** **

**UNITEDSTATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-Q**

** **

----

** **

**QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the quarterly period ended: September 30, 2004**

** **

**Commission file number: 1-11106**

 

**PRIMEDIAInc.**

(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’s telephone number, including areacode           **(212) 745-0100**

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months, and (2) has been subject to such filingrequirements for the past 90 days.

Yes   ý    No   o

 

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

Yes   ý    No   o

 

Number of shares of common stock, par value $.01 per share, of PRIMEDIAInc. outstanding as of October 29, 2004: 260,641,303.

 

 

----

 

**PRIMEDIA Inc.**

** **

**INDEX**

 
| **Part I.   Financial Information:** |                                                                                                                  |
|-----------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------|
|                                                |                                                                                                                  |   |
| Item 1.                                             | Financial  Statements                                                                                                 |   |
|                                                |                                                                                                                  |   |
|                                                | Condensed  Consolidated Balance Sheets  as of September 30, 2004 (Unaudited) and  December 31, 2003                   | 2 |
|                                                |                                                                                                                  |   |
|                                                | Condensed  Statements of Consolidated Operations  (Unaudited) for the three months ended  September 30, 2004 and 2003 | 3 |
|                                                |                                                                                                                  |   |
|                                                | Condensed  Statements of Consolidated Operations  (Unaudited) for the nine months ended  September 30, 2004 and 2003  | 4 |
|                                                |                                                                                                                  |   |
|                                                | Condensed  Statements of Consolidated  Cash Flows (Unaudited) for the nine months  ended September 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                                                           | 62 |
|                                                |                                                                                                                  |   |
| Item 4.                                             | Controls and  Procedures                                                                                              | 62 |
|                                                |                                                                                                                  |   |
| **Part II.   Other Information:**    |                                                                                                                  |
|                                                |                                                                                                                  |   |
| Item 6.                                             | Exhibits                                                                                                              | 63 |
|                                                |                                                                                                                  |   |
|                                                | Signatures                                                                                                            | 65 |

 

----

 

**PRIMEDIA INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                 | ** ** | **September 30, 2004**                               | ** ** | **December 31,  2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                                                 | ** ** | **(Unaudited)**                                      | ** ** | ** **             | ** ** |
| ** **                                                                                                                                                                                                                 | ** ** | **(dollars in thousands, except per share amounts)** | ** ** |
|                                                                                                                                                                                                                       |       |                                                 |       |                   |       |
| **ASSETS**                                                                                                                                                                                                                 |       |                                                 |       |                   |       |
| Current assets:                                                                                                                                                                                                            |       |                                                 |       |                   |       |
| Cash and cash equivalents                                                                                                                                                                                                  |       | $                                                    | 20,033     |                   | $          | 8,685 |   |
| Accounts receivable, net                                                                                                                                                                                                   |       | 183,242                                              |       | 194,080                |       |
| Inventories                                                                                                                                                                                                                |       | 18,916                                               |       | 17,500                 |       |
| Prepaid expenses and other                                                                                                                                                                                                 |       | 33,031                                               |       | 36,059                 |       |
| Assets held for sale                                                                                                                                                                                                       |       | 40,017                                               |       | 31,879                 |       |
| Total current assets                                                                                                                                                                                                       |       | 295,239                                              |       | 288,203                |       |
|                                                                                                                                                                                                                       |       |                                                 |       |                   |       |
| Property and equipment (net of accumulated  depreciation and amortization of $282,770 in 2004 and $280,612 in 2003)                                                                                                        |       | 79,101                                               |       | 110,859                |       |
| Other intangible assets, net                                                                                                                                                                                               |       | 254,338                                              |       | 268,407                |       |
| Goodwill                                                                                                                                                                                                                   |       | 902,232                                              |       | 910,534                |       |
| Other non-current assets                                                                                                                                                                                                   |       | 46,432                                               |       | 58,118                 |       |
| Total Assets                                                                                                                                                                                                               |       | $                                                    | 1,577,342  |                   | $          | 1,636,121 |   |
|                                                                                                                                                                                                                       |       |                                                 |       |                   |       |
| **LIABILITIES AND SHAREHOLDERS’ DEFICIENCY**                                                                                                                                                                          |       |                                                 |       |                   |       |
| Current liabilities:                                                                                                                                                                                                       |       |                                                 |       |                   |       |
| Accounts payable                                                                                                                                                                                                           |       | $                                                    | 82,742     |                   | $          | 78,794 |   |
| Accrued expenses and other                                                                                                                                                                                                 |       | 203,646                                              |       | 213,934                |       |
| Deferred revenues                                                                                                                                                                                                          |       | 167,500                                              |       | 173,607                |       |
| Current maturities of long-term debt                                                                                                                                                                                       |       | 16,222                                               |       | 22,195                 |       |
| Liabilities of businesses held for sale                                                                                                                                                                                    |       | 28,041                                               |       | 16,049                 |       |
| Total current liabilities                                                                                                                                                                                                  |       | 498,151                                              |       | 504,579                |       |
|                                                                                                                                                                                                                       |       |                                                 |       |                   |       |
| Long-term debt                                                                                                                                                                                                             |       | 1,664,617                                            |       | 1,562,441              |       |
| Shares subject to mandatory redemption                                                                                                                                                                                     |       | 474,559                                              |       | 474,559                |       |
| Deferred revenues                                                                                                                                                                                                          |       | 17,692                                               |       | 17,850                 |       |
| Deferred income taxes                                                                                                                                                                                                      |       | 74,288                                               |       | 61,364                 |       |
| Other non-current liabilities                                                                                                                                                                                              |       | 11,195                                               |       | 28,583                 |       |
| Total Liabilities                                                                                                                                                                                                          |       | 2,740,502                                            |       | 2,649,376              |       |
|                                                                                                                                                                                                                       |       |                                                 |       |                   |       |
| Shareholders’ deficiency:                                                                                                                                                                                             |       |                                                 |       |                   |       |
| Series J convertible preferred stock ($.01  par value, 1,319,093 shares issued and outstanding, aggregate liquidation and  redemption values of $164,887 at December 31, 2003)                                             |       | —                                               |       | 164,533                |       |
| Common stock ($.01 par value, 350,000,000  shares authorized at September 30, 2004 and December 31, 2003 and 269,156,873  shares and 268,333,049 shares issued at September 30, 2004 and December 31,  2003, respectively) |       | 2,691                                                |       | 2,683                  |       |
| Additional paid-in capital (including  warrants of $31,690 at September 30, 2004 and December 31, 2003)                                                                                                                    |       | 2,350,754                                            |       | 2,345,152              |       |
| Accumulated deficit                                                                                                                                                                                                        |       | (3,439,767                                           | )          | (3,447,710             | )          |
| Accumulated other comprehensive loss                                                                                                                                                                                       |       | (179                                                 | )          | (176                   | )          |
| Unearned compensation                                                                                                                                                                                                      |       | —                                               |       | (175                   | )          |
| Common stock in treasury, at cost  (8,520,409 shares at September 30, 2004 and 8,610,491 at December 31, 2003)                                                                                                             |       | (76,659                                              | )          | (77,562                | )          |
| Total Shareholders’ Deficiency                                                                                                                                                                                        |       | (1,163,160                                           | )          | (1,013,255             | )          |
|                                                                                                                                                                                                                       |       |                                                 |       |                   |       |
| Total Liabilities and Shareholders’  Deficiency                                                                                                                                                                       |       | $                                                    | 1,577,342  |                   | $          | 1,636,121 |   |

 

Seenotes to condensed consolidated financial statements (unaudited).

 

2

----

 

**PRIMEDIA INC. AND SUBSIDIARIES**

**CONDENSEDSTATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)**

 
| ** **                                                                                                              | ** ** | **Three Months Ended  September 30,**                | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2004**                                             | ** ** | **2003** | ** ** |
| ** **                                                                                                              | ** ** | **(dollars in thousands, except per share amounts)** | ** ** |
|                                                                                                                    |       |                                                 |       |   |   |
| Revenues, net:                                                                                                          |       |                                                 |       |   |   |
| Advertising                                                                                                             |       | $                                                    | 213,165    |   | $ | 202,474 |   |
| Circulation                                                                                                             |       | 70,233                                               |       | 72,679 |   |
| Other                                                                                                                   |       | 40,739                                               |       | 34,937 |   |
| Total revenues, net                                                                                                     |       | 324,137                                              |       | 310,090 |   |
|                                                                                                                    |       |                                                 |       |   |   |
| Operating costs and expenses:                                                                                           |       |                                                 |       |   |   |
| Cost of goods sold                                                                                                      |       | 70,512                                               |       | 68,608 |   |
| Marketing and selling                                                                                                   |       | 67,405                                               |       | 61,466 |   |
| Distribution, circulation and fulfillment                                                                               |       | 53,306                                               |       | 56,842 |   |
| Editorial                                                                                                               |       | 27,788                                               |       | 25,733 |   |
| Other general expenses                                                                                                  |       | 38,177                                               |       | 36,898 |   |
| Corporate administrative expenses  (excluding $1,344 and $770 of non-cash compensation in 2004 and 2003,  respectively) |       | 6,980                                                |       | 6,615 |   |
| Depreciation of property and equipment                                                                                  |       | 8,819                                                |       | 13,763 |   |
| Amortization of intangible assets and other                                                                             |       | 4,452                                                |       | 9,537 |   |
| Non-cash compensation                                                                                                   |       | 1,344                                                |       | 770 |   |
| Provision for severance, closures and  restructuring related costs                                                      |       | 1,926                                                |       | 448 |   |
| Gain on sale of businesses and other, net                                                                               |       | (293                                                 | )          | (706 | ) |
|                                                                                                                    |       |                                                 |       |   |   |
| Operating income                                                                                                        |       | 43,721                                               |       | 30,116 |   |
|                                                                                                                    |       |                                                 |       |   |   |
| Other income (expense):                                                                                                 |       |                                                 |       |   |   |
| Provision for impairment of investments                                                                                 |       | —                                               |       | (1,248 | ) |
| Interest expense                                                                                                        |       | (32,289                                              | )          | (29,884 | ) |
| Interest on shares subject to mandatory  redemption                                                                     |       | (10,945                                              | )          | (11,008 | ) |
| Amortization of deferred financing costs                                                                                |       | (1,334                                               | )          | (1,116 | ) |
| Other income, net                                                                                                       |       | 17,680                                               |       | 519 |   |
|                                                                                                                    |       |                                                 |       |   |   |
| Income (loss) from continuing operations  before income tax expense                                                     |       | 16,833                                               |       | (12,621 | ) |
| Provision for deferred income taxes                                                                                     |       | (4,330                                               | )          | (3,982 | ) |
|                                                                                                                    |       |                                                 |       |   |   |
| Income (loss) from continuing operations                                                                                |       | 12,503                                               |       | (16,603 | ) |
|                                                                                                                    |       |                                                 |       |   |   |
| Discontinued operations (including gain on  sale of businesses, net of $999 and $2,713 in 2004 and 2003, respectively)  |       | (3,763                                               | )          | (22,225 | ) |
|                                                                                                                    |       |                                                 |       |   |   |
| Net income (loss)                                                                                                       |       | 8,740                                                |       | (38,828 | ) |
|                                                                                                                    |       |                                                 |       |   |   |
| Preferred stock dividends and related  accretion, net                                                                   |       | (2,551                                               | )          | (4,845 | ) |
| Income (loss) applicable to common  shareholders                                                                        |       | $                                                    | 6,189      |   | $ | (43,673 | ) |
|                                                                                                                    |       |                                                 |       |   |   |
| Basic and diluted income (loss) per common share:                                                                       |       |                                                 |       |   |   |
| Continuing operations                                                                                                   |       | $                                                    | 0.04       |   | $ | (0.08 | ) |
| Discontinued operations                                                                                                 |       | (0.02                                                | )          | (0.09 | ) |
| Income (loss) applicable to common  shareholders                                                                        |       | $                                                    | 0.02       |   | $ | (0.17 | ) |
|                                                                                                                    |       |                                                 |       |   |   |
| Basic common shares outstanding                                                                                         |       | 260,496,328                                          |       | 259,343,692 |   |
|                                                                                                                    |       |                                                 |       |   |   |
| Diluted common shares outstanding                                                                                       |       | 264,365,201                                          |       | 259,343,692 |   |

 

See notes to condensed consolidated financial statements (unaudited).

 

3

----

 

**PRIMEDIA INC. AND SUBSIDIARIES**

**CONDENSEDSTATEMENTS OF CONSOLIDATED OPERATIONS(UNAUDITED)**

 
| ** **                                                                                                                   | ** ** | **Nine Months Ended  September 30,**                 | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                                   | ** ** | **2004**                                             | ** ** | **2003** | ** ** |
| ** **                                                                                                                   | ** ** | **(dollars in thousands, except per share amounts)** | ** ** |
|                                                                                                                         |       |                                                 |       |   |   |
| Revenues, net:                                                                                                               |       |                                                 |       |   |   |
| Advertising                                                                                                                  |       | $                                                    | 631,190    |   | $ | 617,347 |   |
| Circulation                                                                                                                  |       | 208,785                                              |       | 214,445 |   |
| Other                                                                                                                        |       | 133,192                                              |       | 122,998 |   |
| Total revenues, net                                                                                                          |       | 973,167                                              |       | 954,790 |   |
|                                                                                                                         |       |                                                 |       |   |   |
| Operating costs and expenses:                                                                                                |       |                                                 |       |   |   |
| Cost of goods sold                                                                                                           |       | 205,486                                              |       | 206,308 |   |
| Marketing and selling                                                                                                        |       | 202,975                                              |       | 196,154 |   |
| Distribution, circulation and fulfillment                                                                                    |       | 165,993                                              |       | 168,703 |   |
| Editorial                                                                                                                    |       | 81,443                                               |       | 77,741 |   |
| Other general expenses                                                                                                       |       | 120,593                                              |       | 117,034 |   |
| Corporate administrative expenses  (excluding $4,830 and $2,793 of non-cash compensation in 2004 and 2003,  respectively)    |       | 20,566                                               |       | 20,842 |   |
| Depreciation of property and equipment                                                                                       |       | 27,653                                               |       | 35,116 |   |
| Amortization of intangible assets and other                                                                                  |       | 14,999                                               |       | 29,778 |   |
| Severance related to separated senior  executives                                                                            |       | 658                                                  |       | 5,576 |   |
| Non-cash compensation                                                                                                        |       | 4,830                                                |       | 2,793 |   |
| Provision for severance, closures and  restructuring related costs                                                           |       | 8,719                                                |       | 3,348 |   |
| Provision for unclaimed property                                                                                             |       | 5,500                                                |       | — |   |
| (Gain) loss on sale of businesses and  other, net                                                                            |       | (243                                                 | )          | 625 |   |
|                                                                                                                         |       |                                                 |       |   |   |
| Operating income                                                                                                             |       | 113,995                                              |       | 90,772 |   |
|                                                                                                                         |       |                                                 |       |   |   |
| Other income (expense):                                                                                                      |       |                                                 |       |   |   |
| Provision for impairment of investments                                                                                      |       | (804                                                 | )          | (8,975 | ) |
| Interest expense                                                                                                             |       | (90,053                                              | )          | (94,443 | ) |
| Interest on shares subject to mandatory  redemption                                                                          |       | (32,835                                              | )          | (11,008 | ) |
| Amortization of deferred financing costs                                                                                     |       | (3,653                                               | )          | (2,360 | ) |
| Other income (expense), net                                                                                                  |       | 17,793                                               |       | (3,283 | ) |
|                                                                                                                         |       |                                                 |       |   |   |
| Income (loss) from continuing operations  before income tax expense                                                          |       | 4,443                                                |       | (29,297 | ) |
| Provision for deferred income taxes                                                                                          |       | (13,054                                              | )          | (11,033 | ) |
|                                                                                                                         |       |                                                 |       |   |   |
| Loss from continuing operations                                                                                              |       | (8,611                                               | )          | (40,330 | ) |
|                                                                                                                         |       |                                                 |       |   |   |
| Discontinued operations (including gain on  sale of businesses, net of $43,299 and $105,310 in 2004 and 2003,  respectively) |       | 30,576                                               |       | 70,160 |   |
|                                                                                                                         |       |                                                 |       |   |   |
| Net income                                                                                                                   |       | 21,965                                               |       | 29,830 |   |
|                                                                                                                         |       |                                                 |       |   |   |
| Preferred stock dividends and related  accretion, net                                                                        |       | (13,505                                              | )          | (36,856 | ) |
| Income (loss) applicable to common  shareholders                                                                             |       | $                                                    | 8,460      |   | $ | (7,026 | ) |
|                                                                                                                         |       |                                                 |       |   |   |
| Basic and diluted income (loss) per common  share:                                                                           |       |                                                 |       |   |   |
| Continuing operations                                                                                                        |       | $                                                    | (0.09      | ) | $ | (0.30 | ) |
| Discontinued operations                                                                                                      |       | 0.12                                                 |       | 0.27 |   |
| Income (loss) applicable to common  shareholders                                                                             |       | $                                                    | 0.03       |   | $ | (0.03 | ) |
|                                                                                                                         |       |                                                 |       |   |   |
| Basic and diluted common shares outstanding                                                                                  |       | 260,232,692                                          |       | 259,078,166 |   |

 

Seenotes to condensed consolidated financial statements (unaudited).

 

4

----

 

**PRIMEDIA INC. AND SUBSIDIARIES**

**CONDENSEDSTATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)**

 
| ** **                                                                                       | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                       | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| ** **                                                                                       | ** ** | **(dollars in thousands)**          | ** ** |
|                                                                                             |       |                                |       |   |   |
| **Operating activities:**                                                                        |       |                                |       |   |   |
| Net income                                                                                       |       | $                                   | 21,965     |   | $ | 29,830 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities                |       | 11,333                              |       | 41,172 |   |
| Changes in operating assets and liabilities                                                      |       | 3,034                               |       | (27,031 | ) |
| Net cash provided by operating activities                                                        |       | 36,332                              |       | 43,971 |   |
|                                                                                             |       |                                |       |   |   |
| **Investing activities:**                                                                        |       |                                |       |   |   |
| Additions to property, equipment and other,  net                                                 |       | (23,500                             | )          | (26,523 | ) |
| Proceeds from sale of businesses and other                                                       |       | 70,277                              |       | 183,741 |   |
| Payments for businesses acquired, net of  cash acquired                                          |       | (1,358                              | )          | (7,722 | ) |
| Proceeds from sale of (payments for) other  investments                                          |       | 17,399                              |       | (3,183 | ) |
| Net cash provided by investing activities                                                        |       | 62,818                              |       | 146,313 |   |
|                                                                                             |       |                                |       |   |   |
| **Financing activities:**                                                                        |       |                                |       |   |   |
| Borrowings under credit agreements                                                               |       | 386,700                             |       | 329,400 |   |
| Repayments of borrowings under credit  agreements                                                |       | (461,700                            | )          | (382,312 | ) |
| 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                                                          |       | 1,028                               |       | 1,120 |   |
| Purchases of common stock in connection  with the exchange of exchangeable preferred stock       |       | —                              |       | (19,367 | ) |
| Redemption of Series J Convertible  Preferred Stock                                              |       | (178,038                            | )          | — |   |
| Dividends paid to preferred stock  shareholders                                                  |       | —                              |       | (33,928 | ) |
| Deferred financing costs paid                                                                    |       | (5,686                              | )          | (6,288 | ) |
| Capital lease obligations                                                                        |       | (4,920                              | )          | (3,173 | ) |
| Other                                                                                            |       | (186                                | )          | (233 | ) |
| Net cash used in financing activities                                                            |       | (87,802                             | )          | (190,456 | ) |
|                                                                                             |       |                                |       |   |   |
| Increase (decrease) in cash and cash  equivalents                                                |       | 11,348                              |       | (172 | ) |
| Cash and cash equivalents, beginning of  period                                                  |       | 8,685                               |       | 18,553 |   |
| Cash and cash equivalents, end of period                                                         |       | $                                   | 20,033     |   | $ | 18,381 |   |
|                                                                                             |       |                                |       |   |   |
| **Supplemental information:**                                                                    |       |                                |       |   |   |
| Cash interest paid                                                                               |       | $                                   | 64,307     |   | $ | 75,746 |   |
| Cash interest paid on shares subject to  mandatory redemption                                    |       | $                                   | 32,835     |   | $ | 11,008 |   |
| Cash taxes paid, net of refunds                                                                  |       | $                                   | 171        |   | $ | 441 |   |
| Accretion in carrying value of exchangeable  and convertible preferred stock                     |       | $                                   | 353        |   | $ | 781 |   |
| Payments of dividends-in-kind on Series J  Convertible Preferred Stock                           |       | $                                   | 13,152     |   | $ | 14,099 |   |
| 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 |   |

 

Seenotes to condensed consolidated financial statements (unaudited).

 

5

----

 

**PRIMEDIA Inc.**

**NOTES TOCONDENSED****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, is hereinreferred 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 September 30, 2004 and December 31,2003 and the consolidated results of operations of the Company for the threeand nine months ended September 30, 2004 and 2003, and consolidated cash flowsof the Company for the nine month periods ended September 30, 2004 and 2003 andall adjustments (consisting of normal recurring accruals) considered necessaryfor a fair presentation have been included. All intercompany accounts andtransactions have been eliminated in consolidation. These statements should beread in conjunction with the Company’s annual consolidated financial statementsand related notes for the year ended December 31, 2003, which are included inthe Company’s Annual Report on Form 10-K for the year ended December 31, 2003(which was updated to reflect the reclassification of certain businesses asdiscontinued operations on a Current Report on Form 8-K dated September 13,2004).  The operating results for thethree and nine month periods ended September 30, 2004 are not necessarilyindicative of the results that may be expected for a full year. Certain amountsin the prior periods’ condensed consolidated financial statements and relatednotes have been reclassified to conform to the presentation as of and for thethree and nine month periods ended September 30, 2004.

 

StockBased Compensation

 

The Company has a stock-based employee compensation plan.Effective January 1, 2003, the Company adopted Statement of FinancialAccounting Standards (“SFAS”) No. 123, “Accounting for Stock-BasedCompensation”, as amended by SFAS 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure”, using the prospective method. Uponadoption, the Company began expensing the fair value of stock-basedcompensation for all grants, modifications or settlements made on or afterJanuary 1, 2003.  The adoption ofSFAS 123 decreased the income from continuing operations for the threemonths ended September 30, 2004 by $604 and increased the loss from continuingoperations for the nine months ended September 30, 2004 by $1,972,respectively. The impact of the adoption of SFAS 123 was not significant forthe three and nine months ended September 30, 2003.

 

6

----

 

Thefollowing table illustrates the effect on net income (loss) applicable tocommon shareholders and basic and diluted income (loss) per common share if theCompany had applied the fair value recognition provisions of SFAS 123 to allstock-based employee compensation grants:

 
| ** **                                                                                                       | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                       | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Reported net income (loss) applicable to  common shareholders                                                    |       | $                                     | 6,189      |                                 | $          | (43,673 | ) | $ | 8,460 |   | $ | (7,026 | ) |
|                                                                                                             |       |                                  |       |                                 |       |   |   |   |   |
| Add: Stock-based employee compensation  expense included in reported net income (loss)                           |       | 604                                   |       | 471                                  |       | 2,147 |   | 1,784 |   |
|                                                                                                             |       |                                  |       |                                 |       |   |   |   |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards |       | (3,015                                | )          | (3,291                               | )          | (9,453 | ) | (16,864 | ) |
| Pro forma net income (loss) applicable to  common shareholders                                                   |       | $                                     | 3,778      |                                 | $          | (46,493 | ) | $ | 1,154 |   | $ | (22,106 | ) |
|                                                                                                             |       |                                  |       |                                 |       |   |   |   |   |
| Per Common Share:                                                                                                |       |                                  |       |                                 |       |   |   |   |   |
| Reported basic and diluted income (loss)                                                                         |       | $                                     | 0.02       |                                 | $          | (0.17 | ) | $ | 0.03 |   | $ | (0.03 | ) |
| Pro forma basic and diluted income (loss)                                                                        |       | $                                     | 0.01       |                                 | $          | (0.18 | ) | $ | 0.00 |   | $ | (0.09 | ) |

 

Proforma information regarding net income and earnings per share is required bySFAS 123, and has been determined as if the Company had accounted for itsemployee stock options granted on or before December 31, 2002 under the fairvalue method of SFAS 123. The fair value of these options was estimated atthe date of grant using the Black-Scholes pricing model. For the three monthsended September 30, 2004 and 2003, respectively, the following weighted-averageassumptions were used: risk-free interest rates of 2.97 % and 4.61%; dividendyields of 0.0% and 0.0%; volatility factors of the expected market price of theCompany’s common stock of 82% and 79%, and a weighted-average expected life ofthe options of three and five years. The following weighted-average assumptionswere used for options granted in the nine months ended September 30, 2004 and2003, respectively: risk-free interest rates of 2.85% and 4.57%; dividendyields of 0.0% and 0.0%; volatility factors of the expected market price of theCompany’s common stock of 84% and 79%, and a weighted-average expected life ofthe options of three and five years.  Theestimated fair value of options granted during the three months ended September30, 2004 and 2003 was $88 and $454, respectively, and $406 and $472 during thenine months ended September 30, 2004 and 2003, respectively.

 

TheBlack-Scholes pricing model was developed for use in estimating the fair valueof traded options which have no vesting restrictions and are fullytransferable. In addition, option valuation models require the input of highlysubjective assumptions including the expected stock price volatility. Becausethe Company’s employee stock options have characteristics significantlydifferent from those of traded options, and because changes in the subjectiveinput assumptions can materially affect the fair value estimate, inmanagement’s opinion, the existing models do not necessarily provide a reliablesingle measure of the fair value of its employee stock options.

 

RecentAccounting Pronouncement 

 

Inaccordance with the prospective adoption,**effectiveJuly 1, 2003, of SFAS No. 150, “Accounting for Certain Financial Instrumentswith Characteristics of both Liabilities and Equity”, the Company classified aslong-term liabilities its Series D Exchangeable Preferred Stock, Series FExchangeable Preferred Stock and Series H Exchangeable Preferred Stock(collectively the “Exchangeable Preferred Stock”). Additionally, dividends from

 

7

----

 

thisExchangeable Preferred Stock are classified as interest expense.

 

As a result of the adoption of SFAS 150, the ExchangeablePreferred Stock are now collectively described as “shares subject to mandatoryredemption” on the accompanying condensed consolidated balance sheets as ofSeptember 30, 2004 and December 31, 2003. Dividends on these shares, subsequent to the adoption of SFAS 150, arenow described as “interest on shares subject to mandatory redemption” and areincluded in income (loss) from continuing operations, whereas previously theywere presented below net income (loss) as preferred stock dividends. Theadoption of SFAS 150 decreased the results from continuing operations for thethree and nine months ended September 30, 2004 by $11,281 and $33,843,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.  As a result of SFAS 150 being adopted duringthe third quarter of 2003, loss from continuing operations increased $11,344for the three and nine months ended September 30, 2003.  If SFAS 150 was retroactively adopted on January1, 2003, loss from continuing operations for the nine months ended September30, 2003 would have increased by $22,670. This adoption did not have an impacton income (loss) applicable to common shareholders or basic and diluted income(loss) per common share for any of the periods presented on the accompanyingcondensed statements of consolidated operations.

 

2.** **Divestitures and Investment Sale

 

*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 allperiods presented. Proceeds from the sale of $55,000, subject to standardpost-closing adjustments, were used to pay down the Company’s revolving creditborrowings under its bank credit facilities with JPMorgan Chase Bank, Bank ofAmerica, N.A., The Bank of New York, and The Bank of Nova Scotia, as agents(the “bank credit facilities”). Additionally, the Company finalized a workingcapital settlement with 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 April2004, the Company sold About Web Services, the Web hosting business of AboutInc., part of the Enthusiast Media segment, the results of which have beenclassified as discontinued operations for all periods presented.  Proceeds from the sale were approximately$12,200, subject to standard post-closing adjustments.

 

Additionally, in the second quarter of 2004, the Companybegan evaluating strategic partnerships regarding the *Folio*, *CirculationManagement* and *AmericanDemographics* properties in the Business Information segment.  In August 2004, *Folio*and*CirculationManagement* were contributed to a venture with a third party, underwhich the Company will not have a significant continuing involvement in theoperations and the Company’s share of associated cash flows is not expected tobe significant.  The operating results ofthese properties have been classified as discontinued operations for all periodspresented.

 

In September 2004, the Company announced that it wouldexplore strategic options regarding its Workplace Learning division and isactively pursuing the sale of this division, excluding the Interactive MedicalNetwork (“IMN”), in the Education segment (formerly Education and Training,renamed to reflect the classification of

 

8

----

 

Workplace Learning as discontinued operations). The Companybelieves that there will not be a material loss relating to the sale of thisdivision.  Workplace Learning providesintegrated learning solutions for more than eight million professionals in theindustrial, healthcare, banking, automotive, fire and emergency, government andlaw, and security markets.  The operatingresults of this division, excluding IMN, have been classified as discontinuedoperations for all periods presented and the related assets and liabilitieshave been classified as held for sale as of September 30, 2004.

 

Theresults of the Company’s divestiture of certain properties in 2004 and 2003have been included in discontinued operations on the accompanying condensedstatements of consolidated operations. Discontinued operations include revenues of $10,002 and $35,166 for thethree months ended September 30, 2004 and 2003, respectively, and $35,052 and$142,059 for the nine months ended September 30, 2004 and 2003, respectively.

 

*Balance Sheet-Held for Sale*

 

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

 
| ** **                              | ** ** | **September  30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------------------------------|------------|--------------------------|------------|------------------------|------------|
|                                    |       |                     |       |                   |       |
| **ASSETS**                              |       |                     |       |                   |       |
| Accounts receivable, net                |       | $                        | 3,772      |                   | $          | 8,010 |   |
| Inventories                             |       | 1,803                    |       | 391                    |       |
| Prepaid expenses and other              |       | 1,018                    |       | 907                    |       |
| Property and equipment, net             |       | 19,097                   |       | 297                    |       |
| Other intangible assets, net            |       | —                   |       | 14,056                 |       |
| Goodwill                                |       | —                   |       | 6,747                  |       |
| Other non-current assets.               |       | 14,327                   |       | 1,471                  |       |
| Assets held for sale                    |       | $                        | 40,017     |                   | $          | 31,879 |   |
|                                    |       |                     |       |                   |       |
| **LIABILITIES**                         |       |                     |       |                   |       |
| Accounts payable                        |       | $                        | 1,963      |                   | $          | 3,115 |   |
| Accrued expenses and other              |       | 6,129                    |       | 11,791                 |       |
| Deferred revenues-current               |       | 5,855                    |       | 1,110                  |       |
| Other non-current liabilities           |       | 14,094                   |       | 33                     |       |
| Liabilities of businesses held for sale |       | $                        | 28,041     |                   | $          | 16,049 |   |

 

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

 

*Investment Sale*

 

InSeptember 2004, the Company sold all of its equity investment in approximately36% of the stock of All About Japan, Inc. for proceeds of approximately$16,700.  The investment had no carryingvalue at the time of the sale due to the recording of historical losses as wellas impairment charges recorded in 2001. The Company recognized a gain on the sale of approximately $16,700recorded in other income (expense), net on the accompanying condensedstatements of consolidated operations.

 

9

----

 

3.  Accounts Receivable, Net

 

Accountsreceivable, net, consisted of the following:

 
| ** **                            | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------|------------|-------------------------|------------|------------------------|------------|
| Accounts receivable                   |       | $                       | 197,664    |                   | $          | 212,144 |   |
| Less: Allowance for doubtful accounts |       | 11,459                  |       | 10,798                 |       |
| Allowance for returns and rebates     |       | 2,963                   |       | 7,266                  |       |
|                                  |       | $                       | 183,242    |                   | $          | 194,080 |   |

 

4.  Inventories

 

Inventoriesconsisted of the following:

 
| ** **      | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------|------------|-------------------------|------------|------------------------|------------|
| Finished goods  |       | $                       | 6,969      |                   | $          | 8,008 |   |
| Work in process |       | 118                     |       | 230                    |       |
| Raw materials   |       | 11,829                  |       | 9,262                  |       |
|            |       | $                       | 18,916     |                   | $          | 17,500 |   |

 

5.  Goodwill, Other Intangible Assetsand 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 nine months ended September 30, 2004, there were no eventsor changes 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 $4,318 and $3,974 forthe three months ended September 30, 2004 and 2003, respectively, and $12,924and $10,624, for the nine months ended September 30, 2004 and 2003,respectively, related to the increase in the Company’s net deferred taxliability for the tax effect of the net increase in the difference between thebook and tax basis of the 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

 

10

----

 

Companyexpects that it will record a total of approximately $4,500 to increasedeferred tax liabilities during the remaining three months of 2004.

 

Changesin the carrying amount of goodwill for the nine months ended September 30,2004, by operating segment, are as follows: 

 

| ** **                                                         | ** ** | **Enthusiast  Media** | ** ** | **Consumer  Guides** | ** ** | **Business  Information** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|---------------------------|------------|-----------|------------|
|                                                               |       |                  |       |                 |       |                      |       |      |       |
| Balance as of January 1, 2004                                 |       | $                     | 695,340    |                 | $          | 95,808                    |       | $         | 119,386    |   | $ | 910,534 |   |
| Purchase price allocation adjustments per  final valuation reports |       | —                |       | 193                  |       | —                    |       | 193       |       |
| Goodwill written off related to the sale of  businesses            |       | (6,776                | )          | —               |       | (1,719                    | )          | (8,495    | )          |
| Balance as of September 30, 2004                                   |       | $                     | 688,564    |                 | $          | 96,001                    |       | $         | 117,667    |   | $ | 902,232 |   |

 

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

 
| ** **                                | ** ** | ** **           | ** ** | **September 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                 |       | 346,660                     |       | 321,326                       |       | 25,334 |   | 348,346 |   | 315,860 |   | 32,486 |   |
|                                      |       |                 |       |                        |       |                          |       |   |   |   |   |   |   |   |   |
| Non-compete agreements                    |       | 1-10                 |       | 136,226                     |       | 134,689                       |       | 1,537 |   | 137,829 |   | 134,093 |   | 3,736 |   |
|                                      |       |                 |       |                        |       |                          |       |   |   |   |   |   |   |   |   |
| Trademark license agreements              |       | 2-15                 |       | 2,984                       |       | 2,913                         |       | 71 |   | 2,984 |   | 2,899 |   | 85 |   |
|                                      |       |                 |       |                        |       |                          |       |   |   |   |   |   |   |   |   |
| Copyrights                                |       | 3-20                 |       | 17,940                      |       | 17,267                        |       | 673 |   | 20,550 |   | 19,609 |   | 941 |   |
|                                      |       |                 |       |                        |       |                          |       |   |   |   |   |   |   |   |   |
| Databases                                 |       | 2-12                 |       | 9,353                       |       | 8,921                         |       | 432 |   | 9,353 |   | 8,627 |   | 726 |   |
|                                      |       |                 |       |                        |       |                          |       |   |   |   |   |   |   |   |   |
| Advertiser lists                          |       | 5-20                 |       | 135,978                     |       | 125,728                       |       | 10,250 |   | 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 |   | — |   |
|                                      |       |                 |       |                        |       |                          |       |   |   |   |   |   |   |   |   |
|                                      |       |                 |       | $                           | 689,804    |                          | $          | 651,507 |   | $ | 38,297 |   | $ | 696,267 |   | $ | 643,999 |   | $ | 52,268 |   |

 

11

----

 

Intangibleassets not subject to amortization had a carrying value of $216,041 and$216,139 at September 30, 2004 and December 31, 2003, respectively, andconsisted primarily of trademarks. Amortization expense for intangible assetsstill subject to amortization was $4,098 and $7,603 for the three months endedSeptember 30, 2004 and 2003, respectively, and $14,104 and $24,161 for the ninemonths ended September 30, 2004 and 2003, respectively.  Amortization of deferred wiring costs of $354and $1,934 for the three months ended September 30, 2004 and 2003,respectively, and $895 and $5,617 for the nine months ended September 30, 2004and 2003, respectively, has also been included in amortization of intangibleassets and other on the accompanying condensed statements of consolidatedoperations. At September 30, 2004, estimated future amortization expense ofintangible assets still subject to amortization, excluding deferred wiringcosts, is as follows: approximately $4,000 for the remaining three months of2004 and approximately $11,000, $7,000, $5,000 and $4,000 for 2005, 2006, 2007and 2008, respectively.

 

6.  Long-term Debt

 

Long-termdebt consisted of the following:

 
| ** **                                 | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| Borrowings under bank credit facilities    |       | $                       | 484,906    |                   | $          | 559,906 |   |
| 75/8% Senior Notes  Due 2008               |       | 225,545                 |       | 225,443                |       |
| 87/8% Senior Notes  Due 2011               |       | 470,245                 |       | 469,820                |       |
| 8% Senior Notes Due 2013                   |       | 300,000                 |       | 300,000                |       |
| Senior Floating Rate Notes Due 2010        |       | 175,000                 |       | —                 |       |
|                                       |       | 1,655,696               |       | 1,555,169              |       |
| Obligation under capital leases            |       | 25,143                  |       | 29,467                 |       |
|                                       |       | 1,680,839               |       | 1,584,636              |       |
| Less: Current maturities of long-term debt |       | 16,222                  |       | 22,195                 |       |
|                                       |       | $                       | 1,664,617  |                   | $          | 1,562,441 |   |

 

*$175,000 Senior Floating Rate Notes Due2010 and $100,000 Term Loan C Credit Facility Offerings*

 

On May14, 2004, the Company issued $175,000 principal amount of Senior Floating RateNotes Due 2010 (the “Senior Floating Rate Notes”), and entered into a new$100,000 term loan C credit facility with a maturity date of December 31,2009.  The Senior Floating Rate Notesbear interest equal to the three-month LIBOR plus 5.375% per year and the termloan C at LIBOR plus 4.375% per year. The Company applied the combined net proceeds from the Senior FloatingRate Notes offering and the term loan C credit facility to prepay $30,000 ofoutstanding term loan A commitments and $120,000 of term loan B commitments,with the remainder used to temporarily pay down all outstanding advances underthe revolving credit facility.  Thepurpose of these borrowings was to redeem the Company’s Series J ConvertiblePreferred Stock (see Note 7 for further discussion).

 

*Offering and Amendment to the Company’sBank Credit Facilities*

 

In connection with the offering of the Senior Floating RateNotes, the Company entered into an amendment to its bank credit facilities thatchanged the 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

 

12

----

 

interest coverage ratio, as defined in the bank creditfacilities, at 2.25 to 1 through maturity. The minimum fixed charge coverageratio, as defined, remains unchanged at 1.05 to 1 through maturity. The Companyis in compliance with all of the financial and operating covenants of itsfinancing arrangements.

 

With theexception of the term loan B and the term loan C, the amounts borrowed bearinterest, at the Company’s option, at either the base rate plus an applicablemargin ranging from 0.125% to 1.5% or LIBOR plus an applicable margin rangingfrom 1.125% to 2.5%. The term loan B bears interest at the base rate plus 1.75%or LIBOR plus 2.75%.  The term loan Cbears interest at the base rate plus 3.375% or LIBOR plus 4.375%. At September30, 2004 and December 31, 2003, the weighted average variable interest rate onall outstanding borrowings under the bank credit facilities was 4.3% and 3.6%,respectively.

 

**7.**  Series J Convertible Preferred Stock

** **

On July7, 2004, the Company redeemed all of its outstanding Series J ConvertiblePreferred Stock, representing an aggregate of 1,424,306 shares forapproximately $178,000, using cash on hand of approximately $33,000 and$145,000 of advances under its revolving credit facility.

 

As of December31, 2003, the Company had $164,533 of Series J Convertible Preferred Stockoutstanding. The Company paid dividends in kind of 17,584 and 105,213 shares ofSeries J Convertible Preferred Stock valued at $2,198 and $13,152 during thethree and nine months ended September 30, 2004, respectively, and 38,761 and112,796 shares of Series J Convertible Preferred Stock valued at $4,845 and$14,099 during the three and nine months ended September 30, 2003,respectively.

 

8.  Common Stock and Related Options 

 

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

 
| **Range of  Exercise Prices** | ** ** | **Number  Outstanding at  9/30/04** | ** ** | **Number  Exercisable at  9/30/04** | ** ** | **Weighted  Average  Remaining  Contractual Life** | ** ** | **Weighted  Average  Exercise Price  of Outstanding  Options** | ** ** | **Weighted  Average  Exercise Price  of Exercisable  Options** | ** ** |
|-------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
|                          |       |                                |       |                                |       |                                               |       |                                                           |       |                                                           |       |
| $0.08 -  $0.43                |       | 61,391                              |       | 61,391                              |       | 3                                                  |       | $                                                              | 0.28       |                                                           | $          | 0.28 |   |
| $1.01 -  $1.80                |       | 4,520                               |       | 3,645                               |       | 6                                                  |       | 1.45                                                           |       | 1.48                                                           |       |
| $1.85 -  $1.98                |       | 953,236                             |       | 539,368                             |       | 6                                                  |       | 1.85                                                           |       | 1.85                                                           |       |
| $2.02 -  $2.99                |       | 2,698,500                           |       | 747,875                             |       | 5                                                  |       | 2.82                                                           |       | 2.77                                                           |       |
| $3.09 -  $3.65                |       | 2,072,750                           |       | 36,375                              |       | 7                                                  |       | 3.09                                                           |       | 3.19                                                           |       |
| $4.00 -  $5.95                |       | 7,156,077                           |       | 5,601,265                           |       | 6                                                  |       | 4.73                                                           |       | 4.77                                                           |       |
| $6.00 -  $9.83                |       | 4,206,545                           |       | 2,809,206                           |       | 6                                                  |       | 6.82                                                           |       | 7.05                                                           |       |
| $10.13 -  $19.81              |       | 9,079,154                           |       | 8,762,380                           |       | 5                                                  |       | 13.40                                                          |       | 13.29                                                          |       |
| $20.00 -  $27.13              |       | 147,198                             |       | 146,613                             |       | 5                                                  |       | 25.39                                                          |       | 25.40                                                          |       |
| $34.17 -  $36.52              |       | 11,194                              |       | 11,194                              |       | 5                                                  |       | 34.55                                                          |       | 34.55                                                          |       |
| Total                         |       | 26,390,565                          |       | 18,719,312                          |       | 6                                                  |       | 7.74                                                           |       | 9.10                                                           |       |
|                               |            |                                     |            |                                     |            |                                                    |            |                                                                |            |                                                                |            |  |  |

 

13

----

 

9.  Non-Cash Compensation

 
| ** **                                                                                                                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                             | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Restricted stock (1)                                                                                                                   |       | $                                     | 740        |                                 | $          | 41 |   | $ | 2,683 |   | $ | 88 |   |
| Stock options (2)                                                                                                                      |       | 604                                   |       | —                               |       | 1,972 |   | — |   |
| Amortization of the intrinsic value of  unvested “in-the-money” options issued in connection with the About  acquisition (3) |       | —                                |       | 259                                  |       | 175 |   | 1,025 |   |
| Restricted stock and stock options-About  (4)                                                                                          |       | —                                |       | 470                                  |       | — |   | 1,680 |   |
| Total                                                                                                                                  |       | $                                     | 1,344      |                                 | $          | 770 |   | $ | 4,830 |   | $ | 2,793 |   |

 

----

(1)The Company recognized non-cash compensation charges related to the Company’sgrant of shares of restricted common stock to certain executives during 2003,as well as grants of shares of restricted common stock to certain employees in2003 and 2004 in exchange for their options in the Company’s Internetsubsidiaries of $740 and $41 during the three months ended September 30, 2004and 2003, respectively, and $2,683 and $88 during the nine months endedSeptember 30, 2004 and 2003, respectively. These grants were valued at the dateof grant and are being expensed ratably over their related vesting periods.

 

(2) As a result of the adoption of SFAS 123 effectiveJanuary 1, 2003, the Company recorded a non-cash compensation charge of $604and $1,972 for the three and nine months ended September 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 three and nine months ended September 30, 2003.

 

(3)In connection with the acquisition of About in 2001, the Company recordedcharges related to the amortization of the intrinsic value of unvested “in themoney” options of $259 for the three months ended September 30, 2003 and $175and $1,025 for the nine months ended September 30, 2004 and 2003, respectively.** **As of March 31, 2004, these options werefully vested.

 

(4)The Company recorded charges related to the vesting of certain restricted stockand stock options granted in connection with the acquisition of About in 2001of $470 and $1,680 for the three and nine months ended September 30, 2003,respectively.

 

10.  Senior Executives Severance and Provision forSeverance, Closures and Restructuring Related Costs

 

*Senior Executives Severance*

 

Severance related to the finalization of the separationagreements of the former Chief Executive Officer and the former President andInterim Chief Executive Officer were $0 and $658 for the three and nine monthsended September 30, 2004, respectively, and $0 and $5,576 for the three andnine months ended September 30, 2003, respectively.

 

*Provision for Severance, Closures and Restructuring RelatedCosts*

 

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

 

14

----

 

Details of the initiativesimplemented and the payments made in furtherance of these plans during thenine-months ended September 30, 2004 and 2003 are presented in the followingtables:

 
| ** **                                        | ** ** | **Liability as of  January 1,  2004** | ** ** | **Net Provision  for the Nine  Months Ended  September 30,  2004** | ** ** | **Payments during  the Nine  Months Ended  September 30,  2004** | ** ** | **Liability as of  September  30, 2004** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|------------------------------------------|------------|
| Severance and closures:                           |       |                                  |       |                                                               |       |                                                             |       |                                     |       |
| Employee-related termination costs                |       | $                                     | 4,913      |                                                               | $          | 1,885                                                            |       | $                                        | (4,155     | ) | $ | 2,643 |   |
| Termination of leases related to office  closures |       | 37,056                                |       | 6,834                                                              |       | (6,445                                                           | )          | 37,445                                   |       |
| Total severance and closures                      |       | $                                     | 41,969     | (1)                                                                | $          | 8,719                                                            | (2)        | $                                        | (10,600    | ) | $ | 40,088 |   |

 
| ** **                                        | ** ** | **Liability as of  January 1,  2003** | ** ** | **Net Provision  for the Nine  Months Ended  September 30,  2003** | ** ** | **Payments during  the Nine  Months Ended  September 30,  2003** | ** ** | **Liability as of  September 30,  2003** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|------------------------------------------|------------|
| Severance and closures:                           |       |                                  |       |                                                               |       |                                                             |       |                                     |       |
| Employee-related termination costs                |       | $                                     | 5,100      |                                                               | $          | 3,061                                                            |       | $                                        | (5,257     | ) | $ | 2,904 |   |
| Termination of contracts                          |       | 617                                   |       | 16                                                                 |       | (114                                                             | )          | 519                                      |       |
| Termination of leases related to office  closures |       | 41,626                                |       | 271                                                                |       | (5,614                                                           | )          | 36,283                                   |       |
| Total severance and closures                      |       | $                                     | 47,343     | (1)                                                                | $          | 3,348                                                            | (2)        | $                                        | (10,985    | ) | $ | 39,706 |   |

 

----

(1)   Reduced for liabilities relating todiscontinued operations totaling $1,256 and $2,091 at January 1, 2004 and 2003,respectively.

(2)   Adjusted to exclude net provisions related todiscontinued operations totaling $388 and $883 for the nine months endedSeptember 30, 2004 and 2003, respectively.

 

Theremaining costs, comprised primarily of real estate lease commitments for spacethat the Company no longer occupies, are expected to be paid through 2015.  To reduce the lease related costs, theCompany is aggressively pursuing subleases of its available office space, andmost have been sublet. These leases have been recorded at their net presentvalue amounts 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.

 

Asa result of the implementation of these plans, the Company has closed andconsolidated, to date, 23 office locations and has notified a total of 2,042individuals that they would be terminated under these plans.  As of September 30, 2004, all of theseindividuals have been terminated.

 

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

 

15

----

 

11.  Provision for Unclaimed Property

 

Based onan 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 accrual recordedin the amount of $3,600 as of December 31, 2003. The Company hired an outsideconsultant to assist in estimating the potential risk. It was premature toestimate the extent of the financial risk at the end of 2003, but the Companybelieved that the risk would not have a material impact on its results ofoperations or financial position. Upon completion of the initial phase of thisassessment, the Company recorded an estimated provision for unclaimed propertyof $5,500 in the three months ended March 31, 2004, which increased the accrualto $9,100. The calculation of this provision represents the recording of acorrection of an error for unclaimed property transactions which occurredduring the years 1991 to 2003; however, the amount of the provision, applicableto any year within this period, is not material to the results of operationsfor each of the respective years, nor is the total provision in relation to theestimated results of operations for 2004 considered material.

 

TheCompany has entered the next phase of the assessment whereby the consultantwill assist in refining the estimated provision and in negotiating settlementsunder voluntary compliance agreements with the relevant states.

 

12.  Comprehensive Income (loss)

 

Comprehensive income (loss)for the three and nine months ended September 30, 2004 and 2003 is presented inthe following table:

 
| ** **                               | ** ** | **Three Months Ended  September 30,** | ** ** |
|------------------------------------------|------------|---------------------------------------|------------|
| ** **                               | ** ** | **2004**                              | ** ** | **2003** | ** ** |
| Net Income (loss)                        |       | $                                     | 8,740      |   | $ | (38,828 | ) |
| Other comprehensive income (loss):       |       |                                  |       |   |   |
| Foreign currency translation adjustments |       | 13                                    |       | — |   |
| Total comprehensive income (loss)        |       | $                                     | 8,753      |   | $ | (38,828 | ) |

 
| ** **                               | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|
| ** **                               | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| Net income                               |       | $                                    | 21,965     |   | $ | 29,830 |   |
| Other comprehensive income (loss):       |       |                                 |       |   |   |
| Foreign currency translation adjustments |       | (3                                   | )          | 24 |   |
| Total comprehensive income               |       | $                                    | 21,962     |   | $ | 29,854 |   |

 

16

----

 

13.  Basic and diluted income (loss) per CommonShare

 

Basic and diluted income (loss) per share have beencomputed as follows:

 
| ** **                                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                  | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Basic income (loss) per share computation:                  |       |                                  |       |                                 |       |   |   |   |   |
|                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Net income (loss)                                           |       | $                                     | 8,740      |                                 | $          | (38,828 | ) | $ | 21,965 |   | $ | 29,830 |   |
| Less: Preferred stock dividends and related  accretion, net |       | 2,551                                 |       | 4,845                                |       | 13,505 |   | 36,856 |   |
|                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Income (loss) applicable to common  shareholders            |       | $                                     | 6,189      |                                 | $          | (43,673 | ) | $ | 8,460 |   | $ | (7,026 | ) |
|                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Basic common shares outstanding                             |       | 260,496,328                           |       | 259,343,692                          |       | 260,232,692 |   | 259,078,166 |   |
| Basic income (loss) per share                               |       | $                                     | 0.02       |                                 | $          | (0.17 | ) | $ | 0.03 |   | $ | (0.03 | ) |
|                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Diluted income (loss) per share  computation:               |       |                                  |       |                                 |       |   |   |   |   |
| Net income (loss)                                           |       | $                                     | 8,740      |                                 | $          | (38,828 | ) | $ | 21,965 |   | $ | 29,830 |   |
| Less: Preferred stock dividends and related  accretion, net |       | 2,551                                 |       | 4,845                                |       | 13,505 |   | 36,856 |   |
|                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Income (loss) applicable to common  shareholders            |       | $                                     | 6,189      |                                 | $          | (43,673 | ) | $ | 8,460 |   | $ | (7,026 | ) |
|                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Basic common shares outstanding                             |       | 260,496,328                           |       | 259,343,692                          |       | 260,232,692 |   | 259,078,166 |   |
| Incremental shares for assumed exercise of  securities      |       | 839,237                               |       | —                               |       | — |   | — |   |
| Unvested restricted stock                                   |       | 3,029,636                             |       | —                               |       | — |   | — |   |
|                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Diluted common shares outstanding                           |       | 264,365,201                           |       | 259,343,692                          |       | 260,232,692 |   | 259,078,166 |   |
| Diluted income (loss) per share                             |       | $                                     | 0.02       |                                 | $          | (0.17 | ) | $ | 0.03 |   | $ | (0.03 | ) |

 

Stock options and warrants with exercise prices thatexceeded the fair market value of the Company’s common stock had anantidilutive effect and, therefore, were excluded from the computation ofdiluted earnings per share. These securities that could potentially dilutebasic EPS in the future consisted of approximately 36 million and 53 millionstock options and warrants for the three and nine months ended September 30,2004 and 2003, respectively.

 

14.  Contingencies 

 

The Company is involved in ordinary and routine litigationincidental to its business.  In theopinion of management, there is no pending legal proceeding that would have amaterial adverse affect on the condensed consolidated financial statements ofthe Company.

 

17

----

 

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 (formerly Education and Training, renamed to reflectthe classification of the Workplace Learning division as discontinuedoperations).

 

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, events, licensing and merchandising,as well as About.com.

 

TheConsumer Guides segment is the nation’s largest publisher and distributor offree publications, including *ApartmentGuide, New Home Guide* and *AutoGuide,* the first of which was launched in the first quarter of 2004,their related Web sites and the 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 segment consists of the businesses that provide content to schools,universities, government and other public institutions. It includes Channel One,a proprietary network to secondary schools, Films Media Group, a leading sourcein educational videos, and Interactive Medical Network, a continuing medicaleducation business.

 

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 performancefor each segment based on several factors, of which the primary financialmeasure is earnings before interest, taxes, depreciation, amortization andother (income) charges (“Segment EBITDA”). Other (income) charges includeseverance related to separated senior executives, non-cash compensation,provision for severance, closures and restructuring related costs, provisionfor 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, areeliminated in consolidation.

 

18

----

 
| ** **                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues, net:            |       |                                  |       |                                 |       |   |   |   |   |
| Enthusiast Media          |       | $                                     | 190,884    |                                 | $          | 181,136 |   | $ | 551,398 |   | $ | 536,191 |   |
| Consumer Guides           |       | 71,739                                |       | 69,240                               |       | 214,210 |   | 206,567 |   |
| Business Information      |       | 48,641                                |       | 47,281                               |       | 161,651 |   | 161,326 |   |
| Education                 |       | 13,198                                |       | 13,243                               |       | 46,953 |   | 55,490 |   |
| Intersegment Eliminations |       | (325                                  | )          | (810                                 | )          | (1,045 | ) | (4,784 | ) |
| Total                     |       | $                                     | 324,137    |                                 | $          | 310,090 |   | $ | 973,167 |   | $ | 954,790 |   |
|                      |       |                                  |       |                                 |       |   |   |   |   |
| Segment EBITDA (1):       |       |                                  |       |                                 |       |   |   |   |   |
| Enthusiast Media          |       | $                                     | 42,560     |                                 | $          | 36,580 |   | $ | 114,823 |   | $ | 102,748 |   |
| Consumer Guides           |       | 19,747                                |       | 20,805                               |       | 59,901 |   | 59,376 |   |
| Business Information      |       | 5,432                                 |       | 4,972                                |       | 20,744 |   | 18,029 |   |
| Education                 |       | (778                                  | )          | (1,798                               | )          | 1,332 |   | 8,784 |   |
| Corporate Overhead        |       | (6,992                                | )          | (6,631                               | )          | (20,689 | ) | (20,929 | ) |
| Total                     |       | $                                     | 59,969     |                                 | $          | 53,928 |   | $ | 176,111 |   | $ | 168,008 |   |

 

Below isa reconciliation of the Company’s Segment EBITDA to operating income:

 
| ** **                                                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                         | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Segment EBITDA (1):                                                |       | $                                     | 59,969     |                                 | $          | 53,928 |   | $ | 176,111 |   | $ | 168,008 |   |
| Depreciation of property and equipment                             |       | 8,819                                 |       | 13,763                               |       | 27,653 |   | 35,116 |   |
| Amortization of intangible assets and other                        |       | 4,452                                 |       | 9,537                                |       | 14,999 |   | 29,778 |   |
| Severance related to separated senior  executives                  |       | —                                |       | —                               |       | 658 |   | 5,576 |   |
| Non-cash compensation                                              |       | 1,344                                 |       | 770                                  |       | 4,830 |   | 2,793 |   |
| Provision for severance, closures and  restructuring related costs |       | 1,926                                 |       | 448                                  |       | 8,719 |   | 3,348 |   |
| Provision for unclaimed property                                   |       | —                                |       | —                               |       | 5,500 |   | — |   |
| (Gain) loss on sale of businesses and  other, net                  |       | (293                                  | )          | (706                                 | )          | (243 | ) | 625 |   |
|                                                               |       |                                  |       |                                 |       |   |   |   |   |
| Operating income                                                   |       | $                                     | 43,721     |                                 | $          | 30,116 |   | $ | 113,995 |   | $ | 90,772 |   |

 

----

(1)                                  Segment EBITDA represents the segments’earnings before interest, taxes, depreciation, amortization and other (income)charges.  Other (income) charges includeseverance related to separated senior executives, non-cash compensation,provision for severance, closures and restructuring related costs, provisionfor unclaimed property and (gain) loss on sale of businesses and other,net.  Segment EBITDA is not intended torepresent cash flows from operating activities and should not be considered asan alternative to net income (as determined in conformity with accountingprinciples generally accepted in the United States of America), as an indicatorof the Company’s operating performance or to cash flows as a measure ofliquidity. Segment EBITDA is presented herein because the Company’s chiefoperating decision maker, who is the President and CEO, and the executive teamevaluate and measure each business unit’s performance based on its SegmentEBITDA results. PRIMEDIA believes that Segment EBITDA is the

 

19

----

 

most accurate indicator of its segments’ results,because it 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 ofthe Company’s Debt

 

The information that follows presents condensed consolidating financialinformation as of September 30, 2004 and December 31, 2003 and for the ninemonths ended September 30, 2004 and 2003 for a) PRIMEDIA Inc. (as the Issuer),b) the guarantor subsidiaries, which are with limited exceptions, therestricted subsidiaries, represent the core PRIMEDIA businesses and excludeinvestment and other development properties included in the unrestrictedcategory, c) the non-guarantor subsidiaries (primarily representing Internetassets and businesses, new launches and other properties under evaluation forturnaround or shutdown and foreign subsidiaries), which are with limitedexceptions, the unrestricted subsidiaries, d) elimination entries and e) theCompany on a consolidated basis. During the nine months ended September 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 consolidated financialstatements 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.

 

20

----

** **

**PRIMEDIA INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATING BALANCE SHEET**

**(UNAUDITED)**

** **

September30, 2004

(dollarsin thousands)

 
| ** **                                          | ** ** | **PRIMEDIA Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **PRIMEDIA Inc.  and  Subsidiaries** | ** ** |
|-----------------------------------------------------|------------|-------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|--------------------------------------|------------|
| **ASSETS**                                          |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Current assets:                                     |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Cash and cash equivalents                           |       | $                 | 7,850      |                        | $          | 12,161                          |       | $                | 22         |                                 | $          | — |   | $ | 20,033 |   |
| Accounts receivable, net                            |       | —            |       | 174,673                     |       | 8,569                           |       | —           |       | 183,242                              |       |
| Intercompany receivables                            |       | 1,508,014         |       | 87,903                      |       | 127,593                         |       | (1,723,510       | )          | —                               |       |
| Inventories                                         |       | —            |       | 18,242                      |       | 674                             |       | —           |       | 18,916                               |       |
| Prepaid expenses and other                          |       | 3,569             |       | 23,802                      |       | 5,660                           |       | —           |       | 33,031                               |       |
| Assets held for sale                                |       | —            |       | 24,152                      |       | 15,865                          |       | —           |       | 40,017                               |       |
| Total current assets                                |       | 1,519,433         |       | 340,933                     |       | 158,383                         |       | (1,723,510       | )          | 295,239                              |       |
|                                                |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Property and equipment, net                         |       | 6,074             |       | 64,178                      |       | 8,849                           |       | —           |       | 79,101                               |       |
| Investment in and advances to subsidiaries          |       | 508,335           |       | —                      |       | —                          |       | (508,335         | )          | —                               |       |
| Other intangible assets, net                        |       | —            |       | 253,872                     |       | 466                             |       | —           |       | 254,338                              |       |
| Goodwill                                            |       | —            |       | 886,187                     |       | 16,045                          |       | —           |       | 902,232                              |       |
| Other non-current assets                            |       | 9,657             |       | 32,392                      |       | 4,383                           |       | —           |       | 46,432                               |       |
| Total Assets                                        |       | $                 | 2,043,499  |                        | $          | 1,577,562                       |       | $                | 188,126    |                                 | $          | (2,231,845 | ) | $ | 1,577,342 |   |
|                                                |       |              |       |                        |       |                            |       |             |       |                                 |       |
| **LIABILITIES AND SHAREHOLDERS’ DEFICIENCY**   |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Current liabilities:                                |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Accounts payable                                    |       | $                 | 6,514      |                        | $          | 73,926                          |       | $                | 2,302      |                                 | $          | — |   | $ | 82,742 |   |
| Intercompany payables                               |       | 864,123           |       | 122,078                     |       | 737,309                         |       | (1,723,510       | )          | —                               |       |
| Accrued expenses and other                          |       | 104,902           |       | 95,642                      |       | 3,102                           |       | —           |       | 203,646                              |       |
| Deferred revenues                                   |       | 1,738             |       | 156,964                     |       | 8,798                           |       | —           |       | 167,500                              |       |
| Current maturities of long-term debt                |       | 11,835            |       | 4,387                       |       | —                          |       | —           |       | 16,222                               |       |
| Liabilities of businesses held for sale             |       | —            |       | 22,271                      |       | 5,770                           |       | —           |       | 28,041                               |       |
| Total current liabilities                           |       | 989,112           |       | 475,268                     |       | 757,281                         |       | (1,723,510       | )          | 498,151                              |       |
|                                                |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Long-term debt                                      |       | 1,646,001         |       | 18,616                      |       | —                          |       | —           |       | 1,664,617                            |       |
| Intercompany notes payable                          |       | —            |       | 2,806,611                   |       | 94,118                          |       | (2,900,729       | )          | —                               |       |
| Shares subject to mandatory redemption              |       | 474,559           |       | —                      |       | —                          |       | —           |       | 474,559                              |       |
| Deferred revenues                                   |       | 16,575            |       | 1,117                       |       | —                          |       | —           |       | 17,692                               |       |
| Deferred income taxes                               |       | 74,288            |       | —                      |       | —                          |       | —           |       | 74,288                               |       |
| Other non-current liabilities                       |       | 6,124             |       | 4,495                       |       | 576                             |       | —           |       | 11,195                               |       |
| Total Liabilities                                   |       | 3,206,659         |       | 3,306,107                   |       | 851,975                         |       | (4,624,239       | )          | 2,740,502                            |       |
|                                                |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Shareholders’ deficiency:                      |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Common stock                                        |       | 2,691             |       | —                      |       | —                          |       | —           |       | 2,691                                |       |
| Additional paid-in capital                          |       | 2,350,754         |       | —                      |       | —                          |       | —           |       | 2,350,754                            |       |
| Accumulated deficit                                 |       | (3,439,767        | )          | (1,728,539                  | )          | (663,676                        | )          | 2,392,215        |       | (3,439,767                           | )          |
| Accumulated other comprehensive loss                |       | (179              | )          | (6                          | )          | (173                            | )          | 179              |       | (179                                 | )          |
| Common stock in treasury, at cost                   |       | (76,659           | )          | —                      |       | —                          |       | —           |       | (76,659                              | )          |
| Total Shareholders’ Deficiency                 |       | (1,163,160        | )          | (1,728,545                  | )          | (663,849                        | )          | 2,392,394        |       | (1,163,160                           | )          |
|                                                |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Total Liabilities and Shareholders’ Deficiency |       | $                 | 2,043,499  |                        | $          | 1,577,562                       |       | $                | 188,126    |                                 | $          | (2,231,845 | ) | $ | 1,577,342 |   |

 

21

----

 

**PRIMEDIA INC. AND SUBSIDIARIES**

**CONDENSED STATEMENT OF CONSOLIDATING OPERATIONS**

**(UNAUDITED)**

 

Forthe Nine Months Ended September 30, 2004

(dollarsin thousands)

 
| ** **                                                           | ** ** | **PRIMEDIA Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **PRIMEDIA Inc.  and  Subsidiaries** | ** ** |
|----------------------------------------------------------------------|------------|-------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|--------------------------------------|------------|
|                                                                 |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Revenues, net                                                        |       | $                 | —     |                        | $          | 900,827                         |       | $                | 97,839     |                                 | $          | (25,499 | ) | $ | 973,167 |   |
| Operating costs and expenses:                                        |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Cost of goods sold                                                   |       | —            |       | 194,352                     |       | 11,134                          |       | —           |       | 205,486                              |       |
| Marketing and selling                                                |       | —            |       | 178,501                     |       | 24,474                          |       | —           |       | 202,975                              |       |
| Distribution, circulation and fulfillment                            |       | —            |       | 124,867                     |       | 41,126                          |       | —           |       | 165,993                              |       |
| Editorial                                                            |       | —            |       | 72,459                      |       | 8,984                           |       | —           |       | 81,443                               |       |
| Other general expenses                                               |       | 123               |       | 104,852                     |       | 41,117                          |       | (25,499          | )          | 120,593                              |       |
| Corporate administrative expenses  (excluding non-cash compensation) |       | 16,015            |       | —                      |       | 4,551                           |       | —           |       | 20,566                               |       |
| Depreciation of property and equipment                               |       | 2,187             |       | 20,794                      |       | 4,672                           |       | —           |       | 27,653                               |       |
| Amortization of intangible assets and other                          |       | —            |       | 14,785                      |       | 214                             |       | —           |       | 14,999                               |       |
| Severance related to separated senior  executives                    |       | 658               |       | —                      |       | —                          |       | —           |       | 658                                  |       |
| Non-cash compensation                                                |       | 4,830             |       | —                      |       | —                          |       | —           |       | 4,830                                |       |
| Provision for severance, closures and  restructuring related costs   |       | 3,981             |       | 4,567                       |       | 171                             |       | —           |       | 8,719                                |       |
| Provision for unclaimed property                                     |       | 56                |       | 5,444                       |       | —                          |       | —           |       | 5,500                                |       |
| (Gain) loss on sale of businesses and  other, net                    |       | 47                |       | 1,461                       |       | (1,751                          | )          | —           |       | (243                                 | )          |
|                                                                 |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Operating income (loss)                                              |       | (27,897           | )          | 178,745                     |       | (36,853                         | )          | —           |       | 113,995                              |       |
| Other income (expense):                                              |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Provision for impairment of investments                              |       | (804              | )          | —                      |       | —                          |       | —           |       | (804                                 | )          |
| Interest expense                                                     |       | (87,708           | )          | (2,218                      | )          | (127                            | )          | —           |       | (90,053                              | )          |
| Interest on shares subject to mandatory  redemption                  |       | (32,835           | )          | —                      |       | —                          |       | —           |       | (32,835                              | )          |
| Amortization of deferred financing costs                             |       | (1,007            | )          | (2,595                      | )          | (51                             | )          | —           |       | (3,653                               | )          |
| Equity in income of subsidiaries                                     |       | 78,929            |       | —                      |       | —                          |       | (78,929          | )          | —                               |       |
| Intercompany management fees and interest                            |       | 105,428           |       | (103,148                    | )          | (2,280                          | )          | —           |       | —                               |       |
| Other income, net                                                    |       | 781               |       | 16,680                      |       | 332                             |       | —           |       | 17,793                               |       |
|                                                                 |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Income (loss) from continuing operations  before income tax expense  |       | 34,887            |       | 87,464                      |       | (38,979                         | )          | (78,929          | )          | 4,443                                |       |
| Provision for deferred income taxes                                  |       | (12,922           | )          | (112                        | )          | (20                             | )          | —           |       | (13,054                              | )          |
|                                                                 |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Income (loss) from continuing operations                             |       | 21,965            |       | 87,352                      |       | (38,999                         | )          | (78,929          | )          | (8,611                               | )          |
|                                                                 |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Discontinued operations                                              |       | —            |       | 32,740                      |       | (2,164                          | )          | —           |       | 30,576                               |       |
|                                                                 |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Net income (loss)                                                    |       | $                 | 21,965     |                        | $          | 120,092                         |       | $                | (41,163    | )                                    | $          | (78,929 | ) | $ | 21,965 |   |

 

22

----

 

**PRIMEDIA INC. AND SUBSIDIARIES**

**CONDENSED STATEMENT OF CONSOLIDATING CASH FLOWS**

**(UNAUDITED)**

 

Forthe Nine Months Ended September 30, 2004

(dollarsin thousands)

 
| ** **                                                                                         | ** ** | **PRIMEDIA Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **PRIMEDIA Inc.  and  Subsidiaries** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|--------------------------------------|------------|
| **Operating activities:**                                                                          |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Net income (loss)                                                                                  |       | $                 | 21,965     |                        | $          | 120,092                         |       | $                | (41,163    | )                                    | $          | (78,929 | ) | $ | 21,965 |   |
|                                                                                               |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities |       | (161,983          | )          | 91,811                      |       | 2,576                           |       | 78,929           |       | 11,333                               |       |
| Changes in operating assets and liabilities                                                        |       | 2,449             |       | 12,213                      |       | (11,628                         | )          | —           |       | 3,034                                |       |
|                                                                                               |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Net cash provided by (used in) operating  activities                                               |       | (137,569          | )          | 224,116                     |       | (50,215                         | )          | —           |       | 36,332                               |       |
|                                                                                               |       |              |       |                        |       |                            |       |             |       |                                 |       |
| **Investing activities:**                                                                          |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Additions to property, equipment and other,  net                                                   |       | (869              | )          | (18,775                     | )          | (3,856                          | )          | —           |       | (23,500                              | )          |
| Proceeds from sale of businesses and other                                                         |       | —            |       | 68,163                      |       | 2,114                           |       | —           |       | 70,277                               |       |
| Payments for businesses acquired, net of  cash acquired                                            |       | —            |       | (1,358                      | )          | —                          |       | —           |       | (1,358                               | )          |
| Proceeds from sale of (payments for) other  investments, net                                       |       | (10               | )          | 17,409                      |       | —                          |       | —           |       | 17,399                               |       |
|                                                                                               |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Net cash provided by (used in) investing  activities                                               |       | (879              | )          | 65,439                      |       | (1,742                          | )          | —           |       | 62,818                               |       |
|                                                                                               |       |              |       |                        |       |                            |       |             |       |                                 |       |
| **Financing activities:**                                                                          |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Intercompany activity                                                                              |       | 224,307           |       | (275,814                    | )          | 51,507                          |       | —           |       | —                               |       |
| Borrowings under credit agreements                                                                 |       | 386,700           |       | —                      |       | —                          |       | —           |       | 386,700                              |       |
| Repayments of borrowings under credit  agreements                                                  |       | (461,700          | )          | —                      |       | —                          |       | —           |       | (461,700                             | )          |
| Proceeds from issuance of Senior Floating  Rate Notes                                              |       | 175,000           |       | —                      |       | —                          |       | —           |       | 175,000                              |       |
| Proceeds from (payments for) issuances of  common stock                                            |       | 1,028             |       | —                      |       | —                          |       | —           |       | 1,028                                |       |
| Redemption of Series J Convertible  Preferred Stock                                                |       | (178,038          | )          | —                      |       | —                          |       | —           |       | (178,038                             | )          |
| Deferred financing costs paid                                                                      |       | 3                 |       | (5,689                      | )          | —                          |       | —           |       | (5,686                               | )          |
| Capital lease obligations                                                                          |       | (1,347            | )          | (3,373                      | )          | (200                            | )          | —           |       | (4,920                               | )          |
| Other                                                                                              |       | —            |       | (186                        | )          | —                          |       | —           |       | (186                                 | )          |
|                                                                                               |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Net cash provided by (used in) financing  activities                                               |       | 145,953           |       | (285,062                    | )          | 51,307                          |       | —           |       | (87,802                              | )          |
|                                                                                               |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Increase (decrease) in cash and cash  equivalents                                                  |       | 7,505             |       | 4,493                       |       | (650                            | )          | —           |       | 11,348                               |       |
| Cash and cash equivalents, beginning of  period                                                    |       | 345               |       | 7,668                       |       | 672                             |       | —           |       | 8,685                                |       |
| Cash and cash equivalents, end of period                                                           |       | $                 | 7,850      |                        | $          | 12,161                          |       | $                | 22         |                                 | $          | — |   | $ | 20,033 |   |

 

23

----

 

**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             |       | 163,129                     |       | 8,740                           |       | —           |       | 173,607                              |       |
| 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         |       | 876,842                     |       | 666,014                         |       | (2,149,685       | )          | 504,579                              |       |
|                                                 |       |              |       |                        |       |                            |       |             |       |                                 |       |
| 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                                    |       | —            |       | 17,850                      |       | —                          |       | —           |       | 17,850                               |       |
| 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 |   |

 

24

----

 

**PRIMEDIA INC. AND SUBSIDIARIES**

**CONDENSED STATEMENT OF CONSOLIDATING OPERATIONS**

**(UNAUDITED)**

 

Forthe Nine Months Ended September 30, 2003

(dollarsin thousands)

 
| ** **                                                           | ** ** | **PRIMEDIA Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **PRIMEDIA Inc.  and  Subsidiaries** | ** ** |
|----------------------------------------------------------------------|------------|-------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|--------------------------------------|------------|
|                                                                 |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Revenues, net                                                        |       | $                 | 191        |                        | $          | 859,748                         |       | $                | 121,953    |                                 | $          | (27,102 | ) | $ | 954,790 |   |
| Operating costs and expenses:                                        |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Cost of goods sold                                                   |       | 788               |       | 151,643                     |       | 53,877                          |       | —           |       | 206,308                              |       |
| Marketing and selling                                                |       | —            |       | 165,409                     |       | 30,745                          |       | —           |       | 196,154                              |       |
| Distribution, circulation and fulfillment                            |       | —            |       | 126,782                     |       | 41,921                          |       | —           |       | 168,703                              |       |
| Editorial                                                            |       | —            |       | 73,530                      |       | 4,211                           |       | —           |       | 77,741                               |       |
| Other general expenses                                               |       | 19                |       | 106,107                     |       | 38,010                          |       | (27,102          | )          | 117,034                              |       |
| Corporate administrative expenses  (excluding non-cash compensation) |       | 18,415            |       | —                      |       | 2,427                           |       | —           |       | 20,842                               |       |
| Depreciation of property and equipment                               |       | 4,312             |       | 21,315                      |       | 9,489                           |       | —           |       | 35,116                               |       |
| Amortization of intangible assets and other                          |       | —            |       | 24,143                      |       | 5,635                           |       | —           |       | 29,778                               |       |
| Severance related to separated senior  executives                    |       | 5,576             |       | —                      |       | —                          |       |             |       | 5,576                                |       |
| Non-cash compensation                                                |       | 2,793             |       | —                      |       | —                          |       | —           |       | 2,793                                |       |
| Provision for severance, closures and  restructuring related costs   |       | (860              | )          | 4,208                       |       | —                          |       | —           |       | 3,348                                |       |
| (Gain) loss on sale of businesses and  other, net                    |       | (19               | )          | 1,468                       |       | (824                            | )          | —           |       | 625                                  |       |
|                                                                 |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Operating income (loss)                                              |       | (30,833           | )          | 185,143                     |       | (63,538                         | )          | —           |       | 90,772                               |       |
| Other income (expense):                                              |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Provision for impairment of investments                              |       | (8,975            | )          | —                      |       | —                          |       | —           |       | (8,975                               | )          |
| Interest expense                                                     |       | (91,552           | )          | (3,077                      | )          | 186                             |       | —           |       | (94,443                              | )          |
| Interest on shares subject to mandatory  redemption                  |       | (11,008           | )          | —                      |       | —                          |       | —           |       | (11,008                              | )          |
| Amortization of deferred financing costs                             |       | 1,052             |       | (3,401                      | )          | (11                             | )          | —           |       | (2,360                               | )          |
| Equity in income of subsidiaries                                     |       | 40,637            |       | —                      |       | —                          |       | (40,637          | )          | —                               |       |
| Intercompany management fees and interest                            |       | 142,157           |       | (142,157                    | )          | —                          |       | —           |       | —                               |       |
| Other expense, net                                                   |       | (953              | )          | (2,317                      | )          | (13                             | )          | —           |       | (3,283                               | )          |
|                                                                 |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Income (loss) from continuing operations  before income tax expense  |       | 40,525            |       | 34,191                      |       | (63,376                         | )          | (40,637          | )          | (29,297                              | )          |
| Provision for deferred income taxes                                  |       | (10,695           | )          | (350                        | )          | 12                              |       | —           |       | (11,033                              | )          |
|                                                                 |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Income (loss) from continuing operations                             |       | 29,830            |       | 33,841                      |       | (63,364                         | )          | (40,637          | )          | (40,330                              | )          |
|                                                                 |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Discontinued operations                                              |       | —            |       | 92,245                      |       | (22,085                         | )          | —           |       | 70,160                               |       |
|                                                                 |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Net income (loss)                                                    |       | $                 | 29,830     |                        | $          | 126,086                         |       | $                | (85,449    | )                                    | $          | (40,637 | ) | $ | 29,830 |   |

 

25

----

 

**PRIMEDIA INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**(UNAUDITED)**

** **

Forthe Nine Months Ended September 30, 2003

(dollarsin thousands)

 
| ** **                                                                                          | ** ** | **PRIMEDIA Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **PRIMEDIA Inc.  and  Subsidiaries** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|--------------------------------------|------------|
| **Operating activities:**                                                                           |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Net Income (loss)                                                                                   |       | $                 | 29,830     |                        | $          | 126,086                         |       | $                | (85,449    | )                                    | $          | (40,637 | ) | $ | 29,830 |   |
|                                                                                                |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities: |       | (141,291          | )          | 118,593                     |       | 23,233                          |       | 40,637           |       | 41,172                               |       |
| Changes in operating assets and liabilities                                                         |       | (1,225            | )          | (18,315                     | )          | (7,491                          | )          | —           |       | (27,031                              | )          |
|                                                                                                |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Net cash provided by (used in) operating  activities                                                |       | (112,686          | )          | 226,364                     |       | (69,707                         | )          | —           |       | 43,971                               |       |
|                                                                                                |       |              |       |                        |       |                            |       |             |       |                                 |       |
| **Investing activities:**                                                                           |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Additions to property, equipment and other,  net                                                    |       | (559              | )          | (19,196                     | )          | (6,768                          | )          | —           |       | (26,523                              | )          |
| Proceeds from sale of (payments for)  businesses and other                                          |       | 19                |       | 184,047                     |       | (325                            | )          | —           |       | 183,741                              |       |
| Payments for businesses acquired, net of  cash acquired                                             |       | —            |       | (7,186                      | )          | (536                            | )          | —           |       | (7,722                               | )          |
| Payments for the purchase of other  investments                                                     |       | (632              | )          | (2,285                      | )          | (266                            | )          | —           |       | (3,183                               | )          |
|                                                                                                |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Net cash provided by (used in) investing  activities                                                |       | (1,172            | )          | 155,380                     |       | (7,895                          | )          | —           |       | 146,313                              |       |
|                                                                                                |       |              |       |                        |       |                            |       |             |       |                                 |       |
| **Financing activities:**                                                                           |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Intercompany activity                                                                               |       | 294,879           |       | (372,343                    | )          | 77,464                          |       | —           |       | —                               |       |
| Borrowings under credit agreements                                                                  |       | 329,400           |       | —                      |       | —                          |       | —           |       | 329,400                              |       |
| Repayments of borrowings under credit  agreements                                                   |       | (382,312          | )          | —                      |       | —                          |       | —           |       | (382,312                             | )          |
| 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                                                             |       | 1,120             |       | —                      |       | —                          |       | —           |       | 1,120                                |       |
| Purchases of common stock in connection  with the exchange of exchangeable preferred stock          |       | (19,367           | )          | —                      |       | —                          |       | —           |       | (19,367                              | )          |
| Dividends paid to preferred stock  shareholders                                                     |       | (33,928           | )          | —                      |       | —                          |       | —           |       | (33,928                              | )          |
| Deferred financing cost paid                                                                        |       | —            |       | (6,288                      | )          | —                          |       | —           |       | (6,288                               | )          |
| Capital lease obligations                                                                           |       | (93               | )          | (2,977                      | )          | (103                            | )          |             |       | (3,173                               | )          |
| Other                                                                                               |       | —            |       | (233                        | )          | —                          |       | —           |       | (233                                 | )          |
|                                                                                                |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Net cash provided by (used in) financing  activities                                                |       | 114,024           |       | (381,841                    | )          | 77,361                          |       | —           |       | (190,456                             | )          |
|                                                                                                |       |              |       |                        |       |                            |       |             |       |                                 |       |
| Increase (decrease) in cash and cash  equivalents                                                   |       | 166               |       | (97                         | )          | (241                            | )          | —           |       | (172                                 | )          |
| Cash and cash equivalents, beginning of  period                                                     |       | 4,700             |       | 12,857                      |       | 996                             |       | —           |       | 18,553                               |       |
| Cash and cash equivalents, end of period                                                            |       | $                 | 4,866      |                        | $          | 12,760                          |       | $                | 755        |                                 | $          | — |   | $ | 18,381 |   |

 

26

----

 

**Item 2****.        MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Introduction**

 

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

 

Thefollowing discussion and analysis summarizes the financial condition andoperating performance of the Company and its business segments and should beread in conjunction with the unaudited condensed consolidated financialstatements and notes thereto.

 

**Executive Summary**

 

*Our Business*

 

The Company’s revenues aregenerated from advertising (print and online), circulation (subscriptions andsingle copy sales) and other sources (events, third party distribution, salesof data products and directories, list rental, brand licensing andmerchandising).  PRIMEDIA’s operatingexpenses include cost of goods sold (principally paper and printing); marketingand selling; distribution, circulation and fulfillment; editorial; and othergeneral and corporate administrative expenses (collectively referred to as “operatingexpenses”).

 

*Background*

 

Historically, PRIMEDIA was abroad based media enterprise built primarily from a series of acquisitions andcomprised of numerous disparate assets. During the past few years, the Companysold a number of  properties to betterfocus on its core businesses and reduce debt. As a result of thesedivestitures, the Company has transformed itself into a highly focused targetedmedia company poised for growth. Over the past few years, to counter theeffects of the weakness in the overall advertising environment, the Company hasaggressively attacked its costs. These initiatives have resulted in charges forseverance, closures and restructuring related costs to integrate Companyoperations and consolidate many back office functions and facilities, resultingin a significant reduction in the number of employees and office space. Theseactions have resulted in a stronger balance sheet, improved liquidity and amore efficient organization.  The Companyis now focused on growing organically while still diligently controlling costs.

 

InOctober 2003, Kelly P. Conlin was appointed President and Chief ExecutiveOfficer (“CEO”). Mr. Conlin and the executive team reviewed the Company’soperations and formulated a strategy to enable the Company to capitalize on thefull potential of its businesses and maximize its operating performance. That reviewresulted in a redesigned operating structure with four reportable segments tobetter enable the Company to execute key investment and organic growthinitiatives. Those four principal segments are: Enthusiast Media, ConsumerGuides, Business Information, and Education (formerly Education and Training,see below for discussion of the classification of the Workplace Learningdivision as discontinued operations). Accordingly, the Company has reclassifiedprior year results to reflect this redesigned operating structure.

 

*CompanyStrategy*

 

The Company’s strategy is to focus on itscore media businesses and grow by leveraging and expanding its market-leadingbrands. Actions the Company is taking to organically grow revenues includeintroducing new products, improving and upgrading existing products, expandinginto new markets, enhancing the caliber of its sales force, broadening itsadvertiser base, optimizing distribution, and leveraging its well known brandsthrough extensions including events, television, radio, licensing andmerchandising.

 

27

----

 

*Business Trends*

 

The media industry continuesto be adversely affected by an overall advertising environment that is softerthan historical norms, declining single copy sales of consumer magazines andbudgetary constraints in the education markets. Additionally, low interestrates have resulted in apartment dwellers becoming homeowners and highapartment vacancy rates have pressured the advertising budgets of property managers.

 

In 2004,most of PRIMEDIA’s products are growing despite being 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 avocations and leisure activities, as the Company hasa large presence in those markets. Additionally, the Company has taken many actions to lower costs andimprove profitability, including consolidating, selling or shutting downcertain properties.

 

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

 

In 2004, revenues were$324,137 up 4.5% as compared to $310,090 in 2003.  Revenue increased at the Company’s threemajor business segments while revenues at the Education segment wereessentially flat.  In 2004, operatingexpenses were $264,168 up 3.1% compared to 2003. In 2004, operating income was$43,721 improved from $30,116 in 2003 due to increased revenues and decreaseddepreciation and amortization expenses.  These decreases were partially offset by higher restructuring costs in2004.  Net income (loss) was $8,740 in2004 compared to ($38,828) in 2003, primarily due to improved operating income,the gain on the sale of the Company’s investment in All About Japan, Inc. ofapproximately $16,700 and reduced losses from discontinued operations ofapproximately $18,500.

 

*Forward-LookingInformation*

 

This report contains certainforward-looking statements concerning the Company’s operations, economicperformance and financial condition. These statements are based upon a number of assumptions and estimates,which are inherently subject to uncertainties and external factors, many ofwhich are beyond the control of the Company, and reflect future businessdecisions, which are subject to change. Some of the assumptions may not materialize and unanticipated eventswill occur which may affect the Company’s results.

 

*Why We Use Segment EBITDA*

 

SegmentEBITDA represents the segment’s earnings before interest, taxes, depreciation,amortization and other charges (income) (“Segment EBITDA”). 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. PRIMEDIA believes that Segment EBITDA is the most accurateindicator of its segments’ results, because it focuses on revenue and operatingcost items driven by each operating manager’s performance, and excludes itemslargely outside of the operating manager’s control. Internally, the Company’schief operating decision maker, who is the President and CEO, and the executiveteam measure performance primarily based on Segment EBITDA.

 

SegmentEBITDA is not intended to represent cash flows from operating activities andshould not be considered as an alternative to net income (as determined inconformity with accounting principles generally accepted in the United Statesof America), as an indicator of the Company’s operating performance or to cashflows as a measure of liquidity. Segment EBITDA may not be available for theCompany’s discretionary use as there are requirements to redeem preferred stockand repay debt, 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

 

28

----

 

companies.For more information, see the reconciliation of Segment EBITDA to operatingincome for the Company’s four segments in their respective segment discussionsbelow.

 

*Intersegment Transactions*

 

The information presented below includescertain intersegment transactions and is, therefore, not necessarily indicativeof the results had the operations existed as stand-alone businesses.Intersegment transactions represent intercompany advertising and other serviceswhich are billed at what management believes are prevailing market rates. Theseintersegment transactions, which represent transactions between operating unitsin different business segments, are eliminated in consolidation.

 

*Discontinued Operations*

 

Inaccordance with Statement of Financial Accounting Standards (“SFAS”) 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets”, the Company’s resultshave been classified to reflect Seventeen, Simba Information, Federal Sources, *CableWorld,* Sprinks, RealEstate.com, *New York* magazine, Kagan World Media,About Web Services, About.com’s consumer Web hosting business, and the *Folio, Circulation Management* and *American Demographics* properties as discontinuedoperations for all periods presented.

 

InSeptember 2004, the Company announced that it would explore strategic optionsregarding its Workplace Learning division and is actively pursuing the sale ofthis division, excluding the Interactive Medical Network (“IMN”). As a result,the Education and Training segment has been renamed the Education segment.   The Company believes that there will not bea material loss relating to the sale of this division.  Workplace Learning provides integratedlearning solutions for more than eight million professionals in the industrial,healthcare, banking, automotive, fire and emergency, government and law, andsecurity markets. The operating results of this division, excluding IMN, havebeen classified as discontinued operations for all periods presented.

 

29

----

 

***Segment Data:***

 

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

endedSeptember 30, 2004 and 2003, respectively:

 
| ** **                                                          | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                                          | ** ** | **2004**                             | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues, net:                                                      |       |                                 |       |                                |       |   |   |   |   |
| Continuing Businesses:                                              |       |                                 |       |                                |       |   |   |   |   |
| Enthusiast Media                                                    |       | $                                    | 190,884    |                                | $          | 181,136 |   | $ | 551,398 |   | $ | 536,191 |   |
| Consumer Guides                                                     |       | 71,739                               |       | 69,240                              |       | 214,210 |   | 206,567 |   |
| Business Information                                                |       | 48,641                               |       | 47,281                              |       | 161,651 |   | 161,326 |   |
| Education                                                           |       | 13,198                               |       | 13,243                              |       | 46,953 |   | 55,490 |   |
| Intersegment Eliminations                                           |       | (325                                 | )          | (810                                | )          | (1,045 | ) | (4,784 | ) |
| Total                                                               |       | $                                    | 324,137    |                                | $          | 310,090 |   | $ | 973,167 |   | $ | 954,790 |   |
|                                                                |       |                                 |       |                                |       |   |   |   |   |
| Segment EBITDA: (1)                                                 |       |                                 |       |                                |       |   |   |   |   |
| Continuing Businesses:                                              |       |                                 |       |                                |       |   |   |   |   |
| Enthusiast Media                                                    |       | $                                    | 42,560     |                                | $          | 36,580 |   | $ | 114,823 |   | $ | 102,748 |   |
| Consumer Guides                                                     |       | $                                    | 19,747     |                                | $          | 20,805 |   | $ | 59,901 |   | $ | 59,376 |   |
| Business Information                                                |       | $                                    | 5,432      |                                | $          | 4,972 |   | $ | 20,744 |   | $ | 18,029 |   |
| Education                                                           |       | $                                    | (778       | )                                   | $          | (1,798 | ) | $ | 1,332 |   | $ | 8,784 |   |
| Corporate Overhead                                                  |       | $                                    | (6,992     | )                                   | $          | (6,631 | ) | $ | (20,689 | ) | $ | (20,929 | ) |
|                                                                |       |                                 |       |                                |       |   |   |   |   |
| Depreciation, amortization and other  charges: (2)                  |       |                                 |       |                                |       |   |   |   |   |
| Continuing Businesses:                                              |       |                                 |       |                                |       |   |   |   |   |
| Enthusiast Media                                                    |       | $                                    | 5,205      |                                | $          | 8,546 |   | $ | 24,263 |   | $ | 29,114 |   |
| Consumer Guides                                                     |       | $                                    | 2,729      |                                | $          | 2,839 |   | $ | 8,480 |   | $ | 8,780 |   |
| Business Information                                                |       | $                                    | 2,124      |                                | $          | 3,907 |   | $ | 10,370 |   | $ | 13,610 |   |
| Education                                                           |       | $                                    | 2,260      |                                | $          | 4,519 |   | $ | 7,243 |   | $ | 12,492 |   |
| Corporate                                                           |       | $                                    | 3,930      |                                | $          | 4,001 |   | $ | 11,760 |   | $ | 13,240 |   |
|                                                                |       |                                 |       |                                |       |   |   |   |   |
| Operating income (loss):                                            |       |                                 |       |                                |       |   |   |   |   |
| Continuing Businesses:                                              |       |                                 |       |                                |       |   |   |   |   |
| Enthusiast Media                                                    |       | $                                    | 37,355     |                                | $          | 28,034 |   | $ | 90,560 |   | $ | 73,634 |   |
| Consumer Guides                                                     |       | 17,018                               |       | 17,966                              |       | 51,421 |   | 50,596 |   |
| Business Information                                                |       | 3,308                                |       | 1,065                               |       | 10,374 |   | 4,419 |   |
| Education                                                           |       | (3,038                               | )          | (6,317                              | )          | (5,911 | ) | (3,708 | ) |
| Corporate                                                           |       | (10,922                              | )          | (10,632                             | )          | (32,449 | ) | (34,169 | ) |
|                                                                |       | 43,721                               |       | 30,116                              |       | 113,995 |   | 90,772 |   |
|                                                                |       |                                 |       |                                |       |   |   |   |   |
| Other income (expense):                                             |       |                                 |       |                                |       |   |   |   |   |
| Provision for impairment of investments                             |       | —                               |       | (1,248                              | )          | (804 | ) | (8,975 | ) |
| Interest expense                                                    |       | (32,289                              | )          | (29,884                             | )          | (90,053 | ) | (94,443 | ) |
| Interest on shares subject to mandatory  redemption (3)             |       | (10,945                              | )          | (11,008                             | )          | (32,835 | ) | (11,008 | ) |
| Amortization of deferred financing costs  (3)                       |       | (1,334                               | )          | (1,116                              | )          | (3,653 | ) | (2,360 | ) |
| Other income (expense), net                                         |       | 17,680                               |       | 519                                 |       | 17,793 |   | (3,283 | ) |
| Income (loss) from continuing operations  before income tax expense |       | 16,833                               |       | (12,621                             | )          | 4,443 |   | (29,297 | ) |
|                                                                |       |                                 |       |                                |       |   |   |   |   |
| Provision for deferred income taxes                                 |       | (4,330                               | )          | (3,982                              | )          | (13,054 | ) | (11,033 | ) |
|                                                                |       |                                 |       |                                |       |   |   |   |   |
| Income (loss) from continuing operations                            |       | 12,503                               |       | (16,603                             | )          | (8,611 | ) | (40,330 | ) |
|                                                                |       |                                 |       |                                |       |   |   |   |   |
| Discontinued operations (4)                                         |       | (3,763                               | )          | (22,225                             | )          | 30,576 |   | 70,160 |   |
|                                                                |       |                                 |       |                                |       |   |   |   |   |
| Net income (loss)                                                   |       | $                                    | 8,740      |                                | $          | (38,828 | ) | $ | 21,965 |   | $ | 29,830 |   |

 
| (1) | Segment  EBITDA represents the segments’ earnings before interest, taxes,  depreciation, amortization and other charges (income) (see Note 2  below). Segment EBITDA is not intended to represent cash flows from operating  activities and should not be considered as an alternative to net income (as  determined in conformity with accounting principles generally accepted in the  United States of America), as an indicator of the Company’s operating |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

30

----

 

performance or to cash flows as a measure of liquidity.Segment EBITDA is presented herein because the Company’s chief operatingdecision maker, who is the President and CEO, and the executive team evaluateand measure each business unit’s performance based on its Segment EBITDAresults. PRIMEDIA believes that Segment EBITDA is the most accurate indicatorof its segments’ results, because it focuses on revenue and operating costitems driven by each 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 three and nine months ended September 30, 2004 and 2003 for eachof the 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 itsSeries D Exchangeable Preferred Stock, Series F ExchangeablePreferred Stock and Series H Exchangeable Preferred Stock and to classifydividends from this preferred stock as interest expense. Such stock is nowcollectively described as shares subject to mandatory redemption and dividendson these shares are now included in loss from continuing operations anddescribed as interest on shares subject to mandatory redemption, whereaspreviously they were presented below net income as preferred stock dividends. The adoption of SFAS 150 decreased the resultsfrom continuing operations for the three and nine months ended September 30,2004 by $11,281 and $33,843, respectively, which represents interest on sharessubject to mandatory redemption ($10,945 per quarter) and amortization ofissuance costs ($336 per quarter) which is included in the amortization ofdeferred financing costs on the accompanying condensed statements ofconsolidated operations.  As a result ofSFAS 150 being adopted during the third quarter of 2003, loss from continuingoperations increased $11,344 for the nine months ended September 30, 2003. IfSFAS 150 was adopted retroactively on January 1, 2003, loss from continuingoperations for the nine months ended September 30, 2003 would have increased by$22,670. As SFAS 150 was adopted during the third quarter of 2003, there was nomaterial impact to the Company’s results for the three months ended September30, 2004 as compared to the same period of 2003.

 

(4)                                  Discontinued operationsinclude a gain on sale of businesses, net of $999 and $2,713 in the threemonths ended September 30, 2004 and 2003, respectively, and $43,299 and$105,310 in the nine months ended September 30, 2004 and 2003, respectively.

 

31

----

 

**Three Months Ended September 30, 2004 Compared to ThreeMonths Ended September 30, 2003:**

 

**Consolidated Results:**

 

*Revenues, Net*

 

Consolidatedrevenues were $324,137 in 2004 compared to $310,090 in 2003:

 
| ** **         | ** ** | **Three Months Ended  September 30,** | ** ** | **Percent  Change** | ** ** |
|--------------------|------------|---------------------------------------|------------|---------------------|------------|
| ** **         | ** ** | **2004**                              | ** ** | **2003**            | ** ** | ** ** |
| ** **         | ** ** | ** **                            | ** ** | ** **          | ** ** | ** ** | ** ** |
| **Revenues, net:** | ** ** | ** **                            | ** ** | ** **          | ** ** | ** ** | ** ** |
| Advertising        |       | $                                     | 213,165    |                | $          | 202,474 |   | 5.3 |   |
| Circulation        |       | 70,233                                |       | 72,679              |       | (3.4 | ) |
| Other              |       | 40,739                                |       | 34,937              |       | 16.6 |   |
| Total              |       | $                                     | 324,137    |                | $          | 310,090 |   | 4.5 |   |

 

Advertisingrevenues increased by $10,691 in the third quarter of 2004 compared to 2003with gains at all four segments, including an increase of $8,065 at theEnthusiast Media segment largely due to online advertising increases.  Circulation revenues decreased $2,446 in2004, due to declines at the Enthusiast Media and Business Informationsegments. Other revenues increased in 2004 compared to 2003 primarily due toincreases at Enthusiast Media of $3,145, at Consumer Guides of $1,402 and atBusiness Information of $1,312. Revenue trends within each segment are furtherdetailed in the segment discussions below.

 

*Operating Income (Loss)*

 

Operatingincome increased to $43,721 in 2004 compared to $30,116 in 2003.  The improvement in operating income in 2004was due to the increase in revenues of $14,047 and to decreases in amortizationand depreciation expenses of $5,085 and $4,944, respectively.  Amortization and depreciation expensesdecreased in 2004 compared to 2003 primarily due to certain assets that havebecome fully amortized or depreciated. These expense decreases were partially offset by higher restructuringcosts recorded in 2004 compared to 2003 principally due to the subleasing ofcertain excess real estate at a rate lower than originally estimated.

 

*Net Income (Loss)*

 

The Company had net income in 2004 of $8,740compared to a net loss of $38,828 in 2003. The increase in net income wasprimarily due to improved operating income, lower losses from discontinuedoperations and the gain on the sale of the Company’s investment in the stock ofAll About Japan, Inc. of approximately $16,700 recorded in other income, net in2004.

 

Interest expense increased $2,405 in 2004 to$32,289 from $29,884 in 2003. The increase in interest expense waspredominantly due to higher interest rates and increased debt levels as theCompany incurred additional debt to redeem all of its outstanding Series JConvertible Preferred Stock, totaling approximately $178,000, during the thirdquarter 2004.  The Series J ConvertiblePreferred Stock accrued dividends quarterly at an annual rate of 12.5% and wasthe Company’s highest cost of capital security. As a result, dividends on the Series J Convertible Preferred Stockdecreased $2,647 from $4,845 to $2,198 in 2004 compared to 2003 and will bezero for the fourth quarter of 2004.

 

32

----

 

SFAS 144requires sales or disposals of long-lived assets that meet certain criteria tobe classified on the statement of consolidated operations as discontinuedoperations and to reclassify prior periods accordingly.  During 2003, the Company completed the saleof Seventeen, Simba Information, Federal Sources, *CableWorld,* Sprinks and RealEstate.com and during 2004, theCompany sold *New York* magazine,Kagan World Media and About Web Services, About.com’s consumer Web hostingbusiness.

 

Additionally,in the second quarter of 2004, the Company began evaluating strategicpartnerships regarding the *Folio*,*Circulation Management* and *American Demographics* properties in theBusiness Information segment.   In August2004, *Folio* and *Circulation Management* were contributed toa venture with a third party, under which the Company will not have asignificant continuing involvement in the operations and the Company’s share ofassociated cash flows is not expected to be significant.

 

InSeptember 2004, the Company announced that it would explore strategic optionsregarding its Workplace Learning division and is actively pursuing the sale ofthis division, excluding IMN.

 

Inaccordance with SFAS 144, the financial results of all of these operationshave been classified as discontinued operations on the condensed statements ofconsolidated operations for all periods presented.

 

For thethree months ended September 30, 2004 and 2003, discontinued operations includea net gain on sale of businesses of $999 and $2,713, 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, licensing and merchandising and About.com)**

 

*Revenues, Net*

 

Enthusiast Media revenues were $190,884 or58.9% and $181,136 or 58.4% of the Company’s consolidated revenues for 2004 and2003, respectively. Enthusiast Media revenues increased $9,748 or 5.4% in 2004compared to 2003 as follows:

 
| ** **            | ** ** | **Three Months Ended  September 30,** | ** ** | **Percent  Change** | ** ** |
|-----------------------|------------|---------------------------------------|------------|---------------------|------------|
| ** **            | ** ** | **2004**                              | ** ** | **2003**            | ** ** | ** ** |
| ** **            | ** ** | ** **                            | ** ** | ** **          | ** ** | ** ** | ** ** |
| **Revenues, net:**    | ** ** | ** **                            | ** ** | ** **          | ** ** | ** ** | ** ** |
| Advertising           |       | $                                     | 107,628    |                | $          | 99,563 |   | 8.1 |   |
| Circulation           |       | 66,244                                |       | 67,478              |       | (1.8 | ) |
| Other                 |       | 16,704                                |       | 13,559              |       | 23.2 |   |
| Intersegment revenues |       | 308                                   |       | 536                 |       | (42.5 | ) |
| Total                 |       | $                                     | 190,884    |                | $          | 181,136 |   | 5.4 |   |

 

Advertising revenues increased $8,065 or 8.1%in 2004. The growth was led by an increase in online advertising ofapproximately $6,400, as well as an increase in print advertising driven bydouble digit growth for the Crafts, Truck and Hunting titles.

 

33

----

 

During 2004, the Companyinitiated a comprehensive new advertising tracking system with InquiryManagement Systems (“IMS”), the largest ad-tracking service in NorthAmerica.  Currently, the IMS Auditorservice tracks three quarters of PRIMEDIA’s enthusiast publications and theCompany expects that IMS will track nearly all of its titles by the end of thefirst quarter 2005. Based on the titles currently tracked, IMS Auditor reportsthat PRIMEDIA’s and its competitors’ advertising pages were up in the thirdquarter, with PRIMEDIA’s advertising pages increasing 5.6% and the marketincreasing 4.7%.

 

Circulation revenues at Enthusiast Mediadeclined $1,234 or 1.8% for the three months ended September 30, 2004.Subscription revenue, excluding bulk, was down approximately 2.1% as theCompany reduced subscription levels in certain titles to increase circulationprofitability. Newsstand revenue was flat as increased pricing and the sale ofpremium priced special issues offset a 4.3% decrease in single copy units.   Despite the decline, Enthusiast Media singlecopy results exceeded industry averages as the industry average decline was12.3% for the three months ended September 30, 2004, as reported by theInternational Periodical Distributors Association.

 

Other revenues for Enthusiast Media, whichinclude licensing, merchandising, list rental, events and other items,increased $3,145, or 23.2%, in 2004 compared to 2003.

 

*KeyAccomplishments*

 

The Company continues to receive positiveconsumer response to revitalized editorial**products.The Company redesigned its largest publication, *Motor Trend*, with a new editor this year, and it posted a4.6% increase in advertising pages, while its primary competitor’s fell 0.3%,according to the Publishers Information Bureau. In the first six months of 2004, newsstand sales of *Motor Trend* grew 7.8%, while its primarycompetitor’s declined 5.9%, according to the Audit Bureau of Circulations.

 

The Company is having success with onlineadvertising programs.  Page views, uniquevisitors and online revenue were up sharply across the segments Web sites andat About.com.  One particular example is *Power & Motoryacht* which expanded itsonline video boat testing program, increasing page views 28% and nearlytripling online revenue.

 

PRIMEDIA’s targeted publications and onlineproducts, when aggregated, reach more 18-34 year old males than any otherpublishing company.  The Company hasshown success with its national advertising programs as revenues from nationaladvertisers targeting this elusive and valuable demographic increased 15.8%since the beginning of 2004 with double-digit increases in the third quarterfrom Timberland, Bose, Circuit City, eBay, Clorox and Proctor & Gamble,among others.

 

*Segment EBITDA*

 

Enthusiast Media Segment EBITDA increased$5,980 to $42,560 in 2004 from $36,580 in 2003 as increased revenues werepartially offset by increased operating expenses. The Company is investing inan aggressive product improvement program, research and marketing initiativesto attract more national advertising, and the creation of an enhanced productfulfillment and database project for e-commerce and direct consumermarketing.  Segment EBITDA marginincreased to 22.3% in 2004 from 20.2% in 2003.

 

34

----

 

Belowis a reconciliation of Enthusiast Media Segment EBITDA to operating income forthe three months ended September 30, 2004 and 2003:

 
| ** **                                                         | ** ** | **Three Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                         | ** ** | **2004**                              | ** ** | **2003** | ** ** |
|                                                               |       |                                  |       |   |   |
| Segment EBITDA                                                     |       | $                                     | 42,560     |   | $ | 36,580 |   |
| Depreciation of property and equipment                             |       | 4,195                                 |       | 5,301 |   |
| Amortization of intangible assets and other                        |       | 1,092                                 |       | 3,409 |   |
| Provision for severance, closures and  restructuring related costs |       | 221                                   |       | 195 |   |
| Gain on sale of businesses and other, net                          |       | (303                                  | )          | (359 | ) |
| Operating income                                                   |       | $                                     | 37,355     |   | $ | 28,034 |   |

 

*Operating Income (Loss)*

 

Operatingincome was $37,355 in 2004 compared to $28,034 in 2003, an increase of33.2%.  This increase was principallydriven by the improvement in Segment EBITDA as well a decreases in amortizationand depreciation expenses.

 

*Discontinued Operations*

 

Inaccordance with SFAS 144, the operating results of Seventeen, Sprinks, *New York*magazine and About Web Serviceshave been classified as discontinued operations on the condensed statements ofconsolidated operations for all periods presented.

 

EnthusiastMedia revenues exclude revenues from discontinued operations of $18,827 for thethree months ended September 30, 2003. Enthusiast Media segment operatingincome excludes operating income from discontinued operations of $391 and$4,884 for the three months ended September 30, 2004 and 2003, respectively.  For the three months ended September 30, 2004and 2003, discontinued operations includes a net gain on sale of businesses of$270 and $3,116, respectively.

 

35

----

 

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

 

*Revenues, Net*

 

ConsumerGuides revenues were $71,739 or 22.1% and $69,240 or 22.3% of the Company’sconsolidated revenues for 2004 and 2003, respectively. Consumer Guides revenuesincreased $2,499 or 3.6% in 2004 compared to 2003 as follows:

 
| ** **     | ** ** | **Three Months Ended  September 30,** | ** ** | **Percent  Change** | ** ** |
|----------------|------------|---------------------------------------|------------|---------------------|------------|
| ** **     | ** ** | **2004**                              | ** ** | **2003**            | ** ** | ** ** |
| ** **     | ** ** | ** **                            | ** ** | ** **          | ** ** | ** ** | ** ** |
| Revenues, net: |       |                                  |       |                |       |   |   |
| Advertising    |       | $                                     | 59,546     |                | $          | 58,449 |   | 1.9 |   |
| Other          |       | 12,193                                |       | 10,791              |       | 13.0 |   |
| Total          |       | $                                     | 71,739     |                | $          | 69,240 |   | 3.6 |   |

 

Advertising revenues for the Consumer Guidessegment increased $1,097 to $59,546 in 2004 compared to $58,449 in 2003primarily due to growth in premium onlineadvertising programs and gains in *New HomeGuide*and *Auto Guide*. Advertisingrevenue at the *Apartment Guide*business continues to be affected by a soft, but improving, apartment rentalmarket.

 

Consumer Guides other revenues, which relateto its distribution arm, DistribuTech, increased $1,402 during the thirdquarter of 2004 compared to 2003 due to continued growth of its distributionnetwork and increased rack utilization. DistribuTech increased its average number of third party customers by 3.4% from thesecond quarter of 2004. Its rack utilization rate is 76%, up from 70% a yearago.

 

*KeyAccomplishments*

 

The*NewHome Guide* division continued to post strong advertising revenuegains, up 6% in 2004 compared to 2003 for existing publications and up 4% fromthe second quarter of 2004.  *New Home Guide* has recorded nineconsecutive months of revenue gains.

 

The Company launched the *Houston New Home Guide* in May 2004,becoming the 19th market served and the second *New Home Guide* launched this year.   Both *NewHome Guide*launches as well as the *CharlotteAuto Guide,*launched in March 2004, made significant progress inthe third quarter as they continue to establishthemselves in their respective markets.**The 2004 *New Home Guide* launches grew revenue 30%over the prior quarter, and the expansion *AutoGuide* publication posted a 16% revenue increase over the priorquarter.

 

Despite difficult conditions in the apartmentindustry, *Apartment Guide* postedits second consecutive quarter of advertising revenue gains and madesignificant improvements to its sales and marketing programs. In addition, *Apartmentguide.com* continues to lead theindustry in qualified lead delivery, with nearly 1.4 million leads deliveredduring the third quarter of 2004.

 

*Segment EBITDA*

 

ConsumerGuides Segment EBITDA decreased $1,058 or 5.1% in 2004 to $19,747. The decreasewas primarily due to additional sales and marketing costs related toinvestments in newproducts. This includes the *Charlotte*

 

36

----

 

*Auto Guide*, two additional *Auto Guides*tobe launched in the next four months, as well as the *Orlando New Home Guide* and Houston *New Home Guide*. In addition, sales programinitiatives and continued investment in the distribution network contributed tothe increase in expenses. As a result,Segment EBITDA margin decreased to 27.5% in 2004 compared to 30.0% in 2003.

 

Belowis a reconciliation of Consumer Guides Segment EBITDA to operating income forthe three months ended September 30, 2004 and 2003:

 
| ** **                                                         | ** ** | **Three Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                         | ** ** | **2004**                              | ** ** | **2003** | ** ** |
|                                                               |       |                                  |       |   |   |
| Segment EBITDA                                                     |       | $                                     | 19,747     |   | $ | 20,805 |   |
| Depreciation of property and equipment                             |       | 1,972                                 |       | 1,941 |   |
| Amortization of intangible assets and other                        |       | 767                                   |       | 898 |   |
| Provision for severance, closures and  restructuring related costs |       | (10                                   | )          | — |   |
| Operating income                                                   |       | $                                     | 17,018     |   | $ | 17,966 |   |

 

*Operating Income (Loss)*

 

Operatingincome decreased $948 or 5.3% in 2004 due to the decrease in Segment EBITDA.

 

*Discontinued Operations*

 

Inaccordance with SFAS 144, the results of RealEstate.com have beenclassified as discontinued operations on the condensed statements ofconsolidated operations for three months ended September 30, 2003.

 

ConsumerGuides revenues exclude revenues from discontinued operations of $666 for thethree months ended September 30, 2003. Consumer Guides segment operating incomeexcludes operating losses from discontinued operations of  $1,707 for the three months ended September30, 2003. Discontinued operations includes a loss on sale of business of $1,000in 2003.

 

37

----

 

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

 

*Revenues, Net*

 

BusinessInformation revenues were $48,641 or 15.0% and $47,281 or 15.2% of the Company’sconsolidated revenues for 2004 and 2003, respectively. Business Informationrevenues increased $1,360 or 2.9% in 2004 compared to 2003 as follows:

 
| ** **            | ** ** | **Three Months Ended  September 30,** | ** ** | **Percent  Change** | ** ** |
|-----------------------|------------|---------------------------------------|------------|---------------------|------------|
| ** **            | ** ** | **2004**                              | ** ** | **2003**            | ** ** | ** ** |
| ** **            | ** ** | ** **                            | ** ** | ** **          | ** ** | ** ** | ** ** |
| Revenues, net:        |       |                                  |       |                |       |   |   |
| Advertising           |       | $                                     | 39,162     |                | $          | 37,901 |   | 3.3 |   |
| Circulation           |       | 3,989                                 |       | 5,201               |       | (23.3 | ) |
| Other                 |       | 5,490                                 |       | 4,178               |       | 31.4 |   |
| Intersegment revenues |       | —                                |       | 1                   |       | — |   |
| Total                 |       | $                                     | 48,641     |                | $          | 47,281 |   | 2.9 |   |

 

Overall,Business Information segment revenues are stabilizing and the segment has hadrevenue growth in the last two quarters after twelve quarters of revenuedeclines.

 

Advertisingrevenues increased $1,261 in 2004 with strength primarily in the magazines serving the agriculture,communications, trucking, electrical and financial services sectors partiallyoffset by weakness primarily in the marketing and apparel sectors.

 

Circulation revenues, consist ofsubscriptions to directories and data based products, decreased to $3,989 in2004 compared to $5,201 in 2003.  Thisdecrease was primarily due to a decrease in frequency in certain publicationsfrom quarterly to semi-annually.

 

Other revenues, whichconsist of events, information products and online revenues, were up $1,312, or31.4%, in 2004 compared to 2003.  Theincrease in other revenues is a result of an increase in the number of eventsoccurring during the quarter and an increase in revenues from data products.

 

*Key Accomplishments*

 

Several titles recordedtheir highest revenue in four years or longer. *American Printer*’sSeptember revenue was the highest in the publication’s history.  *FleetOwner*’s September issue generated its highest advertising billing infour years.  *Registered Rep.*’s September issue recorded its highestadvertising billing in three years.  LightingDimensions significantly broadened its advertiser base by successfullylaunching *The Entertainment Show-LDI*,a new event concept, with five mobile outdoor concert stages showcasing allcomponents of entertainment technology.

 

The Company continuedprogress in developing innovative electronic products as online revenueincreased 36% from the same period in 2003 by providing targeted newslettersand webinars, particularly in the *Telephony*and *Broadcast Engineering*titles.

 

38

----

 

*SegmentEBITDA*

 

Business Information Segment EBITDA increased $460 for the three monthsended September 30, 2004 to $5,432. The improvement is predominantly due toincreased revenues as well as continued cost control with the exception ofincreased selling expenses, which increased commensurate with higherrevenues.  Segment EBITDA margin improvedto 11.2% for 2004 versus 10.5% for 2003.

 

Below is a reconciliation of BusinessInformation Segment EBITDA to operating income for the three months endedSeptember 30, 2004 and 2003:

 
| ** **                                                         | ** ** | **Three Months Ended****September  30,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                         | ** ** | **2004**                                 | ** ** | **2003** | ** ** |
|                                                               |       |                                     |       |   |   |
| Segment EBITDA                                                     |       | $                                        | 5,432      |   | $ | 4,972 |   |
| Depreciation of property and equipment                             |       | 950                                      |       | 2,184 |   |
| Amortization of intangible assets and other                        |       | 1,236                                    |       | 2,168 |   |
| Provision for severance, closures and  restructuring related costs |       | (62                                      | )          | (98 | ) |
| Gain on sale of businesses and other, net                          |       | —                                   |       | (347 | ) |
| Operating income                                                   |       | $                                        | 3,308      |   | $ | 1,065 |   |

 

*OperatingIncome (Loss)*

 

Business Information operating incomeincreased $2,243 to $3,308 in 2004 compared to $1,065 in 2003.  This increase was driven by improved SegmentEBITDA and decreases in depreciation and amortization expense in 2004 due tocertain assets becoming fully depreciated or amortized.

 

*DiscontinuedOperations*

 

In accordance with SFAS 144, the results of Simba, FederalSources, *CableWorld*and KaganWorld Media, which have been sold, have been classified as discontinuedoperations on the condensed statements of consolidated operations for allperiods presented.  In addition, theCompany began evaluating strategic partnerships regarding the *Folio*, *CirculationManagement* and *AmericanDemographics* properties during the second quarter 2004 and theoperating results of these properties have been classified as discontinuedoperations for all periods presented.  InAugust 2004, *Folio*and*Circulation Management* were contributedto a venture with a third party, under which the Company will not have asignificant continuing involvement in the operations and the Company’s share ofassociated cash flows is not expected to be significant.

 

Business Information revenues excluderevenues from discontinued operations of $989 and $5,625 for the three monthsended September 30, 2004 and 2003, respectively. Business Information segmentoperating results exclude the operating income from discontinued operations of$505 and $172 for the three months ended September 30, 2004 and 2003,respectively. For the three months ended September 30, 2004 and 2003,discontinued operations include a net gain on sale of businesses of $729 and$597, respectively.

 

39

----

 

**EducationSegment (includes Channel One, Films Media Group and Interactive MedicalNetwork (“IMN”))**

 

*Revenues,Net*

 

Education revenues were $13,198 or 4.1% and$13,243 or 4.3% of the Company’s consolidated revenues for 2004 and 2003,respectively. Education revenues were essentially flat in 2004 compared to 2003as follows:

 
| ** **            | ** ** | **Three Months Ended  September 30,** | ** ** | ** ** | ** ** |
|-----------------------|------------|---------------------------------------|------------|------------|------------|
| ** **            | ** ** | **2004**                              | ** ** | **2003**   | ** ** | **Percent  Change** | ** ** |
|                  |       |                                  |       |       |       |   |   |
| Revenues, net:        |       |                                  |       |       |       |   |   |
| Advertising           |       | $                                     | 6,829      |       | $          | 6,561 |   | 4.1 |   |
| Other                 |       | 6,352                                 |       | 6,409      |       | (0.9 | ) |
| Intersegment revenues |       | 17                                    |       | 273        |       | (93.8 | ) |
| Total                 |       | $                                     | 13,198     |       | $          | 13,243 |   | (0.3 | ) |

 

Education segment advertising revenues, which are generated entirely byChannel One, increased $268 in 2004 as compared to 2003. Advertising gains frommovies, television networks, and consumer products were offset by reducedspending from certain internet providers. Third quarter revenues are seasonally low as schools are closed forsummer vacation during much of the quarter.

 

Increased other revenues at Channel One fromproduction and at the Films Media Group driven by increased DVD sales wereoffset by a decrease at IMN.

 

*SegmentEBITDA*

 

Education Segment EBITDA increased $1,020 to ($778) for the threemonths ended September 30, 2004. This increase is principally due to continuedcost control during the third quarter of 2004. Segment EBITDA margin improvedin 2004 to (5.9%) compared to (13.6%) in 2003.

 

Below is a reconciliation of EducationSegment EBITDA to operating loss for the three months ended September 30, 2004and 2003:

 
| ** **                                                         | ** ** | **Three Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                         | ** ** | **2004**                              | ** ** | **2003** | ** ** |
|                                                               |       |                                  |       |   |   |
| Segment EBITDA                                                     |       | $                                     | (778       | ) | $ | (1,798 | ) |
| Depreciation of property and equipment                             |       | 878                                   |       | 1,457 |   |
| Amortization of intangible assets and other                        |       | 1,357                                 |       | 3,062 |   |
| Provision for severance, closures and  restructuring related costs |       | 25                                    |       | — |   |
| Operating loss                                                     |       | $                                     | (3,038     | ) | $ | (6,317 | ) |

 

*OperatingIncome (Loss)*

 

Operating loss decreased $3,279 for the threemonths ended September 30, 2004 due to decreased amortization and depreciationexpense as certain assets became fully amortized and depreciated since thethird quarter of 2003 as well as increased Segment EBITDA.

 

40

----

 

*DiscontinuedOperations*

 

The Company is exploring strategic options for the Workplace Learningdivision, excluding IMN, and is actively pursuing the sale of thedivision.  Its results have beenclassified as discontinued operations for all periods presented in accordancewith SFAS 144.

 

Education segment revenues exclude revenues from discontinuedoperations of $9,013 and $10,048 for the three months ended September 30, 2004and 2003, respectively. Education segment operating results exclude theoperating loss from discontinued operations of $3,580 and $24,900 for the threemonths ended September 30, 2004 and 2003, respectively.

 

**Corporate:**

 

*CorporateOverhead*

 

Corporate overhead increased to $6,992 in2004 from $6,631 in 2003 primarily due to increased professional fees,including fees incurred in connection with the Company’s year-end assessment ofits internal controls over financial reporting as required by Section 404 ofthe Sarbanes-Oxley Act of 2002, partially offset by reduced compensationexpense related to headcount reductions.

 

*OperatingIncome (Loss)*

 

Corporate operating loss increased $290 in 2004 to $10,922 from $10,632in 2003.  This increase was due to anincrease in stock-based compensation expense in 2004 to $1,344 compared to $770in 2003 and an increase in restructuring related costs to $1,752 in 2004 from$351 in 2003.  These increases werepartially offset by a decrease in depreciation expense of $2,056, primarily dueto the disposal of certain fixed assets in 2003.

 

41

----

 

**Nine MonthsEnded September 30, 2004 Compared to Nine Months Ended September 30, 2003:**

 

**ConsolidatedResults:**

 

*Revenues,Net*

 

Consolidated revenues were $973,167 in 2004compared to $954,790 in 2003:

 
| ** **     | ** ** | **Nine Months Ended  September 30,** | ** ** | **Percent  Change** | ** ** |
|----------------|------------|--------------------------------------|------------|---------------------|------------|
| ** **     | ** ** | **2004**                             | ** ** | **2003**            | ** ** | ** ** |
| Revenues, net: |       |                                 |       |                |       |   |   |
| Advertising    |       | $                                    | 631,190    |                | $          | 617,347 |   | 2.2 |   |
| Circulation    |       | 208,785                              |       | 214,445             |       | (2.6 | ) |
| Other          |       | 133,192                              |       | 122,998             |       | 8.3 |   |
| Total          |       | $                                    | 973,167    |                | $          | 954,790 |   | 1.9 |   |

 

Advertising revenues increased by $13,843 in2004 compared to 2003 due**toincreases of $14,473 and $3,578 at the Enthusiast Media and Consumer Guidessegments, respectively, partially offset by declines of $540 and $3,668 at theBusiness Information and Education segments, respectively. Circulation revenuesdecreased $5,660 in 2004, principally driven by a $4,355 decline at theEnthusiast Media segment. Other revenues increased $10,194 in 2004 compared to2003 primarily due to increases at Consumer Guides of $4,075 from continuedgrowth of its third party distribution business, at Enthusiast Media of $5,772and at Business Information of $2,172 partially offset by a $1,825 decline atthe Education segment*.*Revenuetrends within each segment are further detailed in the segment discussions below.

 

*OperatingIncome (Loss)*

 

Operating income was $113,995 in 2004compared to $90,772 in 2003.  Theimprovement in operating income in 2004 was due to the increase in revenues of$18,377 and a decrease in amortization and depreciation expenses. Amortizationand depreciation expenses decreased $14,779 and $7,463, respectively, in 2004compared to 2003 primarily due to certain intangible assets and property andequipment that have become fully amortized. In addition, severance related to separated senior executives decreased$4,918 to $658 in 2004 compared to $5,576 in 2003. These expense reductionswere partially offset by a provision for unclaimed property.  The Company has completed the initial phaseof its internal assessment regarding compliance with escheatment requirementsfor unclaimed property in certain states and as a result has recorded anestimated provision of $5,500 (see Note 11 of the notes to the condensedconsolidated financial statements).

 

*Net Income(Loss)*

 

The Company had net income in 2004 of $21,965 compared to $29,830 in2003. The decrease in net income was primarily due to the gain on the sale ofSeventeen of $107,138 recorded in discontinued operations in 2003.  In 2004, the Company recorded a gain on thesale of *New York*magazine of$38,006 in discontinued operations and a gain on the sale of the Company’sinvestment in All About Japan, Inc. of approximately $16,700 recorded in otherincome, net.

 

Interest expense decreased $4,390, or 4.6% in 2004 to $90,053 from$94,443 in 2003. The decrease in interest expense was due to the Company’slower average debt levels despite the additional debt issued in May 2004.

 

42

----

 

In accordance with the prospective adoption, effective July 1,2003, of SFAS 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity”, income from continuingoperations decreased by $33,843 which represents $32,835 of interest on sharessubject to mandatory redemption and $1,008 of amortization of issuance costswhich is included in the amortization of deferred financing costs on theaccompanying condensed statement of consolidated operations for the nine monthsended September 30, 2004.  As a result ofSFAS 150 being adopted during the third quarter of 2003, loss from continuingoperations increased $11,344 for the nine months ended September 30, 2003. Suchcharges were recorded as preferred stock dividends and accretion prior toadoption.  If SFAS 150 had been adoptedretroactively on January 1, 2003, loss from continuing operations would haveincreased by $22,670 for the nine months ended September 30, 2003.

 

SFAS 144 requires sales or disposals of long-lived assets thatmeet certain criteria to be classified on the statement of consolidatedoperations as discontinued operations and to reclassify prior periodsaccordingly.  During 2003, the Companycompleted the sale of Seventeen, Simba Information, Federal Sources, *CableWorld,* Sprinks and RealEstate.com andduring 2004, the Company sold *New York*magazine, Kagan World Media and About Web Services, About.com’s consumer Webhosting business.

 

Additionally, in the second quarter of 2004, the Company beganevaluating strategic partnerships regarding the *Folio*, *CirculationManagement* and *AmericanDemographics* properties in the Business Information segment.  In August 2004, *Folio* and *CirculationManagement* were contributed to a venture with a third party, underwhich the Company will not have a significant continuing involvement in theoperations and the Company’s share of associated cash flows is not expected tobe significant.

 

In September 2004, the Company announced that it would explorestrategic options regarding its Workplace Learning division and is activelypursuing the sale of this division, excluding IMN.  As a result, the Company’s Education andTraining segment has been renamed the Education segment.

 

In accordance with SFAS 144, the financial results of all of theseoperations have been classified as discontinued operations on the condensedstatements of consolidated operations for all periods presented.

 

For the nine months ended September 30, 2004 and 2003, discontinued operations includes a net gain on sale ofbusinesses of $43,299 and $105,310, respectively.

 

43

----

 

**SegmentResults:**

 

**EnthusiastMedia Segment (includes Consumer Automotive, Performance Automotive,International Automotive, Outdoors, Action Sports, Lifestyles and HomeTechnology magazine groups, their related Web sites, events, licensing andmerchandising and About.com)**

 

*Revenues,Net*

 

Enthusiast Media revenues were $551,398 or 56.7% and $536,191 or 56.2%of the Company’s consolidated revenues for 2004 and 2003, respectively.Enthusiast Media revenues increased $15,207 or 2.8% in 2004 compared to 2003 asfollows:

 
| ** **            | ** ** | **Nine Months Ended  September 30,** | ** ** | **Percent  Change** | ** ** |
|-----------------------|------------|--------------------------------------|------------|---------------------|------------|
| ** **            | ** ** | **2004**                             | ** ** | **2003**            | ** ** | ** ** |
|                  |       |                                 |       |                |       |   |   |
| Revenues, net:        |       |                                 |       |                |       |   |   |
| Advertising           |       | $                                    | 307,211    |                | $          | 292,738 |   | 4.9 |   |
| Circulation           |       | 195,639                              |       | 199,994             |       | (2.2 | ) |
| Other                 |       | 47,670                               |       | 41,898              |       | 13.8 |   |
| Intersegment revenues |       | 878                                  |       | 1,561               |       | (43.8 | ) |
| Total                 |       | $                                    | 551,398    |                | $          | 536,191 |   | 2.8 |   |

 

Advertising revenues increased $14,473 or 4.9% in 2004. The growth wasled by an increase in online advertising of approximately $18,900 driven by anaggressive effort to improve the sales and marketing of the Company’s onlineproperties.

 

The increase in online advertising revenues allows the Company toreinvest in its properties to be well positioned for the significant growthopportunities in online marketing.  InApril 2004, About.com unveiled its most significant product improvement sincethe site’s debut in 1997 as it launched About 4.0 with an innovative new sitedesign and architecture aimed at enhancing the total user experience.

 

The increase in online advertising was partially offset by anapproximate $4,500 decrease in print advertising, despite print advertisingpages being up 1.2% in 2004 compared to 2003. Specifically, advertising pages in the Company’s automotive titlesdeclined 4.0% while advertising pages for the remainder of the segment’sproperties increased 5.5%.  Industry wideadvertising pages were up 1.3%, with automotive advertising pages decreasing3.1% and non-automotive advertising pages increasing 4.2%, as reported by IMS.

 

Circulation revenues at Enthusiast Media declined $4,355 or 2.2% forthe nine months ended September 30, 2004 due to lower subscription revenue andcontinued softness in single copy sales. Newsstand revenue gains at the Lifestyles (including the soap operatitles) partially offset declines at the other groups.  Overall, single copy units for EnthusiastMedia magazines declined 3.7% for the nine months ended September 30, 2004,compared to the industry average increase of 0.3%, as reported by theInternational Periodical Distributors Association.

 

Other revenues for Enthusiast Media, whichinclude licensing, list rental, events and other, increased $5,772, or 13.8%,in 2004 compared to 2003.  The increasewas primarily due to growth in merchandising revenue and events.

 

44

----

 

*SegmentEBITDA*

 

Enthusiast Media Segment EBITDA increased 11.8% to $114,823 in 2004from $102,748 in 2003. This increase was due predominantly to the increase inrevenues partially offset by increased operating expenses of $3,132. As aresult, Segment EBITDA margin increased to 20.8% in 2004 from 19.2% in 2003.

 

Below is a reconciliation of Enthusiast MediaSegment EBITDA to operating income for the nine months ended September 30, 2004and 2003:

 
| ** **                                                         | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                         | ** ** | **2004**                             | ** ** | **2003** | ** ** |
|                                                               |       |                                 |       |   |   |
| Segment EBITDA                                                     |       | $                                    | 114,823    |   | $ | 102,748 |   |
| Depreciation of property and equipment                             |       | 12,966                               |       | 15,325 |   |
| Amortization of intangible assets and other                        |       | 4,795                                |       | 11,372 |   |
| Provision for severance, closures and  restructuring related costs |       | 3,536                                |       | 2,660 |   |
| Provision for unclaimed property                                   |       | 3,271                                |       | — |   |
| Gain on sale of businesses and other, net                          |       | (305                                 | )          | (243 | ) |
| Operating income                                                   |       | $                                    | 90,560     |   | $ | 73,634 |   |

 

*OperatingIncome (Loss)*

 

Operating income was $90,560 in 2004 comparedto $73,634 in 2003, an increase of $16,926. This increase was principally driven by the improvement in SegmentEBITDA as well as a decrease in amortization and depreciation expense,partially offset by an increase in restructuring related costs and a provisionfor unclaimed property (see Note 11 of the notes to the condensed consolidatedfinancial statements).

 

*DiscontinuedOperations*

 

In accordance with SFAS 144, theoperating results of Seventeen, Sprinks, *NewYork*magazine and About Web Services have been classified asdiscontinued operations on the condensed statements of consolidated operationsfor all periods presented.

 

Enthusiast Media revenues exclude revenuesfrom discontinued operations of $2,290 and $92,415 for the nine months endedSeptember 30, 2004 and 2003, respectively. Enthusiast Media segment operatingincome excludes operating income from discontinued operations of $42,316 and$114,187 for the nine months ended September 30, 2004 and 2003, respectively.  For the nine months ended September 30, 2004and 2003, discontinued operations includes a net gainon sale of businesses of $41,763 and $105,886, respectively.

 

45

----

 

**ConsumerGuides Segment (includes *Apartment Guide,New Home Guide*and *Auto Guide*publicationsand their related Web sites, and the DistribuTech distribution business)**

 

*Revenues,Net*

 

Consumer Guides revenues were $214,210 or22.0% and $206,567 or 21.6% of the Company’s consolidated revenues for 2004 and2003, respectively. Consumer Guides revenues increased $7,643 or 3.7% in 2004compared to 2003 as follows:

 

 
| ** **            | ** ** | **Nine Months Ended  September 30,** | ** ** | **Percent  Change** | ** ** |
|-----------------------|------------|--------------------------------------|------------|---------------------|------------|
| ** **            | ** ** | **2004**                             | ** ** | **2003**            | ** ** | ** ** |
|                  |       |                                 |       |                |       |   |   |
| Revenues, net:        |       |                                 |       |                |       |   |   |
| Advertising           |       | $                                    | 178,931    |                | $          | 175,353 |   | 2.0 |   |
| Other                 |       | 35,279                               |       | 31,204              |       | 13.1 |   |
| Intersegment revenues |       | —                               |       | 10                  |       | — |   |
| Total                 |       | $                                    | 214,210    |                | $          | 206,567 |   | 3.7 |   |

 

Advertising revenues for the Consumer Guides segment increased $3,578to $178,931 in 2004 compared to $175,353 in 2003 primarily due to growth inpremium online advertising programs, *NewHome Guide* and the new *Auto Guide*launched in March 2004. The *NewHome Guide*business had its ninth consecutive month of organicrevenue growth in September 2004*.*  Advertising revenue at the *Apartment Guide* business continued to beaffected by challenges presented by low interest rates, which have drivenincreased home buying and higher than normal apartment vacancy rates depressingapartment owners’ advertising budgets.

 

Consumer Guides other revenues, which relate to its distribution arm,DistribuTech, increased $4,075 in 2004 compared to 2003 due to continued growthof its distribution network, increased rack utilization and an effectivepricing strategy.  Since the firstquarter of 2003, DistribuTech has added over 1,000 retail locations andapproximately 400 additional third party publication customers and boosted itstotal rack utilization from 65% to 76%. DistribuTech distributes more than 2,000 publications on behalf of otherpublishing organizations to many of the country’s leading supermarkets andchain stores, with whom it has exclusive distribution relationships.

 

*SegmentEBITDA*

 

Consumer Guides Segment EBITDA increased $525or 0.9% in 2004 to $59,901. 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. Segment EBITDA margin decreased to 28.0% in 2004compared to 28.7% in 2003.

 

46

----

 

Below is a reconciliation of Consumer GuidesSegment EBITDA to operating income for the nine months ended September 30, 2004and 2003:

 
| ** **                                                         | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                         | ** ** | **2004**                             | ** ** | **2003** | ** ** |
|                                                               |       |                                 |       |   |   |
| Segment EBITDA                                                     |       | $                                    | 59,901     |   | $ | 59,376 |   |
| Depreciation of property and equipment                             |       | 6,031                                |       | 5,952 |   |
| Amortization of intangible assets and other                        |       | 2,414                                |       | 2,696 |   |
| Provision for severance, closures and  restructuring related costs |       | 28                                   |       | — |   |
| Provision for unclaimed property                                   |       | 7                                    |       | — |   |
| Loss on sale of businesses and other, net                          |       | —                               |       | 132 |   |
| Operating income                                                   |       | $                                    | 51,421     |   | $ | 50,596 |   |

 

*OperatingIncome (Loss)*

 

Operating income increased $825 or 1.6% in 2004. This increase isprimarily driven by the improvement in Segment EBITDA.

 

*DiscontinuedOperations*

 

In accordance with SFAS 144, the resultsof RealEstate.com have been classified as discontinued operations on thecondensed statements of consolidated operations for nine months ended September30, 2004 and 2003.

 

Consumer Guides revenues exclude revenuesfrom discontinued operations of $458 and $1,717 for the nine months endedSeptember 30, 2004 and 2003, respectively. Consumer Guides segment operatingincome excludes operating losses from discontinued operations of $252 and$3,190 for the nine months ended September 30, 2004 and 2003,respectively.  In 2004, discontinued operations includes a loss on sale of businessof $519 due to post closing adjustments related to the sale of RealEstate.com. Discontinued operations includes a loss on sale of businessof $1,000 in 2003.

 

47

----

 

**BusinessInformation Segment (includes trade magazines and their related Web sites,events, directories and data products)**

 

*Revenues,Net*

 

Business Information revenues were $161,651or 16.6% and $161,326 or 16.9% of the Company’s consolidated revenues for 2004and 2003, respectively. Business Information revenues increased $325 or 0.2% in2004 compared to 2003 as follows: 

 
| ** **            | ** ** | **Nine Months Ended  September 30,** | ** ** | **Percent  Change** | ** ** |
|-----------------------|------------|--------------------------------------|------------|---------------------|------------|
| ** **            | ** ** | **2004**                             | ** ** | **2003**            | ** ** | ** ** |
|                  |       |                                 |       |                |       |   |   |
| Revenues, net:        |       |                                 |       |                |       |   |   |
| Advertising           |       | $                                    | 119,006    |                | $          | 119,546 |   | (0.5 | ) |
| Circulation           |       | 13,146                               |       | 14,451              |       | (9.0 | ) |
| Other                 |       | 29,499                               |       | 27,327              |       | 7.9 |   |
| Intersegment revenues |       | —                               |       | 2                   |       | — |   |
| Total                 |       | $                                    | 161,651    |                | $          | 161,326 |   | 0.2 |   |

 

Overall, Business Information segmentrevenues are stabilizing and the segment has had revenue growth in the last twoquarters after twelve quarters of revenue declines.

 

Advertising revenues decreased $540 in 2004,despite advertising revenue increases during the second and third quarters, dueto continued softness in trade advertising, particularly in the power,entertainment technology, marketing and apparel categories partially offset bystrength in the communications and financial services sectors.

 

Circulation revenues decreased $1,305 in 2004 compared to 2003primarily due to a decrease in frequency in certain publications from quarterlyto semi-annually.

 

Other revenues, which consist of events, information products andonline revenues, were up $2,172, or 7.9%, in 2004compared to 2003. The focus on online initiatives in developing new electronicproducts contributed to the increase in online revenues.

 

*SegmentEBITDA*

 

Business Information Segment EBITDA increased $2,715 for the ninemonths ended September 30, 2004 to $20,744. The improvement is predominantlydue to continued cost control with expenses declining in all categories.  Operating expenses in this segment declinedby approximately $2,390 in 2004 compared to 2003. These factors contributed toan improved Segment EBITDA margin of 12.8% for 2004 versus 11.2% for 2003.

 

48

----

 

Below is a reconciliation of BusinessInformation Segment EBITDA to operating income for the nine months endedSeptember 30, 2004 and 2003:

 

 
| ** **                                                         | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                         | ** ** | **2004**                             | ** ** | **2003** | ** ** |
|                                                               |       |                                 |       |   |   |
| Segment EBITDA                                                     |       | $                                    | 20,744     |   | $ | 18,029 |   |
| Depreciation of property and equipment                             |       | 3,835                                |       | 6,103 |   |
| Amortization of intangible assets and other                        |       | 3,885                                |       | 6,640 |   |
| Provision for severance, closures and  restructuring related costs |       | 1,097                                |       | 112 |   |
| Provision for unclaimed property                                   |       | 1,538                                |       | — |   |
| Loss on sale of businesses and other, net                          |       | 15                                   |       | 755 |   |
| Operating income                                                   |       | $                                    | 10,374     |   | $ | 4,419 |   |

 

*OperatingIncome (Loss)*

 

Business Information operating incomeincreased $5,955 to $10,374 in 2004 compared to $4,419 in 2003.  The increase in operating income was drivenby improved Segment EBITDA and decreases in depreciation and amortization expensein 2004 as certain assets became fully depreciated or amortized, partiallyoffset by increased restructuring related costs and a provision for unclaimedproperty (see Note 11 of the notes to the condensed consolidated financialstatements).

 

*DiscontinuedOperations*

 

In accordance with SFAS 144, the results of Simba Information,Federal Sources, *CableWorld* andKagan World Media, which have been sold, have been classified as discontinuedoperations on the condensed statements of consolidated operations for allperiods presented.  In addition, theCompany began evaluating strategic partnerships regarding the *Folio*, *CirculationManagement* and *AmericanDemographics* properties during the second quarter of 2004 and theoperating results of these properties have been classified as discontinuedoperations for all periods presented.  InAugust 2004, *Folio*and*Circulation Management* were contributedto a venture with a third party, under which the Company will not have asignificant continuing involvement in the operations and the Company’s share ofassociated cash flows is not expected to be significant.

 

Business Information revenues exclude revenues from discontinuedoperations of $4,959 and $17,900 for the nine months ended September 30, 2004and 2003, respectively. Business Information segment operating results excludethe operating income (loss) from discontinued operations of $634 and ($4,342)for the nine months ended September 30, 2004 and 2003, respectively. For thenine months ended September 30, 2004 and 2003, discontinued operations includea net gain on sale of businesses of $2,055 and $424, respectively.

 

49

----

 

**EducationSegment (includes Channel One, Films Media Group and Interactive MedicalNetwork (“IMN”))**

 

*Revenues,Net*

 

Education revenues were $46,953 or 4.8% and$55,490 or 5.8% of the Company’s consolidated revenues for 2004 and 2003,respectively. Education revenues decreased $8,537 or 15.4% in 2004 compared to2003 as follows:

 
| ** **            | ** ** | **Nine Months Ended  September 30,** | ** ** | **Percent  Change** | ** ** |
|-----------------------|------------|--------------------------------------|------------|---------------------|------------|
| ** **            | ** ** | **2004**                             | ** ** | **2003**            | ** ** | ** ** |
|                  |       |                                 |       |                |       |   |   |
| Revenues, net:        |       |                                 |       |                |       |   |   |
| Advertising           |       | $                                    | 26,042     |                | $          | 29,710 |   | (12.3 | ) |
| Other                 |       | 20,744                               |       | 22,569              |       | (8.1 | ) |
| Intersegment revenues |       | 167                                  |       | 3,211               |       | (94.8 | ) |
| Total                 |       | $                                    | 46,953     |                | $          | 55,490 |   | (15.4 | ) |

 

Education advertising revenues, which are generated entirely by ChannelOne, decreased $3,668 in 2004 as compared to 2003. Channel One’s advertisingrevenue declined primarily as a result of reduced spending by several food andbeverage accounts and the absence of any barter deals in 2004, partially offsetby revenue gains from additional health and beauty brands, movies, militaryrecruitment and television networks.

 

Other revenues decreased $1,825 in 2004 due to declines at IMN andreduced product sales at Films Media Group as state and local school budgetscontinue to be constrained, partially offset by increased production revenue atChannel One.

 

*SegmentEBITDA*

 

Education Segment EBITDA decreased $7,452 to $1,332 for the nine monthsended September 30, 2004. This decrease is principally due to the declines inrevenue discussed above partially offset by continued cost control during 2004.These factors contributed to a decrease in Segment EBITDA margin in 2004 to2.8% compared to 15.8% in 2003.

 

Below is a reconciliation of EducationSegment EBITDA to operating loss for the nine months ended September 30, 2004and 2003:

 
| ** **                                                         | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                         | ** ** | **2004**                             | ** ** | **2003** | ** ** |
|                                                               |       |                                 |       |   |   |
| Segment EBITDA                                                     |       | $                                    | 1,332      |   | $ | 8,784 |   |
| Depreciation of property and equipment                             |       | 2,633                                |       | 3,422 |   |
| Amortization of intangible assets and other                        |       | 3,905                                |       | 9,070 |   |
| Provision for severance, closures and  restructuring related costs |       | 77                                   |       | — |   |
| Provision for unclaimed property                                   |       | 628                                  |       | — |   |
| Operating loss                                                     |       | $                                    | (5,911     | ) | $ | (3,708 | ) |

 

50

----

 

*OperatingIncome (Loss)*

 

Operating loss increased $2,203 for the ninemonths ended September 30, 2004 due to the decrease in Segment EBITDA partiallyoffset by decreased amortization and depreciation expenses as certain assetsbecame fully amortized and depreciated.

 

*DiscontinuedOperations*

 

The Company is exploring strategic options for the Workplace Learningdivision, excluding IMN, and is actively pursuing the sale of thedivision.  Its results have beenclassified as discontinued operations for all periods presented in accordancewith SFAS 144.

 

Education segment revenues exclude revenues from discontinuedoperations of $27,345 and $30,027 for the nine months ended September 30, 2004and 2003, respectively. Education segment operating results exclude theoperating loss from discontinued operations of $9,810 and $34,977 for the ninemonths ended September 30, 2004 and 2003, respectively.

 

**Corporate:**

 

*CorporateOverhead*

 

Corporate overhead decreased to $20,689 in2004 from $20,929 in 2003 primarily due to reduced compensation expenseresulting from headcount reductions and reduced professional fees, partiallyoffset by fees incurred in connection with the Company’s year-end assessment ofits internal controls over financial reporting as required by Section 404 ofthe Sarbanes-Oxley Act of 2002.

 

*OperatingIncome (Loss)*

 

Corporate operating loss decreased $1,720 in2004 to $32,449 from $34,169 in 2003 principally driven by a decrease inseverance related to the separated senior executives of $4,918 to $658 in 2004as a result 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 $3,405 to $3,981 in 2004 and anincrease in stock-based compensation expense in 2004 to $4,830 compared to$2,793 in 2003.

 

**RiskFactors**

 

Set forth below are risks and uncertaintiesthat could cause actual results to differ materially from the resultscontemplated by the forward-looking statements contained in this QuarterlyReport.

 

*Generaleconomic trends, as well as trends in advertising spending, may reduce ouradvertising revenues.*

 

Our advertising revenues are subject to therisks arising from adverse changes in domestic and global economic conditionsand possible shifting of advertising spending amongst media. A decline in thelevel of business activity of certain of our advertisers has had an adverseeffect on our revenues and profit margins. Additionally, high apartment vacancyrates have pressured the advertising budgets of property owners, constraininggrowth in one of our segments.  Becauseof economic 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

 

51

----

 

change, our results of operations may be adverselyaffected.  The Company believes that thetargeted nature of its products together with its diversification of advertisingvehicles, including print, on-line, events and television, would minimize theeffects of shifting advertising spending.

 

*We havesubstantial indebtedness and other financial obligations, which consume asubstantial portion of the cash flow that we generate.*

 

A substantial portion of our cash flow isdedicated to the payment of interest on indebtedness and on shares subject tomandatory redemption which reduces funds available for capital expenditures andbusiness opportunities and may limit our ability to respond to adversedevelopments in our business or in the economy.

 

*Our debtinstruments limit our business flexibility by imposing operating and financialrestrictions on our operations.*

 

The agreements and indentures governing ourindebtedness impose specific operating and financial restrictions on us. Theserestrictions impose limitations on our ability to, among other things:

 

•                  change the nature of our business;

•                  incur additional indebtedness;

•                  create liens on our assets;

•                  sell assets;

•                  issue stock;

•                  engage in mergers, consolidations ortransactions with our affiliates;

•                  make investments in or loans to specificsubsidiaries;

•                  make guarantees or specific restrictedpayments; and

•                  declare or make dividend payments on ourcommon or preferred stock.

 

Failure to comply with the terms and covenants in our indebtednesscould lead to a default under the terms of those documents, which would entitlethe lenders to accelerate the indebtedness and declare all amounts owed due andpayable.  Moreover, the instrumentsgoverning almost all of our indebtedness contain cross-default provisions sothat a default under any of our indebtedness may result in a default under ourother indebtedness.  If a cross-defaultoccurs, the maturity of almost all of our indebtedness could be accelerated andbecome immediately due and payable.  Ifthat were to happen, we would not be able to satisfy our debt obligations,which would have a material adverse effect on our ability to continue as agoing concern.  We may not be able tocomply with these restrictions in the future, or in order to comply with theserestrictions we may have to forgo opportunities that might otherwise bebeneficial to us.

 

Under the terms of our debt instruments, we have the ability to makesignificant additional investments in our unrestricted subsidiaries.

 

*KohlbergKravis Roberts & Co. L.P., or KKR, has control of our common stock and hasthe power to elect all the members of our board of directors and to approve anyaction requiring stockholder approval.*

 

As of September 30, 2004, approximately 60%of the shares of our common stock were held by investment partnerships, ofwhich KKR Associates, L.P., a New York limited partnership (“KKR Associates”),and KKR GP 1996 LLC, a Delaware limited liability company (“KKR GP 1996”), eachan affiliate of KKR, are the general partners. KKR Associates and KKR GP 1996have sole voting and investment power with respect to these shares.Consequently, KKR Associates and KKR GP 1996 and their respective general partnersand members, three of whom are also our directors, control us and have thepower to elect all of our directors and approve any action requiringstockholder approval, including adopting amendments to our certificate ofincorporation and approving

 

52

----

 

mergers or sales of all or substantially all of ourassets. KKR Associates and KKR GP 1996 will also be able to prevent or cause achange of control at any time.

 

*Section 404(evaluation of internal controls) requirements of Sarbanes-Oxley Act of 2002.*

 

The Company believes that italready has effective controls in place. PRIMEDIA continues to work diligentlyto meet the year-end deadline for Section 404 of the Sarbanes-Oxley Act of 2002and intends to be in compliance as of December 31, 2004. However, the Section404 compliance process is new for everyone and there remains a significantamount of work that needs to be accomplished by both the Company and its auditfirm to meet the deadline.

 

*Increasesin paper and postage costs may have an adverse impact on our future financialresults.*

 

The price of paper is a significant expenserelating to our print products and direct mail solicitations. The first paperprice increases across all paper grades in four years became effective in 2004. Postage for product distribution anddirect mail solicitations is also a significant expense. We use the U.S. PostalService for distribution of many of our products and marketing materials. InApril 2003, President Bush signed legislation that will hold postal ratesstable until at least 2006. Paper and postage cost increases may have anadverse effect on our future results. We may not be able to pass these costincreases through to our customers.

 

*Incompatiblefinancial systems limit the Company’s ability to operate efficiently.*

 

PRIMEDIA is the result of numerousacquisitions since its inception in 1989. Many of the companies acquired hadfinancial systems which were incompatible. Incompatible financial systemsacross PRIMEDIA had negatively impacted the Company’s ability to moreefficiently analyze data and respond to business opportunities on a timelybasis. Despite the economic slowdown, the Company has been engaged in upgradingits key financial systems, which are designed to make the financial reportingand analysis functions more efficient. To address management’s concernsregarding the lack of compatible financial systems across the Company and thedemands surrounding increased financial disclosure,the Company has installed an integrated enterprise-wide general ledger systemacross all business units. Despite the difficult economic environment, theCompany spent approximately $15,000 on the systems upgrade, of whichapproximately $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 first half of 2005 at a cost of approximately $5,000. The Company recognizesthat there are inherent risks in a system implementation and has takenreasonable steps to mitigate these risks.

 

*We dependon some important employees, and the loss of any of those employees may harmour business.*

 

Our performance is substantially dependent onthe performance of our executive officers and other key employees. In addition,our success is dependent on our ability to attract, train, retain and motivatehigh quality personnel, especially for our management team. The loss of theservices of any of our executive officers or key employees may harm ourbusiness.

 

The past decline in revenues had necessitatedcost cuts including the reduction of certain personnel at the Company. Suchworkforce reductions may impact the ability of remaining personnel to performtheir assigned 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 concernedabout the intense competition in this economy for the hiring and retention ofqualified financial personnel, the inherent risk in certain systemimplementations across the Company and the demands surrounding increasedfinancial disclosure. To mitigate management’s concerns regarding the hiringand retention of qualified financial personnel and to ensure future stabilityin the financial workforce, the Company continues to upgrade the skill level ofits back office financial personnel, consolidatecertain back office functions and cross train individuals in the performance ofmultiple job functions. Additionally, the Company continues to aggressivelyrecruit qualified professionals to strengthen and increase its financialpersonnel. The Company believes that it is currently close to being fullystaffed in the finance area.

 

53

----

 

# **Liquidity,Capital and Other Resources**

 

As of September 30, 2004, the Company had cash and unused creditfacilities of $333,544, as further detailed below under “Financing Arrangements”,compared to $319,125 as of December 31, 2003. On July 7, 2004, the Company redeemed all of its Series J ConvertiblePreferred Stock.  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.

 

The Company believes its liquidity, capital resources and cash flowfrom operations are sufficient to fund planned capital expenditures, workingcapital requirements, interest and principal payments on its debt and sharessubject to mandatory redemption and other anticipated expenditures for the nexttwelve months. The Company has no significant required debt repayments until2008.

 

*WorkingCapital*

 

Consolidated working capital reflects certain industry working capitalpractices and accounting principles, including the recording of deferredrevenue from subscriptions as a current liability as well as the expensing ofcertain advertising, editorial and product development costs as incurred.Consolidated working capital deficiency, which includes current maturities oflong-term debt, was $202,912 at September 30, 2004 compared to $216,376 atDecember 31, 2003.

 

*Cash Flow – 2004 Compared to 2003*

 

Net cash provided by operating activities decreased $7,639 to $36,332from $43,971 for the nine months ended September 30, 2004 and 2003,respectively. This change is primarily due to payments made in 2004 related tothe finalization of the separation agreements of the former CEO and the formerPresident and Interim CEO as well as interest related to shares subject tomandatory redemption paid in 2004 as a result of the Company’s adoption of SFAS150, 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.

 

Net cash provided by investing activities decreased $83,495 to $62,818from $146,313 for the nine months ended September 30, 2004 and 2003,respectively.  Proceeds from the sale ofbusinesses were $70,277 in 2004 compared to $183,741 in 2003. Net capitalexpenditures decreased to $23,500 in 2004, compared to $26,523 in 2003. TheCompany expects capital spending in 2004 to remain consistent with 2003.

 

Net cash used in financing activities was$87,802 in 2004 compared to $190,456 in 2003 predominantly due to proceeds fromthe issuance of $175,000 Senior Floating Rate Notes and a new $100,000 termloan C credit facility offset by voluntary permanent reductions of term loans Aand B of $150,000 and the pay down of all outstanding borrowings under therevolving credit facility in 2004. In addition, in July 2004 the Companyredeemed all of  itsoutstanding Series J Convertible Preferred Stock for approximately $178,000,using cash on hand of approximately $33,000 and $145,000 of advances under itsrevolving credit facility (See further discussion below in OtherArrangements).  In 2003, proceeds fromthe sale of businesses and the issuance of 8% Senior Notes were used to paydown borrowings under the Company’s credit facilities and redeem the Company’sremaining 81/2% Senior Notes. (See further discussion belowin Financing Arrangements).

 

54

----

 

***Financing Arrangements***

 

*BankCredit Facilities*

 

On April 29, 2004, the Company amended its credit facilities agreementwith various financial institutions with JPMorgan Chase Bank, Bank of America,N.A., The Bank of New York, and The Bank of Nova Scotia, as agents (the “bankcredit facilities”).  The debt under thebank credit facilities agreement, including term loan C, and as otherwisepermitted under the bank credit facilities agreement and the indebtednessrelating to the 7 5/8% Senior Notes,8 7/8% Senior Notes,8% Senior Notes and Senior Floating Rate Notes of the Company (togetherreferred to as “Senior Notes”) is secured by a pledge of the stock of PRIMEDIACompanies Inc., an intermediate holding company, owned directly by the Company,which owns directly or indirectly all shares of PRIMEDIA subsidiaries thatguarantee such debt.

 

On May 14, 2004, the Company issued $175,000 principal amount of SeniorFloating Rate Notes Due 2010, 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 three-month LIBOR plus 5.375% per year and the term loan C at LIBORplus 4.375% per year.  The Companyapplied the combined net proceeds from the Senior Floating Rate Notes offeringand the term loan C credit facility to prepay $30,000 of outstanding term loanA commitments and $120,000 of term loan B commitments, with the remainder usedto temporarily pay down all outstanding advances under the revolving creditfacility.  The purpose of these borrowingswas to redeem the Company’s Series J Convertible Preferred Stock, which wascompleted on July 7, 2004

 

Substantially all proceeds from sales of businesses and otherinvestments were used to pay down borrowings under the bank credit facilitiesagreement.  Amounts under the revolvingloan commitment may be reborrowed and used for general corporate and workingcapital purposes as well as to finance certain future acquisitions.  The Company made voluntary pre-paymentstowards the term loans A and B and voluntary permanent reductions of therevolving loan commitment consisting of the following for the nine months endedSeptember 30, 2004 and 2003:

 
| ** **                            | ** ** | **Nine Months  Ended September  30, 2004** | ** ** | **Nine Months  Ended September  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 |   |

 

55

----

 

The bank credit facilities consisted of the following as of September30, 2004:

 
| ** **                    | ** ** | **Revolver** | ** ** | **Term A** | ** ** | **Term B** | ** ** | **Term C** | ** ** | **Total** | ** ** |
|-------------------------------|------------|--------------|------------|------------|------------|------------|------------|------------|------------|-----------|------------|
| Bank Credit Facilities        |       | $            | 405,650    |       | $          | 60,000     |       | $          | 252,906    |      | $          | 100,000 |   | $ | 818,556 |   |
| Borrowings Outstanding        |       | (72,000      | )          | (60,000    | )          | (252,906   | )          | (100,000   | )          | (484,906  | )          |
| Letters of Credit Outstanding |       | (20,139      | )          | —     |       | —     |       | —     |       | (20,139   | )          |
| Unused Bank Commitments       |       | $            | 313,511    |       | $          | —     |       | $          | —     |      | $          | — |   | $ | 313,511 |   |

 

With the exception of the term loan B and C, the amounts borrowed bearinterest, at the Company’s option, at either the base rate plus an applicablemargin ranging from 0.125% to 1.5% or LIBOR plus an applicable margin rangingfrom 1.125% to 2.5%. The term loan B bears interest at the base rate plus 1.75%or LIBOR plus 2.75%.  The term loan Cbears interest at the base rate plus 3.375% or LIBOR plus 4.375%.  At September 30, 2004 and December 31, 2003,the weighted average variable interest rate on all outstanding borrowings underthe bank credit facilities was 4.3% and 3.6%, respectively.

 

Under the bank credit facilities, the Companyhas agreed to pay commitment fees at a per annum rate of either 0.375% or 0.5%,depending on its debt to EBITDA ratio, as defined in the bank credit facilitiesagreement, on the daily average aggregate unutilized commitment under therevolving loan commitment.  During thefirst and second quarters of 2004, the Company’s commitment fees were paid at aweighted average rate of 0.375% and during the third quarter of 2004,0.432%.  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.

 

The commitments under the revolving loanportion of the bank credit facilities are subject to mandatory reductionssemi-annually on June 30 and December 31, commencing June 30, 2005, with thefinal reduction on June 30, 2008.  Theaggregate mandatory reductions of the revolving loan commitments under the bankcredit facilities are $42,700 in 2005, $64,050 in 2006, $128,100 in 2007 and afinal reduction of $170,800 in 2008.  Tothe extent that the total revolving credit loans outstanding exceed the reducedcommitment amount, these loans must be paid down to an amount equal to or lessthan the reduced commitment amount. However, if the total revolving credit loans outstanding do not exceedthe reduced commitment amount, then there is no requirement to pay down any ofthe revolving credit loans.  Remainingaggregate term loan payments 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.

 

The bank credit facilities agreement, amongother things, limits the Company’s ability to change the nature of itsbusinesses, incur indebtedness, create liens, sell assets, engage in mergers,consolidations or transactions with affiliates, make investments in or loans tocertain subsidiaries, issue guarantees and make certain restricted paymentsincluding dividend payments on or repurchases of the Company’s common stock inexcess of $75,000 in any given year.

 

56

----

 

The bank credit facilities and Senior Notesagreements of the Company contain certain customary events of default whichgenerally give the banks or the noteholders, as applicable, the right toaccelerate payments of outstanding debt. Under the bank credit facilities agreement, these events include:

 

•                  failure to maintain required covenant ratios, asdescribed below;

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

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

•                  occurrence of certain insolvency proceedings withrespect 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 a change ofcontrol of the Company.

 

The events of default contained in PRIMEDIA’s Senior Notes are similarto, but generally less restrictive than, those contained in the Company’s bankcredit facilities.

 

*ContractualObligations*

 

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

 
| **Contractual  Obligations**                                                          | ** ** | **Total**     | ** ** | **Less than  1 year** | ** ** | **Payments Due by Period** | ** ** | **After  5 years** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------|------------|-----------------------|------------|----------------------------|------------|--------------------|------------|
| **1-3 years**                                                                         | ** ** | **4-5 years** |
|                                                                                  |       |          |       |                  |       |                       |       |               |       |   |   |
| Long-term debt obligations (net of  unamortized discount)                             |       | $             | 1,655,696  |                  | $          | 10,881                     |       | $                  | 41,528     |   | $ | 563,090 |   | $ | 1,040,197 |   |
| Interest on long-term debt obligations(1)                                             |       | 761,050       |       | 120,977               |       | 255,141                    |       | 215,941            |       | 168,991 |   |
| 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) |       | 200,857       |       | 43,782                |       | 87,564                     |       | 59,649             |       | 9,862 |   |
| Capital lease obligations                                                             |       | 25,143        |       | 5,341                 |       | 6,248                      |       | 4,003              |       | 9,551 |   |
| Interest on capital lease obligations                                                 |       | 7,264         |       | 1,649                 |       | 2,370                      |       | 1,688              |       | 1,557 |   |
| Operating lease obligations                                                           |       | 256,162       |       | 48,478                |       | 80,019                     |       | 48,966             |       | 78,699 |   |
| Total Contractual Obligations                                                         |       | $             | 3,380,731  |                  | $          | 231,108                    |       | $                  | 472,870    |   | $ | 1,060,824 |   | $ | 1,615,929 |   |

 

----

(1)                                  Interest payments are based on the Company’sprojected interest rates and estimated principal amounts outstanding for theperiods presented.

 

The Company had $72,000 of borrowingsoutstanding at September 30, 2004 under the revolving loan portion of the bankcredit facilities, which expires in 2008. Assuming this balance remainsconstant until the end of the term, and application of the Company's projectedinterest rates, total interest payments related to the revolver under our bankcredit facilities are estimated to be $16,227 for the periods presented in theabove table. These interest payments are not included in the above table.

 

The Company has othercommitments in the form of letters of credit of $20,139 aggregate face valuewhich expire on or before September 30, 2005.

 

*OffBalance Sheet Arrangements*

 

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

 

57

----

 

*CovenantCompliance*

 

As defined in the amended bank creditfacilities agreement, the maximum allowable debt leverage ratio was amended to6.25 to 1 through September 30, 2005. The maximum debt leverage ratio decreases to 6.00 to 1, 5.75 to 1, 5.50to 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 July1, 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, remains unchanged at 1.05 to 1through maturity.  The Company is incompliance with all of the financial and operating covenants of its financingarrangements.

 

The Company is herewithproviding detailed information and disclosure as to the methodology used indetermining compliance with the leverage ratio in the bank credit facilitiesagreement.  Under its bank creditfacilities and Senior Note agreements, the Company is allowed to designatecertain businesses as unrestricted subsidiaries to the extent that the value ofthose businesses does not exceed the permitted amounts, as defined in theseagreements. The Company has designated certain of its businesses asunrestricted (the “Unrestricted Group”), which primarily represent Internetbusinesses, trademark and content licensing and service companies, new launches(including traditional start-ups), other properties under evaluation forturnaround or shutdown and foreign subsidiaries. Except for those specificallydesignated by the Company as unrestricted, all businesses of the Company arerestricted (the “Restricted Group”). Indebtedness under the bank credit facilities and Senior Note agreementsis guaranteed by each of the Company’s domestic subsidiaries in the RestrictedGroup in accordance with the provisions and limitations of the Company’s bankcredit facilities and Senior Note agreements. The guarantees are full, unconditional and joint and several.  The Unrestricted Group does not guarantee thebank credit facilities or Senior Notes. For purposes of determining compliance with certain financial covenantsunder the Company’s bank credit facilities agreement, the Unrestricted Group’sresults (positive or negative) are not reflected in the Consolidated EBITDA ofthe Restricted Group which, as defined in the bank credit facilities agreement,excludes losses of the Unrestricted Group, non-cash charges and restructuringcharges and is adjusted primarily for the trailing four quarters results ofacquisitions and divestitures and estimated savings for acquired businesses.

 

58

----

 

The followingrepresents a reconciliation of EBITDA of the Restricted Group for purposes ofthe leverage ratio as defined in the bank credit facilities agreement tooperating income for the three and twelve months ended September 30, 2004:

 
| ** **                                                         | ** ** | **For the Three  Months Ended  September 30,  2004** | ** ** | **For the Twelve  Months Ended  September 30,  2004** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------------|------------|
|                                                               |       |                                                 |       |                                                  |       |
| EBITDA of the Restricted Group                                     |       | $                                                    | 67,617     |                                                  | $          | 303,796 |   |
| EBITDA loss of the Unrestricted Group                              |       | (9,381                                               | )          | (49,378                                               | )          |
| Divestiture and other adjustments                                  |       | 1,733                                                |       | 6,572                                                 |       |
| Depreciation of property and equipment                             |       | (8,819                                               | )          | (38,888                                               | )          |
| Amortization of intangible assets and other                        |       | (4,452                                               | )          | (38,810                                               | )          |
| Severance related to separated senior  executives                  |       | —                                               |       | (4,454                                                | )          |
| Non-cash compensation                                              |       | (1,344                                               | )          | (13,221                                               | )          |
| Provision for severance, closures and  restructuring related costs |       | (1,926                                               | )          | (13,473                                               | )          |
| Provision for unclaimed property                                   |       | —                                               |       | (5,500                                                | )          |
| Income on the sales of businesses and  other, net                  |       | 293                                                  |       | 277                                                   |       |
| Operating income                                                   |       | $                                                    | 43,721     |                                                  | $          | 146,921 |   |

 

The EBITDA loss of theUnrestricted Group, as defined in the bank credit facilities agreement, iscomprised of the following categories:

 
| ** **                                      | ** ** | **For the Three  Months Ended  September 30,  2004** | ** ** | **For the Twelve  Months Ended  September 30,  2004** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------------|------------|
| Internet properties                             |       | $                                                    | 1,528      |                                                  | $          | 14,622 |   |
| Traditional turnaround and start-up  properties |       | 6,386                                                |       | 28,402                                                |       |
| Related overhead and other charges              |       | 1,467                                                |       | 6,354                                                 |       |
|                                            |       | $                                                    | 9,381      |                                                  | $          | 49,378 |   |

 

The Company hasestablished intercompany arrangements that reflect transactions, such asleasing, licensing, sales and related services and cross-promotion, betweenCompany businesses in the Restricted Group and the Unrestricted Group whichmanagement believes are on an arms’ length basis and as permitted by the bankcredit facilities and Senior Note agreements. These intercompany arrangementsafford strategic benefits across the Company’s properties and, in particular,enable the Unrestricted Group to utilize established brands and content,promote brand awareness and increase traffic and revenue to the properties ofthe Unrestricted Group. For company-wide consolidated financial reporting,these intercompany transactions are eliminated in consolidation.

 

The calculation of theCompany’s leverage ratio, as required under the bank credit facilitiesagreement for covenant purposes, is defined as the Company’s consolidated debtdivided by the EBITDA of the Restricted Group. At September 30, 2004, this leverage ratio was approximately 5.6 to 1.0.

 

59

----

 

*OtherArrangements*

 

During 2002, the Company’s Board of Directors authorized the exchangeof up to $165,000 of the Company’s Exchangeable Preferred Stock for commonstock.  As of September 30, 2004, theCompany has exchanged $75,441 liquidation value of Series D ExchangeablePreferred Stock, Series F Exchangeable Preferred Stock and Series HExchangeable Preferred Stock (carrying value of $73,874) for 14,360,306 sharesof common stock of the Company.

 

In addition, the Company’s Board of Directors authorized the exchangeby the Company of up to $50,000 of Exchangeable Preferred Stock for commonstock and the subsequent repurchase of the common stock issued in connectionwith the exchange transactions.  As ofSeptember 30, 2004, the Company has exchanged $25,000 liquidation value ofSeries D Exchangeable Preferred Stock, Series F Exchangeable Preferred Stockand Series H Exchangeable Preferred Stock (carrying value of $24,597) for8,733,842 shares of common stock of the Company and subsequently repurchasedall of the common stock issued in connection with such exchanges.

 

The Series J Convertible Preferred Stock was convertible at the optionof the holder after one year from the date of issuance, into approximately25,100,000 shares of the Company’s common stock at a conversion price of $7 pershare, subject to adjustment.  Dividendson the Series J Convertible Preferred Stock accrued quarterly at an annual rateof 12.5% and were payable quarterly in-kind. The Company paid dividends-in-kindof 17,584 and 105,213 shares of Series J Convertible Preferred Stock valued at$2,198 and $13,152 during the three and nine months ended September 30, 2004,respectively, and 38,761 and 112,796 shares of Series J Convertible PreferredStock valued at $4,845 and $14,099 during the three and nine months endedSeptember 30, 2003, respectively.

 

On May 14, 2004 the Company issued $175,000 of Senior Floating RateNotes due 2010 and entered into a new $100,000 term loan C credit facility witha maturity date of December 31, 2009. The Company used the proceeds from these transactions to make voluntarypre-payments to the term loans A and B with the remainder used to temporarilypay down all outstanding advances under its revolving credit facility.

 

On July 7, 2004, the Company redeemed all of its outstanding Series JConvertible Preferred Stock, representing an aggregate of 1,424,306 shares forapproximately $178,000, using cash on hand of approximately $33,000 and$145,000 of advances under its revolving credit facility.

 

*Contingencies*

 

The Company is involved in ordinary and routine litigation incidental toits 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.

 

# **CriticalAccounting Policies and Estimates**

 

During the first nine months of 2004, therewere no significant changes related to the Company’s critical accountingpolicies and estimates as disclosed in the Company’s annual report on Form 10-Kfor the year ended December 31, 2003.

 

# **RecentAccounting Pronouncements**

 

In 2003, the Company adopted an accountingchange, as required by the Financial Accounting Standards Board that impactsyear-over-year comparisons of financial results.  This change is summarized below:

 

60

----

 

*SFAS 150,*“*Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity*”

 

Effective July 1, 2003, the Company prospectively adopted SFAS150.  SFAS 150 requires the Company toclassify as long-term liabilities its Series D Exchangeable Preferred Stock,Series F Exchangeable Preferred Stock and Series H Exchangeable Preferred Stockand to reclassify dividends from this preferred stock as interest expense.  As a result of the adoption by the Company ofSFAS 150, the Series D Exchangeable Preferred Stock, Series F ExchangeablePreferred Stock and Series H Exchangeable Preferred Stock are now collectivelydescribed as “shares subject to mandatory redemption” on the accompanyingcondensed consolidated balance sheets as of September 30, 2004 and December 31,2003.  Dividends on these shares are nowdescribed as “interest on shares subject to mandatory redemption” and includedin income from continuing operations for the three and nine months endedSeptember 30, 2004, whereas previously they were presented below net income(loss) as preferred stock dividends. This adoption did not have an impact on income (loss) applicable tocommon shareholders or basic and diluted income (loss) per common share for anyof the periods presented on the accompanying condensed statements ofconsolidated operations.

 

**Impact ofInflation and Other Costs**

 

The impact of inflation was immaterial during2003 and through the first nine months of 2004. Postage for productdistribution and direct mail solicitations is a significant expense of theCompany.  The Company uses the U.S.Postal Service for distribution of many of its products and marketingmaterials.  There were no increases inpostage rates in 2003 or in the first nine 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 nine months of 2004, paper costswere approximately 7% of the Company’s total operating costs and expenses.  The Company’s paper expense increasedapproximately 3% during the first nine months of 2004 as compared to the sameperiod in 2003.  The Company attributesthe increase in paper expenses primarily to higher volume usage as a result ofproduct upgrades and increased folio sizes.

 

**Seasonality**

 

The Company’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.

 

61

----

 

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

 

During the first nine months of 2004, therewere no significant changes related to the Company’s market risk exposure.

 

**Item 4****.****  CONTROLS ANDPROCEDURES**

 

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

### * *

The Company’s management, with the participation of the Company’s ChiefExecutive Officer, Chief Financial Officer and Chief Accounting Officer, hasevaluated the effectiveness of the Company’s disclosure controls and proceduresas of the end of the period covered by this report.  Based on such evaluation, the Company’s ChiefExecutive Officer, Chief Financial Officer and Chief Accounting Officer haveconcluded that, as of the end of such period, the Company’s disclosure controlsand procedures are effective in recording, processing, summarizing andreporting, on a timely basis, information required to be disclosed by theCompany in the reports that it files or submits under the Securities ExchangeAct of 1934, as amended.

 

### ***Internal Control Over FinancialReporting***

### * *

During the nine month period ended September30, 2004, there have not been any changes in the Company’s internal controlover financial reporting that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

62

----

 

**PART II****.****  OTHER INFORMATION**

 

**Item6**. EXHIBITS

 
| (a)    |   | Exhibits                                                                                                                                                                                                                                                                                                                                    |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| 3.1    |   | Certificate of  Incorporation of The Virtual Flyshop, Inc. (1)                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| 3.2    |   | By-laws of The Virtual  Flyshop, Inc. (1)                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| 3.3    |   | Third Amended and Restated  Certificate of Incorporation of About, Inc. (1)                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| 3.4    |   | Second Amended and  Restated By-laws of About, Inc. (1)                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| 4.1    |   | Form of Senior Floating  Rate Note due 2010(2)                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| 4.2    |   | Senior Floating Rate Note  Indenture (including form of note and form of guarantee)(2)                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| 4.3    |   | Registration Rights  Agreement dated as of May 14, 2004, among PRIMEDIA Inc., certain of its  subsidiaries and Banc of America Securities LLC, Citigroup Global Markets  Inc., J.P. Morgan Securities Inc., Lehman Brothers Inc., BNY Capital Market,  Inc. and Scotia Capital (USA) Inc., as representatives of the initial  purchasers(2) |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| 10.1   |   | Second Amendment, dated as  of April 29, 2004, with JPMorgan Chase Bank (f/k/a The Chase Manhattan Bank),  as administrative agent, Bank of America N.A., as syndication agent, and The  Bank of New York and The Bank of Nova Scotia, as co-documentation agents(2)                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| 10.2.1 |   | Credit Agreement, dated as  of May 14, 2004, with Bank of America N.A., as syndication agent, Citicorp  North America, Inc., as co-syndication agent and JPMorgan Chase Bank as  administrative agent(2)                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| 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(*)                                                                                                                                                                                             |

 

----

(1) Incorporated byreference to PRIMEDIA Inc.’s Registration Statement Form S-4 Registration No333-113742)

 

63

----

 

(2) Incorporated by reference to PRIMEDIAInc.’s Registration Statement Form S-4 Registration No 333-120138)

 

(*) Filed herewith.

 

64

----

 

SIGNATURES

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
|   |             |   |                                                           | PRIMEDIA  Inc. |   |   |
|--------|------------------|--------|----------------------------------------------------------------|----------------|--------|--------|
|   |             |   | (Registrant)                                                   |           |   |
|   |             |   |                                                           |           |
|   |             |   |                                                           |           |
| Date:  | November 9, 2004 |   | /s/ Kelly P. Conlin                                            |           |
|   |             |   | (Signature)                                                    |           |
|   |             |   | Chief Executive Officer and President                          |           |
|   |             |   | (Principal Executive Officer)                                  |           |
|   |             |   |                                                           |           |
|   |             |   |                                                           |           |
| Date:  | November 9, 2004 |   | /s/ Matthew A. Flynn                                           |           |
|   |             |   | (Signature)                                                    |           |
|   |             |   | Senior Vice President, Chief Financial Officer and Treasurer   |
|   |             |   | (Principal Financial Officer)                                  |           |
|   |             |   |                                                           |           |
|   |             |   |                                                           |           |
| Date:  | November 9, 2004 |   | /s/ Robert J. Sforzo                                           |           |
|   |             |   | (Signature)                                                    |           |
|   |             |   | Senior Vice President, Chief Accounting Officer and Controller |
|   |             |   | (Principal Accounting Officer)                                 |           |
|        |                  |        |                                                                |                |        |        |  |

 

65

----