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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K


[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)   
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 2003

OR

[    ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)  
OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File number: 1-11106

PRIMEDIA Inc.

(Exact name of registrant as specified in its charter)

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

745 Fifth Avenue, New York, New York

10151
(Address of principal executive offices) (Zip Code)

(212) 745-0100
(Registrant's telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, par value $.01 per share   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None


        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes     X          No          

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

[            X            ]

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

Yes     X          No          

        The aggregate market value of the voting common equity of PRIMEDIA Inc. ("PRIMEDIA") which is held by non-affiliates of PRIMEDIA, computed by reference to the closing price as of the last business day of the registrant's most recently completed second fiscal quarter, June 30, 2003, was approximately $303 million. The registrant has no non-voting common stock.

        As of February 27, 2004, 259,916,007 shares of PRIMEDIA's Common Stock were outstanding.

        The following documents are incorporated into this Form 10-K by reference: None.




Table of Guarantors

Exact Name of
Registrant as Specified
in its Charter

  State or other
Jurisdiction of
Incorporation or
Organization

  Primary Standard
Industrial
Classification
Code Number

  I.R.S. Employer
Identification Number

Canoe & Kayak, Inc.   Delaware   51112   41-1895510
Channel One Communications Corp.   Delaware   51312   13-3783278
Cover Concepts Marketing Services, LLC   Delaware   54189   04-3370389
CSK Publishing Company Inc.   Delaware   51112   13-3023395
Films for the Humanities & Sciences, Inc.   Delaware   51211   13-1932571
Go Lo Entertainment, Inc.   California   56192   95-4307031
Haas Publishing Companies, Inc.   Delaware   51113   58-1858150
Hacienda Productions, Inc.   Delaware   51211   13-4167234
HPC Brazil, Inc.   Delaware   51113   13-4083040
IntelliChoice, Inc.   California   51112   77-0168905
Kagan Media Appraisals, Inc.   Delaware   51112   77-0157500
Kagan Seminars, Inc.   Delaware   51112   94-2515843
Kagan World Media, Inc.   Delaware   51112   77-0225377
McMullen Argus Publishing, Inc.   California   51112   95-2663753
Media Central IP Corp   Delaware   551112   13-4199107
Motor Trend Auto Shows Inc.   Delaware   56192   57-1157124
Paul Kagan Associates, Inc.   Delaware   51112   13-4140957
PRIMEDIA Business Magazines & Media Inc.   Delaware   51112   48-1071277
PRIMEDIA Companies Inc.   Delaware   551112   13-4177687
PRIMEDIA Enthusiast Publications, Inc.   Pennsylvania   51112   23-1577768
PRIMEDIA Finance Shared Services, Inc.   Delaware   551112   13-4144616
PRIMEDIA Holdings III Inc.   Delaware   551112   13-3617238
PRIMEDIA Information Inc.   Delaware   51112   13-3555670
PRIMEDIA Leisure Group Inc.   Delaware   551112   51-0386031
PRIMEDIA Magazines Inc.   Delaware   51112   13-3616344
PRIMEDIA Magazine Finance Inc.   Delaware   51112   13-3616343
PRIMEDIA Special Interest Publications Inc.   Delaware   51112   52-1654079
PRIMEDIA Specialty Group Inc.   Delaware   551112   36-4099296
PRIMEDIA Workplace Learning LLC   Delaware   61143   13-4119787
PRIMEDIA Workplace Learning LP   Delaware   61143   13-4119784
Simba Information Inc.   Connecticut   51112   06-1281600
The Virtual Flyshop, Inc.   Colorado   51112   84-1318377

        The address, including zip code, and telephone number, including area code, of each additional registrant's principal executive office is 745 Fifth Avenue, New York, New York 10151 (212-745-0100).

        These companies are listed as guarantors of the debt securities of the registrant. The consolidating financial statements of the Company depicting separately its guarantor and non-guarantor subsidiaries are presented as Note 27 of the notes to the consolidated financial statements. All of the equity securities of each of the guarantors set forth in the table above are owned, either directly or indirectly, by PRIMEDIA Inc., and there has been no default during the preceding 36 calendar months with respect to any indebtedness or material long-term leases of PRIMEDIA Inc. or any of the guarantors.

ii


PRIMEDIA Inc.
Annual Report on Form 10-K
December 31, 2003

 
 
 
  Page
PART I        
  Item 1.   Business   1
  Item 2.   Properties   9
  Item 3.   Legal Proceedings   10
  Item 4.   Submission of Matters to a Vote of Security Holders   10

PART II

 

 

 

 
  Item 5.   Market for Registrant's Common Equity and Related Stockholder Matters   11
  Item 6.   Selected Financial Data   12
  Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations   15
  Item 7A.   Quantitative and Qualitative Disclosures About Market Risk   59
  Item 8.   Financial Statements and Supplementary Data   61
  Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   136
  Item 9A.   Evaluation of Disclosure Controls and Procedures   136

PART III

 

 

 
  Item 10.   Directors and Executive Officers of the Registrant   137
  Item 11.   Executive Compensation   140
  Item 12.   Security Ownership of Certain Beneficial Owners   145
  Item 13.   Certain Relationships and Related Transactions   148
  Item 14.   Principal Accountant Fees and Services   149

PART IV

 

 

 
  Item 15.   Exhibits, Financial Statement Schedule and Reports on Form 8-K   150
        Signatures   151
        Valuation and Qualifying Accounts   S-1
        Exhibit Index   E-1

iii



PART I

ITEM 1.  BUSINESS.

General

        PRIMEDIA Inc. ("PRIMEDIA" or the "Company") is one of the largest targeted media companies in the United States. Our properties deliver content via print (magazines, books and directories), live events (trade and consumer shows), video, as well as the Internet and other marketing solutions in niche markets.

        In October 2003, PRIMEDIA appointed Kelly P. Conlin as its President and Chief Executive Officer. Mr. Conlin is now PRIMEDIA's chief operating decision maker. After reviewing the Company's operations, Mr. Conlin and the executive team implemented a change in the Company's reportable segments effective in the fourth quarter of 2003 to conform with the way the Company's businesses are assessed and managed. As a result of this change in reportable segments, all prior periods were restated to conform with the new segment format.

        The Company's newly designated segments are comprised of: Enthusiast Media, Consumer Guides, Business Information and Education and Training. The results of these newly established segments will, consistent with past practice, be regularly reviewed by the Company's chief operating decision maker and the executive team to determine how resources will be allocated to each segment and to assess the performance of each segment.

Enthusiast Media Segment

        PRIMEDIA Enthusiast Media encompasses the Company's consumer magazines, their related Web sites and live events, and About.com ("About"). The Enthusiast Media segment includes 121 consumer magazine titles, is the third largest overall producer of magazine advertising pages in the U.S., according to Media Industry Newsletter, February 2, 2004, and has leading market positions in the Automotive, Outdoors, Action Sports, Crafts, History, Marine, Equine and Home Technology categories. Brands include Automobile, Creating Keepsakes, Florida Sportsman, Hot Rod, In-Fisherman, Motor Trend, Power & Motoryacht, Super Street, Surfer, Stereophile and Truckin'. About and the magazine-branded Web sites collectively are the 10th most visited collection of consumer Web sites in the U.S. as ranked by Nielsen/Net Ratings, and had an average of 29.6 million unique visitors each month in 2003.

Enthusiast Media Products

Group

  Publications
  Web Sites
  Events
  Representative Brands
Enthusiast Automotive   52   52   31   Hot Rod, Truckin', Super Street, Lowrider, Motorcyclist, Four Wheeler, Muscle Mustangs & Fast Fords
Consumer Automotive   3   4   17   Motor Trend, Automobile, Truck Trend, IntelliChoice
Outdoors   16   17   17   In-Fisherman, Game & Fish, Florida Sportsman
Action Sports   10   11   25   Surfer, Snowboarder, Slam
Home Technology   7   5   3   Stereophile, Home Theater, Shutterbug, PHOTOgraphic
Lifestyles   33   21   14   Creating Keepsakes, Power & Motoryacht, EQUUS, SAIL, Soap Opera Digest, American History
Online Guides     450     About.com
   
 
 
   
Total   121   560   107    
   
 
 
   

        For the year ended December 31, 2003, in the Enthusiast Media segment, 54% of revenues were from advertising, 38% from circulation and 8% from other sources.



        The Company's consumer magazine circulation revenue is divided equally between retail sales (largely newsstand) and subscriptions. To acquire new subscribers, the Company solicits through direct mail, telemarketing, in-magazine promotions and the Internet, including the Company's Web sites.

        Readers value enthusiast magazines for their targeted editorial content and also rely on them as primary sources of information in the relevant topic areas. This aspect makes the enthusiast magazines important media buys for advertisers. Advertising sales for the Company's enthusiast magazines are generated largely by in-house sales forces. The magazines compete for advertising on the basis of circulation and the niche markets they serve. Each of the Company's enthusiast magazines faces competition in its subject area from a variety of publishers and competes for readers on the basis of the high quality of its targeted editorial, which is provided by in-house and freelance writers.

        The Company publishes 55 automotive magazines, including consumer automotive titles such as Automobile and Motor Trend which cater to the high-end and new car automotive market, as well as highly specialized enthusiast titles such as Truckin', Lowrider, Muscle Mustang & Fast Fords, Vette, Motorcyclist, Dirt Rider and Sport Compact Car. The Company's 55 automotive magazines represent the largest portfolio of magazines in the enthusiast and the consumer automotive categories. Supplementing the print publications, PRIMEDIA has a strong presence on the Internet with a companion Web site to each publication or a presence for each publication on the About network. In the high-end and new car markets, PRIMEDIA's publications compete against Car and Driver and Road and Track, both owned by Hachette Filipacchi Media.

        The Company is a leading publisher of magazines for outdoor and other enthusiast markets with such titles as Fly Fisherman, Power & Motoryacht, EQUUS, and Creating Keepsakes. The Company also publishes numerous magazines targeting action sports enthusiasts such as Surfer, Surfing, Skateboarder and Snowboarder. In the consumer technology market, the Company's publications include PHOTOgraphic, Home Theater and Stereophile. The Company's major competitors in the enthusiast market include the Time4Media division of Time Warner Inc., Hachette Filipacchi Media and Meredith Publishing, a subsidiary of Meredith Corporation. The Company also competes in individual enthusiast markets with a number of smaller, privately-owned or regionally-based magazine publishers.

        PRIMEDIA publishes two leading soap opera magazines, Soap Opera Digest and Soap Opera Weekly. Both publications compete with Bauer Publishing.

        The Company operates RetailVision, a specialty magazine distribution company, which distributes over 700 titles, including the titles of 80 other publishers, to over 50,000 independent niche retail locations such as auto parts retailers, craft shops, tackle shops, and music stores.

        About is a leading producer of information and original content on the Internet. About generates revenue from two primary sources: brand advertising on the About network and auction-based pay per click classified advertising (both "search" and "contextual").

        About consists of a network of 450 highly-targeted Web sites covering over 10,000 discrete topics. The information and original content on the Web sites are generated by experts known as "Guides." All Guides must successfully complete the About training program. In the fourth quarter of 2003, the Company entered into a four-year services agreement with Google Inc. under which Google is the exclusive provider of auction-based classifieds for the About network and most of the Company's other Enthusiast Media Web sites.

        In the brand advertising arena, the About network competes with other large-scale Internet properties, such as America Online, Yahoo! and Microsoft Network, to sell display advertising to national advertisers and competes with many smaller targeted Web sites whose content overlaps the content on the individual guide sites.

2



Consumer Guides Segment

        PRIMEDIA Consumer Guides includes the Company's Apartment Guide, New Homes Guide, their related Web sites and DistribuTech. PRIMEDIA is the largest publisher and distributor of rental apartment guides in the U.S. with 81 guides in 75 regional markets with a combined monthly circulation of 1.6 million. Most of the Company's apartment guide publications are distributed monthly and provide informational listings about featured apartment communities. Virtually 100% of Apartment Guide advertising revenue is generated by apartment community managers who need to fill vacant apartments. All of the Company's consumer guides are free to users.

Consumer Guides Products

Category

  Northeast
  Southeast
  Midwest
  West
  TOTAL
Apartment Guide   25   23   14   19   81
New Homes Guide   5   4   5   3   17
DistribuTech Retail Locations   5,121   3,006   2,448   5,452   16,027
   
 
 
 
 
Major Markets   Washington D.C., Philadelphia, Baltimore, Chicago   Atlanta, Tampa, Orlando, Broward   Dallas-Fort Worth, Houston, Austin,
Kansas City
  Phoenix,
Las Vegas,
Los Angeles,
San Francisco
   

        The Company is a leading provider of apartment listings due to the cost effectiveness of its products as measured by the cost per lease to the advertiser. The average number of monthly unique visitors to the Company's Web site, Apartmentguide.com, was approximately 1 million per month in 2003. Apartmentguide.com, which carries all of the listings included in the print products, plus listings for cities in which the Company has no publication, listed approximately 21,000 properties as of December 31, 2003. The Web site offers many premium features not provided by its print products including virtual tours and search functionality. Approximately $8.5 million of revenue was generated by the sale of these premium products during 2003. Through the print guides and the Apartmentguide.com Web site, the Company generated 5.8 million leads for apartment property managers in 2003. The majority of Apartment Guide customers purchase 12-month contracts, and, in 2003, approximately 90% of standard listing contracts were renewed when they expired. The total number of advertisers increased to approximately 23,000 in 2003 from 22,500 in 2002. Advertising in the consumer guides is generated by a 307 person sales force located throughout the United States. The Company's national competitors include Trader Publishing Company (publishers of For Rent) and Network Communications Inc. (publishers of Apartment Finder).

        The Company's DistribuTech division is the nation's largest distributor of free publications, and distributes its own consumer guides and over 2,000 third-party titles. In 2003, publications were distributed to more than 16,000 grocery, convenience, video, drug stores, universities, military bases, major employers and other locations in 73 metropolitan areas. The majority of these locations have exclusive distribution agreements with DistribuTech. The guides are typically displayed in free-standing, multi-pocket racks. DistribuTech generates revenues by leasing rack pockets to other publications and ensuring that the publications are stocked in specific racks. The Company has approximately 300 drivers servicing all locations. These drivers service the racks at each location an average of 8.6 times per month. DistribuTech competes for third-party publication distribution primarily on the basis of its prime retail locations and its service. DistribuTech's principal competitor is Trader Distribution Services, a division of Trader Publishing Company.

3


        The Company is a leader in new home guides with publications in 17 major markets including Denver, Phoenix, Dallas-Fort Worth and Philadelphia, and plans to launch in additional markets this year. Additionally, Consumer Guides will launch its first Auto Guide in Charlotte, North Carolina in March 2004 with other markets planned for 2004. The Company is building on its proprietary distribution channels and successful high margin business model to enter the substantial market for pre-owned vehicle advertising by auto dealers. The new Auto Guide will publish current auto dealer pre-owned car inventory in that market and also provide customer leads to dealers through its Web site, initially charlotteautoguide.com.

Business Information Segment

        PRIMEDIA Business Information is a leading publisher of Business Information magazines, directories, data products, buyer's guides, Web sites and events that provide vital information to business professionals in more than a dozen industries. In 2003, over 80% of the Company's business information magazine titles ranked number one or number two in their category based on advertising pages as tracked by Inquiry Management Systems.

Business Information Products

Category

  Publications
  Directories,
Data Products
& Buyer's
Guides

  Web
Sites

  Events
  Representative Brands
Transportation and Public Services   15   13   19   1   Price Digests, AC-U-KWIK, Clymer Manuals, Ward's Auto World, American Trucker, Fire Chief, Waste Age, American School and University

Entertainment and Media

 

13

 

11

 

17

 

4

 

Broadcast Engineering
, Electronic Musician, MIX, Video Systems, Millimeter

Technology

 

7

 

7

 

9

 

2

 

Electronics Source Book
, Telephony, Paper Film and Foil Converter

Energy and Construction

 

12

 

9

 

21

 

6

 

Electrical Construction & Maintenance
, Transmission and Distribution World, Concrete Products, Equipment Watch, Access Control and Security Systems

Marketing and Meetings

 

11

 

7

 

15

 

6

 

Meetings magazines
, Special Events, American Demographics

Financial Services and Real Estate

 

4

 

2

 

5

 


 

Registered Rep.
, Trusts and Estates, National Real Estate Investor

Agribusiness and Textiles

 

14

 

2

 

17

 


 

BEEF
, Corn and Soybean Digest, Stitches, Modern Uniforms

Fitness and Healthcare

 

2

 

2

 

5

 

4

 

Club Industry
, Homecare
   
 
 
 
   
Total   78   53   108   23    
   
 
 
 
   

        Each of the business information magazines is distributed almost exclusively to purchasing decision-makers in a targeted industry group, and provides a highly targeted advertising medium to that industry. These magazines compete for advertising on the basis of advertising rates, circulation, reach, editorial content and readership commitment. Advertising sales are made by in-house sales forces and are supplemented by independent representatives in selected regions and overseas.

4


        The Company also publishes 53 products that provide in-depth data on selected markets. Ward's Automotive Reports is recognized as the authoritative source for industry-wide statistics on automotive production and sales. In addition, the Company publishes used vehicle valuation information in print and electronic formats including Equipment Watch. Other data based products include The Electronics Source Book and AC-U-KWIK.

        The Company sponsors 23 conferences and trade shows, in most cases serving the advertisers and readers of the corresponding publications, including Waste Expo, Lighting Dimensions International, Promo Expo and Club Industry National.

        The Company competes with large domestic and international competitors across the different business information markets that it serves. These competitors include Reed Business Information (owned by Reed Elsevier Group plc), VNU Business Media (owned by VNU NV) and Advanstar Communications.

        In 2004, the Company will actively seek to further leverage Business Information's powerful brands, focusing on new revenue streams from ancillary products and outside alliances. The Company will also work to enhance existing marketing programs beyond print advertising, expanding the use of e-mail newsletters, Webcasts, market databases and other tools, to better identify prospects and deliver leads to customer sales organizations.

Education and Training Segment

        PRIMEDIA Education and Training is comprised of the businesses that provide content to schools, universities, government and other public institutions as well as training. This segment includes Channel One, Films for the Humanities and Sciences and Workplace Learning.

Education and Training Products

Business

  Description
  Key Brands/Markets
Channel One   Reaches nearly 8 million students, 350,000+ classrooms, and almost 12,000 schools across the U.S.   Channel One News

Films for the Humanities and Sciences

 

Distributes 2,900 owned products and 10,100 licensed products

 

Films for the Humanities, Cambridge, Meridian, and Curriculum Media Group

Workplace Learning

 

Creates, produces, and distributes proprietary content for employee training. Platforms include satellite programming, interactive multimedia, Internet, books, CDs, and videos

 

Banking, Government, Healthcare, Public & Private Security, Industrial

        Channel One News is the highest rated teen television program, reaching nearly 8 million teens in over 350,000 classrooms across the U.S. and is the only daily, closed circuit television news program delivered to secondary school students in their classrooms. Channel One News' average teen audience is ten times larger than the average teen audience of the five cable news networks and the evening newscasts of ABC, CBS, and NBC combined, and is twenty times larger than MTV's average weekly teen audience.

        Channel One generates the majority of its revenue by selling the two minutes of advertising shown during each 12-minute Channel One News daily newscast. Channel One News airs only during the school year, typically September to June. Accordingly, Channel One earns the largest share of its revenue in the beginning of the school year, the Company's fourth quarter. The Channel One News program does not air during the summer months and, accordingly, Channel One sees a seasonal revenue drop in the Company's third quarter each year.

5


        Schools sign up for the Channel One service under a three-year contract. Channel One provides schools with a turnkey system of satellite dish, videocassette recorders and networked televisions. These products and services are provided to schools at no charge. In addition, Channel One Connection, a service of Channel One Network, provides to Channel One schools up to 120 minutes of additional educational programming per school day at no charge.

        Channel One has a library of over 2,700 broadcasts including approximately 275 single subject series, 95 of which have been released as videos. The Company's channelone.com online network and its channeloneteacher.com Web site provide supplemental information to students and educators.

        Films for the Humanities and Sciences is a leading distributor of videos, DVDs, and CD-ROMs to schools, colleges, and libraries in North America. Its products are sold mostly by direct mail to teachers, instructors and librarians and primarily serve students in grades 8 to 12 and in college. The major competitors are Discovery Communications, Inc. (which recently acquired United Learning), AIMS Multimedia, PBS Video and Schlessinger Media, a division of Library Video Company.

        Workplace Learning, a leading provider of integrated training, information and communication solutions for improving employee performance, is a leader in such markets as fire and emergency services (Fire and Emergency Training Network) where it reached more than 250,000 fire and EMS personnel in 2003, industrial (PRIMEed, SafeStart), healthcare (Health and Sciences Television Network), pharmaceuticals (Interactive Medical Networks), police and first responders (Law Enforcement Training Network, Homeland One) and banking (Bankers Training and Consulting Company). The Company largely delivers its products via satellite, videotape, CD-ROM, live events and increasingly over the Internet.

        Workplace Learning has numerous direct and indirect competitors, including General Physics Corporation and HealthStream, Inc. In addition, many potential customers do their own in-house training. Workplace Learning is focused on growing in profitable vertical markets where the Company has proprietary content and unique distribution advantages, including banking, healthcare and government.

Advertising

        Approximately 62% of the Company's total revenue is derived from advertising. In general, the Company sells two types of advertising: lead generation advertising and brand awareness advertising. In a given media market in which the Company competes (e.g. fishing), lead generation advertising is purchased by advertisers who are "endemic" to that market (e.g. fishing rod manufacturers) and are seeking to trigger a direct, specific buying decision. The Company's Enthusiast Media, Consumer Guides and Business Information segments derive a majority of their revenue from this type of advertising.

        In contrast, brand awareness advertising concentrates on introducing or reinforcing a product's brand image with the reader, user or viewer. The Company's larger circulation magazine properties, such as Motor Trend, and television properties, such as Channel One, generate more of their revenue from brand awareness advertising, primarily from the large automobile manufacturers, beverage, health and beauty, video game and telecommunications sectors.

        PRIMEDIA's focus on lead generation advertising from endemic advertisers gives the Company a stable base of advertising revenue, less susceptible to the fluctuations of the business cycle than the brand advertising market. PRIMEDIA's divestitures in 2003 and early 2004 of large circulation magazine titles such as Seventeen and New York, has increased the percentage of its advertising revenues from endemic advertisers.

Divestitures

        Historically, PRIMEDIA has actively sought to acquire magazines and other media properties to strengthen its competitive position in the segments and markets in which it competes. The Company has also traditionally managed its portfolio of media assets by opportunistically divesting assets no longer core

6



to the Company's overall strategy. In 2003, PRIMEDIA continued to focus on reducing the amount of debt on its balance sheet through the divestiture of several large consumer magazine properties.

        In 2003, the Company sold Seventeen magazine and its companion properties including a number of Seventeen branded assets, Teen magazine, seventeen.com, teenmag.com and Cover Concepts, an in-school marketing unit, to The Hearst Corporation for $182 million. Additionally, the Company sold Sprinks to Google and RealEstate.com to Lending Tree, Inc. for proceeds of $12 million and $15 million, respectively, in 2003.

        In January 2004, the Company completed the sale of New York magazine to New York Media Holdings, LLC, an entity controlled by Wasserstein family trusts, for $55 million.

        Financial results for these divestitures are reported in discontinued operations on the statements of consolidated operations.

        As a result of these divestitures, the Company now is more focused on growing the revenues of its core businesses.

Production and Fulfillment

        Virtually all of the Company's print products are printed and bound by independent printers. The Company believes that because of its buying power, outside printing services can be purchased at favorable prices. The Company provides most of the content for its Web sites but outsources technology and production.

        The principal raw material used in the Company's products is paper which is purchased directly from several paper mills, including the industry's three largest paper mills. Paper prices increased in 2003 and the paper mills are expected to attempt to increase prices in 2004. The Company has used strategic sourcing principles to gain stable supplies at favorable prices.

        The Company uses the U.S. Postal Service for distribution of many of its products and marketing materials and is therefore subject to postage rate changes. Many of the Company's products are packaged and delivered to the U.S. Postal Service directly by the printers. Other products are sent from warehouses and other facilities operated by the Company. While postal rates increased in 2002, there were no additional increases in 2003 and in April 2003, President Bush signed legislation that will hold postal rates stable until at least 2006.

        In the future, the Company may be impacted by future cost increases, driven by inflation or market conditions in these categories.

Employees

        During 2003, the Company's headcount declined primarily due to divestitures and consolidation of certain functions. As of December 31, 2003, the Company had approximately 4,700 full-time equivalent employees compared to approximately 5,100 at the end of 2002. None of its employees are union members. Management considers its relations with its employees to be good.

7


Company Organization

        PRIMEDIA was incorporated on November 22, 1991 in the State of Delaware. The principal executive office of the Company is located at 745 Fifth Avenue, New York, New York, 10151; telephone number (212) 745-0100.

        The Company holds regular meetings to inform investors about the Company. To obtain information on these meetings or to learn more about the Company please contact:

James Magrone
Senior Vice President, Investor Relations
Tel: 212-745-0634
Email: jmagrone@primedia.com

        The 2004 PRIMEDIA Annual Meeting of Shareholders will be held on Wednesday, May 12, 2004 at 10:00 a.m., at the Four Seasons Hotel, 57 East 57th Street, New York, NY.

Available Information

        The Company's Internet address is: www.primedia.com. The Company makes available free of charge through its Web site its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the Securities and Exchange Commission.

8


ITEM 2.  PROPERTIES.

        The following table sets forth certain information with respect to the Company's principal locations as of December 31, 2003. These properties were leased by the Company initially for use in its operations but as a result of divestitures and consolidations, certain of these properties are now leased to third party tenants. Of the total of approximately 2.5 million rentable square feet currently under lease, approximately 585,000 rentable square feet are either available for sublease or currently subleased to a third party. The locations presently used by the Company for its operations are considered adequate by the Company for its present needs.

Location

  Principal Use
  Approximate
Rentable Square
Feet(rsf)

  Type of Ownership
Expiration Date
of Lease

New York, NY
745 Fifth Ave
  Executive and administrative offices (Corporate)   81,041   Lease expires in 2008, 25,697 rsf sublet
New York, NY
249 W. 17th Street
  Executive and administrative offices (Enthusiast Media)   79,000   Lease expires in 2007
New York, NY
1440 Broadway
  Executive and administrative offices (Corporate, Education and Training)   206,801   Lease expires in 2015, 183,406 rsf available for sublease or currently under sublease
New York, NY
200 Madison Ave
  Executive and administrative offices (Enthusiast Media)   45,480   Lease expires in 2006
New York, NY
260 Madison Ave
  Executive and administrative offices (Enthusiast Media)   33,208   Lease expires in 2008
New York, NY
261 Madison Ave
  Executive and administrative offices (Enthusiast Media)   40,324   Lease expires in 2008, 8,869 rsf sublet
Lawrenceville, NJ
2572 Brunswick Pike
  Printing and Video Duplication (Education and Training)   54,000   Lease expires in 2013
Anaheim, CA
2400 Katella Ave.
  Executive and administrative offices (Enthusiast Media)   33,522   Lease expires in 2008
Los Angeles, CA
6420 Wilshire Blvd.
  Executive and administrative offices (Enthusiast Media)   207,469   Lease expires in 2009, 77,840 rsf available for sublease or currently under sublease
Los Angeles, CA
5300 Melrose Avenue
  Executive and administrative offices and broadcast production (Education and Training)   24,320   Lease expires in 2005
Harrisburg, PA, 6385 & 6405 Flank Drive (combined)   Executive and administrative offices (Enthusiast Media)   43,309   Lease expires in 2009
Overland Park, KS
9800 Metcalf Avenue
  Executive and administrative offices (Business Information)   85,648   Lease expires in 2006, 5,962 rsf sublet
Stamford, CT
11 Riverbend Drive
  Executive and administrative offices (Business Information)   62,751   Lease expires in 2006, 8,000 rsf available for sublease
Norcross, GA
3119-3139 Campus Drive
  Executive and administrative offices (Consumer Guides)   50,100   Lease expires in 2009
Norcross, GA
3159 Campus Drive
  Executive and administrative offices (Consumer Guides)   20,200   Lease expires in 2004
Carrolton, TX
4101 International Parkway
  Executive and administrative offices, small printing and video duplication (Education and Training)   205,750   Lease expires in 2014

9


ITEM 3.  LEGAL PROCEEDINGS.

        There are no material pending legal proceedings to which the Company is or was a party.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

        There were no matters submitted to a vote of security holders during the fourth quarter of 2003.

10



PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Market Information

        PRIMEDIA Common Stock is listed on the New York Stock Exchange, under the ticker symbol "PRM". As of February 27, 2004, there were 415 holders of record of PRIMEDIA Common Stock. The Company has not paid and has no present intention to pay dividends on its Common Stock. In addition, the Company's bank credit facility and Senior Notes impose certain limitations on the amount of dividends permitted to be paid on the Company's Common Stock. See Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Arrangements." High, low and closing sales prices for 2003 and 2002 were as follows:

 
  2003 Sales Price
Quarters Ended

  High
  Low
  Close
March 31   $3.05   $1.87   $2.45
June 30   $3.78   $2.03   $3.05
September 30   $3.99   $2.33   $2.85
December 31   $3.45   $2.58   $2.83
 
  2002 Sales Price
Quarters Ended

  High
  Low
  Close
March 31   $4.60   $2.10   $3.17
June 30   $3.25   $1.00   $1.22
September 30   $1.59   $0.76   $1.39
December 31   $3.50   $1.11   $2.06

        The closing stock price increased by 37.4% from December 31, 2002 to December 31, 2003. From January 1, 2004 through March 12, 2004, the high price for the stock was $3.06, the low price was $2.42 and the closing price on March 12, 2004 was $2.68.

Equity Compensation Plan Information

        Information required by this item with respect to equity compensation plans of the Company is included in Part III, Item 12 of this Form 10-K under the caption "Equity Compensation Plan Information."

Recent Sales of Unregistered Securities

        In November 2003, the Company issued 78,000 shares of its unregistered Common Stock to Paul Kagan as deferred purchase price payable in connection with the acquisition by the Company in November 2000 of the assets of Paul Kagan Associates, Inc. and the stock of certain of its affiliated companies. The aggregate purchase price paid by the Company in connection with the transaction was 1,190,000 shares of the Company's Common Stock, of which 390,000 shares are payable in five equal annual installments of 78,000 shares on each annual anniversary of the closing date of the transaction. The issuance to Paul Kagan was made by the Company in reliance on Section 4(2) of the Securities Act of 1933, as amended.

        During the three months ended December 31, 2003, the Company issued 832,627 shares of its unregistered Common Stock in exchange for outstanding preferred stock of the Company in reliance on Section 3(a)(9) of the Securities Act of 1933, as amended. The Company subsequently repurchased these 832,627 shares of Common Stock for $2.95 per share or approximately $2,456,250.

11


ITEM 6.  SELECTED FINANCIAL DATA.

        The selected consolidated financial data were derived from the audited consolidated financial statements of the Company as of December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001. The data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the related notes thereto included elsewhere herein. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), the Company has reclassified the results of Seventeen magazine and related teen properties, Simba, Federal Sources, CableWorld, Sprinks and RealEstate.com, which were all sold in 2003, as discontinued operations for the periods prior to their respective divestiture dates. During 2003, the Company initiated a plan to sell Kagan World Media and, during January 2004, the Company sold New York magazine. The Company has reclassified the results of New York and Kagan World Media for all periods presented and as of December 31, 2003 has classified the assets and liabilities of each as held for sale on the Company's consolidated balance sheet.


PRIMEDIA INC. AND SUBSIDIARIES

 
  Years Ended December 31,
 
 
  2003
  2002
  2001
  2000
  1999
 
 
  (dollars in thousands, except per share amounts)

 
Operating Data:                                
Revenues, net(1)   $ 1,345,622   $ 1,412,552   $ 1,377,774   $ 1,337,052   $ 1,396,900  
Depreciation of property and equipment (2)     55,887     68,881     75,714     49,675     44,833  
Amortization of intangible assets, goodwill and other (3)(7)     75,953     208,238     677,776     108,765     430,325  
Other (income) charges (4)     29,827     67,418     43,125     41,570     (213,580 )
Operating income (loss)     82,397     (100,316 )   (651,320 )   (3,367 )   16,542  
Provision for impairment of investments (5)     (8,975 )   (19,045 )   (106,512 )   (188,526 )    
Interest expense     (124,528 )   (139,878 )   (145,928 )   (143,933 )   (164,867 )
Loss from continuing operations before income tax expense (12)     (79,572 )   (257,696 )   (950,265 )   (342,773 )   (151,361 )
Income tax expense (6)     (12,220 )   (46,356 )   (135,000 )   (41,200 )   (6,500 )
Loss from continuing operations     (91,792 )   (304,052 )   (1,085,265 )   (383,973 )   (157,861 )
Discontinued operations     130,664     93,137     (26,376 )   37,147     37,748  
Cumulative effect of a change in accounting principle (7)         (388,508 )            
Net income (loss)     38,872     (599,423 )   (1,111,641 )   (346,826 )   (120,113 )
Preferred stock dividends and related accretion, net (8)(12)     (41,853 )   (47,656 )   (62,236 )   (53,063 )   (53,062 )
Loss applicable to common shareholders     (2,981 )   (647,079 )   (1,173,877 )   (399,889 )   (173,175 )
Basic and diluted income (loss) applicable to common shareholders per common share (9):                                
  Loss from continuing operations   $ (0.51 ) $ (1.39 ) $ (5.30 ) $ (2.71 ) $ (1.45 )
  Discontinued operations     0.50     0.37     (0.12 )   0.23     0.26  
  Cumulative effect of a change in accounting principle (7)         (1.53 )            
   
 
 
 
 
 
  Net loss   $ (0.01 ) $ (2.55 ) $ (5.42 ) $ (2.48 ) $ (1.19 )
   
 
 
 
 
 
Basic and diluted common shares outstanding     259,230,001     253,710,417     216,531,500     161,104,053     145,418,441  
   
 
 
 
 
 
Balance Sheet Data:                                
Cash and cash equivalents   $ 8,685   $ 18,553   $ 33,588   $ 23,690   $ 28,661  
Working capital deficiency (10)     (205,300 )   (248,280 )   (221,047 )   (346,447 )   (200,458 )
Other intangible assets and Goodwill, net     1,178,941     1,323,560     2,029,727     1,647,592     1,835,356  
Total assets     1,636,121     1,835,620     2,731,219     2,677,479     2,714,552  
Long-term debt (11)     1,562,441     1,727,677     1,945,631     1,503,188     1,732,896  
Shares subject to mandatory redemption (Exchangeable preferred stock) (12)     474,559     484,465     562,957     561,324     559,689  
Total shareholders' deficiency     (1,013,255 )   (1,043,798 )   (480,592 )   (236,026 )   (144,238 )

(see notes on the following page)

12


Notes to Selected Financial Data

(1)
As a result of divestitures made in 2003 and the related requirements of SFAS 144, the Company reclassified amounts from revenues, net, to discontinued operations for the years ended December 31, 2002, 2001, 2000, and 1999 as follows:

 
  Years Ended December 31,
 
  2002
  2001
  2000
  1999
Revenues, net (as reported in 2002 Form 10-K)   $ 1,587,564   $ 1,578,357   $ 1,547,491   $ 1,587,879
Less:                        
Effect of SFAS 144 for 2003 divestitures     175,012     200,583     210,439     190,979
   
 
 
 
Revenues, net (as reclassified)   $ 1,412,552   $ 1,377,774   $ 1,337,052   $ 1,396,900
   
 
 
 

(2)
Includes an impairment of long-lived assets of $9,739 for the year ended December 31, 2002.

(3)
Includes an impairment of intangible assets, goodwill and other, of $35,253, $146,064, $427,016 and $275,788 for the years ended December 31, 2003, 2002, 2001 and 1999, respectively.

(4)
Represents severance related to separated senior executives of $9,372 for the year ended December 31, 2003, non-cash compensation and non-recurring charges of $11,184, $10,502, $56,679 and $35,210 for the years ended December 31, 2003, 2002, 2001 and 2000, respectively, provision for severance, closures and restructuring related costs of $8,673, $49,669, $43,679, $20,798 and $22,000 for the years ended December 31, 2003, 2002, 2001, 2000 and 1999, respectively, and loss (gain) on the sale of businesses and other, net, of $598, $7,247, ($57,233), ($14,438) and ($235,580) for the years ended December 31, 2003, 2002, 2001, 2000, and 1999, respectively.


The Company adopted SFAS 123 "Accounting for Stock-Based Compensation" in the fourth quarter of 2003 and began recording employee stock-based compensation under the fair value method effective January 1, 2003. The adoption resulted in a non-cash compensation charge of $5,980.

(5)
Represents impairments of the Company's investment in CMGI, Inc. of $7,029 and $155,474 for the years ended December 31, 2001 and 2000, respectively, the Company's investment in Liberty Digital of $658 and $21,869 for the years ended December 31, 2001 and 2000, respectively, the Company's investments in various assets-for-equity transactions of $8,975, $10,783 and $83,959 for the years ended December 31, 2003, 2002 and 2001, respectively, and various other PRIMEDIA investments of $8,262, $14,866 and $11,183 for the years ended December 31, 2002, 2001 and 2000, respectively.

(6)
Historically, the Company did not need a valuation allowance for the portion of the tax effect of net operating losses equal to the amount of deferred income tax liabilities related to tax-deductible goodwill and trademark amortization expected to occur during the carryforward period of the net operating losses based on the timing of the reversal of these taxable temporary differences. As a result of the adoption of SFAS 142, "Goodwill and Other Intangible Assets", the Company records a valuation allowance in excess of its net deferred tax assets to the extent the difference between the book and tax basis of indefinite-lived intangible assets is not expected to reverse during the net operating loss carryforward period. With the adoption of SFAS 142, the Company no longer amortizes the book basis in the indefinite-lived intangibles, but will continue to amortize these intangibles for tax purposes. For 2003 and 2002, income tax expense primarily consists of deferred income taxes of $11,864 and $49,500, respectively, related to the increase in the Company's net deferred tax liability for the tax effect of the net increase in the difference between the book and tax basis in the indefinite-lived intangible assets. The income tax expense recorded in 2003 and 2002 is net of tax refunds received. During 2001 and 2000, the Company increased its valuation allowance due to continued historical operating losses and the impairment of long-lived assets, primarily goodwill and investments, resulting in a net provision for income taxes of $135,000 and $41,200, respectively. At December 31, 1999, the Company's management determined that no adjustment to net deferred

13


(7)
In connection with the adoption of SFAS 142 on January 1, 2002, the Company recorded an impairment charge related to its goodwill and certain indefinite lived intangible assets as a cumulative effect of a change in accounting principle. Additionally, SFAS 142 prohibited the amortization of goodwill and indefinite lived intangible assets, effective January 1, 2002. Amortization expense for goodwill and certain trademarks which ceased being amortized under SFAS 142 (excluding provisions for impairment) was $186,422, $36,904 and $59,799 for the years ended December 31, 2001, 2000 and 1999, respectively.

(8)
Includes gain on exchanges of the Series D Exchangeable Preferred Stock, Series F Exchangeable Preferred Stock and Series H Exchangeable Preferred Stock of $944 and $32,788 in 2003 and 2002, respectively, and the issuance of warrants valued at $5,891 and $498 to KKR 1996 Fund during 2002 and 2001, respectively, in connection with the EMAP acquisition.

(9)
Basic and diluted income (loss) per common share, as well as the basic and diluted common shares outstanding, were computed as described in Note 16 of the notes to the consolidated financial statements included elsewhere in this Annual Report.

(10)
Includes current maturities of long-term debt and net assets held for sale, where applicable. Consolidated working capital reflects certain industry working capital practices and accounting principles, including the expensing of certain editorial and product development costs when incurred and the recording of deferred revenue from subscriptions as a current liability. Advertising costs are expensed when the promotional activities occur except for certain direct-response advertising costs which are capitalized and amortized over the estimated period of future benefit.

(11)
Excludes current maturities of long-term debt.

(12)
The Company adopted SFAS 150 "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity", prospectively, effective July 1, 2003, which requires the Company to classify as long-term liabilities its Series D Exchangeable Preferred Stock, Series F Exchangeable Preferred Stock and Series H Exchangeable Preferred Stock and to classify dividends from preferred stock as interest expense. Such stock is now described as shares subject to mandatory redemption and dividends on these shares are now described as interest on shares subject to mandatory redemption, whereas previously they were presented below net income (loss) as preferred stock dividends. The adoption of SFAS 150 increased the loss from continuing operations for the year ended December 31, 2003 by $22,547 which represents primarily interest on shares subject to mandatory redemption and amortization of issuance costs which are included in the amortization of deferred financing costs on the accompanying statement of consolidated operations. If SFAS 150 was adopted on July 1, 2002, July 1, 2001, July 1, 2000 and July 1, 1999, loss from continuing operations, in each year, would have increased by $19,763, $27,345, $27,348 and $27,627, respectively. The 2002 increase to loss from continuing operations was reduced by a net gain of $4,488 on exchanges of the Exchangeable Preferred Stock.

14


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS).

Introduction

        The following discussion and analysis summarizes the financial condition and operating performance of the Company and its business segments and should be read in conjunction with the Company's historical consolidated financial statements and notes thereto included elsewhere in this Annual Report.

Executive Summary

Our Business

        The Company's revenues are generated from advertising, circulation (subscriptions and single copy sales) and other sources (events, list rental, third party distribution, training services, sales of books and directories, and other sources). PRIMEDIA's largest operating expenses are cost of goods sold (including paper and printing); marketing and selling; distribution, circulation and fulfillment; editorial; and other general and corporate administrative expenses (collectively referred to as "operating expenses").

Background

        Historically, PRIMEDIA was a broad based media enterprise built primarily from a series of acquisitions and comprised of numerous disparate assets. The most recent significant acquisitions were About.com ("About") and the EMAP properties in 2001. During 2001 and 2002, the Company integrated those properties into its operating units. Additionally, during the past few years, the Company sold a number of properties, including Bacon's, The Modern Bride Group, the American Baby Group, Seventeen and New York magazines and other properties, in order to better focus the Company on its core businesses and reduce debt. As a result of recent divestitures, the Company has transformed itself into a highly focused targeted media company. To counter the effects of the weakness in the overall advertising environment, the Company has aggressively controlled its costs. These cost initiatives have resulted in charges for severance, closures and restructuring related costs to integrate Company operations and consolidate many back office functions and facilities, resulting in a significant reduction in the number of employees and office space required. These actions have resulted in a stronger balance sheet, improved liquidity and a more efficient and better focused organization. The asset divestiture and cost reduction programs are essentially complete and the Company is now focused on growing organically.

Company Strategy

        In October 2003, PRIMEDIA appointed Kelly P. Conlin as President and CEO. Mr. Conlin and the executive team reviewed the Company's operations and formulated a strategy to enable the Company to capitalize on the full potential of its businesses and maximize its operating performance. That review resulted in a redesigned operating structure with four reportable segments to better enable the Company to execute key investment and organic growth initiatives. Those four principal segments are: Enthusiast Media, Consumer Guides, Business Information, and Education and Training. Accordingly, the Company has reclassified prior year results to reflect this redesigned operating structure with four reportable segments.

        The Company's strategy is to focus on its core enthusiast media businesses and grow through maximizing and expanding its market-leading brands. Actions the Company is taking to organically grow revenues include expanding into new markets, introducing new products and improving existing ones, enhancing the capabilities of its sales force, broadening its advertiser base, optimizing distribution, and leveraging its well known brands through licensing and merchandising arrangements.

15



General Business Trends

        In 2003, many of PRIMEDIA's products continued to grow, while others were affected by external pressures and actions the Company took to improve profitability. The Company has capitalized on the general trend of marketers seeking to better target their advertising, the growth of free publications, the aggressive marketing and new product introductions in the automotive industry and the growing popularity of personal hobbies and leisure activities, as the Company has a large presence in those sectors. The Company's revenues continue to be adversely affected by the weakness in the overall advertising environment, particularly in business-to-business markets, the industry-wide trend of declining single copy sales of consumer magazines, cutbacks in the demand for training services, particularly industrial videotape sales and satellite based training for healthcare professionals, and budgetary constraints in the education markets. Additionally, high apartment vacancy rates have pressured the advertising budgets of property managers, which has constrained the growth in the Company's Apartment Guide. The Company has taken certain actions to lower costs and improve profitability which has also negatively affected revenues, including reducing the rate base for the soap opera magazine titles, and consolidating or shutting down certain properties.

2003 Summary Consolidated Results

        In 2003, revenues were $1,345,622, down 4.7% compared to 2002. Growth in the Consumer Guides segment was offset by the continuing weakness in the Business Information and Education and Training segments, and growth in advertising in the Enthusiast Media segment was offset by the effect of the rate base reduction at the soap opera titles and continuing weakness in single copy magazine sales. In 2003, operating expenses were $1,101,558, down 5.7% compared to 2002. Costs declined in nearly every expense category, due to lower levels of business and the aggressive cost actions implemented by the Company. In 2003, operating income was $82,397, improved from an operating loss of $100,316 in 2002. The improvement was due primarily to lower restructuring and non-cash impairment charges taken in 2003 compared to 2002. Net income was $38,872 in 2003 compared to a net loss of $599,423 in 2002. The improvement was due primarily to the net increase in operating income, the cumulative effect of a change in accounting principle (from the adoption of SFAS 142) of $388,508, recorded in 2002, and the decrease in related non-cash deferred income tax expense.

2003 Summary Segment Results

        The following segment results discussion reflects Continuing Businesses (as defined below).

        The Enthusiast Media segment produces and distributes content through magazines and via the Internet to consumers in various niche and enthusiast markets. It includes the Company's consumer magazine brands, their related Web sites and live events, as well as About. In 2003, revenues for the Enthusiast Media segment were $725,892, down 2.0%, and Segment EBITDA (as defined below) was $146,939, up 11.4%, compared to 2002. The Company intends to grow this segment by improving its products, investing in its sales capabilities, improving its circulation management, and leveraging its well-known brands. For example, during the fourth quarter of 2003, PRIMEDIA increased its distribution points by several thousand for a number of enthusiast titles offered at Kroger, Food Lion, Albertson's, Auto Zone, Pep Boys and other key retail outlets. In addition, the Company has put into place a plan to use more sophisticated statistical modeling to manage print order and draw allotment to improve efficiency and profitability of this important distribution channel.

        The Consumer Guides segment is the nation's largest publisher and distributor of free publications, including Apartment Guide and New Homes Guide. In 2003, revenues for the Consumer Guides segment were $276,639, up 3.5%, and Segment EBITDA was $83,163, up 13.4%, compared to 2002. The Company intends to grow this segment by launching Auto Guide in 2004, expanding New Homes Guide into new

16



markets, adding to its Apartment Guide sales force to deepen its market penetration, and continuing to expand third party distribution.

        The Business Information segment includes the Company's business-to-business targeted publications, Web sites and events, with a focus on bringing sellers together with qualified buyers in numerous industries. In 2003, revenues for the Business Information segment were $228,784, down 11.7%, and Segment EBITDA was $34,197, down 10.8%, compared to 2002, which was the result of the severe advertising recession which has particularly affected the business-to-business markets. The Company believes there are many opportunities to enhance marketing programs beyond print advertising by expanding the use of email, newsletters, Webcasts, market databases and other tools to provide marketing programs that identify prospects and deliver leads to customer sales organizations.

        The Education and Training segment is comprised of the businesses that provide content for schools, universities, government and other public institutions as well as corporate training initiatives. It includes Channel One, Films for the Humanities and Sciences and Workplace Learning. In 2003, revenues for the Education and Training segment were $119,778, down 18.3%, and Segment EBITDA was $5,674, down 83.7%, compared to 2002. The Company intends to improve the performance of this segment by expanding the number of Channel One advertisers, migrating the products of Films for the Humanities and Sciences to digital delivery, and exploring joint venture opportunities and focusing on the profitable verticals for Workplace Learning.

Forward-Looking Information

        PRIMEDIA, in its fourth quarter 2003 earnings conference call with investors and related earnings release on February 5, 2004, indicated that it expected revenues to grow in the low single digit percentage range and Segment EBITDA for PRIMEDIA's four business segments, after Corporate Overhead, to grow in the mid single digit percentage range in 2004 as compared to 2003.

        The Company has assumed improving industry fundamentals as 2004 progresses for consumer magazine advertising growth and expects single copy sales of consumer magazines to continue to face challenges, especially in the first half of 2004. Growth at Consumer Guides is expected to gain momentum in the second half of 2004 as its entry into new markets begins to show results. Trade advertising and trade shows are expected to stabilize in 2004. Education and Training is expected to improve as 2004 progresses.

        The Company expects to show Segment EBITDA growth primarily in the second half of 2004, with performance during the first half affected by soft industry fundamentals. The Company plans to continue to control operating costs in 2004 and expects new investments and its strategic initiatives early in 2004 to show results in the second half of the year.

        The Company's 2004 guidance follows a 2003 in which PRIMEDIA created a new strategic operating structure that it believes provides well-defined platforms for growth as well as greater clarity and visibility into the Company's businesses. The Company believes 2004 will be a year of investing in its businesses and building on its platforms for growth.

        This Annual Report contains certain forward-looking statements concerning the Company's operations, economic performance and financial condition. These statements are based upon a number of assumptions and estimates, which are inherently subject to uncertainties and contingencies, many of which are beyond the control of the Company, and reflect future business decisions, which are subject to change. Some of the assumptions may not materialize and unanticipated events may occur which can affect the Company's results.

Why We Use Segment EBITDA

        Segment EBITDA represents each segment's earnings before interest, taxes, depreciation, amortization and other charges (income) ("Segment EBITDA"). Other charges (income) include

17



severance related to separated senior executives, non-cash compensation and non-recurring charges, provision for severance, closures and restructuring related costs and (gain) loss on sale of businesses and other, net. PRIMEDIA believes that Segment EBITDA is the most accurate indicator of its segments' results, because it focuses on revenue and operating cost items driven by operating managers' performance, and excludes non-recurring items and items largely outside of operating managers' control. Internally, the Company's chief operating decision maker and the executive team measure performance primarily based on Segment EBITDA.

        Segment EBITDA is not intended to represent cash flows from operating activities and should not be considered as an alternative to net income or loss (as determined in conformity with accounting principles generally accepted in the United States of America), as an indicator of the Company's operating performance, or to cash flows as a measure of liquidity. Segment EBITDA may not be available for the Company's discretionary use as there are requirements to redeem preferred stock and repay debt, among other payments. Segment EBITDA as presented may not be comparable to similarly titled measures reported by other companies since not all companies necessarily calculate Segment EBITDA in an identical manner, and therefore, it is not necessarily an accurate measure of comparison between companies. See reconciliation of Segment EBITDA to operating income (loss) for the Company's four segments in their respective segment discussions below.

Intersegment Transactions

        The information presented below includes certain intersegment transactions and is, therefore, not necessarily indicative of the results had the operations existed as stand-alone businesses. Intersegment transactions represent intercompany, advertising and other services which are billed at what management believes are prevailing market rates. These intersegment transactions, which represent transactions between operating units in different business segments, are eliminated in consolidation.

Non-Core Businesses

        Management believes a meaningful comparison of the results of operations for 2003, 2002 and 2001 is obtained by using the segment information and by presenting results from continuing businesses ("Continuing Businesses") which exclude the results of businesses classified as non-core ("Non-Core Businesses"). The Non-Core Businesses are those businesses that have been divested, discontinued or that management was evaluating for turnaround or shutdown. The Non-Core Businesses include QWIZ, Inc. (divested in April 2001), Bacon's (divested in November 2001) and certain other titles of the Enthusiast Media, Consumer Guides and Business Information segments that were discontinued or divested. In addition, the Company restructured or consolidated other media properties, whose value could only be realized through the far greater efficiency of having select functions absorbed by the core operations and has included these properties in Non-Core Businesses. In the ordinary course of business, corporate administrative costs of approximately $1,900 and $9,900 were allocated to the Non-Core Businesses during 2002 and 2001, respectively. The Company believes that most of these costs, many of which are volume driven, such as the processing of payables and payroll, were permanently reduced due to the shutdown or divestiture of the Non-Core Businesses. Since June 30, 2002, the Company has not classified any additional businesses as Non-Core Businesses nor have any additional balances been allocated to the Non-Core Businesses.

Reclassifications due to Discontinued Operations

        In accordance with Statement of Financial Accounting Standards ("SFAS") 144, "Accounting for the Disposal of Long-Lived Assets", the Company's results have been reclassified to reflect Seventeen and its companion teen properties ("Seventeen"), Simba Information, Federal Sources, CableWorld, Sprinks, and RealEstate.com as discontinued operations for the periods prior to their respective divestiture dates.

18



        In 2003, the Company also reclassified the results of New York magazine, which was sold in January 2004, and Kagan World Media for which the Company has initiated plans to sell, to discontinued operations for all periods presented.

Segment Data

        Segment data for the Company, based on its redesigned operating structure, is presented below for all periods.

 
  Years Ended December 31,
 
 
  2003
  2002
  2001
 
Revenues, net:                    
  Continuing Businesses:                    
    Enthusiast Media   $ 725,892   $ 740,400   $ 572,196  
    Consumer Guides     276,639     267,166     255,391  
    Business Information     228,784     259,030     322,976  
    Education and Training     119,778     146,586     165,295  
    Intersegment Eliminations     (5,471 )   (14,121 )   (11,619 )
   
 
 
 
      Subtotal     1,345,622     1,399,061     1,304,239  
  Non-Core Businesses         13,491     73,535  
   
 
 
 
      Total   $ 1,345,622   $ 1,412,552   $ 1,377,774  
   
 
 
 
Segment EBITDA (1):                    
  Continuing Businesses:                    
    Enthusiast Media   $ 146,939   $ 131,879   $ 69,492  
   
 
 
 
    Consumer Guides   $ 83,163   $ 73,338   $ 58,657  
   
 
 
 
    Business Information   $ 34,197   $ 38,349   $ 58,212  
   
 
 
 
    Education and Training   $ 5,674   $ 34,821   $ 28,117  
   
 
 
 
    Corporate Overhead   $ (25,909 ) $ (30,913 ) $ (32,308 )
   
 
 
 
  Non-Core Businesses   $   $ (3,253 ) $ (28,340 )
   
 
 
 
Depreciation, amortization and other charges (2):                    
  Continuing Businesses:                    
    Enthusiast Media   $ 43,245   $ 127,257   $ 572,651  
   
 
 
 
    Consumer Guides   $ 11,834   $ 15,199   $ 18,760  
   
 
 
 
    Business Information   $ 18,630   $ 78,603   $ 49,197  
   
 
 
 
    Education and Training   $ 59,823   $ 107,648   $ 67,164  
   
 
 
 
    Corporate   $ 28,135   $ 12,747   $ 31,709  
   
 
 
 
  Non-Core Businesses   $   $ 3,083   $ 65,669  
   
 
 
 

19


 
  Years Ended December 31,
 
 
  2003
  2002
  2001
 
Operating income (loss):                    
  Continuing Businesses:                    
    Enthusiast Media   $ 103,694   $ 4,622   $ (503,159 )
    Consumer Guides     71,329     58,139     39,897  
    Business Information     15,567     (40,254 )   9,015  
    Education and Training     (54,149 )   (72,827 )   (39,047 )
    Corporate     (54,044 )   (43,660 )   (64,017 )
   
 
 
 
      Subtotal     82,397     (93,980 )   (557,311 )
  Non-Core Businesses         (6,336 )   (94,009 )
   
 
 
 
      Total     82,397     (100,316 )   (651,320 )
Other income (expense):                    
  Provision for impairment of investments     (8,975 )   (19,045 )   (106,512 )
  Interest expense     (124,528 )   (139,878 )   (145,928 )
  Interest on shares subject to mandatory redemption (3)     (21,889 )        
  Amortization of deferred financing costs     (3,462 )   (3,469 )   (10,947 )
  Other, net     (3,115 )   5,012     (35,558 )
   
 
 
 
Loss from continuing operations before income tax expense     (79,572 )   (257,696 )   (950,265 )
Income tax expense     (12,220 )   (46,356 )   (135,000 )
   
 
 
 
Loss from continuing operations     (91,792 )   (304,052 )   (1,085,265 )
Discontinued operations (4)     130,664     93,137     (26,376 )
Cumulative effect of a change in accounting principle                    
(from the adoption of SFAS 142)         (388,508 )    
   
 
 
 
Net income (loss)   $ 38,872   $ (599,423 ) $ (1,111,641 )
   
 
 
 

(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 or loss (as determined in conformity with generally accepted accounting principles), as an indicator of the Company's operating performance or to cash flows as a measure of liquidity. Segment EBITDA is presented herein because the Company's chief operating decision maker evaluates and measures each business unit's performance based on its Segment EBITDA results. PRIMEDIA believes that Segment EBITDA is the most accurate indicator of its segments' results, because it focuses on revenue and operating cost items driven by operating managers' performance, and excludes non-recurring items and items largely outside of operating managers' control. Segment EBITDA may not be available for the Company's discretionary use as there are requirements to redeem preferred stock and repay debt, among other payments. Segment EBITDA as presented may not be comparable to similarly titled measures reported by other companies since not all companies necessarily calculate Segment EBITDA in an identical manner, and therefore, is not necessarily an accurate measure of comparison between companies. See reconciliation of Segment EBITDA to operating income (loss) for the years ended December 31, 2003, 2002 and 2001 for the each of the Company's segments in their respective segment discussions below. Segment EBITDA excludes $8,535 of additional restructuring related costs included in general and administrative expenses for the year ended December 31, 2001.

(2)
Depreciation for the years ended December 31, 2003, 2002 and 2001 was $55,887, $68,881 and $75,714, respectively, and includes an impairment of long-lived assets of $9,739 in 2002. Amortization for the years ended December 31, 2003, 2002 and 2001 was $75,953, $208,238 and $677,776,

20


(3)
Effective July 1, 2003, the Company prospectively adopted SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity," which requires the Company to classify as long term liabilities its Series D Exchangeable Preferred Stock, Series F Exchangeable Preferred Stock and Series H Exchangeable Preferred Stock and to classify dividends from this preferred stock as interest expense. Such stock is now collectively described as shares subject to mandatory redemption and dividends on these shares are now included in loss from continuing operations and described as interest on shares subject to mandatory redemption, whereas previously they were presented below net income (loss) as preferred stock dividends. The adoption of SFAS 150 increased the loss from continuing operations for the year ended December 31, 2003 by $22,547 which represents primarily interest on shares subject to mandatory redemption and amortization of issuance costs which are included in the amortization of deferred financing costs on the accompanying statement of consolidated operations. If SFAS 150 was adopted on July 1, 2002 and July 1, 2001 loss from continuing operations, in each year, would have increased by $19,763 and $27,345, respectively. The 2002 increase to loss from continuing operations was reduced by a net gain of $4,488 on exchanges of the Exchangeable Preferred Stock.

(4)
Discontinued operations includes gains on sale of businesses, net of tax, of $125,247 and $111,449 in 2003 and 2002, respectively.

Results of Operations

2003 Compared to 2002

Consolidated Results:

Revenues, Net

        Consolidated revenues from Continuing Businesses decreased 3.8% to $1,345,622 in 2003 from $1,399,061 in 2002:

 
  Years Ended December 31,
   
 
  Percent
Change

 
  2003
  2002
Revenues, net:                
  Continuing Businesses:                
    Advertising   $ 832,085   $ 857,288   (2.9)
    Circulation     321,751     342,057   (5.9)
    Other     191,786     199,716   (4.0)
   
 
   
      Subtotal     1,345,622     1,399,061   (3.8)
  Non-Core Businesses         13,491   (100)
   
 
   
      Total   $ 1,345,622   $ 1,412,552   (4.7)
   
 
   

21


        Advertising revenues decreased by $25,203 in 2003 compared to 2002 due to declines of $27,850 and $5,514 at the Business Information and Education and Training segments, respectively, partially offset by increases in 2003 of $4,547 and $3,614 at the Consumer Guides and Enthusiast Media segments, respectively. Circulation revenues decreased $20,306 in 2003, principally driven by an $18,669 decline in revenues at the Enthusiast Media segment due primarily to the impact of the rate base reduction at the soap opera titles implemented early in 2003 and to a lesser extent weakness in single copy sales. Other revenues decreased in 2003 compared to 2002 due to a $13,518 decline at the Education and Training segment partially offset by an increase at Consumer Guides of $5,841 due to the continued growth of its third party distribution business. Revenue trends within each segment are further detailed in the segment discussions below.

Operating Income (Loss)

        Operating income from Continuing Businesses was $82,397 in 2003 compared to an operating loss of $93,980 in 2002. This increase was predominantly due to the net decrease of $120,550 in non-cash impairment charges taken in 2003 versus 2002. For the year ended December 31, 2003, the Company recorded an impairment charge of $35,253 in amortization under SFAS 142 and SFAS 144 related to goodwill and intangibles. The total impairment charge recorded in depreciation and amortization primarily under SFAS 142 and SFAS 144 for the year ended December 31, 2002 was $155,803 related to goodwill, intangibles and other assets. Also, the provision for severance, closures and restructuring related costs decreased by $40,996 in 2003 to $8,673 from $49,669 in 2002.

        Total operating income (loss), including Continuing Businesses and Non-Core Businesses, was $82,397 in 2003 compared to ($100,316) in 2002.

Net Income (Loss)

        The Company had net income in 2003 of $38,872 compared to net loss of $599,423 in 2002. The increase in net income from 2002 was primarily due to the increase in operating income as discussed above and the Company's initial adoption of SFAS 142 in 2002. In connection with the adoption of SFAS 142 effective January 1, 2002, the Company recorded an impairment charge related to its goodwill and certain indefinite lived intangible assets of $388,508, as a cumulative effect of a change in accounting principle. In addition, the Company recorded $49,500 of non-cash deferred income tax expense in 2002 as a result of the adoption of SFAS 142, compared to $11,864 recorded in 2003.

        Interest expense also decreased $15,350, or 11.0% in 2003 to $124,528 from $139,878 in 2002. The decrease in interest expense is due to the Company's reduction of long-term debt, including current maturities, lower interest rates and the Company's refinancing of its highest cost debt at lower interest rates.

        Effective July 1, 2003, the Company prospectively adopted SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity", which requires dividends on the Company's Series D Exchangeable Preferred, Series F Exchangeable Preferred and Series H Exchangeable Preferred Stock (such stock is now collectively described as shares subject to mandatory redemption in the Company's financial statements) to be included in net income (loss) as interest on shares subject to mandatory redemption, whereas previously they were presented below net income (loss) as preferred stock dividends. The adoption of SFAS 150 increased the loss from continuing operations for the year ended December 31, 2003 by $22,547 which represents primarily interest on shares subject to mandatory redemption and amortization of issuance costs which are included in the amortization of deferred financing costs on the accompanying statement of consolidated operations. If SFAS 150 was adopted on July 1, 2002 loss from continuing operations would have increased by $19,763, net of a gain of $4,488 on exchanges of the Exchangeable Preferred Stock.

22



        SFAS 144 requires sales or disposals of long-lived assets that meet certain criteria to be classified on the statement of consolidated operations as discontinued operations and to reclassify prior periods accordingly. During 2002, the Company completed the sale of the Modern Bride Group, ExitInfo, Doll Reader, Chicago, Horticulture, IN New York and the American Baby Group and, as a result of adopting SFAS 144, reclassified the financial results of these divested units into discontinued operations on the statement of consolidated operations for the year ended December 31, 2002.

        During 2003, the Company completed the sales of Seventeen, Simba Information, Federal Sources, CableWorld, Sprinks and RealEstate.com and during January 2004, the Company sold New York magazine. In addition, the Company initiated a plan to sell Kagan World Media in 2003. In accordance with SFAS 144, the financial results of these operations have been reclassified into discontinued operations on the statements of consolidated operations for the years ended December 31, 2003 and 2002.

        For the years ended December 31, 2003 and 2002, discontinued operations includes net gains on sale of businesses of $125,247 and $111,449, respectively.

Segment Results:

        The results of the Company's four reportable segments are discussed below. All amounts are from Continuing Businesses unless otherwise specified.

Enthusiast Media Segment (includes consumer magazines, their related Web sites and events, and About)

Revenues, Net

        Enthusiast Media revenues were $725,892 or 53.9% and $740,400 or 52.9% of the Company's consolidated revenues for 2003 and 2002, respectively. Enthusiast Media revenues decreased $14,508 or 2.0% in 2003 compared to 2002 as follows:

 
  Years Ended December 31,
   
 
 
  Percent
Change

 
 
  2003
  2002
 
Revenues, net:                  
  Advertising   $ 390,941   $ 387,327   0.9  
  Circulation     274,173     292,842   (6.4 )
  Other     58,796     57,010   3.1  
  Intersegment revenues     1,982     3,221   (38.5 )
   
 
     
    Total   $ 725,892   $ 740,400   (2.0 )
   
 
     

        Advertising revenues increased $3,614 or 0.9% in 2003. Enthusiast Media's strongest advertising gains were at Motor Trend, automotive enthusiast, outdoor and crafts titles, with 2003 continuing base title increases of 17.6%, 4.3%, 3.7% and 3.3%, respectively. For the year ended December 31, 2003, PRIMEDIA's enthusiast magazines advertising pages at continuing base titles fell by 1.0%, the same decrease as the overall industry average, as reported by the Publishers Information Bureau. Advertising revenues at About increased $1,606 in 2003 compared to 2002, primarily due to increases in contextual advertising. Enthusiast Media advertising revenue increases were partially offset by approximately $4,600 in decreased advertising revenue compared to 2002 due to the rate base reduction at the soap opera titles implemented in the first quarter of 2003 which lowered product cost and improved profitability. In addition, approximately $7,200 of advertising revenue was lost in 2003 due to product shutdowns. Excluding the revenue drop attributable to the soap opera titles' rate base reduction and normalizing for product shutdowns, advertising revenues at the consumer magazines continuing titles and their related Web sites increased approximately $13,800 in 2003 versus 2002.

23



        Contributing to the overall decrease in revenues at Enthusiast Media was a decline in circulation revenues of $18,669 or 6.4% for the year ended December 31, 2003. Lost circulation revenue related to the rate base reduction at the soap opera titles accounted for $15,600 of the decline. In addition, single copy sales were negatively affected by the strike at approximately 860 Southern California grocery stores that began in October 2003 and was ongoing at December 31, 2003. Southern California is a large market for the Company's automotive enthusiast and outdoor sports magazines. Single copy units for Enthusiast Media magazines declined 5.3% for the year ended December 31, 2003, compared to the industry average decline of 13.1%, as reported by the International Periodical Distributors Association.

        Other revenues for Enthusiast Media, which include licensing, list rental, events and other, increased $1,786, or 3.1%, in 2003 compared to 2002.

Segment EBITDA

        Enthusiast Media Segment EBITDA increased 11.4% to $146,939 in 2003 from $131,879 in 2002. This increase in Segment EBITDA was due to cost initiatives, including savings in paper, production, headcount and group overhead. Other actions included the elimination of the Company's stand-alone, company-wide sales group with its responsibilities passed to smaller more focused sales groups. In addition, the rate base reduction implemented at the soap opera titles led to decreased revenues accompanied by lower product costs which improved profitability. Enthusiast Media operating expenses declined by approximately $29,600 in 2003 compared to 2002. In 2003, operating expenses included approximately $2,300 of costs related to the settlement of certain lawsuits resulting from pre-acquisition About contracts. As a result of these factors, Segment EBITDA margin increased to 20.2% in 2003 from 17.8% in 2002.

        Below is a reconciliation of Enthusiast Media Segment EBITDA to operating income for the years ended December 31, 2003 and 2002:

 
  Years Ended
December 31,

 
  2003
  2002
Segment EBITDA   $ 146,939   $ 131,879
  Depreciation of property and equipment     21,507     18,879
  Amortization of intangible assets and other     17,379     59,969
  Non-cash compensation and non-recurring charges         3,365
  Provision for severance, closures and restructuring related costs     4,617     40,360
  (Gain) loss on sale of businesses and other, net     (258 )   4,684
   
 
Operating income   $ 103,694   $ 4,622
   
 

Operating Income (Loss)

        Operating income was $103,694 in 2003 compared to $4,622 in 2002, an increase of $99,072. The increase is primarily related to decreases in impairment charges and in the provision for severance, closures and restructuring related costs. During 2002, the Company recorded impairment charges of $37,335 in depreciation and amortization primarily related to goodwill and trademarks under SFAS 142 and related to property, equipment and certain finite lived intangible assets under SFAS 144. In 2003, as a result of the Company's annual impairment testing required under SFAS 142, the Company recorded an impairment related to trademarks in amortization of $2,337. The decrease in severance, closures and restructuring related costs of $35,743 is a result of the termination of certain real estate lease obligations related to office closures in 2002.

24



Discontinued Operations

        In accordance with SFAS 144, the operating results of the Modern Bride Group, Doll Reader, Chicago, Horticulture, the American Baby Group, IN New York, Seventeen and Sprinks have been reclassified to discontinued operations on the statements of consolidated operations for the periods prior to their respective divestiture dates. In addition, the Company has reclassified the results of New York magazine, which was sold during January 2004, into discontinued operations for the years ended December 31, 2003 and 2002.

        Enthusiast Media revenues exclude revenues from discontinued operations of $103,747 and $226,033 for years ended December 31, 2003 and 2002, respectively. Enthusiast Media segment operating income excludes operating income from discontinued operations of $124,087 and $113,615 for years ended December 31, 2003 and 2002, respectively. For 2003 and 2002, discontinued operations includes a net gain on sale of businesses of $113,227 and $106,847, respectively.

Consumer Guides Segment (includes Apartment Guide and New Homes Guide, their Web sites and DistribuTech)

Revenues, Net

        Consumer Guides revenues were $276,639 or 20.6% and $267,166 or 19.1% of the Company's consolidated revenues for 2003 and 2002, respectively. Consumer Guides revenues increased $9,473 or 3.5% in 2003 compared to 2002 as follows:

 
  Years Ended
December 31,

   
 
 
  Percent
Change

 
 
  2003
  2002
 
Revenues, net:                  
  Advertising   $ 234,352   $ 229,805   2.0  
  Other     42,277     36,436   16.0  
  Intersegment revenues     10     925   (98.9 )
   
 
     
    Total   $ 276,639   $ 267,166   3.5  
   
 
     

        Advertising revenues for the Consumer Guides segment increased $4,547 to $234,352 in 2003 compared to $229,805 in 2002. Continuing page growth in the Apartment Guide business contributed to approximately $5,400 of the increase in advertising revenues despite growth constraints due to challenges presented by record low interest rates driving increased home buying and higher than normal apartment vacancy rates depressing apartment managers' advertising budgets. Revenue recognized in connection with assets-for-equity transactions decreased to approximately $100 in 2003 compared to approximately $3,000 in 2002 and there were no deferred revenues relating to assets-for-equity transactions on the Consumer Guides balance sheet at December 31, 2003.

        Consumer Guides other revenues relate to its distribution arm, DistribuTech, which continues its growth with revenues from the distribution of third party free publications increasing approximately $5,800 in 2003. During 2003, DistribuTech distributed more than 2,000 publications on behalf of publishing organizations to many of the country's leading supermarkets and chain stores, with which it has exclusive distribution relationships.

Segment EBITDA

        Consumer Guides Segment EBITDA increased $9,825 or 13.4% during the year ended December 31, 2003 to $83,163. The increase in Segment EBITDA is primarily due to the increase in revenues in 2003 with relatively stable operating expenses. As a result of the above, Segment EBITDA margin increased to 30.1% in 2003 compared to 27.5% in 2002.

25



        Below is a reconciliation of PRIMEDIA Consumer Guides Segment EBITDA to operating income for the years ended December 31, 2003 and 2002:

 
  Years Ended December 31,
 
  2003
  2002
Segment EBITDA   $ 83,163   $ 73,338
  Depreciation of property and equipment     8,110     8,574
  Amortization of intangible assets and other     3,592     5,184
  Provision for severance, closures and restructuring related costs         574
  Loss on sale of businesses and other, net     132     867
   
 
Operating income   $ 71,329   $ 58,139
   
 

Operating Income (Loss)

        Operating income increased $13,190 or 22.7% in 2003. This increase is primarily driven by the improvement in Segment EBITDA. Amortization of intangible assets and other decreased $1,592 during the year ended December 31, 2003 compared to 2002 predominantly due to the write-off of approximately $1,500 recorded to amortization related to the shutdown of the Atlanta Real Estate Guide in 2002.

Discontinued Operations

        In accordance with SFAS 144, the results of ExitInfo and RealEstate.com have been reclassified to discontinued operations on the statements of consolidated operations for the periods prior to their respective divestiture dates.

        Consumer Guides revenues exclude revenues from discontinued operations of $2,443 and $11,966 for years ended December 31, 2003 and 2002, respectively. Consumer Guides segment operating income excludes operating income from discontinued operations of $8,000 and $1,620 for years ended December 31, 2003 and 2002, respectively. For 2003 and 2002, discontinued operations includes a net gain on sale of businesses of $10,184 and $4,602, respectively.

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

Revenues, Net

        Business Information revenues were $228,784 or 17.0% and $259,030 or 18.5% of the Company's consolidated revenues for 2003 and 2002, respectively. Business Information revenues decreased $30,246 or 11.7% in 2003 compared to 2002 as follows:

 
  Years Ended December 31,
   
 
  Percent
Change

 
  2003
  2002
Revenues, net:                
  Advertising   $ 162,104   $ 189,954   (14.7)
  Circulation     21,243     21,522   (1.3)
  Other     45,435     47,474   (4.3)
  Intersegment revenues     2     80   (97.5)
   
 
   
    Total   $ 228,784   $ 259,030   (11.7)
   
 
   

26


        Advertising revenues decreased $27,850 in 2003 due to continued softness in trade advertising, particularly in the telecommunications, entertainment technology, and agriculture categories. The decrease was a result of a lower number of pages as well as a lower rate per page. For 2003, the decline in PRIMEDIA's trade magazine advertising pages was in line with comparable sectors of the industry. Revenues related to several unprofitable product lines that were shut down in 2003 contributed to approximately $5,600 of the decline. In addition, non-cash revenue items such as barter and assets-for-equity revenue transactions declined approximately $5,000 in 2003 compared to 2002. There were no deferred revenues related to assets-for-equity transactions on the Business Information balance sheet at December 31, 2003.

        Business Information circulation revenues, which consist of subscriptions for directories and data based products, were essentially flat, in 2003 compared to 2002.

        Other revenues, which consist of trade shows, licensing, consulting and list rental, were down $2,039, or 4.3%, for the year ended December 31, 2003.

Segment EBITDA

        Business Information Segment EBITDA decreased $4,152 for the year ended December 31, 2003 to $34,197. This decrease is predominantly due to the revenue decline in the segment as discussed above, partially offset by continued cost initiatives including headcount reductions, the elimination of group overhead and the shutdown of unprofitable titles. Operating expenses in this segment declined by approximately $26,100 in 2003 compared to 2002. These factors contributed to a slightly improved Segment EBITDA margin of 14.9% for 2003 versus 14.8% for 2002, despite the significant revenue reduction.

        Below is a reconciliation of Business Information Segment EBITDA to operating income (loss) for the years ended December 31, 2003 and 2002:

 
  Years Ended December 31,
 
 
  2003
  2002
 
Segment EBITDA   $ 34,197   $ 38,349  
  Depreciation of property and equipment     8,245     10,090  
  Amortization of intangible assets and other     9,175     62,997  
  Non-cash compensation and non-recurring charges         330  
  Provision for severance, closures and restructuring related costs     388     4,890  
  Loss on sale of businesses and other, net     822     296  
   
 
 
Operating income (loss)   $ 15,567   $ (40,254 )
   
 
 

Operating Income (Loss)

        Business Information operating income increased $55,821, principally as there were no impairments in 2003 related to SFAS 142 and SFAS 144. During 2002, the Company recorded an impairment charge under SFAS 142 and SFAS 144 of $49,651 recorded in amortization related to goodwill, trademarks and certain finite lived intangible assets. In addition, the provision for severance, closures and restructuring related costs decreased $4,502 in 2003 compared to 2002.

27



Discontinued Operations

        In accordance with SFAS 144, the results of Simba, Federal Sources, CableWorld and Kagan World Media have been reclassified to discontinued operations on the statements of consolidated operations for the years ended December 31, 2003 and 2002.

        Business Information revenues exclude revenues from discontinued operations of $15,190 and $19,489 for the years ended December 31, 2003 and 2002, respectively. Business Information segment operating results exclude the operating losses from discontinued operations of $1,409 and $15,939 for 2003 and 2002, respectively. For the year ended December 31, 2003, discontinued operations includes a net gain on sales of businesses of $1,836.

Education and Training (includes Workplace Learning, Channel One and Films for the Humanities and Sciences)

Revenues, Net

        Education and Training revenues were $119,778 or 8.9% and $146,586 or 10.5% of the Company's consolidated revenues for 2003 and 2002, respectively. Education and Training revenues decreased $26,808 or 18.3% in 2003 compared to 2002 as follows:

 
  Years Ended December 31,
   
 
  Percent Change
 
  2003
  2002
Revenues, net:                
  Advertising   $ 44,688   $ 50,202   (11.0)
  Circulation     26,335     27,693   (4.9)
  Other     45,278     58,796   (23.0)
  Intersegment revenues     3,477     9,895   (64.9)
   
 
   
    Total   $ 119,778   $ 146,586   (18.3)
   
 
   

        Education and Training advertising revenues, which are generated entirely by Channel One, decreased $5,514 in 2003 as compared to 2002. Channel One's advertising revenue declined as a result of reduced spending by several large accounts, including agencies of the U.S. government and two food and beverage companies (which merged), partially offset by revenue from new accounts.

        Workplace Learning subscription revenue accounts for all of the segment's circulation revenue, which decreased $1,358 during the year ended December 31, 2003. Lagging demand for corporate training services from Workplace Learning, particularly industrial videotape sales and satellite based training for healthcare professionals, continued to depress subscription revenues as well as product sale revenues which are classified in other. Reduced product sales at Workplace Learning and Films for the Humanities and Sciences primarily accounted for the decline of $13,518 in other revenues in 2003. A decrease in Workplace Learning, single event and live event sales accounted for approximately $8,000 of this decline. Continuing constraints on state and local school budgets was the driver of approximately $4,900 of declines in product sales at Films for the Humanities and Sciences in 2003 compared to 2002.

Segment EBITDA

        Education and Training Segment EBITDA decreased $29,147 to $5,674 for the year ended December 31, 2003. This decrease is principally due to the declines in revenue discussed above as well an increase in operating expenses of approximately $2,300 which was partially due to the reversal of an excess sales and uses tax reserve during December 2002 whereas no similar reversal was made in 2003. Additionally, in the fourth quarter of 2003, the Company recorded a non-cash charge of approximately

28



$2,800 for the impairment of certain deferred programming assets at Workplace Learning. These factors contributed to a decrease in Segment EBITDA margin in 2003 to 4.7% compared to 23.8% in 2002.

        Below is a reconciliation of Education and Training Segment EBITDA to operating loss for the years ended December 31, 2003 and 2002:

 
  Years Ended December 31,
 
 
  2003
  2002
 
Segment EBITDA   $ 5,674   $ 34,821  
  Depreciation of property and equipment     12,986     28,344  
  Amortization of intangible assets and other     45,807     79,151  
  Provision for severance, closures and restructuring related costs     1,030     153  
   
 
 
Operating loss   $ (54,149 ) $ (72,827 )
   
 
 

Operating Income (Loss)

        Operating loss decreased $18,678 for the year ended December 31, 2003 due to lower impairment charges recorded in 2003 versus 2002, partially offset by the decrease in Segment EBITDA as discussed above. During 2002, the Company recorded impairment charges under SFAS 142 and SFAS 144 of $9,375 in depreciation related to property and equipment and $59,442 in amortization related to goodwill, intangible assets and other. During 2003, the Company recorded a $32,916 impairment charge under SFAS 142 and SFAS 144 in amortization related to goodwill, trademarks and certain finite lived intangible assets.

Corporate:

Corporate Overhead

        Corporate overhead decreased $5,004 in 2003 to $25,909 from $30,913 in 2002. The decrease is primarily due to a reduction in compensation expense and the reversals of employee incentive compensation accruals, of approximately $3,100 and $1,400 in 2003 and 2002, respectively, due to changes in estimates.

Operating Income (Loss)

        Corporate operating loss increased $10,384 in 2003 to $54,044 from $43,660 in 2002 principally due to the severance recorded related to the separated senior executives of $9,372. Effective January 1, 2003, the Company adopted SFAS 123, as amended by SFAS 148, using the prospective method which resulted in $5,980 being recorded to non-cash compensation expense for the year ended December 31, 2003. Depreciation of property and equipment increased $2,345 to $5,039 in 2003 primarily related to the disposal of certain fixed assets recorded in 2003.

Non-Core Businesses:

        Since June 30, 2002, the Company has not classified any additional businesses as Non-Core Businesses nor have any additional balances been allocated to the Non-Core Businesses subsequent to June 30, 2002.

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Results of Operations

2002 Compared to 2001

Consolidated Results:

Revenues, Net

        Consolidated revenues from Continuing Businesses increased 7.3% to $1,399,061 in 2002 from $1,304,239 in 2001:

 
  Years Ended
December 31,

   
 
 
  Percent Change
 
 
  2002
  2001
 
Revenues, net:                  
  Continuing Businesses:                  
    Advertising   $ 857,288   $ 855,925   0.2  
    Circulation     342,057     278,160   23.0  
    Other     199,716     170,154   17.4  
   
 
     
      Subtotal     1,399,061     1,304,239   7.3  
  Non-Core Businesses     13,491     73,535   (81.7 )
   
 
     
      Total   $ 1,412,552   $ 1,377,774   2.5  
   
 
     

        Advertising revenues increased $1,363 in 2002 with an increase of $69,246 at the Enthusiast Media segment primarily attributable to the inclusion of the full year results of EMAP, acquired in the latter part of 2001, partially offset by a decline of $56,650 at the Business Information segment. The inclusion of the full year EMAP results in 2002 primarily drove the increase in circulation revenues of $63,897 and other revenues of $29,562 compared to 2001. Additionally, contributing to the increase in other revenues was an increase of $8,326 at Consumer Guides in 2002. Partially offsetting the increase in other revenues were decreases at the Business Information and Education and Training segments in 2002 of $8,657 and $7,689, respectively.

        Total revenues, including Continuing and Non-Core Businesses, increased 2.5% to $1,412,552 in 2002 from $1,377,774 in 2001.

        The Company had entered various assets-for-equity investments in start-ups and early stage companies in 2001 and did so to a much lesser extent in 2002. Some of these transactions included cash consideration paid by the Company. The non-cash consideration was comprised of advertising, content licensing and other services to be rendered by the Company in exchange for a small equity position in these entities. The Company recognizes revenue when these services are delivered in accordance with the Company's revenue recognition policies. Revenue recognized in connection with these assets-for-equity transactions was approximately $7,600 and $34,600 during the years ended December 31, 2002 and 2001, respectively, from Continuing Businesses. The revenue from these transactions declined substantially throughout 2002 and continued to decline in 2003 to approximately $300. In addition, for the years ended December 31, 2002 and 2001, revenue from barter transactions was approximately $18,000 and $32,700, respectively, with equal related expense amounts in each year.

Operating Income (Loss)

        Operating loss from Continuing Businesses was $93,980 in 2002 compared to $557,311 in 2001. The decrease was primarily due to a decrease in amortization expense of $366,534 which was primarily due to higher impairments of goodwill and other intangible assets in 2001 ($186,929) as well as the elimination in 2002 of goodwill and certain trademark amortization upon the adoption of SFAS 142 on January 1, 2002

30



($179,940). The total impairment charges recorded in amortization and depreciation primarily under SFAS 142 and SFAS 144 for the year end December 31, 2002 were $146,064 related to goodwill, intangibles and other assets and $9,739 related to property and equipment. Total operating loss was $100,316 in 2002 compared to $651,320 in 2001.

Net Income (Loss)

        The Company had a net loss of $599,423 in 2002 compared to $1,111,641 in 2001. The decrease in net loss from 2001 was primarily due to the decrease in operating loss as discussed above as well as a decrease in the provision for impairment of investments of $87,467 to $19,045 in 2002.

        Interest expense decreased by $6,050 or 4.1% in 2002 compared to 2001 primarily due to lower average levels of indebtedness as a result of the Company's use of divestiture proceeds to pay down borrowings under the Company's credit facilities, as well as a reduction in interest rates.

        In connection with the adoption of SFAS 142, effective January 1, 2002, the Company recorded an impairment charge related to its goodwill and certain indefinite lived intangible assets of $388,508, as a cumulative effect of a change in accounting principle. In addition, the Company recorded $49,500 of related non-cash deferred income tax expense under SFAS 142.

        During 2002, the Company completed the sale of the Modern Bride Group, ExitInfo, Doll Reader, Chicago, Horticulture, the American Baby Group and IN New York. In accordance with SFAS 144, the operating results of the divested operating units have been reclassified to discontinued operations on the statements of consolidated operations for the years ended December 31, 2002 and 2001.

        During the year ended December 31, 2003, the Company completed the sale of Seventeen, Simba Information, Federal Sources, CableWorld, Sprinks and RealEstate.com and during January 2004, the Company sold New York magazine. In addition, the Company initiated a plan to sell Kagan World Media in 2003. In accordance with SFAS 144, the financial results of these operations have been reclassified into discontinued operations on the statements of consolidated operations for the years ended December 31, 2002 and 2001. Discontinued operations includes a net gain on sale of businesses of $111,449 in 2002.

Segment Results:

        The results of the Company's four reportable segments are discussed below. All amounts are from Continuing Businesses unless otherwise specified.

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Enthusiast Media Segment (includes enthusiast magazines, their related Web sites, events and About)

Revenues, Net

        Enthusiast Media revenues were $740,400 or 52.9% and $572,196 or 43.9% of the Company's consolidated revenues for 2002 and 2001, respectively. Enthusiast Media revenues increased $168,204 or 29.4% in 2002 compared to 2001 as follows:

 
  Years Ended
December 31,

   
 
 
  Percent Change
 
 
  2002
  2001
 
Revenues, net:                  
  Advertising   $ 387,327   $ 318,081   21.8  
  Circulation     292,842     228,473   28.2  
  Other     57,010     19,428   193.4  
  Intersegment revenues     3,221     6,214   (48.2 )
   
 
     
    Total   $ 740,400   $ 572,196   29.4  
   
 
     

        Advertising, circulation and other revenues increased $69,246, $64,369 and $37,582, respectively, in 2002 versus 2001. The inclusion of full year 2002 results of EMAP, which was acquired during the third quarter of 2001 was the predominant driver of the substantial revenue increases in the Enthusiast Media segment, contributing to 175.0%, 85.2% and 40.4% of the increases in advertising, circulation and other revenues, respectively, for 2002 compared to 2001.

        Excluding EMAP, Enthusiast Media saw a decline in advertising revenues of approximately $52,000 primarily due to industry wide softness. Included in this decline was a reduction of approximately $18,200 of non-cash revenue items such as barter and assets-for-equity revenue transactions primarily at About. Revenue recognized in connection with assets-for-equity transactions was approximately $500 and $7,000 in 2002 and 2001, respectively. For the years ended December 31, 2002 and 2001, revenue from barter transactions was approximately $5,000 and $16,700, respectively, with equal related expense amounts in each year.

        Enthusiast Media circulation and other revenues, excluding EMAP, had increases of approximately $9,500 and $22,400, respectively, in 2002 compared to 2001. Enthusiast Media's other revenues include licensing, list rentals, events and other.

Segment EBITDA

        Enthusiast Media Segment EBITDA increased 89.8% to $131,879 in 2002 from $69,492 in 2001 primarily due to the full year inclusion of the results of EMAP in 2002. The increase in year over year Segment EBITDA related to EMAP was $40,995 or 65.7% of the segment's increase. Cost reduction measures taken across the segment in 2002 and 2001 also contributed to the increase in Segment EBITDA in 2002. These cost actions included significant headcount reductions, the shutdown of unprofitable magazine titles and the rationalization of costs at the Company's Internet operations. Segment EBITDA margin increased to 17.8% in 2002 compared to 12.1% in 2001.

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        Below is a reconciliation of Enthusiast Media Segment EBITDA to operating income (loss) for the years ended December 31, 2002 and 2001:

 
  Years Ended
December 31,

 
 
  2002
  2001
 
Segment EBITDA   $ 131,879   $ 69,492  
  Depreciation of property and equipment     18,879     10,620  
  Amortization of intangible assets and other     59,969     510,124  
  Non-cash compensation and non-recurring charges     3,365     26,479  
  Provision for severance, closures and restructuring related costs     40,360     24,891  
  Loss on sale of businesses and other, net     4,684     537  
   
 
 
Operating income (loss)   $ 4,622     ($503,159 )
   
 
 

Operating Income (Loss)

        Operating income (loss) was $4,622 in 2002 compared to ($503,159) in 2001. The increase in operating income was attributable to a decrease in amortization expense of $450,155 as a result of a $296,022 decrease in impairment charges in 2002 compared to 2001 as well as the elimination of goodwill and certain trademark amortization upon the adoption of SFAS 142 of $159,451. Additionally, the $62,387 increase in Segment EBITDA and decrease in non-cash compensation and non-recurring charges of $23,114 contributed to the increase in operating income. Partially offsetting these factors was an increase of severance, closures and restructuring related costs of $15,469 primarily as a result of the termination of certain real estate lease obligations related to office closures in 2002.

Discontinued Operations

        In accordance with SFAS 144, the operating results of the Modern Bride Group, Doll Reader, Chicago, Horticulture, the American Baby Group, IN New York, Seventeen and Sprinks have been reclassified to discontinued operations on the statements of consolidated operations for periods prior to their respective divestiture dates.

        In addition, the Company has reclassified the results of New York magazine, which was sold in January 2004, into discontinued operations on the statements of consolidated operations for the years ended December 31, 2002 and 2001.

        Enthusiast Media revenues exclude revenues from discontinued operations of $226,033 and $306,480 for years ended December 31, 2002 and 2001, respectively. Enthusiast Media segment operating income (loss) excludes operating income from discontinued operations of $113,615 and $6,237 for years ended December 31, 2002 and 2001, respectively. For 2002, discontinued operations includes a net gain on sale of businesses of $106,847.

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        Consumer Guides Segment (including Apartment Guide, New Homes Guide, their Web sites and DistribuTech)

Revenues, Net

        Consumer Guides revenues were $267,166 or 19.1% and $255,391 or 19.6% of the Company's consolidated revenues for 2002 and 2001, respectively. Consumer Guides revenues increased $11,775 or 4.6% in 2002 compared to 2001 as follows:

 
  Years Ended
December 31,

   
 
  Percent Change
 
  2002
  2001
Revenues, net:                
  Advertising   $ 229,805   $ 227,118   1.2
  Other     36,436     28,110   29.6
  Intersegment revenues     925     163   467.5
   
 
   
    Total   $ 267,166   $ 255,391   4.6
   
 
   

        Advertising revenues for the Consumer Guides segment, including barter and assets-for-equity revenues, increased approximately $6,100 in 2002 as a result of gains at the Apartment Guide business offset by approximately $3,400 in lost revenues related to product shutdowns in 2002. Revenue from barter transactions was approximately $3,100 and $900 in 2002 and 2001, respectively. Revenue recognized in connection with assets-for-equity transactions decreased to approximately $3,000 in 2002 from $8,200 in 2001. Consumer Guides other revenues, which relate to distribution of third party free publications by its distribution arm, DistribuTech, increased $8,326 or 29.6% in 2002 compared to 2001.

Segment EBITDA

        Consumer Guides Segment EBITDA increased $14,681 or 25.0% during the year ended December 31, 2002 to $73,338. The increase in Segment EBITDA is primarily due to the increase in revenues in 2002 which drove the increase in Segment EBITDA margin to 27.5% in 2002 compared to 23.0% in 2001.

        Below is a reconciliation of PRIMEDIA Consumer Guides Segment EBITDA to operating income for the years ended December 31, 2002 and 2001:

 
  Years Ended December 31,
 
 
  2002
  2001
 
Segment EBITDA   $ 73,338   $ 58,657  
  Depreciation of property and equipment     8,574     8,441  
  Amortization of intangible assets and other     5,184     9,442  
  Provision for severance, closures and restructuring related costs     574     1,129  
  (Gain) loss on sale of businesses and other, net     867     (252 )
   
 
 
Operating income   $ 58,139   $ 39,897  
   
 
 

Operating Income (Loss)

        Operating income increased $18,242 or 45.7% in 2002. This increase is primarily driven by the improvement in Segment EBITDA. In addition, amortization of intangible assets and other decreased

34



$4,258 during the year ended December 31, 2002 compared to 2001 predominantly due to the elimination of goodwill and trademark amortization upon the adoption of SFAS 142 in 2002.

Discontinued Operations

        In accordance with SFAS 144, the results of ExitInfo and RealEstate.com have been reclassified to discontinued operations on the statements of consolidated operations for the periods prior to their respective divestiture dates.

        Consumer Guides revenues exclude revenues from discontinued operations of $11,966 and $14,911 for years ended December 31, 2002 and 2001, respectively. Consumer Guides segment operating income excludes operating income (loss) from discontinued operations of $1,620 and ($1,173) for years ended December 31, 2002 and 2001, respectively. For 2002, discontinued operations includes a net gain on sale of businesses of $4,602.

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

Revenues, Net

        Business Information revenues were $259,030 or 18.5% and $322,976 or 24.8% of the Company's consolidated revenues for 2002 and 2001, respectively. Business Information revenues decreased $63,946 or 19.8% in 2002 compared to 2001 as follows:

 
  Years Ended
December 31,

   
 
 
  Percent Change
 
 
  2002
  2001
 
Revenues, net:                  
  Advertising   $ 189,954   $ 246,604   (23.0 )
  Circulation     21,522     20,121   7.0  
  Other     47,474     56,131   (15.4 )
  Intersegment revenues     80     120   (33.3 )
   
 
     
    Total   $ 259,030   $ 322,976   (19.8 )
   
 
     

        Advertising revenues decreased 23.0% primarily attributable to industry-wide softness in business-to-business advertising during 2002 with the steepest declines in the telecommunications, entertainment technology, agribusiness and trucking sectors. Revenue recognized in connection with assets-for-equity transactions was approximately $4,100 and $10,000 for the years ended December 31, 2002 and 2001, respectively. For the years ended December 31, 2002 and 2001, revenue from barter transactions was approximately $6,900 and $8,900, respectively, with equal related expense amounts in each year.

Segment EBITDA

        Business Information Segment EBITDA decreased $19,863 for the year ended December 31, 2002 to $38,349. This decrease is predominantly due to the revenue declines in the segment as discussed above, partially offset by cost initiatives including significant headcount reductions, which resulted in an operating cost decline of approximately $44,100. These factors resulted in a Segment EBITDA margin for 2002 versus 2001 of 14.8% and 18.0%, respectively.

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        Below is a reconciliation of Business Information Segment EBITDA to operating income (loss) for the years ended December 31, 2002 and 2001:

 
  Years Ended December 31,
 
 
  2002
  2001
 
Segment EBITDA   $ 38,349   $ 58,212  
  Depreciation of property and equipment     10,090     14,742  
  Amortization of intangible assets and other     62,997     24,638  
  Non-cash compensation and non-recurring charges     330      
  Provision for severance, closures and restructuring related costs     4,890     10,750  
  (Gain) loss on sale of businesses and other, net     296     (933 )
   
 
 
Operating income (loss)     ($40,254 ) $ 9,015  
   
 
 

Operating Income (Loss)

        Operating income (loss) was ($40,254) in 2002 compared to $9,015 in 2001 due to decreased Segment EBITDA and an increase in amortization expense of $38,359. Amortization expense increased in 2002 primarily due to impairment charges recorded during 2002 of $49,651, partially offset by the elimination of goodwill and trademark amortization upon the adoption of SFAS 142 of $13,896 and a decrease in amortization expense in 2002 for finite lived intangible assets.

Discontinued Operations

        In accordance with SFAS 144, the results of Simba, Federal Sources, CableWorld and Kagan World Media have been reclassified to discontinued operations on the statements of consolidated operations for the years ended December 31, 2002 and 2001.

        Business Information revenues excludes results from discontinued operations of $19,489 and $22,514 for the years ended December 31, 2002 and 2001, respectively. Business Information segment operating loss excludes operating loss from discontinued operations of $15,939 and $31,404 for 2002 and 2001, respectively.

        Education and Training (includes Workplace Learning, Channel One and Films for the Humanities and Sciences)

Revenues, Net

        Education and Training revenues were $146,586 or 10.5% and $165,295 or 12.7% of the Company's consolidated revenues for 2002 and 2001, respectively. Education and Training revenues decreased $18,709 or 11.3% in 2002 compared to 2001 as follows:

 
  Years Ended
December 31,

   
 
 
  Percent Change
 
 
  2002
  2001
 
Revenues, net:                  
  Advertising   $ 50,202   $ 64,122   (21.7 )
  Circulation     27,693     29,566   (6.3 )
  Other     58,796     66,485   (11.6 )
  Intersegment revenues     9,895     5,122   93.2  
   
 
     
    Total   $ 146,586   $ 165,295   (11.3 )
   
 
     

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        Advertising revenues, which are generated primarily by Channel One, decreased $13,920 in 2002 compared to 2001. The decline was due to the expiration of long-term contracts as well as decreases in non-cash revenue items such as barter and assets-for-equity revenue transactions. Revenue recognized in connection with assets-for-equity transactions was approximately $9,400 in 2001, with no such revenues recorded in 2002. For the years ended December 31, 2002 and 2001, revenue from barter transactions was approximately $3,000 and $6,200, respectively, with equal related expense amounts in each year.

        Circulation revenues, which relate to Workplace Learning subscription revenues, decreased $1,873 in 2002 compared to 2001. Other revenues, which primarily relate to revenues from Films for the Humanities and Sciences and Workplace Learning's event revenues, declined $7,689 in 2002 compared to 2001. Workplace Learning revenues declined in part because of a cyclical pullback in demand for training services while revenues at Films for the Humanities and Sciences decreased due to the education budgetary pressures resulting from economic softness.

Segment EBITDA

        Education and Training Segment EBITDA increased $6,704 to $34,821 for the year ended December 31, 2002. This increase is due to cost initiatives which resulted in an operating cost decline of approximately $25,400, partially offset by the revenue declines as discussed above. The segment also recorded credits of $1,321 in 2002 and $4,000 in 2001 related to reversals of sales tax accruals in both years. These factors resulted in an increase in the Segment EBITDA margin in 2002 of 23.8% compared to 17.0% in 2001.

        Below is a reconciliation of Education and Training Segment EBITDA to operating loss for the years ended December 31, 2002 and 2001:

 
  Years Ended
December 31,

 
 
  2002
  2001
 
Segment EBITDA   $ 34,821   $ 28,117  
  Depreciation of property and equipment     28,344     33,171  
  Amortization of intangible assets and other     79,151     30,010  
  Provision for severance, closures and restructuring related costs     153     3,983  
   
 
 
Operating loss     ($72,827 )   ($39,047 )
   
 
 

Operating Income (Loss)

        Operating loss increased $33,780 for the year ended December 31, 2002 due to impairment charges recorded in 2002. During 2002, the Company recorded an impairment charge under SFAS 142 and SFAS 144 of $9,375 related to property and equipment and $59,442 related to goodwill, intangible assets and other, respectively. These charges were partially offset by the increase in Segment EBITDA as discussed above as well as decreases in depreciation and the provision for severance, closures and restructuring related costs in 2002 compared to 2001.

Corporate:

        Corporate overhead decreased by 4.3% to $30,913 in 2002 from $32,308 in 2001. This decrease was due to savings related to headcount reductions partially offset by higher professional fees and certain incremental technology and consulting costs.

        Operating loss decreased $20,357 to $43,660 in 2002 from $64,017 in 2001. The decrease is predominantly due to a decrease in non-cash compensation and non-recurring charges of $23,393 from

37



$30,200 to $6,807 during the years ended December 31, 2001 and 2002, respectively. Non-cash compensation and non-recurring charges represent executive compensation in the form of stock and option grants and the extension of certain stock option expiration periods. In addition, the operating loss includes a provision for severance, closures and restructuring related costs of $3,692 and $7,603 during the years ended December 31, 2002 and 2001, respectively. This provision is comprised of employee related termination costs and real estate lease commitments for space that the Company no longer occupies.

Non-Core Businesses:

        During 2001, the Company shut down or divested approximately 40 properties. Segment EBITDA losses from these properties approximated $36,900 for the year ended December 31, 2001. These Segment EBITDA losses were partially offset by positive Segment EBITDA at Bacon's, which was divested during 2001, resulting in a net Segment EBITDA loss for the Non-Core Businesses of $28,340.

        In 2001, the Company recorded a net gain on sale of businesses for the Non-Core Businesses of $47,648, which was predominantly due to the sale of Bacon's. This was partially offset by impairments recorded in amortization expense related to goodwill, trademarks and other intangibles in 2001 for the Non-Core Businesses of $94,023.

        Corporate administrative costs of approximately $1,900 and $9,900 were allocated to the Non-Core Businesses during the years ended December 31, 2002 and 2001, respectively. The Company believes that these costs, many of which were transaction driven, such as the processing of payables and payroll, have been permanently reduced or eliminated due to the shutdown or divestiture of the Non-Core Businesses.

        Since June 30, 2002, the Company has not classified any additional businesses as Non-Core Businesses nor have any additional balances been allocated to the Non-Core Businesses subsequent to June 30, 2002.

Risk Factors

        Set forth below are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Annual Report.

General economic trends may reduce our advertising revenues.

        Our advertising revenues are subject to the risks arising from adverse changes in domestic and global economic conditions. A decline in the level of business activity of our advertisers has had an adverse effect on our revenues and profit margins. Because of the recent economic slowdown in the United States, many advertisers, particularly business-to-business advertisers, have reduced advertising expenditures. Any further impact of this slowdown on us is difficult to predict, but it may result in further reductions in advertising revenue. Additionally, if geopolitical events negatively impact the economy, our results of operations may be adversely affected.

We have substantial indebtedness and other monetary obligations, which consume a substantial portion of the cash flow that we generate.

        A substantial portion of our cash flow is dedicated to the payment of interest on indebtedness and to the payment of dividends on our preferred stock, which reduces funds available for capital expenditures and business opportunities and may limit our ability to respond to adverse developments in our business or in the economy.

Our debt instruments limit our business flexibility by imposing operating and financial restrictions on our operations.

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

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

        As of December 31, 2003, approximately 60% of the shares of our common stock were held by investment partnerships, of which KKR Associates, L.P., a New York limited partnership ("KKR Associates"), and KKR GP 1996 LLC, a Delaware limited liability company ("KKR GP 1996"), each an affiliate of KKR, are the general partners. KKR Associates and KKR GP 1996 have sole voting and investment power with respect to these shares. Consequently, KKR Associates and KKR GP 1996 and their respective general partners and members, three of whom are also our directors, control us and have the power to elect all of our directors and approve any action requiring stockholder approval, including adopting amendments to our certificate of incorporation and approving mergers or sales of all or substantially all of our assets. KKR Associates and KKR GP 1996 will also be able to prevent or cause a change of control at any time.

Increases in paper and postage costs may have an adverse impact on our future financial results.

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

Incompatible financial systems limit the Company's ability to operate efficiently.

        PRIMEDIA is the result of numerous acquisitions since its inception in 1989. Many of the companies acquired had financial systems which are incompatible. Incompatible financial systems across PRIMEDIA have negatively impacted the Company's ability to efficiently analyze data and respond to business opportunities on a timely basis. Significant capital expenditures are necessary to upgrade and standardize financial systems across the Company. Despite the economic slowdown, the Company has been engaged in upgrading its key financial systems, which are designed to make the financial reporting and analysis functions more efficient. To address management's concerns regarding the current lack of compatible financial systems across the Company and the demands surrounding increased financial disclosure, the Company has installed an integrated enterprise-wide general ledger system across all companies. Despite the difficult economic environment, the Company spent approximately $15,000 on the systems upgrade, of which approximately $10,000 and $5,000 was spent during 2003 and 2002, respectively. However, it will

39



take approximately 12 months to fully realize the planned benefits of this integrated enterprise-wide system. The Company is also implementing a new integrated billing/accounts receivable system across its consumer magazine units which is scheduled for completion in the latter part of 2004 at a cost of approximately $5,000. The Company recognizes that there are inherent risks in a system implementation and has taken reasonable steps to mitigate these risks.

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

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

        The decline in revenues in a difficult economy has necessitated cost cuts including the reduction of certain personnel at the Company. Such workforce reductions may impact the ability of remaining personnel to perform their assigned responsibilities in an efficient manner, due to the increased volume of work being generated in the financial area and to the continuing process of converting certain of our financial systems. The Company believes that it has in place the necessary financial workforce to analyze data and has put in place additional financial personnel during the period prior to the completion of the financial systems upgrade in order to improve the efficiency of financial analysis and mitigate the risk of employee turnover.

        The Company's management is concerned about the intense competition in this economy for the hiring and retention of qualified financial personnel, the inherent risk in certain system implementations across the Company and the demands surrounding increased financial disclosure. To mitigate management's concerns regarding the hiring and retention of qualified financial personnel and to ensure future stability in the financial workforce, the Company continues to upgrade the skill level of its back office personnel, consolidate certain back office functions and cross train individuals in the performance of multiple job functions. Additionally, the Company continues to aggressively recruit qualified professionals to strengthen and increase its financial personnel. The Company believes that it is currently close to being fully staffed in the finance area.

The Company may not be in compliance with escheatment laws in one or more states.

        Based on an initial internal assessment, we believe that certain of our business units may have unclaimed property that should have been remitted to one or more states under their respective escheatment laws. The property in question appears to relate primarily to unused advertising credits and outstanding accounts payable checks. We have hired PriceWaterhouseCoopers LLP to assist us in assessing this issue and, if necessary, negotiating settlements with the relevant states. It is premature to estimate the extent of the financial risk at this time, but the Company believes that this risk will not have a material impact on its results of operations or financial position.

Liquidity, Capital and Other Resources

        During 2003, the Company continued to focus on debt reduction made possible by the divestiture of selected media properties no longer considered core to the Company's overall strategy. The Company has reduced long-term debt, including current maturities, by $369,260, or 18.9%, to $1,584,636 at December 31, 2003 from $1,953,896 at December 31, 2001. As of December 31, 2003, the Company had cash and unused credit facilities of $319,125 as further detailed below under "Financing Arrangements". The Company has also implemented and continues to implement various cost-cutting programs and cash conservation plans, which involve the limitation of capital expenditures and the control of working capital. These plans should help mitigate any future possible cash flow shortfalls. The Company's asset sales and

40



continued cost reductions during 2002 and 2003 have facilitated its strategy to become a more efficient and better focused company while strengthening its balance sheet and improving liquidity.

        The Company believes its liquidity, capital resources and cash flow are sufficient to fund planned capital expenditures, working capital requirements, interest and principal payments on its debt, payment of preferred stock dividends and other anticipated expenditures in 2004. The Company has no significant required debt repayments until 2008.

Working Capital

        Consolidated working capital reflects certain industry working capital practices and accounting principles, including the recording of deferred revenue from subscriptions as a current liability as well as the expensing of certain advertising, editorial and product development costs as incurred. Consolidated working capital deficiency, which includes current maturities of long-term debt, was $205,300 at December 31, 2003 compared to $248,280 at December 31, 2002. The change in working capital is primarily attributable to a decrease in accounts payable and accrued expenses related to company-wide cost reductions. Revenue declines in 2003 contributed to a decrease in accounts receivable and a related decrease in deferred revenue. In addition, working capital deficiency was reduced at December 31, 2003 due to the reclassification of approximately $23,000 of goodwill, intangibles and other non-current assets as assets held for sale on the accompanying December 31, 2003 balance sheet.

Cash Flow—2003 Compared to 2002

        Net cash provided by operating activities increased $12,905 or 25.7% to $63,186 in 2003 from $50,281 in 2002. This increase is primarily due to decreased interest payments related to the Company's bank credit facility (as defined below) and Senior Notes (as defined below) and continued aggressive cost control. Interest payments decreased $17,478 or 12.3% in 2003 compared to 2002 due to the Company's reduction of long-term debt, including current maturities, lower interest rates and the Company's refinancing of its highest cost debt at lower interest rates. Partially offsetting this decrease in interest paid was interest related to shares subject to mandatory redemption of $10,945 in 2003 as a result of the Company's adoption of SFAS 150, effective July 1, 2003. Payments on these shares of $33,928 and $49,806 prior to the adoption of SFAS 150 were classified as preferred stock dividends and are presented as part of cash flows used in financing activities for the years ended December 31, 2003 and 2002, respectively.

        Net cash provided by investing activities decreased $45,229 or 23.2% to $149,554 from $194,783 for the years ended December 31, 2003 and 2002, respectively. Proceeds from the sale of businesses were $213,677 in 2003 compared to $241,864 in 2002. Cash paid for acquired businesses increased to $22,786 in 2003 from $3,969 principally due a strategic acquisition at the Consumer Guides segment. Net capital expenditures including the Company's continued investment in enterprise-wide financial systems, were steady at $39,497 in 2003, compared to $39,163 in 2002. The Company expects capital spending in 2004 to remain consistent with 2003.

        Net cash used in financing activities was $222,608 in 2003 compared to $260,099 in 2002 predominantly due to the Company's use of divestiture proceeds during 2003 and 2002 to reduce long-term debt and redeem shares subject to mandatory redemption (the Company's Exchangeable Preferred Stock).

Cash Flow—2002 Compared to 2001

        Net cash provided by (used in) operating activities, as reported, during 2002 including interest payments of $141,696, increased to $50,281 as compared to ($101,348) during 2001, primarily due to the increase in Segment EBITDA. Net cash provided by investing activities during 2002 was $194,783, primarily due to proceeds from the divestiture program, compared to net cash used of $407,057 during 2001, primarily due to the acquisition of EMAP. Net capital expenditures decreased 35.5% to $39,163

41



during 2002 compared to $60,740 during 2001 due primarily to the Company's efforts to control capital spending. Net cash provided by (used in) financing activities during 2002 was ($260,099) primarily due to the use of divestiture proceeds to pay down debt compared to $518,303 during 2001, which represented proceeds from equity and debt issuances primarily used to finance the acquisition activity.

Financing Arrangements

        On June 20, 2001, the Company completed a refinancing of its existing bank credit facilities pursuant to new bank credit facilities with JPMorgan Chase Bank, Bank of America, N.A., The Bank of New York, and The Bank of Nova Scotia, as agents (the "bank credit facility"). The debt under the bank credit facility agreement and as otherwise permitted under the credit facility agreement and the indebtedness relating to the 75/8% Senior Notes, 87/8% Senior Notes and 8% Senior Notes of the Company (together referred to as "Senior Notes") is secured by a pledge of the stock of PRIMEDIA Companies Inc., an intermediate holding company, owned directly by the Company, which owns directly or indirectly all shares of PRIMEDIA subsidiaries that guarantee such debt. Borrowings under the bank credit facility are guaranteed by each of our wholly owned domestic restricted subsidiaries as determined by the Company's management in accordance with the provisions and limitations of the Company's bank credit facility agreement. Certain of our subsidiaries are not guarantors of the bank credit facility.

        As a result of the refinancing of the Company's existing bank credit facility in 2001, the Company wrote-off the remaining balances of deferred financing costs originally recorded approximating $7,250. This write-off is included within amortization of deferred financing costs on the statement of consolidated operations for the year ended December 31, 2001.

        Substantially all proceeds from sales of businesses and other investments were used to pay down borrowings under the bank credit facility agreement. Amounts under the bank credit facility may be reborrowed and used for general corporate and working capital purposes as well as to finance certain future acquisitions. In the second quarter of 2003, the Company made voluntary pre-payments toward the term loans A and B and a voluntary permanent reduction of the bank credit facility's revolving loan commitment in the amounts of $5,000, $21,000 and $24,000, respectively. The bank credit facility consisted of the following at December 31, 2003:

 
  Revolver
  Term A
  Term B
  Total
 
Credit Facility   $ 427,000   $ 90,000   $ 372,906   $ 889,906  
Borrowings Outstanding     (97,000 )   (90,000 )   (372,906 )   (559,906 )
Letters of Credit Outstanding     (19,560 )             (19,560 )
   
 
 
 
 
Unused Bank Commitments   $ 310,440   $   $   $ 310,440  
   
 
 
 
 

        With the exception of the term loan B, the amounts borrowed bear interest, at the Company's option, at either the base rate plus an applicable margin ranging from 0.125% to 1.5% or the Eurodollar Rate plus an applicable margin ranging from 1.125% to 2.5%. The term loan B bears interest at the base rate plus 1.75% or the Eurodollar Rate plus 2.75%. At December 31, 2003 and December 31, 2002, the weighted average variable interest rate on all outstanding borrowings under the bank credit facility was 3.6% and 4.4%, respectively.

        Under the bank credit facility, the Company has 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 facility agreement, on the daily average aggregate unutilized commitment under the revolving loan commitment. During the first quarter of 2003, the Company's commitment fees were paid at a weighted average rate of 0.5% and during the second, third and fourth quarters of 2003, at 0.375%. The Company also has agreed to pay certain fees with respect to the issuance of letters of credit and an annual administration fee.

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        The commitments under the revolving loan portion of the bank credit facility are subject to mandatory reductions semi-annually on June 30 and December 31, commencing December 31, 2004, with the final reduction on June 30, 2008. The aggregate mandatory reductions of the revolving loan commitments under the bank credit facility are $21,350 in 2004, $42,700 in 2005, $64,050 in 2006, $128,100 in 2007 and a final reduction of $170,800 in 2008. To the extent that the total revolving credit loans outstanding exceed the reduced commitment amount, these loans must be paid down to an amount equal to or less than the reduced commitment amount. However, if the total revolving credit loans outstanding do not exceed the reduced commitment amount, then there is no requirement to pay down any of the revolving credit loans. Remaining aggregate term loan payments under the bank credit facility are $15,075 in 2004, $26,325 in 2005, 2006 and 2007, $15,074 in 2008 and $353,782 in 2009.

        The bank credit facility agreement, among other things, limits the Company's ability to change the nature of its businesses, incur indebtedness, create liens, sell assets, engage in mergers, consolidations or transactions with affiliates, make investments in or loans to certain subsidiaries, issue guarantees and make certain restricted payments including dividend payments on and or repurchases of the Company's common stock in excess of $75,000 in any given year.

        The bank credit facility and Senior Notes agreements of the Company contain certain customary events of default which generally give the banks or the noteholders, as applicable, the right to accelerate payments of outstanding debt. Under the bank credit facility agreement, these events include:

Senior Notes and Senior Note Redemptions

        The events of default contained in PRIMEDIA's Senior Notes are similar to, but generally less restrictive than, those contained in the Company's bank credit facility agreement.

        101/4% Senior Notes.    On March 5, 2003, the Company redeemed the remaining $84,175 of the 101/4% Senior Notes at the carrying value of $84,175, plus accrued interest. These notes were redeemed 15 months prior to maturity. The Company funded this transaction with additional borrowings under its bank credit facility. The redemption resulted in a write-off of unamortized issuance costs of $343 which is recorded in other, net, on the accompanying consolidated statement of operations for the year ended December 31, 2003.

        81/2% Senior Notes.    On June 16, 2003, the Company redeemed the remaining 81/2% Senior Notes at the carrying value of $291,073, plus accrued interest. The Company funded the transaction with the proceeds of the 8% Senior Notes offering. The redemption resulted in write-offs of unamortized issuance costs of $1,810 and the unamortized discount of $427 which are included in other, net, on the accompanying consolidated statement of operations for the year ended December 31, 2003.

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        75/8% Senior Notes.    Interest is payable semi-annually in April and October at the annual rate of 75/8%. The 75/8% Senior Notes, with a face value of $226,116, mature on April 1, 2008, with no sinking fund requirements. The 75/8% Senior Notes are redeemable in whole or in part, at the option of the Company, at 103.813% as of April 1, 2003 with annual reductions to 100% in 2006 and thereafter, plus accrued and unpaid interest. The unamortized discount for these notes totaled $672 and $803 at December 31, 2003 and 2002, respectively.

        87/8% Senior Notes.    In 2001, the Company completed an offering of $500,000 of 87/8% Senior Notes. Net proceeds from this offering of $492,685 were used to repay borrowings under the bank credit facility. Interest is payable semi-annually in May and November at an annual rate of 87/8%. The 87/8% Senior Notes, with a face value of $475,500, mature on May 15, 2011, with no sinking fund requirements. Beginning in 2006, the 87/8% Senior Notes are redeemable in whole or in part at the option of the Company, at 104.438% with annual reductions to 100% in 2009 and thereafter, plus accrued and unpaid interest. The unamortized discount for these notes totaled $5,680 and $6,201 at December 31, 2003 and 2002, respectively.

        8% Senior Notes.    On May 15, 2003, the Company issued $300,000 of Senior Notes at par. Interest is payable semi-annually in May and November at the annual rate of 8%. The 8% Senior Notes mature on May 15, 2013 with no sinking fund requirements and may not be redeemed prior to May 15, 2008 other than through the use of proceeds of future equity offerings, subject to certain conditions, or in connection with a change of control. Beginning in May 2008, the notes are redeemable in whole or in part at the option of the Company, at 104% in 2008 with annual reductions to 100% in 2011 and thereafter, plus accrued and unpaid interest. The Company has agreed to use its reasonable best efforts to consummate, within 12 months after the issue date of the notes, an offer to exchange the 8% Senior Notes for registered notes with substantially identical terms to those notes, except that the registered exchange notes will generally be freely transferable or in certain limited circumstances to file and cause to become effective a shelf registration statement with respect to the resale of the 8% Senior Notes. Under certain circumstances if the Company is not in compliance with these obligations, the Company will be required to pay additional interest for the period it is not in compliance. The Company intends to file a registration statement with respect to the offer to exchange the 8% Senior Notes for registered notes subsequent to the filing of this Form 10-K.

        During 2002, the Board of Directors authorized the Company to expend up to $90,000 for the purchase of its Senior Notes in private or public transactions. In 2002, the Company repurchased certain of its Senior Notes as follows:

Senior
Notes

  Purchase
Price

  Face
Value

  Unamortized
Discount

  Carrying
Value

  Unamortized
Issuance
Costs

  Gain(1)
  7.625%   $ 21,089   $ 23,885   $ 79   $ 23,806   $ 226   $ 2,491
  8.50%     7,838     8,500     15     8,485     65     582
  8.875%     21,210     24,500     324     24,176     430     2,536
10.25%     14,300     15,825         15,825     95     1,430
   
 
 
 
 
 
Total   $ 64,437   $ 72,710   $ 418   $ 72,292   $ 816   $ 7,039
   
 
 
 
 
 

(1)
In accordance with SFAS 145, the gain on Senior Note redemptions is recorded in other, net on the Company's consolidated statement of operations for the year ended December 31, 2002.

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Contractual Obligations

        The Senior Notes and the bank credit facility all rank senior in right of payment to all subordinated obligations which PRIMEDIA Inc. (a holding company) may incur. The Senior Notes are secured by a pledge of stock of PRIMEDIA Companies Inc.

        If the Company becomes subject to a change of control, each holder of the Senior Notes will have the right to require the Company to purchase any or all of its Senior Notes at a purchase price equal to 101% of the aggregate principal amount of the purchased Senior Notes plus accrued and unpaid interest, if any, to the date of purchase.

        There are no significant required debt repayments until 2008. The contractual obligations of the Company are as follows:

 
   
  Payments Due by Period
Contractual Obligations

  Total
  Less than
1 year

  1-3 years
  4-5 years
  After
5 years

Long-term debt obligations (net of unamortized discount)   $ 1,555,169   $ 15,075   $ 52,650   $ 363,842   $ 1,123,602
Interest on long-term debt obligations(1)     738,264     101,660     216,332     208,288     211,984
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)     233,694     43,782     87,564     72,211     30,137
Capital lease obligations     29,467     7,120     7,670     3,522     11,155
Interest on capital lease obligations     8,412     1,862     2,567     1,866     2,117
Operating lease obligations     285,719     46,585     88,500     62,898     87,736
   
 
 
 
 
Total Contractual Obligations   $ 3,325,284   $ 216,084   $ 455,283   $ 880,114   $ 1,773,803
   
 
 
 
 

(1)
Interest payments are based on the Company's projected interest rates and estimated principal amounts outstanding for the periods presented.

        The Company currently has $97,000 of borrowings outstanding at December 31, 2003 under the revolving loan portion of the bank credit facility. The bank credit facility expires in 2008. Assuming this balance remains constant until the end of the term, and application of the Company's projected interest rates, total interest payments related to the revolver under our bank credit facility are estimated to be $22,598 for the periods presented in the above table. These interest payments are not included in the above table.

        The Company has other commitments in the form of letters of credit of $19,560 aggregate face value which expire on or before December 31, 2004.

        A change in the rating of our debt instruments by the outside rating agencies does not negatively impact our ability to use our available lines of credit or the borrowing rate under our bank credit facility. As of March 1, 2004, the Company's senior debt rating from Moody's was B3 and from Standard and Poor's was B.

Off Balance Sheet Arrangements

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

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Covenant Compliance

        On June 13, 2003, the bank credit facility agreement was amended to provide for a one-year hiatus in each of the scheduled step-downs in the permitted leverage ratio, as defined in the bank credit facility agreement. As a result of the amendment, the maximum permitted leverage ratio, as defined, is 6.0 and does not step down to 5.75 until the third quarter of 2004. This amendment enables the Company to consider alternatives to improve its capital structure but was not necessary for the Company to remain in compliance with all of its debt covenants.

        Under the most restrictive debt covenants as defined in the Company's bank credit facility agreement, the Company must maintain a minimum interest coverage ratio, as defined, of 2.0 to 1 and a minimum fixed charge coverage ratio, as defined, of 1.05 to 1. The Company's maximum allowable debt leverage ratio, as defined, is 6.0 to 1. The maximum leverage ratio decreases to 5.75 to 1, 5.5 to 1, 5.0 to 1 and 4.5 to 1, respectively, on July 1, 2004, January 1, 2005, January 1, 2006 and January 1, 2007. The minimum interest coverage ratio increases to 2.25 to 1 and 2.5 to 1, respectively, on January 1, 2004 and January 1, 2005. The Company is in compliance with the financial and operating covenants of its financing arrangements.

        The Company is herewith providing detailed information and disclosure as to the methodology used in determining compliance with the leverage ratio in the credit facility agreement. Under its bank credit facility and Senior Note agreements, the Company is allowed to designate certain businesses as unrestricted subsidiaries to the extent that the value of those businesses does not exceed the permitted amounts, as defined in these agreements. The Company has designated certain of its businesses as unrestricted (the "Unrestricted Group"), which primarily represent Internet businesses, trademark and content licensing and service companies, new launches (including traditional start-ups), other properties under evaluation for turnaround or shutdown and foreign subsidiaries. Except for those specifically designated by the Company as unrestricted, all businesses of the Company are restricted (the "Restricted Group"). Indebtedness under the bank credit facility and Senior Note agreements is guaranteed by each of the Company's domestic subsidiaries in the Restricted Group in accordance with the provisions and limitations of the Company's bank credit facility and Senior Note agreements. The guarantees are full, unconditional and joint and several. The Unrestricted Group does not guarantee the bank credit facility or Senior Notes. For purposes of determining compliance with certain financial covenants under the Company's bank credit facility, the Unrestricted Group's results (positive or negative) are not reflected in the Consolidated EBITDA of the Restricted Group which, as defined in the bank credit facility agreement, excludes losses of the Unrestricted Group, non-cash charges and restructuring charges and is adjusted primarily for the trailing four quarters results of acquisitions and divestitures and estimated savings for acquired business.

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        The following represents a reconciliation of EBITDA of the Restricted Group for purposes of the leverage ratio as defined in the bank credit facility agreement to operating income (loss) for the years ended December 31, 2003 and 2002:

 
  Years Ended December 31
 
 
  2003
  2002
 
EBITDA of the Restricted Group   $ 313,076   $ 376,958  
EBITDA loss of the Unrestricted Group     (72,929 )   (131,965 )
Divestiture and other adjustments     (5,455 )   (772 )
Depreciation of property and equipment     (55,887 )   (68,881 )
Amortization of intangible assets and other     (75,953 )   (208,238 )
Non-cash compensation and non-recurring charges     (11,184 )   (10,502 )
Provision for severance, closures and restructuring related costs     (8,673 )   (49,669 )
Loss on the sale of businesses and other, net     (598 )   (7,247 )
   
 
 
Operating income (loss)   $ 82,397     ($100,316 )
   
 
 

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

 
  Years Ended December 31,
 
  2003
  2002
Internet properties   $36,721   $85,897
Traditional turnaround and start-up properties   29,057   35,769
Related overhead and other charges   7,151   9,604
Non-Core Properties     695
   
 
    $72,929   $131,965
   
 

        The Company has established intercompany arrangements that reflect transactions, such as leasing, licensing, sales and related services and cross-promotion, between Company businesses in the Restricted Group and the Unrestricted Group, which management believes are, on an arms' length basis and as permitted by the bank credit facility and Senior Note agreements. These intercompany arrangements afford 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 of the Unrestricted Group. For company-wide consolidated financial reporting, these intercompany transactions are eliminated in consolidation.

        The calculation of the Company's leverage ratio, as required under the bank credit facility agreement for covenant purposes, is defined as the Company's consolidated debt divided by the EBITDA of the Restricted Group. At December 31, 2003, this leverage ratio was approximately 5.1 to 1, compared to the corresponding ratio at December 31, 2002 of approximately 4.6 to 1.

Other Arrangements

        Two senior executives of About entered into share lockup agreements with the Company. Under the terms of those agreements, during the first year after the closing of the acquisition by the Company of About, the executives could sell a portion of their shares of the Company's common stock, subject to the Company's right of first refusal with respect to any sale. In the event that the gross proceeds received on sale were less than $33,125 (assuming all shares are sold), the Company agreed to pay the executives the amount of such shortfall. In 2002, the Company paid approximately $21,000 related to these agreements.

        As a result of one of these executives leaving the Company, effective December 2001, the vesting of half of his restricted shares (1,105,550 shares) and options (1,302,650 options) was accelerated and the

47



remainder was forfeited, resulting in a reversal of unearned compensation of $19,166 in 2001. The accelerated options expired unexercised during the first quarter of 2002.

        In 2003, the second executive left the Company and as a result the vesting of his restricted shares and options was accelerated resulting in an additional charge of $1,120.

        During the first quarter of 2002, the Board of Directors authorized the exchange by the Company of up to $100,000 of Exchangeable Preferred Stock for common stock. During May 2002, the Board of Directors increased this authorization to an aggregate of $165,000. During 2002, the Company exchanged $23,013 liquidation value of Series D Exchangeable Preferred Stock (carrying value of $22,650) for 4,467,033 shares of common stock, $22,667 liquidation value of Series F Exchangeable Preferred Stock (carrying value of $22,103) for 4,385,222 shares of common stock and $29,761 liquidation value of Series H Exchangeable Preferred Stock (carrying value of $29,121) for 5,508,051 shares of common stock.

        In the fourth quarter of 2002, the Company's Board of Directors authorized the exchange by the Company of up to $30,000 of Exchangeable Preferred Stock for common stock and the subsequent repurchase by the Company of the common stock issued in connection with the exchange transactions. In the second quarter of 2003, the Board of Directors increased this authorization to an aggregate of $50,000. In the fourth quarter of 2002, the Company exchanged $6,150 liquidation value of Series H Exchangeable Preferred Stock (carrying value of $6,031) for 2,860,465 shares of common stock. During 2003, the Company exchanged $9,500 liquidation value of Series D Exchangeable Preferred Stock (carrying value of $9,410) for 3,055,961 shares of common stock, $7,000 liquidation value of Series F Exchangeable Preferred Stock (carrying value of $6,849) for 2,124,166 shares of common stock and $2,350 liquidation value of Series H Exchangeable Preferred Stock (carrying value of $2,307) for 693,250 shares of common stock. The Company repurchased all of the common stock issued in connection with all of the exchange transactions in the fourth quarter of 2002 and 2003.

        The exchange transactions described above were entered into by the Company with the holders of the Exchangeable Preferred Stock in privately negotiated transactions. The Company recognized a net gain of $959 and $32,788 on the exchanges described above for the years ended December 31, 2003 and 2002, respectively. Of these gains, $944 and $32,788 are included in additional paid-in capital on the Company's consolidated balance sheets as of December 31, 2003 and 2002, respectively, and $15 is included in other, net on the Company's statement of consolidated operations for the year ended December 31, 2003 due to the adoption of SFAS 150 effective July 1, 2003. The Company expects to realize approximately $1,800 and $7,500 in annualized cash savings from reduced dividend payments associated with its Exchangeable Preferred Stock (classified as shares subject to mandatory redemption on the Company's financial statements) as a result of the 2003 and 2002 exchanges, respectively.

Financing Arrangements—EMAP Financing

        On August 24, 2001, the Company acquired 100% of the outstanding common stock of the publishing business of EMAP. The total consideration was $525,000, comprised of $515,000 in cash, including an estimate of working capital settlements of $10,000, and warrants to acquire 2,000,000 shares of the Company's common stock at $9 per share. The fair value of the warrants was approximately $10,000 and was determined using a Black Scholes pricing model. These warrants expire ten years from the date of issuance. In 2003, the Company finalized the working capital settlement with the seller in the amount of $11,711 of which $10,000 was included in the initial purchase price and paid in 2001.

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        The Company financed the acquisition of EMAP by (1) issuing 1,000,000 shares of Series J Convertible Preferred Stock to KKR 1996 Fund L.P. ("KKR 1996 Fund") (an investment partnership created at the direction of Kohlberg Kravis Roberts & Co. L.P. ("KKR"), a related party of the Company) for $125,000 and (2) drawing upon its revolving credit facility in an amount of approximately $265,000. In addition, KKR 1996 Fund purchased from the Company $125,000 of common stock and Series K Convertible Preferred Stock, both at a price per share equal to $4.70. This resulted in an additional 10,800,000 shares of common stock and 15,795,745 shares of Series K Convertible Preferred Stock. On September 27, 2001, all of the issued and outstanding shares of the Series K Convertible Preferred Stock were, in accordance with their terms, converted into 15,795,745 shares of the Company's common stock.

        The Series J Convertible Preferred Stock is convertible at the option of the holder into approximately 23,600,000 shares of the Company's common stock at a conversion price of $7 per share, subject to adjustment. Dividends on the Series J Convertible Preferred Stock accrue quarterly, at an annual rate of 12.5% and are payable quarterly in-kind. During 2003 and 2002, the Company paid dividends-in-kind (152,769 and 135,076 shares of Series J Convertible Preferred Stock, respectively) valued at approximately $19,096 and $16,884, respectively.

        In connection with the equity financing by KKR 1996 Fund, the Company paid KKR 1996 Fund a commitment fee consisting of warrants to purchase 1,250,000 shares of common stock ("commitment warrants") of the Company at an exercise price of $7 per share, subject to adjustment, and a funding fee consisting of warrants to purchase an additional 2,620,000 shares of the Company's common stock ("funding warrants") at an exercise price of $7 per share, subject to adjustment. These warrants may currently be exercised and expire on the earlier of August 24, 2011 or upon a change in control, as defined therein. In addition, the Company was required to issue to KKR 1996 Fund additional warrants to purchase up to 4,000,000 shares of the Company's common stock at an exercise price of $7 per share, subject to adjustment, contingent upon the length of time that the Series J Convertible Preferred Stock was outstanding. As the Series J Convertible Preferred Stock was outstanding for twelve months from the date of issuance, KKR 1996 Fund received the additional warrants to purchase four million shares of common stock. These warrants expire on the earlier of ten years from the date of issuance or upon a change in control.

        All of the above described financing transactions between the Company and KKR were reviewed by and recommended for approval by a Special Committee of the Company's Board of Directors, comprised solely of independent directors (neither employees of the Company nor affiliated with KKR). In connection therewith, the Special Committee retained its own counsel and investment banker to advise it as to the financing transactions. Such financing transactions were approved by the full Board of Directors, following such recommendation.

Contingencies and Other

        The Company is involved in ordinary and routine litigation incidental to its business. In the opinion of management, there is no pending legal proceeding that would have a material adverse effect on the consolidated financial statements of the Company.

        During 2002, PRIMEDIA contributed the Gravity Games, a product previously acquired from EMAP, to a limited liability company (the "LLC") formed jointly by PRIMEDIA and Octagon Marketing and Athlete Representation, Inc. (now known as Octagon, Inc.) ("Octagon"), with each party owning a 50% interest. The LLC entered into an agreement with NBC Sports, a division of National Broadcasting Company, Inc. ("NBC") which required the LLC to pay specified fees to NBC for certain production services performed by NBC and network air time provided by NBC, during each of 2002 and 2003. Under the terms of this agreement and a related guarantee, PRIMEDIA was responsible for the payment of a portion of such fees in the event that the LLC failed to satisfy its payment obligations to NBC.

49



        During the third quarter of 2003, the Company contributed $2,500 to the LLC, $1,100 of which was used to fund the LLC's obligations to NBC. In October of 2003, the Company and Octagon each contributed $850 to the LLC for a total of $1,700. In the fourth quarter of 2003, the LLC used $1,013 of each party's prior funding for a total of $2,025 to pay NBC. As of December 31, 2003, the LLC has paid all fees to NBC in full and has no remaining fee obligations to NBC.

        Pursuant to a restructuring agreement entered into between PRIMEDIA and Octagon in August 2003, PRIMEDIA's interest in the LLC terminated effective October 31, 2003 and PRIMEDIA has ended its direct involvement in the Gravity Games with the conclusion of the September 2003 event. Additionally, as a result of PRIMEDIA's exit from the LLC, the Company is entitled to 50% of certain October 31, 2003 assets and liabilities of the LLC, as they are settled, which resulted in the Company receiving a cash payment of $893 in December 2003.

        As of and for the year ended December 31, 2003, no officers or directors of the Company have been granted loans by the Company, nor has the Company guaranteed any obligations of such persons.

Critical Accounting Policies and Estimates

        The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to allowances for doubtful accounts, reserves for sales returns and allowances, reserves for severance, closures and restructuring related costs, purchase price allocations, impairments of investments, divestiture reserves, the recoverability of long-lived assets including goodwill and the valuation of equity instruments and allowances for income taxes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. These estimates or assumptions form the basis of our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates which would affect our reported results from operations. We believe the following is a description of the critical accounting policies and estimates used in the preparation of our consolidated financial statements.

        Allowances for doubtful accounts are estimated losses resulting from our customers' failure to make required payments. The Company continually monitors collections from customers and provides a provision for estimated credit losses. The Company aggressively pursues collection efforts on these overdue accounts and upon collection reverses the write-off in future periods. If future payments by our customers were to differ from our estimates, we may need to increase or decrease our allowances for doubtful accounts.

        Reserves for sales returns and allowances are primarily related to our newsstand sales. The Company estimates and maintains these reserves based primarily on its distributors' historical return practices and our actual return experience. If actual sales returns and allowances were to differ from our estimates, we may need to increase or decrease our reserve for sales returns and allowances.

        Reserves for severance, closures and restructuring related costs are estimated costs resulting from management's plans and actions to integrate the Company and consolidate certain back office functions. If the future payments of these costs were to differ from our estimates, we may need to increase or decrease our reserves.

        The Company records purchase price allocations for acquisitions based on preliminary information received at the date of acquisition and based on our acquisition experience. These allocations are subject to adjustments and are finalized once additional information concerning asset and liability valuations is obtained, typically from an independent appraisal. The final asset and liability fair values may differ from

50



the preliminary allocations. If the final allocations for the acquisitions differ from the preliminary allocations, we may need to increase or decrease our depreciation and/or amortization expense, for the acquired assets.

        The Company has held or currently holds investments in various companies. Investments where the Company has the ability to exercise significant influence over financial and accounting policies are accounted for under the equity method of accounting and the Company records its share of income (losses) of these investments based upon the investee's most recent available financial information, typically on a three-month lag. Investments where the Company does not have significant influence are accounted for under the cost method. Some of the investments were in publicly traded companies, which may have highly volatile share prices. Other investments are in private companies that have no active market by which fair values can be easily assessed. For significant transactions involving equity securities in private companies, the Company obtains and considers independent third-party valuations where appropriate. Such valuations use a variety of methodologies to estimate fair value, including comparing the security with securities of publicly traded companies in similar lines of business, comparing the nature of security, price, and related terms of investors in the same round of financing, applying price multiples to estimated future operating results for the private company, and then also estimating discounted cash flows for that company. Using these valuations and other information available to the Company, such as the Company's knowledge of the industry and knowledge of specific information about the Investee, the Company determines the estimated fair value of the securities received.

        We record an investment impairment charge when we believe an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments, thereby possibly requiring an impairment charge to the carrying value of the asset in the future.

        Reserves for estimated obligations relating to divestitures may arise as a result of the sale of certain titles or business units. These reserves are established for such items that we remain liable for after the sale is completed and are recorded at the time of the divestiture as part of the gain or loss on the sale of the divested asset or business. If the future payments for such items differ from our estimates, there could be a change in the determination of the gain or loss on sale.

        On January 1, 2002, the Company adopted SFAS 142 for all remaining goodwill and indefinite lived intangible assets. Upon adoption, the Company ceased the amortization of goodwill and indefinite lived intangible assets, which consist primarily of trademarks. All of the Company's other intangible assets are subject to amortization.

        The Company's SFAS 142 evaluations are performed by an independent valuation firm, utilizing reasonable and supportable assumptions and projections and reflect management's best estimate of projected future cash flows. The Company's discounted cash flow valuations use a range of discount rates that represent the Company's weighted-average cost of capital and include an evaluation of other companies in each reporting unit's industry. The assumptions utilized by the Company in these evaluations are consistent with those utilized in the Company's annual planning process. If the assumptions and estimates underlying these goodwill and trademark impairment evaluations are not achieved, the ultimate amount of the impairment could be adversely affected.

        The Company periodically evaluates the recoverability of our long-lived assets, including property and equipment and intangible assets, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or in connection with its annual financial review process. Our evaluations include analyses based on the cash flows generated by the underlying assets, profitability information, including estimated future operating results, trends or other determinants of fair value. If the value of the asset determined by these evaluations is less than its carrying amount, an impairment is recognized for the difference between the fair value and the carrying value of the asset. Future adverse changes in market

51



conditions or poor operating results of the related business may indicate an inability to recover the carrying value of the assets, thereby possibly requiring an impairment charge to the carrying value of the asset, in the future.

        Effective January 1, 2003, we account for stock-based compensation in accordance with the fair value recognition provisions of SFAS 123. The application of SFAS 123 requires judgment, including the expected life and stock price volatility for stock options and expected dividends and forfeitures for all employee option grants. Changes in the expected or actual outcome of forfeitures due to service-and/or performance-related conditions could materially impact the amount of stock-based compensation expense recognized.

        The Company accounts for income taxes in accordance with SFAS 109, "Accounting for Income Taxes," which requires that deferred tax assets and liabilities be recognized, using enacted tax rates, for the effect of temporary differences between the book and tax basis of recorded assets and liabilities. SFAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Net Operating and Capital Loss Carryforwards

        At December 31, 2003, the Company had aggregate net operating and capital loss carryforwards of $1,760,785 which will be available to reduce future taxable income through 2023. To the extent that the Company achieves positive net income in the future, the net operating and capital loss carryforwards may be able to be utilized and the Company's valuation allowance will be adjusted accordingly.

Senior Executives Severance and Provision for Severance, Closures and Restructuring Related Costs

Senior Executives Severance

        During 2003, the Company estimated and recorded $9,372 of severance related to the separation of the former Interim Chief Executive Officer and President, the former Chief Executive Officer and the former Chief Financial Officer. The actual severance amount may differ from this estimated amount; accordingly, the Company may record future adjustments as amounts are finalized. At December 31, 2003, these amounts are included in accrued expenses and other on the accompanying consolidated balance sheet.

Provision for Severance, Closures and Restructuring Related Costs

        Starting in 2000, the Company implemented plans to integrate the operations of the Company and consolidate many functions and facilities. All restructuring related charges were expensed as incurred. Thereafter, through 2003, the Company announced additional cost reduction initiatives that it would continue to implement and expand upon the cost reduction initiatives already enacted. In June 2002, the FASB issued SFAS 146 "Accounting for Costs Associated with Exit or Disposal Activities", which superseded Emerging Issues Task Force ("EITF") No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS 146 affects the timing of the recognition of costs associated with an exit or disposal plan by requiring them to be recognized when incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 has been applied prospectively to exit or disposal activities initiated after December 31, 2002.

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        Details of the initiatives implemented and the payments made in furtherance of these plans in the years ended December 31, 2003 and 2002 are presented in the following tables:

 
  Liability as of
January 1, 2003

  Net Provision for the
Year Ended
December 31, 2003

  Payments/Write-off
during the
Year Ended
December 31, 2003

  Liability as of
December 31,
2003

Severance and closures:                        
  Employee-related termination costs   $ 3,733   $ 5,872   ($ 6,623 ) $ 2,982
  Termination of contracts     575     16     (124 )   467
  Termination of leases related to office closures     41,366     2,338     (6,804 )   36,900
  Write-off of programming assets         447     (447 )  
   
 
 
 
Total severance and closures   $ 45,674(1 ) $ 8,673(2 ) ($ 13,998 ) $ 40,349
   
 
 
 

 


 

Liability as of
January 1, 2002


 

Net Provision for the
Year Ended
December 31, 2002


 

Payments/Write-off
during the
Year Ended
December 31, 2002


 

Liability as of
December 31,
2002

Severance and closures:                        
  Employee-related termination costs   $ 8,011   $ 6,806   ($ 11,084 ) $ 3,733
  Termination of contracts     2,243     200     (1,868 )   575
  Termination of leases related to office closures     12,517     38,960     (10,111 )   41,366
  Write-off of leasehold improvements         2,918     (2,918 )  
   
 
 
 
      22,771     48,884     (25,981 )   45,674
   
 
 
 
Restructuring related:                        
  Relocation and other employee costs         785     (785 )  
   
 
 
 
          785     (785 )  
   
 
 
 
Total severance, closures and restructuring related costs   $ 22,771(1 ) $ 49,669(2 ) ($ 26,766 ) $ 45,674
   
 
 
 

(1)
Adjusted to exclude liabilities relating to discontinued operations totaling $3,760 and $1,627 at January 1, 2003 and 2002, respectively.

(2)
Adjusted to exclude net provisions related to discontinued operations totaling $721 and $2,245 for the years ended December 31, 2003 and 2002, respectively.

        The remaining costs, comprised primarily of real estate lease commitments for space that the Company no longer occupies, are expected to be paid through 2015. To reduce the lease related costs, the Company is aggressively pursuing subleases of its available office space. These leases have been recorded at their net present value amounts and are net of estimated sublease income amounts. If the Company is successful in subleasing the restructured office space at a different rate, or is unable to sublease the space by the prescribed date used in the initial calculation, the reserve will be adjusted accordingly.

        Included in the net provision for the years ended December 31, 2003 and 2002 are reversals of $2,513 and $4,809, respectively, of previously recorded accruals.

        As a result of the implementation of these plans, the Company has closed and consolidated 22 office locations and has notified a total of 2,002 individuals that they would be terminated under these plans. As of December 31, 2003, all but 11 of those individuals have been terminated.

53



        In general, the Company has realized sufficient savings from its plans to integrate the operations of the Company and to recover the costs associated with these plans, related to employee termination costs, within approximately a one-year period. Savings from terminations of contracts and lease costs will be realized over the estimated life of the contract or lease.

        The liabilities representing the provision for severance, closures and restructuring related costs are included in accrued expenses and other on the consolidated balance sheets as of December 31, 2003 and 2002.

        For purposes of the Company's bank credit facility and Senior Note agreements, the provision for severance, closures and restructuring related costs is omitted from the Company's calculation of consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA").

Recent Accounting Pronouncements

        In 2002 and 2003, the Company adopted a series of accounting changes, as recommended by the Financial Accounting Standard Board ("FASB") and EITF, that impact year-over-year comparisons of financial results. These changes are summarized below.

Adoption of EITF No. 00-25 and EITF No. 01-9, effective January 1, 2002

        In April 2001, the EITF issued No. 00-25, which addresses whether consideration from a vendor to a reseller of the vendor's products is an adjustment to the selling price or the cost of the product. This issue was further addressed by EITF No. 01-9, issued in September 2001. The Company adopted EITF No. 00-25 and EITF No. 01-9 effective January 1, 2002. The adoption of EITF No. 00-25 and EITF No. 01-9 resulted in a net reclassification of product placement costs relating to single copy sales, previously classified as distribution, circulation and fulfillment expense on the accompanying statements of consolidated operations, to reductions of revenues from such activities. The change in classification is industry-wide and had no impact on the Company's results of operations, cash flows or financial position.

Adoption of SFAS 142 regarding impairment of goodwill and indefinite-lived intangible assets, effective January 1, 2002

        On January 1, 2002, the Company adopted SFAS 142, and evaluated its goodwill and indefinite lived intangible assets (primarily trademarks) at the reporting unit level for impairment and determined that certain of these assets were impaired. As a result, the Company recorded an impairment charge within cumulative effect of a change in accounting principle of $388,508 ($1.53 per share) effective in the first quarter 2002. Previously issued financial statements as of December 31, 2002 reflect the cumulative effect of this accounting change at the beginning of the year of adoption.

        SFAS 142 requires companies to continue to assess goodwill and indefinite lived intangible assets for impairment at least once a year subsequent to adoption. Any impairment subsequent to the initial implementation is recorded in operating income. The Company established October 31 as the annual impairment test date and accordingly evaluated goodwill and trademarks as of October 31, 2002 and 2003, resulting in impairment charges recorded within amortization of $95,490 ($0.38 per share), and $14,758 ($0.06 per share) during 2002 and 2003, respectively.

        In addition to the annual impairment test, an assessment is also required whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Due to the continued softness of Workplace Learning revenue and operating results, the Company performed an impairment test on the Education and Training segment as of July 31, 2003, prior to its annual testing date of October 31. As a result, the Company recorded an impairment charge for Workplace Learning within amortization expense of $19,768 ($0.08 per share) related to the impairment of goodwill associated with Workplace Learning.

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        Historically, the Company did not need a valuation allowance for the portion of the tax effect of net operating losses equal to the amount of deferred tax liabilities related to tax-deductible goodwill and trademark amortization expected to occur during the carryforward period of the net operating losses based on the timing of the reversal of these taxable temporary differences. As a result of the adoption of SFAS 142, the Company records a valuation allowance in excess of its net deferred tax assets to the extent the difference between the book and tax basis of indefinite-lived intangible assets is not expected to reverse during the net operating loss carryforward period. With the adoption of SFAS 142, the Company no longer amortizes the book basis in the indefinite-lived intangibles, but will continue to amortize these intangibles for tax purposes. For 2003 and 2002, income tax expense primarily consists of deferred income taxes of $11,864 and $49,500, respectively, related to the increase in the Company's net deferred tax liability for the tax effect of the net increase in the difference between the book and tax basis in the indefinite-lived intangible assets.

        In addition, since amortization of tax-deductible goodwill and trademarks ceased on January 1, 2002, the Company will have deferred tax liabilities that will arise each quarter because the taxable temporary differences related to the amortization of these assets will not reverse prior to the expiration period of the Company's deductible temporary differences unless the related assets are sold or an impairment of the assets is recorded. The Company expects that it will record approximately $17,400 to increase deferred tax liabilities during 2004.

Adoption of SFAS 143, effective January 1, 2003

        In August 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement Obligations". The standard requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The standard was effective for the Company beginning January 1, 2003. The adoption of SFAS 143 did not have a material impact on the Company's results of operations or financial position.

Adoption of SFAS 144 regarding impairment or disposal of long-lived assets, effective January 1, 2002

        In August 2001, the FASB issued SFAS 144, which established one accounting model for long-lived assets to be held and used, long-lived assets (including those accounted for as a discontinued operation) to be disposed of by sale and long-lived assets to be disposed of other than by sale, and resolved certain implementation issues related to SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".

        The Company adopted SFAS 144 on January 1, 2002, and as a result, the results of the Modern Bride Group, ExitInfo, Doll Reader, Chicago, Horticulture, IN New York and the American Baby Group, which were sold during 2002, and Seventeen magazine and related teen properties, Simba, Federal Sources, CableWorld and Sprinks, which were sold during 2003, were recorded as discontinued operations for the periods prior to their respective divestiture dates.

        The Company also reclassified the results of New York magazine which was sold in January 2004, and Kagan World Media for which the Company has initiated plans to sell, to discontinued operations for all years presented.

        Discontinued operations include revenues of $121,380, $257,488 and $343,905 and income (loss) of $130,664, $93,137 and ($26,376) (including a gain on sale of $125,247, $111,449 and $0), for the years ended December 31, 2003, 2002 and 2001, respectively. The discontinued operations include expenses related to certain centralized functions that are shared by multiple titles, such as production, circulation,

55



advertising, human resource and information technology costs but exclude general overhead costs. These costs were allocated to the discontinued entities based upon relative revenues for the related years. The allocation methodology is consistent with that used across the Company. These allocations amounted to $2,774, $10,660 and $12,274 for the years ended December 31, 2003, 2002 and 2001, respectively.

        The Company recorded a state income tax provision of $1,000 associated with the divestiture of Seventeen and its related teen properties, which is included in discontinued operations on the statement of consolidated operations for the year ended December 31, 2003.

        The Company recorded a charge of $1,816 to depreciation expense due to the disposal of certain fixed assets for the year ended December 31, 2003. In connection with the results of impairment tests under SFAS 142, the Company also evaluated the recoverability of certain finite-lived assets of its reporting units under SFAS 144 as of January 1, 2002, October 31, 2002 and July 31, 2003 and recorded impairment charges of $7,120, $45,299, and $727, respectively.

SFAS 144 Revenue reclassifications

        In accordance with SFAS 144, the Company reclassified amounts from revenues, net, to discontinued operations for the years ended December 31, 2002 and 2001, as follows:

 
  Years Ended December 31,
 
  2002
  2001
Revenues, net (as reported in 2002 Form 10-K)   $ 1,587,564   $ 1,578,357
Less: Effect of SFAS 144 for 2003 divestitures     175,012     200,583
   
 
Revenues, net (as reclassified)   $ 1,412,552   $ 1,377,774
   
 

Early adoption for 2002 of SFAS 145, "Rescission of FASB Statements Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections"

        In April 2002, the FASB issued SFAS 145, which for most companies requires gains and losses on extinguishments of debt to be classified within income or loss from continuing operations rather than as extraordinary items as previously required under SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt an Amendment of APB Opinion No. 30." Extraordinary treatment will be required for certain extinguishments as provided under APB Opinion 30. SFAS 145 was effective for financial statements issued on or after May 15, 2002. During the year ended December 31, 2002, the Company recorded a gain in other, net, of $7,039, which was net of the write-off of $816 of unamortized issuance costs, related to the partial repurchase and retirement of $72,710 of the Company's Senior Notes, which had a carrying value of $72,292, at a discount. As a result of the redemption of the Company's 81/2% and 101/4% Senior Notes in 2003, the Company recorded a loss in other, net, of $2,580 related to the write-off of unamortized discount and issuance costs.

Adoption of SFAS 146, effective for transactions initiated after December 31, 2002

        In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities" which superseded EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS 146 affects the timing of the recognition of costs associated with an exit or disposal plan by requiring them to be recognized when incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 has been applied prospectively to exit or disposal activities initiated after December 31, 2002, and has not had a material impact on the Company's results of operations or financial position.

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Adoption of SFAS 148, effective for annual periods ending after December 15, 2002 and interim periods beginning after December 15, 2002

        In December 2002, the FASB issued SFAS 148 "Accounting for Stock-Based Compensation—Transition and Disclosure," an amendment of FASB Statement No. 123 "Accounting for the Stock Based Compensation" to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. During the fourth quarter of 2003, the Company adopted SFAS 123, "Accounting for Stock-Based Compensation", as amended by SFAS 148, using the prospective method. Upon adoption, the Company began expensing the fair value of stock-based compensation for all grants, modifications or settlements made on or after January 1, 2003. SFAS 123 provides for a fair-value based method of accounting for employee options and measures compensation expense using an option valuation model that takes into account, as of the grant date, the exercise price and expected life of the option, the current price of the underlying stock and its expected volatility, expected dividends on the stock, and the risk-free interest rate for the expected term of the option.

        The adoption of SFAS 123 increased the loss from continuing operations for the year ended December 31, 2003 by $5,980. Prior quarters were not restated as the impact was not significant.

        Assuming the Company had accounted for all option grants and Employee Stock Purchase Plan ("ESPP") in accordance with SFAS 123, including those issued prior to January 1, 2003, the estimated non-cash option and ESPP expense would have been $27,433, $36,092 and $38,226 for the years ended December 31, 2003, 2002 and 2001, respectively.

Issuance of SFAS 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities", effective July 1, 2003

        In April 2003, the FASB issued SFAS 149, which amends and clarifies accounting for derivative instruments, and for hedging activities under SFAS 133. Specifically, SFAS 149 requires that contracts with comparable characteristics be accounted for similarly. Additionally, SFAS 149 clarifies the circumstances in which a contract with an initial net investment meets the characteristics of a derivative and when a derivative contains a financing component that requires special reporting in the statement of cash flows. This Statement is generally effective for contracts entered into or modified after June 30, 2003. Subsequent to the maturity of interest rate swap agreements in 2002, the Company has not been a party to and has not entered into any derivative contracts.

Adoption of SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", effective July 1, 2003

        On July 1, 2003, the Company prospectively adopted SFAS 150, which requires the Company to classify as long-term liabilities its Series D Exchangeable Preferred Stock, Series F Exchangeable Preferred Stock and Series H Exchangeable Preferred Stock and to classify dividends from this preferred stock to interest expense. As a result of the adoption by the Company of SFAS 150, the Series D Exchangeable Preferred Stock, Series F Exchangeable Preferred Stock and Series H Exchangeable Preferred Stock are now collectively described as "shares subject to mandatory redemption" on the accompanying consolidated balance sheet and dividends on these shares are now described as "interest on shares subject to mandatory redemption" and included in loss from continuing operations before income tax expense whereas previously they were presented below net income (loss) as preferred stock dividends.

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Adoption of FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34", effective January 1, 2003

        In November 2002, the FASB approved FASB Interpretation No. 45 ("FIN 45") which clarifies the requirements of SFAS 5, "Accounting for Contingencies", relating to a guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. Specifically, FIN 45 requires a guarantor to recognize a liability for the non-contingent component of certain guarantees, representing the obligation to stand ready to perform in the event that specified triggering events or conditions occur. Effective January 1, 2003, the Company adopted FIN 45 which has not had a material impact on the Company's results of operations or financial position.

Adoption of FASB Interpretation No. 46(R), "Consolidation of Variable Interest Entities", effective for variable interest entities created after January 31, 2003 and FASB Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities", effective for financial statements issued after December 31, 2003

        In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Effective January 31, 2003, the Company has adopted FIN 46, which has not had a material impact on the Company's results of operations or financial position. FIN 46 was revised to clarify the original interpretation in December 2003. The revision did not have a material impact on the company's results of operations or financial position.

Impact of Inflation and Other Costs

        The impact of inflation was immaterial during 2003, 2002 and 2001. Postage, however, for product distribution and direct mail solicitations is a significant expense of the Company. The Company uses the U.S. Postal Service for distribution of many of its products and marketing materials. Postage rates increased approximately 3% in July 2001 and approximately 12% effective July 1, 2002. There were no additional increases in 2003 and in April 2003, President Bush signed legislation that will hold postal rates stable until at least 2006. In the past, the effects of inflation on operating expenses including postage increases have substantially been offset by PRIMEDIA's ability to increase selling prices. No assurances can be given that the Company can pass such cost increases through to its customers in the future. In addition to pricing actions, the Company is continuing to examine all aspects of the manufacturing and purchasing processes to identify ways to offset price increases. The Company's paper expense decreased approximately 7% in 2003 and was essentially flat in 2002. In 2003, 2002 and 2001, paper cost represented approximately 8% of the Company's total operating expenses. The Company attributes the 2003 decline in paper expenses to a decrease in the volume of paper used as a result of the smaller folio sizes of magazines and fewer bulk copies.

Seasonality

        The Company's operations are seasonal in nature. Operating results have historically been stronger in the second half of the year with generally strongest results generated in the fourth quarter of the year. The seasonality of the Company's business reflects (i) the relationship between advertising purchases and the retail and academic cycles and (ii) subscription promotions and the holiday season. As discussed above in the Business section, Channel One and Films for the Humanities and Sciences conduct most of their business during the school year, with the majority of revenues occurring in the fourth quarter. The Company's Business Information trade shows also generally occur in the second and fourth quarters. This seasonality causes, and will likely continue to cause, a variation in the Company's quarterly operating

58



results. Such variations have an effect on the timing of the Company's cash flows and the reported quarterly results.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

        The Company is exposed to the impact of changes in interest rates. Prior to 2002, the Company had managed fluctuations in interest rates through the use of swap agreements to hedge a portion of its floating rate borrowings. The Company's objective in managing this exposure was to reduce fluctuations in earnings and cash flows associated with changes in interest rates. At December 31, 2003, the Company was not a party to any interest rate swap contracts.

        The following table provides information about our financial instruments that are sensitive to changes in interest rates, including debt obligations at December 31, 2003 and 2002. For debt obligations, the table presents mandatory principal reductions, repayment schedules of outstanding debt and projected weighted average interest rates by expected maturity dates and reflects at December 31, 2002, the Company's early redemption of its 101/4% Senior Notes in March 2003. For variable rate instruments, we have indicated the applicable floating rate index. The fair value of financial instruments are estimates based upon market conditions and perceived risks at December 31, 2003 and 2002 and may not be indicative of their actual fair values.

        The Company periodically evaluates its exposure to interest rates and maintains a balance between fixed rate and variable rate obligations. As summarized in the table below, the Company carried a fixed rate on $1,486,425, or 73%, of the outstanding long-term debt, including shares subject to mandatory redemption and excluding capital leases, of the Company as of December 31, 2003. As of December 31, 2002, the Company carried a long-term fixed rate on $942,016, or 57% of outstanding long-term debt, excluding capital leases, of the Company.

At December 31, 2003

 
  2004
  2005
  2006
  2007
  2008
  Thereafter
  Total
  Fair Value
at 12/31/03

LIABILITIES                                                
Long-Term Debt Including Current Portion:                                                
  Fixed Rate Debt   $   $   $   $   $ 393,603   $ 1,082,572   $ 1,476,175   $ 1,486,425
  Weighted Average Interest Rate     8.62%     8.62%     8.62%     8.62%     8.61%     8.61%     8.62%      
  Variable Rate Debt   $ 15,075   $ 26,325   $ 26,325   $ 26,325   $ 112,074   $ 353,782   $ 559,906   $ 559,906
  Average Interest Rate—Forward LIBOR Curve Plus Determined Spread     3.92%     5.40%     6.40%     7.07%     7.78%     8.07%     6.22%      

At December 31, 2002

 
  2003
  2004
  2005
  2006
  2007
  Thereafter
  Total
  Fair Value
at 12/31/02

LIABILITIES                                                
Long-Term Debt Including Current Portion:                                                
  Fixed Rate Debt   $   $   $   $ 291,500   $   $ 701,615   $ 993,115   $ 942,016
  Weighted Average Interest Rate     8.50%     8.48%     8.48%     8.47%     8.47%     8.47%     8.50%      
  Variable Rate Debt   $ 4,038   $ 15,913   $ 27,788   $ 27,788   $ 79,563   $ 569,816   $ 724,906   $ 724,906
  Average Interest Rate—Forward LIBOR Curve Plus Determined Spread     4.06%     5.10%     6.33%     7.13%     7.67%     8.26%     6.69%      

        The Company has entered into variable-rate debt that, at December 31, 2003, had an outstanding balance of $559,906. Based on the Company's variable-rate obligations outstanding at December 31, 2003, each 25 basis point increase or decrease in the level of interest rates would, respectively, increase or decrease the Company's annual interest expense and related cash payments by approximately $1,400. Such potential increases or decreases are based on certain simplifying assumptions, including a constant level of

59



variable-rate debt for all maturities and an immediate, across-the-board increase or decrease in the level of interest rates with no other subsequent changes for the remainder of the period.

        The Company has entered into fixed-rate debt, including shares subject to mandatory redemption that, at December 31, 2003, had an outstanding balance of $1,476,175 and a fair value of approximately $1,486,425. Based on the Company's fixed-rate debt obligations outstanding at December 31, 2003, a 25 basis point increase or decrease in the level of interest rates would, respectively, decrease or increase the fair value of the fixed-rate debt by approximately $25,000. Such potential increases or decreases are based on certain simplifying assumptions, including a constant level and rate of fixed-rate debt and an immediate, across-the-board increase or decrease in the level of interest rates with no other subsequent changes for the remainder of the period.

60



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Table of Contents to Consolidated Financial Statements

PRIMEDIA Inc. and Subsidiaries    
  Independent Auditors' Report   62
  Statements of Consolidated Operations for the Years Ended December 31, 2003, 2002 and 2001   63
  Consolidated Balance Sheets as of December 31, 2003 and 2002   64
  Statements of Consolidated Cash Flows for the Years Ended December 31, 2003, 2002 and 2001   65
  Statements of Shareholders' Deficiency for the Years Ended December 31, 2003, 2002 and 2001   68
  Notes to Consolidated Financial Statements for the Years Ended December 31, 2003, 2002 and 2001   70

61


Independent Auditors' Report

To the Shareholders and Board of Directors of
PRIMEDIA Inc.
New York, New York:

        We have audited the accompanying consolidated balance sheets of PRIMEDIA Inc. and subsidiaries (the "Company") as of December 31, 2003 and 2002, and the related statements of consolidated operations, shareholders' deficiency, and consolidated cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

        As discussed in Note 2 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, effective January 1, 2001, Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," and Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," effective January 1, 2002, the recognition provisions of Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation," as amended, effective January 1, 2003, and Statement of Financial Accounting Standards No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," effective July 1, 2003.

DELOITTE & TOUCHE LLP
New York, New York
February 27, 2004

62



PRIMEDIA INC. AND SUBSIDIARIES

Statements of Consolidated Operations

(dollars in thousands, except per share amounts)

 
  Years Ended December 31,
 
 
  2003
  2002
  2001
 
Revenues, net:                    
Advertising   $ 832,085   $ 865,488   $ 870,797  
Circulation     321,751     346,391     298,026  
Other     191,786     200,673     208,951  
   
 
 
 
  Total revenues, net     1,345,622     1,412,552     1,377,774  

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 
  Cost of goods sold     290,037     314,349     330,108  
  Marketing and selling     269,995     286,788     350,110  
  Distribution, circulation and fulfillment     228,007     241,488     210,589  
  Editorial     103,458     112,067     123,610  
  Other general expenses     184,265     182,742     185,965  
  Corporate administrative expenses (excluding $11,184, $10,502, and $56,679 of non-cash compensation and non-recurring charges in 2003, 2002, and 2001, respectively)     25,796     30,897     32,097  
  Depreciation of property and equipment (including $9,739 of provision for impairment in 2002)     55,887     68,881     75,714  
  Amortization of intangible assets, goodwill and other (including $35,253, $146,064 and $427,016 of provision for impairment in 2003, 2002 and 2001, respectively)     75,953     208,238     677,776  
  Severance related to separated senior executives     9,372          
  Non-cash compensation and non-recurring charges     11,184     10,502     56,679  
  Provision for severance, closures and restructuring related costs     8,673     49,669     43,679  
  Loss (gain) on sale of businesses and other, net     598     7,247     (57,233 )
   
 
 
 
Operating income (loss)     82,397     (100,316 )   (651,320 )

Other income (expense):

 

 

 

 

 

 

 

 

 

 
  Provision for impairment of investments     (8,975 )   (19,045 )   (106,512 )
  Interest expense     (124,528 )   (139,878 )   (145,928 )
  Interest on shares subject to mandatory redemption     (21,889 )        
  Amortization of deferred financing costs     (3,462 )   (3,469 )   (10,947 )
  Other, net     (3,115 )   5,012     (35,558 )
   
 
 
 
Loss from continuing operations before income tax expense     (79,572 )   (257,696 )   (950,265 )
Income tax expense     (12,220 )   (46,356 )   (135,000 )
   
 
 
 
Loss from continuing operations     (91,792 )   (304,052 )   (1,085,265 )

Discontinued operations (including gain on sale of businesses, net of tax, of $125,247 and $111,449 in 2003 and 2002, respectively)

 

 

130,664

 

 

93,137

 

 

(26,376

)
Cumulative effect of a change in accounting principle (from the adoption of Statement of Financial Accounting Standards No. 142)         (388,508 )    
   
 
 
 
Net income (loss)     38,872     (599,423 )   (1,111,641 )

Preferred stock dividends and related accretion, net (including $944 and $32,788 gain on exchange of exchangeable preferred stock in 2003 and 2002, respectively)

 

 

(41,853

)

 

(47,656

)

 

(62,236

)
   
 
 
 
Loss applicable to common shareholders   $ (2,981 ) $ (647,079 ) $ (1,173,877 )
   
 
 
 
Per common share:                    
  Loss from continuing operations   $ (0.51 ) $ (1.39 ) $ (5.30 )
  Discontinued operations     0.50     0.37     (0.12 )
  Cumulative effect of a change in accounting principle         (1.53 )    
   
 
 
 
  Basic and diluted loss applicable to common shareholders   $ (0.01 ) $ (2.55 ) $ (5.42 )
   
 
 
 
Basic and diluted common shares outstanding     259,230,001     253,710,417     216,531,500  
   
 
 
 

See notes to consolidated financial statements.

63



PRIMEDIA INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(dollars in thousands, except per share amounts)

 
  December 31,
 
 
  2003
  2002
 
ASSETS              
Current assets:              
  Cash and cash equivalents   $ 8,685   $ 18,553  
  Accounts receivable, net     194,080     219,177  
  Inventories     17,500     24,321  
  Prepaid expenses and other     36,059     42,620  
  Assets held for sale     31,879      
   
 
 
      Total current assets     288,203     304,671  

Property and equipment, net

 

 

110,859

 

 

127,950

 
Other intangible assets, net     268,407     351,021  
Goodwill     910,534     972,539  
Other non-current assets     58,118     79,439  
   
 
 
    $ 1,636,121   $ 1,835,620  
   
 
 

LIABILITIES AND SHAREHOLDERS' DEFICIENCY

 

 

 

 

 

 

 
Current liabilities:              
  Accounts payable   $ 78,794   $ 109,911  
  Accrued expenses and other     218,612     250,258  
  Deferred revenues     157,853     185,121  
  Current maturities of long-term debt     22,195     7,661  
  Liabilities of businesses held for sale     16,049      
   
 
 
      Total current liabilities     493,503     552,951  

Long-term debt

 

 

1,562,441

 

 

1,727,677

 
Shares subject to mandatory redemption     474,559      
Deferred revenues     33,604     41,466  
Deferred income taxes     61,364     49,500  
Other non-current liabilities     23,905     23,359  
   
 
 
      Total Liabilities     2,649,376     2,394,953  
   
 
 
Commitments and contingencies (Note 23)              

Exchangeable preferred stock (aggregate liquidation and redemption value of $493,409 at December 31, 2002)

 

 


 

 

484,465

 

Shareholders' deficiency:

 

 

 

 

 

 

 
  Series J convertible preferred stock ($.01 par value, 1,319,093 shares and 1,166,324 shares issued and outstanding, aggregate liquidation and redemption values of $164,887 and $145,791 at December 31, 2003 and 2002, respectively)     164,533     145,351  
  Common stock ($.01 par value, 350,000,000 shares authorized at December 31, 2003 and 2002 and 268,333,049 and 267,505,223 shares issued at December 31, 2003 and 2002, respectively)     2,683     2,675  
  Additional paid-in capital (including warrants of $31,690 at December 31, 2003 and 2002)     2,345,152     2,336,091  
  Accumulated deficit     (3,447,710 )   (3,445,083 )
  Accumulated other comprehensive loss     (176 )   (247 )
  Unearned compensation     (175 )   (4,730 )
  Common stock in treasury, at cost (8,610,491 shares and 8,639,775 shares at December 31, 2003 and 2002, respectively)     (77,562 )   (77,855 )
   
 
 
      Total shareholders' deficiency     (1,013,255 )   (1,043,798 )
   
 
 
    $ 1,636,121   $ 1,835,620  
   
 
 

See notes to consolidated financial statements.

64



PRIMEDIA INC. AND SUBSIDIARIES

Statements of Consolidated Cash Flows

(dollars in thousands)

 
  Years Ended December 31,
 
 
  2003
  2002
  2001
 
Operating activities:                    
  Net income (loss)   $ 38,872   $ (599,423 ) $ (1,111,641 )
  Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:                  
    Depreciation and amortization     141,258     302,070     806,968  
    Gain on sale of businesses and other, net     (124,649 )   (104,202 )   (57,233 )
    Non-cash revenue related to assets-for-equity transactions     (284 )   (7,570 )   (53,750 )
    Equity in losses of equity method investments     4,256     6,146     39,761  
    Accretion of discount on acquisition obligation and other     3,392     2,591     1,657  
    Non-cash compensation and non-recurring charges     11,184     18,581     29,628  
    Cumulative effect of a change in accounting principle         388,508      
    Provision for the impairment of investments     8,975     19,231     106,512  
    Deferred income taxes     11,864     49,500     135,000  
    Other, net     151     (9,039 )   6,866  
  Changes in operating assets and liabilities:                    
    (Increase) decrease in:                    
    Accounts receivable, net     1,436     43,162     50,876  
    Inventories     5,332     8,826     9,803  
    Prepaid expenses and other     15,580     11,510     (6,062 )
    Decrease in:                    
    Accounts payable     (24,885 )   (33,830 )   (24,115 )
    Accrued expenses and other     (11,664 )   (19,093 )   (21,113 )
    Deferred revenues     (13,083 )   (16,647 )   (12,842 )
    Other non-current liabilities     (4,549 )   (10,040 )   (1,663 )
   
 
 
 
      Net cash provided by (used in) operating activities     63,186     50,281     (101,348 )
   
 
 
 
Investing activities:                    
  Additions to property, equipment and other, net     (39,497 )   (39,163 )   (60,740 )
  Proceeds from sale of businesses and other     213,677     241,864     90,413  
  Payments for businesses acquired, net of cash acquired     (22,786 )   (3,969 )   (425,848 )
  Payments for other investments, net     (1,840 )   (3,949 )   (10,882 )
   
 
 
 
      Net cash provided by (used in) investing activities     149,554     194,783     (407,057 )
   
 
 
 
Financing activities:                    
  Borrowings under credit agreements     433,400     501,765     1,474,600  
  Repayments of borrowings under credit agreements     (514,225 )   (644,909 )   (1,620,725 )
  Payments for repurchases of senior notes     (375,675 )   (64,437 )    
  Proceeds from issuance of Senior Notes, net     300,000         492,685  
  Payments of acquisition obligation             (8,833 )
  Proceeds from issuances of common stock and Series K Convertible Preferred Stock, net     1,182     1,435     130,299  
  Proceeds from issuance of Series J Convertible Preferred Stock and related warrants             124,649  
  Purchases of common stock for the treasury     (21,822 )        
  Dividends paid to preferred stock shareholders     (33,928 )   (49,806 )   (53,060 )
  Deferred financing costs paid     (6,287 )   (108 )   (17,888 )
  Other     (5,253 )   (4,039 )   (3,424 )
   
 
 
 
      Net cash provided by (used in) financing activities     (222,608 )   (260,099 )   518,303  
   
 
 
 
Increase (decrease) in cash and cash equivalents     (9,868 )   (15,035 )   9,898  
Cash and cash equivalents, beginning of year     18,553     33,588     23,690  
   
 
 
 
Cash and cash equivalents, end of year   $ 8,685   $ 18,553   $ 33,588  
   
 
 
 
                     

65


Supplemental information:                    
  Cash interest paid   $ 124,218   $ 141,696   $ 128,639  
   
 
 
 
  Cash interest paid on shares subject to mandatory redemption   $ 10,945   $   $  
   
 
 
 
  Taxes (paid) refunds received, net   $ (328 ) $ 3,311   $ 111  
   
 
 
 
  Businesses acquired:                    
    Fair value of assets acquired   $ 13,906   $   $ 1,396,655  
    Less: Liabilities assumed (paid)     (8,880 )   (3,969 )   160,768  
    Less: Stock and stock option consideration for About.com, Inc. acquisition             700,549  
    Less: Cash acquired in connection with the About.com, Inc. acquisition             109,490  
   
 
 
 
    Payments for businesses acquired, net of cash acquired   $ 22,786   $ 3,969   $ 425,848  
   
 
 
 
  Non-cash activities:                    
    Assets acquired under capital lease obligations   $ 9,608   $ 349   $ 730  
   
 
 
 
    Exchange of the Company's common shares of Internet Gift Registries   $   $   $ 6,457  
   
 
 
 
    Conversion of the Company's investment in About common shares held prior to the merger date into the Company's treasury stock   $   $   $ 74,865  
   
 
 
 
    Compensatory common shares and stock option issued in connection with the About merger   $   $   $ 58,826  
   
 
 
 
    Issuance of warrants in connection with Emap acquisition and related financing   $   $ 5,891   $ 16,120  
   
 
 
 
    Issuance of options to a related party in connection with services received   $   $ 990   $  
   
 
 
 
    Compensation expense in connection with SFAS 123 adoption   $ 5,980   $   $  
   
 
 
 
    Accretion in carrying value of exchangeable and convertible preferred stock   $ 780   $ 7,865   $ 4,772  
   
 
 
 
    Payments of dividends-in-kind on Series J Convertible Preferred Stock   $ 19,096   $ 16,884   $ 3,906  
   
 
 
 
    Carrying value of exchangeable preferred stock converted to common stock   $ 18,566   $ 79,905   $  
   
 
 
 
    Fair value of common stock issued in connection with conversion of exchangeable preferred stock   $ 17,578   $ 47,117   $  
   
 
 
 
    Asset-for-equity investments   $   $ 2,690   $ 29,639  
   
 
 
 
    Repurchase of common stock for the treasury (settled in 2003)   $   $ 4,244   $  
   
 
 
 

See notes to consolidated financial statements.

66


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67


PRIMEDIA INC. AND SUBSIDIARIES

Statements of Shareholders' Deficiency

Years Ended December 31, 2003, 2002 and 2001

(dollars in thousands, except per share amounts)






 
Balance at January 1, 2001  
Comprehensive loss:  
  Net loss  
  Other comprehensive loss:  
    Cumulative effect of SFAS 133 adoption  
    Change in fair value of derivative instruments  
    Unrealized loss on available-for-sale securities  
    Foreign currency translation adjustments  
   
  Comprehensive loss  
   
Issuances of common stock and replacement options in connection with About merger  
Issuances of restricted stock and options to About executives  
Forfeiture of common stock and options related to About executive separation  
Net compensation expense recognized in connection with About merger  
Issuances of common stock, net of issuance costs  
Issuance of warrants in connection with EMAP acquisition  
Issuance of Series J Convertible Preferred Stock and related warrants in connection with EMAP acquisition, net  
Issuance of Common Stock in connection wtih EMAP acquisition  
$10.00 Series D Exchangeable Preferred Stock—cash dividends  
$9.20 Series F Exchangeable Preferred Stock—cash dividends  
$8.625 Series H Exchangeable Preferred Stock—cash dividends  
Series J Convertible Preferred Stock—Dividends in kind (31,248 shares)  
Other  
   
Balance at December 31, 2001  

Comprehensive loss:

 
  Net loss  
  Other comprehensive loss:  
    Change in fair value of derivative instruments  
    Foreign currency translation adjustments  
   
  Comprehensive loss  
   
Net compensation expense recognized in connection with About merger  
Issuance of warrants in connection with EMAP acquisition  
Issuances of common stock, net of issuance costs  
Purchases of common stock  
$10.00 Series D Exchangeable Preferred Stock—cash dividends  
$9.20 Series F Exchangeable Preferred Stock—cash dividends  
$8.625 Series H Exchangeable Preferred Stock—cash dividends  
Series J Convertible Preferred Stock—Dividends in kind (135,076 shares)  
Conversions of preferred stock into common shares (including gain on conversions of $32,788)  
Issuance of options to a consulting firm in connection with services received  
Other  
   

Balance at December 31, 2002

 
   

Comprehensive income:

 
Net income  
Other comprehensive income:  
Foreign currency translation adjustments  
   
Comprehensive income  
   
Net compensation expense recognized in connection with About merger  
Issuances of common stock, net  
Purchases of common stock for the treasury  
$10.00 Series D Exchangeable Preferred Stock—cash dividends  
$9.20 Series F Exchangeable Preferred Stock—cash dividends  
$8.625 Series H Exchangeable Preferred Stock—cash dividends  
Series J Convertible Preferred Stock—Dividends in kind (152,769 shares)  
Conversions of preferred stock into common shares (including gain on conversion of $944)  
Non-cash charges for stock-based compensation  
Other  
   
Balance at December 31, 2003  
   

68



 
   
   
   
   
   
   
  Common Stock
in Treasury

   
 
 
  Common Stock
   
   
  Accumulated
Other
Comprehensive
Income (Loss)

   
   
 
Series J
Convertible Preferred Stock

  Additional
Paid-in
Capital

  Accumulated
Deficit

  Unearned
Compensation

   
 
  Shares
  Par Amount
  Shares
  Amount
  Total
 
$   167,798,702   $ 1,678   $ 1,366,950   ($1,603,096 ) ($1,558 ) $—     $—   ($236,026 )
                                             
                      (1,111,641 )                 (1,111,641 )
                                             
                          (1,247 )             (1,247 )
                          (650 )             (650 )
                          (693 )             (693 )
                          2,026               2,026  
                                         
 
                                          (1,112,205 )
                                         
 
      52,418,727     524     707,617           (7,592 ) 7,467,693   (74,865 ) 625,684  
      2,955,450     29     51,205           (51,234 )          
      (1,105,550 )   (11 )   (19,155 )         19,166            
                              28,126           28,126  
      1,261,961     13     5,751                       5,764  
                  10,498   (498 )                 10,000  
  114,970               9,679                       124,649  
      26,595,745     266     124,269                       124,535  
                      (20,000 )                 (20,000 )
                      (11,500 )                 (11,500 )
                      (21,560 )                 (21,560 )
  3,906                   (3,906 )                  
  3,139   969,633     10     2,118           (348 ) 325,482   (2,978 ) 1,941  

 
 
 
 
 
 
 
 
 
 
  122,015   250,894,668     2,509     2,258,932   (2,772,201 ) (2,122 ) (11,882 ) 7,793,175   (77,843 ) (480,592 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
                      (599,423 )                 (599,423 )
                                             
                          1,897               1,897  
                          (22 )             (22 )
                                         
 
                                          (597,548 )
                                         
 
                              6,808           6,808  
                  5,891   (5,891 )                  
      1,071,126     10     2,744                       2,754  
                                  2,860,465   (4,244 ) (4,244 )
                      (19,394 )                 (19,394 )
                      (11,188 )                 (11,188 )
                      (20,102 )                 (20,102 )
  16,884                   (16,884 )                  
      14,360,306     144     75,517               (2,860,465 ) 4,244   79,905  
                  990                       990  
  6,452   1,179,123     12     (7,983 )         344   846,600   (12 ) (1,187 )

 
 
 
 
 
 
 
 
 
 
  145,351   267,505,223     2,675     2,336,091   (3,445,083 ) (247 ) (4,730 ) 8,639,775   (77,855 ) (1,043,798 )
                                             
                      38,872                   38,872  
                                             
                          71               71  
                                         
 
                                          38,943  
                                         
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
                              4,555           4,555  
      827,826     8     3,018                       3,026  
                                  5,873,377   (17,578 ) (17,578 )
                      (8,674 )                 (8,674 )
                      (4,546 )                 (4,546 )
                      (9,183 )                 (9,183 )
  19,096                   (19,096 )                  
                  944               (5,873,377 ) 17,578   18,522  
                  5,980                       5,980  
  86               (881 )             (29,284 ) 293   (502 )

 
 
 
 
 
 
 
 
 
 
$ 164,533   268,333,049   $ 2,683   $ 2,345,152   ($3,447,710 ) ($176 ) ($175 ) 8,610,491   ($77,562 ) ($1,013,255 )

 
 
 
 
 
 
 
 
 
 

See notes to consolidated financial statements.

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PRIMEDIA INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(dollars in thousands, except per share amounts)

1.  Description of Business

        PRIMEDIA Inc. (which together with its subsidiaries is herein referred to as either "PRIMEDIA" or the "Company" unless the context implies otherwise) is one of the largest targeted media companies in the United States. PRIMEDIA's properties deliver content via print (magazines, books and directories), live events (trade and consumer shows), video as well as the Internet and other marketing solutions in niche markets.

        The Company's four business segments are Enthusiast Media, Consumer Guides, Business Information and Education and Training. The Company's Enthusiast Media segment delivers content, both print and online, to consumers in various niche markets while monetizing the readership via advertising, subscription and newsstand sales. The Enthusiast Media segment includes the consumer magazines, their related Web sites, live events, and About.com, Inc. ("About"). The Company's Consumer Guides segment publishes and distributes rental apartment and new home guides in the United States in print and online formats. The Company's Business Information segment provides targeted publications, Web sites and exhibitions that bring sellers of business information and products together with qualified buyers in such fields as agriculture, communications, healthcare, media, professional services and transportation. The Company's Education and Training segment produces and delivers education and training materials targeted to classroom and workplace audiences via satellite, videotape, CD-ROM, live events and over the Internet. The Education and Training segment includes Channel One, Films for the Humanities and Sciences and Workplace Learning ("WPL"). As discussed in Note 26, during the fourth quarter of 2003, the Company realigned its businesses into four reportable segments and has restated prior periods accordingly.

2.  Summary of Significant Accounting Policies

        Basis of Presentation.    The consolidated financial statements include the accounts of PRIMEDIA and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to the prior years' consolidated financial statements to conform with the current year presentation.

        Use of Estimates.    The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Significant accounting estimates include the establishment of the allowances for doubtful accounts, reserves for sales returns and allowances, provisions for severance, closures and restructuring related costs, purchase price allocations, impairments of investments, divestiture reserves, valuation of equity instruments and allowances for income taxes and the recoverability of long-lived assets including goodwill.

        Cash and Cash Equivalents.    Management considers all highly liquid instruments purchased with an original maturity of 90 days or less to be cash equivalents. Cash overdrafts representing outstanding checks of $30,949 and $34,601 at December 31, 2003 and 2002, respectively, have been reclassified to accounts payable on the accompanying consolidated balance sheets.

        Concentrations of Credit Risk.    Substantially all of the Company's trade receivables are from subscription and advertising customers located throughout the United States. The Company establishes its credit policies based on an ongoing evaluation of its customers' credit worthiness and competitive market conditions and establishes its allowance for doubtful accounts based on an assessment of exposures to credit losses at each balance sheet date. The Company believes its allowance for doubtful accounts is sufficient based on the credit exposures outstanding at December 31, 2003.

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        Inventories.    Inventories, including paper, purchased articles, photographs and art, are valued at the lower of cost or market, principally on a first-in, first-out basis.

        Property and Equipment.    Property and equipment, net are stated at cost less accumulated depreciation and amortization. Depreciation of property and equipment, including the amortization of leasehold improvements, is provided at rates based on the estimated useful lives or lease terms, if shorter, using primarily the straight-line method. Improvements are capitalized while maintenance and repairs are expensed as incurred. Whenever significant events or changes occur, such as those affecting general market conditions or pertaining to a specific industry or an asset category, the Company reviews the property and equipment for impairment. When such factors, events or circumstances indicate that property and equipment should be evaluated for possible impairment, the Company uses an estimate of cash flows (undiscounted and without interest charges) over the remaining lives of the assets to measure recoverability. If the estimated cash flows are less than the carrying value of the asset, the loss is measured as the amount by which the carrying value of the asset exceeds fair value.

        Goodwill and Other Intangible Assets.    On January 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") 142, "Goodwill and Other Intangible Assets". Under SFAS 142, goodwill and intangible assets deemed to have an indefinite life (primarily trademarks) are no longer amortized but are subject to impairment tests, at least annually. Upon adoption, the Company ceased amortizing goodwill and indefinite lived intangible assets.

        The Company tests goodwill for impairment, and has established October 31 as the annual impairment test date, using a fair value approach at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment for which discrete financial information is available and reviewed regularly by management. Assets and liabilities of the Company have been assigned to the reporting units to the extent that they are employed in or are considered a liability related to the operations of the reporting unit and are considered in determining the fair value of the reporting unit. See Note 8 for further discussion on SFAS 142.

        Finite-lived assets are tested for impairment using a fair value approach whenever events or changes in circumstances indicate that their carrying value may not be recoverable in accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." See Note 8 for further discussion on SFAS 144.

        Other Investments.    Investments where the Company has the ability to exercise significant influence over financial and accounting policies are accounted for under the equity method of accounting. The Company records its share of income (losses) of certain equity investees based upon the investee's most recent available financial information, typically on a three month lag. Investments where the Company does not have significant influence are accounted for under the cost method.

        In accordance with the provisions of SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities," investments in marketable securities are classified as available-for-sale and are carried at fair market value, with the unrealized gains and losses reported in accumulated other comprehensive income (loss) ("OCI").

        Other investments are periodically reviewed by the Company for impairment whenever significant events or changes occur, such as those affecting general market conditions or those pertaining to a specific industry or an individual investment, which could result in the carrying value of an investment exceeding its fair value. An impairment will be considered to have occurred when it is determined that the decline in fair

71



value below its carrying value is other than temporary, based on consideration of all available evidence. If it has been determined that an impairment in value has occurred, the carrying value of the investment would be written down to an amount equivalent to the fair value of the investment. The determination of fair value begins with a contemporaneous market price because that price reflects the market's most recent evaluation of the total mix of available information. Absent a contemporaneous market price, determination of fair value is based on all other available information, including but not limited to, recent financing obtained and/or projected revenue streams.

        Income Taxes.    Income taxes are accounted for in accordance with SFAS No. 109, "Accounting for Income Taxes", which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax basis of recorded assets and liabilities.

        Deferred Financing Costs.    Deferred financing costs are being amortized by the straight-line method over the terms of the related indebtedness.

        Deferred Wiring and Installation Costs.    Wiring and installation costs incurred by WPL and Channel One have been capitalized and are being amortized by the straight-line method over the related estimated useful lives which are 5 years for WPL and 18 months for Channel One. Prior to 2003, Channel One's policy was to amortize wiring expenditures so that these costs would be fully amortized as of December 31, 2003. Beginning in 2003, new wiring expenditures are being amortized over 18 months to be consistent with the estimated timing of the implementation of a new video platform.

        $10.00 Series D Exchangeable Preferred Stock ("Series D Exchangeable Preferred Stock"), $9.20 Series F Exchangeable Preferred Stock ("Series F Exchangeable Preferred Stock"), and $8.625 Series H Exchangeable Preferred Stock ("Series H Exchangeable Preferred Stock").    The Series D Exchangeable Preferred Stock, Series F Exchangeable Preferred Stock and Series H Exchangeable Preferred Stock shall be referred to herein collectively as the "Exchangeable Preferred Stock." The Series D Exchangeable Preferred Stock, Series F Exchangeable Preferred Stock and Series H Exchangeable Preferred Stock are stated at redemption value and classified as long-term liabilities in accordance with SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" effective July 1, 2003. Dividends on the Series D Exchangeable Preferred Stock, Series F Exchangeable Preferred Stock and Series H Exchangeable Preferred Stock are classified as interest expense and the related issuance costs are classified as other assets on the consolidated balance sheet. Prior to July 1, 2003, the Series D Exchangeable Preferred Stock, Series F Exchangeable Preferred Stock and Series H Exchangeable Preferred Stock were stated at fair value on the date of issuance less issuance costs. The difference between their carrying values and their redemption values was being accreted (using the interest method) by periodic charges to additional paid-in capital (see Note 13).

        Series J Convertible Preferred Stock ("Series J Convertible Preferred Stock").    Series J Convertible Preferred Stock was stated at fair value on the date of issuance less issuance costs. The difference between its carrying value and its redemption value is being accreted (using the interest method) by periodic charges to additional paid-in capital. The accretion is deducted in the calculation of net loss applicable to common shareholders (see Note 14).

        Stock-Based Compensation.    At December 31, 2003, the Company has a stock-based employee compensation plan, which is described more fully in Note 15. Effective January 1, 2003, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation", as amended by SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure", using the prospective method.

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Upon adoption, the Company began expensing the fair value of stock-based compensation for all grants, modifications or settlements made on or after January 1, 2003. The adoption of SFAS 123 increased the loss from continuing operations for the year ended December 31, 2003 by $5,980 (see Note 18).

        Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options granted on or before December 31, 2002 under the fair value method of SFAS 123. The fair value of these options was estimated at the date of grant using the Black-Scholes pricing model for options granted in 2003, 2002 and 2001. The following weighted-average assumptions were used for 2003, 2002 and 2001, respectively: risk-free interest rates of 2.99%, 4.61% and 4.70%; dividend yields of 0.0%, 0.0% and 0.0%; volatility factors of the expected market price of the Company's common stock of 80.65%, 122.20% and 100.42%; and a weighted-average expected life of the option of four years. The estimated fair value of options granted during 2003, 2002 and 2001 was $7,195, $12,423 and $110,007, respectively.

        The Black Scholes pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

        The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation.

 
  Years Ended December 31,
 
 
  2003
  2002
  2001
 
Reported net loss applicable to common shareholders   ($2,981 ) ($647,079 ) ($1,173,877 )

Add: stock-based employee compensation expense included in reported net loss, net of related tax effects

 

8,740

 

4,667

 

14,554

 

Deduct: total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects

 

(27,433

)

(36,092

)

(38,226

)
   
 
 
 
Pro forma net loss applicable to common shareholders   ($21,674 ) ($678,504 ) ($1,197,549 )
   
 
 
 

Per common share:

 

 

 

 

 

 

 
  Reported basic and diluted loss   ($0.01 ) ($2.55 ) ($5.42 )
  Pro Forma basic and diluted loss   ($0.08 ) ($2.67 ) ($5.53 )

        Revenue Recognition.    Advertising revenues for all consumer magazines are recognized as income at the on-sale date, net of provisions for estimated rebates, adjustments and discounts. Other advertising revenues are generally recognized based on the publications' cover dates. Online advertising is generally recognized as advertisements are run. Newsstand sales are recognized as revenue at the on-sale date for all publications, net of provisions for estimated returns. Subscriptions are recorded as deferred revenue when received and recognized as revenue over the term of the subscription. WPL's subscription and broadcast fees for satellite and videotape network services are recognized in the month services are rendered. Sales of books and other items are recognized as revenue upon shipment, net of an allowance for returns. In

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compliance with Emerging Issues Task Force ("EITF") No. 00-10, "Accounting for Shipping and Handling Fees and Costs," distribution costs charged to customers are recognized as revenue when the related product is shipped. Channel One's advertising revenue, net of commissions, is recognized as advertisements are aired on the program. Certain advertisers are guaranteed a minimum number of viewers per advertisement shown; the revenue recognized is based on the actual viewers delivered not to exceed the original contract value. The Company also derives revenue from various licensing agreements, which grant the licensee rights to use the trademarks and brand names of the Company in connection with the manufacture and sale of certain designated products. Licensing revenue is generally recognized by the Company as earned.

        From time to time, the Company enters into multiple element arrangements whereby it may provide a combination of services including print advertising, content licensing, customer lists, on-line advertising and other services. Revenue from each element is recorded when the following conditions exist: (1) the product or service provided represents a separate earnings process; (2) the fair value of each element can be determined separately and; (3) the undelivered elements are not essential to the functionality of a delivered element. If the conditions for each element described above do not exist, revenue is recognized as earned using revenue recognition principles applicable to those elements as if it were one arrangement, generally on a straight-line basis. In November 2002, the EITF reached a consensus on EITF No. 00-21, "Accounting for Revenue Arrangements with Multiple Element Deliverables". EITF No. 00-21 addresses how to account for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. Revenue arrangements with multiple deliverables should be divided into separate units of accounting if the deliverables in the arrangement meet certain criteria. Arrangement consideration should be allocated among the separate units of accounting based on their relative fair values. EITF No. 00-21 also supersedes certain guidance set forth in Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements", issued by the Securities and Exchange Commission. The final consensus is applicable to agreements entered into in quarters beginning after June 15, 2003, with early adoption permitted. Additionally, companies are permitted to apply the consensus guidance to all existing arrangements as a cumulative effect of a change in accounting principle. The adoption of EITF No. 00-21 did not have a material impact on the Company's results of operations or financial position.

        Barter Transactions.    The Company trades advertisements in its traditional and online properties in exchange for trade show space and booths and advertising in properties of other companies. Revenue and related expenses from barter transactions are recorded at fair value in accordance with EITF No. 99-17, "Accounting for Advertising Barter Transactions." Revenue from barter transactions is recognized in accordance with the Company's revenue recognition policies. Expense from barter transactions is generally recognized as incurred. Revenue from barter transactions was approximately $13,700, $18,000 and $32,700 for the years ended December 31, 2003, 2002 and 2001, respectively with equal related expense amounts in each year.

        Editorial and Product Development Costs.    Editorial costs and product development costs are generally expensed as incurred. Product development costs include the cost of artwork, graphics, prepress, plates and photography for new products.

        Advertising and Subscription Acquisition Costs.    Advertising and subscription acquisition costs are expensed the first time the advertising takes place, except for certain direct-response advertising, the primary purpose of which is to elicit sales from customers who can be shown to have responded specifically to the advertising and that results in probable future economic benefits. Direct-response advertising

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consists of product promotional mailings, catalogues, telemarketing and subscription promotions. These direct-response advertising costs are capitalized as assets and amortized over the estimated period of future benefit. The amortization periods range from one to two years subsequent to the promotional event. Amortization of direct-response advertising costs is included in marketing and selling expenses on the accompanying statements of consolidated operations. Advertising expense was approximately $58,200, $81,500 and $88,700 during the years ended December 31, 2003, 2002 and 2001, respectively.

        Foreign Currency.    Gains and losses on foreign currency transactions, which are not significant, have been included in other, net on the accompanying statements of consolidated operations. The effects of translation of foreign currency financial statements into U.S. dollars are included in OCI within shareholders' deficiency on the accompanying consolidated balance sheets.

        Internal-Use Software.    In compliance with American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," the Company expenses costs incurred in the preliminary project stage and, thereafter, capitalizes costs incurred in the developing or obtaining of internal use software and includes them in property and equipment, net. Certain costs, such as maintenance and training, are expensed as incurred. Capitalized costs are amortized over a period of not more than three years using the straight-line method. In addition, in compliance with SOP 98-1 and EITF No. 00-2, "Accounting for Web Site Development Costs," direct internal and external costs associated with the development of the features and functionality of the Company's Web sites incurred during the application and infrastructure development phase have been capitalized, and are included in property and equipment, net on the accompanying consolidated balance sheets. Typical capitalized costs include but are not limited to, acquisition and development of software tools required for the development and operation of the website, acquisition and registration costs for domain names and costs incurred to develop graphics for the website. These capitalized costs are amortized over the estimated useful life of up to three years using the straight-line method. Capitalized software costs are subject to impairment evaluation in accordance with the provisions of SFAS 144.

        Derivative Financial Instruments.    Effective January 1, 2001, the Company adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities.

        SFAS 133 requires that all derivatives, whether designated in hedging relationships or not, be recorded on the balance sheet at fair value regardless of the purpose or intent for holding them. If a derivative is designated as a fair-value hedge, changes in the fair value of the derivative and the related change in the hedged item are recognized in operations. If a derivative is designated as a cash-flow hedge, changes in the fair value of the derivative are recorded in OCI and are recognized in the statement of consolidated operations when the hedged item affects operations. For a derivative that does not qualify as a hedge, changes in fair value are recognized in operations.

Recent Accounting Pronouncements

        In 2002 and 2003 the Company adopted a series of accounting changes, as recommended by the FASB and EITF, that impact year-over-year comparisons of financial results. These changes are summarized below.

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Adoption of EITF No. 00-25 "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products," and EITF No. 01-9 "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)"

        EITF No. 00-25, issued in April 2001, addresses whether consideration from a vendor to a reseller of the vendor's products is an adjustment to the selling price or the cost of the product. This issue was further addressed by EITF No. 01-9, issued in September 2001. The Company adopted EITF No. 00-25 and EITF No. 01-9 effective January 1, 2002. The adoption of EITF No. 00-25 and EITF No. 01-9 resulted in a net reclassification of product placement costs relating to single copy sales, previously classified as distribution, circulation and fulfillment expense on the accompanying statements of consolidated operations, to reductions of revenues from such activities. The change in classification is industry-wide and had no impact on the Company's results of operations, cash flows or financial position. The reclassification resulted in a net decrease in revenues and a corresponding decrease in operating expenses of $20,614 for the year ended December 31, 2001.

Adoption of SFAS 142 regarding impairment of goodwill and indefinite-lived intangible assets, effective January 1, 2002

        On January 1, 2002, the Company adopted SFAS 142, and evaluated its goodwill and indefinite lived intangible assets (primarily trademarks) at the reporting unit level for impairment and determined that certain of these assets were impaired. As a result, the Company recorded an impairment charge within cumulative effect of a change in accounting principle of $388,508 ($1.53 per share) effective in the first quarter 2002. Previously issued financial statements as of December 31, 2002 reflect the cumulative effect of this accounting change at the beginning of the year of adoption.

        SFAS 142 requires companies to continue to assess goodwill and indefinite lived intangible assets for impairment at least once a year subsequent to adoption. Any impairment subsequent to the initial implementation is recorded in operating income. The Company established October 31 as the annual impairment test date and accordingly evaluated goodwill and trademarks as of October 31, 2002 and 2003, resulting in impairment charges recorded within amortization of $95,490 ($0.38 per share) and $14,758 ($0.06 per share) during 2002 and 2003, respectively (see Note 8).

        In addition to the annual impairment test, an assessment is also required whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Due to the continued softness of WPL revenue and operating results, the Company performed an impairment test on the Education and Training segment as of July 31, 2003, prior to its annual testing date of October 31. As a result, the Company recorded an impairment charge for WPL within amortization expense of $19,768 ($0.08 per share) related to the impairment of goodwill associated with WPL (see Note 8).

        Historically, the Company did not need a valuation allowance for the portion of the tax effect of net operating losses equal to the amount of deferred tax liabilities related to tax-deductible goodwill and trademark amortization expected to occur during the carryforward period of the net operating losses based on the timing of the reversal of these taxable temporary differences. As a result of the adoption of SFAS 142, the Company records a valuation allowance in excess of its net deferred tax assets to the extent the difference between the book and tax basis of indefinite-lived intangible assets is not expected to reverse during the net operating loss carryforward period. With the adoption of SFAS 142, the Company no longer amortizes the book basis in the indefinite-lived intangibles, but will continue to amortize these intangibles for tax purposes. For 2003 and 2002, income tax expense primarily consists of deferred income taxes of

76



$11,864 and $49,500, respectively, related to the increase in the Company's net deferred tax liability for the tax effect of the net increase in the difference between the book and tax basis in the indefinite-lived intangible assets.

        In addition, since amortization of tax-deductible goodwill and trademarks ceased on January 1, 2002, the Company will have deferred tax liabilities that will arise each quarter because the taxable temporary differences related to the amortization of these assets will not reverse prior to the expiration period of the Company's deductible temporary differences unless the related assets are sold or an impairment of the assets is recorded. The Company expects that it will record approximately $17,400 to increase deferred tax liabilities during 2004.

Adoption of SFAS 143 "Accounting for Asset Retirement Obligations"

        In August 2001, the FASB issued SFAS 143 which requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The standard was effective for the Company beginning January 1, 2003. The adoption of SFAS 143 did not have a material impact on the Company's results of operations or financial position.

Adoption of SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets"

        In August 2001, the FASB issued SFAS 144, which established one accounting model for long-lived assets to be held and used, long-lived assets (including those accounted for as a discontinued operation) to be disposed of by sale and long-lived assets to be disposed of other than by sale, and resolved certain implementation issues related to SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".

        The Company adopted SFAS 144 on January 1, 2002, and as a result, the results of the Modern Bride Group, ExitInfo, Doll Reader, Chicago, Horticulture, IN New York and the American Baby Group, which were sold during 2002, and Seventeen magazine and related teen properties, Simba, Federal Sources, CableWorld and Sprinks, the pay per click advertising network which serves About.com and numerous third party distribution partners, which were sold during 2003, were recorded as discontinued operations for the periods prior to their respective divestiture dates.

        The Company also reclassified the results of New York magazine, which was sold in January 2004, and Kagan World Media for which the Company has initiated plans to sell, to discontinued operations for all periods presented.

        Discontinued operations includes revenues of $121,380, $257,488 and $343,905 and income (loss) of $130,664, $93,137 and ($26,376) (including a gain on sale of $125,247, $111,449 and $0), for the years ended December 31, 2003, 2002 and 2001, respectively. The discontinued operations include expenses related to certain centralized functions that are shared by multiple titles, such as production, circulation, advertising, human resource and information technology costs but exclude general overhead costs. These costs were allocated to the discontinued entities based upon relative revenues for the related years. The allocation methodology is consistent with that used across the Company. These allocations amounted to $2,774, $10,660 and $12,274 for the years ended December 31, 2003, 2002 and 2001, respectively.

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        The Company recorded a state income tax provision of $1,000 associated with the divestiture of Seventeen and its related teen properties, which is included in discontinued operations on the statements of consolidated operations for the year ended December 31, 2003.

        The Company recorded a charge of $1,816 to depreciation expense due to the disposal of certain fixed assets for the year ended December 31, 2003. In connection with the results of impairment tests under SFAS 142, the Company also evaluated the recoverability of certain finite-lived assets of its reporting units under SFAS 144 as of January 1, 2002, October 31, 2002 and July 31, 2003 and recorded impairment charges of $7,120, $45,299, and $727, respectively (see Note 8).

SFAS 144 revenue reclassifications

        In accordance with the adoption of SFAS 144, the Company reclassified amounts from revenues, net, to discontinued operations for the years ended December 31, 2002 and 2001, as follows:

 
  Years Ended December 31,
 
  2002
  2001
Revenues, net (as reported in 2002 Form 10-K)   $ 1,587,564   $ 1,578,357
Less: Effect of SFAS 144 for 2003 divestitures     175,012     200,583
   
 
Revenues, net (as reclassified)   $ 1,412,552   $ 1,377,774
   
 

SFAS 145 "Rescission of FASB Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections"

        In April 2002, the FASB issued SFAS 145 which for most companies required gains and losses on extinguishments of debt to be classified within income or loss from continuing operations rather than as extraordinary items as previously required under SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt an amendment of Accounting Principles Board ("APB") Opinion No. 30." Extraordinary treatment will be required for certain extinguishments as provided under APB Opinion No. 30. This statement is effective for financial statements issued on or after May 15, 2002. During the year ended December 31, 2002, the Company recorded a gain in other, net, of $7,039, which was net of the write-off of the $816 of unamortized issuance costs related to the partial repurchase and retirement of $72,710 of the Company's Senior Notes, which had a carrying value of $72,292, at a discount. As a result of the redemption of the Company's 81/2% and 101/4% Senior Notes in 2003, the Company recorded a loss in other, net, of $2,580 related to the write-off of unamortized discount and issuance costs (see Note 11).

SFAS 146 "Accounting for Costs Associated with Exit or Disposal Activities"

        In June 2002, the FASB issued SFAS 146 which superseded EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS 146 affects the timing of the recognition of costs associated with an exit or disposal plan by requiring them to be recognized when incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 has been applied prospectively to exit or disposal activities initiated after December 31, 2002 and has not had a material impact on the Company's results of operations or financial position.

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SFAS 148, "Accounting for Stock-Based Compensation—Transition and Disclosure"

        In December 2002, the FASB issued SFAS 148 "Accounting for Stock-Based Compensation—Transition and Disclosure" an amendment of SFAS 123, "Accounting for Stock-Based Compensation" to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for annual periods ending after December 15, 2002 and interim periods beginning after December 15, 2002. Effective January 1, 2003, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation", as amended by SFAS 148, using the prospective method. Upon adoption, the Company began expensing the fair value of stock-based compensation for all grants, modifications or settlements made on or after January 1, 2003. The adoption of SFAS 123 increased the loss from continuing operations for the year ended December 31, 2003 by $5,980. Prior quarters were not restated as the impact was not significant.

        SFAS No. 123 provides for a fair-value based method of accounting for employee options and measures compensation expense using an option valuation model that takes into account, as of the grant date, the exercise price and expected life of the option, the current price of the underlying stock and its expected volatility, expected dividends on the stock, and the risk-free interest rate for the expected term of the option. Assuming the Company had accounted for the options in accordance with SFAS 123 for all grants, the estimated non-cash option expense would have been $27,433, $36,092 and $38,226 for the years ended December 31, 2003, 2002 and 2001, respectively.

SFAS 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities"

        In April 2003, the FASB issued SFAS 149, which amends and clarifies accounting for derivative instruments, and for hedging activities under SFAS 133. Specifically, SFAS 149 requires that contracts with comparable characteristics be accounted for similarly. Additionally, SFAS 149 clarifies the circumstances in which a contract with an initial net investment meets the characteristics of a derivative and when a derivative contains a financing component that requires special reporting in the statement of cash flows. SFAS 149 is generally effective for contracts entered into or modified after June 30, 2003. Subsequent to the maturity of interest rate swap agreements in 2002, the Company has not been a party to and has not entered into any derivative contracts.

SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity"

        Effective July 1, 2003, the Company prospectively adopted SFAS 150. SFAS 150 requires the Company to classify as long-term liabilities its Series D Exchangeable Preferred Stock, Series F Exchangeable Preferred Stock and Series H Exchangeable Preferred Stock and to classify dividends from this preferred stock as interest expense. As a result of the adoption by the Company of SFAS 150, the Series D Exchangeable Preferred Stock, Series F Exchangeable Preferred Stock and Series H Exchangeable Preferred Stock are now collectively described as "shares subject to mandatory redemption" on the accompanying consolidated balance sheet as of December 31, 2003. Dividends on these shares are now described as "interest on shares subject to mandatory redemption" and included in loss from continuing operations for the year ended December 31, 2003, whereas previously they were presented below net income (loss) as preferred stock dividends (see Note 13).

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FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statement No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34"

        In November 2002, the FASB approved FASB Interpretation No. 45 ("FIN 45") which clarifies the requirements of SFAS No. 5, "Accounting for Contingencies", relating to a guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. Specifically, FIN 45 requires a guarantor to recognize a liability for the non-contingent component of certain guarantees, representing the obligation to stand ready to perform in the event that specified triggering events or conditions occur. Effective January 1, 2003, the Company adopted FIN 45 which has not had a material impact on the Company's results of operations or financial position.

FASB Interpretation No. 46(R), "Consolidation of Variable Interest Entities"

        In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Effective January 31, 2003, the Company has adopted FIN 46, which has not had a material impact on the Company's results of operations or financial position. FIN 46 was revised to clarify the original interpretation in December 2003. The revision did not have a material impact on the Company's results of operations or financial position.

3. Acquisitions

        In 2001, the Company acquired About, a platform comprised of a network of more than 400 highly targeted topic-specific Web sites, and EMAP, a publisher of more than 60 consumer titles reaching over 75 million enthusiasts. The acquisitions have been accounted for by the purchase method. The consolidated financial statements include the operating results of the acquisitions subsequent to their respective dates of acquisition. The pro forma effect of the About and EMAP acquisitions on the Company's operations is presented below.

About

        On February 28, 2001, the Company completed its merger with About. Under terms of the merger agreement, shareholders of About received approximately 45,000,000 shares of the Company's common stock or 2.3409 shares for each About share. Such shares were valued at $11.81. An independent appraisal was used to allocate the purchase price to the fair value of assets acquired and liabilities assumed including identifiable intangibles. The goodwill and other finite lived intangible assets related to the About merger were amortized during 2001 over an estimated useful life of three years. In accordance with SFAS 142, the Company ceased amortizing goodwill as of January 1, 2002. Finite lived intangible assets continue to be

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amortized over their estimated useful lives. The following is a summary of the calculation of the purchase price, as well as the allocation of purchase price to the fair value of net assets acquired:

Total number of shares of PRIMEDIA common stock issued to consummate the merger   44,951,034  
Fair value per share of PRIMEDIA common stock   $11.81  
   
 
Value of shares of PRIMEDIA common stock issued   $530,872  
Fair value of replacement options issued (13,383,579 options)   102,404  
Less: Unearned compensation related to unvested options   (7,592 )
Cost of About shares acquired prior to the merger converted to treasury stock   74,865  
Direct merger costs   16,792  
   
 
Total purchase price   717,341  
Less: Fair value of net tangible assets (including cash acquired of $109,490)   (175,050 )
Less: Fair value of identifiable intangible assets   (24,743 )
   
 
Goodwill   $517,548  
   
 

        In connection with the merger with About, outstanding options to purchase shares of About common stock held by certain individuals were converted into 13,383,579 options to purchase shares of PRIMEDIA common stock. The fair value of the vested and unvested options issued by PRIMEDIA was $102,404 determined using a Black Scholes pricing model. On February 28, 2001, the date that the Company granted these unvested replacement options, the intrinsic value of the "in-the-money" unvested replacement options was $19,741. Based on a four-year service period from the original date that these options were granted, the Company classified $7,592 as unearned compensation relating to unvested options. The Company recorded charges related to the amortization of the intrinsic value of unvested "in-the-money" options of $1,282, $2,775 and $3,360 for the years ended December 31, 2003, 2002 and 2001, respectively (see Note 18). The remaining $12,149 is included within the total purchase price. As of December 31, 2003, a number of these options have been forfeited or expired unexercised. Most of these remaining outstanding options have an exercise price which exceeded the Company's share price on December 31, 2003.

        In the fourth quarter of 2001, concurrent with its annual financial review process, the Company determined that the estimated future undiscounted cash flows of About were not sufficient to recover the carrying value of the goodwill. Accordingly, the Company recorded an impairment charge of $326,297 to write down About's goodwill to the estimated fair value.

        In connection with the About merger, the Company entered into agreements for future services (not included in the purchase price) with two key executives of About as discussed in Note 18.

EMAP

        On August 24, 2001, the Company acquired the outstanding common stock of EMAP. The total consideration was $525,000, comprised of $515,000 in cash, including an estimate of working capital settlements of $10,000, and warrants to acquire 2,000,000 shares of the Company's common stock at $9 per share. The fair value of the warrants was approximately $10,000 and was determined using a Black Scholes pricing model. These warrants expire ten years from the date of issuance.

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        The Company financed the acquisition of EMAP by (1) issuing 1,000,000 shares of Series J Convertible Preferred Stock to KKR 1996 Fund L.P. ("KKR 1996 Fund") (an investment partnership created at the direction of Kohlberg Kravis Roberts & Co. L.P., ("KKR") a related party of the Company) for $125,000 and (2) drawing upon its revolving credit facility in an amount of approximately $265,000. In addition, KKR 1996 Fund purchased from the Company $125,000 of common stock and Series K Convertible Preferred Stock, both at a price per share equal to $4.70. This resulted in an additional 10,800,000 shares of common stock and 15,795,745 shares of Series K Convertible Preferred Stock. On September 27, 2001, all of the issued and outstanding shares of the Series K Convertible Preferred Stock were, in accordance with their terms, converted into 15,795,745 shares of the Company's common stock.

        In connection with the equity financing by KKR 1996 Fund, the Company paid KKR 1996 Fund a commitment fee consisting of warrants to purchase 1,250,000 shares of common stock ("commitment warrants") of the Company at an exercise price of $7 per share, subject to adjustment, and a funding fee consisting of warrants to purchase an additional 2,620,000 shares of the Company's common stock ("funding warrants") at an exercise price of $7 per share, subject to adjustment. These warrants may be currently exercised and expire on the earlier of August 24, 2011 or upon a change in control, as defined therein. Based on the terms of the Series J Convertible Preferred Stock agreement, the Company was required to issue, and has issued, to KKR 1996 Fund additional warrants to purchase up to 4,000,000 shares of the Company's common stock at an exercise price of $7 per share, subject to adjustment. The Company ascribed a value of $6,389 to these warrants using the Black Scholes pricing model. These warrants expire on the earlier of ten years from the date of issuance or upon a change in control.

        The 1,250,000 commitment warrants issued to KKR 1996 Fund represent a commitment fee related to the financing transaction as a whole. The Company valued these warrants at $5,622 using the Black Scholes pricing model and recorded them as a component of additional paid-in capital.

        The Company attributed the 2,620,000 funding warrants to the issuance of the Series J Convertible Preferred Stock. The Company valued these warrants at $9,679 using the Black Scholes pricing model and has accordingly reduced the face value of the Series J Convertible Preferred Stock. The Company accreted the difference between the carrying value and the redemption value of the Series J Convertible Preferred Stock to additional paid-in capital using the effective interest method over a one year period as the earliest date at which the preferred stock was convertible was one year from the date of issuance. The accretion was deducted in the calculation of loss applicable to common shareholders.

        During 2002, the Company elected to account for the EMAP acquisition as an asset acquisition for income tax purposes.

        In 2003, the Company finalized the working capital settlement with the seller in the amount of $11,711, of which $10,000 was included in the initial purchase price and paid in 2001.

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        The following is a summary of the calculation of the purchase price, as described above, as well as the allocation of the purchase price to the fair value of the net assets acquired:

Purchase consideration (including working capital settlement of $11,711, and other settlements)   $526,711
Direct acquisition costs   6,615
   
Total purchase price   533,326
Add: Fair value of net tangible liabilities of EMAP   40,435
Less: Fair value of identifiable intangible assets   121,600
   
Goodwill   $452,161
   

        Of the $121,600 fair value of identifiable intangible assets, $99,200 represents trademarks not subject to amortization and $22,400 represents amortizable membership, subscriber and customer lists.

        The Company's consolidated results of operations includes results of operations of About and EMAP from their respective dates of acquisition. The results of About and EMAP are included in the Company's Enthusiast Media segment. The unaudited pro forma information below presents the consolidated results of operations as if the About and EMAP acquisitions had occurred as of January 1, 2001. In accordance with SFAS 142, these pro forma adjustments assume that none of the goodwill and indefinite lived intangible assets associated with the EMAP acquisition are amortized. If the Company had recorded amortization of the goodwill and indefinite lived intangible assets in connection with the EMAP acquisition in accordance with the Company's historical amortization policies, assuming the acquisition occurred on January 1, 2001, amortization expense would have increased by approximately $13,700 in 2001. The unaudited pro forma information has been included for comparative purposes and is not indicative of the results of operations of the consolidated Company had the transactions occurred as of January 1, 2001, nor is it necessarily indicative of future results.

 
  Year Ended
December 31, 2001

 
 
  (dollars in thousands,
except per share amounts)

 
Revenues, net   $1,773,136  
Loss from continuing operations applicable to common shareholders   ($1,309,348 )
Loss applicable to common shareholders   ($1,306,306 )
Basic and diluted loss from continuing operations applicable to common shareholders per common share   ($5.40 )
Basic and diluted net loss applicable to common shareholders per common share   ($5.38 )
Weighted average shares used in basic and diluted loss applicable to common shareholders per common share   242,615,842  

        No material acquisitions were completed during 2003 and 2002. Payments for businesses acquired on the accompanying statement of consolidated cash flows for the year ended December 31, 2003 and 2002, primarily represent immaterial acquisitions, as well as, payment for certain deferred purchase price liabilities associated with prior year acquisitions.

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4. Divestitures

2001

        In April 2001, the Company sold QWIZ, Inc. for $7,000 of cash. The related gain approximated $300 and is included in (loss) gain on sale of businesses and other, net on the accompanying statement of consolidated operations for the year ended December 31, 2001. Proceeds from the sale were primarily used to pay down borrowings under the Company's bank credit facility.

        In November 2001, the Company sold Bacon's Information, Inc. ("Bacons") to Observer AB for $90,000, $15,000 of which represented a note receivable. The gain approximated $54,600 and is included in (loss) gain on sale of businesses and other, net on the accompanying statement of consolidated operations for the year ended December 31, 2001. Proceeds from the sale of Bacons were primarily used to pay down borrowings under the Company's bank credit facility. During 2002, the Company received the entire $15,000 balance on the note receivable.

        In addition, during 2001, the Company completed several other smaller divestitures which were not material to the results of operations or cash flows of the Company for the year ended December 31, 2001.

2002

        In 2002, the Company completed several divestitures, the results of which have been included in discontinued operations in accordance with SFAS 144. These divestitures include the Modern Bride Group, ExitInfo, Chicago, the American Baby group, IN New York, Horticulture and Doll Reader. The related net gain on sale of businesses of $111,449 for the year ended December 31, 2002 has been included in discontinued operations on the accompanying statement of consolidated operations.

        During 2002, the Company completed the sale of several other properties which did not qualify as discontinued operations under SFAS 144 since they had been previously classified as non-core businesses. The related net loss on sale of businesses of $7,247 is included in loss (gain) on sale of businesses and other, net, on the accompanying statement of consolidated operations for the year ended December 31, 2002.

        Proceeds from these sales were approximately $228,000 and were used to pay down the Company's outstanding debt and borrowings under the bank credit facility and for general corporate purposes. In connection with certain of the divestitures, the Company agreed to provide certain services to the purchasers including space rental and finance, sales and systems support at negotiated rates over specified terms.

2003

        During 2003, the Company completed several divestitures, the results of which have been included in discontinued operations in accordance with SFAS 144. In May 2003, the Company sold Seventeen magazine and its companion properties, including a number of Seventeen branded assets, Teen magazine, Seventeen.com, teenmag.com and Cover Concepts, an in-school marketing unit. In July 2003, the Company sold gURL.com, also a Seventeen property. These products were included in the Enthusiast Media Segment. In addition, the Company sold Sprinks, the pay per click advertising network which served About.com and numerous third party distribution partners, and was part of the Enthusiast Media Segment, Realestate.com, which was part of the Consumer Guides segment, as well as Simba Information, Federal

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Sources and Cableworld, all part of the Business Information Segment. Proceeds from these divestitures in 2003 were approximately $213,000 and were used to pay down the Company's outstanding debt and borrowings under the bank credit facility and for general corporate purposes. The related gain on sale of businesses of $126,026 for the year ended December 31, 2003 has been included in discontinued operations on the accompanying statement of consolidated operations.

        During the year ended December 31, 2003, the Company finalized certain aspects of the 2002 dispositions which were classified as discontinued operations and recognized a net loss of $779.

        In addition, during the year ended December 31, 2003, the Company completed the sale of several other properties which did not qualify as discontinued operations under SFAS 144. The related loss on the sale of these businesses of $598 for the year ended December 31, 2003 is included in loss (gain) on sale of businesses and other, net, on the accompanying statement of consolidated operations. Proceeds from these sales were approximately $850 and were used to pay down the Company's outstanding debt and borrowings under the bank credit facility.

        In October 2003, the Company initiated a plan to sell Kagan World Media, part of the Business Information segment, the results of which have been classified as discontinued operations for all periods presented.

        In January 2004, the Company completed the sale of New York magazine, part of the Enthusiast Media segment, the results of which have been reclassified as discontinued operations for all periods presented. Proceeds from the sale of $55,000, subject to standard post-closing adjustments, were used to pay down the Company's borrowings under its bank credit facility. Additionally the Company finalized a working capital settlement with the purchaser of Seventeen, resulting in a payment to the purchaser of $3,379 in January 2004.

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Balance Sheet—Held for Sale

        The assets and liabilities of businesses that the Company has initiated plans to sell as of December 31, 2003 have been reclassified to held for sale on the accompanying consolidated balance sheet as of December 31, 2003 and are as follows:

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

5. Accounts Receivable, Net

        Accounts receivable, net, consisted of the following:

 
  December 31,
 
  2003
  2002
Accounts receivable   $212,144   $246,234
Less: Allowance for doubtful accounts   10,798   17,629
          Allowance for returns and rebates   7,266   9,428
   
 
    $194,080   $219,177
   
 

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6. Inventories

        Inventories consisted of the following:

 
  December 31,
 
  2003
  2002
Finished goods     $8,008     $9,420
Work in process     230     73
Raw materials     9,262     14,828
   
 
    $ 17,500   $ 24,321
   
 

7. Property and Equipment, Net

        Property and equipment, net, including those held under capital leases, consisted of the following:

 
   
  December 31,
 
  2003
Range of Lives
(years)

 
  2003
  2002
Land       $334     $1,662
Buildings and improvements   3-32     57,862     58,583
Furniture and fixtures   3-10     30,612     37,829
Machinery and equipment   3-10     126,789     156,512
Internal use software   2-3       84,302     82,135
School equipment   2-10     75,316     73,704
Other   2-7       16,256     12,407
       
 
          391,471     422,832
Less: Accumulated depreciation and amortization         280,612     294,882
       
 
        $ 110,859   $ 127,950
       
 

        Included in property and equipment are assets which were acquired under capital leases in the amount of $52,584 and $44,078 with accumulated amortization of $25,328 and $20,527 at December 31, 2003 and 2002, respectively (see Note 23).

8. Goodwill, Other Intangible Assets and Other

        On January 1, 2002, in connection with the adoption SFAS 142, the Company reviewed its goodwill and indefinite lived intangible assets (primarily trademarks) for impairment and determined that certain of these assets were impaired. As a result, the Company recorded an impairment charge within cumulative effect of a change in accounting principle of $388,508 ($1.53 per share) effective in the first quarter 2002. Previously issued financial statements as of December 31, 2002 reflect the cumulative effect of this accounting change at the beginning of the year of adoption.

        SFAS 142 requires companies to continue to assess goodwill and indefinite lived intangible assets for impairment at least once a year subsequent to adoption. Any impairment subsequent to the initial implementation is recorded in operating income. The Company established October 31 as the annual

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impairment test date and accordingly evaluated goodwill and trademarks as of October 31, 2002 and 2003, resulting in impairment charges recorded within amortization of $95,490 ($0.38 per share) and $14,758 ($0.06 per share) during 2002 and 2003, respectively.

        In addition to the annual impairment test, an assessment is also required whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Due to the continued softness of WPL revenue and operating results, the Company performed an impairment test on the Education and Training segment as of July 31, 2003, prior to its annual testing date of October 31. As a result, the Company recorded an impairment charge for WPL within amortization expense of $19,768 ($0.08 per share) related to the impairment of goodwill associated with WPL.

        For the year ended December 31, 2002, the Company recorded an additional impairment charge relating to goodwill and trademarks of $7,894 ($0.03 per share) not related to SFAS 142 in the Enthusiast Media Segment.

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        As a result of the Company's impairment testing under SFAS 142, impairment charges by operating segment, were as follows:

 
  Enthusiast
Media

  Business
Information

  Education
and Training

  Total(1)
January 1, 20022                        
  Goodwill   $ 129,563   $ 155,583   $ 44,513   $ 329,659
  Trademarks     37,863     13,611     7,375     58,849
   
 
 
 
    $ 167,426   $ 169,194   $ 51,888   $ 388,508
   
 
 
 
October 31, 20023                        
  Goodwill   $ 22,122   $ 49,031   $ 23,518   $ 94,671
  Trademarks     710     109         819
   
 
 
 
    $ 22,832   $ 49,140   $ 23,518   $ 95,490
   
 
 
 
July 31, 2003                        
  Goodwill   $   $   $ 19,768   $ 19,768
  Trademarks                
   
 
 
 
    $   $   $ 19,768   $ 19,768
   
 
 
 
October 31, 2003                        
  Goodwill   $   $   $ 8,395   $ 8,395
  Trademarks     2,337         4,026     6,363
   
 
 
 
    $ 2,337   $   $ 12,421   $ 14,758
   
 
 
 

(1)
There were no impairments for the Consumer Guides segment under SFAS 142 for any period presented.

(2)
Charged to cumulative effect of a change in accounting principle.

(3)
Impairments have been reclassified to reflect discontinued operations.

        In connection with the results of the SFAS 142 impairment tests summarized above, factors indicated that the carrying value of certain finite lived assets might not be recoverable. Accordingly, impairment testing under SFAS 144 was undertaken as of January 1, 2002, October 31, 2002 and July 31, 2003 resulting in impairment charges of $7,120, $45,299, and $727, respectively.

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        A summary of the Company's impairment charges as a result of SFAS 144, by operating segment, were as follows:

 
  Enthusiast
Media

  Business
Information

  Education
and Training

  Total(1)
January 1, 2002(2)                        
  Amortization of intangible assets, goodwill and other   $ 6,245   $ 511   $   $ 6,756
  Depreciation of property and equipment     364             364
   
 
 
 
    $ 6,609   $ 511   $   $ 7,120
   
 
 
 
October 31, 2002(3)                        
  Amortization of intangible assets, goodwill and other   $   $   $ 35,924   $ 35,924
  Depreciation of property and equipment             9,375     9,375
   
 
 
 
    $   $   $ 45,299   $ 45,299
   
 
 
 
July 31, 2003                        
  Amortization of intangible assets, goodwill and other   $   $   $ 727   $ 727
  Depreciation of property and equipment                
   
 
 
 
    $   $   $ 727   $ 727
   
 
 
 

(1)
There were no impairments for the Consumer Guides segment under SFAS 144 for any period presented.

(2)
Impairment charges were recorded in the third quarter of 2002.

(3)
Impairments have been reclassified to reflect discontinued operations.

        The Company's SFAS 142 evaluations as of the adoption date and as of the annual impairment testing date of October 31 were performed by an independent valuation firm. The July 31, 2003 valuation was performed internally and utilized a consistent approach updated to reflect current information. The evaluations utilized both an income and market valuation approach and contain reasonable and supportable assumptions and projections and reflect management's best estimate of projected future cash flows. The Company's discounted cash flow valuation used a range of discount rates that represented the Company's weighted-average cost of capital and included an evaluation of other companies in each reporting unit's industry. The assumptions utilized by the Company in these evaluations are consistent with those utilized in the Company's annual planning process. If the assumptions and estimates underlying these goodwill and trademark impairment evaluations are not achieved, the amount of the impairment could be adversely affected. Future impairment tests will be performed at least annually (as of October 31) in conjunction with the Company's annual budgeting and forecasting process, with any impairment classified as an operating expense.

        Historically, the Company did not need a valuation allowance for the portion of the tax effect of net operating losses equal to the amount of deferred tax liabilities related to tax-deductible goodwill and trademark amortization expected to occur during the carryforward period of the net operating losses based on the timing of the reversal of these taxable temporary differences. As a result of the adoption of SFAS 142, the Company records a valuation allowance in excess of its net deferred tax assets to the extent the difference between the book and tax basis of indefinite-lived intangible assets is not expected to reverse

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during the net operating loss carryforward period. With the adoption of SFAS 142, the Company no longer amortizes the book basis in the indefinite-lived intangibles, but will continue to amortize these intangibles for tax purposes. For 2003 and 2002, income tax expense primarily consists of deferred income taxes of $11,864 and $49,500, respectively, related to the increase in the Company's net deferred tax liability for the tax effect of the net increase in the difference between the book and tax basis in the indefinite-lived intangible assets.

        In addition, since amortization of tax-deductible goodwill and trademarks ceased on January 1, 2002, the Company will have deferred tax liabilities that will arise each quarter because the taxable temporary differences related to the amortization of these assets will not reverse prior to the expiration period of the Company's deductible temporary differences unless the related assets are sold or an impairment of the assets is recorded. The Company expects that it will record approximately $17,400 to increase deferred tax liabilities during 2004.

        For the year ended December 31, 2001, the Company recorded the About impairment charge discussed in Note 3, as well as $100,719 of other impairment charges to amortization expense to write down certain long-lived assets, primarily the excess of purchase price over net assets acquired and other intangible assets related to certain product lines, of which $46,563 related to the Business Information segment, $10,836 related to the Consumer Guides segment, and $43,320 related to the Enthusiast Media segment.

        Changes in the carrying amount of goodwill for the years ended December 31, 2002 and December 31, 2003, by operating segment, are as follows:

 
  Enthusiast
Media

  Consumer
Guides

  Business
Information

  Education
and Training

  Total
 
Balance as of January 1, 2002   $ 898,730   $ 98,792   $ 330,914   $96,194   $1,424,630  
Initial impairment charge     (129,563 )       (155,583 ) (44,513 ) (329,659 )
Annual impairment charge     (22,122 )       (49,031 ) (23,518 ) (94,671 )
Annual impairment charge related to discontinued operations             (2,556 )   (2,556 )
Purchase price allocation adjustments for valuation reports and acquisition reserve adjustments     43,022     772     (1,174 )   42,620  
Goodwill written off related to the sale of businesses     (56,922 )   (9,163 )   (490 )   (66,575 )
Other     (1,250 )           (1,250 )
   
 
 
 
 
 
Balance as of December 31, 2002     731,895     90,401     122,080   28,163   972,539  
Third quarter impairment charge               (19,768 ) (19,768 )
Annual impairment charge               (8,395 ) (8,395 )
Purchase price allocation adjustments for valuation reports and acquisition reserve adjustments     1,761     7,160     414     9,335  
Goodwill written off related to the sale of businesses     (32,174 )   (1,753 )   (2,542 )   (36,469 )
Goodwill allocated to assets held for sale     (6,142 )       (605 )   (6,747 )
Other             39     39  
   
 
 
 
 
 
Balance as of December 31, 2003   $ 695,340   $ 95,808   $ 119,386   $—   $910,534  
   
 
 
 
 
 

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        A reconciliation of the reported net loss and loss per common share to the amounts adjusted for the exclusion of amortization of goodwill and indefinite lived intangible assets, the cumulative effect of a change in accounting principle and the deferred provision for income taxes follows:

 
  Years Ended December 31,
 
 
  2003
  2002
  2001
 
Reported loss applicable to common shareholders   ($ 2,981 ) ($ 647,079 ) ($ 1,173,877 )
Amortization of goodwill and indefinite lived intangible assets             186,422  
Cumulative effect of a change in accounting principle         388,508      
Deferred provision for income taxes     11,864     49,500      
   
 
 
 
Adjusted income (loss) applicable to common shareholders     $8,883     ($209,071 )   ($987,455 )
   
 
 
 
Per common share:                    
Reported loss applicable to common shareholders     $(0.01 )   $(2.55 )   $(5.42 )
Amortization of goodwill and indefinite lived intangible assets             0.86  
Cumulative effect of a change in accounting principle         1.53      
Deferred provision for income taxes     0.04     0.20      
   
 
 
 
Adjusted income (loss) applicable to common shareholders     $0.03     ($0.82 )   ($4.56 )
   
 
 
 

        Intangible assets subject to amortization after the adoption of SFAS 142 consist of the following:

 
   
  December 31,
 
   
  2003
  2002
 
  Range of
Lives

  Gross
Carrying
Amount

  Accumulated
Amortization

  Net
  Gross
Carrying
Amount

  Accumulated
Amortization

  Net
Trademarks   3   $ 21,013   $ 19,845   $ 1,168   $ 21,013   $ 12,841   $ 8,172
Membership, subscriber and customer lists   2-20     348,346     315,860     32,486     433,584     387,201     46,383
Non-compete agreements   1-10     137,829     134,093     3,736     209,827     199,941     9,886
Trademark license agreements   2-15     2,984     2,899     85     2,967     2,880     87
Copyrights   3-20     20,550     19,609     941     20,550     18,901     1,649
Databases   2-12     9,353     8,627     726     13,583     12,141     1,442
Advertiser lists   5-20     135,978     122,852     13,126     142,564     129,182     13,382
Distribution agreements   1-7     10,410     10,410         11,745     11,731     14
Other   1-5     9,804     9,804         10,099     10,099    
       
 
 
 
 
 
        $ 696,267   $ 643,999   $ 52,268   $ 865,932   $ 784,917   $ 81,015
       
 
 
 
 
 

        Intangible assets not subject to amortization had a carrying value of $216,139 and $270,006 at December 31, 2003 and 2002, respectively, and consisted of trademarks. Amortization expense for other intangible assets still subject to amortization (excluding provision for impairment) was $32,656, $50,935 and $47,958 for the years ended December 31, 2003, 2002 and 2001, respectively. Amortization expense (excluding provision for impairment) for goodwill and trademarks was $186,422 for the year ended December 31, 2001. Amortization of deferred wiring costs (excluding provision for impairment) of $8,044,

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$11,239 and $16,380 for the years ended December 31, 2003, 2002 and 2001, respectively, has also been included in amortization of intangible assets, goodwill and other on the accompanying statements of consolidated operations. At December 31, 2003, estimated future amortization expense of other intangible assets still subject to amortization, excluding deferred wiring costs, is as follows: approximately $18,000, $11,000, $7,000, $5,000 and $4,000 for 2004, 2005, 2006, 2007 and 2008, respectively.

9.  Other Non-Current Assets

        Other non-current assets consisted of the following:

 
  December 31,
 
  2003
  2002
Deferred financing costs, net   $ 26,753   $ 18,144
Deferred wiring and installation costs, net     2,075     8,468
Direct-response advertising costs, net     10,419     14,709
Video mastering and programming costs, net     12,835     13,791
Other investments     3,938     21,268
Other     2,098     3,059
   
 
    $ 58,118   $ 79,439
   
 

        The deferred financing costs at December 31, 2003 include $7,264 of issuance costs related to the Series D Exchangeable Preferred Stock, Series F Exchangeable Preferred Stock and Series H Exchangeable Preferred Stock which are now collectively described as shares subject to mandatory redemption (see Note 13).

        The deferred financing costs are net of accumulated amortization of $18,567 and $12,923 at December 31, 2003 and 2002, respectively. The deferred wiring and installation costs are net of accumulated amortization of $77,107 and $69,063 at December 31, 2003 and 2002, respectively. Direct-response advertising costs are net of accumulated amortization of $41,185 and $81,621 at December 31, 2003 and 2002, respectively. Video mastering and programming costs are net of accumulated amortization of $52,841 and $42,223 at December 31, 2003 and 2002, respectively.

Other Investments

        Other investments consist of the following:

 
  December 31,
 
  2003
  2002
Cost method investments   $ 3,210   $ 18,706
Equity method investments     728     2,562
   
 
    $ 3,938   $ 21,268
   
 

        The Company's investments in start-up and venture-stage companies in which the Company received equity (the "Investees") in exchange for advertising, content licensing and other services totaled $810 (cost

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method investments) and $16,870 ($15,956 representing cost method investments and $914 representing equity method investments) at December 31, 2003 and December 31, 2002, respectively. At December 31, 2003 and December 31, 2002, respectively, $6 and $4,963 relating to start-up investments and venture stage companies are included as deferred revenues on the accompanying consolidated balance sheets. This deferred revenue represents advertising, content licensing and other services to be rendered by the Company in exchange for equity in these entities. The Company recognizes these amounts as revenue in accordance with the Company's revenue recognition policies. The Company recorded revenue from these agreements related to its continuing operations of approximately $300, $7,600 and $34,600 for the years ended December 31, 2003, 2002 and 2001, respectively. The Company recorded revenue from these agreements related to its discontinued operations of approximately $19,100 for the year ended December 31, 2001.

        At December 31, 2002, PRIMEDIA Ventures Inc. ("PRIMEDIA Ventures") investments were $350 (cost method investment). The Company's PRIMEDIA Ventures investment at December 31, 2003 was zero.

        The Company has retained a small interest in a previously divested business of $2,400 (cost method investment) at December 31, 2003 and December 31, 2002.

        PRIMEDIA's equity method investments represent PRIMEDIA's investment in certain companies where PRIMEDIA has the ability to exercise significant influence over the operations (including financial and operational policies). The Company's equity method investments consist primarily of an investment in the Gravity Games totaling $672 and $1,526 at December 31, 2003 and December 31, 2002, respectively (see Note 23). In addition, the Company had other equity investments of $56 and $122 at December 31, 2003 and December 31, 2002, respectively.

        The Company recorded $4,256, $6,146 and $39,761 of equity method losses from Investees and other equity method investments, during the years ended December 31, 2003, 2002 and 2001, respectively. These equity method losses are included in other income (expense), net on the accompanying statements of consolidated operations.

Provision for Impairment of Investments

        Investments are continually reviewed by the Company for impairment whenever significant events occur, such as those affecting general market conditions or those pertaining to a specific industry or an individual investment, which could result in the carrying value of an investment exceeding its fair value.

        If an investment is deemed to be other than temporarily impaired, its carrying value will be reduced to fair market value. During the years ended December 31, 2003, 2002 and 2001, the Company recorded a provision for impairment of its investments in certain Investees of $8,975, $10,783 and $83,959, respectively. The Company also recorded an additional provision for impairment of its PRIMEDIA Ventures investments of $4,815 and $6,600 for the years ended December 31, 2002 and 2001, respectively. In addition, the Company recorded a provision for impairment of its other investments of $3,447 and $15,953 for the years ended December 31, 2002 and 2001, respectively. The Company recorded impairments on these investments as the decline in the value was deemed other than temporary. In determining such impairments, the Company considered the impact of the investees' current year

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performance and future business plans, and in certain circumstances, the Company utilized the results of work performed by independent valuation specialists.

Sale of Investments

        For the year ended December 31, 2003, the Company sold certain PRIMEDIA Ventures and assets-for-equity investments for proceeds of $2,252 and realized a gain on these sales of $517. For the year ended December 31, 2002 and 2001, respectively, the Company sold certain PRIMEDIA Ventures investments for proceeds of $323 and $3,100 and realized a gain on these sales of $28 and $1,400. These gains are included in other, net, on the statements of consolidated operations.

10.  Accrued Expenses and Other

        Accrued expenses and other current liabilities consisted of the following:

 
  December 31,
 
  2003
  2002
Payroll, commissions and related employee benefits   $ 59,218   $ 80,040
Rent and lease liabilities     38,764     50,791
Retail display costs and allowances     14,782     17,262
Promotion costs     2,214     4,169
Royalties     2,422     2,593
Circulation costs     10,353     6,567
Professional fees     7,074     6,036
Taxes     10,608     11,203
Deferred purchase price     1,694     4,919
Dividends payable         11,527
Interest payable     16,092     25,835
Interest payable on shares subject to mandatory redemption     10,945    
Other     44,446     29,316
   
 
    $ 218,612   $ 250,258
   
 

        The above amounts include $2,982 and $3,733 of restructuring related payroll costs, $467 and $575 of contract termination costs and $36,900 and $41,366 of restructuring related leases at December 31, 2003 and 2002, respectively.

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11.  Long-Term Debt

        Long-term debt consisted of the following:

 
  December 31,
 
  2003
  2002
Borrowings under bank credit facilities   $ 559,906   $ 640,731
101/4% Senior Notes Due 2004         84,175
81/2% Senior Notes Due 2006         291,007
75/8% Senior Notes Due 2008     225,443     225,312
87/8% Senior Notes Due 2011     469,820     469,299
8% Senior Notes Due 2013     300,000    
   
 
      1,555,169     1,710,524
Obligation under capital leases (see Note 23)     29,467     24,814
   
 
      1,584,636     1,735,338
Less: Current maturities of long-term debt     22,195     7,661
   
 
    $ 1,562,441   $ 1,727,677
   
 

        On June 20, 2001, the Company completed a refinancing of its existing bank credit facilities pursuant to new bank credit facilities with JPMorgan Chase Bank, Bank of America, N.A., The Bank of New York, and The Bank of Nova Scotia, as agents (the "bank credit facility"). The debt under the bank credit facility agreement and as otherwise permitted under the bank credit facility agreement and the indebtedness relating to the 75/8% Senior Notes, 87/8% Senior Notes and 8% Senior Notes of the Company (together referred to as "Senior Notes") is secured by a pledge of the stock of PRIMEDIA Companies Inc., an intermediate holding company, owned directly by the Company, which owns directly or indirectly all shares of PRIMEDIA subsidiaries that guarantee such debt (as well as certain of the Company's other equally and ratably secured indebtedness).

        Substantially all proceeds from sales of businesses and other investments were used to pay down borrowings under the bank credit facility agreement. Amounts under the bank credit facility may be reborrowed and used for general corporate and working capital purposes as well as to finance certain future acquisitions. In the second quarter of 2003, the Company made voluntary pre-payments toward the term loans A and B and a voluntary permanent reduction of the bank credit facility's revolving loan commitment in the amounts of $5,000, $21,000 and $24,000, respectively. The bank credit facility consisted of the following at December 31, 2003:

 
  Revolver
  Term A
  Term B
  Total
 
Credit Facility   $427,000   $90,000   $372,906   $889,906  
Borrowings Outstanding   (97,000 ) (90,000 ) (372,906 ) (559,906 )
Letters of Credit Outstanding   (19,560 )     (19,560 )
   
 
 
 
 
Unused Bank Commitments   $310,440   $—   $—   $310,440  
   
 
 
 
 

        With the exception of the term loan B, the amounts borrowed bear interest, at the Company's option, at either the base rate plus an applicable margin ranging from 0.125% to 1.5% or the Eurodollar Rate plus an applicable margin ranging from 1.125% to 2.5%. The term loan B bears interest at the base rate plus

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1.75% or the Eurodollar Rate plus 2.75%. At December 31, 2003 and December 31, 2002, the weighted average variable interest rate on all outstanding borrowings under the bank credit facility was 3.6% and 4.4%, respectively.

        Under the bank credit facility, the Company has 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 facility agreement, on the daily average aggregate unutilized commitment under the revolving loan commitment. During the first quarter of 2003, the Company's commitment fees were paid at a weighted average rate of 0.5%, and during the second, third and fourth quarters of 2003, at 0.375%. The Company also has agreed to pay certain fees with respect to the issuance of letters of credit and an annual administration fee.

        The commitments under the revolving loan portion of the bank credit facility are subject to mandatory reductions semi-annually on June 30 and December 31, commencing December 31, 2004, with the final reduction on June 30, 2008. The aggregate mandatory reductions of the revolving loan commitments under the bank credit facility are $21,350 in 2004, $42,700 in 2005, $64,050 in 2006, $128,100 in 2007 and a final reduction of $170,800 in 2008. To the extent that the total revolving credit loans outstanding exceed the reduced commitment amount, these loans must be paid down to an amount equal to or less than the reduced commitment amount. However, if the total revolving credit loans outstanding do not exceed the reduced commitment amount, then there is no requirement to pay down any of the revolving credit loans. Remaining aggregate term loan payments under the bank credit facility are $15,075 in 2004, $26,325 in 2005, 2006 and 2007, $15,074 in 2008 and $353,782 in 2009.

        The bank credit facility agreement, among other things, limits the Company's ability to change the nature of its businesses, incur indebtedness, create liens, sell assets, engage in mergers, consolidations or transactions with affiliates, make investments in or loans to certain subsidiaries, issue guarantees and make certain restricted payments including dividend payments on or repurchases of the Company's common stock in excess of $75,000 in any given year.

        The bank credit facility and Senior Notes agreements of the Company contain certain customary events of default which generally give the banks or the noteholders, as applicable, the right to accelerate payments of outstanding debt. Under the bank credit facility agreement, these events include:

        The events of default contained in the Senior Notes are similar to, but generally less restrictive than, those contained in the Company's bank credit facility.

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        101/4% Senior Notes.    On March 5, 2003, the Company redeemed the remaining $84,175 of the 101/4% Senior Notes at the carrying value of $84,175, plus accrued interest. These notes were redeemed 15 months prior to maturity. The Company funded this transaction with additional borrowings under its bank credit facility. The redemption resulted in a write-off of unamortized issuance costs of $343 which is recorded in other, net, on the accompanying statement of consolidated operations for the year ended December 31, 2003.

        81/2% Senior Notes.    On June 16, 2003, the Company redeemed the remaining 81/2% Senior Notes at the carrying value of $291,073, plus accrued interest. The Company funded the transaction with the proceeds of the 8% Senior Notes offering. The redemption resulted in write-offs of unamortized issuance costs of $1,810 and the unamortized discount of $427 which are included in other, net, on the accompanying statement of consolidated operations for the year ended December 31, 2003.

        75/8% Senior Notes.    Interest is payable semi-annually in April and October at the annual rate of 75/8%. The 75/8% Senior Notes mature on April 1, 2008, with no sinking fund requirements. The 75/8% Senior Notes are redeemable in whole or in part, at the option of the Company, at 102.542% in 2004 with annual reductions to 100% in 2006 and thereafter, plus accrued and unpaid interest. The unamortized discount for these notes totaled $672 and $803 at December 31, 2003 and 2002, respectively.

        87/8% Senior Notes.    In 2001, the Company completed an offering of $500,000 of 87/8% Senior Notes. Net proceeds from this offering of $492,685 were used to repay borrowings under the bank credit facility. The 87/8% Senior Notes mature on May 15, 2011, with no sinking fund requirements, and have interest payable semi-annually in May and November at an annual rate of 87/8%. Beginning in 2006, the 87/8% Senior Notes are redeemable at 104.438% with annual reductions to 100% in 2009 plus accrued and unpaid interest. The unamortized discount for these notes totaled $5,680 and $6,201 at December 31, 2003 and 2002, respectively.

        8% Senior Notes.    On May 15, 2003, the Company issued $300,000 of Senior Notes at par. Interest is payable semi-annually in May and November at the annual rate of 8%. The 8% Senior Notes mature on May 15, 2013 with no sinking fund requirements and may not be redeemed prior to May 15, 2008 other than through the use of proceeds of future equity offerings, subject to certain conditions, or in connection with a change of control. Beginning in May 2008, the notes are redeemable in whole or in part at the option of the Company, at 104% in 2008 with annual reductions to 100% in 2011 and thereafter, plus accrued and unpaid interest. The Company has agreed to use its reasonable best efforts to consummate, within 12 months after the issue date of the notes, an offer to exchange the 8% Senior Notes for registered notes with substantially identical terms to those notes, except that the registered exchange notes will generally be freely transferable or in certain limited circumstances to file and cause to become effective a shelf registration statement with respect to the resale of the 8% Senior Notes. Under certain circumstances if the Company is not in compliance with these obligations, the Company will be required to pay additional interest for the period it is not in compliance.

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        During 2002, the Board of Directors authorized the Company to expend up to $90,000 for the purchase of its Senior Notes in private or public transactions. In 2002, the Company repurchased certain of its Senior Notes as follows:

Senior Notes
  Purchase Price
  Face Value
  Unamortized Discount
  Carrying Value
  Unamortized
Issuance
Costs

  Gain(1)
7.625 % $ 21,089   $ 23,885   $ 79   $ 23,806   $ 226   $ 2,491
8.50 %   7,838     8,500     15     8,485     65     582
8.875 %   21,210     24,500     324     24,176     430     2,536
10.25 %   14,300     15,825         15,825     95     1,430
   
 
 
 
 
 
  Total   $ 64,437   $ 72,710   $ 418   $ 72,292   $ 816   $ 7,039
   
 
 
 
 
 

(1)
In accordance with SFAS 145, the gain on Senior Note redemptions is recorded in other, net on the Company's consolidated statement of operations for the year ended December 31, 2002.

        The Senior Notes and the bank credit facility all rank senior in right of payment to all subordinated obligations which PRIMEDIA Inc. (a holding company) may incur. The Senior Notes are secured by a pledge of stock of PRIMEDIA Companies Inc.

        If the Company becomes subject to a change of control, each holder of the Senior Notes will have the right to require the Company to purchase any or all of its Senior Notes at a purchase price equal to 101% of the aggregate principal amount of the purchased Senior Notes plus accrued and unpaid interest, if any, to the date of purchase.

Covenant Compliance

        On June 13, 2003, the bank credit facility agreement was amended to provide for a one-year hiatus in each of the scheduled step-downs in the permitted leverage ratio, as defined in the bank credit facility agreement. As a result of the amendment, the maximum permitted leverage ratio, as defined, is 6.0 and does not step down to 5.75 until the third quarter of 2004. This amendment enables the Company to consider alternatives to improve its capital structure, but was not necessary for the Company to remain in compliance with all of its debt covenants.

        Under the most restrictive covenants as defined in the bank credit facility agreement, the Company must maintain a minimum interest coverage ratio, as defined, of 2.0 to 1 and a minimum fixed charge coverage ratio, as defined, of 1.05 to 1. The maximum allowable debt leverage ratio, as defined, is 6.0 to 1. The maximum leverage ratio decreases to 5.75 to 1, 5.5 to 1, 5.0 to 1 and 4.5 to 1, respectively, on July 1, 2004, January 1, 2005, January 1, 2006 and January 1, 2007. The minimum interest coverage ratio increases to 2.25 to 1 and 2.5 to 1, respectively, on January 1, 2004 and January 1, 2005. The Company is in compliance with all of the financial and operating covenants of its financing arrangements.

        Under its bank credit facility and Senior Note agreements, the Company is allowed to designate certain businesses as unrestricted subsidiaries to the extent that the value of those businesses does not exceed the permitted amounts, as defined in these agreements. The Company has designated certain of its businesses as unrestricted (the "Unrestricted Group"), which primarily represent Internet businesses,

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trademark and content licensing and service companies, new launches (including traditional start-ups), other properties under evaluation for turnaround or shutdown and foreign subsidiaries. Except for those specifically designated by the Company as unrestricted, all businesses of the Company are restricted (the "Restricted Group"). Indebtedness under the bank credit facility and Senior Note agreements is guaranteed by each of the Company's domestic subsidiaries in the Restricted Group in accordance with the provisions and limitations of the Company's bank credit facility and Senior Note agreements. The guarantees are full, unconditional and joint and several. The Unrestricted Group does not guarantee the bank credit facility or Senior Notes. For purposes of determining compliance with certain financial covenants under the Company's bank credit facility agreement, the Unrestricted Group's results (positive or negative) are not reflected in the Consolidated EBITDA of the Restricted Group which as defined in the bank credit facility agreement excludes losses of the Unrestricted Group, non-cash charges and restructuring charges and is adjusted primarily for the trailing four quarters results of acquisitions and divestitures and estimated savings for acquired businesses. The Company has established intercompany arrangements that reflect transactions, such as leasing, licensing, sales and related services and cross-promotion, between Company businesses in the Restricted Group and the Unrestricted Group, which management believes are on an arms length basis and as permitted by the bank credit facility and Senior Note agreements. These intercompany arrangements afford 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 Unrestricted Group. For company-wide consolidated financial reporting, these intercompany transactions are eliminated in consolidation.

        The scheduled repayments of all debt outstanding, net of unamortized discount, including capital leases of December 31, 2003, are as follows:

Years Ending
December 31,

  Debt
  Capital Lease
Obligations

  Total
2004   $ 15,075   $ 7,120   $ 22,195
2005     26,325     4,249     30,574
2006     26,325     3,421     29,746
2007     26,325     1,673     27,998
2008     337,517     1,849     339,366
Thereafter     1,123,602     11,155     1,134,757
   
 
 
    $ 1,555,169   $ 29,467   $ 1,584,636
   
 
 

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12. Income Taxes

        At December 31, 2003, the Company had aggregate net operating and capital loss carryforwards for Federal and State income tax purposes of $1,760,785 which will be available to reduce future taxable income. The utilization of such net operating losses ("NOLs") and capital losses is subject to certain limitations under Federal income tax laws. In certain instances, such NOLs may only be used to reduce future taxable income of the respective company which generated the NOLs. The capital losses may only be used to offset future capital gains. The NOLs and capital losses are scheduled to expire in the following years:

 
  NOLs
  Capital
Losses

  Total
2004   $ 60,351   $   $ 60,351
2005     102,404     90,218     192,622
2006     87,903     233,726     321,629
2007     51,084     10,843     61,927
2008     85,449         85,449
2009     70,105         70,105
2010     153,320         153,320
2011     32,389         32,389
2012     63,737         63,737
2015            
2016            
2017     15,144         15,144
2018     75,647         75,647
2019     54,777         54,777
2020     124,408         124,408
2021     308,497         308,497
2022     58,375         58,375
2023     82,408         82,408
   
 
 
Total   $ 1,425,998   $ 334,787   $ 1,760,785
   
 
 

        Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax

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purposes, and (b) operating and capital loss carryforwards. The tax effects of significant items comprising the Company's deferred income taxes are as follows:

 
  December 31,
 
 
  2003
  2002
 
 
  Federal
  State
  Total
  Federal
  State
  Total
 
Deferred income tax assets:                                      
Difference between book and tax basis of accrued expenses and other   $ 11,876   $ 3,479   $ 15,355   $ 20,633   $ 6,045   $ 26,678  
Difference between book and tax basis of other intangible assets     115,887     33,950     149,837     139,659     40,915     180,574  
Operating loss carryforwards     455,609     71,436     527,045     439,798     71,613     511,411  
Capital loss carryforwards     115,110     5,900     121,010     117,523     1,010     118,533  
Net unrealized loss on investments     16,357     4,792     21,149     32,165     9,423     41,588  
   
 
 
 
 
 
 
Total   $ 714,839   $ 119,557   $ 834,396   $ 749,778   $ 129,006   $ 878,784  
   
 
 
 
 
 
 
Deferred income tax liabilities:                                      
Difference between book and tax basis of indefinite lived intangible assets   $ 47,460   $ 13,904   $ 61,364   $ 38,284   $ 11,216   $ 49,500  
Difference between book and tax basis of property and equipment     7,543     2,210     9,753     3,469     1,016     4,485  
Other     6,702     1,964     8,666     12,037     3,526     15,563  
   
 
 
 
 
 
 
Total     61,705     18,078     79,783     53,790     15,758     69,548  
   
 
 
 
 
 
 
Net deferred income tax assets     653,134     101,479     754,613     695,988     113,248     809,236  
Less: Valuation allowance     (700,594 )   (115,383 )   (815,977 )   (734,272 )   (124,464 )   (858,736 )
   
 
 
 
 
 
 
Net   ($ 47,460 ) ($ 13,904 ) ($ 61,364 ) ($ 38,284 ) ($ 11,216 ) ($ 49,500 )
   
 
 
 
 
 
 

        The components of the provision for income tax expense (benefit) are as follows:

 
  2003
  2002
  2001
 
Current:                    
  Federal   $   ($ 3,144 ) $  
  State and local     1,356          
   
 
 
 
    Total current expense (benefit)     1,356     (3,144 )    
   
 
 
 
Deferred:                    
  Federal   $ 42,854   ($ 107,762 ) ($ 131,341 )
  State and local     11,769     (19,309 )   (30,030 )
   
 
 
 
    Total     54,623     (127,071 )   (161,371 )
Change in valuation allowance     (42,759 )   176,571     296,371  
   
 
 
 
Total deferred provision     11,864     49,500     135,000