Form 10-K
Table of Contents
Index to Financial Statements

 

 

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, 2008

OR

 

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

Commission File number: 1-11106

LOGO

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.)

3585 Engineering Drive, Norcross, Georgia   30092
(Address of principal executive offices)   (Zip Code)

(678) 421-3000

(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 $0.01 per share

  New York Stock Exchange

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

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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 the 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 a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Exchange Act Rule 12b-2).

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company    Yes  ¨    No  x

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, 2008, was approximately $82.8 million. The registrant has no non-voting common stock.

As of March 2, 2009, 44,009,205 shares of PRIMEDIA’s Common Stock were outstanding.

The following documents are incorporated into this Form 10-K by reference: Part III of this Report on Form 10-K incorporates information by reference from the registrant’s Proxy Statement for its 2009 Annual Meeting of Stockholders to be held on May 20, 2009. The definitive Proxy Statement will be filed within 120 days of the end of the fiscal year ended December 31, 2008.

 

 

 


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Index to Financial Statements

PRIMEDIA Inc.

Annual Report on Form 10-K

December 31, 2008

Table of Contents

We include cross references to captions elsewhere in this Annual Report on Form 10-K, which we refer to as this “Report,” where you can find related additional information. The following table of contents tells you where to find these captions.

 

          Page
   Important Information About this Report    1
   PART I   

Item 1.

   Business    1

Item 1A.

   Risk Factors    5

Item 1B.

   Unresolved Staff Comments    10

Item 2.

   Properties    11

Item 3.

   Legal Proceedings    11

Item 4.

   Submission of Matters to a Vote of Security Holders    11
   PART II   

Item 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   12

Item 6.

   Selected Financial Data    13

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    15

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk    34

Item 8.

   Financial Statements and Supplementary Data    35

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    78

Item 9A.

   Controls and Procedures    78

Item 9B.

   Other Information    82
   PART III   

Item 10.

   Directors, Executive Officers and Corporate Governance    82

Item 11.

   Executive Compensation    82

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   82

Item 13.

   Certain Relationships and Related Transactions and Director Independence    82

Item 14.

   Principal Accountant Fees and Services    83
   PART IV   

Item 15.

   Exhibits and Financial Statement Schedules    83
   Signatures    84
   Valuation and Qualifying Accounts    S-1
   Exhibit Index    E-1

 

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IMPORTANT INFORMATION ABOUT THIS REPORT

In this Report, the words “PRIMEDIA,” “Company,” “we,” “us” and “our” mean PRIMEDIA Inc., including its subsidiaries, unless the context otherwise specifies or requires.

This document contains “forward-looking statements”—that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance, and often contain words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks” or “will.” Forward-looking statements by their nature address matters that are, to different degrees, uncertain. For us, particular uncertainties which could adversely or positively affect our future results include, among others: general economic trends and conditions and, in particular, continuing negative trends and conditions in the new home sales sector of the residential real estate industry; changes in technology and competition; implementation and results of our ongoing strategic initiatives; demand by customers for our premium services; expenses or adverse results of our ongoing litigation; changes in U.S. federal tax laws; increases in paper costs; the inability to maintain the New York Stock Exchange’s continued listing standards for our common stock; and numerous other matters of national, regional and local market scale, including those of a political, economic, business, competitive and regulatory nature. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements.

PART I

 

ITEM 1. BUSINESS

General

We are an integrated media company that publishes and distributes advertising-supported print and online consumer guides, primarily for the apartment and other rental property sectors of the residential real estate industry. Our print and online guides are provided free of charge to end users. In 2008, we distributed approximately 23 million of our print guides to approximately 51,000 U.S. locations through our proprietary distribution network, DistribuTech. Our principal digital assets include the websites associated with our print publications and Internet-only offerings, including ApartmentGuide.com, Rentals.com, RentalHouses.com, NewHomeGuide.com and AmericanHomeGuide.com.

Over the past several years, we have aggressively divested assets no longer part of our current core businesses. Our continuing operations are currently comprised solely of what has been described historically as the Consumer Guides segment.

Apartments

Apartment Guide

Thirty-four years old, Apartment Guide is our flagship product and largest business, comprising approximately 84.3% of our advertising revenue for 2008 and 87.2% of our advertising revenue for the fourth quarter of 2008. Apartment Guide delivers apartment and apartment community rental information to consumers via print, Internet and mobile devices. Apartment Guide currently publishes 77 print guides in 74 markets, averaging over 18,000 apartment community listings in print – over 40% more listings than our nearest print competitor within these markets – with a combined 2008 circulation of approximately 15 million.

ApartmentGuide.com and RentRentar.com, our Spanish-language edition of ApartmentGuide.com, are available throughout all U.S. markets. Our websites offer many premium features not available through our print products, including virtual tours, flexible search functionality, detailed photos and floorplans, as well as detailed and original information on neighborhoods.

 

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Apartment Guide advertising revenue is generated primarily from property management companies that manage larger apartment communities (generally in excess of 50 units) that experience vacancies on a regular basis. The majority of Apartment Guide advertising revenue is derived from contracts at least 12 months in duration, and a majority of these contracts are renewed when they expire. Most of our Apartment Guide print publications are published monthly.

In the 74 markets in which Apartment Guide publishes a print guide, its product offerings are built upon an integrated media package, featuring both print and online advertising. In markets where we do not publish a print version of our guides, Apartment Guide offers a variety of Internet-only packages.

Apartment Guide’s national competitors, print and online or online only, include Move, Inc., owner of Move.com, eBay, owner of Rent.com, Dominion Enterprises, publisher of For Rent, Network Communications Inc., publisher of Apartment Finder, and Classified Media Ventures, owner of Apartments.com.

Rentals.com

Rentals.com is a residential real estate rental website with what we believe to be the most comprehensive collection of paid listings of rental properties on the Internet. Landlords, investors and property managers use Rentals.com to list their rental vacancies, most often through the self-provisioning feature of our website we call the “Ad Store,” and peruse expert advice and tips on managing their rental properties or the property management business. Consumers searching for a rental property can efficiently search over 50,000 listings and obtain detailed information on metropolitan areas and neighborhoods. Types of rentals listed on Rentals.com include: single-family homes, condominiums, town homes, vacation homes, single-unit apartments and apartment communities.

Listings on the Rentals.com network of websites are generally purchased on a monthly basis through our “Ad Store,” the self-provisioning feature of our website, and longer-term packages are available for property management company clients. Listings include unlimited photos, property descriptions and other features, such as Google Maps. A majority of our customer base is derived form the Ad Store, while a majority of the listings are derived from property management companies.

Rentals.com’s competitors include RealEIS, LLC, which owns HomeRentals.net, eBay, owner of Rent.com, Classified Ventures LLC, which owns RentalHomesPlus.com, Move, Inc., owner of Move.com, and, to a lesser extent, traditional print newspapers.

New Homes

Our New Homes division provides display and classified advertising for new home builders to showcase product and inventory on a national and local basis through a network of home-related websites, including NewHomeGuide.com, AmericanHomeGuides.com, NewHomeDirectory.com, FloridaGuide.com, and many others specific to major home building states and metropolitan areas. As of December 31, 2008, New Homes published 32 print guides, distributed in 18 states and Washington, D.C., averaging over 4,300 new home community listings with a combined 2008 circulation of approximately 7 million. New Homes advertising revenue is generated primarily from new home builders and advertising agencies representing builders.

In the 27 markets in which our New Homes businesses publish a print guide, product offerings are built upon an integrated media package, featuring both print and online advertising. New Homes publications are published bi-monthly. In markets where we do not publish a print version of our guides, New Homes offers a variety of Internet-only packages.

During 2008, we ceased publication of two New Home Guide Professional Editions. In early 2009, we announced that we were suspending additional print publications, while focusing on Internet offerings in related markets, as we continue to reduce our cost structure for this business to offset expected revenue losses.

 

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Our New Homes division competes primarily with national competitors such as Move, Inc., owner of Move.com, and Network Communications, Inc., publisher of New Home Finder. We also compete with Housing Guide of America, a consortium of local and regional magazine publishers, Builder Homesite, Inc., owner of newhomesource.com, and Lending Tree, LLC, owner of the iNest real estate brokerage.

DistribuTech

DistribuTech distributes free magazines, including PRIMEDIA guides and over 2,400 third-party titles, flyers and special piece advertising materials, to more than 51,000 locations in 41 states. DistribuTech maintains community rack programs, many of which are on an exclusive basis, with several large national and regional retail chains, including grocery, drug, convenience, video, fitness and mass merchandise retailers. The free publications are typically displayed in free-standing, multi-pocket racks located in high-visibility, high-traffic locations at the entrance or exit of these locations.

Historically, the primary function of our DistribuTech business has been to ensure priority placement for PRIMEDIA publications and to reduce our overall distribution costs. Revenue from third-party customers who pay DistribuTech for distribution services contributes to this reduction in costs. Our DistribuTech business continues to experience a significant loss of revenue from third-party customers, particularly those who publish free resale home and automobile sales publications, which are scaling back or ceasing operations or providing an Internet-only product. We intend to continue to reduce our cost structure for this business to offset, in part, expected revenue losses.

DistribuTech competes for third-party publication distribution, primarily on the basis of distribution locations, price and service. DistribuTech’s primary competitor is Dominion Distribution Services, a division of Dominion Enterprises.

Technology

We use technology to improve our operations by increasing productivity, improving effectiveness and minimizing costs. With the introduction of mobile technologies, such as wireless data networks and laptop/handheld technologies, the use of technology has expanded within our organization to include customer relationship management activities and business workflow functionality.

We backup critical website data at various times throughout the day and retain it at certified third-party facilities. We have firewalls and switchgear designed to help ensure network security. We rely increasingly on hosted providers for many of our corporate applications. These applications are provided over our network to us and configured to meet our needs, although the software itself is not installed at our locations.

Production and Fulfillment

All of our print products are printed and bound by independent printers. We believe that because of our buying power, outside printing services have been and will continue to be purchased at favorable prices. We provide most of the content for our websites, but we outsource some technology, production and content.

The principal raw material used in our products is paper, which is purchased from merchants. In 2008, paper prices fluctuated, but increased as the year ended. We expect paper costs to slightly decrease in 2009. We expect to offset existing costs through adjustment of our production metrics. In the future, our results could be adversely affected by increases in paper prices.

Sales and Marketing

We sell our products and services through our direct sales force. Our sales force is comprised currently of approximately 490 sales personnel. The sales force is generally organized vertically, focusing on specific

 

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categories and product lines, and by market. Generally, sales personnel are responsible for developing new accounts and servicing existing customers. Most of our sales personnel live in the market they serve. We also maintain an in-house telemarketing sales force, supplemented by local and regional support in the field, that focus on specific customer segments within markets.

Our websites are marketed to end users through our print publications and through search engine optimization, e-mail marketing and online advertising, which we purchase on a non-exclusive basis with companies such as Google, MSN, Yahoo! and Advertising.com. We monetize visits to our websites through various advertising revenue formats, such as cost per impression, cost per click, cost per action and flat fees.

Our marketing personnel conduct a variety of marketing programs designed to raise the general awareness of our Company and our business units, generate leads for the sales organization and promote our various product lines. These programs include participation in trade shows and industry trade group participation, public relations, digital/online promotion, advertising and production of collateral literature.

We supplement our in-house sales force by utilizing a number of third-party services, affiliates and networks. In 2008, more than 89.3% of our Internet audience was generated through non-paid sources, such as repeat visitation, word-of-mouth, natural search and public relations. We selectively utilize paid-marketing sources, such as search engine marketing, affiliate relationships and co-branded partner deployments.

One of our individual advertisers comprised approximately 1.0% of our total revenue in 2008.

Employees

During 2008, our overall headcount declined by approximately 12.6%, primarily due to the elimination of certain administrative and support positions as a result of automation and consolidation of functions, while our sales personnel headcount increased by approximately 6.5%. As of December 31, 2008, we had approximately 1,000 employees, of which approximately 20 were part-time, compared to approximately 1,150 employees at the end of 2007, of which approximately 25 were part-time. Our employees are not represented by any collective bargaining agreements. We consider our relations with our employees to be good.

Intellectual Property

We own various registered trademarks, including Apartment Guide, and have service mark applications pending for others. We also have the right to use a number of unregistered service marks in connection with our businesses. So long as these marks remain in continuous use in connection with similar goods and services, their terms can be perpetual, subject, with respect to registered trademarks, to the timely renewal of such registrations in the United States Patent and Trademark Office. Some of our content and databases are copyrighted, as are certain of our software and user manuals. The absence of a registration does not waive copyright protection.

Divestitures and Assets and Liabilities of Businesses Held for Sale

Over the past several years, we have aggressively sought to divest assets no longer part of our current core businesses.

We classified as discontinued operations the following entities within the Enthusiast Media segment during 2005: About.com, Ward’s Automotive Group, the History and Crafts groups, and two magazine titles, which were shut down. During 2006, we completed the sale of the History and Crafts groups.

We sold our Business Information segment during 2005. Additionally, in 2005, we discontinued and shut down the operations of our Software on Demand division and also sold our Workplace Learning division, excluding PRIMEDIA Healthcare.

 

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During 2006, we discontinued and sold our Gems group, part of the Enthusiast Media segment. Additionally, during 2006, we announced that we had agreed to sell our Outdoors group, also part of the Enthusiast Media segment. The sale was completed during 2007.

We classified as discontinued operations the entire Education segment during the fourth quarter of 2006. Our Education segment was comprised of Channel One, a proprietary network for secondary schools; Films Media Group, a leading source of educational video; and PRIMEDIA Healthcare, a medical education business. During 2007, we completed the sales of Channel One and Films Media Group. In February 2007, we also announced our intent to explore the sale of our Enthusiast Media segment, and on August 1, 2007, we completed the sale.

During 2008, we completed the sale of the Auto Guides division and sold certain assets and liabilities of PRIMEDIA Healthcare. Discontinued operations for the years ended December 31, 2008, 2007 and 2006 include revenue of $3.4 million, $358.8 million and $741.5 million, respectively, and (loss) income before (benefit) provision for income taxes of $(9.2) million, $50.9 million and $67.4 million, respectively, which excludes gain on sale of businesses. The gain on sale of businesses, net of tax, was $2.0 million, $459.1 million and $62.4 million for the years ended December 31, 2008, 2007 and 2006, respectively.

As of December 31, 2007, we had assets and liabilities of businesses held for sale of $5.8 million and $2.5 million, respectively, which represented the assets and liabilities of PRIMEDIA Healthcare and the Auto Guides division. As of December 31, 2008, there were no assets and liabilities of businesses held for sale.

Financial results for all divestitures are reported in discontinued operations on the consolidated statement of operations for all periods presented.

Company Organization

PRIMEDIA Inc. was incorporated on November 22, 1991 in the State of Delaware as K-III Communications Corporation. In 1997, we changed our name to PRIMEDIA Inc. Our principal executive offices are located at 3585 Engineering Drive, Norcross, Georgia 30092, and our telephone number is (678) 421-3000.

Available Information

We maintain an Internet website located at www.primedia.com on which, among other things, we make available, free of charge, various corporate governance materials and reports that we file or furnish to the United States Securities and Exchange Commission (“SEC”). Our Corporate Governance Guidelines, Code of Ethics, and charters for each of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee, are all provided on this website. We will post any waivers of our Code of Ethics granted to any of our directors or executive officers on the “Investor Relations” portion of this website. Our reports and other filings, including, without limitation, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and all other documents, including amendments thereto, filed with or furnished to the SEC, are made available as soon as practicable after their receipt by the SEC. We are not incorporating the information on our website into this Report, and our website and the information appearing on our website are not included in, and are not part of, this Report.

 

ITEM 1A. RISK FACTORS

Below, we have described our present view of certain important risk factors. This discussion of risk factors contains “forward-looking statements,” as discussed on page one of this Annual Report on Form 10-K. These risk factors may be important to understanding any statement in this Report or elsewhere. The following information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes in this Report.

 

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We depend on large property management companies in the apartment leasing sector of the residential real estate industry for a majority of our revenue, and any industry developments that adversely affect the number and value of leasing transactions generated could adversely impact our financial results.

The return on investment for our large property management company advertisers depends upon the comparison of how many leases are being generated for the managed communities in a particular local market, and the value of such leases, to the amount charged for our advertising. Many of the factors affecting the number and value of lease transactions are beyond our control. In markets where occupancy levels are extraordinarily high or extraordinarily low, the management company’s return on investment can be adversely affected, and the management company may choose to decrease the level of advertising, which could adversely affect our revenue.

Our new home guides and related websites depend on the new home sales sector of the residential real estate industry, which is cyclical.

Approximately 15.7% of our 2008 advertising revenue was generated from sales of advertising products to new home builders in the residential real estate industry. This sector, which is cyclical, directly affects the success of our New Homes division. The return on investment for our new home builder advertisers depends on the success rate of actual sales that are closed in comparison to the advertising expenses paid. If our advertisers experience lower return on investment because actual sales decline for reasons beyond our control, they may choose to decrease their advertising budget, which would adversely affect our revenue.

The United States economy is currently experiencing its worst downturn in the residential real estate industry in over 50 years. The duration of this downturn, as is true of most trends in the real estate industry, is unpredictable, and as a result, our prospects in this area are also unpredictable. An economic recession, unfavorable taxation laws and regulations, higher credit standards, unavailability of mortgage loans, increased interest rates, increased unemployment, lower consumer confidence or lower wages can cause consumers to reduce their activity in the residential real estate industry, thus negatively impacting local new home sales markets.

We rely on our proprietary distribution network as a competitive advantage, and our historical business model for this business involves relatively high fixed costs that we may be unable to adjust in a timely manner in response to a reduction in revenue.

Historically, the primary function of DistribuTech has been to ensure priority placement for PRIMEDIA publications and to reduce our overall distribution costs. Revenue from third-party customers who pay DistribuTech for distribution services contributes to this reduction in costs. Our DistribuTech business continues to experience a significant loss of revenue from third-party customers, particularly those who publish free resale home and automobile sales publications, which are scaling back or ceasing operations or providing an Internet-only product.

As part of our distribution business, we enter into agreements with various retail chains for exclusive rights of distribution. Most of these agreements extend beyond one year in duration and contribute to relatively high fixed costs within this business. We are undertaking strategic initiatives to reduce the cost structure of our DistribuTech business, while maintaining our competitive advantage. However, our efforts may not ultimately achieve anticipated business goals, and, if we fail to achieve these goals, this business could be materially adversely affected.

The market for our products and services is highly competitive.

The markets for our products and services are disbursed throughout the United States. Generally, other print and online apartment and new home resources for the consumer represent our main competitors. To a lesser extent, we also compete with traditional newspapers and yellow pages.

 

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Innovations by competitors or other market participants may increase the level of competition in the markets in which we operate. This can include product, pricing or marketing innovations, new or improved services, technology advances, or new modes of doing business that enhance the consumer’s ability to shop and compare offerings from multiple companies, among other initiatives. Our ability to react to such advances and navigate new competitive environments is important to our success.

In addition, some of our current and potential competitors may have greater financial, technical, operational and marketing resources than we have. Competitive pressures may also force prices for our services to decrease, which may adversely affect us.

If any of our relationships with Internet search websites terminate, or if such websites’ methodologies are modified, traffic to our websites and corresponding consumer origination volumes could decline.

We depend, in part, on various Internet search websites, such as Google, MSN and Yahoo!, and other websites to direct a significant amount of traffic to our websites. Search websites typically provide two types of search results, algorithmic and purchased listings. Algorithmic listings cannot be purchased and, instead, are determined and displayed solely by a set of formulas designed by search engine companies. Other listings can be purchased and are displayed if particular word searches are performed on a search engine. We rely on both algorithmic and purchased search results, as well as advertising on other Internet websites, to direct a substantial share of the visitors to our websites and the advertiser customers we serve.

Our ability to maintain the flow of visitors directed to our websites by search websites and other Internet websites is not entirely within our control. For example, search websites frequently revise their algorithms in an attempt to optimize their search result listings. Changes in the methodologies used by search websites to display results could cause our websites to receive less favorable placements, which could reduce the number of users who link to our websites from these search websites. We may also make poor decisions regarding the purchase of search results or the placement of advertisements on other Internet websites, which could also reduce the number of users directed to our websites. Any reduction in the number of users directed to our websites would negatively affect our ability to earn revenue. If traffic on our websites declines, we may need to resort to more costly sources to replace lost traffic, and such increased expense could adversely affect our business and profitability.

If we are unable to meet rapid changes in technology, our services and technology and systems may become obsolete.

The Internet and e-commerce are constantly changing. Due to the costs and management time required to introduce new services and enhancements, we may not be able to respond in a timely manner to competitive innovations. To remain competitive, we must continue to enhance and improve the functionality and features of our online businesses. Further, to remain competitive, we must meet the challenges of the introduction by our competitors of new services using new technologies or the introduction of new industry standards and practices. In addition, the vendors we use to support our technology may not provide the level of service we expect or may not continue to provide their product or services on commercially reasonable terms or at all. If we fail to meet any of these potential changes or our vendors fail to provide the necessary support to our technology, our results of operations and financial condition could be negatively impacted.

Our success and growth depend, to a significant degree, upon the protection of our intellectual property rights.

As a media company, we have a significant intellectual property portfolio, especially copyrights and trademarks, and have allocated considerable resources toward intellectual property maintenance, prosecution and enforcement. For example, we hold and maintain or have pending applications for numerous copyrights and trademarks in connection with our various products and services, such as Apartment Guide. In addition, we also continuously develop and create proprietary software to enhance our ability to effectively and efficiently update

 

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the listings in our online and print publications. We may be unable to deter infringement or misappropriation of our data and other proprietary information, detect unauthorized use or take appropriate steps to enforce our intellectual property rights. Any unauthorized use of our intellectual property could make it more expensive for us to do business and consequently harm our business.

If we are unable to obtain or maintain key website addresses, our ability to operate and grow our business may be impaired.

Our website addresses, or domain names, are critical to our business. However, the regulation of domain names is subject to change, and it may be difficult for us to prevent third parties from acquiring domain names that are similar to ours, that infringe our trademarks or that otherwise decrease the value of our brands. If we are unable to obtain or maintain key domain names for the various areas of our business, our ability to operate and grow our business may be impaired.

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

The price of paper is a significant expense relating to our print products. We incurred paper price increases in both 2004 and 2005, after many years of stable or declining prices, with no increases during 2006. However, we experienced increased paper costs at the end of 2007 and 2008. We expect paper prices to only slightly decrease in 2009. Any future paper cost increases will have an adverse effect on our future results to the extent we are unable to offset these increases through adjustment of production metrics or by passing these increases through to our customers.

Kohlberg Kravis Roberts & Co. L.P. (“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 March 2, 2009, approximately 59.1% of the outstanding shares of our common stock were held by investment partnerships of which KKR Associates, L.P. and KKR GP 1996 LLC 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, two of whom are also on our Board of 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.

Our stock price is volatile.

Our common stock price has experienced substantial volatility in the past and may remain volatile in the future. Volatility can arise as a result of a number of the factors discussed in this “Risk Factors” section, as well as divergence between our actual or anticipated financial results and published expectations of analysts, and announcements that we, our competitors or our customers may make.

If we are unable to meet the New York Stock Exchange (“NYSE”) continued listing requirements, the NYSE may delist our common stock, which could negatively affect the price of the common stock and your ability to sell the common stock.

We previously announced on November 24, 2008 that the NYSE had notified us that we were considered “below criteria” specifically because our average total market capitalization was less than $75 million over a consecutive 30 trading-day period. This required us to submit a plan that demonstrated our ability to achieve compliance with the continued listing standards within 18 months of receipt of the notice. On February 17, 2009, we announced that the New York Stock Exchange had notified us that it had accepted our proposed plan for continued listing on

 

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the NYSE. As a result of the acceptance, our common stock will continue to be listed on the NYSE, pending quarterly reviews by the NYSE’s Listing and Compliance Committee to ensure progress against the plan.

In the future, we may not be able to meet the continued listing requirements of the NYSE. If we are unable to satisfy the NYSE criteria for continued listing, our common stock would be subject to delisting. Trading, if any, in our common stock would thereafter be conducted on another exchange or quotation system. As a consequence of any such delisting, a stockholder would likely find it more difficult to dispose of, or to obtain accurate quotations as to the prices for our common stock.

We may be unable to realize the benefits of our net operating loss carryforwards (“NOLs”), and, as a result, lose our future tax savings, which could have a negative impact on our liquidity and financial position.

NOLs may be utilized to offset federal and state taxable income in future years and eliminate income taxes otherwise payable on such taxable income, subject to certain adjustments. The Internal Revenue Service (“IRS”), or state taxing authorities could challenge the amount of the NOLs, which could result in increases in future income tax liabilities. Based on current federal and state corporate income tax rates, our NOLs could provide a benefit to us, if fully utilized, of significant future tax savings. However, if we do not have sufficient taxable income in future years to use the tax benefits before they expire, we will lose the benefit of these NOLs permanently. Our inability to utilize available NOLs, if any, could require us to pay substantial additional federal and state taxes and interest, which may adversely affect our liquidity and financial position.

Future legislation may result in our inability to realize the tax benefits of our NOLs.

It is possible that legislation or regulations will be adopted that would limit our ability to use the tax benefits associated with our NOLs. However, we are not currently aware of any proposed changes in the tax laws or regulations that would materially and adversely impact our ability to use available NOLs, if any.

Our use of NOL carryforwards could be limited by ownership changes.

In addition to the general limitations on the carryback and carryforward of NOLs under Section 172 of the Internal Revenue Code (the “Code”), Section 382 of the Code imposes further limitations on the utilization of NOLs by a corporation following various types of ownership changes which result in more than a 50 percentage point change in ownership of a corporation within a three year period. Therefore, the future utilization of our NOLs may be subject to limitation for regular federal income tax purposes.

We cannot be certain that the limitations of Section 382 will not limit or deny in full our future utilization of available NOLs, if any. Such limitation or denial could require us to pay substantial additional federal and state taxes and interest. Moreover, we cannot be certain that future ownership changes will not limit or deny in full our future utilization of all of available NOLs. If we cannot utilize available NOLs, if any, we may be required to pay substantial additional federal and state taxes and interest. Such tax and interest liabilities may adversely affect our liquidity and financial position.

The soundness of financial institutions could adversely affect us.

We have relationships with several financial institutions as lenders under our credit facility and engage in transactions with other counterparties in the financial services industry. Defaults by, or even rumors or questions about, financial institutions or the financial services industry generally, could result in losses or defaults by these institutions. We believe that available credit under our revolving credit facility was recently effectively reduced by $12.0 million as a result of the bankruptcy filing of Lehman Brothers Holdings Inc., the parent company of Lehman Brothers, Inc., which is a participating lender in the credit facility. In the event that the volatility of the financial markets further adversely affects these financial institutions, we may be unable to access our credit

 

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facility or complete financing transactions as intended, which could adversely affect our revenue and results of operations.

Our credit agreement limits our business flexibility by imposing operating and financial restrictions on our operations.

Our credit agreement imposes specific operating and financial restrictions on us. These restrictions impose conditions or limitations on our ability to, among other things:

 

   

change the nature of our business;

   

incur additional indebtedness;

   

create liens on our assets;

   

sell assets;

   

issue stock;

   

engage in mergers, consolidations or transactions with our affiliates;

   

make investments in or loans to specific subsidiaries;

   

make guarantees or specific restricted payments; and

   

declare or make dividend payments on our common stock.

Our failure to comply with the terms and covenants in our credit agreement could lead to a default under the terms of such agreement, which would entitle the lenders to accelerate the indebtedness and declare all amounts owed due and payable. If that occurred, we might not be able to refinance otherwise satisfy our debt obligations, which could have a substantial adverse effect on our ability to continue as a going concern. We may not be able to comply with these restrictions in the future, or, in order to comply with these restrictions, we may have to forego opportunities that might otherwise be beneficial to us.

Our accounting policies and methods are key to how we report our financial condition and results of operations and may require management to make estimates about matters that are uncertain.

Accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with accounting principles generally accepted in the United States of America (“GAAP”).

Management has identified certain accounting policies as being critical because they require management’s judgment to ascertain the valuations of assets, liabilities, commitments and contingencies. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or reducing a liability. We have established detailed policies and control procedures that are intended to ensure these critical accounting estimates and judgments are well controlled and applied consistently. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. Because of the uncertainty of estimates about these matters, we cannot guarantee that we will not be required to adjust accounting policies or restate prior period financial statements. See Item 7—”Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” and Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements in this Report for more information.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

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ITEM 2. PROPERTIES

The following table sets forth certain information with respect to our principal locations as of December 31, 2008. These properties were leased by us initially for use in our 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 0.9 million rentable square feet currently under lease, approximately 0.3 million rentable square feet are fully subleased to third parties. We consider the locations presently used by us for our operations to be adequate for our present needs. If we are forced for any reason to vacate any of our facilities due to lease expirations or any other reasons, we believe that equally suitable alternative locations are available on equally favorable terms in all of the locations where we do business.

 

Principal Locations

 

Principal Use

  Approximate
Rentable Square
Feet (“RSF”)
 

Type of Ownership

Expiration Date

of Lease

New York, NY 1440 Broadway

 

Sublease

 

170,594

 

Lease expires in 2015; fully sublet as of December 31, 2008

New York, NY 261 Madison

  Sublease   72,100   Lease expires in 2017; fully sublet as of December 31, 2008

Norcross, GA 3585 Engineering Drive

 

Executive and administrative offices

 

89,000

 

Lease expires in 2016

 

ITEM 3. LEGAL PROCEEDINGS

We are involved in lawsuits and claims, both actual and potential, including some that we have asserted against others, in which substantial monetary damages are sought. Although the result of any future litigation of such lawsuits and claims is inherently unpredictable, management believes that, in the aggregate, the outcome of all such lawsuits and claims will not have a material effect on the Company’s long-term consolidated financial position or liquidity; however, any such outcome could be material to the results of operations of any particular period in which costs, if any, are recognized.

 

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

No matters were submitted to a vote of our stockholders, through the solicitation of proxies or otherwise, during the fourth quarter of 2008.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is listed on the NYSE under the ticker symbol “PRM.” As of March 2, 2009, there were 578 holders of record of our common stock. The following table sets forth, for the quarterly periods indicated, the high, low and closing sales prices per share of our common stock as quoted on the NYSE at the end of regular trading, as well as the cash dividends declared per share of common stock:

 

     Stock Prices    Cash Dividends
Declared per Share

2008 Quarters Ended

   High    Low    Close   

March 31

   $ 9.18    $ 5.69    $ 7.35    $ 0.07

June 30

     7.54      4.65      4.66      0.07

September 30

     4.74      2.20      2.43      0.07

December 31

     2.51      0.69      2.17      0.07
     Stock Prices    Cash Dividends
Declared per Share

2007 Quarters Ended

   High    Low    Close   

March 31

   $ 16.50    $ 9.72    $ 15.96    $

June 30

     20.40      14.04      17.10     

September 30

     17.94      12.48      14.04      2.15

December 31

     14.83      7.01      8.50     

Dividends

Our bank credit facilities impose certain limitations on the amount of dividends permitted to be paid on our common stock. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity, Capital and Other Resources—Financing Arrangements.”

We announced on March 12, 2009 that our Board of Directors had authorized our fifth regular quarterly cash dividend of $0.07 per share of common stock, payable on March 31, 2009, to stockholders of record on March 23, 2009. We currently expect that we will continue to pay a regular quarterly dividend, at the discretion of our Board of Directors.

Equity Compensation Plan Information

Information required by this item with respect to our equity compensation plans is incorporated by reference to our Proxy Statement for our 2009 Annual Meeting of Stockholders. The definitive Proxy Statement will be filed within 120 days of the end of the fiscal year ended December 31, 2008.

Recent Sales of Unregistered Securities

There have been no recent sales of unregistered securities.

Issuer Purchases of Equity Securities

On December 4, 2008, our Board of Directors authorized a program to repurchase up to $5.0 million of our common stock over the next 12 months. Under the terms of the repurchase program, we may repurchase shares in open market purchases or through privately negotiated transactions. We expect to use cash on hand to fund repurchases of our common stock. As of December 31, 2008, we had not repurchased any shares under the program, and $5.0 million remained available for share repurchases. See Note 23, “Subsequent Events,” to the consolidated financial statements in this Report for more information.

 

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Performance Graph

The stock performance graph is not and shall not be deemed incorporated by reference by any general statement incorporating by reference this Report into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934 (collectively, the “Acts”), except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under such Acts.

The following graph assumes a $100 investment on December 31, 2003 (including reinvestment of all dividends) in our common stock, the S&P 500 Index and a composite peer group of companies. The peer group consists of Autobytel Inc., Martha Stewart Living Omnimedia, Inc., Meredith Corp. and Move, Inc.

LOGO

 

     Dec-03    Dec-04    Dec-05    Dec-06    Dec-07    Dec-08

PRIMEDIA Inc.

   $ 100    $ 134    $ 57    $ 60    $ 50    $ 13

S&P © 500

     100      109      112      128      132      81

Peer Group (4 Stocks)*

     100      134      112      126      74      26

 

  * The Four-Stock Peer Group consists of Autobytel Inc., Martha Stewart Living Omnimedia, Inc., Meredith Corp. and Move, Inc.

 

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data were derived from the audited consolidated financial statements. 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.

 

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PRIMEDIA INC. AND SUBSIDIARIES

 

    Years Ended December 31,  
    2008   2007     2006     2005     2004  
    (Dollars in thousands, except per share amounts)  

Operating Data:

         

Revenue, net

  $ 304,105   $ 314,800     $ 307,929     $ 307,187     $ 286,511  

Depreciation and amortization of property and equipment

    14,475     12,612       11,501       10,410       11,243  

Amortization of intangible assets

    2,870     3,492       3,286       3,140       3,174  

Interest expense

    19,338     77,660       126,940       128,980       120,506  

Income (loss) from continuing operations

  $ 49,027   $ (55,678 )   $ (65,114 )   $ (101,306 )   $ (109,991 )

Discontinued operations, net of tax

    10,441     547,123       103,344       665,924       145,461  

Cumulative effect of change in accounting principle, net of tax(1)

              22              
                                     

Net income

    59,468     491,445       38,252       564,618       35,470  

Preferred stock dividends(4)

                          (13,505 )
                                     

Income applicable to common stockholders

  $ 59,468   $ 491,445     $ 38,252     $ 564,618     $ 21,965  
                                     

Basic and diluted income (loss) applicable to common stockholders per common share(2):

         

Income (loss) from continuing operations

  $ 1.11   $ (1.26 )   $ (1.48 )   $ (2.31 )   $ (2.84 )

Discontinued operations

    0.24     12.40       2.35       15.19       3.35  

Cumulative effect of change in accounting principle(1)

              0.00              
                                     

Income applicable to common stockholders

  $ 1.35   $ 11.14     $ 0.87     $ 12.88     $ 0.51  
                                     

Dividends declared per share of common stock

  $ 0.28   $ 2.15     $     $     $  
                                     

Basic common shares outstanding (weighted-average)(2)

    44,176,398     44,118,943       43,997,665       43,838,591       43,414,667  
                                     

Diluted common shares outstanding (weighted-average)(2)

    44,197,590     44,118,943       43,997,665       43,838,591       43,414,667  
                                     

Balance Sheet Data:

         

Goodwill and intangible assets, net

  $ 152,942   $ 155,712     $ 862,025     $ 994,581     $ 1,145,463  

Total assets

    286,154     256,864       1,254,329       1,389,468       1,559,048  

Long-term debt(3)

    245,531     247,575       1,316,959       1,456,770       1,635,964  

Shares subject to mandatory redemption (Exchangeable preferred stock)(4)

                          474,559  

 

Notes to Selected Financial Data

(1)

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment, using the modified prospective method. Prior to the adoption of this statement, we expensed the fair value of stock-based compensation for all grants, modifications or settlements made on or after January 1, 2003 in accordance with the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, which was adopted on January 1, 2003 using the prospective method. Upon adoption of

 

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SFAS No. 123(R), we were also required to expense the fair value of any awards that were granted prior to January 1, 2003 and that were not fully vested as of January 1, 2006. The cumulative effect of adopting this change in accounting principle was less than $0.1 million, which is included in the results of operations for the year ended December 31, 2006.

 

(2) Income (loss) per common share has been determined based on income (loss) applicable to common stockholders, divided by the weighted-average number of common shares outstanding for all years presented.

The securities that could potentially dilute basic earnings per share in the future consist of 1.6 million warrants at December 31, 2008, 2007, 2006, 2005 and 2004; and an aggregate of 3.1 million, 3.2 million, 3.4 million, 3.6 million and 4.6 million stock options and shares of restricted stock as of December 31, 2008, 2007, 2006, 2005 and 2004, respectively. For the year ended December 31, 2008, potentially dilutive securities, including 2.7 million stock options and 1.6 million warrants to purchase common stock, were not included in the computation of diluted income per common share because their strike price was greater than the average market price of our common stock during the period, and their inclusion would be anti-dilutive. An additional 0.4 million shares of restricted stock were excluded from diluted earnings per share for the year ended December 31, 2008 because either they did not vest and were forfeited or the calculation under the treasury stock method resulted in no additional dilutive shares. For the years ended December 31, 2007, 2006, 2005 and 2004, potentially dilutive securities were not included in the computation of diluted income (loss) per common share because the effect of their inclusion, as measured against loss from continuing operations, would be anti-dilutive.

 

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

 

(4) We adopted SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, prospectively, effective July 1, 2003, which required us to classify as long-term liabilities our 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. If SFAS No. 150 had been adopted on January 1, 2001, loss from continuing operations would have increased by $22.7 million for the year ended December 31, 2003. The 2003 increase to loss from continuing operations has been reduced by a net gain of $0.9 million on exchanges of the shares subject to mandatory redemption. During 2005, we purchased all of our outstanding shares subject to mandatory redemption.

 

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

The following discussion and analysis summarizes our financial condition and operating performance and should be read in conjunction with our historical consolidated financial statements and notes thereto included elsewhere in this Report.

Executive Summary

Our Business

We are an integrated media company that publishes and distributes advertising-supported print and online consumer guides primarily for the apartment and other rental property sectors of the residential real estate industry. Our print and online guides are provided free of charge to end users. In 2008, we distributed approximately 23 million of our print guides to approximately 51,000 U.S. locations through our proprietary distribution network, DistribuTech. Our principal digital assets include the websites associated with our print publications and Internet-only offerings, such as ApartmentGuide.com, Rentals.com, RentalHouses.com, NewHomeGuide.com and AmericanHomeGuide.com.

 

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Fiscal 2008 Fourth Quarter Results

We had total revenue of $73.4 million, representing a $5.7 million year-over-year decrease, primarily due to a decrease in New Homes advertising revenue. Apartments, representing approximately 87% of fourth quarter advertising revenue, grew revenue 2.7% on a year-over-year basis, driven by increased customer count and apartment community listings.

Income from continuing operations increased $29.7 million to $34.7 million, or $0.78 per diluted common share, primarily due to the release of $29.3 million in deferred tax asset valuation allowance.

Net income increased $44.6 million to $32.0 million, or $0.72 per diluted common share, primarily due to the release of the deferred tax asset valuation allowance, partially offset by a $6.0 million charge for litigation-related losses.

2008 Summary Consolidated Results

In 2008, revenue was $304.1 million, down 3.4% as compared to $314.8 million in 2007. In 2008, costs and expenses were $282.1 million, down 30.0% compared to $403.2 million in 2007.

In 2008, income from continuing operations was $49.0 million, up from a loss of $55.7 million in 2007.

Net income was $59.5 million in 2008, including gain on sale of businesses, net of tax, of $2.0 million, compared to $491.4 million in 2007, including gain on sale of businesses, net of tax, of $459.1 million.

Business Trends and Outlook

During 2009, we intend to continue to grow our customer count and market share in our largest business, Apartment Guide, and pursue enhancements to our product portfolio and selective market and market segment expansion. We anticipate increasing our investment in search engine optimization and marketing. We also intend to aggressively grow our Rentals.com business by focusing on driving revenue growth and improving site engineering and performance, while increasing traffic, primarily through search engine optimization.

The residential real estate sales industry continues to suffer through an unprecedented collapse in demand and access to credit markets. As a result, we anticipate increasing pressure on our New Homes and DistribuTech businesses during 2009, with full year levels of percentage decline in revenue exceeding those experienced during the fourth quarter of 2008. We remain focused on managing costs for these businesses in accordance with anticipated levels of revenue and managing our client relationships to best position us for opportunities as macroeconomic conditions improve.

During 2008, we ceased publication of two New Home Guide Professional Editions. In early 2009, we announced that we were suspending additional print publications, while focusing on Internet offerings in related markets, as we continue to reduce our cost structure for this business to offset expected revenue losses.

We anticipate that DistribuTech will continue to be impacted by lower revenue from customers that publish free publications, particularly those within the resale home and automobile sales sectors, and are scaling back or ceasing operations or providing an Internet-only product. We intend to continue to reduce our cost structure for this business to offset, in part, expected revenue losses. Our overall goal is to create a more efficient distribution network by streamlining the expense structure, including through real estate consolidation and process automation, and optimizing the distribution footprint by eliminating less effective locations.

Transition Plan

We have relocated our corporate headquarters from New York to Norcross, Georgia. We continued to utilize certain of our New York-based functions through the first half of 2008 and to incur their associated costs.

 

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Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations is based upon the amounts reported in our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts. The significant accounting policies, outlined in Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements are integral to an understanding of management’s discussion and analysis. The accounting policies and estimates that we believe are the most critical to an understanding of the results of operations and financial condition are those that require complex management judgment regarding matters that are highly uncertain at the time policies were applied and estimates were made. These accounting policies and estimates are discussed below. We base some of our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Additionally, GAAP allows or requires many assets and liabilities to be accounted for at fair value, which is defined to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP also requires that certain assets be assessed for impairment based on fair value. In cases where active markets do not exist, as discussed below, modeling or other techniques may be required to estimate fair value. Different estimates reasonably could have been used in the current period that would have had a material effect on these financial statements, and changes in these estimates are likely to occur from period to period in the future.

We have discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of the Board of Directors, and the Audit Committee has reviewed our disclosures relating to them in this Management’s Discussion and Analysis.

Goodwill Impairment Testing. Goodwill is deemed to have an indefinite life and is not amortized but is subject to an impairment test, at least annually. Goodwill represents the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed in business combinations. The value of goodwill is ultimately derived from an entity’s ability to generate net earnings after the acquisition. A decline in net earnings could be indicative of a decline in the fair value of goodwill and result in impairment. For that reason, we test, at a reporting unit level, goodwill for impairment and have established October 31 as the annual impairment testing date. 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. Our assets and liabilities are assigned to reporting units to the extent that they are employed in or are considered a liability related to the operations of the reporting units and are considered in determining the fair value of the reporting units. We presently have only one reporting unit. The goodwill impairment test is conducted by calculating the fair value of the reporting unit, which begins with management’s expectations of cash flows in the next five years plus an expected residual value. A discount factor, approximating our weighted-average cost of capital (13% for 2008 and 9.5% for 2007), is then applied to the forecasted cash flows to determine the present value. The resulting fair value is compared to the carrying value of the reporting unit. As long as the present value is greater, there is no impairment to goodwill. In the annual assessment for 2008, there was no indicated impairment to goodwill.

While we believe all assumptions utilized in our assessment of goodwill for impairment are reasonable and appropriate, changes in actual earnings, the growth rate of future earnings, the effective tax rate (38% for 2008 and 2007) and our weighted-average cost of capital could all cause different results for the calculation of the present value of future cash flows. In management’s estimation, most sensitive of these assumptions is cash flows from future earnings. Based on the 2008 assessment for impairment, a 20% decline in the amount of forecasted cash flows from future earnings would not result in an indicated goodwill impairment.

Long-Lived Assets. We review our long-lived assets for impairment whenever events and circumstances indicate assets might be impaired. Those events and circumstances include, but are not limited to, a significant change in the extent to which an asset is utilized (e.g., when a decision is made to dispose of an asset and certain other

 

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criteria are met), a significant decrease in the market price of an asset and a significant adverse change in the business climate that could affect the value of an asset, and operating or cash flow losses associated with the use of an asset. When such a review is conducted, we use an estimate of undiscounted cash flows, which are derived from our historical experience and long-term business plans, over the remaining lives of the assets to measure recoverability. If the estimated cash flows are less than the carrying value of an asset, the loss is measured as the amount by which the carrying value of the asset exceeds fair value.

Valuation Allowances for Deferred Tax Assets. Deferred tax assets and liabilities arise from temporary differences (i.e., amounts that are recognized as income or deducted as expenses at different times for GAAP and tax purposes). Deferred tax assets also arise from benefits recorded from NOLs (i.e., amounts representing losses for tax purposes that may be utilized in future years to offset taxable income). A net deferred tax asset must be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or all of the deferred tax asset will not be realized. The valuation allowance must be sufficient to reduce the net deferred tax asset to the amount that is more likely than not to be realized. Changes in the valuation allowance are recorded as increases or decreases in income tax expense. Future realization of the tax benefit of an existing deductible temporary difference or carryforward ultimately depends on the existence of sufficient taxable income of the appropriate character (e.g., ordinary income or capital gain) within the carryback or carryforward period available under the tax law. There are four possible sources of taxable income that may be available under the tax law to realize a tax benefit for deductible temporary differences and carryforwards:

 

   

Future reversals of existing taxable temporary differences;

   

Future taxable income exclusive of reversing temporary differences and carryforwards;

   

Taxable income in prior carryback year(s) if carryback is permitted under the tax law; and

   

Tax-planning strategies that would, if necessary, be implemented to, for example:

 

¡

 

Accelerate taxable amounts to utilize expiring carryforwards; or

 

¡

 

Change the character of taxable or deductible amounts from ordinary income or loss to capital gain or loss.

Evidence available about each of those possible sources of taxable income will vary for different tax jurisdictions and, possibly, from year to year. To the extent evidence about one or more sources of taxable income is sufficient to support a conclusion that a valuation allowance is not necessary, other sources need not be considered. Consideration of each source is required, however, to determine the amount of the valuation allowance that is recognized for deferred tax assets. After consideration of the available evidence, a valuation allowance, if warranted, is established to reduce the deferred tax asset to the amount that is more likely than not to be realized.

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, effective for fiscal years beginning after December 15, 2006. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 requires that, in order to be recognized, tax benefits must be more likely than not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. In evaluating the ability to realize deferred tax assets, including NOLs, and any need for a valuation allowance, it is necessary to first consider the recognition threshold for uncertain tax positions and reduce the deferred tax assets by any required FIN 48 reserve.

As of December 31, 2008, we had aggregate federal NOLs of approximately $454.3 million, which are available to reduce future taxable income, and the substantial majority expire between 2020 and 2024. In addition, we have significant state and local NOLs in various jurisdictions in which we and/or our subsidiaries file income tax returns. These state and local NOLs expire over various periods based on applicable state and local regulations.

 

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The federal, state and local NOLs are the single largest component of our net deferred tax asset. Additionally, since amortization of tax-deductible goodwill and trademarks ceased for GAAP purposes on January 1, 2002, we expect that deferred tax liabilities will arise each quarter because the taxable temporary differences related to the amortization of these assets are not expected to reverse prior to the expiration period of our deductible temporary differences unless the related assets are sold or an impairment of the assets is recorded. Consequently, we may record a valuation allowance in excess of our 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 NOL period.

Based on the weight of objectively verifiable available positive and negative evidence, at December 31, 2008, we recorded a partial reversal of our valuation allowance against our net deferred tax asset of $29.3 million because we believe it is more likely than not that this portion of the deferred tax asset will be realized. We will need to generate approximately $84.0 million in pre-tax income for financial reporting purposes to realize this asset.

Elements of positive evidence included:

 

   

remaining lives of the NOLs;

   

historical income when results are normalized to remove the impact of discontinued operations and to reflect the completion of the Company’s relocation from New York to Norcross; and

   

forecasted income, utilizing the same forecast as for goodwill impairment testing in future periods.

Elements of negative evidence included:

 

   

historical losses and

   

uncertainty as to the timing and exact amount of future earnings as a result of current economic conditions, the U.S. residential real estate industry, as well as the uncertainty of the effectiveness of the steps we have taken, and will take, to mitigate the adverse impact on our businesses.

Our assessment in 2008 is different than it was in 2007, primarily due to the completion of the relocation of the Company from New York to Norcross, resulting in a significantly reduced cost structure, and almost a full year of operations of the Consumer Guides business supporting the entire PRIMEDIA cost structure, while maintaining profitability without the impact of divested entities.

Stock-Based Compensation. Effective January 1, 2006, we adopted the provisions of, and account for stock-based compensation in accordance with, SFAS No. 123(R). Under the fair value recognition provisions of SFAS No. 123(R), stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is the vesting period.

 

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The most commonly granted form of stock-based compensation has been stock options. The fair value of stock options is determined using an option-pricing model that takes into account certain assumptions, including the exercise price, which is the stock price at the grant date, the expected life of the grant, the volatility of the underlying stock, the expected dividends on the stock and the risk-free interest rate over the expected life of the grant. The fair value of a stock option estimated at the grant date is not subsequently adjusted for changes in the price of the underlying stock or its volatility, the life of the grant, dividends on the stock or the risk-free interest rate. Generally, changes in the assumptions will have the following impact on the fair value of stock option awards:

 

Assumption

   Impact on Fair Value

Exercise price:

  

Increased price

   Lower fair value

Decreased price

   Higher fair value

Expected life of grant:

  

Increased life

   Higher fair value

Decreased life

   Lower fair value

Volatility of underlying stock:

  

Increased volatility

   Higher fair value

Decreased volatility

   Lower fair value

Expected dividends:

  

Higher dividends

   Lower fair value

Lower dividends

   Higher fair value

Risk-free interest rate:

  

Higher rate

   Lower fair value

Lower rate

   Higher fair value

Allowance for Doubtful Accounts. The allowance for doubtful accounts represents our estimate of losses in our accounts receivable resulting from our customers’ failure to make required payments. We continually monitor collections from customers and the age of outstanding balances. Each of our business units provides for estimated credit losses based on historical analysis of the propensity of their customer base to make required payments. We aggressively pursue collection efforts on overdue accounts and, upon collection of any amounts previously written off, reverse the write-off. If future payments by our customers were to differ from our estimates, we may need to increase or decrease our allowance for doubtful accounts.

Provision for Restructuring Costs. Reserves for restructuring costs are estimated costs resulting from our plans and actions to integrate the Company and consolidate certain back office functions. Examples include employee-related termination costs and the cost of the termination of real estate leases, net of anticipated sublease income, if applicable, and the related write-off of leasehold improvements. If the future payments of these costs or amounts of sublease income were to differ from our estimates, we may need to increase or decrease our reserves.

Divestiture Reserves. 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. Examples include stay bonuses for key personnel, severance, taxes and working capital adjustments. If the future payments for such items differ from its estimates, there could be a change in the determination of the gain or loss on sale.

 

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Results of Operations

2008 Compared to 2007

Consolidated Results

Revenue, Net

 

Revenue Component

   For the Years Ended
December 31,
   $ Change
Favorable/
(Unfavorable)
    % Change
Favorable/
(Unfavorable)
 
   2008    2007     
     (Dollars in thousands)  

Apartments

   $ 211,367    $ 206,424    $ 4,943     2.4 %

New Homes

     39,337      50,740      (11,403 )   (22.5 )
                            

Total advertising revenue

     250,704      257,164      (6,460 )   (2.5 )

Distribution

     53,401      57,636      (4,235 )   (7.3 )
                            

Total revenue, net

   $ 304,105    $ 314,800    $ (10,695 )   (3.4 )%
                            

Apartments

Apartment Guide, ApartmentGuide.com and Rentals.com, representing approximately 84.3% of advertising revenue during the year ended December 31, 2008, increased 2.4% compared to the same period in 2007. The increase in revenue was primarily due to a 3.3% increase in Apartment Guide communities served, partially offset by a 0.7% decrease in revenue per community. The increase in apartment communities served and the decrease in revenue per community were both a result of special customer incentives and promotional offerings designed to attract additional apartment communities. Apartment Guide also benefited from the opening of the Greenville, South Carolina Apartment Guide in March 2008, which contributed approximately $0.5 million in revenue in 2008.

Approximately 17% of the 2008 revenue from Apartment Guide was derived from markets that had high occupancy rates, which we consider to be 95% or higher. This compares to 28% in 2007. As of December 31, 2008, occupancy rates in Apartment Guide markets ranged from 85% to 97%, with an average of 93.0% in 2008, compared to 93.6% in 2007, and with the majority of markets experiencing occupancy levels between 90% and 95%. As occupancy rates increase beyond 95%, apartment communities tend to reduce their advertising spend because they require fewer prospective tenants. As occupancy rates fall below 90%, apartment communities tend to cut back on spending, including advertising. For these reasons, occupancy rates in excess of 95% or below 90% ordinarily result in a decrease in our advertising income.

New Homes

The New Homes businesses, representing approximately 15.7% of advertising revenue during the year ended December 31, 2008, decreased 22.5% compared to the same period in 2007. The decrease in revenue was primarily due to a 19.4% decrease in new home communities served and a 4.0% decrease in revenue per community served. These resulted from a decline in standard advertising spending of 19% and a decline in premium advertising spending of 32% by new home builders, driven by continued weakness in the new home sales sector.

The difficult conditions for new home builders caused pressure throughout 2008, as the challenging mortgage environment and declining home prices worsened. In response to this environment, we suspended publication of our Atlanta Professional Home Guide in January 2008 and our Charlotte Professional Home Guide in December 2008.

 

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Distribution Revenue

Distribution revenue, which relates to our distribution arm, DistribuTech, decreased by 7.3% during the year ended December 31, 2008 compared to the same period in 2007. There was a 0.9% increase in the number of pockets sold in our display racks; however, this growth was more than offset by an 8.2% decrease in the average revenue per pocket due to softness in demand. Our distribution revenue continues to be adversely impacted by the loss of business, particularly business from publishers within the resale home and automobile sales sectors scaling back or ceasing operations or providing an Internet-only product.

Costs and Expenses

 

     For the Years Ended
December 31,
   $ Change
(Favorable)/
Unfavorable
    % Change
(Favorable)/
Unfavorable
 

Costs and Expenses

   2008     2007     
         
     (Dollars in thousands)  

Cost of goods sold (exclusive of depreciation and amortization of property and equipment)

   $ 32,420     $ 34,655    $ (2,235 )   (6.4 )%

Marketing and selling

     75,722       81,064      (5,342 )   (6.6 )

Distribution and circulation

     85,218       83,561      1,657     2.0  

General and administrative expenses

     48,700       57,747      (9,047 )   (15.7 )

Depreciation and amortization of property and equipment

     14,475       12,612      1,863     14.8  

Amortization of intangible assets

     2,870       3,492      (622 )   (17.8 )

Provision for restructuring costs

     5,238       10,496      (5,258 )   (50.1 )

Interest expense

     19,338       77,660      (58,322 )   (75.1 )

Amortization of deferred financing costs

     922       1,743      (821 )   (47.1 )

Other (income) loss, net

     (2,821 )     40,176      (42,997 )   (107.0 )
                             

Total cost and expenses

   $ 282,082     $ 403,206    $ (121,124 )   (30.0 )%
                             

The decrease in cost of goods sold was due to the reformatting of our printed guides, including reductions in both paper size and weight, as well as distribution optimization, partially offset by the increased cost of paper.

The decrease in marketing and selling expenses was primarily due to a reduction of approximately 60 employees compared to the prior year, resulting in a $4.0 million reduction in expense. In addition, other marketing-related activities declined $1.2 million.

General and administrative expenses declined, primarily due to decreases in corporate overhead of $18.1 million, resulting from the completion of the relocation of our headquarters from New York to Norcross, audit and other professional fees of $2.6 million, and recovery, under our primary directors and officers liability insurance, of approximately $1.0 million of certain costs incurred prior to 2008 in connection with a derivative lawsuit that is described in Note 20, “Commitments and Contingencies,” to the consolidated financial statements. These declines were partially offset by increases in compensation-related expense for our former and new CEOs of approximately $2.4 million, $5.2 million in costs incurred in the movement of our headquarters, $1.1 million in additional stock-based compensation expense, $1.9 million in bad debt expense and $1.9 million in additional legal expense, primarily to defend ourselves against the derivative lawsuit.

Depreciation and amortization of property and equipment increased primarily as a result of internal-use software being placed in service.

The provision for restructuring costs was lower due to a decrease of $5.5 million in severance expense for positions that were eliminated. This was offset by an increase of $0.2 million in lease-related expenses, consisting of an additional $0.8 million for office closures offset by a $0.6 million benefit in 2008 arising from revised estimates of future rent expense and sublease income from offices closed in 2007 and prior.

 

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Interest expense decreased primarily due to lower average debt levels, as during the third quarter of 2007, we repaid all $492.5 million in principal of our term loan, redeemed all $410.0 million in principal of our 8  7/8% Senior Notes due 2011, redeemed $292.2 million in principal of our 8% Senior Notes due 2013 (the “8% Senior Notes”) and redeemed all $122.5 million in principal of our Senior Floating Rate Notes due 2010. The decrease is also attributable to the redemption of the remaining $2.6 million in 8% Senior Notes outstanding during 2008. The decrease in interest expense was partially offset by an increase in interest related to borrowings against our Revolving Facility. See the discussion under “Liquidity, Capital and Other Resources.”

Other (income) loss, net increased due to a loss on debt redemptions, during 2007, for the debt instruments mentioned above of $44.3 million. The corresponding loss in 2008 was approximately $0.1 million. The 2008 amount also reflects the reversal of a $2.6 million annuity obligation to one of our former CEOs due to his death in 2008, which relieved us of any further obligation to him.

Income Taxes

During 2008, we recorded a benefit from income taxes related to continuing operations of $27.0 million, compared to $32.7 million in 2007, reflecting an effective rate of (122.6)% in 2008, compared to (37.0)% in 2007. The variance is primarily due to 2008 valuation allowance release of approximately $29.3 million on deferred tax assets. See the discussion under “Critical Accounting Policies and Estimates – Valuation Allowance for Deferred Tax Assets.”

Discontinued Operations

In accordance with SFAS No. 144, we have classified the operating results of our divested entities as discontinued operations in the consolidated statement of operations for all periods presented.

We completed the sales of Channel One and Films Media Group, parts of the Education segment, during the second quarter of 2007. On August 1, 2007, we completed the sale of our Enthusiast Media segment. During the first quarter of 2008, we sold certain assets and liabilities of PRIMEDIA Healthcare, resulting in a gain of $0.1 million, and shut down the remaining operations, resulting in a loss of approximately $0.4 million.

In the fourth quarter of 2007, we classified the results of operations of our Auto Guides division as discontinued operations due to our intent to dispose of the Auto Guides division. During 2008, we sold certain assets and liabilities related to our Auto Guides division, resulting in a gain of $1.3 million, net of tax benefits, and shut-down the remaining operations, resulting in a loss of approximately $0.8 million.

In 2005, we sold substantially all of the assets of Workplace Learning for the assumption of ongoing liabilities, while retaining a secondary liability as the assignor of the building and satellite time leases. Each month, our liability is reduced either by fulfilling our secondary liability as the assignor of the building lease or due to assignee’s performance under the terms of the lease, which results in income for us. During the years ended December 31, 2008 and 2007, as a result of the assignee’s performance, we recorded $3.0 million and $1.0 million in income, respectively, which is included in discontinued operations.

During the year ended December 31, 2008, we recorded a charge of $4.5 million in discontinued operations related to settlement of the CK Media litigation and $0.5 million related to the settlement of an unrelated case. Additionally, during the years ended December 31, 2008 and 2007, we recorded charges of $1.0 million and $2.0 million in discontinued operations, respectively, for various other litigation-related losses. See Note 20, “Commitments and Contingencies,” to the consolidated financial statements in this Report for more information.

During the year ended December 31, 2008, we recognized a tax benefit of $16.3 million in discontinued operations, primarily as a result of our ability to carry back a projected 2008 NOL against taxes paid on a portion of the 2007 gain on divestitures of certain subsidiaries. The current year NOL arises primarily from the reversal of differences between the carrying value and tax basis in a group of PRIMEDIA Healthcare intangible assets

 

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triggered by the sale of those assets during 2008. We also recognized a tax benefit of $4.2 million in discontinued operations during the year ended December 31, 2008, primarily as a result of changes in our estimate of our ability to utilize certain NOLs to offset 2007 taxable income.

Discontinued operations for the years ended December 31, 2008 and 2007 includes revenue of $3.4 million and $358.8 million, respectively, and a (loss) income before taxes of $(9.2) million and $50.9 million, respectively, which excludes gain on sale of businesses. The gain on sale of businesses, net of tax, was $2.0 million and $459.1 million for the years ended December 31, 2008 and 2007, respectively.

2007 Compared to 2006

Consolidated Results

Revenue, Net

 

Revenue Component

   For the Years Ended
December 31,
   $ Change
Favorable/
(Unfavorable)
   % Change
Favorable/
(Unfavorable)
 
   2007    2006      
     (Dollars in thousands)  

Apartments

   $ 206,424    $ 205,705    $ 719    0.3 %

New Homes

     50,740      46,269      4,471    9.7  
                           

Total advertising revenue

     257,164      251,974      5,190    2.1  

Distribution

     57,636      55,955      1,681    3.0  
                           

Total revenue, net

   $ 314,800    $ 307,929    $ 6,871    2.2 %
                           

Apartments

Apartment Guide, ApartmentGuide.com and Rentals.com, representing approximately 80.3% of 2007 advertising revenue, experienced a slight revenue increase for the year, primarily due to an increase in Rentals.com revenue, which effectively offset a decline in Apartment Guide revenue due to a decrease of 7.5% in revenue per community.

The entire Rentals.com network of websites grew revenue approximately 70.0% in 2007 compared to 2006; however, if all operations included in 2007 were owned in 2006, the growth in revenue would have been approximately 35.2%. Rentals.com primarily serves advertisers of property types that we refer to as single units, including rental houses, town homes, condominiums, apartments and communities with less than 50 rental units.

During 2007, Apartment Guide benefited from reduced condominium conversion activity and more normalized occupancy rates. By the end of 2007, 28% of the Apartment Guide markets were selling in environments with high occupancies, which we consider to be 95% or higher. This compares to 50% in 2006.

New Homes

The New Home Guide and NewHomeGuide.com business, representing approximately 19.7% of 2007 advertising revenue, delivered strong results with total revenue growth of 9.7% in 2007. During 2007, we launched two New Home Guide publications in Richmond and Colorado Springs and a New Home Guide Professional Edition in Charlotte, which targeted real estate professionals. These new publications contributed to an increase of 13.9% in the number of communities served, which was partially offset by a decrease of 3.9% in revenue per community served.

Distribution Revenue

Distribution revenue increased by 3.0% in 2007 compared to 2006. This increase was primarily attributable to a 3.4% increase in the number of pockets sold in our display racks as the result of the addition of over 2,000 new retail locations during 2007. This growth was slightly offset by a 0.4% decrease in the average revenue per

 

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pocket, as most of the new pockets sold were in the lower levels of our racks, which command less revenue than the more desirable upper level. Our growth in distribution revenue was outpaced by the growth in our distribution costs resulting from the addition of new retail locations and the extension of national grocery chain relationships.

Costs and Expenses

 

Cost and Expenses Component

   For the Years Ended
December 31,
   $ Change
(Favorable)/
Unfavorable
    % Change
(Favorable)/
Unfavorable
 
   2007    2006     
     (Dollars in thousands)  

Cost of goods sold (exclusive of depreciation and amortization of property and equipment)

   $ 34,655    $ 35,963    $ (1,308 )   (3.6 )%

Marketing and selling

     81,064      76,432      4,632     6.1  

Distribution and circulation

     83,561      78,494      5,067     6.5  

General and administrative expenses

     57,747      66,800      (9,053 )   (13.6 )

Depreciation and amortization of property and equipment

     12,612      11,501      1,111     9.7  

Amortization of intangible assets

     3,492      3,286      206     6.3  

Provision for restructuring costs

     10,496      1,306      9,190     703.7  

Interest expense

     77,660      126,940      (49,280 )   (38.8 )

Amortization of deferred financing costs

     1,743      2,567      (824 )   (32.1 )

Other (income) loss, net

     40,176      1,337      38,839     2,904.9  
                            

Total cost and expenses

   $ 403,206    $ 404,626    $ (1,420 )   (0.4 )%
                            

The cost of goods sold decline was a result of lower printing costs due to the full year impact of more favorable printing contract renewals.

Marketing and selling expenses increased due to the full year impact of hiring sales personnel for Rentals.com and Apartment Guide.

Distribution and circulation expenses increased due to the addition to our DistribuTech distribution network of approximately 2,000 retail locations and extending national grocery chain relationships.

Other general and administrative expenses declined primarily due to reductions in our corporate overhead, mainly due to the transition of the New York corporate function to Norcross resulting from the sale of the Enthusiast Media segment and the majority of the Education segment in 2007.

The provision for restructuring costs increase related to the transition of corporate functions and was higher due to an increase of $7.2 million in severance expense for the positions that were eliminated and additional lease-related expenses of $2.0 million of as a result the relocation of our headquarters from New York to Norcross.

Interest expense decreased, primarily due to lower average debt levels, as during the third quarter of 2007, we repaid all $492.5 million in principal of our term loan, redeemed all $410.0 million in principal of our 8 7/8% Senior Notes due 2011, redeemed $292.2 million in principal of our 8% Senior Notes and redeemed all $122.5 million in principal of our Senior Floating Rate Notes due 2010. This decrease was partially offset by higher interest rates.

In connection with these debt redemptions, we recorded a loss in other (income) loss, net of approximately $44.3 million, including the write-off of deferred financing costs of approximately $8.7 million.

 

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Income Taxes

During 2007, we recorded a benefit from income taxes of $32.7 million, compared to $31.6 million in 2006, reflecting an effective rate of (37.0)% in 2007, compared to (32.7)% in 2006. The increase was due to a smaller pre-tax loss, offset by changes in the deferred tax asset valuation allowance, changes in state and local taxes, and other less significant changes.

Discontinued Operations

Discontinued operations includes the operations of the Enthusiast Media segment, which was discontinued in the first quarter of 2007, the Education segment, which was discontinued in the fourth quarter of 2006, and the Business Information segment, which was discontinued and sold during 2005. The Education segment was comprised of Channel One, Films Media Group and PRIMEDIA Healthcare. We completed the sales of Channel One and Films Media Group during the second quarter of 2007. On August 1, 2007, we completed the sale of our Enthusiast Media segment.

In the fourth quarter of 2007, we classified the results of operations of our Auto Guides division as discontinued operations due to our intent to dispose of the Auto Guides division.

Discontinued operations for the years ended December 31, 2007 and 2006 includes revenue of $358.8 million and $741.5 million, respectively, and income before taxes of $50.9 million and $67.4 million, respectively, which excludes gain on sale of businesses. The gain on sale of businesses, net of tax, was $459.1 million and $62.4 million for the years ended December 31, 2007 and 2006, respectively.

Liquidity, Capital and Other Resources

During 2008, we reduced long-term debt by $2.0 million, primarily through the scheduled repayment of principal. At December 31, 2008, we had cash and cash equivalents and unused credit facilities of $102.4 million, as further detailed below under Financing Arrangements, compared to $106.4 million as of December 31, 2007. The use of this cash and unused credit facilities is subject to customary conditions contained in our debt agreements. Our asset sales, debt redemptions and investment in organic growth have facilitated our objective to become a better strategically focused company, while strengthening our balance sheet and improving liquidity.

In September 2008, we borrowed $13.2 million against our revolving credit facility and did not repay it by year-end. At December 31, 2008, the remaining availability under the revolving credit facility is approximately $71.0 million, which also reflects letters of credit outstanding and an effective reduction in available borrowing capacity related to the bankruptcy filing of Lehman Brothers Holdings Inc., the parent company of Lehman Brothers Inc. (“Lehman”), a participating lender in the $100.0 million facility. Lehman’s commitment under the revolving credit facility is $12.0 million. Our ability to borrow under our revolving credit facility could be further impaired if any other participating lender in the facility were unwilling or unable to honor its contractual obligation to lend to us.

As is more fully described under Financing Arrangements below, we have required debt repayments, including capital leases, of $3.0 million during the next 12 months, which does not include the $13.2 million balance outstanding under our revolving credit facility. We believe our liquidity, capital resources and cash flows from operations are sufficient to fund planned capital expenditures, working capital requirements, interest and principal payments on our debt, and other anticipated expenditures for the foreseeable future. We have no significant required debt repayments until 2014.

 

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Working Capital

Consolidated working capital, which includes current maturities of long-term debt, was $11.5 million at December 31, 2008, compared to $(0.3) million at December 31, 2007. The increase in working capital was primarily due to an increase in our current deferred tax assets resulting from the partial release of our deferred tax asset valuation allowance as well as the current deferred tax asset resulting from our 2008 NOL that we expect to carryback in order to offset 2007 taxable income. The deferred tax assets are classified as current because we expect to realize the benefit within the next twelve months.

Cash Flow—2008 Compared to 2007

Net cash provided by operating activities was $21.1 million in 2008, compared to net cash used in operating activities of $45.5 million in 2007. This increase in cash flow from operating activities was primarily due to less cash paid for interest and taxes of $70.7 million and $34.0 million, respectively, offset by less cash flows provided by operating activities of businesses that were discontinued and sold in 2007 and the first half of 2008. For purposes of calculating cash provided by or used in operating activities, discontinued operations are included until sold or shut down; therefore, these discontinued operations did not contribute to operating activities for the full year in which the sale occurred.

Cash Flows from Investing Activities

Our cash flows provided by investing activities are summarized as follows:

 

     Years Ended December 31,     $ Change  
     2008     2007    
     (Dollars in thousands)  

Purchases of available for sale securities

   $     $ (247,426 )   $ 247,426  

Proceeds from sales of available for sale securities

     15,425       232,001       (216,576 )

Payments for equity investments

     (14 )           (14 )

Additions to property and equipment

     (12,977 )     (20,352 )     7,375  

Proceeds from sales of businesses

     2,389       1,352,626       (1,350,237 )

Payments related to the sale of businesses

     (4,355 )     (21,420 )     17,065  

Payments for businesses acquired, net of cash acquired

           (34,129 )     34,129  

Proceeds from sale of other investments

           289       (289 )
                        

Net cash provided by investing activities

   $ 468     $ 1,261,589     $ (1,261,121 )
                        

The decrease in net cash provided by investing activities was primarily due to the cash proceeds received from the sale of the Enthusiast Media segment and most of the Education segment during 2007.

Cash Flows from Financing Activities

Our cash flows used in financing activities are summarized as follows:

 

     Years Ended December 31,     $ Change  
     2008     2007    
     (Dollars in thousands)  

Payment of dividend on common stock

   $ (12,359 )   $ (95,010 )   $ 82,651  

Net borrowings under revolving credit facility

     13,200             13,200  

Borrowings under credit agreements

           282,800       (282,800 )

Repayments of borrowings under credit agreements

     (2,500 )     (528,800 )     526,300  

Capital lease payments

     (506 )     (739 )     233  

Payments for redemption of senior notes

     (2,679 )     (859,735 )     857,056  

Deferred financing costs paid

           (6,287 )     6,287  

Proceeds from issuances of common stock, net

     42       722       (680 )

Other

     (1 )     (114 )     113  
                        

Net cash used in financing activities

   $ (4,803 )   $ (1,207,163 )   $ 1,202,360  
                        

 

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This decrease in net cash used in financing activities was primarily due to net borrowings in 2008 of $7.5 million compared to net repayment of debt of approximately $1,106.4 million in 2007, as well as a decrease in cash dividends paid on our common stock of $82.7 million.

Cash Flow—2007 Compared to 2006

Net cash used in operating activities was $45.5 million in 2007, compared to net cash generated from operating activities of $37.8 million in 2006. This decrease was primarily due to the settlement during 2007 of numerous accrued expenses and other liabilities existing at December 31, 2006, including payroll, commissions and related employee benefits, retail display costs and allowances, rent and lease liabilities, circulation costs and deferred purchase price obligations, as well as cash paid for taxes. The decreases in these liabilities were largely due to the divestitures completed in 2007. Cash used in operating activities was partially offset by a decrease in cash paid for interest due to a lower average balance of debt outstanding during 2007. For purposes of calculating cash provided by or used in operating activities, discontinued operations are included until sold or shut down; therefore, these discontinued operations did not contribute to operating activities for the full year in which the sale occurred.

Cash Flows from Investing Activities

Our cash flows provided by investing activities are summarized as follows:

 

     Years Ended December 31,     $ Change  
     2007     2006    
     (Dollars in thousands)  

Purchases of available for sale securities

   $ (247,426 )   $     $ (247,426 )

Proceeds from sales of available for sale securities

     232,001             232,001  

Additions to property and equipment

     (20,352 )     (26,762 )     6,410  

Proceeds from sales of businesses

     1,352,626       152,348       1,200,278  

Payments related to the sale of businesses

     (21,420 )           (21,420 )

Payments for businesses acquired, net of cash acquired

     (34,129 )     (23,858 )     (10,271 )

Proceeds from sale of other investments

     289       1,300       (1,011 )
                        

Net cash provided by investing activities

   $ 1,261,589     $ 103,028     $ 1,158,561  
                        

The increase in net cash provided by investing activities was primarily due to the sale of the Enthusiast Media segment and most of the Education segment during 2007. The proceeds from the sale of businesses (net of payments related to the sale of business) increased approximately $1,178.9 million in 2007.

Cash Flows from Financing Activities

Our cash flows used in financing activities are summarized as follows:

 

     Years Ended December 31,     $ Change  
     2007     2006    
     (Dollars in thousands)  

Payment of dividend on common stock

   $ (95,010 )   $     $ (95,010 )

Borrowings under credit agreements

     282,800       271,100       11,700  

Repayments of borrowings under credit agreements

     (528,800 )     (288,100 )     (240,700 )

Capital lease payments

     (739 )     (2,448 )     1,709  

Payments for redemption of senior notes

     (859,735 )     (122,968 )     (736,767 )

Deferred financing costs paid

     (6,287 )           (6,287 )

Proceeds from issuances of common stock, net

     722       426       296  

Other

     (114 )     (216 )     102  
                        

Net cash used in financing activities

   $ (1,207,163 )   $ (142,206 )   $ (1,064,957 )
                        

 

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The increase in net cash used in financing activities is primarily due to the increase in repayment of debt of approximately $977.5 million in 2007, as well as cash dividends paid on our common stock of $95.0 million.

Why We Use the Term Free Cash Flow

Free cash flow is defined as net cash provided by operating activities adjusted for additions to property, equipment and other, net, exclusive of acquisitions, and capital lease payments.

We believe that the use of free cash flow enables our chief operating decision maker, our President and CEO, to make decisions based on our cash resources. We also believe that free cash flow provides useful information to investors as it is considered to be an indicator of our liquidity, including our ability to reduce debt and make strategic investments.

Free cash flow is not intended to represent cash flows from operating activities as determined in conformity with GAAP. Free cash flow, as presented, may not be comparable to similarly titled measures reported by other companies since not all companies necessarily calculate free cash flow in an identical manner, and therefore, it is not necessarily an accurate measure of comparison between companies.

The following table presents our free cash flow:

 

     Years Ended December 31,  
     2008     2007     2006  
     (Dollars in thousands)  

Net cash provided by (used in) operating activities

   $ 21,096     $ (45,545 )   $ 37,751  

Additions to property and equipment

     (12,977 )     (20,352 )     (26,762 )

Capital lease payments

     (506 )     (739 )     (2,448 )
                        

Free cash flow

   $ 7,613     $ (66,636 )   $ 8,541  
                        

Our free cash flow improved in 2008, primarily due to the lower cash paid for income taxes, primarily related to divestitures, lower debt service, due to a lower average balance of debt outstanding, and by lower additions to property and equipment. This was partially offset by the fact that, for purposes of calculating cash provided by or used in operating activities, discontinued operations are included until sold or shut down; therefore, these discontinued operations did not contribute to operating activities for the full year in which the sale occurred.

Financing Arrangements

Bank Credit Facilities

On August 1, 2007, we completed the financing for a $350.0 million senior secured bank credit facility. The new bank credit facility provides for two loan facilities: (1) a revolving credit facility with aggregate commitments of $100.0 million (the “Revolving Facility”), which matures on August 1, 2013, and (2) a Term Loan B credit facility in an aggregate principal amount of $250.0 million (the “Term Loan B Facility”), which matures on August 1, 2014 (the “Term Loan B Maturity Date”). We capitalized approximately $6.3 million of financing costs associated with the new credit facilities. Amounts borrowed under the Revolving Facility bear interest, at our option, at an annual rate of either the base rate plus an applicable margin ranging from 0.625% to 1.00% or the eurodollar rate plus an applicable margin ranging from 1.625% to 2.00%. The weighted-average interest rate on the Revolving Facility at December 31, 2008 was 2.46%. The Term Loan B Facility bears interest, at our option, at an annual rate of either the base rate plus an applicable margin ranging from 1.00% to 1.25% or the eurodollar rate plus an applicable margin ranging from 2.00% to 2.25%. The weighted-average interest rate on the Term Loan B Facility at December 31, 2008 was 3.62%. As a result of the bankruptcy filing of Lehman Brothers Holdings Inc. discussed above, we believe the aggregate commitments available to us under the Revolving Facility have been effectively reduced to $88.0 million.

 

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There are no scheduled commitment reductions under the Revolving Facility. The loan under the Term Loan B Facility is subject to scheduled repayment in quarterly installments of approximately $0.6 million each payable on March 31, June 30, September 30 and December 31 of each year commencing on March 31, 2008 and ending on June 30, 2014, followed by a final repayment of $233.8 million on the Term Loan B Maturity Date. Additionally, through August 1, 2009, we are required to manage our interest rate risk arising from the Term Loan B Facility through the utilization of derivative financial instruments in a notional amount equal to at least 35% of the Term Loan B Facility principal outstanding. We had derivative financial instruments with a notional amount equal to 90.9% of the unpaid principal balance of the Term Loan B Facility in a designated hedging relationship at December 31, 2008.

The bank credit facilities consisted of the following as of December 31, 2008 (dollars in thousands):

 

     Revolver     Term B     Total  

Bank credit facilities(1)

   $ 88,000     $ 247,500     $ 335,500  

Borrowings outstanding

     (13,200 )     (247,500 )     (260,700 )

Letters of credit outstanding

     (3,834 )           (3,834 )
                        

Unused bank commitments

   $ 70,966     $     $ 70,966  
                        

 

(1) As a result of the bankruptcy filing of Lehman Brothers Holdings Inc. discussed above, we believe the aggregate commitments available to us under the Revolving Facility have been effectively reduced from $100.0 million to $88.0 million.

Under the new bank credit facilities agreement, we have agreed to pay commitment fees at a per annum rate of either 0.375%, 0.300% or 0.250%, depending on our debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio, as defined in the bank credit facilities agreement, on the daily average aggregate unutilized commitment under the revolving loan commitment. The weighted-average of our commitment fees under the new bank credit facilities agreement for 2008 and for the five months it was outstanding during 2007 was 0.32% and 0.36%, respectively. We also have agreed to pay certain fees with respect to the issuance of letters of credit and an annual administration fee. From time to time, we may pay amendment fees under our bank credit facilities agreement.

The bank credit facilities agreement, among other things, limits our ability to change the nature of our 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 our common stock.

Revolving Facility

In June 2008, we borrowed $5.0 million against our Revolving Facility, which was repaid in July 2008. In September 2008, we borrowed $13.2 million against our Revolving Facility, which remained outstanding at year-end.

8% Senior Notes

On May 15, 2008, we redeemed the remaining $2.6 million in 8% Senior Notes due 2013 outstanding. The Notes were redeemed at a 4% premium of the outstanding aggregate principal amount, which was approximately $0.1 million, plus accrued and unpaid interest thereon until the redemption date. We did not incur any early termination penalties in connection with the redemption of the 8% Senior Notes beyond the 4% redemption premium.

Interest Rate Swaps

As of December 31, 2008, we were party to five interest rates swaps with an aggregate notional amount of $225.0 million. All of the interest rate swaps were in designated hedging relationships to hedge the variability of future cash flows due to changes in the benchmark interest rate associated with our Term Loan B Facility. One of

 

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the interest rate swaps with a notional amount of $50.0 million matures on December 31, 2010; two with an aggregate notional amount of $75.0 million mature on December 31, 2009, and two with an aggregate notional amount of $100.0 million mature on September 30, 2009.

Contractual Obligations

Our contractual obligations as of December 31, 2008 are as follows:

 

Contractual Obligations

  Total   Payments Due by Period
    Less than1
year
  1-3 years   4-5 years   After 5 years
         
    (Dollars in thousands)

Long-term debt obligations, including current portion(1)

  $ 247,500   $ 2,500   $ 5,000   $ 5,000   $ 235,000

Capital lease obligations, including current portion

    1,076     544     521     11    

Interest on capital lease obligations

    282     194     88        

Operating lease obligations(2)

    119,437     20,540     36,091     30,638     32,168

Retail display allowances

    98,440     46,405     40,340     9,054     2,641

Workplace Learning lease obligations(3)

    10,786     3,099     3,963     1,790     1,934
                             

Total

  $ 477,521   $ 73,282   $ 86,003   $ 46,493   $ 271,743
                             

 

(1) Interest related to our long-term debt obligations are variable in nature, and interest payments have been excluded from this table. The interest rate on these obligations resets quarterly and had a weighted-average rate of 3.62% at December 31, 2008. See the discussion above under Bank Credit Facilities.

 

(2) Future rental commitments for operating leases have not been reduced by minimum noncancelable sublease income aggregating $62.6 million as of December 31, 2008. Operating lease obligations include restructuring liabilities.

 

(3) Amounts represent the present value of expected future net payments related to Workplace Learning lease obligations. See Contingencies and Other discussion below for further detail.

The contractual obligations table above does not reflect any of our $83.6 million in unrecognized tax benefits at December 31, 2008, which resulted in a recorded liability of $22.8 million that has been accrued in accordance with FIN 48 because we are unable to determine when, or if, payment of these amounts will be made.

We had $13.2 million in borrowings outstanding at December 31, 2008 under our Revolving Facility. The interest rate is variable in nature and resets quarterly. It was 2.46% at December 31, 2008. The Revolving Facility does not have a scheduled repayment date, and both the amount outstanding and the related interest payments have been excluded from this table. See discussion above on Bank Credit Facilities.

We have other commitments in the form of letters of credit of $3.8 million aggregate face value, which expire on or before December 31, 2008.

A change in the rating of our debt instruments by outside rating agencies does not negatively impact our ability to use our available lines of credit or the borrowing rate under our bank credit facilities. As of November 2008, our senior debt ratings from Moody’s and Standard and Poor’s were Ba3 and BB, respectively.

We announced on March 12, 2009 that our Board of Directors had authorized a cash dividend of $0.07 per share of common stock, payable on March 31, 2009, to stockholders of record on March 23, 2009. We expect to pay this dividend out of our existing cash balance. Additionally, we currently expect that we will continue to pay a

 

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regular quarterly dividend for the foreseeable future, at the discretion of our Board of Directors, dependent on such factors as available cash, anticipated cash needs, overall financial and market conditions, future prospects for cash flow and such other factors as are deemed relevant by our Board of Directors.

Off Balance Sheet Arrangements

We have 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.

Covenant Compliance

Under the most restrictive covenants contained in the new bank credit facilities agreement, the maximum allowable total leverage ratio, as defined in the agreement, is 5.25 to 1.

Under our bank credit facilities agreement, we are 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. We have designated certain of our businesses as unrestricted (the “Unrestricted Group”), which represent primarily 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. Indebtedness under the bank credit facilities agreement is guaranteed by each of our domestic subsidiaries in the Restricted Group in accordance with the provisions and limitations of our bank credit facilities agreement. The guarantees are full, unconditional, and joint and several. The Unrestricted Group does not guarantee the bank credit facilities. For purposes of determining compliance with certain financial covenants under our 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 facilities 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 calculation of our leverage ratio, as required under the bank credit facilities agreement for covenant purposes, is defined as our consolidated debt divided by the EBITDA of the Restricted Group. As of December 31, 2008, this leverage ratio was approximately 3.2 to 1, compared to 2.9 to 1 at December 31, 2007.

Contingencies and Other

We are involved in lawsuits and claims, both actual and potential, including some that we have asserted against others, in which substantial monetary damages are sought. See Note 20, “Commitments and Contingencies,” to the consolidated financial statements in Item 8 of this Report for a description of certain of these lawsuits, including a description of the settlement of a lawsuit related to the divestiture of our Crafts Group in 2006. As discussed in Note 20, although the result of any future litigation of such lawsuits and claims is inherently unpredictable, management believes that, in the aggregate, the outcome of all such lawsuits and claims will not have a material effect on our consolidated financial position or liquidity; however, any such outcome could be material to the results of operations of any particular period in which costs, if any, are recognized.

As of and for the year ended December 31, 2008, none of our officers or directors have been granted loans by us, nor have we guaranteed any obligations of such persons.

In 2005, we sold substantially all of the assets of Workplace Learning for the assumption of ongoing liabilities, while retaining a secondary liability as the assignor of the building and satellite time leases. We received a third-party guaranty of up to $10.0 million against those lease obligations to reimburse us for lease payments made (the “Guaranty”). In the first half of 2006, we made payments on behalf of Workplace Learning pursuant to our secondary liability. During the second quarter of 2006, we recorded a liability for the fair value of the lease payments, net of sublease income, related to our secondary liability on the lease payments. At that time, we also

 

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recorded a receivable of $10.0 million for the amount due from the third-party guarantor for the lease payments. As a result of recording the receivable and liability during the second quarter of 2006, we recorded a charge of approximately $7.2 million to discontinued operations. In the second half of 2006, we commenced a lawsuit to collect on the Guaranty. During the fourth quarter of 2006, we determined that it was not probable that the third party would remit payment, as required under the Guaranty, and we fully reserved for the $10.0 million receivable with a charge to discontinued operations as of December 31, 2006. We continue to exercise all available legal remedies against the third-party guarantor and to fulfill our secondary obligation regarding the Workplace Learning lease.

On October 19, 2008, the assignee of the building lease and a related entity filed petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Texas. That proceeding is at an early stage, and the ultimate outcome of the proceeding, including the full effect on the Company’s secondary liability as assignor of the building lease, and the Company’s recovery, if any, on claims that the Company may have against the assignee, is uncertain.

As of December 31, 2008, we have recorded a total liability of $10.8 million for the fair value of the future lease payments, net of estimated sublease income, in the consolidated balance sheet.

Stock Repurchase Plan

On December 4, 2008, our Board of Directors authorized a program to repurchase up to $5.0 million of our common stock over the next 12 months. Under the terms of the repurchase program, we may repurchase shares in open market purchases or through privately negotiated transactions. We expect to use cash on hand to fund repurchases of our common stock. As of December 31, 2008, we had not repurchased any shares under the plan, and $5.0 million remained available for share repurchases. See Note 23, “Subsequent Events,” to the consolidated financial statements in this Report for more information.

Recent Accounting Pronouncements

See Note 2, “Summary of Significant Accounting Policies—Recent Accounting Pronouncements,” to the consolidated financial statements, which is included in Item 8 of this Report.

Impact of Inflation and Other Costs

Our largest exposure to inflation relates to the cost of paper. The cost of paper increased in 2008 compared to 2007, rising in the second quarter by 6.3% and again by 3.8% in the fourth quarter. We presently anticipate slight decreases in paper prices in 2009.

Seasonality

Our operations are minimally seasonal in nature.

 

   

The majority of our sales comprise contracts with a duration of 12 months or longer.

   

We experience modest seasonality in our single-unit real estate listing as that business declines in the winter months. This business represents a relatively small part of the total business.

 

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

Interest Rate Risk

We are exposed to the impact of changes in interest rates, primarily through our Term Loan B Facility, which is variable-rate debt that had an outstanding balance of $247.5 million at December 31, 2008. As part of our management of interest rate risk, we have designated derivative financial instruments in hedging relationships against the variability in cash flows due to changes in the benchmark interest rate on our Term Loan B Facility. The table below shows the change in interest expense we estimate would occur over the next 12 months from 50 and 100 basis point increases and decreases in interest rates based upon our current Term Loan B Facility balance and derivative financial instrument positions at December 31, 2008. Such potential increases or decreases are based on certain simplifying assumptions, including a constant level of debt and an immediate, across-the-board increase or decrease in the level of interest rates with no other subsequent changes for one year.

 

Changes in Interest Expense

 
     December 31,  

Interest Rate

Change (in Basis

Points)

     2008         2007    
     (Dollars in thousands)  

+100

   $ 466     $ 491  

+50

     233       245  

-50

     (233 )     (245 )

-100

     (466 )     (491 )

Credit Risk

Our hedging transactions using derivative financial instruments also involve certain additional risks, such as counterparty credit risk. The counterparties to our derivative financial instruments are major financial institutions and securities dealers, which we believe are well capitalized with investment grade credit ratings and with which we may have other financial relationships. While we do not anticipate nonperformance by any counterparty, we are exposed to potential credit losses in the event the counterparty fails to perform. Our exposure to credit risk in the event of default by a counterparty is the difference between the value of the contract and the current market price at the time of the default. There can be no assurance that we will be able to adequately protect against the foregoing risks and will ultimately realize an economic benefit that exceeds the related expenses incurred in connection with engaging in such hedging strategies.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements

 

   Page

Selected Quarterly Data

   35

Report of Independent Registered Public Accounting Firm

   37

Consolidated Balance Sheet as of December 31, 2008 and 2007

   38

Consolidated Statement of Operations for the Years Ended December 31, 2008, 2007 and 2006

   39

Consolidated Statement of Changes in Stockholders’ Deficiency for the Years Ended December  31, 2008, 2007 and 2006

   40

Consolidated Statement of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006

   41

Notes to Consolidated Financial Statements

   42

Selected Quarterly Data

The following is selected unaudited consolidated financial data for the Company for the indicated periods:

 

    Year Ended December 31, 2008
    First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter
    Total
    (Unaudited)
    (Dollars in thousands, except per share data)

Revenue, net

  $ 77,488     $ 76,794     $ 76,414     $ 73,409     $ 304,105

Gross profit

    68,744       68,527       68,420       65,994       271,685

(Provision) benefit for income taxes

    (1,002 )     (1,267 )     (128 )     29,401       27,004

Income from continuing operations

  $ 2,214     $ 3,474     $ 8,648     $ 34,691     $ 49,027

Discontinued operations, net of tax

    11,383       (1,544 )     3,312       (2,710 )     10,441
                                     

Net income

  $ 13,597     $ 1,930     $ 11,960     $ 31,981     $ 59,468
                                     

Basic and diluted (loss) income per common share(1):

         

Continuing operations

  $ 0.05     $ 0.08     $ 0.20     $ 0.78     $ 1.11

Discontinued operations

    0.26       (0.04 )     0.07       (0.06 )     0.24
                                     

Net income

  $ 0.31     $ 0.04     $ 0.27     $ 0.72     $ 1.35
                                     

Basic common shares outstanding (weighted-average)

    44,171,917       44,174,533       44,175,009       44,184,134       44,176,398

Diluted common shares outstanding (weighted-average)

    44,203,993       44,189,055       44,188,562       44,208,750       44,197,590

 

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    Year Ended December 31, 2007  
    First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter
    Total  
    (Unaudited)  
    (Dollars in thousands, except per share data)  

Revenue, net

  $ 76,900     $ 78,511     $ 80,256     $ 79,133     $ 314,800  

Gross profit

    68,154       69,760       71,208       71,023       280,145  

Benefit (provision) for income taxes.

    5,876       8,780       21,214       (3,142 )     32,728  

(Loss) income from continuing operations

  $ (13,175 )   $ (11,109 )   $ (36,357 )   $ 4,963     $ (55,678 )

Discontinued operations, net of tax

    117,829       16,782       430,109       (17,597 )     547,123  
                                       

Net income (loss)

  $ 104,654     $ 5,673     $ 393,752     $ (12,634 )   $ 491,445  
                                       

Basic and diluted (loss) income per common share(1):

         

Continuing operations

  $ (0.30 )   $ (0.25 )   $ (0.82 )   $ 0.11     $ (1.26 )

Discontinued operations

    2.68       0.38       9.74       (0.40 )     12.40  
                                       

Net income (loss)

  $ 2.38     $ 0.13     $ 8.92     $ (0.29 )   $ 11.14  
                                       

Basic common shares outstanding (weighted-average)

    44,086,888       44,098,131       44,137,802       44,152,950       44,118,943  

Diluted common shares outstanding (weighted-average)

    44,086,888       44,098,131       44,137,802       44,259,053       44,118,943  

 

(1) Basic and diluted income (loss) per common share amounts have been computed using the weighted-average number of shares indicated below and, in all cases, round to the amounts presented.

Correction of Cash Flows from Operating and Investing Activities

During the preparation of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, the Company discovered an error in its reporting of cash flows from operating and investing activities in its consolidated statement of cash flows in its Quarterly Report on Form 10-Q for the nine months ended September 30, 2008. The Company improperly included the final adjustment to the net proceeds from the sale of its Enthusiast Media segment as an operating activity rather than an investing activity. This error had no impact on the Company’s consolidated balance sheet, consolidated statement of operations or cash flows from financing activities for any period.

The error resulted in an understatement of cash flows from operating activities and a corresponding overstatement of cash flows from investing activities for the nine months ended September 30, 2008.

A summary of the effects of the correction of this error is as follows (dollars in thousands):

 

For the Nine Months Ended September 30, 2008

   As Reported     Correction
Adjustment
    As
Corrected
 

STATEMENT OF CASH FLOWS

      

Changes in operating assets and liabilities

   $ (46,269 )   $ 4,355     $ (41,914 )

Net cash (used in) provided by operating activities

     (320 )     4,355       4,035  

Payments related to the sale of businesses

           (4,355 )     (4,355 )

Net cash provided by investing activities

     9,896       (4,355 )     5,541  

When the Company files its Quarterly Report on Form 10-Q for the period ended September 30, 2009, it will correct the amounts reported for 2008 consistent with the “As Corrected” amounts above.

 

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LOGO

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of

PRIMEDIA Inc.

Norcross, Georgia

We have audited the accompanying consolidated balance sheet of PRIMEDIA Inc. and subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of operations, changes in stockholders’ deficiency and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedule listed in the Index at Item 15(a)2. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 PRIMEDIA Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, the Company adopted the provisions of United States Securities and Exchange Commission Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, as of December 31, 2006 and the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 16, 2009 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

Atlanta, Georgia

March 16, 2009

 

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PRIMEDIA INC. AND SUBSIDIARIES

Consolidated Balance Sheet

 

     December 31,  
     2008     2007  
     (Dollars in thousands, except
per share data)
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 31,470     $ 14,709  

Available for sale securities

           15,425  

Accounts receivable (net of allowance for doubtful accounts of $1,528 and $1,271, respectively)

     27,983       27,692  

Inventories

     936       742  

Prepaid expenses and other

     26,545       8,155  

Deferred tax asset, net

     2,102        

Assets of businesses held for sale

           5,793  
                

Total current assets

     89,036       72,516  

Property and equipment (net of accumulated depreciation and amortization of $83,203 and $82,760, respectively)

     18,765       18,424  

Intangible assets, net

     23,637       26,426  

Goodwill

     129,305       129,286  

Deferred tax asset—non-current, net

     12,867        

Other non-current assets

     12,544       10,212  
                

Total assets

   $ 286,154     $ 256,864  
                

Liabilities and stockholders’ deficiency

    

Current liabilities:

    

Accounts payable

   $ 14,792     $ 11,874  

Accrued expenses and other

     44,491       51,291  

Deferred revenue

     1,990       1,942  

Revolving credit facility

     13,200        

Current maturities of long-term debt and capital lease obligations

     3,045       5,262  

Liabilities of businesses held for sale

           2,484  
                

Total current liabilities

     77,518       72,853  

Long-term debt

     245,531       247,575  

Deferred revenue

     9,350       11,050  

Deferred income tax liability—non-current, net

           12,264  

Other non-current liabilities

     51,043       56,947  
                

Total liabilities

     383,442       400,689  

Commitments and contingencies (Note 20)

    

Stockholders’ deficiency:

    

Common stock—par value $0.01; 350,000,000 shares authorized; 45,595,618 and 45,572,518 shares issued, respectively; 44,188,550 and 44,165,450 shares outstanding, respectively

    
     455       455  

Additional paid-in capital (including warrants of $31,690 at December 31, 2008 and 2007)

     2,372,578       2,370,428  

Accumulated deficit

     (2,389,610 )     (2,436,719 )

Common stock in treasury, at cost (1,407,068 shares at December 31, 2008 and 2007)

     (75,877 )     (75,877 )

Accumulated other comprehensive loss

     (4,834 )     (2,112 )
                

Total stockholders’ deficiency

     (97,288 )     (143,825 )
                

Total liabilities and stockholders’ deficiency

   $ 286,154     $ 256,864  
                

The accompanying notes are an integral part of these consolidated financial statements.

 

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PRIMEDIA INC. AND SUBSIDIARIES

Consolidated Statement of Operations

 

     Years Ended December 31,  
     2008     2007     2006  
     (Dollars in thousands, except per share data)  

Revenue, net:

      

Advertising

   $ 250,704     $ 257,164     $ 251,974  

Distribution

     53,401       57,636       55,955  
                        

Total revenue, net

     304,105       314,800       307,929  

Costs and expenses:

      

Cost of goods sold (exclusive of depreciation and amortization of property and equipment)

     32,420       34,655       35,963  

Marketing and selling

     75,722       81,064       76,432  

Distribution and circulation

     85,218       83,561       78,494  

General and administrative expenses

     48,700       57,747       66,800  

Depreciation and amortization of property and equipment

     14,475       12,612       11,501  

Amortization of intangible assets

     2,870       3,492       3,286  

Provision for restructuring costs

     5,238       10,496       1,306  

Interest expense

     19,338       77,660       126,940  

Amortization of deferred financing costs

     922       1,743       2,567  

Other (income) loss, net

     (2,821 )     40,176       1,337  
                        

Total costs and expenses

     282,082       403,206       404,626  

Income (loss) from continuing operations before benefit for income taxes

     22,023       (88,406 )     (96,697 )

Benefit for income taxes

     27,004       32,728       31,583  
                        

Income (loss) from continuing operations

     49,027       (55,678 )     (65,114 )

Discontinued operations, net of tax (including gain on sale of businesses, net of tax, of $2,049, $459,135 and $62,401, respectively)

     10,441       547,123       103,344  

Cumulative effect of change in accounting principle, net of tax

                 22  
                        

Net income

   $ 59,468     $ 491,445     $ 38,252  
                        

Basic and diluted earnings (loss) per common share:

      

Continuing operations

   $ 1.11     $ (1.26 )   $ (1.48 )

Discontinued operations

     0.24       12.40       2.35  

Cumulative effect of change in accounting principle

                 0.00  
                        

Net income

   $ 1.35     $ 11.14     $ 0.87  
                        

Dividends declared per share of common stock outstanding

   $ 0.28     $ 2.15     $  
                        

Weighted-average basic shares of common stock outstanding

     44,176,398       44,118,943       43,997,665  
                        

Weighted-average diluted shares of common stock outstanding

     44,197,590       44,118,943       43,997,665  
                        

The accompanying notes are an integral part of these consolidated financial statements.

 

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PRIMEDIA INC. AND SUBSIDIARIES

Consolidated Statement of Changes in Stockholders’ Deficiency

 

     Shares    Par
Value
   Additional
Paid-in
Capital
    Accumulated
Deficit
    Common
Stock in
Treasury
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Stockholders’
Deficiency
 
     (Dollars in thousands, except per share data)  

Balance at January 1, 2006

   45,359,813    $ 454    $ 2,365,339     $ (2,861,645 )   $ (75,877 )   $     $ (571,729 )

Comprehensive income:

                

Net income

                   38,252                   38,252  
                      

Total comprehensive income

                   38,252  

Cumulative effect of change in accounting principle, net of tax

             (352 )     6,365                   6,013  

Non-cash charges for stock-based compensation

             3,808                         3,808  

Issuances of common stock, net

   115,714      1      425                         426  
                                                    

Balance at December 31, 2006

   45,475,527      455      2,369,220       (2,817,028 )     (75,877 )           (523,230 )

Comprehensive income (loss):

                

Net income

                   491,445                   491,445  

Other comprehensive loss

                

Net unrealized losses on cash flow hedges

                               (2,112 )     (2,112 )
                      

Total comprehensive income

                   489,333  

Cumulative effect of change in accounting principle

             (16,126 )         (16,126 )

Non-cash charges for stock-based compensation

             486                         486  

Issuances of common stock, net

   96,991           722                         722  

Cash dividends declared on common stock ($2.15 per share)

                   (95,010 )                 (95,010 )
                                                    

Balance at December 31, 2007

   45,572,518      455      2,370,428       (2,436,719 )     (75,877 )     (2,112 )     (143,825 )

Comprehensive income (loss):

                

Net income

                   59,468                   59,468  

Other comprehensive loss, net of tax

                

Net unrealized losses on cash flow hedges

                               (2,722 )     (2,722 )
                      

Total comprehensive income

                   56,746  

Non-cash charges for stock-based compensation

             2,108                         2,108  

Issuances of common stock, net

   23,100           42                         42  

Cash dividends declared on common stock ($0.28 per share)

                   (12,359 )                 (12,359 )
                                                    

Balance at December 31, 2008

   45,595,618    $ 455    $ 2,372,578     $ (2,389,610 )   $ (75,877 )   $ (4,834 )   $ (97,288 )
                                                    

The accompanying notes are an integral part of these consolidated financial statements.

 

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PRIMEDIA INC. AND SUBSIDIARIES

Consolidated Statement of Cash Flows

 

     Years Ended December 31,  
     2008     2007     2006  
     (Dollars in thousands)  

Operating activities:

      

Net income

   $ 59,468     $ 491,445     $ 38,252  

Cumulative effect of change in accounting principle, net of tax

                 (22 )

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

      

Depreciation and amortization

     18,407       19,692       54,448  

Impairment on investments

     914              

Gain on sales of businesses, net

     (2,049 )     (459,135 )     (62,376 )

Accretion of acquisition obligation and other

           3,240       (830 )

Stock-based compensation

     2,108       486       3,808  

Deferred income taxes

     (27,233 )     (59,796 )     (6,526 )

Loss on redemption of debt

     103       44,339       2,598  

Bad debt expense

     3,817       3,282       5,518  

Loss on disposal of property and equipment

     1,251       5,963        

(Increase) decrease in:

      

Accounts receivable, net

     (2,310 )     (7,226 )     855  

Inventories

     (194 )     2,868       5,894  

Prepaid expenses and other

     (21,162 )     (351 )     (7 )

Increase (decrease) in:

      

Accounts payable

     2,690       (4,870 )     (2,045 )

Accrued expenses and other

     (7,157 )     (87,392 )     (14,746 )

Deferred revenue

     (1,652 )     (1,726 )     1,538  

Other non-current liabilities

     (5,910 )     442       6,264  

Other, net

     5       3,194       5,128  
                        

Net cash provided by (used in) operating activities

     21,096       (45,545 )     37,751  
                        

Investing activities:

      

Purchases of available for sale securities

           (247,426 )      

Proceeds from sales of available for sale securities

     15,425       232,001        

Payments for equity investments

     (14 )            

Additions to property and equipment

     (12,977 )     (20,352 )     (26,762 )

Proceeds from sales of businesses

     2,389       1,352,626       152,348  

Payments related to the sale of businesses

     (4,355 )     (21,420 )      

Payments for businesses acquired, net of cash acquired

           (34,129 )     (23,858 )

Proceeds from sale of other investments

           289       1,300  
                        

Net cash provided by investing activities

     468       1,261,589       103,028  
                        

Financing activities:

      

Payment of dividends on common stock

     (12,359 )     (95,010 )      

Net borrowings under revolving credit facility

     13,200              

Borrowings under credit agreements

           282,800       271,100  

Repayments of borrowings under credit agreements

     (2,500 )     (528,800 )     (288,100 )

Capital lease payments

     (506 )     (739 )     (2,448 )

Payments for redemption of senior notes

     (2,679 )     (859,735 )     (122,968 )

Deferred financing costs paid

           (6,287 )      

Proceeds from issuances of common stock, net

     42       722       426  

Other

     (1 )     (114 )     (216 )
                        

Net cash used in financing activities

     (4,803 )     (1,207,163 )     (142,206 )
                        

Increase (decrease) in cash and cash equivalents

     16,761       8,881       (1,427 )

Cash and cash equivalents, beginning of period

     14,709       5,828       7,255  
                        

Cash and cash equivalents, end of period

   $ 31,470     $ 14,709     $ 5,828  
                        

Supplemental information:

      

Cash paid for interest, including interest on capital and restructured leases

   $ 19,323     $ 90,037     $ 128,819  
                        

Cash paid for income taxes, net of refunds received

   $ 7,746     $ 41,755     $ 4,504  
                        

Noncash investing and financing activities:

      

Equipment acquisitions under capital leases

   $ 1,321     $     $  
                        

Businesses acquired:

      

Fair value of assets acquired

   $     $ 34,435     $ 25,205  

(Liabilities assumed) net of deferred purchase price payments

           (306 )     (1,347 )
                        

Payments for businesses acquired, net of cash acquired

   $     $ 34,129     $ 23,858  
                        

The accompanying notes are an integral part of these consolidated financial statements.

 

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PRIMEDIA INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1.    Description of Business

PRIMEDIA Inc., together with its subsidiaries, is herein referred to as either “PRIMEDIA” or the “Company,” unless the context implies otherwise. PRIMEDIA is an integrated media company that publishes and distributes advertising-supported print and online consumer guides, primarily for the apartment and other rental property sectors of the residential real estate industry in the United States. The print and online guides are provided free of charge to end users, and printed guides are distributed through the Company’s proprietary distribution network, which also provides distribution services to third-party publications.

The Company has traditionally managed its portfolio of media assets by opportunistically seeking to divest of assets no longer part of its overall strategy, including its Enthusiast Media, Education and Business Information segments and its Auto Guides division. As a result, the Company has one remaining segment, Consumer Guides, and one reporting unit.

Note 2.    Summary of Significant Accounting Policies

Use of Estimates. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) 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 allowance for doubtful accounts, the provision for restructuring costs, the cost of stock-based compensation, divestiture reserves, the valuation allowance for deferred tax assets, uncertain tax positions, and the recoverability and lives of long-lived assets, including goodwill.

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. Prior year editorial costs have been reclassed to cost of goods sold, and certain prior year liabilities reported in accounts payable have been reclassed to accrued expenses and other in order to conform to the current year presentation.

Cash and Cash Equivalents. Management considers all highly liquid instruments purchased with an original maturity of 90 days or less to be cash equivalents. As of December 31, 2008, cash equivalents include money market accounts.

Investment Securities. Investment securities are classified according to management’s intent with respect to the securities. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities, securities are classified as:

 

   

Held to maturity if management has the positive intent and ability to hold them to maturity. These securities are carried at cost, adjusted for the amortization of premium and accretion of discount.

   

Trading if the securities are principally held for the purpose of selling them in the near term. These securities are carried at fair value, with unrealized gains and losses recognized in the statement of operations.

   

Available for sale if the securities are not classified as held to maturity or trading. These securities are carried at fair value, with net unrealized gains and losses reported as a component of accumulated other comprehensive income (loss) (“AOCI”).

Concentrations of Credit Risk. Substantially all of the Company’s trade receivables are from 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

 

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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 exposure outstanding as of December 31, 2008.

Inventories. Inventories, principally paper, are valued at the lower of cost or market, on a first-in, first-out basis.

Property and Equipment. Property and equipment 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 the straight-line method. Improvements which extend the lives of assets are capitalized, while maintenance and repairs are expensed as incurred.

Goodwill and Other Intangible Assets. Goodwill and other intangible assets are accounted for in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. Consistent with SFAS No. 142, the Company does not amortize goodwill and indefinite-lived intangible assets, primarily trademarks, but subjects them to impairment tests, at least annually. All other intangible assets are amortized over their estimated useful lives, primarily on a straight-line basis. The Company’s annual impairment testing date for goodwill and indefinite-lived intangible assets is October 31. Testing is conducted using a fair value approach (at a reporting unit level for goodwill). 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 are assigned to reporting units to the extent that they are employed in or are considered a liability related to the operations of the reporting units and are considered in determining the fair value of the reporting units. Fair value is determined by calculating the present value of management’s best estimate of future cash flows at the reporting unit or for the asset as applicable. The Company uses a discount rate that represents its weighted-average cost of capital (13% for 2008 and 9.5% for 2007). The fair value is compared to the carrying value of the reporting unit, or of the asset, as applicable. As long as the fair value is greater, there is no impairment.

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.

Except as indicated in Note 3, the Company’s impairment testing under SFAS No. 142 did not result in any impairments for any periods presented.

Long-Lived Assets. Consistent with SFAS No. 144, Accounting for the Impairment on Disposal of Long-Lived Assets, the Company reviews long-lived assets for impairment whenever events and circumstances indicate assets might be impaired. When such reviews are conducted, the Company uses an estimate of undiscounted cash flows over the remaining lives of the assets to measure recoverability. If the estimated cash flows are less than the carrying value of an asset, the loss is measured as the amount by which the carrying value of the asset exceeds fair value.

Income Taxes. Income taxes are accounted for in accordance with SFAS No. 109, Accounting for Income Taxes, which requires an asset and liability approach for the accounting and reporting of income taxes. The provision for income taxes is comprised of taxes that are currently payable and deferred taxes that relate to temporary differences between the book basis and tax basis of assets and liabilities that will result in deductible or taxable amounts in future years when such assets and liabilities are recovered or settled, respectively. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be realized or settled. Recognition of certain deferred tax assets is based upon management’s belief that, based upon historical earnings and anticipated future earnings, normal operations or available tax planning strategies will generate sufficient future taxable income to realize these benefits. A significant portion of the Company’s deferred tax assets are net operating loss carryforwards (“NOLs”), which have lives of up to 20 years. When, in the opinion of management, it is “more likely than not” that deferred tax assets will be realized, no valuation allowance is established for those deferred tax assets.

 

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In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, effective for fiscal years beginning after December 15, 2006. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 requires that, in order to be recognized, tax benefits must be more likely than not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Differences between the amounts recognized in the balance sheet prior to the adoption of FIN 48 and the amounts reported after adoption were accounted for as a cumulative-effect adjustment recorded to the beginning balance of accumulated deficit. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The Company adopted the provisions of FIN 48 on January 1, 2007 and, as a result, recognized a liability for uncertain tax positions and related interest and penalties of $16.1 million, which was accounted for as an increase to the January 1, 2007 balance of accumulated deficit, net of any valuation allowance impact. The total amount of unrecognized tax benefits as of January 1, 2007 was $102.5 million. In addition to the unrecognized tax benefits, the Company had $3.7 million of interest and penalties accrued as of January 1, 2007. The FIN 48 liability is included in other non-current liabilities in the consolidated balance sheet.

The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits in the provision for income taxes.

Deferred Financing Costs. Deferred financing costs are amortized under the straight-line method over the terms of the related indebtedness, which approximates the effective interest method.

Stock-Based Compensation. Prior to January 1, 2006, the Company accounted for stock-based compensation under SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, under the prospective method. Upon the adoption of SFAS No. 123, the Company began expensing the fair value of stock-based compensation for all grants, modifications or settlements made on or after January 1, 2003. Effective January 1, 2006, the Company adopted the provisions of, and accounts for stock-based compensation in accordance with, SFAS No. 123(R), Share-Based Payment, which replaced SFAS No. 123 and superseded Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees. Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period, giving effect to anticipated forfeitures of awards. The Company elected the modified prospective transition method, which requires recognition of compensation expense from the beginning of the fiscal period in which the recognition provisions are first applied as if the fair-value-based accounting method had been used to account for all employee awards granted, modified or settled after the effective date and to any awards that were not fully vested as of the effective date.

Upon adoption of SFAS No. 123(R), the Company recorded an increase in net income of $0.4 million as a portion of the cumulative effect of change in accounting principle due to SFAS No. 123(R)’s requirement to apply an estimated forfeiture rate to unvested awards, which were previously recognized when they occurred, and a reduction to net income of $0.3 million as a portion of the cumulative effect of change in accounting principle due to SFAS No. 123(R)’s requirement to value stock-based compensation related to the acquisition of Automotive.com.

The Company calculates the grant date fair value of employee stock options using the Black-Scholes pricing model. The Black-Scholes pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of

 

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highly subjective assumptions, including the expected stock price volatility. The Company’s employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate of its employee stock options.

The Company recognizes the cost of graded-vesting stock-based compensation awards expected to vest on a straight-line basis over the requisite service period.

Revenue Recognition. Advertising revenue is recognized ratably over the term of the contract with advertisers. Distribution revenue is recognized ratably over the term of the contract with third-party publishers.

Barter Transactions. The Company trades advertisements in its traditional and online properties in exchange for advertising in properties of other companies and distribution-related expenses. Revenue and related expenses from barter transactions are recorded at fair value in accordance with APB Opinion No. 29, Accounting for Nonmonetary Transactions, as amended by SFAS No. 153, Exchanges of Nonmonetary Assets, Emerging Issues Task Force Issue (“EITF”) No. 93-11, Accounting for Barter Transactions Involving Barter Credits, EITF No. 99-17, Accounting for Advertising Barter Transactions, and EITF No. 01-2, Interpretations of APB No. 29. Revenue from barter transactions was approximately $1.8 million, $2.5 million and $6.4 million for the years ended December 31, 2008, 2007 and 2006, respectively, with approximately equal related expense amounts in each year.

Cost of Goods Sold. Costs of goods sold is comprised of paper, printing and editorial costs, which include the cost of artwork, graphics, prepress and photography for new advertising, and which are expensed as incurred.

Internal-Use Software. In compliance with American Institute of Certified Public Accountants 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 developing or obtaining 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 in the consolidated balance sheet. 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 two years using the straight-line method. Capitalized software costs are subject to impairment evaluation in accordance with the provisions of SFAS No. 144.

Derivative Financial Instruments. In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, the Company records all derivative financial instruments in the consolidated balance sheet at their fair value in prepaid expenses and other or other non-current assets and in accrued expenses and other or other non-current liabilities. Changes in fair value are recorded each period in operations or AOCI, depending upon the purpose for using the derivative financial instrument and its qualification, designation and effectiveness as a hedging instrument. Under SFAS No. 133, the Company may designate a derivative financial instrument as a hedging instrument in either a cash flow or a fair value hedging relationship.

Derivative financial instruments designated in a hedging relationship to mitigate exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. To the extent that a hedging instrument is proven effective in mitigating exposure to the risk being hedged, changes in fair value of the hedged item are recorded within operations as an offset to amounts recorded with respect to fair value changes of the derivative financial instrument.

Derivative financial instruments that are designated to hedge the variability in expected future cash flows of forecasted transactions are considered cash flow hedges. The effective portion of the change in fair value of the

 

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derivative financial instrument is recorded in AOCI and reclassified into operations during the period in which the hedged transaction occurs. Any ineffectiveness in an effective hedging relationship is recorded in current period operations within the related revenue or expense line of the hedged item.

The Company must perform a prospective assessment at the inception of each hedging relationship and at least quarterly thereafter to determine whether the derivative financial instrument is expected to be highly effective in hedging the designated risk. If the derivative financial instrument is no longer expected to be highly effective in the hedging relationship, hedge accounting must be discontinued prospectively. Retrospective testing must also be performed quarterly to determine whether the derivative financial instrument has been highly effective in achieving risk management objectives. When a hedging relationship fails retrospective testing, hedge accounting is discontinued at the date when the hedge was last demonstrated to be effective.

Hedge accounting is discontinued prospectively in existing hedging relationships when: (1) any qualification criteria can no longer be met; (2) the hedging instrument has expired, been sold, terminated or exercised; (3) the hedged item has been sold, matured or terminated; (4) it is no longer deemed probable that a hedged forecasted transaction will occur; or (5) management determines that a hedge is no longer deemed appropriate and de-designates the hedging instrument.

In the case of fair value hedges, when: (1) hedging criteria are no longer met; (2) management de-designates the hedging instrument; or (3) the hedging instrument has expired, been sold, terminated or exercised, the Company discontinues recording changes in fair value of the hedged item and amortizes the existing basis adjustment to operations over the hedged item’s remaining expected life. For fair value hedges where the hedged item has been sold, matured or terminated, the difference between the carrying value of the hedged item and its fair value is recorded in current operations.

For cash flow hedges, when: (1) hedging criteria are no longer met; (2) management de-designates the hedging instrument; or (3) the hedging instrument has expired, been sold, terminated or exercised, changes in the value of the derivative financial instrument are recorded to current operations, while the net gain or loss previously recorded in AOCI continues to be reported there until the hedged forecasted transaction impacts operations. When the hedged forecasted transaction is deemed probable to not occur, the amount recorded in AOCI is immediately released into current operations.

Derivative financial instruments and hedging activities—business perspective. The Company utilizes derivative financial instruments, including interest rate swaps, to manage interest rate risks associated with its debt facilities. As of December 31, 2008, the Company’s derivative financial instrument positions were comprised of interest rate swap agreements, which were designated in cash flow hedging relationships. The Company does not use derivative financial instruments for speculative purposes.

Fair Value Measurements. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which provides guidance on how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP. SFAS No. 157 creates a common definition of fair value to be used throughout GAAP and prescribes methods for measuring fair value, which are intended to make the measurement of fair value more consistent and comparable across companies.

SFAS No. 157 establishes a three-tiered hierarchy to prioritize inputs used to measure fair value. Those tiers are defined as follows:

 

   

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

   

Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability.

   

Level 3 inputs are unobservable inputs for the asset or liability.

 

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The highest priority in measuring assets and liabilities at fair value is placed on the use of Level 1 inputs, while the lowest priority is placed on the use of Level 3 inputs.

This statement also expands the related disclosure requirements in an effort to provide greater transparency around fair value measures. SFAS No. 157 is effective as of the beginning of fiscal years beginning after November 15, 2007.

In February 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-2, which delays the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years, for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Examples of items to which the deferral would apply include, but are not limited to:

 

   

Nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination or other new basis event, but not measured at fair value in subsequent periods (nonrecurring fair value measurements);

   

Reporting units measured at fair value in the first step of a goodwill impairment test and nonfinancial assets and nonfinancial liabilities measured at fair value in the second step of a goodwill impairment test (measured at fair value on a recurring basis, but not necessarily recognized or disclosed in the financial statements at fair value);

   

Indefinite-lived intangible assets measured at fair value for impairment assessment (measured at fair value on a recurring basis, but not necessarily recognized or disclosed in the financial statements at fair value);

   

Long-lived assets (asset groups) measured at fair value for an impairment assessment (nonrecurring fair value measurements); and

   

Liabilities for exit or disposal activities initially measured at fair value (nonrecurring fair value measurements).

The Company adopted SFAS No. 157 on January 1, 2008 for its financial assets and liabilities, and the adoption did not have a material impact on the Company’s financial condition, results of operations or cash flows. The Company is still evaluating the impact of the items deferred by FSP FAS 157-2 (see Note 19 for information and related disclosures regarding the Company’s fair value measurements).

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This statement permits companies to choose, at specified election dates, to measure eligible items, which include most recognized financial assets and liabilities and firm commitments, at fair value with unrealized gains and losses on items for which the fair value option has been elected reported in earnings at each subsequent reporting date. Generally, the decision about whether to elect the fair value option must be:

 

   

Applied instrument by instrument;

   

Irrevocable; and

   

Applied only to an entire instrument and not to only specified risks, specific cash flows or portions of that instrument.

A company may decide whether to elect the fair value option for each eligible item on its election date. Alternatively, a company may elect the fair value option according to a preexisting policy for specified types of eligible items. A company may choose to elect the fair value option for an eligible item only on the date that certain events occur, including when:

 

   

A company first recognizes the eligible item;

   

A company enters into an eligible firm commitment;

   

Financial assets that have been reported at fair value with unrealized gains and losses included in earnings because of specialized accounting principles cease to qualify for that specialized accounting; or

   

The accounting treatment for an investment in another entity changes.

 

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This statement is effective as of the beginning of fiscal years that begin after November 15, 2007. The Company did not elect the fair value option for any of its financial assets or liabilities upon adoption of SFAS No. 159 on January 1, 2008, resulting in no impact on its financial condition, results of operations or cash flows.

Effect of Prior Year Misstatements. In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. This bulletin summarizes the SEC staff’s view regarding the process of quantifying financial statement misstatements. SAB No. 108 permits companies to adjust for the cumulative effect of immaterial errors relating to prior years in the carrying amount of assets and liabilities as of the beginning of the fiscal year, with an offsetting adjustment to the opening balance of accumulated deficit in the year of adoption. SAB No. 108 became effective for reporting periods ending after November 15, 2006. The Company adopted SAB No. 108 during the fourth quarter of 2006 and identified three matters for consideration under this bulletin.

The first was identified trademarks related to inactive publications, which were not written off in the years that they became inactive (2002—2005). Management believes that this error, totaling approximately $5.3 million, net of deferred tax liabilities, was not material to the consolidated financial statements of the prior years. However, management does believe that this error was material to its consolidated financial statements for 2006 and upon adoption of SAB No. 108, recorded a cumulative effect adjustment as of January 1, 2006, which increased accumulated deficit by approximately $5.3 million and as a result, reduced intangible assets by approximately $6.9 million and deferred tax liabilities by approximately $1.6 million.

The second was a conclusion that, based on applicable tax regulations, a worthless stock deduction associated with the divestiture of PRIMEDIA Business Magazines and Media, should have been considered in the 2005 provision for income taxes calculation. This benefit would have reduced the Company’s total provision for income taxes by approximately $4.2 million. Management believes that this error was not material to the consolidated financial statements of the prior year. However, management does believe that this error was material to its consolidated financial statements for 2006 and upon adoption of SAB No. 108, recorded a cumulative effect adjustment as of January 1, 2006, which reduced accumulated deficit by approximately $4.2 million.

The third was a conclusion that deferred income tax benefits of approximately $7.5 million should have been recorded during the year ended December 31, 2005 when it became apparent that certain taxable temporary differences would reverse as a result of the classification of businesses as discontinued operations. Management believes that this error, totaling approximately $7.5 million, was not material to the consolidated financial statements of the prior year. However, management does believe that this error was material to its consolidated financial statements for 2006 and upon adoption of SAB No. 108, recorded a cumulative effect adjustment as of January 1, 2006, which decreased accumulated deficit by approximately $7.5 million.

Recent Accounting Pronouncements

SFAS No. 141(R)

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, which establishes new principles and disclosure requirements pertaining to business combinations. Primary changes to existing accounting include requirements for the acquirer to recognize:

 

   

Assets acquired, liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date;

   

Identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values, in a step acquisition;

   

Assets acquired and liabilities assumed arising from contractual contingencies as of the acquisition date, measured at their acquisition-date fair values;

 

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Goodwill as of the acquisition date, measured as a residual, which in most types of business combinations will result in measuring goodwill as the excess of the consideration transferred plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair values of the identifiable net assets acquired;

   

Contingent consideration at the acquisition date, measured at its fair value at that date;

   

The effect of a bargain purchase in earnings; and

   

Changes in the amount of its deferred tax benefits that are recognizable because of a business combination either in income from continuing operations in the period of the combination or directly in contributed capital, depending on the circumstances.

SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is not permitted. The Company does not presently expect this statement will have a material impact on its financial condition, results of operations and cash flows.

SFAS No. 160

In December 2007, the FASB also issued a related statement, SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. This statement establishes accounting and reporting standards that require:

 

   

Ownership interests in subsidiaries held by parties other than the parent to be clearly identified, labeled and presented in the consolidated balance sheet within equity, but separate from the parent’s equity;

   

The amount of consolidated net income attributable to the parent and to the noncontrolling interest to be clearly identified and presented on the face of the consolidated statement of operations;

   

Changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary to be accounted for consistently;

   

When a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value;

   

Gains or losses on the deconsolidation of a subsidiary to be measured using the fair value of any noncontrolling equity investment rather than the carrying amount of the retained investment; and

   

Entities to provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners.

SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is not permitted. This statement must be applied prospectively as of the beginning of the year of adoption, except for the presentation and disclosure requirements, which must be applied retrospectively for all periods presented. The Company does not presently expect this statement will have a material impact on its financial condition, results of operations or cash flows.

SFAS No. 161

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities. This statement is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial condition, results of operations and cash flows.

SFAS No. 161 amends existing disclosure requirements to provide users of financial statements with an enhanced understanding of:

 

   

How and why an entity uses derivative financial instruments;

   

How derivative financial instruments and related hedged items are accounted for; and

   

How derivative financial instruments and related hedged items affect an entity’s financial position, financial performance and cash flows.

 

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To meet those objectives, SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivative financial instruments, quantitative disclosures about fair value amounts of and gains and losses on derivative financial instruments, and disclosures about credit-risk-related contingent features in derivative agreements.

SFAS No. 161 is effective for financial statements issued for fiscal years, and interim periods within these fiscal years, beginning after November 15, 2008, with early adoption encouraged. In years after initial adoption, SFAS No. 161 requires comparative disclosures only for periods subsequent to initial adoption. The enhanced disclosures required by this statement will not have a material impact on the Company’s financial condition, results of operations and cash flows.

FASB Staff Position FAS 142-3

In April 2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, Determination of the Useful Life of Intangible Assets, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset with a finite useful life. Rather than considering legal, regulatory or contractual provisions that enable renewal or extension of the asset’s legal or contractual life without substantial cost, FSP FAS 142-3 requires an entity to use, among other factors, its own historical experience in renewing or extending similar arrangements, regardless of whether those arrangements have explicit renewal or extension provisions, in determining the useful life of the asset. If an entity does not have its own historical experience, it should consider the assumptions that market participants would use about renewal or extension (consistent with the highest and best use of the asset by market participants), adjusted for any identified entity-specific factors.

FSP FAS 142-3 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is not permitted. This FSP must be applied prospectively as of the beginning of the year of adoption, to all intangible assets acquired after the effective date. The Company does not presently expect this FSP will have a material impact on its financial condition, results of operations or cash flows.

FSP EITF 03-6-1

In June 2008, the FASB issued FAS EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transaction Are Participating Securities. FSP EITF 03-6-1 requires that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. This FSP is effective for financial statements issued for fiscal years and interim periods within those fiscal years beginning after December 15, 2008, and it requires that all prior period earnings per share data presented (including interim financial statements, summaries of earnings and selected financial data) be adjusted retrospectively to conform with its provisions. The Company is currently evaluating the impact that the adoption of FSP EITF 03-6-1 will have on its results of operations.

Note 3.    Divestitures

The Company has classified the results of divested entities as discontinued operations in accordance with SFAS No. 144.

2005

During 2005, the Company decided to pursue the sales of its Crafts and History groups, part of the Enthusiast Media segment, and to discontinue the operations of its Software on Demand division, part of the Education segment. The Company completed the sale of the History group during 2006 for $17.0 million, resulting in a gain of $13.7 million. The sale of the Crafts group was completed in 2006 for $132.0 million, resulting in a gain of $54.6 million.

 

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2006

In 2006, the Company classified as discontinued operations and completed the sale of the Gems group, part of the Enthusiast Media segment.

During the fourth quarter of 2006, the Company announced that it had agreed to sell its Outdoors group, part of the Enthusiast Media segment, which consisted primarily of its hunting, fishing and shooting titles, for $170.0 million in cash. The transaction was completed in 2007 and resulted in a gain of $57.5 million. Additionally, during 2006, the Company announced that it would classify the results of operations of its Education segment as discontinued operations, due to the Company actively pursuing the sale of this segment. The Company’s Education segment was comprised of Channel One, a proprietary network for secondary schools, Films Media Group, a leading source of educational video, and PRIMEDIA Healthcare, a medical education business. During the second quarter of 2007, the Company completed the sale of Channel One at a loss of $7.1 million and completed the sale of Films Media Group for a gain of $0.2 million. The assets and liabilities of PRIMEDIA Healthcare are included in assets and liabilities of businesses held for sale in the consolidated balance sheet as of December 31, 2007 (see Held for Sale discussion below).

2007

In February 2007, the Company announced its intent to explore the sale of its Enthusiast Media segment, and on August 1, 2007, it completed the sale for $1,177.9 million, resulting in a gain of approximately $461.0 million. The Company applied the proceeds from the sale to pay down debt.

In the fourth quarter of 2007, the Company classified the results of operations of its Auto Guides division as discontinued operations, due to its intent to sell or shut down the operations of the Auto Guides division in 2008. The assets and liabilities of the Auto Guides division are included in assets and liabilities of businesses held for sale in the consolidated balance sheet as of December 31, 2007 (see Held for Sale discussion below).

2008

During 2008, the Company sold certain assets and liabilities of its Auto Guides division for approximately $2.1 million, resulting in a $1.3 million gain, net of tax benefits, and shut down the remaining operations, resulting in a loss of approximately $0.8 million.

During 2008, the Company sold certain assets and liabilities of PRIMEDIA Healthcare for approximately $0.2 million, resulting in a gain of $0.1 million, and shut down the remaining operations resulting in a loss of $0.4 million.

During 2008, the final adjustments to the net proceeds from the sale of the Enthusiast Media segment were settled and resulted in an additional gain of $0.7 million, which was recorded in discontinued operations.

The operating results of all these operations have been classified as discontinued operations for all periods presented.

Total revenue, net and income before provision for income taxes included in discontinued operations for the years ended December 31, 2008, 2007 and 2006 in the consolidated statement of operations are as follows:

 

     Years Ended December 31,
     2008     2007    2006
     (Dollars in thousands)

Total revenue, net

   $ 3,353     $ 358,794    $ 741,537
                     

(Loss) income before (benefit) provision for income taxes(1).

   $ (9,169 )   $ 50,926    $ 67,393
                     

 

(1) Income (loss) before (benefit) provision for income taxes above excludes gains on sale of businesses.

 

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The gain on sale of businesses, net of tax, was $2.0 million, $459.1 million and $62.4 million for the years ended December 31, 2008, 2007 and 2006, respectively.

During 2008, the Company recognized a tax benefit of $16.3 million in discontinued operations as a result of its ability to carry back a projected 2008 NOL against taxes paid on a portion of the 2007 gain on divestitures of certain subsidiaries. The 2008 NOL arose primarily from the reversal of differences between the carrying value and tax basis in a group of PRIMEDIA Healthcare intangible assets triggered by the sale of those assets during 2008. The Company also recognized a tax benefit of $4.2 million in discontinued operations during 2008, primarily as a result of changes in its estimate of its ability to utilize certain NOLs to offset 2007 taxable income.

Held for Sale

The assets and liabilities of businesses which the Company had initiated plans to sell, but had not sold, as of December 31, 2007, were classified as held for sale in the consolidated balance sheet. As of December 31, 2007, businesses held for sale represent the assets and liabilities of PRIMEDIA Healthcare and the Auto Guides division. As of December 31, 2008, there were no assets and liabilities of businesses held for sale.

 

     December 31,
2007
     (Dollars in thousands)

Assets

  

Accounts receivable, net

   $ 2,474

Prepaid expenses and other

     91

Property and equipment, net

     1,882

Intangible assets

     1,327

Other non-current assets

     19
      

Assets of businesses held for sale

   $ 5,793
      

Liabilities

  

Accounts payable

   $ 228

Accrued expenses and other

     2,250

Other non-current liabilities

     6
      

Liabilities of businesses held for sale

   $ 2,484
      

As discussed above, in 2008, the Company completed the sale of certain assets and liabilities of PRIMEDIA Healthcare and shut down the remaining operations. It also completed the sale of certain assets and liabilities of the Auto Guides division and shut down the remaining operations during 2008.

Impairment

In accordance with SFAS No. 142, the Company performs annual impairment testing on its goodwill and indefinite-lived intangible assets. In connection with the results of the SFAS No. 142 impairment testing, factors indicated that the carrying value of certain finite-lived assets might not be recoverable. As a result, during the third quarter of 2007, the Company recorded an impairment charge of $1.2 million related to the write-down of certain definite-lived intangibles of the Auto Guides division, which is included in discontinued operations. Additionally during 2006, the Company recorded impairment charges of $2.2 million related to indefinite-lived intangible assets of the Education segment, which are also included in discontinued operations.

The Company also performed an impairment test in accordance with SFAS No. 144 and recorded a loss of $8.8 million during 2006 related to the write-down of certain assets, including property and equipment and definite lived intangible assets, of its Education segment, as well as a provision for expected loss on sale of business, all of which are included in discontinued operations.

 

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Note 4.    Acquisitions

In January 2006, the Company acquired the assets of RentClicks for $12.7 million in cash, including acquisition related expenses, and potential earnout consideration. The amount of the earnout consideration of approximately $2.1 million was charged to goodwill during 2006 when it was earned and was based on a measure of RentClicks’ earnings. The results of operations of this acquisition did not have a material impact on the Company’s results of operations for the year ended December 31, 2006, nor were the operations of this acquisition material during 2006 prior to the acquisition.

In February 2007, the Company acquired the assets of RentalHouses.com for approximately $9.0 million in cash plus post-closing adjustments. This acquisition did not have a material impact on the Company’s results of operations for the year ended December 31, 2007, nor were the operations of this acquisition material during 2007 prior to the acquisition.

In November 2005, the Company purchased 80% of the stock of Automotive.com, Inc. for a total purchase price of $92.1 million, comprised of $68.4 million in cash, net of cash acquired, $23.4 million, representing the present value of expected future payments to be made to acquire the remaining shares of Automotive.com, Inc., and $0.3 million of estimated acquisition costs.

In connection with the Company’s acquisition of 80% of the common stock of Automotive.com in 2005, PRIMEDIA and the minority shareholders of Automotive.com, including its Chief Executive Officer, entered into a forward agreement through which PRIMEDIA would purchase the remaining 20% of Automotive.com’s common stock in early 2009 or, if the forward agreement was extended, early 2010. The settlement price of the forward agreement was to be based on a measure of Automotive.com’s earnings in the fiscal year prior to settlement.

Due to the ongoing relationship of the Chief Executive Officer of Automotive.com with the company after the acquisition, for accounting purposes, the forward agreement was bifurcated into the components relating to him on the one hand and the other minority shareholders on the other. The component of the forward agreement relating to the other minority shareholders was recorded as a liability at fair value as of the transaction date and an adjustment to the purchase price. Automotive.com was part of the Company’s Enthusiast Media segment, which was sold during 2007. The purchaser of the Enthusiast Media segment assumed all of the Company’s obligations under the forward agreement. During the year ended December 31, 2006, the fair value of the liability decreased $2.5 million, resulting in a corresponding reduction to interest expense. The change in the fair value of the liability during 2007 until the sale of the Enthusiast Media segment resulted in an increase in interest expense of $2.1 million. Changes in the fair value of the component pertaining to Automotive.com’s Chief Executive Officer have been charged to compensation expense, including $2.3 million during the year ended December 31, 2006 and an immaterial amount during the year ended December 31, 2007.

In January 2007, the Company acquired Modified Automotive Group, publisher of Modified Magazine, Modified Luxury & Exotics Magazine, Modified Mustangs Magazine, and their related event partnerships and websites for approximately $15.0 million in cash, including acquisition related expenses. This acquisition was part of the Enthusiast Media segment, which was sold during 2007.

In addition, during 2007 and 2006, the Company made other payments relating to acquisitions of $10.1 million and $11.2 million, respectively. The results of operations of these acquisitions did not have a material impact on the Company’s results of operations for the years ended December 31, 2008, 2007 or 2006. The Company did not undertake any acquisitions during 2008, but during 2008, it recorded adjustments to goodwill of less than $0.1 million related to prior year acquisitions.

 

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Note 5.    Available for Sale Securities

During 2008, the Company sold all of its available for sale securities with no realized gain or loss. As of December 31, 2008, the Company had no available for sale securities.

As of December 31, 2007, the amortized cost and fair value of available for sale securities, with gross unrealized gains and losses, were as follows:

 

     Amortized Cost    Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
     (Dollars in thousands)

Auction rate securities

   $ 15,425    $    $    $ 15,425
                           

Total available for sale securities

   $ 15,425    $    $    $ 15,425
                           

Note 6.    Property and Equipment, Net

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

 

     2008    December 31,
     Range of Lives
(years)
   2008    2007
          (Dollars in thousands)

Building and leasehold improvements

   5-10    $ 4,147    $ 8,131

Furniture and fixtures

   7      4,619      4,104

Machinery and equipment

   3-5      13,778      11,343

Internal use software

   2-3      64,150      63,375

Display racks and other

   3      15,274      14,231
                
        101,968      101,184

Less: Accumulated depreciation and amortization

        83,203      82,760
                
      $ 18,765    $ 18,424
                

Included in property and equipment as of December 31, 2008 and 2007 are assets acquired under capital leases in the amount of $2.1 million and $0.8 million, respectively, with accumulated amortization of $1.1 million and $0.7 million, respectively (see Note 20).

Note 7.    Goodwill and Other Intangible Assets

SFAS No. 142 requires companies to assess goodwill and indefinite-lived intangible assets for impairment at least annually. Except as indicated in Note 3, the Company’s impairment testing under SFAS No. 142 did not result in any impairment for any periods presented.

Changes in the carrying amount of goodwill were as follows (dollars in thousands):

 

Balance as of January 1, 2007

   $ 674,138  

Goodwill acquired related to acquisition of businesses

     6,100  

Goodwill written off related to the sale of businesses

     (550,952 )
        

Balance as of December 31, 2007

     129,286  

Goodwill related final purchase accounting adjustments for prior year acquisition of businesses

     19  

Goodwill written off related to the sale of businesses

      
        

Balance as of December 31, 2008

   $ 129,305  
        

 

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Intangible assets subject to amortization consisted of the following:

 

     Weighted-
Average
Amortization
Period
(Years)
   December 31,
      2008    2007(1)
      Carrying
Amount
   Accumulated
Amortization
   Net    Carrying
Amount
   Accumulated
Amortization
   Net
        (Dollars in thousands)

Membership, subscriber and customer lists

      $    $    $    $ 34    $ 34    $

Advertiser lists

   13      94,454      77,767      16,687      94,454      75,615      18,839

Other

   6      5,905      5,233      672      6,170      5,052      1,118
                                            
      $ 100,359    $ 83,000    $ 17,359    $ 100,658    $ 80,701    $ 19,957
                                            

 

(1) Excluding intangible assets classified as assets held for sale (see Note 3).

Intangible assets not subject to amortization had a carrying value of $6.3 million and $6.5 million as of December 31, 2008 and 2007, respectively, excluding intangible assets classified as assets held for sale, and consisted of trademarks. Amortization expense for intangible assets subject to amortization was $2.9 million, $3.5 million and $3.3 million for the years ended December 31, 2008, 2007 and 2006, respectively. As of December 31, 2008, estimated future amortization expense of intangible assets subject to amortization was approximately: $2.5 million, $2.3 million, $2.0 million, $2.0 million and $2.0 million for 2009, 2010, 2011, 2012 and 2013, respectively.

Note 8.    Other Non-Current Assets

Other non-current assets consisted of the following:

 

     December 31,
     2008    2007
     (Dollars in thousands)

Deferred financing costs, net

   $ 5,014    $ 5,941

Cost-method investments

     2,500      3,400

Taxes

     4,330     

Other

     700      871
             
   $ 12,544    $ 10,212
             

Deferred financing costs

The deferred financing costs are net of accumulated amortization of $1.3 million and $14.3 million as of December 31, 2008 and 2007, respectively. During 2008 and 2007, the Company charged-off less than $0.1 million and approximately $8.7 million, respectively, of deferred financing costs resulting from debt redemptions (see Note 10).

Cost-method investments

During 2008, the Company’s cost-method investments were evaluated for impairment because the Company identified events and changes in circumstances that had a potentially significant adverse effect on the fair value of the investments. The Company estimated that the fair value for one of its investments was less than the cost and recorded an other-than-temporary impairment charge of approximately $0.9 million in 2008, which is included in other (income) loss, net in the consolidated statement of operations.

 

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Note 9.    Accrued Expenses and Other

Accrued expenses and other current liabilities consisted of the following:

 

     December 31,
     2008    2007
     (Dollars in thousands)

Payroll, commissions and related employee benefits

   $ 8,768    $ 15,658

Taxes

     11,560      15,829

Rent and lease liabilities

     4,750      1,921

Derivative financial instrument liabilities

     4,253      2,427

Professional fees

     780      1,120

Divestiture reserves

     —        5,061

Reserves for litigation

     8,000      2,000

Other

     6,380      7.275
             
   $ 44,491    $ 51,291
             

Note 10.    Borrowings

Long-term debt consisted of the following:

 

     December 31,
     2008    2007
     (Dollars in thousands)

Borrowings under bank credit facilities

   $ 247,500    $ 250,000

8% Senior Notes

          2,576

Obligations under capital leases (see Note 20)

     1,076      261
             
     248,576      252,837

Less: Current maturities of long-term debt

     3,045      5,262
             
   $ 245,531    $ 247,575
             

Bank Credit Facilities

On August 1, 2007, the Company completed the financing for a $350.0 million senior secured bank credit facility. The new bank credit facility provides for two loan facilities: (1) a revolving credit facility with aggregate commitments of $100.0 million (the “Revolving Facility”), which matures on August 1, 2013, and (2) a Term Loan B credit facility in an aggregate principal amount of $250.0 million (the “Term Loan B Facility”), which matures on August 1, 2014 (the “Term Loan B Maturity Date”). The Company capitalized approximately $6.3 million of financing costs associated with the new credit facilities.

Amounts borrowed under the Revolving Facility bear interest, at the Company’s option, at an annual rate of either the base rate plus an applicable margin ranging from 0.625% to 1.00% or the eurodollar rate plus an applicable margin ranging from 1.625% to 2.00%. The weighted-average interest rate on the Revolving Facility at December 31, 2008 was 2.46%. The Term Loan B Facility bears interest, at the Company’s option, at an annual rate of either the base rate plus an applicable margin ranging from 1.00% to 1.25% or the eurodollar rate plus an applicable margin ranging from 2.00% to 2.25%. The weighted-average interest rate on the Term Loan B Facility at December 31, 2008 was 3.62%. Additionally, through August 1, 2009, the Company is required to manage its interest rate risk arising from the Term Loan B Facility through the utilization of derivative financial instruments in a notional amount equal to at least 35% of the Term Loan B principal outstanding (see Note 18).

There are no scheduled commitment reductions under the Revolving Facility. As a result of the bankruptcy filing of Lehman Brothers Holdings Inc., the parent company of Lehman Brothers Inc. (“Lehman”), a participating lender in the Company’s Revolving Facility, the Company believes the aggregate commitments available to it

 

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under the Revolving Facility have been effectively reduced to $88.0 million. The loans under the Term Loan B Facility are subject to scheduled repayment in quarterly installments of $0.6 million each payable on March 31, June 30, September 30 and December 31 of each year commencing on March 31, 2008 and ending on June 30, 2014, followed by a final repayment of $233.8 million on the Term Loan B Maturity Date.

The bank credit facilities consisted of the following as of December 31, 2008 (dollars in thousands):

 

     Revolver     Term B     Total  

Bank credit facilities(1)

   $ 88,000     $ 247,500     $ 335,500  

Borrowings outstanding

     (13,200 )     (247,500 )     (260,700 )

Letters of credit outstanding

     (3,834 )           (3,834 )
                        

Unused bank commitments

   $ 70,966     $     $ 70,966  
                        

 

(1) As a result of the bankruptcy filing of Lehman Brothers Holdings Inc. discussed above, the Company believes the aggregate commitments available to it under the Revolving Facility have been effectively reduced from $100.0 million to $88.0 million.

Under the new bank credit facilities agreement, the Company has agreed to pay commitment fees at a per annum rate of either 0.375%, 0.300% or 0.250%, depending on its debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio, as defined in the bank credit facilities agreement, on the daily average aggregate unutilized commitment under the revolving loan commitment. The weighted-average of its commitment fees under the new bank credit facilities for 2008 and for the five months it was outstanding during 2007 was 0.32% and 0.36%, respectively. The Company also has agreed to pay certain fees with respect to the issuance of letters of credit and an annual administration fee. From time to time, it may pay amendment fees under its bank credit facilities.

The bank credit facilities 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 its common stock. The bank credit facilities are guaranteed by the common stock of substantially all of PRIMEDIA’s subsidiaries.

8% Senior Notes

On May 15, 2008, the Company redeemed all $2.6 million of its outstanding 8% Senior Notes. The Notes were redeemed at a 4% premium of the outstanding aggregate principal amount, which was approximately $0.1 million, and which is included in other (income) loss, net in the consolidated statement of operations, plus accrued and unpaid interest thereon until the redemption date. The Company did not incur any early termination penalties in connection with the redemption of the 8% Senior Notes beyond the 4% redemption premium.

Covenant Compliance

Under the most restrictive covenants contained in the new bank credit facilities agreement, the maximum allowable total leverage ratio, as defined in the agreement, is 5.25 to 1. As of December 31, 2008, this leverage ratio was approximately 3.2 to 1.

For purposes of the Company’s bank credit facilities, the provision for restructuring costs is excluded from the Company’s calculation of consolidated EBITDA, as defined in the bank credit facilities.

 

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The scheduled repayments of all debt outstanding, including capital leases, as of December 31, 2008, were as follows (dollars in thousands):

 

Years Ending December 31,

   Debt    Capital Lease
Obligations
and Other
   Total

2009

   $ 15,700    $ 544    $ 16,244

2010

     2,500      383      2,883

2011

     2,500      138      2,638

2012

     2,500      11      2,511

2013

     2,500           2,500

Thereafter

     235,000           235,000
                    

Total

   $ 260,700    $ 1,076    $ 261,776
                    

Amounts outstanding under the Revolving Facility, which totaled $13.2 million as of December 31, 2008, do not have a scheduled date by which they must be repaid. For purposes of this table, they have been included in the 2009 scheduled repayments.

Debt Redemptions

During 2006, the Company redeemed a total of $65.5 million in principal of its 8 7/8% Senior Notes due 2011 (the “8 7/8% Senior Notes”) in multiple transactions, for $64.0 million plus $0.6 million of accrued interest. Also during 2006, the Company redeemed a total of $5.2 million in principal of its 8% Senior Notes due 2013 (the “8% Senior Notes”) in multiple transactions for $4.8 million plus $0.2 million of accrued interest, and it redeemed a total of $52.5 million in principal of its Senior Floating Rate Notes due 2010 (the “Senior Floating Rate Notes”) in multiple transactions for $55.1 million plus $0.5 million of accrued interest. As a result of these transactions, the Company recorded a loss of $2.6 million, included in other (income) loss, net in the consolidated statement of operations, for the year ended December 31, 2006, which was comprised of the following:

 

     Debt Instrument     
     8 7/8% Senior
Notes due

2011
    8% Senior
Notes due
2013
    Senior Floating
Rate Notes due
2010
   Total
     (Dollars in thousands)

Principal redeemed

   $ 65,485     $ 5,190     $ 52,500    $ 123,175

Redemption price

     63,972       4,790       55,120      123,882
                             

Premium (discount) paid

     (1,513 )     (400 )     2,620      707

Write-off of deferred financing fees

     664       69       581      1,314

Write-off of original issue discount

     577                  577
                             

Total (gain) loss on redemption

   $ (272 )   $ (331 )   $ 3,201    $ 2,598
                             

 

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During 2007, the Company, with the amounts borrowed under the Term Loan B Facility, combined with the net proceeds received from the sale of Enthusiast Media, repaid all $492.5 million in principal of its existing term loan at June 30, 2007, redeemed all $410.0 million in principal of its 8 7/8% Senior Notes, redeemed $292.2 million in principal of its 8% Senior Notes, redeemed all $122.5 million in principal of its Senior Floating Rate Notes and paid approximately $16.0 million of accrued interest on its 8% Senior Notes. The Company recorded a loss on debt redemptions of $44.3 million, included in other (income) loss, net in the consolidated statement of operations, for the year ended December 31, 2007, which was comprised of the following.

 

     Debt Instrument    Total
     8 7/8% Senior
Notes due

2011
   8% Senior
Notes due

2013
   Senior Floating
Rate Notes due
2010
   Bank
Credit
Facilities
  
          (Dollars in thousands)     

Principal redeemed

   $ 410,015    $ 292,214    $ 122,500    $ 492,500    $ 1,317,229

Redemption price

     422,340      309,121      126,175      492,500      1,350,136
                                  

Premium paid

     12,325      16,907      3,675           32,907

Write-off of deferred financing fees

     3,200      3,426      1,107      993      8,726

Write-off of original issue discount

     2,706                     2,706
                                  

Total loss on redemption

   $ 18,231    $ 20,333    $ 4,782    $ 993    $ 44,339
                                  

Note 11.    Income Taxes

The components of the provision (benefit) for income taxes were as follows:

 

     Years Ended December 31,  
     2008     2007     2006  
     (Dollars in thousands)  

Current:

      

Federal

   $ (20,859 )   $ 39,181     $ 1,765  

State and local

     622       2,672       9,436  
                        

Total

     (20,237 )     41,853       11,201  

Deferred:

      

Federal

     1,928       250,276       24,564  

State and local

     164       34,157       31,173  
                        

Total

     2,092       284,433       55,737  

Change in valuation allowance

     (29,325 )     (344,229 )     (62,263 )
                        

Total deferred benefit

     (27,233 )     (59,796 )     (6,526 )
                        

Total (benefit) provision for income taxes

   $ (47,470 )   $ (17,943 )   $ 4,675  
                        

The (benefit) provision for income taxes included in the Company’s consolidated statement of operations was as follows:

 

     Years Ended December 31,  
     2008     2007     2006  
     (Dollars in thousands)  

Continuing operations

   $ (27,004 )   $ (32,728 )   $ (31,583 )

Discontinued operations

     (20,466 )     14,785       36,258  
                        

Total (benefit) provision for income taxes

   $ (47,470 )   $ (17,943 )   $ 4,675  
                        

 

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During the year-end close process for 2007, the Company discovered errors related to its accounting for income taxes applicable to continuing operations, a $1.2 million benefit, and discontinued operations, a $2.4 million benefit. The errors were not material to the interim periods to which they relate and were corrected in the fourth quarter of 2007.

Additionally, during the fourth quarter of 2007, the Company recorded an increase in its FIN 48 liability and a corresponding charge to income taxes applicable to discontinued operations of $7.5 million, resulting from a change in estimates related to income tax positions previously taken. The changes in estimate were the result of new information having an impact on the tax positions that became available to the Company during the fourth quarter.

A reconciliation of the income tax expected at the U.S. federal statutory income tax rate of 35% to the income taxes provided on the income (loss) from continuing operations is set forth below:

 

     Years Ended December 31,  
     2008     2007     2006  
     (Dollars in thousands)  

Tax provision (benefit) at federal statutory rate

   $ 7,708     $ (30,943 )   $ (33,844 )

State and local taxes, net of federal impact

     (485 )     (2,747 )     (1,949 )

Change in valuation allowance

     (37,014 )     1,466       214  

Change in deferred tax liability

     2,092       1,466       2,279  

Other, net

     695       (1,970 )     1,717  
                        

Benefit for income taxes

   $ (27,004 )   $ (32,728 )   $ (31,583 )
                        

The change in the valuation allowance during 2008 resulted from the utilization of net deferred tax assets to offset income from continuing operations during the year as well as the partial release discussed in further detail below.

 

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Deferred income taxes reflect the net tax effects of (i) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and (ii) operating and capital loss carryforwards. Net deferred tax assets are recorded to the extent the Company believes these assets will more likely than not be realized. The tax effects of significant items comprising the Company’s deferred income taxes are as follows:

 

    December 31,  
    2008     2007  
    Federal     State and
Local
    Total     Federal     State and
Local
    Total  
    (Dollars in thousands)  

Deferred income tax assets:

           

Current:

           

Difference between carrying amount and tax basis of accrued expenses and other

  $ 10,412     $ 1,428     $ 11,840     $ 4,890     $ 330     $ 5,220  

Difference between carrying amount and tax basis of restructuring reserves

    1,217       167       1,384       3,356       227       3,583  

Difference between carrying amount and tax basis of deferred rent

    1,534       210       1,744       2,493       168       2,661  
                                               

Total current

    13,163       1,805       14,968       10,739       725       11,464  
                                               

Non-current:

           

Difference between carrying amount and tax basis of accrued expenses and other

    299       41       340       423       29       452  

Difference between carrying amount and tax basis of restructuring reserves

    6,528       895       7,423       6,104       412       6,516  

Difference between carrying amount and tax basis of deferred rent

    2,567       352       2,919       3,371       228       3,599  

Difference between carrying amount and tax basis of other intangible assets

    1,356       186       1,542       13,803       933       14,736  

Difference between carrying amount and tax basis of property and equipment

    (481 )     (66 )     (547 )     4,099       277       4,376  

Difference between carrying amount and tax basis of FIN 48 liability

    5,105       111       5,216       5,881       56       5,937  

Difference between carrying amount and tax basis of stock-based compensation

    1,142       157       1,299                    

Operating loss carryforwards

    156,736       6,531       163,267       147,195       4,792       151,987  

AMT credit carryforwards

    2,687             2,687                    

Difference between carrying amount and tax basis of cost-method investments

    8,550       1,172       9,722       5,511       372       5,883  
                                               

Total non-current

    184,489       9,379       193,868       186,387       7,099       193,486  
                                               

Total deferred income tax assets

    197,652       11,184       208,836       197,126       7,824       204,950  
                                               

Deferred income tax liabilities:

           

Non-current:

           

Difference between carrying amount and tax basis of indefinite-lived intangible assets

    12,625       1,731       14,356       10,661       1,603       12,264  
                                               

Total deferred income tax liabilities

    12,625       1,731       14,356       10,661       1,603       12,264  
                                               

Net deferred income tax assets

    185,027       9,453       194,480       186,465       6,221       192,686  

Less: Valuation allowance

    (168,327 )     (11,184 )     (179,511 )     (197,126 )     (7,824 )     (204,950 )
                                               

Net

  $ 16,700     $ (1,731 )   $ 14,969     $ (10,661 )   $ (1,603 )   $ (12,264 )
                                               

 

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During 2008, the Company increased its net deferred tax asset and the associated valuation allowance by $26.9 million as a result of its analysis of its cumulative deferred tax balances. This analysis had no effect on the consolidated statement of operations.

As of December 31, 2008, the Company had aggregate federal NOLs of approximately $454.3 million. During 2008, the Company realized $16.3 million of net deferred tax assets related to the tax loss for the year. The Company intends to carryback the $16.3 million net deferred tax asset to its 2007 federal income tax return filing and recover income taxes previously paid. The expected carryback is included in prepaid expenses and other on the consolidated balance sheet. The $454.3 million of federal NOLs remaining at December 31, 2008 are available to reduce future taxable income, and the substantial majority expire between 2020 and 2024. In addition, the Company has state and local NOLs in various jurisdictions in which the Company and/or its subsidiaries file income tax returns. These state and local NOLs expire over various periods based on applicable state and local statutes and regulations.

Based on the weight of objectively verifiable available positive and negative evidence as of December 31, 2008, the Company recorded a partial release of the valuation allowance against its net deferred tax asset of $29.3 million because it believes it is more likely than not that this portion of the deferred tax asset will be realized. The Company will need to generate approximately $84.0 million in pre-tax income for financial reporting purposes to realize this asset.

Elements of positive evidence included:

 

   

the remaining lives of the NOLs;

   

historical income when results are normalized to remove the impact of discontinued operations and to reflect the completion of the Company’s relocation from New York to Norcross; and

   

forecasted income, utilizing the same forecast as for goodwill impairment testing, in future periods.

Elements of negative evidence included:

 

   

historical losses and

   

uncertainty as to the timing and exact amount of future earnings as a result of current economic conditions, the U.S. residential real estate industry, as well as the uncertainty of the effectiveness of the steps the Company has taken, and will take, to mitigate the adverse impact on its businesses.

The Company’s assessment in 2008 is different than it was in 2007, primarily due to the completion of the relocation of the Company from New York to Norcross, resulting in a significantly reduced cost structure, and almost a full year of operations of the Consumer Guides business supporting the entire PRIMEDIA cost structure, while maintaining profitability without the impact of divested entities.

With the adoption of SFAS No. 142, the Company no longer amortizes the indefinite-lived intangible assets but for financial reporting purposes continues to amortize these intangible assets for tax purposes. Therefore, the Company will have deferred tax liabilities that will arise each quarter because the temporary differences related to the amortization of these assets for tax purposes 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. During 2008, 2007 and 2006, the Company recorded a provision (benefit) for deferred income taxes of $2.1 million, $(59.8) million and $(6.5) million, respectively, related to the change in the Company’s net deferred tax liability for the tax effect of the net increase in the difference between the basis in the indefinite-lived intangible assets for financial reporting and tax purposes.

Approximately $1.4 million of the valuation allowance at December 31, 2008 relates to net deferred tax assets which were recorded in accounting for the acquisitions of various entities.

 

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The following is a reconciliation of the total amount of liability for unrecognized tax benefits (dollars in thousands):

 

     2008     2007  

Unrecognized tax benefit, beginning of period

   $ 92,684     $ 102,531  

Gross increases—tax positions in prior period

     1,103        

Gross decrease—tax positions in prior period

     (490 )     (20,618 )

Gross increase—tax positions in current period

     7,219       19,684  

Settlements

     (837 )      

Lapse of statute of limitations

     (607 )     (924 )

Divestitures

     (15,516 )     (7,989 )
                

Unrecognized tax benefit, end of period

   $ 83,556     $ 92,684  
                

The total amount of unrecognized tax benefits as of December 31, 2008 was $83.6 million. Approximately $19.7 million of this amount would, if recognized, have an impact on the effective income tax rate, while approximately $63.9 million would not. As of December 31, 2008, the Company’s recorded FIN 48 liability was $22.8 million, which includes $3.1 million of interest.

Related to unrecognized tax benefits noted above, the Company had charges for penalties of $0.7 million and no net charges for interest during 2008, and in total, as of December 31, 2008, had recognized a liability for penalties and interest of $0.7 million and $2.4 million, respectively. During 2007, the Company had no charges for penalties and had a net reduction of interest charges of $0.9 million, and in total, as of December 31, 2007, had recognized a liability for $2.4 million in interest and had no liabilities for penalties.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions, and the Company is routinely under audit by multiple tax authorities. The Company is currently under audit by the Internal Revenue Service (“IRS”) for its 2005 and 2006 federal consolidated income tax filings and the New York Department of Revenue for income for filings for the tax years 2005 through 2007. The Company reported NOLs from tax years back to 1992 on federal and state tax returns currently under, or open to, examination. The Company believes that its accrual for tax liabilities is adequate for all open audit years based on its assessment of many factors, including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and involves a series of complex judgments about future events.

Due to the uncertainty regarding the timing of the completion of income tax examinations, the Company cannot conclude it is reasonably possible that, as a result of these examinations, there will be significant changes to the unrecognized tax benefit within twelve months of December 31, 2008. However, the statute of limitations in certain state and local jurisdictions is expected to expire within the next twelve months and may result in a decrease of unrecognized tax benefits and accrued interest of approximately $1.2 million.

In connection with the sale of the Enthusiast Media segment in August 2007, the Company entered into an agreement with the buyer whereby it agreed to indemnify the buyer for certain losses that might arise from uncertain tax positions taken in previous years. As a result, $1.6 million of the $8.0 million decrease for 2007 in the uncertain tax positions due to divestitures included in the table above was reclassified from the FIN 48 liability to a contingent liability with no impact to current earnings. The amount ultimately reclassified was not equal to the amount previously recorded by the Company for such issues since the accounting model for contingent liabilities is different than the accounting model for uncertain tax positions. An increase in discontinued operations of $6.4 million, including an amount equal to the difference in these two models, was recorded in connection with the transaction.

In connection with the sale of PRIMEDIA Healthcare in 2008, the Company recorded a $15.5 million decrease in the uncertain tax positions related to the divestiture. Of this amount, a $0.8 million benefit was recorded in discontinued operations for the amount that impacted the effective income tax rate. The remaining decrease in

 

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the uncertain tax positions related to PRIMEDIA Healthcare of $14.7 million did not have an impact on the effective income tax rate due to the valuation allowance recorded against the NOLs.

Note 12.    Stockholders’ Equity

Reverse Stock Split

On August 1, 2007, the Company effected a one-for-six reverse stock split of its common stock. After the reverse stock split was effected, each PRIMEDIA stockholder received one new share of PRIMEDIA common stock in exchange for every six existing shares. For all periods presented, effect has been given to the impact of the reverse stock split on the amounts reported for shares, including warrants, stock options and restricted stock, stock prices, and earnings (loss) and dividends per share.

Warrants to Purchase Common Stock

In connection with the financing for an acquisition completed in 2001, the Company had outstanding, as of December 31, 2008 and 2007, warrants permitting the holders to purchase approximately 1.6 million additional shares of the Company’s common stock. The warrants expire upon the earlier of 2011 or upon a change of control, have exercise prices ranging from $42.00 to $54.00 per share, subject to adjustment, and may be net settled in shares of the Company’s common stock. The value of these warrants included in additional paid-in capital of $31.7 million was determined using the Black-Scholes pricing model.

Approximately 1.3 million of the warrants are held by KKR 1996 Fund L.P., an investment partnership created at the direction of Kohlberg Kravis Roberts & Co. L.P. (“KKR”). KKR is a related party to the Company (see Note 21).

Options to Purchase Common Stock

In 2001, the Company retained KKR Capstone (formerly known as Capstone Consulting LLC) to provide consulting services to the Company. In 2002, the Company granted 0.3 million options to purchase the Company’s common stock to Capstone for services received. These options were fully vested as of the grant date, have a ten year life and an exercise price of $10.80 per share. Related non-cash compensation of $1.0 million, determined using the Black-Scholes pricing model, was recorded for the year ended December 31, 2002. KKR Capstone is a related party to the Company (see Note 21). These options are not included in the employees stock option activity table (see Note 13).

Stock Repurchase Plan

On December 4, 2008, the Company’s Board of Directors authorized a program (the “Repurchase Program”) to repurchase up to $5.0 million of its common stock over the next 12 months. Under the terms of the Repurchase Program, the Company may repurchase shares in open market purchases or through privately negotiated transactions. The Company expects to use cash on hand to fund repurchases of its common stock. As of December 31, 2008, the Company had not repurchased any shares under the plan, and $5.0 million remained available for share repurchases (see Note 23).

Note 13.    Employee Benefit Plans

Stock Incentive Plans

The PRIMEDIA Inc. 1992 Stock Purchase and Option Plan, as amended, (the “Stock Option Plan”) authorizes sales of shares of common stock and grants of incentive awards in various forms, including stock options, to key employees and other persons with a unique relationship with the Company. The Stock Option Plan has authorized grants of up to 7.5 million shares of the Company’s common stock or options to management personnel. The Company had approximately 1.9 million shares of its common stock reserved for future grants in connection with the Stock Option Plan at December 31, 2008.

 

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Restricted Stock

Performance Share Plan

During 2008, the Compensation Committee of the Board of Directors (the “Compensation Committee”) approved awards of performance-based restricted stock granted under the Stock Option Plan, to certain employees of the Company. Restricted stock, targeted at 0.2 million shares, may be earned or forfeited based on the Company’s level of achievement of performance goals for the year ending December 31, 2008. The restricted stock underlying grants is forfeited if less than 90% of the applicable performance goal is achieved and fully vests if at least 100% of the applicable performance goal is achieved. If at least 90%, but less than 100%, of the applicable performance goal is achieved, a portion of the restricted stock vests pursuant to a predetermined formula. Restricted stock that is earned vests on the date of determination by the Compensation Committee of the extent to which the applicable performance goal is achieved, provided the grantee is employed by the Company at such time. At that time, restrictions on the earned portion of the award will lapse, and the corresponding shares will be awarded to the grantee.

In 2008, the Compensation Committee approved awards, under the Stock Option Plan, of performance-based restricted stock, targeted at 0.4 million shares, which may be earned based on the Company’s level of achievement for years ending December 31, 2009 and 2010. The performance targets for the 2009 awards were set during the first quarter of 2009, at which time the awards were considered granted. It is expected that the performance targets for the 2010 awards will be set during the first quarter of 2010, at which time those awards will be considered granted. No expense for the 2009 and 2010 awards will be recorded prior to the grant date. Performance-based restricted stock is expensed based on the likelihood of the Company achieving the performance targets.

Service Plan

During 2008, the Compensation Committee approved an award of 0.2 million shares of service-based restricted stock granted under the Stock Option Plan to the Company’s Chief Executive Officer (“CEO”). The restricted stock includes tandem dividend rights and will be earned as long as the CEO remains employed with the Company through certain vesting dates in 2009 and 2010.

A summary of the Company’s restricted stock award activity as of December 31, 2008 and 2007 and changes during the years then ended is presented below:

 

     2008    2007
     Number of
Shares
    Weighted-
Average
Grant-
Date
Fair Value
   Number of
Shares
    Weighted-
Average
Grant-
Date
Fair Value

Outstanding at beginning of year

   19,763     $ 18.50    62,409     $ 18.06

Granted

   429,634       5.49         

Vested

   (18,118 )     18.28    (37,500 )     17.40

Forfeited

   (15,645 )     7.32    (5,146 )     20.88
                 

Outstanding at end of year

   415,634       5.49    19,763       18.50
                 

As of December 31, 2008, there was $0.7 million of total unrecognized compensation cost related to restricted stock. The cost is expected to be recognized over a weighted-average period of less than one year. The total fair value of shares vested during the year ended December 31, 2008 was less than $0.1 million.

 

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Stock Options

Stock options are granted with exercise prices at or above quoted market value for the Company’s common stock at time of issuance. Most of the options are exercisable at the rate of 20%-33% per year commencing on the anniversary date of the grant. Most options granted pursuant to the Stock Option Plan expire no later than ten years from the date the option was granted.

A summary of the Company’s stock option award activity for the years ended December 31, 2008 and 2007 is as follows:

 

    2008   2007
    Options     Weighted-
Average
Exercise
Price
  Weighted-
Average
Remaining
Contractual
Term

(in years)
  Aggregate
Intrinsic
Value

(dollars in
thousands)
  Options     Weighted-
Average
Exercise
Price
  Weighted-
Average
Remaining
Contractual
Term

(in years)
  Aggregate
Intrinsic
Value

(dollars in
thousands)

Outstanding at beginning of year

  2,892,865     $ 48.65       3,302,504     $ 45.90    

Granted

  840,000       6.42       9,058       13.80    

Exercised

              (40,987 )     13.27     $ 120

Expired

  (1,105,709 )     42.67       (366,097 )     27.73    

Forfeited

  (220,812 )     36.38       (11,613 )     41.97    
                       

Outstanding at end of year

  2,406,344       37.67   3     2,892,865       48.65   3    
                       

Vested or expected to vest at end of year

  2,385,785       37.94   3     2,892,038       48.63   3    
                       

Exercisable at end of year

  1,886,790       46.27   2     2,792,592       49.27   3    
                       

The fair value of each option award was estimated at the date of grant using the Black-Scholes pricing model under the assumptions noted in the following table. Where certain inputs to the Black-Scholes model varied throughout the period, the ranges utilized for those assumptions are disclosed. Expected volatilities are based on historical volatilities of the Company’s common stock. The Company uses historical data to estimate option exercises and employee terminations within the valuation model. The expected term of options granted is derived from the historical exercise behavior of employees and represents the period of time that options granted are expected to be outstanding. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Details of stock option grants are as follows:

 

     Years Ended December 31,
     2008    2007    2006

Expected volatility

   75.15%-83.78%    61.03%    61.71%–63.63%