company prospectively adopted SFAS 150, “Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity,”which requires the Company to classify as long term liabilities its Series DExchangeable Preferred Stock, Series F Exchangeable Preferred Stock andSeries H Exchangeable Preferred Stock and to classify dividends from thispreferred stock as interest expense. Such stock is now collectively describedas shares subject to mandatory redemption and dividends on these shares are nowincluded in loss from continuing operations and described as interest on sharessubject to mandatory redemption, whereas previously they were presented belownet income as preferred stock dividends. The adoption of SFAS 150 increased theloss from continuing operations for the six and three months ended June 30,2004 by $22,562 and $11,281 which represent interest on shares subject tomandatory redemption ($10,945 per quarter) and amortization of issuance costs($336 per quarter) which is included in the amortization of deferred financingcosts on the accompanying condensed statements of consolidated operations.  If SFAS 150 was adopted retroactively onJanuary 1, 2003, loss from continuing operations for the six and three monthsended June 30, 2003 would have increased by $22,670 and $10,794, respectively.

 

(4)                                  Discontinued operationsinclude a gain on sale of businesses, net of $42,226 and $102,605 in the sixmonths ended June 30, 2004 and 2003, respectively, and $4,192 and $103,846 inthe three months ended June 30, 2004 and 2003, respectively.

 

31

----

 

**Three Months Ended June 30, 2004 Compared to Three MonthsEnded June 30, 2003:**

 

**Consolidated Results:**

 

*Revenues, Net*

 

Consolidated revenues were $342,176 in 2004 compared to$339,291 in 2003:

 
| ** **     | ** ** | **Three Months Ended  June 30,** | ** ** | **Percent  Change** | ** ** |
|----------------|------------|----------------------------------|------------|---------------------|------------|
| ** **     | ** ** | **2004**                         | ** ** | **2003**            | ** ** | ** ** |
|           |       |                             |       |                |       |   |   |
| Revenues, net: |       |                             |       |                |       |   |   |
| Advertising    |       | $                                | 213,696    |                | $          | 211,462 |   | 1.1 |   |
| Circulation    |       | 76,989                           |       | 77,779              |       | (1.0 | ) |
| Other          |       | 51,491                           |       | 50,050              |       | 2.9 |   |
|           |       |                             |       |                |       |   |   |
| Total          |       | $                                | 342,176    |                | $          | 339,291 |   | 0.9 |   |

 

Advertising revenues increased by $2,234 in the secondquarter of 2004 compared to 2003 due**toan increase of $3,834 at the Enthusiast Media segment, partially offset by adecline of $2,304 at the Education and Training segment. Circulation revenuesdecreased $790 in 2004, principally driven by a $669 decline in revenues at theEducation and Training segment. Other revenues increased in 2004 compared to2003 primarily due to increases at Consumer Guides of $1,410 from continuedgrowth of its third party distribution business and at Enthusiast Media of$1,048 partially offset by a $874 decline at the Education and Training segment*.*Revenue trends within each segment arefurther detailed in the segment discussions below.

 

*Operating Income (Loss)*

 

Operating income increased to $45,922 in 2004 compared to$32,382 in 2003.  The improvement inoperating income in 2004 was due to decreases in amortization and depreciationexpenses of $5,103 and $4,178, respectively, as well as an absence of severancerelated to separated senior executives in 2004 compared to $5,576 recordedduring the second quarter of 2003. Amortization and depreciation expenses decreased in 2004 compared to2003 primarily due to certain assets that have become fully amortized ordepreciated subsequent to the second quarter of 2003.   These expense decreases were partiallyoffset by higher restructuring costs recorded in 2004 compared to 2003 dueprimarily to the continued consolidation of operations resulting in excess realestate.

 

*Net Income (Loss)*

 

TheCompany had net income in 2004 of $2,154 compared to $88,904 in 2003. Thedecrease in net income was primarily due to the gain on the sale of Seventeenof $104,304 recorded in discontinued operations during the second quarter of2003.

 

Interestexpense decreased $1,586 or 5.0% in 2004 to $30,164 from $31,750 in 2003. Thedecrease in interest expense was due to the Company’s lower average debt levelsdespite the additional debt issued in May 2004.

 

In accordance with the prospective adoption, effectiveJuly 1, 2003, of SFAS 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity”, loss fromcontinuing operations increased by $11,281 which represents $10,945 of intereston shares subject to mandatory redemption and $336 of amortization of issuancecosts which is included in the amortization of deferred financing costs on theaccompanying condensed statement of consolidated operations for the threemonths ended June 30, 2004. If

 

32

----

 

SFAS 150 was adopted retroactively on January 1,2003, loss from continuing operations for the three months ended June 30, 2003would have increased by $10,794.

 

SFAS 144 requires salesor disposals of long-lived assets that meet certain criteria to be classifiedon the statement of consolidated operations as discontinued operations and toreclassify prior periods accordingly. During 2003, the Company completed the sale of Seventeen, SimbaInformation, Federal Sources, *CableWorld,*Sprinks and RealEstate.com and during 2004, the Company sold *New York* magazine, Kagan World Media andAbout Web Services, About.com’s consumer Web hosting business.  In accordance with SFAS 144, thefinancial results of these operations have been reclassified into discontinuedoperations on the condensed statements of consolidated operations for periodsprior to their respective divestiture date. In addition, the Company is evaluatingstrategic partnerships regarding the *Folio*,*Circulation Management* and *American Demographics* properties in theBusiness Information segment and the operating results of these properties havebeen classified as discontinued operations for all periods presented. For thethree months ended June 30, 2004 and 2003, discontinued operations includes anet gain on sale of businesses of $4,192 and $103,846, respectively.

 

**Segment Results:**

 

**Enthusiast Media Segment (includesConsumer Automotive, Performance Automotive, International Automotive,Outdoors, Action Sports, Lifestyles and Home Technology magazine groups, theirrelated Web sites, events, and About.com)**

 

*Revenues, Net*

 

EnthusiastMedia revenues were $187,955 or 54.9% and $183,420 or 54.1% of the Company’sconsolidated revenues for 2004 and 2003, respectively. Enthusiast Mediarevenues increased $4,535 or 2.5% in 2004 compared to 2003 as follows:

 
| ** **            | ** ** | **Three Months Ended  June 30,** | ** ** | **Percent  Change** | ** ** |
|-----------------------|------------|----------------------------------|------------|---------------------|------------|
| ** **            | ** ** | **2004**                         | ** ** | **2003**            | ** ** | ** ** |
|                  |       |                             |       |                |       |   |   |
| Revenues, net:        |       |                             |       |                |       |   |   |
| Advertising           |       | $                                | 105,237    |                | $          | 101,403 |   | 3.8 |   |
| Circulation           |       | 66,411                           |       | 66,512              |       | (0.2 | ) |
| Other                 |       | 15,958                           |       | 14,910              |       | 7.0 |   |
| Intersegment revenues |       | 349                              |       | 595                 |       | (41.3 | ) |
| Total                 |       | $                                | 187,955    |                | $          | 183,420 |   | 2.5 |   |

 

Advertisingrevenues increased $3,834 or 3.8% in 2004. The growth was led by an increase inonline advertising of approximately $5,300, partially offset by a decrease inprint advertising due to a soft quarter for automotive print advertising.

 

The Company has initiated acomprehensive new advertising tracking system with Inquiry Management Systems(“IMS”), the largest ad-tracking service in North America.  Currently, the IMS Auditor service tracksthree quarters of PRIMEDIA’s enthusiast publications and the Company expectsthat IMS will track nearly all of its titles by the end of the third quarter2004. Based on the titles currently tracked, IMS Auditor reports thatPRIMEDIA’s and its competitors’ advertising pages were essentially flat in thesecond quarter, with PRIMEDIA’s advertising pages declining 0.6% and the marketincreasing 0.3%.  These results werenegatively skewed by the performance in the automotive categories, which theCompany continues to expect will improve in the

 

33

----

 

second half of 2004 due tothe timing of new automobile model introductions.  Excluding automotive titles, PRIMEDIA’sadvertising pages increased 5.2% in the quarter, compared to a market increaseof 3.7%, according to IMS.

 

Circulationrevenues at Enthusiast Media declined $101 or 0.2% for the three months endedJune 30, 2004 with gains in single copy revenues from the Lifestyles (includingthe soap opera titles), Consumer Automotive and Action Sports groups, offset byweakness in other groups.  Overall,single copy units for Enthusiast Media magazines increased 0.1% for the threemonths ended June 30, 2004, compared to the industry average decline of 1.5%,as reported by the International Periodical Distributors Association.

 

Other revenues for Enthusiast Media, which includelicensing, merchandising, list rental, events and other, increased $1,048, or7.0%, in 2004 compared to 2003.  Theincrease was primarily due to growth in merchandising and the timing of certainautomotive events during the second quarter of 2004 compared to 2003.

 

*Key Accomplishments*

 

TheCompany is continuing to combat industry wide circulation weakness with severalinitiatives, including several additional magazine titles authorized fordistribution to Wal-Mart stores, and new distribution to large retail chainssuch as CSK Auto and Fred’s Dollar Stores in 1,180 and 550 locations,respectively.

 

Thesegment’s 2004 product improvement initiatives continued, highlighted by aredesigned *Hot Rod*issuefeaturing 32 additional pages of editorial content, improved paper stock and anupgraded design.  The first tworedesigned *Hot Rod*issues are upapproximately 20% in advertising revenues and newsstand sales.

 

TheCompany’s initiatives to extend existing brands include licensing *Lowrider* brand apparel to be sold byleading retailers, developing *In-Fisherman*branded electronic entertainment for personal computers and video consoles withDestineer, a technology leader in the video game market, and an agreement withProcter & Gamble to release Febreze AutoTM with the *Motor Trend* seal of approval.

 

The April 2004 launch ofAbout 4.0, with an innovative new site design and architecture aimed atenhancing the total user experience, resulted in a 16% increase in page viewsand substantially higher traffic in areas of greatest value toadvertisers.  A test of an onlinebroadcast advertising platform, Unicast, on the new About platform resulted inthe highest clickthrough rates of all the sites in the test, providing a strongfoundation for what is expected to be one of the highest growth categories forWeb-based advertising.

 

*Segment EBITDA*

 

EnthusiastMedia Segment EBITDA increased $543 to $42,849 in 2004 from $42,306 in 2003 asincreased revenues were partially offset by increased operating expenses. TheCompany is investing in an aggressive product improvement program, research andmarketing initiatives to attract more national advertising, and the creation ofan enhanced product fulfillment and database project for e-commerce and directconsumer marketing.  Segment EBITDAmargin decreased to 22.8% in 2004 from 23.1% in 2003.

 

34

----

 

Below is a reconciliation of Enthusiast Media SegmentEBITDA to operating income for the three months ended June 30, 2004 and 2003: 

 
| ** **                                                         | ** ** | **Three Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                         | ** ** | **2004**                         | ** ** | **2003** | ** ** |
|                                                               |       |                             |       |   |   |
| Segment EBITDA                                                     |       | $                                | 42,849     |   | $ | 42,306 |   |
| Depreciation of property and equipment                             |       | 3,740                            |       | 5,829 |   |
| Amortization of intangible assets and other                        |       | 1,316                            |       | 3,650 |   |
| Provision for severance, closures and  restructuring related costs |       | 3,231                            |       | 2,074 |   |
| Loss on sale of businesses and other, net                          |       | —                           |       | 117 |   |
|                                                               |       |                             |       |   |   |
| Operating income                                                   |       | $                                | 34,562     |   | $ | 30,636 |   |

 

*Operating Income (Loss)*

 

Operating income was $34,562 in 2004 compared to $30,636in 2003, an increase of 12.8%.  Thisincrease was principally driven by decreases in amortization and depreciationexpenses as well as the improvement in Segment EBITDA, partially offset by anincrease in restructuring related costs.

 

*Discontinued Operations*

 

In accordance with SFAS 144, the operating resultsof Seventeen, Sprinks, *New York*magazineand About Web Services have been reclassified to discontinued operations on thecondensed statements of consolidated operations for the periods prior to theirrespective divestiture dates.

 

Enthusiast Media revenues exclude revenues fromdiscontinued operations of $117 and $29,476 for the three months ended June 30,2004 and 2003, respectively. Enthusiast Media segment operating income excludesoperating income from discontinued operations of $4,583 and $105,328 for thethree months ended June 30, 2004 and 2003, respectively.  For the three months ended June 30, 2004 and2003, discontinued operations includes a net gain on sale of businesses of$4,300 and $103,748, respectively.

 

**Consumer Guides Segment (includes *Apartment Guide, New Home Guide*and *Auto Guide*publications and their relatedWeb sites, and the DistribuTech distribution business)**

 

*Revenues, Net*

 

Consumer Guides revenues were $71,084 or 20.8% and$69,404 or 20.5% of the Company’s consolidated revenues for 2004 and 2003,respectively. Consumer Guides revenues increased $1,680 or 2.4% in 2004compared to 2003 as follows: 

 
| ** **     | ** ** | **Three Months Ended  June 30,** | ** ** | **Percent  Change** | ** ** |
|----------------|------------|----------------------------------|------------|---------------------|------------|
| ** **     | ** ** | **2004**                         | ** ** | **2003**            | ** ** | ** ** |
|           |       |                             |       |                |       |   |   |
| Revenues, net: |       |                             |       |                |       |   |   |
| Advertising    |       | $                                | 59,293     |                | $          | 59,023 |   | 0.5 |   |
| Other          |       | 11,791                           |       | 10,381              |       | 13.6 |   |
| Total          |       | $                                | 71,084     |                | $          | 69,404 |   | 2.4 |   |

 

35

----

 

Advertisingrevenues for the Consumer Guides segment increased $270 to $59,293 in 2004compared to $59,023 in 2003 primarily due to growth in premium onlineadvertising programs and the new *Auto Guide*launchedin March 2004.  Advertising revenue at the *Apartment Guide* business continues to beaffected by a soft rental market due to low interest rates which is drivingincreased home buying and higher than normal apartment vacancy rates.

 

ConsumerGuides other revenues, which relate to its distribution arm, DistribuTech,increased $1,410 during the second quarter of 2004 compared to 2003 due tocontinued growth of its distribution network and increased rack utilization.DistribuTech increased its average number of third partycustomers by 7%. Its rack utilization rate is 76%, an increase of 4 percentagepoints compared to first quarter 2004 and up 8 percentage points compared to a yearago.

 

*Key Accomplishments*

 

Apartmentguide.comdelivered nearly one half million leads to advertisers in June 2004,which was its strongest performance to date and a record for the industry.

 

The Company launched theHouston *New Home Guide* in May2004, becoming the 19th market served and the second *New Home Guide* launched this year.

 

*Segment EBITDA*

 

Consumer Guides Segment EBITDA decreased $490 or 2.3% in2004 to $20,512. The decrease was primarily due to additional sales andmarketing expenses related to new products, including the Charlotte *AutoGuide*business and the Orlando and Houston *New Home Guides,* as well as higherdistribution expenses.* *Asa result, Segment EBITDA margin decreased to 28.9% in 2004 compared to 30.3% in2003.

 

Below is a reconciliation of Consumer Guides SegmentEBITDA to operating income for the three months ended June 30, 2004 and 2003:

 
| ** **                                  | ** ** | **Three Months Ended  June 30,** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **2004**                         | ** ** | **2003** | ** ** |
|                                        |       |                             |       |   |   |
| Segment EBITDA                              |       | $                                | 20,512     |   | $ | 21,002 |   |
| Depreciation of property and equipment      |       | 2,018                            |       | 2,014 |   |
| Amortization of intangible assets and other |       | 824                              |       | 899 |   |
| Operating income                            |       | $                                | 17,670     |   | $ | 18,089 |   |

 

*Operating Income (Loss)*

 

Operating income decreased $419 or 2.3% in 2004 due tothe decrease in Segment EBITDA.

 

*Discontinued Operations*

 

In accordance with SFAS 144, the results ofRealEstate.com have been reclassified to discontinued operations on thecondensed statements of consolidated operations for three months ended June 30,2004 and 2003.

 

Consumer Guides revenues exclude revenues from discontinuedoperations of $516 for the three months ended June 30, 2003. Consumer Guidessegment operating income excludes operating losses from discontinued operationsof $9 and $1,294 for the three months ended June 30, 2004 and 2003,respectively.

 

36

----

 

**Business Information Segment (includestrade magazines and their related Web sites, events, directories and dataproducts)**

 

*Revenues, Net*

 

Business Information revenues were $58,208 or 17.0% and$57,938 or 17.1% of the Company’s consolidated revenues for 2004 and 2003,respectively. Business Information revenues increased $270 or 0.5% in 2004compared to 2003 as follows:

 
| ** **             | ** ** | **Three Months Ended  June 30,** | ** ** | **Percent  Change** | ** ** |
|------------------------|------------|----------------------------------|------------|---------------------|------------|
| ** **             | ** ** | **2004**                         | ** ** | **2003**            | ** ** | ** ** |
|                   |       |                             |       |                |       |   |   |
| Revenues, net:         |       |                             |       |                |       |   |   |
| Advertising            |       | $                                | 39,927     |                | $          | 39,493 |   | 1.1 |   |
| Circulation            |       | 4,617                            |       | 4,637               |       | (0.4 | ) |
| Other                  |       | 13,664                           |       | 13,807              |       | (1.0 | ) |
| Intersegment revenues. |       | —                           |       | 1                   |       | (100 | ) |
|                   |       |                             |       |                |       |   |   |
| Total                  |       | $                                | 58,208     |                | $          | 57,938 |   | 0.5 |   |

 

Overall, Business Information segment revenues arestabilizing, with approximately 37% of the segment’s revenues coming fromsectors that are up, approximately 50% from sectors that are flat andapproximately 13% from sectors that remain down.

 

Advertising revenues increased $434 in 2004 with strengthprimarily in themagazines serving the agriculture, communications and financial servicessectors offset by weakness primarily in the marketing and public servicessectors.

 

Circulationrevenues, which consist of subscriptions to directories and data basedproducts, were flat at $4,617 in 2004 compared to $4,637 in 2003.

 

Other revenues, whichconsist of events, information products and online revenues, were down $143, or1.0%, in 2004 compared to 2003.

 

*Key Accomplishments*

 

The Business Informationsegment continued to improve as the business showed a revenue gain for thefirst time in twelve quarters.

 

TheCompany launched *EquipmentWatch,*acompletely revamped subscription data product. The new paid-content Web site provides integrated access to *EquipmentWatch’s* construction equipmentvaluation, ownership, operating cost and specification data.  This paid content subscription model is beingextended to other markets.

 

TheCompany continued progress in developing electronic products. Projects such asweb-based continuing education, sponsored webcasts, and custom micrositescontributed to an increase of 57% in online revenue.

 

*Segment EBITDA*

 

BusinessInformation Segment EBITDA increased $2,257 for the three months ended June 30,2004 to $10,223. The improvement is predominantly due to continued cost controlwith expenses declining in most categories.

 

37

----

 

Asoperating expenses in this segment declined by approximately $2,000 in 2004compared to 2003. Segment EBITDA margin improved to 17.6% for 2004 versus 13.7%for 2003.

 

Below is a reconciliation of Business Information SegmentEBITDA to operating income for the three months ended June 30, 2004 and 2003:

 
| ** **                                                         | ** ** | **Three Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                         | ** ** | **2004**                         | ** ** | **2003** | ** ** |
|                                                               |       |                             |       |   |   |
| Segment EBITDA                                                     |       | $                                | 10,223     |   | $ | 7,966 |   |
| Depreciation of property and equipment                             |       | 1,376                            |       | 1,881 |   |
| Amortization of intangible assets and other                        |       | 1,258                            |       | 2,193 |   |
| Provision for severance, closures and  restructuring related costs |       | 416                              |       | (380 | ) |
| Loss on sale of businesses and other, net                          |       | 15                               |       | 1,095 |   |
| Operating income                                                   |       | $                                | 7,158      |   | $ | 3,177 |   |

 

*Operating Income (Loss)*

 

Business Information operating income increased $3,981 to$7,158 in 2004 compared to $3,177 in 2003. This increase was driven by improved Segment EBITDA and decreases indepreciation and amortization expense in 2004 due to certain assets becomingfully depreciated or amortized.  Inaddition, loss on sale of businesses decreased in 2004 compared to 2003 as theCompany recorded a loss related to the sale of the assets of *Coal Age*and *Engineering & Mining Journal*in 2003.

 

*Discontinued Operations*

 

In accordance withSFAS 144, the results of Simba, Federal Sources, *CableWorld*and Kagan World Media, whichhave been sold, have been reclassified to discontinued operations on thecondensed statements of consolidated operations for periods prior to theirrespective divestiture dates.  Inaddition, the Company is evaluating strategic partnerships regarding the *Folio*, *CirculationManagement* and *AmericanDemographics* properties and the operating results of theseproperties have been classified as discontinued operations for all periodspresented.

 

Business Information revenues exclude revenues fromdiscontinued operations of $1,645 and $6,509 for the three months ended June30, 2004 and 2003, respectively. Business Information segment operating resultsexclude the operating loss from discontinued operations of $476 and $800 forthe three months ended June 30, 2004 and 2003, respectively. For the threemonths ended June 30, 2004 and 2003, discontinued operations include a net gain(loss) on sale of businesses of ($108) and $98, respectively.

 

**Education and Training (includes ChannelOne, Films Media Group and Workplace Learning)**

 

*Revenues, Net*

 

Education and Training revenues were $25,314 or 7.4% and$30,088 or 8.9% of the Company’s consolidated revenues for 2004 and 2003,respectively. Education and Training revenues decreased $4,774 or 15.9% in 2004compared to 2003 as follows:

 

38

----

 
| ** **            | ** ** | **Three Months Ended  June 30,** | ** ** | **Percent  Change** | ** ** |
|-----------------------|------------|----------------------------------|------------|---------------------|------------|
| ** **            | ** ** | **2004**                         | ** ** | **2003**            | ** ** | ** ** |
|                  |       |                             |       |                |       |   |   |
| Revenues, net:        |       |                             |       |                |       |   |   |
| Advertising           |       | $                                | 9,239      |                | $          | 11,543 |   | (20.0 | ) |
| Circulation           |       | 5,961                            |       | 6,630               |       | (10.1 | ) |
| Other                 |       | 10,078                           |       | 10,952              |       | (8.0 | ) |
| Intersegment revenues |       | 36                               |       | 963                 |       | (96.3 | ) |
| Total                 |       | $                                | 25,314     |                | $          | 30,088 |   | (15.9 | ) |

 

Educationand Training advertising revenues, which are generated entirely by Channel One,decreased $2,304 in 2004 as compared to 2003. Advertising gains frommovies, television networks, military recruitment and other clients were offsetby reduced spending from certain food and beverage accounts.

 

WorkplaceLearning subscription revenue accounts for all of the segment’s circulationrevenue, which decreased $669 in 2004. Lagging demand for training servicesfrom Workplace Learning continued to depress subscription revenues as well asproduct sale revenues which are classified in other.

 

Reducedproduct sales at Workplace Learning and the Films Media Group primarilyaccounted for the decline of $874 in other revenues in 2004. At the Films MediaGroup, continuing constraints on state and local school budgets were the driverof approximately $550 of declines in product sales in 2004 compared to 2003.

 

*Key Action Steps to Improve Performance*

 

The Company is working toimprove Channel One’s sales effectiveness by focusing the sales team onindustry segments instead of geography. The Company is reorganizing the FilmsMedia Group’s marketing efforts under a newly recruited, experienced directmarketing professional. In addition, the Company is continuing a thoroughreview of Workplace Learning’s portfolio.

 

*Segment EBITDA*

 

Educationand Training Segment EBITDA decreased $2,246 to ($606) for the three monthsended June 30, 2004. This decrease is principally due to the declines inrevenue discussed above partially offset by continued cost control during thesecond quarter of 2004. These factors contributed to a decrease in SegmentEBITDA margin in 2004 to (2.4%) compared to 5.5% in 2003.

 

Below is a reconciliation of Education and TrainingSegment EBITDA to operating loss for the three months ended June 30, 2004 and2003:

 
| ** **                                                         | ** ** | **Three Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| **2004**                                                           | ** ** | **2003**                         | ** ** |
|                                                               |       |                             |       |   |   |
| Segment EBITDA                                                     |       | $                                | (606       | ) | $ | 1,640 |   |
| Depreciation of property and equipment                             |       | 2,368                            |       | 3,846 |   |
| Amortization of intangible assets and other                        |       | 1,419                            |       | 3,178 |   |
| Provision for severance, closures and  restructuring related costs |       | 185                              |       | 250 |   |
| Operating loss                                                     |       | $                                | (4,578     | ) | $ | (5,634 | ) |

 

39

----

 

*Operating Income (Loss)*

 

Operating loss decreased $1,056 for the three monthsended June 30, 2004 due to decreased amortization and depreciation as certainassets became fully amortized and fully depreciated since the second quarter of2003, partially offset by the decrease in Segment EBITDA.

 

**Corporate:**

 

*Corporate Overhead*

 

Corporate overhead decreased to $5,984 in 2004 from$6,700 in 2003 primarily due to a reduction in general and administrativeexpenses.

 

*Operating Income (Loss)*

 

Corporateoperating loss decreased $4,996 in 2004 to $8,890 from $13,886 in 2003principally driven by the absence of severance related to separated seniorexecutives in 2004 compared to $5,576 recorded in 2003.  This decrease was partially offset by an increasein stock-based compensation expense in 2004 to $1,567 compared to $777 in 2003and an increase in restructuring related costs to $623 in 2004 from $44 in2003.

 

**Six Months Ended June 30, 2004 Compared to Six Months EndedJune 30, 2003:**

 

**Consolidated Results:**

 

*Revenues, Net*

 

Consolidated revenues were $667,362 in 2004 compared to$664,778 in 2003:

 
| ** **     | ** ** | **Six Months Ended  June 30,** | ** ** | **Percent  Change** | ** ** |
|----------------|------------|--------------------------------|------------|---------------------|------------|
| ** **     | ** ** | **2004**                       | ** ** | **2003**            | ** ** | ** ** |
| Revenues, net: |       |                           |       |                |       |   |   |
| Advertising    |       | $                              | 418,025    |                | $          | 414,915 |   | 0.7 |   |
| Circulation    |       | 150,792                        |       | 155,081             |       | (2.8 | ) |
| Other          |       | 98,545                         |       | 94,782              |       | 4.0 |   |
| Total          |       | $                              | 667,362    |                | $          | 664,778 |   | 0.4 |   |

 

Advertising revenues increased by $3,110 in 2004 comparedto 2003 due**to increases of$6,408 and $2,481 at the Enthusiast Media and Consumer Guides segments,respectively, partially offset by declines of $1,801 and $3,978 at the BusinessInformation and Education and Training segments, respectively. Circulationrevenues decreased $4,289 in 2004, principally driven by a $3,121 decline inrevenues at the Enthusiast Media segment due to continued weakness in singlecopy sales. Other revenues increased $3,763 in 2004 compared to 2003 primarilydue to increases at Consumer Guides of $2,673 from continued growth of itsthird party distribution business, at Enthusiast Media of $2,627 and atBusiness Information of $768 partially offset by a $2,305 decline at theEducation and Training segment*.*Revenuetrends within each segment are further detailed in the segment discussionsbelow.

 

40

----

 

*Operating Income (Loss)*

 

Operating income was $64,046 in 2004 compared to $50,115in 2003.  The improvement in operatingincome in 2004 was due to reduced operating expenses and a decrease inamortization and depreciation expenses. Amortization and depreciation expensedecreased $9,822 and $4,557, respectively, in 2004 compared to 2003 primarilydue to certain intangible assets and property and equipment that have becomefully amortized or depreciated subsequent to June 30, 2003.  In addition, severance related to separatedsenior executives decreased $4,918 to $658 in 2004 compared to $5,576 in 2003.These expense reductions were partially offset by a provision for unclaimedproperty.  The Company has completed theinitial phase of its internal assessment regarding compliance with escheatmentrequirements for unclaimed property in certain states and as a result hasrecorded an estimated provision of $5,500 (see Note 11 of the notes to thecondensed consolidated financial statements).

 

*Net Income (Loss)*

 

TheCompany had net income in 2004 of $13,225 compared to $68,657 in 2003. Thedecrease in net income was primarily due to the gain on the sale of Seventeenof $104,304 recorded in discontinued operations in 2003.  The Company recorded a gain on the sale of *New York*magazine of $37,978 in discontinuedoperations in 2004.

 

Interestexpense decreased $6,461, or 9.9% in 2004 to $58,742 from $65,203 in 2003. Thedecrease in interest expense was due to the Company’s lower average debt levelsdespite the additional debt issued in May 2004.

 

In accordance with the prospective adoption, effectiveJuly 1, 2003, of SFAS 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity”, loss fromcontinuing operations increased by $22,562 which represents $21,890 of intereston shares subject to mandatory redemption and $672 of amortization of issuancecosts which is included in the amortization of deferred financing costs on theaccompanying condensed statement of consolidated operations for the six monthsended June 30, 2004. If SFAS 150 was adopted retroactively on January 1,2003, loss from continuing operations for the six months ended June 30, 2003would have increased by $22,670.

 

SFAS 144 requires salesor disposals of long-lived assets that meet certain criteria to be classifiedon the statement of consolidated operations as discontinued operations and toreclassify prior periods accordingly. During 2003, the Company completed the sale of Seventeen, SimbaInformation, Federal Sources, *CableWorld,*Sprinks and RealEstate.com and during 2004, the Company sold *New York* magazine, Kagan World Media andAbout Web Services, About.com’s consumer Web hosting business. In accordancewith SFAS 144, the financial results of these operations have beenreclassified into discontinued operations on the condensed statements ofconsolidated operations for periods prior to their respective divestiture date.In addition, the Company is evaluating strategic partnerships regarding the *Folio*, *CirculationManagement* and *American Demographics*properties in the Business Information segment. The operating results of these properties have been classified asdiscontinued operations for all periods presented. For the six months endedJune 30, 2004 and 2003, discontinued operations includes a net gain on sale ofbusinesses of $42,226 and $102,605, respectively.

 

41

----

 

**Segment Results:**

 

**Enthusiast Media Segment (includesConsumer Automotive, Performance Automotive, International Automotive, Outdoors,Action Sports, Lifestyles and Home Technology magazine groups, their relatedWeb sites, events, and About.com)**

 

*Revenues, Net*

 

EnthusiastMedia revenues were $360,514 or 54.0% and $355,055 or 53.4% of the Company’sconsolidated revenues for 2004 and 2003, respectively. Enthusiast Mediarevenues increased $5,459 or 1.5% in 2004 compared to 2003 as follows:

 
| ** **            | ** ** | **Six Months Ended  June 30,** | ** ** | **Percent  Change** | ** ** |
|-----------------------|------------|--------------------------------|------------|---------------------|------------|
| **2004**              | ** ** | **2003**                       | ** ** |
|                  |       |                           |       |                |       |   |   |
| Revenues, net:        |       |                           |       |                |       |   |   |
| Advertising           |       | $                              | 199,583    |                | $          | 193,175 |   | 3.3 |   |
| Circulation           |       | 129,395                        |       | 132,516             |       | (2.4 | ) |
| Other                 |       | 30,966                         |       | 28,339              |       | 9.3 |   |
| Intersegment revenues |       | 570                            |       | 1,025               |       | (44.4 | ) |
| Total                 |       | $                              | 360,514    |                | $          | 355,055 |   | 1.5 |   |

 

Advertisingrevenues increased $6,408 or 3.3% in 2004. The growth was led by an increase inonline advertising of approximately $10,700 predominantly driven by anaggressive effort to improve the sales and marketing of the Company’s onlineproperties.

 

Theincrease in online advertising revenues allows the Company to reinvest in itsproperties to be well positioned for the significant growth opportunities inonline marketing.  In April 2004,About.com unveiled its most significant product improvement since the site’sdebut in 1997 as it launched About 4.0 with an innovative new site design andarchitecture aimed at enhancing the total user experience.

 

Theincrease in online advertising was partially offset by an approximate $4,300decrease in print advertising. Print advertising pages were down 1.3% in 2004compared to 2003.  Specifically,advertising pages in the Company’s automotive titles declined 6.4% whileadvertising pages for the remainder of the segment’s properties increased3.5%.  Industry wide advertising pageswere up 2.0%, with automotive advertising pages increasing 0.2% andnon-automotive advertising pages increasing 2.9%, as reported by IMS.  The Company expects automotive advertising toresume growth in the second half of 2004 as many new car models are scheduledfor introduction.

 

Circulationrevenues at Enthusiast Media declined $3,121 or 2.4% for the six months endedJune 30, 2004 due to continued softness in single copy sales.  Newsstand revenue gains at the Lifestyles(including the soap opera titles) group partially offset declines at the otherEnthusiast segment groups.  Overall,single copy units for Enthusiast Media magazines declined 2.6% for the sixmonths ended June 30, 2004, compared to the industry average increase of 1.2%,as reported by the International Periodical Distributors Association.

 

Other revenues for Enthusiast Media, which includelicensing, list rental, events and other, increased $2,627, or 9.3%, in 2004compared to 2003.  The increase wasprimarily due to growth in merchandising revenue and events, including thetiming of certain automotive events during 2004.

 

42

----

 

*Segment EBITDA*

 

EnthusiastMedia Segment EBITDA increased 9.2% to $72,263 in 2004 from $66,168 in 2003.This increase was due predominantly to the increase in revenues as well as toreduced operating expenses of $636. As a result, Segment EBITDA marginincreased to 20.0% in 2004 from 18.6% in 2003.

 

Below is a reconciliation of Enthusiast Media SegmentEBITDA to operating income for the six months ended June 30, 2004 and 2003: 

 
| ** **                                                         | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                         | ** ** | **2004**                       | ** ** | **2003** | ** ** |
|                                                               |       |                           |       |   |   |
| Segment EBITDA                                                     |       | $                              | 72,263     |   | $ | 66,168 |   |
| Depreciation of property and equipment                             |       | 8,771                          |       | 10,024 |   |
| Amortization of intangible assets and other                        |       | 3,703                          |       | 7,963 |   |
| Provision for severance, closures and  restructuring related costs |       | 3,315                          |       | 2,465 |   |
| Provision for unclaimed property                                   |       | 3,271                          |       | — |   |
| Gain (loss) on sale of businesses and  other, net                  |       | (75                            | )          | 116 |   |
| Operating income                                                   |       | $                              | 53,278     |   | $ | 45,600 |   |

 

*Operating Income (Loss)*

 

Operating income was $53,278 in 2004 compared to $45,600in 2003, an increase of $7,678.  Thisincrease was principally driven by the improvement in Segment EBITDA as well asdecreases in amortization and depreciation expenses, partially offset by anincrease in restructuring related costs and a provision for unclaimed property(see Note 11 of the notes to the condensed consolidated financial statements).

 

*Discontinued Operations*

 

In accordance with SFAS 144, the operating resultsof Seventeen, Sprinks, *New York*magazineand About Web Services have been reclassified to discontinued operations on thecondensed statements of consolidated operations for the periods prior to theirrespective divestiture dates.

 

Enthusiast Media revenues exclude revenues fromdiscontinued operations of $2,290 and $73,588 for the six months ended June 30,2004 and 2003, respectively. Enthusiast Media segment operating income excludesoperating income from discontinued operations of $41,850 and $109,303 for thesix months ended June 30, 2004 and 2003, respectively.  For the six months ended June 30, 2004 and2003, discontinued operations includes a net gain on sale of businesses of$41,419 and $102,770, respectively.

 

**Consumer Guides Segment (includes *Apartment Guide, New Home Guide*and *Auto Guide*publications and their relatedWeb sites, and the DistribuTech distribution business)**

 

*Revenues, Net*

 

Consumer Guides revenues were $142,471 or 21.3% and$137,327 or 20.7% of the Company’s consolidated revenues for 2004 and 2003,respectively. Consumer Guides revenues increased $5,144 or 3.7% in 2004compared to 2003 as follows:

 

43

----

 
| ** **            | ** ** | **Six Months Ended  June 30,** | ** ** | **Percent  Change** | ** ** |
|-----------------------|------------|--------------------------------|------------|---------------------|------------|
| **2004**              | ** ** | **2003**                       | ** ** |
|                  |       |                           |       |                |       |   |   |
| Revenues, net:        |       |                           |       |                |       |   |   |
| Advertising           |       | $                              | 119,385    |                | $          | 116,904 |   | 2.1 |   |
| Other                 |       | 23,086                         |       | 20,413              |       | 13.1 |   |
| Intersegment revenues |       | —                         |       | 10                  |       | (100 | ) |
| Total                 |       | $                              | 142,471    |                | $          | 137,327 |   | 3.7 |   |

 

Advertisingrevenues for the Consumer Guides segment increased $2,481 to $119,385 in 2004compared to $116,904 in 2003 primarily due to growth in premium onlineadvertising programs and the new *Auto Guide*launchedin March 2004. Advertising revenue at the *Apartment Guide* business continued to beaffected by challenges presented by low interest rates which is drivingincreased home buying and higher than normal apartment vacancy rates depressingapartment owners’ advertising budgets.

 

ConsumerGuides other revenues, which relate to its distribution arm, DistribuTech,increased $2,673 in 2004 compared to 2003 due to continued growth of itsdistribution network, increased rack utilization and an effective pricingstrategy.  Since the first quarter of2003, DistribuTech has added over 1,000 retail locations and approximately 400additional third party publication customers and boosted its total rackutilization from 65% to 76%.  DistribuTechdistributes more than 2,000 publications on behalf of other publishingorganizations to many of the country’s leading supermarkets and chain stores,with whom it has exclusive distribution relationships.

 

*Segment EBITDA*

 

Consumer Guides Segment EBITDA increased $1,583 or 4.1%in 2004 to $40,154. The increase is due to higher revenues in 2004 partiallyoffset by increased operating expenses, particularly sales and marketingexpenses related to new product introductions (*AutoGuide*and**new marketsfor *New Home Guide*) as well ashigher distribution expenses. As a result, Segment EBITDA margin increased to28.2% in 2004 compared to 28.1% in 2003.

 

Below is a reconciliation of Consumer Guides SegmentEBITDA to operating income for the six months ended June 30, 2004 and 2003:

 
| ** **                                                         | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------|------------|
| **2004**                                                           | ** ** | **2003**                       |
|                                                               |       |                           |       |   |   |
| Segment EBITDA                                                     |       | $                              | 40,154     |   | $ | 38,571 |   |
| Depreciation of property and equipment                             |       | 4,059                          |       | 4,011 |   |
| Amortization of intangible assets and other                        |       | 1,647                          |       | 1,798 |   |
| Provision for severance, closures and  restructuring related costs |       | 38                             |       | — |   |
| Provision for unclaimed property                                   |       | 7                              |       | — |   |
| Loss on sale of businesses and other, net                          |       | —                         |       | 132 |   |
| Operating income                                                   |       | $                              | 34,403     |   | $ | 32,630 |   |

 

44

----

 

*Operating Income (Loss)*

 

Operatingincome increased $1,773 or 5.4% in 2004. This increase is primarily driven bythe improvement in Segment EBITDA.

 

*Discontinued Operations*

 

In accordance with SFAS 144, the results ofRealEstate.com have been reclassified to discontinued operations on thecondensed statements of consolidated operations for six months ended June 30,2004 and 2003.

 

Consumer Guides revenues exclude revenues fromdiscontinued operations of $458 and $1,051 for the six months ended June 30,2004 and 2003, respectively. Consumer Guides segment operating income excludesoperating losses from discontinued operations of $252 and $1,483 for the sixmonths ended June 30, 2004 and 2003, respectively.  In 2004, discontinued operations includes aloss on sale of business of $519 due to post closing adjustments related to thesale of RealEstate.com.

 

**Business Information Segment (includestrade magazines and their related Web sites, events, directories and dataproducts)**

 

*Revenues, Net*

 

Business Information revenues were $113,010 or 16.9% and$114,144 or 17.2% of the Company’s consolidated revenues for 2004 and 2003,respectively. Business Information revenues decreased $1,134 or 1.0% in 2004compared to 2003 as follows:

 
| ** **            | ** ** | **Six Months Ended  June 30,** | ** ** | **Percent  Change** | ** ** |
|-----------------------|------------|--------------------------------|------------|---------------------|------------|
| **2004**              | ** ** | **2003**                       | ** ** |
|                  |       |                           |       |                |       |   |   |
| Revenues, net:        |       |                           |       |                |       |   |   |
| Advertising           |       | $                              | 79,844     |                | $          | 81,645 |   | (2.2 | ) |
| Circulation           |       | 9,157                          |       | 9,257               |       | (1.1 | ) |
| Other                 |       | 24,009                         |       | 23,241              |       | 3.3 |   |
| Intersegment revenues |       | —                         |       | 1                   |       | (100 | ) |
| Total                 |       | $                              | 113,010    |                | $          | 114,144 |   | (1.0 | ) |

 

Overall, Business Information segment revenues arestabilizing and the second quarter of 2004 marked the first time in twelvequarters the segment showed an increase in revenues.

 

Advertising revenues decreased $1,801 in 2004 due tocontinued softness in trade advertising, particularly in the power,entertainment technology, marketing and agriculture categories partially offsetby strength in the communications and financial services sectors.

 

Circulationrevenues, which consist of subscriptions to directories and data basedproducts, were essentially flat in 2004 compared to 2003.

 

45

----

 

Otherrevenues, which consist of events, information products and online revenues,were up $768, or 3.3%, in 2004 compared to 2003. The focus on onlineinitiatives in developing new electronic products contributed to the increasein online revenues.

 

*Segment EBITDA*

 

BusinessInformation Segment EBITDA increased $2,633 for the six months ended June 30,2004 to $15,312. The improvement is predominantly due to continued cost controlwith expenses declining in all categories, partially offset by the decline inrevenues.  Operating expenses in thissegment declined by approximately $3,800 in 2004 compared to 2003. Thesefactors contributed to an improved Segment EBITDA margin of 13.5% for 2004versus 11.1% for 2003.

 

Below is a reconciliation of Business Information SegmentEBITDA to operating income for the six months ended June 30, 2004 and 2003: 

 
| ** **                                                         | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------|------------|
| **2004**                                                           | ** ** | **2003**                       | ** ** |
|                                                               |       |                           |       |   |   |
| Segment EBITDA                                                     |       | $                              | 15,312     |   | $ | 12,679 |   |
| Depreciation of property and equipment                             |       | 2,957                          |       | 3,998 |   |
| Amortization of intangible assets and other                        |       | 2,649                          |       | 4,472 |   |
| Provision for severance, closures and  restructuring related costs |       | 1,159                          |       | 210 |   |
| Provision for unclaimed property                                   |       | 1,538                          |       | — |   |
| Loss on sale of businesses and other, net                          |       | 15                             |       | 1,109 |   |
| Operating income                                                   |       | $                              | 6,994      |   | $ | 2,890 |   |

 

*Operating Income (Loss)*

 

Business Information operating income increased $4,104 to$6,994 in 2004 compared to $2,890 in 2003. The increase in operating income was driven by improved Segment EBITDAand decreases in depreciation and amortization expense in 2004 as certainassets became fully depreciated or amortized, partially offset by a provisionfor unclaimed property (see Note 11 of the notes to the condensed consolidatedfinancial statements).

 

*Discontinued Operations*

 

Inaccordance with SFAS 144, the results of Simba, Federal Sources, *CableWorld* and Kagan World Media have beenreclassified to discontinued operations on the condensed statements ofconsolidated operations for periods prior to their respective divestituredates. In addition, the Company is evaluating strategic partnerships regardingthe *Folio*, *Circulation Management* and *American Demographics* properties and theoperating results of these properties have been classified as discontinuedoperations for all periods presented.

 

BusinessInformation revenues exclude revenues from discontinued operations of $3,970and $12,176 for the six months ended June 30, 2004 and 2003, respectively.Business Information segment operating results exclude the operating income(loss) from discontinued operations of $201 and ($4,050) for the six monthsended June 30, 2004 and 2003, respectively. For the six months ended June 30,2004 and 2003, discontinued operations include a net gain (loss) on sale ofbusinesses of $1,326 and ($165), respectively.

 

46

----

 

**Education and Training (includes ChannelOne, Films Media Group and Workplace Learning)**

 

*Revenues, Net*

 

Education and Training revenues were $52,087 or 7.8% and$62,226 or 9.4% of the Company’s consolidated revenues for 2004 and 2003,respectively. Education and Training revenues decreased $10,139 or 16.3% in2004 compared to 2003 as follows: 

 
| ** **            | ** ** | **Six Months Ended  June 30,** | ** ** | **Percent  Change** | ** ** |
|-----------------------|------------|--------------------------------|------------|---------------------|------------|
| **2004**              | ** ** | **2003**                       | ** ** |
|                  |       |                           |       |                |       |   |   |
| Revenues, net:        |       |                           |       |                |       |   |   |
| Advertising           |       | $                              | 19,213     |                | $          | 23,191 |   | (17.2 | ) |
| Circulation           |       | 12,240                         |       | 13,308              |       | (8.0 | ) |
| Other                 |       | 20,484                         |       | 22,789              |       | (10.1 | ) |
| Intersegment revenues |       | 150                            |       | 2,938               |       | (94.9 | ) |
| Total                 |       | $                              | 52,087     |                | $          | 62,226 |   | (16.3 | ) |

 

Educationand Training advertising revenues, which are generated entirely by Channel One,decreased $3,978 in 2004 as compared to 2003. Channel One’s advertising revenuedeclined primarily as a result of reduced spending by several food and beverageaccounts, partially offset by revenue gains from additional health and beautybrands, movies, military recruitment and telecommunications firms.

 

WorkplaceLearning subscription revenue accounts for all of the segment’s circulationrevenue, which decreased $1,068 in 2004. Lagging demand for training servicesfrom Workplace Learning continued to depress subscription revenues as well asproduct sale revenues which are classified in other.

 

Reducedproduct sales at Workplace Learning and the Films Media Group primarilyaccounted for the decline of $2,305 in other revenues in 2004. At the FilmsMedia Group, continuing constraints on state and local school budgets were thedriver of approximately $1,500 of declines in product sales in 2004 compared to2003.

 

*Segment EBITDA*

 

Educationand Training Segment EBITDA decreased $6,701 to ($729) for the six months endedJune 30, 2004. This decrease is principally due to the declines in revenuediscussed above partially offset by continued cost control during 2004. Thesefactors contributed to a decrease in Segment EBITDA margin in 2004 to (1.4%)compared to 9.6% in 2003.

 

Below is a reconciliation of Education and TrainingSegment EBITDA to operating loss for the six months ended June 30, 2004 and2003:

 
| ** **                                                         | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------|------------|
| **2004**                                                           | ** ** | **2003**                       | ** ** |
|                                                               |       |                           |       |   |   |
| Segment EBITDA                                                     |       | $                              | (729       | ) | $ | 5,972 |   |
| Depreciation of property and equipment                             |       | 4,751                          |       | 6,992 |   |
| Amortization of intangible assets and other                        |       | 2,784                          |       | 6,372 |   |
| Provision for severance, closures and  restructuring related costs |       | 433                            |       | 250 |   |
| Provision for unclaimed property                                   |       | 628                            |       | — |   |
| Operating loss                                                     |       | $                              | (9,325     | ) | $ | (7,642 | ) |

 

47

----

 

*Operating Income (Loss)*

 

Operating loss increased $1,683 for the six months endedJune 30, 2004 due to the decrease in Segment EBITDA partially offset bydecreased amortization and depreciation as certain assets became fullyamortized and fully depreciated since June 30, 2003.

 

**Corporate:**

 

*Corporate Overhead*

 

Corporate overhead decreased to $13,474 in 2004 from$14,124 in 2003 primarily due to a reduction in general and administrativeexpenses.

 

*Operating Income (Loss)*

 

Corporate operating loss decreased $2,059 in 2004 to$21,304 from $23,363 in 2003 principally driven by a decrease in severancerelated to the separated senior executives of $4,918 to $658 in 2004 as aresult of the finalization of the separation agreements of two of theexecutives compared to $5,576 recorded in 2003. This was partially offset by an increase in the provision for severance,closures and restructuring related costs of $2,004 to $2,229 in 2004 and anincrease in stock-based compensation expense in 2004 to $3,486 compared to$2,023 in 2003.

 

**Risk Factors**

 

Set forth below are risks and uncertainties that couldcause actual results to differ materially from the results contemplated by theforward-looking statements contained in this Quarterly Report.

 

*General economic trends, as well astrends in advertising spending, may reduce our advertising revenues.*

 

Our advertising revenues are subject to the risks arisingfrom adverse changes in domestic and global economic conditions and possibleshifting of advertising spending amongst media. A decline in the level ofbusiness activity of certain of our advertisers has had an adverse effect onour revenues and profit margins. Additionally, high apartment vacancy rateshave pressured the advertising budgets of property owners, constraining growthin one of our segments.  Because ofeconomic conditions in the United States, many advertisers, particularlybusiness-to-business advertisers, have reduced advertising expenditures. Anyfurther adverse impact of economic conditions and high vacancy rates on theCompany is difficult to predict, but it may result in further reductions inadvertising revenue. Additionally, if geopolitical events negatively impact theeconomy or advertising spending patterns change, our results of operations maybe adversely affected.  The Companybelieves that the targeted nature of its products together with itsdiversification of advertising vehicles, including print, on-line, events andtelevision, would minimize the effects of shifting advertising spending.

 

*We have substantial indebtedness andother financial obligations, which consume a substantial portion of the cashflow that we generate.*

 

A substantial portion of our cash flow is dedicated tothe payment of interest on indebtedness and on shares subject to mandatoryredemption which reduces funds available for capital expenditures and businessopportunities and may limit our ability to respond to adverse developments inour business or in the economy.

 

48

----

 

*Our debt instruments limit our businessflexibility by imposing operating and financial restrictions on our operations.*

 

The agreements and indentures governing our indebtednessimpose specific operating and financial restrictions on us. These restrictionsimpose limitations on our ability to, among other things:

 

•                  change the nature of ourbusiness;

•                  incur additionalindebtedness;

•                  create liens on ourassets;

•                  sell assets;

•                  issue stock;

•                  engage in mergers,consolidations or transactions with our affiliates;

•                  make investments in orloans to specific subsidiaries;

•                  make guarantees orspecific restricted payments; and

•                  declare or make dividendpayments on our common or preferred stock.

 

Failureto comply with the terms and covenants in our indebtedness could lead to adefault under the terms of those documents, which would entitle the lenders toaccelerate the indebtedness and declare all amounts owed due and payable.  Moreover, the instruments governing almostall of our indebtedness contain cross-default provisions so that a defaultunder any of our indebtedness may result in a default under our otherindebtedness.  If a cross-default occurs,the maturity of almost all of our indebtedness could be accelerated and becomeimmediately due and payable.  If thatwere to happen, we would not be able to satisfy our debt obligations, whichwould have a material adverse effect on our ability to continue as a goingconcern.  We may not be able to complywith these restrictions in the future, or in order to comply with theserestrictions we may have to forgo opportunities that might otherwise bebeneficial to us.

 

Underthe terms of our debt instruments, we have the ability to make significantadditional investments in our unrestricted subsidiaries.

 

*Kohlberg Kravis Roberts & Co. L.P.,or KKR, has control of our common stock and has the power to elect all themembers of our board of directors and to approve any action requiringstockholder approval.*

 

As of June 30, 2004, approximately 60% of the shares ofour common stock were held by investment partnerships, of which KKR Associates,L.P., a New York limited partnership (“KKR Associates”), and KKR GP 1996 LLC, aDelaware limited liability company (“KKR GP 1996”), each an affiliate of KKR,are the general partners. KKR Associates and KKR GP 1996 have sole voting andinvestment power with respect to these shares. Consequently, KKR Associates andKKR GP 1996 and their respective general partners and members, three of whomare also our directors, control us and have the power to elect all of ourdirectors and approve any action requiring stockholder approval, includingadopting amendments to our certificate of incorporation and approving mergersor sales of all or substantially all of our assets. KKR Associates and KKR GP1996 will also be able to prevent or cause a change of control at any time.

 

*Increases in paper and postage costsmay have an adverse impact on our future financial results.*

 

The price of paper is a significant expense relating toour print products and direct mail solicitations. Postage for productdistribution and direct mail solicitations is also a significant expense. Weuse the U.S. Postal Service for distribution of many of our products andmarketing materials. In April 2003, President Bush signed legislation that willhold postal rates stable until at least 2006. Paper and postage cost increasesmay have an adverse effect on our future results. We may not be able to passthese cost increases through to our customers.

 

49

----

 

*Incompatible financial systems limit theCompany’s ability to operate efficiently.*

 

PRIMEDIA is the result of numerous acquisitions since itsinception in 1989. Many of the companies acquired had financial systems whichwere incompatible. Incompatible financial systems across PRIMEDIA had negativelyimpacted the Company’s ability to more efficiently analyze data and respond tobusiness opportunities on a timely basis. Despite the economic slowdown, theCompany has been engaged in upgrading its key financial systems, which aredesigned to make the financial reporting and analysis functions more efficient.To address management’s concerns regarding the lack of compatible financialsystems across the Company and the demands surrounding increased financialdisclosure, the Company has installed an integrated enterprise-wide generalledger system across all business units. Despite the difficult economicenvironment, the Company spent approximately $15,000 on the systems upgrade, ofwhich approximately $10,000 and $5,000 was spent during 2003 and 2002, respectively.The Company is also implementing a new integrated billing/accounts receivablesystem across its consumer magazine units which is scheduled for completion inthe latter part of 2004 at a cost of approximately $5,000. The Companyrecognizes that there are inherent risks in a system implementation and hastaken reasonable steps to mitigate these risks.

 

*We depend on some important employees,and the loss of any of those employees may harm our business.*

 

Our performance is substantially dependent on theperformance of our executive officers and other key employees. In addition, oursuccess is dependent on our ability to attract, train, retain and motivate highquality personnel, especially for our management team. The loss of the servicesof any of our executive officers or key employees may harm our business.

 

The past decline in revenues had necessitated cost cutsincluding the reduction of certain personnel at the Company. Such workforcereductions may impact the ability of remaining personnel to perform theirassigned responsibilities in an efficient manner, primarily due to theincreased volume of work being generated in the financial area and to thecontinuing process of converting certain of our financial systems. The Companybelieves that it has in place the necessary financial workforce to analyze dataand has put in place additional resources during the period prior to thecompletion of the financial systems upgrade to improve the efficiency offinancial analysis and mitigate the risk of employee turnover.

 

The Company’s management also is concerned about theintense competition in this economy for the hiring and retention of qualifiedfinancial personnel, the inherent risk in certain system implementations acrossthe Company and the demands surrounding increased financial disclosure. Tomitigate management’s concerns regarding the hiring and retention of qualifiedfinancial personnel and to ensure future stability in the financial workforce,the Company continues to upgrade the skill level of its back office financialpersonnel, consolidate certain back office functions and cross trainindividuals in the performance of multiple job functions. Additionally, theCompany continues to aggressively recruit qualified professionals to strengthenand increase its financial personnel. The Company believes that it is currentlyclose to being fully staffed in the finance area.

# ** **

# **Liquidity,Capital and Other Resources**

 

As ofJune 30, 2004, the Company had cash and unused credit facilities of $452,049,as further detailed below under “Financing Arrangements”, compared to $319,125as of December 31, 2003.  On July 7,2004, the Company redeemed all of its Series J Convertible Preferred Stock.  As of August 4, 2004, the Company had over$250,000 in cash and available unused credit facilities. The Company has alsoimplemented and continues to implement various cost-cutting programs and cashconservation plans, which involve the limitation of capital expenditures andthe control of working capital. These plans should help mitigate any futurepossible cash flow shortfalls.

 

50

----

 

TheCompany believes its liquidity, capital resources and cash flow from operationsare sufficient to fund planned capital expenditures, working capitalrequirements, interest and principal payments on its debt, payment of preferredstock dividends and other anticipated expenditures for the next twelve months.The Company has no significant required debt repayments until 2008.

 

*Working Capital*

 

Consolidatedworking capital reflects certain industry working capital practices andaccounting principles, including the recording of deferred revenue fromsubscriptions as a current liability as well as the expensing of certainadvertising, editorial and product development costs as incurred. Consolidatedworking capital deficiency, which includes current maturities of long-termdebt, was $117,835 at June 30, 2004 compared to $200,622 at December 31,2003.

 

*Cash Flow– 2004 Compared to 2003*

 

Netcash used in operating activities increased $15,239 to $16,959 from $1,720 forthe six months ended June 30, 2004 and 2003, respectively. This change isprimarily due to payments made in 2004 related to the finalization of theseparation agreements of the former CEO and the former President and InterimCEO as well as interest related to shares subject to mandatory redemption of$26,455 paid in 2004 as a result of the Company’s adoption of SFAS 150,effective July 1, 2003.  Payments onthese shares prior to the adoption of SFAS 150 were classified as preferredstock dividends and are presented as part of cash flows used in financingactivities in 2003.

 

Netcash provided by (used in) investing activities decreased $101,861 to $56,107from $157,968 for the six months ended June 30, 2004 and 2003,respectively.  Proceeds from the sale ofbusinesses were $70,277 in 2004 compared to $182,922 in 2003. Net capitalexpenditures decreased to $13,574 in 2004, compared to $21,166 in 2003. TheCompany expects capital spending in 2004 to remain consistent with 2003.

 

Net cash provided by (used in) financing activities was$18,725 in 2004 compared to $(151,226) in 2003 predominantly due to proceedsfrom the issuance of $175,000 Senior Floating Rate Notes and a new $100,000term loan C credit facility offset by voluntary permanent reductions of termloans A and B of $150,000 and the pay down of all outstanding borrowings underthe revolving credit facility in 2004. In 2003, proceeds from the sale of businesses and the issuance of 8% SeniorNotes were used to pay down borrowings under the Company’s credit facilities.(See further discussion below in Financing Arrangements.)

 

***Financing Arrangements***

*****Bank Credit Facilities*

 

On April 29, 2004, theCompany amended its credit facilities agreement with various financialinstitutions with JPMorgan Chase Bank, Bank of America, N.A., The Bank of NewYork, and The Bank of Nova Scotia, as agents (the “bank creditfacilities”).  The debt under the bankcredit facilities agreement, including term loan C, and as otherwise permittedunder the bank credit facilities agreement, and the indebtedness relating tothe 7 5/8% Senior Notes, 8 7/8% Senior Notes, 8% SeniorNotes and Senior Floating Rate Notes of the Company (together referred to as“Senior Notes”) is secured by a pledge of the stock of PRIMEDIA Companies Inc.,an intermediate holding company, owned directly by the Company, which ownsdirectly or indirectly all shares of PRIMEDIA subsidiaries that guarantee suchdebt.

 

On May 14, 2004, the Companyissued $175,000 principal amount of Senior Floating Rate Notes Due 2010, andentered into a new $100,000 term loan C credit facility with a maturity date ofDecember 31, 2009.  The Senior FloatingRate Notes bear interest equal to three-month LIBOR plus 5.375% per year andthe term loan C at three-month LIBOR plus 4.375% per year.  The Company applied the combined net proceedsfrom the

 

51

----

 

Senior Floating Rate Notesoffering and the term loan C credit facility to prepay $30,000 of outstandingterm loan A commitments and $120,000 of term loan B commitments, with theremainder used to temporarily pay down all outstanding advances under therevolving credit facility.  The purposeof these borrowings was to provide the ability to redeem the Company’s Series JConvertible Preferred Stock, which was completed on July 7, 2004 (seeSubsequent Event Note 17 of the notes to the condensed consolidated financialstatements).

 

Substantially all proceedsfrom sales of businesses and other investments were used to pay down borrowingsunder the bank credit facilities agreement. Amounts under the revolving loan commitment may be reborrowed and usedfor general corporate and working capital purposes as well as to financecertain future acquisitions.  The Companymade voluntary pre-payments towards the term loans A and B and voluntarypermanent reductions of the revolving loan commitment consisting of thefollowing as of June 30, 2004:

 
| ** **                            | ** ** | **Three and Six  Months Ended  June 30, 2004** | ** ** | **Three and Six  Months Ended  June 30, 2003** | ** ** |
|---------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
|                                  |       |                                           |       |                                           |       |
| Term A (cash pre-payment)             |       | $                                              | 30,000     |                                           | $          | 5,000 |   |
|                                  |       |                                           |       |                                           |       |
| Term B (cash pre-payment)             |       | 120,000                                        |       | 21,000                                         |       |
|                                  |       |                                           |       |                                           |       |
| Revolving loan (commitment reduction) |       | 21,350                                         |       | 24,000                                         |       |
|                                  |       |                                           |       |                                           |       |
| Total                                 |       | $                                              | 171,350    |                                           | $          | 50,000 |   |

 

The bank credit facilitiesconsisted of the following as of June 30, 2004:

 
| ** **                    | ** ** | **Revolver** | ** ** | **Term A** | ** ** | **Term B** | ** ** | **Term C** | ** ** | **Total** | ** ** |
|-------------------------------|------------|--------------|------------|------------|------------|------------|------------|------------|------------|-----------|------------|
| Bank Credit Facilities        |       | $            | 405,650    |       | $          | 60,000     |       | $          | 252,906    |      | $          | 100,000 |   | $ | 818,556 |   |
| Borrowings Outstanding        |       | —       |       | (60,000    | )          | (252,906   | )          | (100,000   | )          | (412,906  | )          |
| Letters of Credit Outstanding |       | (20,159      | )          | —     |       | —     |       | —     |       | (20,159   | )          |
| Unused Bank Commitments       |       | $            | 385,491    |       | $          | —     |       | $          | —     |      | $          | — |   | $ | 385,491 |   |

 

With the exception of theterm loan B and C, the amounts borrowed bear interest, at the Company’s option,at either the base rate plus an applicable margin ranging from 0.125% to 1.5%or LIBOR plus an applicable margin ranging from 1.125% to 2.5%. The term loan Bbears interest at the base rate plus 1.75% or LIBOR  plus 2.75%. The term loan C bears interest at the base rate plus 3.375% or LIBORplus 4.375%.  At June 30, 2004 andDecember 31, 2003, the weighted average variable interest rate on alloutstanding borrowings under the bank credit facilities was 3.8% and 3.6%,respectively.

 

Underthe bank credit facilities, the Company has agreed to pay commitment fees at aper annum rate of either 0.375% or 0.5%, depending on its debt to EBITDA ratio,as defined in the bank credit facilities agreement, on the daily averageaggregate unutilized commitment under the revolving loan commitment.  During the first and second quarters of 2004,the Company’s commitment fees were paid at a weighted average rate of0.375%.  The Company also has agreed topay certain fees with respect to the issuance of letters of credit and anannual administration fee.  From time totime the Company may pay amendment fees under its bank credit facilities.

 

Thecommitments under the revolving loan portion of the bank credit facilities aresubject to mandatory reductions semi-annually on June 30 and December 31,commencing June 30, 2005, with the final reduction on June 30, 2008.  The aggregate mandatory reductions of therevolving loan commitments under the bank credit facilities are $42,700 in 2005,$64,050 in 2006, $128,100 in 2007 and a final reduction of $170,800 in2008.  To the extent that the totalrevolving credit loans outstanding exceed the reduced commitment amount, theseloans must be paid down to an amount equal to or less than the reducedcommitment amount.  However, if the totalrevolving credit loans outstanding do not exceed the reduced commitment amount,then there is no requirement to pay down any of the revolving creditloans.  Remaining aggregate term loanpayments under the bank credit facilities are $500 in 2004, $20,764 in 2005,2006 and 2007, $12,192 in 2008 and $337,922 in 2009.

 

52

----

 

Thebank credit facilities agreement, among other things, limits the Company’sability to change the nature of its businesses, incur indebtedness, createliens, sell assets, engage in mergers, consolidations or transactions withaffiliates, make investments in or loans to certain subsidiaries, issueguarantees and make certain restricted payments including dividend payments onor repurchases of the Company’s common stock in excess of $75,000 in any givenyear.

 

Thebank credit facilities and Senior Notes agreements of the Company containcertain customary events of default which generally give the banks or thenoteholders, as applicable, the right to accelerate payments of outstandingdebt.  Under the bank credit facilitiesagreement, these events include:

 

•                  failure to maintain required covenant ratios,as described below;

•                  failure to make a payment of principal,interest or fees within five days of its due date;

•                  default, beyond any applicable grace period,on any aggregate indebtedness of PRIMEDIA exceeding $20,000;

•                  occurrence of certain insolvency proceedingswith respect to PRIMEDIA or any of its material subsidiaries;

•                  entry of one judgment or decree involving aliability of $15,000 or more (or more than one involving an aggregate liabilityof $25,000 or more); and

•                  occurrence of certain events constituting achange of control of the Company.

 

The events of defaultcontained in PRIMEDIA’s Senior Notes are similar to, but generally lessrestrictive than, those contained in the Company’s bank credit facilities.

 

*Contractual Obligations*

 

Thereare no required significant debt repayments until 2008.  The following are certain contractualobligations of the Company as of June 30, 2004:

 
| **Contractual Obligations**                                                           | ** ** | ** ** | ** **            | **Payments Due by Period** | ** **    |
|---------------------------------------------------------------------------------------|------------|------------|-----------------------|----------------------------|---------------|
| ** **                                                                            | **Total**  | ** ** | **Less than  1 year** | ** **                 | **1-3 years** | ** ** | **4-5 years** | ** ** | **After  5 years** | ** ** |
|                                                                                  |       |       |                  |                       |          |   |   |   |   |   |   |
| Long-term debt obligations (net of  unamortized discount)                             |       | $          | 1,583,517             |                       | $             | 10,881 |   | $ | 41,528 |   | $ | 491,007 |   | $ | 1,040,101 |   |
| Interest on long-term debt  obligations (1)                                           |       | 794,841    |                  | 120,977                    |          | 255,141 |   | 233,182 |   | 185,541 |   |
| Shares subject to mandatory redemption  (Exchangeable Preferred Stock)                |       | 474,559    |                  | —                     |          | — |   | 167,487 |   | 307,072 |   |
| Interest on shares subject to mandatory  redemption (Exchangeable Preferred Stock)(1) |       | 211,802    |                  | 43,782                     |          | 87,564 |   | 63,836 |   | 16,620 |   |
| Capital lease obligations                                                             |       | 25,458     |                  | 5,802                      |          | 5,661 |   | 3,909 |   | 10,086 |   |
| Interest on capital lease obligations                                                 |       | 7,453      |                  | 1,618                      |          | 2,356 |   | 1,746 |   | 1,733 |   |
| Operating lease obligations                                                           |       | 248,968    |                  | 43,048                     |          | 74,039 |   | 51,217 |   | 80,664 |   |
| Total Contractual Obligations                                                         |       | $          | 3,346,598             |                       | $             | 226,108 |   | $ | 466,289 |   | $ | 1,012,384 |   | $ | 1,641,817 |   |

 

----

(1)                                  Interest payments arebased on the Company’s projected interest rates and estimated principal amountsoutstanding for the periods presented.

 

TheCompany currently has $0 of borrowings outstanding at June 30, 2004 under therevolving loan portion of the bank credit facilities, which expires in 2008.

 

53

----

 

TheCompany has other commitments in the form of letters of credit of $20,159aggregate face value which expire on or before June 30, 2005.

 

*Off Balance Sheet Arrangements*

 

The Company has no variable interest (otherwise known as“special purpose”) entities or off balance sheet debt, other than as related tooperating leases in the ordinary course of business as disclosed above.

 

*Covenant Compliance*

 

Asdefined in the amended bank credit facilities agreement, the maximum allowabledebt leverage ratio was amended to 6.25 to 1 through September 30,2005.  The maximum debt leverage ratiodecreases to 6.00 to 1, 5.75 to 1, 5.50 to 1, 5.25 to 1, 5.00 to 1, 4.75 to 1and 4.50 to 1, on October 1, 2005, July 1, 2006, October 1, 2006, April 1,2007, October 1, 2007, April 1, 2008 and July 1, 2008, respectively.  The amendment to the bank credit facilitiesalso set the minimum interest coverage ratio, as defined in the bank creditfacilities, at 2.25 to 1 through maturity. The minimum fixed charge coverage ratio, as defined, remains unchangedat 1.05 to 1 through maturity.  TheCompany is in compliance with all of the financial and operating covenants ofits financing arrangements.

 

The Company is herewith providing detailed informationand disclosure as to the methodology used in determining compliance with theleverage ratio in the bank credit facilities agreement.  Under its bank credit facilities and SeniorNote agreements, the Company is allowed to designate certain businesses asunrestricted subsidiaries to the extent that the value of those businesses doesnot exceed the permitted amounts, as defined in these agreements. The Companyhas designated certain of its businesses as unrestricted (the “Unrestricted Group”),which primarily represent Internet businesses, trademark and content licensingand service companies, new launches (including traditional start-ups), otherproperties under evaluation for turnaround or shutdown and foreignsubsidiaries. Except for those specifically designated by the Company asunrestricted, all businesses of the Company are restricted (the “RestrictedGroup”).  Indebtedness under the bankcredit facilities and Senior Note agreements is guaranteed by each of theCompany’s domestic subsidiaries in the Restricted Group in accordance with theprovisions and limitations of the Company’s bank credit facilities and SeniorNote agreements.  The guarantees arefull, unconditional and joint and several. The Unrestricted Group does not guarantee the bank credit facilities orSenior Notes.  For purposes ofdetermining compliance with certain financial covenants under the Company’sbank credit facilities agreement, the Unrestricted Group’s results (positive ornegative) are not reflected in the Consolidated EBITDA of the Restricted Groupwhich, as defined in the bank credit facilities agreement, excludes losses ofthe Unrestricted Group, non-cash charges and restructuring charges and isadjusted primarily for the trailing four quarters results of acquisitions anddivestitures and estimated savings for acquired businesses.

 

54

----

 

The following represents a reconciliation of EBITDA ofthe Restricted Group for purposes of the leverage ratio as defined in the bankcredit facilities agreement to operating income for the three and twelve monthsended June 30, 2004:

 

| ** **                                                         | ** ** | **For the Three  Months Ended  June 30, 2004** | ** ** | **For the Twelve  Months Ended  June 30, 2004** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------|------------|-------------------------------------------------|------------|
|                                                               |       |                                           |       |                                            |       |
| EBITDA of the Restricted Group                                     |       | $                                              | 77,969     |                                            | $          | 309,738 |   |
| EBITDA loss of the Unrestricted Group                              |       | (11,193                                        | )          | (58,437                                         | )          |
| Divestiture and other adjustments                                  |       | 218                                            |       | (5,107                                          | )          |
| Depreciation of property and equipment                             |       | (10,181                                        | )          | (50,538                                         | )          |
| Amortization of intangible assets and other                        |       | (4,817                                         | )          | (65,944                                         | )          |
| Severance related to separated senior  executives                  |       | —                                         |       | (4,454                                          | )          |
| Non-cash compensation                                              |       | (1,567                                         | )          | (12,642                                         | )          |
| Provision for severance, closures and  restructuring related costs |       | (4,455                                         | )          | (12,860                                         | )          |
| Provision for unclaimed property                                   |       | —                                         |       | (5,500                                          | )          |
| Income (loss) on the sales of businesses  and other, net           |       | (52                                            | )          | 762                                             |       |
| Operating income                                                   |       | $                                              | 45,922     |                                            | $          | 95,018 |   |

 

The EBITDA loss of the Unrestricted Group, as defined inthe bank credit facilities agreement, is comprised of the following categories:

 
| ** **                                      | ** ** | **For the Three  Months Ended  June 30, 2004** | ** ** | **For the Twelve  Months Ended  June 30, 2004** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------|------------|-------------------------------------------------|------------|
| Internet properties                             |       | $                                              | 3,291      |                                            | $          | 21,038 |   |
| Traditional turnaround and start-up  properties |       | 6,527                                          |       | 30,990                                          |       |
| Related overhead and other charges              |       | 1,375                                          |       | 6,409                                           |       |
|                                            |       | $                                              | 11,193     |                                            | $          | 58,437 |   |

 

The Company has established intercompany arrangementsthat reflect transactions, such as leasing, licensing, sales and relatedservices and cross-promotion, between Company businesses in the RestrictedGroup and the Unrestricted Group which management believes are on an arms’length basis and as permitted by the bank credit facilities and Senior Noteagreements. These intercompany arrangements afford strategic benefits acrossthe Company’s properties and, in particular, enable the Unrestricted Group toutilize established brands and content, promote brand awareness and increasetraffic and revenue to the properties of the Unrestricted Group. Forcompany-wide consolidated financial reporting, these intercompany transactionsare eliminated in consolidation.

 

The calculation of the Company’s leverage ratio, asrequired under the bank credit facilities agreement for covenant purposes, isdefined as the Company’s consolidated debt divided by the EBITDA of theRestricted Group.  At June 30, 2004, this leverage ratio was approximately5.1 to 1.0. Adjusting for the redemption of the Series J Convertible PreferredStock, the pro forma leverage ratio would be approximately 5.7 times, versusthe permitted maximum of 6.25 times.

 

*Other Arrangements*

 

During2002, the Company’s Board of Directors authorized the exchange of up to$165,000 of the Company’s Exchangeable Preferred Stock for common stock.  As of June 30, 2004, the Company hasexchanged $75,441

 

55

----

 

liquidationvalue of Series D Exchangeable Preferred Stock, Series F Exchangeable PreferredStock and Series H Exchangeable Preferred Stock (carrying value of $73,874) for14,360,306 shares of common stock of the Company.

 

Inaddition, the Company’s Board of Directors authorized the exchange by theCompany of up to $50,000 of Exchangeable Preferred Stock for common stock andthe subsequent repurchase of the common stock issued in connection with theexchange transactions.  As of June 30,2004, the Company has exchanged $25,000 liquidation value of Series DExchangeable Preferred Stock, Series F Exchangeable Preferred Stock and SeriesH Exchangeable Preferred Stock (carrying value of $24,597) for 8,733,842 sharesof common stock of the Company and subsequently repurchased all of the commonstock issued in connection with such exchanges.

 

TheSeries J Convertible Preferred Stock is convertible at the option of the holderafter one year from the date of issuance, into approximately 25,100,000 sharesof the Company’s common stock at a conversion price of $7 per share, subject toadjustment.  Dividends on the Series JConvertible Preferred Stock accrue quarterly at an annual rate of 12.5% and arepayable quarterly in-kind. The Company paid dividends-in-kind of 87,629and 46,407 shares of Series J Convertible Preferred Stock valued at $10,954 and$5,801 during the six and three months ended June 30, 2004, respectively, and74,035 and 37,587 shares of Series J Convertible Preferred Stock valued at$9,254 and $4,698 during the six and three months ended June 30, 2003,respectively.

 

The Company entered into aseries of transactions with the intention to redeem its highest cost of capitalsecurity, the Series J Convertible Preferred Stock, which had an annualpay-in-kind dividend yield of approximately 13%.

 

On May 14, 2004 the Companyissued $175,000 of Senior Floating Rate Notes due 2010 and entered into a new$100,000 term loan C credit facility with a maturity date of December 31,2009.  The Company used the proceeds fromthese transactions to make voluntary pre-payments to the term loans A and Bwith the remainder used to temporarily pay down all outstanding advances underits revolving credit facility.

 

On July 7, 2004, the Companyredeemed all of its outstanding Series J Convertible Preferred Stock,representing an aggregate of 1,424,306 shares for approximately $178,000, usingcash on hand of approximately $33,000 and approximately $145,000 of advancesunder its revolving credit facility.

 

*Contingencies*

 

The Company is involved inordinary and routine litigation incidental to its business.  In the opinion of management, there is nopending legal proceeding that would have a material adverse affect on thecondensed consolidated financial statements of the Company.

 

# **Critical Accounting Policies and Estimates**

 

During the first six months of 2004, there were nosignificant changes related to the Company’s critical accounting policies andestimates as disclosed in the Company’s annual report on Form 10-K for the yearended December 31, 2003.

 

# **Recent Accounting Pronouncements**

 

In2003, the Company adopted an accounting change, as required by the FinancialAccounting Standards Board that impacts year-over-year comparisons of financialresults.  This change is summarizedbelow:

 

*SFAS 150,*“*Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity*”

 

Effective July 1, 2003, theCompany prospectively adopted SFAS 150. SFAS 150 requires the Company to classify as long-term liabilities itsSeries D Exchangeable Preferred Stock, Series F Exchangeable Preferred Stockand Series H Exchangeable Preferred Stock and to reclassify dividends from thispreferred stock as interest expense.  Asa result of the adoption by the Company of SFAS 150, the Series D ExchangeablePreferred Stock, Series F Exchangeable Preferred Stock and Series HExchangeable Preferred Stock are now collectively described as “shares subjectto mandatory redemption” on the accompanying condensed consolidated balancesheets as of June 30, 2004 and December 31, 2003.  Dividends on these shares are now describedas “interest on shares subject to mandatory redemption” and included in lossfrom continuing operations for the six and three months ended June 30, 2004,whereas previously they were presented below net

 

56

----

 

income as preferred stockdividends.  This adoption did not have animpact on income (loss) applicable to common shareholders or income (loss) percommon share for any of the periods presented on the accompanying condensedstatements of consolidated operations.

 

**Impact of Inflation and Other Costs**

 

Theimpact of inflation was immaterial during 2003 and through the first six monthsof 2004. Postage for product distribution and direct mail solicitations is asignificant expense of the Company.  TheCompany uses the U.S. Postal Service for distribution of many of its productsand marketing materials.  There were noincreases in postage rates in 2003 or the first six months of 2004.  In April 2003, President Bush signedlegislation that will hold postal rates stable until at least 2006.  In the past, the effects of inflation onoperating expenses have substantially been offset by PRIMEDIA’s ability toincrease selling prices.  No assurancescan be given that the Company can pass such cost increases through to itscustomers in the future. In addition to pricing actions, the Company iscontinuing to examine all aspects of the manufacturing and purchasing processesto identify ways to offset some of these price increases.  In the first six months of 2004, paper costswere approximately 7% of the Company’s total operating costs and expenses.  The Company’s paper expense decreasedapproximately 1% during the first six months of 2004 as compared to the sameperiod in 2003.  The Company attributesthe decrease in paper expenses to favorable pricing offset by higher volumeusage attributable to product upgrades and increased folio sizes.

 

**Seasonality**

 

TheCompany’s operations are seasonal in nature. Operating results havehistorically been stronger in the second half of the year with generallystrongest results generated in the fourth quarter of the year. The seasonalityof the Company’s business reflects (i) the relationship betweenadvertising purchases and the retail and academic cycles and(ii) subscription promotions and the holiday season. This seasonalitycauses, and will likely continue to cause, a variation in the Company’squarterly operating results. Such variations have an effect on the timing ofthe Company’s cash flows and the reported quarterly results.

 

57

----

 

**Item 3.****  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

Duringthe first six months of 2004, there were no significant changes related to the Company’smarket risk exposure.

 

**Item 4.****  CONTROLS AND PROCEDURES**

 

### ***Disclosure Controls and Procedures***

 

The Company’s management,with the participation of the Company’s Chief Executive Officer, ChiefFinancial Officer and Chief Accounting Officer, has evaluated the effectivenessof the Company’s disclosure controls and procedures as of the end of the periodcovered by this report.  Based on suchevaluation, the Company’s Chief Executive Officer, Chief Financial Officer andChief Accounting Officer have concluded that, as of the end of such period, theCompany’s disclosure controls and procedures are effective in recording,processing, summarizing and reporting, on a timely basis, information requiredto be disclosed by the Company in the reports that it files or submits underthe Securities Exchange Act of 1934, as amended.

 

### ***Internal Control Over Financial Reporting***

 

Duringthe six month period ended June 30, 2004, there have not been any changes inthe Company’s internal control over financial reporting that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

 

58

----

 

**PART II****.  OTHERINFORMATION**

 

**Item 4**.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

 

a)              The Annual Meeting of Shareholders was heldMay 12, 2004.

 

b)             At the meeting, directors, Joseph Y. Bae,David Bell, Beverly C. Chell, Kelly P. Conlin, Timothy D. Dattels, MeyerFeldberg, Perry Golkin, H. John Greeniaus, Henry R. Kravis and Dean B. Nelsonwere elected.

 

c)              Set forth below is a description of the itemsthat were voted upon at such meeting and the number of votes cast for, againstor withheld, plus abstentions and broker non-votes, as applicable, as to eachsuch matter and director.

 

(i)Election of Directors

** **

**Anelection of ten directors was held and the shares so present were voted for asfollows for the election of each of the following:**

** **

| ** **         | ** ** | **Number of  Shares Voted for** | ** ** | **Number of  Shares  Withheld** | ** ** |
|--------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Joseph Y. Bae      |       | 221,505,564                     |       | 26,135,401                      |       |
| David Bell         |       | 244,101,277                     |       | 3,539,688                       |       |
| Beverly C. Chell   |       | 223,527,495                     |       | 24,113,470                      |       |
| Kelly P. Conlin    |       | 224,485,345                     |       | 23,155,620                      |       |
| Timothy D. Dattels |       | 244,100,501                     |       | 3,540,464                       |       |
| Meyer Feldberg     |       | 244,982,093                     |       | 2,658,872                       |       |
| Perry Golkin       |       | 221,237,108                     |       | 26,403,857                      |       |
| H. John Greeniaus  |       | 244,142,014                     |       | 3,498,951                       |       |
| Henry R. Kravis    |       | 215,534,196                     |       | 32,106,769                      |       |
| Dean B. Nelson     |       | 223,926,021                     |       | 23,714,944                      |       |

 

(ii)          Theapproval of Deloitte & Touche LLP as independent auditors for the Companyfor the fiscal year ending December 31, 2004 was ratified with 238,862,262votes for, 2,148,589 votes against and 6,630,114 votes abstaining.

 

59

----

 

**Item 6****. EXHIBITS AND REPORTS ONFORM 8-K**

 

(a)           Exhibits

 
| 31.1   |   | Certification  by Kelly P. Conlin Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                  |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                         |
| 31.2   |   | Certification  by Matthew A. Flynn Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                 |
|   |   |                                                                                                                                         |
| 31.3   |   | Certification  by Robert J. Sforzo Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                 |
|   |   |                                                                                                                                         |
| 32.1   |   | Certification  by Kelly P. Conlin Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002  |
|   |   |                                                                                                                                         |
| 32.2   |   | Certification  by Matthew A. Flynn Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 |
|   |   |                                                                                                                                         |
| 32.3   |   | Certification  by Robert J. Sforzo Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

(b)Reports on Form 8-K during the quarter ended June 30, 2004.

 

The Company furnished aCurrent Report on Form 8-K, dated April 29, 2004, (a) announcing under Item 12thereof the issuance of a press release dated April 29, 2004 regarding itsfinancial results for the first quarter ended March 31, 2004, and (b)furnishing as exhibits under Item 7 thereof a copy of the press release.

 

The Company furnished aCurrent Report on Form 8-K, dated May 5, 2004, (a) announcing under Item 5thereof the issuance of a press release dated May 5, 2004 regarding theCompany’s Senior Floating Rate Notes and (ii) furnishing as an exhibit underItem 7 thereof a copy of the press release.

 

The Company furnished aCurrent Report on Form 8-K, dated May 10, 2004, (a) announcing under Item 5thereof the issuance of a press release dated May 10, 2004 regarding theCompany’s Senior Floating Rate Notes and entering into a term loan creditfacility and (ii) furnishing as an exhibit under Item 7 thereof a copy of thepress release.

 

The Company furnished a CurrentReport on Form 8-K, dated May 14, 2004, (a) announcing under Item 5 thereof theissuance of a press release dated May 14, 2004 regarding the Company’s SeniorFloating Rate Notes and entering into a term loan credit facility and (ii)furnishing as an exhibit under Item 7 thereof a copy of the press release.

 

 

60

----

 

SIGNATURES

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|   |           | PRIMEDIA  Inc.                                                       |                       |   |
|--------|----------------|----------------------------------------------------------------------|----------------------------|--------|
|   |           | (Registrant)                                                         |
|   |           |                                                                 |
|   |           |                                                                 |
| Date:  | August 9, 2004 |                                                                 |   /s/ Kelly P. Conlin |   |
|   |           | (Signature)                                                          |
|   |           | Chief Executive Officer and President  (Principal Executive Officer) |
|   |           |
|        |                |                                                                      |                            |        |  |

 

 
| Date:  | August 9, 2004 |                                                                                         |   /s/ Matthew A. Flynn |   |
|--------|----------------|----------------------------------------------------------------------------------------------|-----------------------------|--------|
|   |           | (Signature)                                                                                  |
|   |           | Senior Vice President, Chief Financial Officer and  Treasurer  (Principal Financial Officer) |

 

 
| Date:  | August 9, 2004 |                                                                                            |   /s/ Robert J. Sforzo |   |
|--------|----------------|-------------------------------------------------------------------------------------------------|-----------------------------|--------|
|   |           | (Signature)                                                                                     |
|   |           | Senior Vice President, Chief Accounting Officer  and Controller  (Principal Accounting Officer) |

 

61

----