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, 2009

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ¨    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  ¨    Non-accelerated filer  ¨    Smaller reporting company  x

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, 2009, was approximately $34.9 million. The registrant has no non-voting common stock.

As of March 1, 2010, 44,146,959 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 2010 Annual Meeting of Stockholders to be held on May 19, 2010. The definitive Proxy Statement will be filed within 120 days of the end of the fiscal year ended December 31, 2009.

 

 

 


Table of Contents
Index to Financial Statements

PRIMEDIA Inc.

Annual Report on Form 10-K

December 31, 2009

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

   7

Item 1B.

  

Unresolved Staff Comments

   12

Item 2.

  

Properties

   12

Item 3.

  

Legal Proceedings

   12

Item 4.

  

Reserved

   12
   PART II   

Item 5.

  

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

   14

Item 6.

  

Selected Financial Data

   15

Item 7.

  

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

   17

Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

   44

Item 8.

  

Financial Statements and Supplementary Data

   45

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   92

Item 9A.

  

Controls and Procedures

   92

Item 9B.

  

Other Information

   96
   PART III   

Item 10.

  

Directors, Executive Officers and Corporate Governance

   96

Item 11.

  

Executive Compensation

   96

Item 12.

  

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

   96

Item 13.

  

Certain Relationships and Related Transactions and Director Independence

   96

Item 14.

  

Principal Accountant Fees and Services

   96
   PART IV   

Item 15.

  

Exhibits and Financial Statement Schedules

   97
  

Signatures

   98
  

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, trends and conditions in the apartment and other rental property and new home sales sectors of the residential real estate industry; changes in technology and competition; implementation and results of our ongoing strategic initiatives; demand by customers for our services; expenses or adverse results of litigation; changes in U.S. federal tax laws; 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 a targeted media company that provides consumers with tools and information they need to find a place to live. Our consumer directories are targeted primarily for the apartment and other rental property sectors of the residential real estate industry and are provided free to consumers through online, print and mobile platforms. We derive advertising revenue by providing our advertiser clients – property management companies, private owner/landlords, new home builders and real estate professionals – with products and services that generate measurable results in the form of cost-effective, quality leads.

Our principal digital assets include ApartmentGuide.com, Rentals.com, RentalHouses.com, NewHomeGuide.com and AmericanHomeGuides.com. According to comScore Media Metrix, unique visitors to our websites reached 3.3 million in January 2010, compared with 3.1 million in January 2009. The total number of leads we produce for our advertisers has grown year over year, and leads derived from our online and mobile services now represent more than 75% of the total leads we deliver to our advertiser clients.

We produce printed directories for 75 markets and distribute them through display rack programs, many of which are on an exclusive basis, with large national and regional retail chains, including grocery, drug, convenience, video, fitness and mass merchandise retailers. In 2009, we distributed approximately 14.9 million printed directories to approximately 17,000 advertiser client locations and 28,000 retail and other locations.

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

Apartments

Our Apartments division comprised approximately 91.7% of our advertising revenue for 2009 and 93.1% of our advertising revenue for fourth quarter 2009.

Apartment Guide

Thirty-five years old, Apartment Guide, our flagship brand and largest business, delivers apartment and apartment community rental information to consumers through a combination of Internet, print and mobile

 

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products and services. ApartmentGuide.com and RentRentar.com, our Spanish-language edition of ApartmentGuide.com, offer many premium features not available through our printed directories, including flexible search functionality, detailed photos and floorplans, virtual tours, as well as detailed information on metro areas and neighborhoods. Our ApartmentGuide.com mobile platform continues to expand through launches of iPhone and Android applications, which together have generated over 541,000 downloads through January 2010.

We currently produce 77 Apartment Guide printed directories in 75 markets, averaging over 17,000 apartment community listings in print – over 40% more listings than our nearest print competitor within these markets – with a 2009 distribution of approximately 12.0 million copies. Most of our Apartment Guide printed directories are published monthly, though we expect to move to bi-monthly publishing schedules for some of our markets.

We continued to reinforce our commitment to industry-leading innovation in 2009 with the launch of My.ApartmentGuide.com. Feedback from our advertiser clients has confirmed our view that My.ApartmentGuide.com is a valuable, unique ROI-based management tool that enables our clients to measure the cost-effectiveness and other performance metrics of the rental search and lead-generation process. We also released version 2.0 of our iPhone application and launched our initial Android application in 2009.

Apartment Guide advertising revenue is generated primarily from property management companies that manage larger apartment communities (generally in excess of 50 units) that experience ongoing vacancies. A majority of our 2009 revenue was derived from contracts at least 12 months in duration, and a majority of these contracts were renewed when they expired. Most of our property management company clients purchase integrated media packages that include online, mobile and print advertising. However, as we continue to pursue enhancements to our product portfolio and market segment expansion to grow our customer count, we are providing more flexibility to clients, based on specific markets and market segments, to purchase more customized mixes of products, product features and services on a stand-alone or package basis.

Apartment Guide’s national competitors include Rent.com (owned by eBay), Apartments.com (owned by Classified Media Ventures), For Rent (published by Dominion Enterprises), Apartment Finder (published by Network Communications Inc.) and, to a lesser extent, Move.com (owned by Move, Inc.) and craigslist.org (owned by craigslist, Inc.).

Rentals.com

Rentals.com is a comprehensive real estate rental site with one of the largest collections of single-unit rental property listings on the Internet. The Rentals.com Network of Sites, which includes Rentals.com and RentalHouses.com, averaging more than 33,000 listings, including approximately 28,000 distribution partner listings, of single-family homes, townhomes, condos and smaller apartment communities, as well as select inventory of apartments from ApartmentGuide.com. Our advertiser clients use Rentals.com and RentalHouses.com to list their rental vacancies, including through the self-provisioning feature of the website we call the “Ad Store,” and peruse the expert advice and tips on managing their rental properties offered on our websites. A majority of our customers are derived from the Ad Store, while a majority of our listings are derived from property management companies.

Advertising revenue is generated primarily from private owner/landlords, investors and property managers that own or manage single-unit rental properties or smaller apartment communities (generally less than 50 units) that experience vacancies intermittently. Listings on the Rentals.com and RentalHouses.com Network of Sites are generally purchased on a monthly basis, though longer-term packages are available for property management company clients. In some of its markets, advertisers purchase basic and premium listings. In all other markets, basic listings are provided free of charge, with premium upgrades available for charges that vary by category and market.

 

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Competitors of Rentals.com and RentalHouses.com include craigslist.org (owned by craigslist, Inc.), HomeRentals.net (owned by RealEIS, LLC), RentalHomesPlus.com (owned by Classified Ventures LLC), Move.com (owned by Move, Inc.) and, to a lesser extent, traditional newspapers.

New Homes

Our New Homes division, comprising approximately 8.3% of our advertising revenue for 2009 and 6.9% of our advertising revenue for fourth quarter 2009, 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 states and metropolitan areas with significant home building activity. In addition, as of December 31, 2009, New Homes produced 21 printed directories, averaging over 2,100 new home community listings in print, with a combined 2009 distribution of approximately 3.0 million copies. New Homes printed directories generally are published bi-monthly.

New Homes advertising revenue is generated primarily from new home builders and advertising agencies representing new home builders. Most of our clients purchase integrated media packages that include online, mobile and print advertising. However, our products and services are offered nationwide on a stand-alone or package basis.

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

Distribution

In 2009, our distribution function, DistribuTech, distributed free publications, including PRIMEDIA’s directories and over 1,800 third-party titles, flyers and special piece advertising materials, to more than 28,000 retail locations and 17,000 PRIMEDIA advertiser client locations in 39 states and Washington, D.C. DistribuTech maintains display rack programs, many of which are on an exclusive basis, which we refer to as retail display allowances, or RDAs, with several large national and regional retail chains. The free directories are typically displayed in free-standing, multi-pocket racks located in high-visibility, high-traffic locations at the entrance or exit of these locations.

The primary function of DistribuTech is to ensure priority placement for PRIMEDIA’s directories through RDAs and to reduce our overall distribution costs through revenue from third-party customers who pay DistribuTech for distribution services. Historically, we have paid substantial premiums for the exclusive nature of many of our RDAs, which has contributed to relatively high fixed costs within this function. In addition, over the past three years, we have experienced substantial declines in revenue from third-party DistribuTech customers that have scaled back or ceased operations or are providing an Internet-only product.

Beginning in 2008, we undertook strategic initiatives to significantly reduce the cost structure of our distribution function, including the relatively high costs of RDAs. During 2009, we implemented a plan to further reduce our ongoing distribution costs arising from RDAs that were underperforming, and as a result, our distribution costs decreased from $85.2 million in 2008 to $60.9 million in 2009. We intend to continue aggressively reducing our distribution cost structure.

Our overall distribution strategy is to reduce our print distribution costs as we devote greater resources to opportunities for growth that digital media present and eliminate less effective locations, while focusing our efforts on retaining and servicing locations that produce the best results for PRIMEDIA’s advertisers in terms of leads. We intend to move to a smaller, more efficient distribution model that primarily relies on third-party distribution services, in combination with more limited internal resources, to deliver our directories.

 

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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 back up 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

We provide most of the content for our websites, but we outsource some technology, production and content. All of our printed directories are printed and bound by independent printers. The principal raw material used in our printed directories is paper, which is purchased from merchants. In 2009, paper prices declined as the year progressed. We expect paper costs to increase slightly in 2010, and we expect to offset these costs through adjustment of our production metrics. In the future, our results could be adversely affected by increases in paper prices.

Sales and Marketing

Because our directories are free to users, we compete for audience on the basis of the relevance and usefulness of our search results and the features, availability and ease of use of our tools and information. Our websites are marketed to end users through our printed directories 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!, Advertising.com and others. 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, which comprise the substantial majority of our advertising revenue.

We sell our advertising products and services to our advertiser clients through our direct sales force. Our sales force is comprised currently of approximately 460 sales people. The sales force is generally organized vertically, focusing on specific categories and product lines, and by market. Generally, sales people are responsible for developing new accounts and servicing existing customers. Most of our sales people live in the market they serve. We also maintain an in-house telemarketing sales force, supplemented by local and regional support in the field, which focuses on specific customer segments within markets.

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

In 2009, more than 74% 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 1.5% of our total revenue in 2009, while another comprised 1.3%. All of our other individual advertisers comprised less than 1.0% of our total revenue in 2009.

Employees

During 2009, our overall headcount declined by approximately 9.0%, primarily due to the elimination of certain administrative and support positions as a result of automation and consolidation of functions. Our sales force

 

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headcount also declined by 7.9%. As of December 31, 2009, we had approximately 900 employees, of which approximately 20 were part-time, compared to approximately 1,000 employees at the end of 2008, of which approximately 20 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. Most 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.

 

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Discontinued Operations

Over the past several years, we have aggressively sought to divest assets no longer part of our current core businesses. Details about our divestitures during the years ended December 31, 2008 and 2007 are as follows:

 

               

Consideration

  Pre-tax Gain or Loss
on Disposition
Recognized During
the Years Ended
December 31,
 

Segment, Group or Division

 

Year of
Inclusion in
Discontinued
Operations

 

Basis for
Inclusion in
Discontinued
Operations

 

Year of
Disposition

 

Form

  Amount       2008       2007(1)  
                    (Dollars in thousands)  

Outdoors group (part of Enthusiast Media (“PEM”) segment), primarily hunting, fishing and shooting titles

  2006   Agreement to sell   2007   Cash   $ 170,000   $   $ 57,547   

Channel One (part of Education segment), proprietary network for secondary schools

  2006   Announcement of intent to sell segment   2007   Assumption by the acquirer of net liabilities     8,600         (7,050

Films Media Group (part of Education segment), a source of educational video

  2006   Announcement of active pursuit of sale of segment   2007   Cash     11,000         170   

PRIMEDIA Healthcare (part of Education segment), a medical education business(2)

  2006   Announcement of active pursuit of sale of segment   2008   Cash     200         132       

Enthusiast Media segment(3)(4)

  2007   Sale of segment   2007   Cash     1,177,900         460,988   

Auto Guides division(5)

  2007   Announcement of intent to sell or shut down operations of division   2008   Cash     2,100     42       

 

(1) Loss related to final adjustments for disposition in previous years was approximately $0.7 million in 2007.

 

(2) Remaining operations were shut down, resulting in a loss of approximately $0.4 million.

 

(3) Proceeds were used to pay down debt

 

(4) Gain related to final adjustments was approximately $0.7 million in 2008 and resulted in payment of approximately $4.4 million to acquirer.

 

(5) Remaining operations were shut down, resulting in a loss of approximately $0.8 million.

 

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There was no pre-tax gain or loss on disposition recognized during the year ended December 31, 2009.

As of December 31, 2009 and 2008, there were no assets or liabilities of businesses held for sale.

The financial results for all divestitures are reported as discontinued operations in the consolidated statement of operations for all periods presented and are more fully discussed in Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Report.

Company Organization

PRIMEDIA Inc. was incorporated on November 22, 1991 in the State of Delaware as K-III Communications Corporation, and 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 a 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 1 of this Report. 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 contained elsewhere in this Report.

Deterioration in general economic conditions, and in the specific industries in which we operate, have adversely affected and are expected to continue to adversely affect advertising revenue.

National and local market economic conditions affect the overall levels of advertising revenue. Negative economic conditions, including a U.S. recession and the nationwide and local downturn in the housing markets, have adversely affected and are expected to continue to adversely affect our overall level of advertising revenue, and a failure of economic conditions to improve in our markets could adversely affect our future business, financial condition and results of operations.

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 economic or 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 we are generating 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

 

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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. The effects of occupancy rates can be mitigated or exacerbated by effective rent levels, which are essentially average rent amounts after giving effect to free months of rent and other incentives.

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

Approximately 8.3% of our 2009 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 tend to decrease their advertising budget, which adversely affects 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.

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 online and print apartment and new home-targeted resources for the consumer represent our main competitors. To a lesser extent, we also compete with traditional newspapers and yellow pages.

Competition for advertising is generally based on audience or traffic levels and demographics, price, service and advertising results. Competition from all relevant media and services affects our ability to attract and retain consumers and advertisers and to maintain or increase our advertising rates. This competition has intensified as a result of the continued developments of digital media technologies. Distribution of advertising over the Internet, as well as through mobile phones and other devices, continues to increase in popularity. As a result, a shift from print advertising to online alternatives has contributed to significant declines in print advertising.

The majority of our current product offerings are built upon integrated media packages that feature online, mobile and print components. However, we are continuing to aggressively develop and market our online products and services, and we could experience a decline in advertising revenue if we are unable to migrate print advertising to our website offerings in volumes or at rates sufficient to offset declines in print advertising.

If we are not successful in growing our digital products and services, our business, financial condition and prospects will be adversely affected.

Our growth depends, to a significant degree, upon the development of our digital products and services. Accordingly, our ability to grow and succeed over the long term depends on various factors, including, among other things:

 

   

increasing our online traffic and attracting and retaining visitors to our websites, which may be adversely affected by search engines (including Google, the primary search engine directing traffic to our websites) changing the algorithms responsible for directing search queries to web pages;

   

attracting advertisers to our websites, which depends partly on our ability to generate online traffic and partly on the rate at which users engage in lease or sale transactions with advertisers using our websites;

 

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maintaining or increasing advertising rates on our websites, which will depend, in part, on the market position of our brands;

   

exploiting new and existing technologies to distinguish our products and services from those of our competitors and developing new content, products and services, which may move in unanticipated directions due to the development of competitive alternatives, rapid technological change, regulatory changes and shifting market preferences;

   

investing funds and resources in online opportunities, in which some of our existing competitors and possible additional entrants may have greater operational, financial and other resources than we do or may be better positioned to compete for certain opportunities; and

   

attracting and retaining talent for critical positions.

Even if we continue to develop our digital products and services, we may not be successful in generating or increasing revenue from these products or services due to increasing competition and economic conditions. If we are not successful in maintaining or growing revenue from our digital products and services to offset current and anticipated declines in revenue from print products, our business, financial condition and prospects will be adversely affected.

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 the listings in our online and print directories. 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.

Kohlberg Kravis Roberts & Co. L.P. (“KKR”) has control of a majority of our outstanding 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 1, 2010, approximately 58.9% 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, L.P. and KKR GP 1996 LLC 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

 

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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, L.P. and KKR GP 1996 LLC 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; announcements that we, our competitors or our customers may make; and the relatively small portion of our outstanding shares that is in the hands of public investors, as opposed to our officers, directors and controlling-interest investors.

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 reduce 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, generally resulting 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 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.

If we are unable to meet continued listing requirements of the New York Stock Exchange, Inc. (“NYSE”), 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.

In November 2008, the NYSE 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

 

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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. In February 2009, the NYSE notified us that it had accepted our proposed plan for continued listing on the NYSE, subject to quarterly reviews by the NYSE’s Listing and Compliance Committee to ensure progress against the plan. In June 2009, the NYSE lowered its minimum total market capitalization requirement to $50 million and subsequently notified us that we were considered in compliance and that no quarterly reviews would be required.

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.

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. As a result of Lehman Brothers, Inc. ceasing to be a participating lender in our credit facility, the total capacity under our revolving credit facility was reduced by $12.0 million to $88.0 million. In the event that the volatility of the financial markets further adversely affects financial institutions that are lenders under our credit facility, we may be unable to access our credit 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 or 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 and estimates 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

 

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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 contained elsewhere in this Report for more information.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2. PROPERTIES

The following table sets forth certain information with respect to our principal locations as of December 31, 2009. 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 subleased to third-party tenants; only the Norcross location is used in our current operations. Of the total of approximately 1.1 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

Norcross, GA 3585 Engineering Drive

  Executive and administrative offices   86,600  

Lease expires in 2016

Carrollton, TX 4101 International Parkway

  Sublease   201,180   Lease expires in 2014; 62,825 RSF sublet as of December 31, 2009

New York, NY 1440 Broadway

  Sublease   170,700   Lease expires in 2015; fully sublet as of December 31, 2009

New York, NY 261 Madison

  Sublease   72,100   Lease expires in 2017; 47,333 RSF sublet as of December 31, 2009

 

ITEM 3. LEGAL PROCEEDINGS

As is more fully discussed in Note 20, “Commitments and Contingencies,” to the consolidated financial statements contained elsewhere in the Report, 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 our 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. RESERVED

 

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EXECUTIVE OFFICERS OF THE REGISTRANT

Our current executive officers are:

 

Corporate Officers   

Dean B. Nelson

Chairman of the Board

Age: 51

   Mr. Nelson became Chairman of the Board in April 2003 and also served as President and Chief Executive Officer from October 2005 to September 2007. He has served as the Chief Executive Officer of Capstone Consulting LLC, a strategic consulting firm, since March 2000.

Charles J. Stubbs

President and

Chief Executive Officer

Age: 37

   Mr. Stubbs has served as President and Chief Executive Officer since May 2008. From November 2004 to May 2008, he was the President and CEO of YellowPages.com. Prior to that time, Mr. Stubbs served as President of BellSouth IntelliVentures, the electronic media division of BellSouth Advertising and Publishing Group. Before joining BellSouth, Mr. Stubbs was Executive Vice President of Infospace, a Bellevue, Washington-based entity that develops and markets Internet and wireless solutions for wireless operators and content sites.

Kim R. Payne

Senior Vice President and

Chief Financial Officer

Age: 41

   Ms. Payne has served as Chief Financial Officer since August 2007. Previously, she had served as Chief Financial Officer of our operating subsidiary since August 2006. She joined us as an accountant in 1991 and during her tenure has served in various finance management roles at our operating subsidiary, including Financial Analyst, Director of Analysis and Planning, and Vice President of Finance.

J. Michael Barber

Senior Vice President and

Chief Accounting Officer

Age: 43

   Mr. Barber has served as Chief Accounting Officer since May 2008. Prior to joining us in October 2007, Mr. Barber served as Executive Vice President and Chief Accounting Officer of HomeBanc Corp. from September 2004 through October 2007. From 2001 to August 2004, he served as Senior Vice President/Manager of Accounting Policy and Reporting with Union Planters Corp., a bank holding company. Prior to 2001, Mr. Barber worked with PricewaterhouseCoopers LLP, where he was a Senior Manager in that organization’s banking practice. Mr. Barber is a certified public accountant.

Arlene Mayfield

Senior Vice President and

President, Apartment Guide and

New Home Guide

Age: 47

   Ms. Mayfield has served as Senior Vice President since December 2007 and President of the Apartment Guide and New Home Guide businesses since October 2005 and November 2008, respectively. Previously, she had served as Vice President of the New Home Guide from September 2003 through October 2005. She began her career with us in 1993 as the Publisher of the Albuquerque Apartment Guide. Ms. Mayfield was promoted to Publisher of the Orlando Apartment Guide in 1997 and subsequently to Regional Director for the Eastern Region in 1999.

Keith L. Belknap, Jr.

Senior Vice President, General

Counsel and Secretary

Age: 52

   Mr. Belknap has served as Senior Vice President, General Counsel and Secretary since September 2007 and of our operating subsidiary since March 2007. Mr. Belknap is responsible for oversight of our legal and corporate and business development functions. From February 2006 to March 2007, he served as Assistant General Counsel of PPG Industries, Inc. From April 2003 to February 2006, he served as a Principal Counsel to Georgia-Pacific Corporation. Prior to April 2003, Mr. Belknap was Counsel at Skadden, Arps, Slate, Meagher & Flom LLP.
Business Executive   

Jamison M. Clymer

President, Rentals.com

Age: 35

   Mr. Clymer has served as President of Rentals.com since January 2008. Prior to joining us, Mr. Clymer served as Vice President and General Manager of Homes.com at Dominion Enterprises from January 2005 through December 2007. From October 2003 through December 2004, he served as General Manager of Employmentguide.com at Dominion, and from July 2001 through September 2003 he served as District Manager of Employmentguide.com.

 

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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 1, 2010, there were 636 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

2009 Quarters Ended

   High    Low    Close   

March 31

   $ 3.00    $ 1.60    $ 2.47    $ 0.07

June 30

     4.05      1.80      2.01      0.07

September 30

     3.25      1.72      2.52      0.07

December 31

     4.29      2.36      3.61      0.07
     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

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 4, 2010 that our Board of Directors had authorized a regular quarterly cash dividend of $0.07 per share of common stock, payable on or about March 24, 2010, to stockholders of record on March 15, 2010. 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 2010 Annual Meeting of Stockholders. The definitive Proxy Statement will be filed within 120 days of the end of the fiscal year ended December 31, 2009.

Recent Sales of Unregistered Securities

There have been no recent sales of unregistered securities.

Issuer Purchases of Equity Securities

Our Board of Directors has authorized a program (the “Repurchase Program”) to repurchase up to $5.0 million of our common stock through December 31, 2010. 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 any repurchases of our common stock. As of December 31, 2008, we had not repurchased any shares under the Repurchase Program. During the three months ended March 31, 2009, we repurchased 0.2 million shares of our common stock for approximately $0.4 million at a weighted-average price (including brokerage commissions) of $1.79 per share. We did not repurchase any additional shares of our common stock during the year ended December 31, 2009 beyond those discussed above. The reacquired shares have been designated as treasury shares. As of December 31, 2009, we had $4.6 million available under the Repurchase Program for further share repurchases, which we may make.

 

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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 graph below compares the cumulative total stockholder return of our Common Stock with the cumulative total return of the S&P 500 Index and two different customized peer groups, the “Old Peer Group” and the “New Peer Group,” for the period commencing December 31, 2004 and ending December 31, 2009. The Old Peer Group is comprised of Autobytel Inc., Martha Stewart Living Omnimedia, Inc., Meredith Corp. and Move, Inc. The New Peer Group is comprised of Move, Inc., Martha Stewart Living Omnimedia, Inc., The Knot, Inc. and Market Leader, Inc. We elected to change our peer group because we believe the companies reflected in the New Peer Group provide a more relevant comparison to our business model and industry than the Old Peer Group. The graph assumes that $100 was invested in our Common Stock, in the index and in each of the peer groups on December 31, 2004 and that all dividends were reinvested on a quarterly basis.

LOGO

 

     Dec-04    Dec-05    Dec-06    Dec-07    Dec-08    Dec-09

PRIMEDIA Inc.

   $ 100    $ 42    $ 44    $ 43    $ 12    $ 22

S&P © 500

     100      103      117      121      75      92

Old Peer Group (4 Stocks)

     100      102      106      66      26      38

New Peer Group (4 Stocks)

     100      135      204      112      60      71

 

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 in this Report.

 

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PRIMEDIA INC. AND SUBSIDIARIES

 

    As of and for the Years Ended December 31,  
    2009     2008   2007     2006     2005  
    (Dollars in thousands, except per share amounts)  

Operating Data:

         

Revenue, net

  $ 257,931      $ 304,105   $ 314,800      $ 307,929      $ 307,187   

Depreciation and amortization of property and equipment

    13,256        14,475     12,612        11,501        10,410   

Amortization of intangible assets

    2,970        2,870     3,492        3,286        3,140   

Interest expense

    15,670        19,338     77,660        126,940        128,980   

Income (loss) from continuing operations

  $ 4,540      $ 49,027   $ (55,678   $ (65,114   $ (101,306

Discontinued operations, net of tax

    (1,052     10,441     547,123        103,344        665,924   

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

                      22          
                                     

Net income

    3,488        59,468     491,445        38,252        564,618   
                                     

Income applicable to common stockholders

  $ 3,488      $ 59,468   $ 491,445      $ 38,252      $ 564,618   
                                     

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

         

Income (loss) from continuing operations

  $ 0.10      $ 1.11   $ (1.26   $ (1.48   $ (2.31

Discontinued operations

    (0.02     0.24     12.40        2.35        15.19   

Cumulative effect of change in accounting principle(1)

                      0.00          
                                     

Income applicable to common stockholders

  $ 0.08      $ 1.35   $ 11.14      $ 0.87      $ 12.88   
                                     

Dividends declared per share of common stock

  $ 0.28      $ 0.28   $ 2.15      $      $   
                                     

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

    44,124,538        44,176,398     44,118,943        43,997,665        43,838,591   
                                     

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

    44,214,003        44,197,590     44,118,943        43,997,665        43,838,591   
                                     

Balance Sheet Data:

         

Goodwill and intangible assets, net

  $ 149,972      $ 152,942   $ 155,712      $ 862,025      $ 994,581   

Total assets

    239,729        286,154     256,864        1,254,329        1,389,468   

Long-term debt(3)

    222,349        245,531     247,575        1,316,959        1,456,770   

 

Notes to Selected Financial Data

(1) Effective January 1, 2006, we adopted GAAP related to the accounting for share-based payments, 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 GAAP, which was adopted on January 1, 2003 using the prospective method. Upon adoption, 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.

 

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The securities that could potentially dilute basic earnings per share in the future consist of 1.6 million warrants at December 31, 2009, 2008, 2007, 2006 and 2005; and an aggregate of 2.1 million, 3.1 million, 3.2 million, 3.4 million and 3.6 million stock options and shares of restricted stock as of December 31, 2009, 2008, 2007, 2006 and 2005, respectively. For the year ended December 31, 2009, potentially dilutive securities, including 2.5 million stock options and 1.6 million warrants to purchase common stock, were not included in the weighted-average number of common shares outstanding used 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 the weighted-average number of common shares outstanding used in the computation of diluted earnings per share for the year ended December 31, 2009 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 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 weighted-average number of common shares outstanding used 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 the weighted-average number of common shares outstanding used in the computation of diluted earnings per share for the year ended December 31, 2008 because either the performance goals were not met at the end of the period or the calculation under the treasury stock method resulted in no additional dilutive shares.

For the years ended December 31, 2007, 2006 and 2005, potentially dilutive securities were not included in the weighted-average number of common shares outstanding used 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.

 

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 Company

We are a targeted media company that provides consumers with tools and information they need to find a place to live. Our consumer directories are targeted primarily for the apartment and other rental property sectors of the residential real estate industry and are provided free to consumers through a combination of online, print and mobile platforms. We derive advertising revenue by providing our advertiser clients – property management companies, private owner/landlords, new home builders and real estate professionals – with products and services that generate measurable results in the form of cost-effective, quality leads.

Our principal digital assets include ApartmentGuide.com, Rentals.com, RentalHouses.com, NewHomeGuide.com and AmericanHomeGuides.com. According to comScore Media Metrix, unique visitors to our websites reached 3.3 million in January 2010, compared with 3.1 million in January 2009. The total number of leads we produce for our advertisers has grown year over year, and leads derived from our online and mobile services now represent more than 75% of the total leads we deliver to our advertiser clients.

 

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We produce printed directories for 75 markets and distribute them through display rack programs, many of which are on an exclusive basis, with large national and regional retail chains, including grocery, drug, convenience, video, fitness and mass merchandise retailers. In 2009, we distributed approximately 14.9 million printed directories to approximately 17,000 advertiser client locations and 28,000 retail and other locations.

Fiscal 2009 Fourth Quarter Results

 

     Fourth Quarters Ended
December 31,
    $ Change
Favorable/
(Unfavorable)
    % Change
Favorable/
(Unfavorable)
 
     2009     2008      
     (Dollars in thousands)  

Revenues, net

   $ 61,253      $ 73,409      $ (12,156   (16.6 )% 

(Provision) benefit for income taxes

     (3,535     29,401        (32,936   (112.0

Income from continuing operations

   $ 7,469      $ 34,691      $ (27,222   (78.5 )% 

Discontinued operations, net of tax

     3,679        (2,710     6,389      235.8   
                          

Net income

   $ 11,148      $ 31,981      $ (20,833   (65.1
                          

The decrease in revenue, net was primarily attributable to a decrease in New Homes advertising revenue and distribution revenue. The decrease in New Homes advertising revenue was due to a 39.1% decrease in revenue per community served driven by the continued weaknesses in the new home sales sector and a 21.2% decrease in new home communities served. The decrease in distribution revenue was due to a 23.6% decrease in the average revenue per pocket due to softness in demand and a 24.2% decrease in the number of pockets sold in our display racks due largely to the reduction in retail locations serviced.

Income from continuing operations decreased primarily due to lower revenue of $12.2 million and the release in 2008 of $29.3 million in deferred tax asset valuation allowance, partially offset by decreases in 2009 in distribution and circulation of $8.2 million, cost of goods sold of $2.2 million, and general and administrative of $2.0 million.

Net income decreased due to the factors above, partially offset by a $6.4 million increase in income from discontinued operations, net of tax, which was the result of a benefit recorded from our estimated liability for certain tax-related contingencies of approximately $6.0 million, primarily due to the lapsing of the statutes of limitations.

2009 Summary Consolidated Results

In 2009, revenue was $257.9 million, down 15.2% as compared to $304.1 million in 2008. In 2009, costs and expenses were $251.3 million, down 10.9% compared to $282.1 million in 2008.

In 2009, income from continuing operations was $4.5 million, compared to $49.0 million in 2008.

Net income was $3.5 million in 2009 compared to $59.5 million in 2008, which included gain on sale of businesses, net of tax, of $2.0 million.

Business Trends and Outlook

The continuing and deepening deterioration in the economy generally and in the conditions in the residential real estate industry in particular have resulted in relatively low occupancy and effective rent levels on a national basis. Though local market conditions vary, our advertisers generally have responded to these conditions with shifts in marketing strategies and budget cuts, which have depressed and may continue to depress our advertising

 

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revenue. As we look ahead, we believe advertisers will continue to be cautious with their budgets, focusing more on total advertising spend than on ROI, and advertising revenue is likely to continue to be challenged in 2010.

Also contributing to shifts in marketing strategies of our advertisers is the continuing increase in popularity of online advertising, including through mobile phones and other devices. The broad shift from print advertising to online alternatives has contributed to significant declines in print advertising across traditional media products and services. Most of our current offerings are built upon integrated media packages that include online, print and mobile components. However, we have seen the effects of this trend in revenue declines attributable to our premium print products, as well as increasing advertiser focus on our online and mobile offerings.

The targeted nature of our ROI-based print products is why they continue to deliver substantial value to our advertisers, even though the greater portion of the value we now deliver (in the form of leads) on a national basis has shifted to our digital products and services. The mix of advertising results, and therefore value, as between our digital and print products and services is highly market-specific, with consumers in some markets favoring print products, while those in other markets favor our Internet or mobile services.

Overall, we expect our advertisers to increasingly favor digital media choices in their advertising budgets, and we are continuing to aggressively develop and market our online and mobile offerings. However, at least in the shorter term, we anticipate continuing decreases in revenue per community served as we increase apartment communities served. We believe that our growth will depend, to a significant degree, upon the value of our online products and services and our ability to monetize this value.

During 2010, we intend to continue to grow our client count and market share in our largest business, Apartment Guide, and pursue enhancements to our product portfolio and market and market segment expansion. We also intend to grow our Rentals.com business by focusing on improving site engineering and performance, while increasing traffic, primarily through search engine optimization. Our visibility around 2010 revenue for Apartments is extremely limited, given general economic and market conditions, though we currently expect to see a 5% to 6% year-over-year decline in first quarter 2010 Apartments revenue, similar to the percentage decline experienced in fourth quarter 2009.

We anticipate continued pressure on our New Homes business during 2010, and we remain focused on managing costs for this business in accordance with anticipated levels of revenue and managing our client relationships to best position us for opportunities as macroeconomic conditions improve. We currently expect a 40% to 50% year-over-year decline in New Homes revenue in first quarter 2010.

We anticipate that DistribuTech will continue to be impacted by lower revenue from customers that publish free publications and are scaling back or ceasing operations or providing an Internet-only product and by further reductions in retail locations serviced. Since 2008, we have undertaken strategic initiatives to substantially reduce the cost structure of our distribution function. As a result, distribution costs decreased from $85.2 million in 2008 to $60.9 million in 2009. We intend to continue aggressively reducing our distribution cost structure and expect to incur restructuring charges related to our RDAs of between $5.0 million and $7.0 million in 2010. We currently expect a 35% to 40% year-over-year decline in DistribuTech revenue in first quarter 2010.

Our overall distribution strategy is to reduce our overall print distribution costs as we devote greater resources to opportunities for growth that digital media present and eliminate less effective locations, while focusing our efforts on retaining and servicing locations that produce the best results for PRIMEDIA advertisers in terms of leads. We intend to move to a smaller, more efficient distribution model that primarily relies on third-party distribution services, in combination with more limited internal resources, to deliver our directories.

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 contained elsewhere in this Report, 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 2009 and 2008), 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.

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 2009 and 2008) 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.

Over the past six years, our actual revenue and earnings before interest, taxes, depreciation and amortization, and other (“EBITDA”) have generally been within a range of 7% higher to 7% lower than our forecasted amounts. In our annual impairment testing for 2009, we determined that the estimated fair value of our reporting unit substantially exceeded its carrying value. We have also performed a sensitivity analysis of our calculated fair value by assuming our cash flows from future earnings to be 20% lower than our forecast. The results indicated that such declines would not result in an indicated goodwill impairment.

 

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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 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.

During the fourth quarter of 2009, factors were identified indicating that the carrying value of certain of our advertiser lists might not be recoverable. We determined that the expected undiscounted cash flows associated with one advertiser list were less than the carrying value and, as a result, recorded an impairment charge of approximately $0.5 million, which is included in amortization of intangible assets in the consolidated statement of operations. We also determined that the decline in the value of these assets was occurring faster than the expense being recognized using the straight-line method of amortization. To better match the deterioration in the value of the assets, we also concluded that an accelerated method of amortization over a shorter estimated life would be appropriate and made this change in estimate effective January 1, 2010.

Income Taxes and Tax-Related Liabilities. Our income tax expense is affected by judgments we must make about the realizability of our net deferred tax assets and our reserves for uncertain tax positions. Our net income is also impacted by our judgments about our tax-related contingent liabilities.

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.

 

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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 reserve for uncertain tax positions.

As of December 31, 2009, we had aggregate federal NOLs of approximately $452.4 million, which are available to reduce future taxable income, and the substantial majority expire between 2020 and 2024. In addition, we have 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.

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, 2009, we have recorded a valuation allowance against all but $26.3 million of our net deferred tax asset because we believe only this portion is more likely than not to be realized. We will need to generate approximately $75.1 million in pre-tax income for financial reporting purposes to realize this asset.

Elements of positive evidence about the realizability of our asset 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 about the realizability of our asset 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 2009 is consistent with our view in 2008.

As of December 31, 2009, we maintained a partial valuation allowance against our net deferred income tax assets. We may release additional valuation allowance in future periods when we can conclude that a greater portion of the net deferred tax assets is more likely than not to be realized. To the extent we report taxable income in future periods, we intend to use NOLs, to the extent allowable, to offset that taxable income and reduce cash outflows for income taxes. Our ability to use our federal and state NOLs and federal and state tax credit carryforwards may be subject to restrictions attributable to equity transactions in the future resulting from changes in ownership as defined under the Internal Revenue Code.

Uncertain Tax Positions. GAAP for the accounting for uncertainty in income taxes 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. Uncertainty can arise because:

 

   

a tax position is not more likely than not to be sustained upon examination by the taxing authority;

   

the tax position is more likely than not to be sustained, but for a lesser amount; or

   

the tax position is more likely than not to be sustained, but not in the financial period in which the tax position was originally taken.

 

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Under GAAP, in order to be recognized, tax benefits from a tax position 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. We must adjust our reserves for uncertain tax positions, including any impact on the related interest and penalties, in light of changing facts and circumstances, such as the progress of an examination.

Currently, we are under audit by the Internal Revenue Service (“IRS”) for our 2005 and 2006 federal consolidated income tax filings and other material state taxing jurisdictions for income for filings for the tax years 2005 through 2007. We reported NOLs from tax years back to 1992 on federal and state tax returns currently under, or open to, examination. We believe that our accrual for tax liabilities is adequate for all open audit years based on our 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.

At December 31, 2009, we had total unrecognized tax benefits of $82.2 million and a recorded liability for uncertain tax positions of $28.3 million. A number of years may elapse before a particular matter for which we have established a reserve is examined and finally resolved, and due to the uncertainty regarding the timing of the completion of income tax examinations, it is difficult to assess when changes in our estimated liability will occur. However, the statutes of limitations in certain state and local jurisdictions are expected to lapse within the next twelve months and may result in a decrease of unrecognized tax benefits and accrued interest of approximately $1.2 million.

Tax-related Contingent Liabilities. In connection with the sale of assets and the divestiture of businesses, we may agree to indemnify the buyer and related parties for certain losses or liabilities incurred by the buyer with respect to liabilities related to the pre-closing operations of the assets sold, including tax liabilities not assumed by the buyer in the transaction.

As with any liability, we have accrued for those tax-related contingent obligations that are considered probable and reasonably estimable. Over time, circumstances could change that might increase the likelihood of payment related to a specific indemnity for which no reserve has been established. Additionally, our estimate about the amount due under to a specific indemnity could change. Either of these situations will result in a change in our net income.

During the year ended December 31, 2009, we reduced certain tax-related contingent liability obligations, while the statutes of limitations for others ultimately lapsed, and resulted in the reduction of a significant portion of the recorded liability, which resulted in a $6.6 million benefit to earnings in discontinued operations.

 

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Stock-Based Compensation. Under the fair value recognition provisions of GAAP, 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. Awards of performance-based restricted stock also require estimates about whether and to what extent applicable performance thresholds are likely to be achieved, which results in vesting of the award according to a predetermined formula. 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 typically 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 businesses provides for estimated credit losses based on historical analysis of the propensity of their customer base to make required payments.

The following is operational information related to our accounts receivable and related allowance for doubtful accounts:

 

     As of and for the Years Ended
December 31,
 
     2009     2008     2007  

Bad debt expense as a percentage of total revenue, net

   1.6   1.3   0.6

Write-offs of uncollectable accounts as a percentage of total revenues, net

   2.1      1.5      0.9   

Allowance for doubtful accounts as a percentage of gross accounts receivable

   4.7      5.2      4.4   

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

 

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need to increase or decrease our allowance for doubtful accounts. We do not believe those increases or decreases would have a material impact on our long-term consolidated financial position or liquidity, although they could be material to the results of operations of any particular period in which they are recognized.

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, the cost of terminating or foregoing our rights under our RDAs 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. Many of these costs are estimated using a discounted cash flow model. The most sensitive inputs into this model are the discount rate, which is based on current rates that would be offered to us for debt with a remaining maturity equivalent to the cash flows, and estimates of sublease income. 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.

Results of Operations

2009 Compared to 2008

Consolidated Results

Revenue, Net

 

     Years Ended
December 31,
   $ Change
Favorable/

(Unfavorable)
    % Change
Favorable/

(Unfavorable)
 

Revenue Component

   2009    2008     
     (Dollars in thousands)  

Apartments

   $ 206,041    $ 211,367    $ (5,326   (2.5 )% 

New Homes

     18,530      39,337      (20,807   (52.9
                        

Total advertising revenue

     224,571      250,704      (26,133   (10.4

Distribution

     33,360      53,401      (20,041   (37.5
                        

Total revenue, net

   $ 257,931    $ 304,105    $ (46,174   (15.2
                        

Apartments

Apartment Guide, ApartmentGuide.com, Rentals.com and RentalHouses.com, representing approximately 91.7% of advertising revenue during the year ended December 31, 2009, decreased 2.5% compared to the same period in 2008. The decrease in revenue was primarily due to a 9.3% decrease in revenue per apartment community served in our Apartment Guide business, which was partially offset by a 7.8% increase in communities served.

Generally, advertising spend by property management company advertisers is driven by local market factors outside our control, including occupancy rates and effective rent levels, which are essentially average rent amounts after giving effect to free months of rent and other incentives. Our historical experience has been that 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 all discretionary spending, including advertising. For these reasons, occupancy rates in excess of 95% or below 90% ordinarily result in a decrease in revenue per community served.

As of December 31, 2009, occupancy rates in Apartment Guide markets ranged from 86% to 97%, with an average of 92% in 2009, compared to 93% in 2008, and with the majority of markets experiencing occupancy levels between 90% and 94%.

During 2009, approximately 1% of revenue from Apartment Guide was derived from markets that had occupancy rates of 95% or higher, which compares to 17% in 2008. Also during 2009, approximately 16% of revenue from Apartment Guide was derived from markets that had occupancy rates below 90%, which compares to 1% in 2008.

 

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The effects of occupancy rates are mitigated or exacerbated by effective rent levels. In the markets in which we print a directory, effective rents were down 4.5% for 2009 compared to 2008, which served to compound the impact on the revenue of markets with occupancy rates above 90%.

New Homes

The New Home Guide, NewHomeGuide.com and AmericanHomeGuides.com businesses, representing approximately 8.3% of advertising revenue during the year ended December 31, 2009, decreased 52.9% compared to the same period in 2008. The decrease in revenue was due to a 35.0% decrease in revenue per new home community served and a 27.8% decrease in communities served. The decrease in revenue per community served resulted from a decline in standard advertising spending of 50.4% and a decline in premium advertising spending of 66.5% by new home builders, driven by continued weakness in the new home sales sector.

The difficult conditions for new home builders persisted in 2009. We believe pressure in this business will continue over the near term and remain challenging for the foreseeable future. Since June 30, 2008, we have suspended 11 print directories that were considered less effective, and, as of December 31, 2009, we published New Home Guides in 21 markets. We may suspend additional New Home Guide print directories, which could adversely impact our revenue. We continue to focus on online offerings across all markets.

Distribution Revenue

Distribution revenue, which relates to our distribution arm, DistribuTech, decreased by 37.5% during the year ended December 31, 2009 compared to the same period in 2008. The decrease in revenue was due to a 20.5% decrease in the average revenue per pocket due to softness in demand and a 21.4% decrease in the number of pockets sold in our display racks. Our distribution revenue reflects the impact of the reduction in retail locations serviced, and it continues to be adversely impacted by the loss of business from publishers within the resale home, automobile sales and employment classifieds sectors scaling back or ceasing operations or providing an Internet-only product.

As part of our distribution function, we have entered into RDAs with various retail chains, including grocery, drug, convenience, video, fitness and mass merchandise retailers for exclusive rights for distribution related to us and third-party free publications. Since the third quarter of 2008, we have implemented a plan to further reduce our ongoing distribution costs through actions related to RDAs that were underperforming. These actions included renegotiating existing RDAs at more favorable rates and/or for a shorter duration; declining to renew certain RDAs when they expired; and, most significantly during 2009, by recording a restructuring charge of $20.7 million as a result of:

 

   

terminating our distribution rights for some or all locations covered by certain RDAs at a negotiated price;

   

discontinuing service for and vacating some locations covered by certain RDAs; and

   

determining to forego distribution rights for certain locations that are not currently being serviced.

 

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Costs and Expenses

 

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

Costs and Expenses Component

   2009     2008      
     (Dollars in thousands)  

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

   $ 23,369      $ 32,420      $ (9,051   (27.9 )% 

Marketing and selling

     77,635        75,722        1,913      2.5   

Distribution and circulation

     60,931        85,218        (24,287   (28.5

General and administrative expenses

     37,906        48,700        (10,794   (22.2

Depreciation and amortization of property and equipment

     13,256        14,475        (1,219   (8.4

Amortization of intangible assets

     2,970        2,870        100      3.5   

Provision for restructuring costs

     25,627        5,238        20,389      389.3   

Interest expense

     15,670        19,338        (3,668   (19.0

Amortization of deferred financing costs

     915        922        (7   (0.8

Other income, net

     (6,986     (2,821     (4,165   (147.6
                          

Total cost and expenses

   $ 251,293      $ 282,082      $ (30,789   (10.9
                          

The decrease in cost of goods sold was due to a decrease in the cost of paper, reformatting of our printed directories, including reductions in both paper size and weight, as well as printing fewer directories.

The increase in marketing and selling was primarily due to increased spending related to search engine marketing.

Our distribution and circulation costs decreased as a result of ongoing action with certain of our RDAs since the third quarter of 2008. As is more fully discussed under Distribution Revenue above and in Note 16, “Provision for Restructuring Costs,” to the consolidated financial statements contained elsewhere in this Report, other of our RDAs are part of a restructuring charge we incurred during 2009 related to actions we took to reduce our ongoing distribution costs.

General and administrative expenses declined, primarily due to decreases in corporate overhead and position eliminations of $1.4 million, resulting from the relocation of our headquarters from New York to Norcross in 2008; a $2.2 million reduction in costs associated with the hiring of a new CEO in 2008; a decrease of $0.8 million in stock-based compensation; $6.4 million resulting from insurance premium reductions and lower facilities costs attributable to our cost-cutting initiatives; and a decrease of $0.4 million in professional fees and legal expenses. These decreases were partially offset by an increase of $0.4 million in bad debt expense.

Depreciation and amortization of property and equipment decreased primarily as a result of certain internal-use software becoming fully depreciated during the past twelve months, partially offset by new internal-use software being placed in service during that same period.

As is more fully discussed in Note 7, “Goodwill and Other Intangible Assets,” to the consolidated financial statements contained elsewhere in this Report, we recorded an impairment charge of approximately $0.5 million in 2009 related to one of our advertiser lists. The expected undiscounted cash flows associated with these assets were less than the carrying value, resulting in impairment.

The provision for restructuring costs increased primarily due to a $20.7 million charge for certain of our RDAs that were underperforming. The charge included costs associated with the termination or modification of the agreements; discontinuing service to and vacating some locations covered; and determining to forego distribution rights in certain locations that are not currently being serviced. The 2009 restructuring charge also includes $1.1 million related to office space vacated during 2009 as part of our 2009 restructuring plan. It also includes $2.8

 

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million related to office space vacated during 2009 as part of the continuation of our 2008 restructuring plan. As a result, there was a $1.3 million increase in charges related to vacated office space in 2009 compared to 2008. The increases resulting from RDAs and vacated office space were partially offset by lower severance of $1.6 million.

Interest expense decreased primarily due to lower average debt levels, as during the second quarter of 2009, we repurchased and retired $14.0 million in principal of our Term Loan B Facility, and during the fourth quarter of 2009, we repurchased and retired another $6.3 million of our Term Loan B Facility. The decrease is also attributable to a lower weighted-average interest rate during 2009 and 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, net increased due to a gain on debt repurchases during 2009 of $5.0 million, which includes the write off of approximately $0.4 million in deferred financing fees. The corresponding loss in 2008 was approximately $0.1 million. In addition, we recognized a gain on sale of cost-method investments of $2.3 million during 2009. The increase was partially offset by an increase in other-than-temporary impairment charge of $1.5 million in 2009 related to a cost-method investment, compared to $0.9 million in 2008. 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 2009, we recorded an income tax expense related to continuing operations of $(2.1) million, compared to a benefit of $27.0 million in 2008, reflecting an effective rate of 31.6% in 2009, compared to (122.6)% in 2008. The variance is primarily due to a 2008 valuation allowance release of approximately $29.3 million on deferred tax assets, which is more fully discussed under “Critical Accounting Policies and Estimates – Income Taxes and Tax-Related Liabilities” above and in Note 11, “Income Taxes,” to the consolidated financial statements contained elsewhere in this Report.

Discontinued Operations

In accordance with GAAP, we have classified the results of our divested entities as discontinued operations in the consolidated statement of operations for all periods presented.

Additional details about our divestitures are included in Note 3, “Discontinued Operations,” to our consolidated financial statements contained elsewhere in this Report.

 

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The components of discontinued operations included in the consolidated statement of operations are as follows:

 

     Years Ended
December 31,
    $ Change
Favorable/

(Unfavorable)
    % Change
Favorable/

(Unfavorable)
 
     2009     2008      
     (Dollars in thousands)  

Total revenue, net

   $      $ 3,353      $ (3,353   (100.0 )% 
                              

Income (loss) from operations:

        

PRIMEDIA Healthcare

   $      $ 132      $ (132   (100.0 )% 

Auto Guides division

            (1,668     1,668      100.0   

Provision for litigation reserves and settlements

     (3,250     (6,000     2,750      45.8   

Professional fees

     (1,825     (2,287     462      20.2   

Adjustments to accrued operating lease liabilities

     (2,770     2,123        (4,893   (230.5

Insurance-related expenses

     (397     (1,488     1,091      73.3   

Write-off of receivables and other assets

     (259     (1,164     905      77.7   

Tax-related contingencies

     6,638        462        6,176      1,336.8   

Other

     (249     (960     711      74.1   
                          

Loss from operations before benefit (provision) for income taxes

     (2,112     (10,850     8,738      80.5   

Gain on sale of businesses:

        

PEM segment

            651        (651   (100.0

PRIMEDIA Healthcare

            132        (132   (100.0

Auto Guides division

            42        (42   (100.0

Benefit for income taxes

     1,060        20,466        (19,406   (94.8
                          

Discontinued operations, net of tax (including gain on sale of businesses)

   $ (1,052   $ 10,441      $ (11,493   (110.1
                          

The components of the benefit for income taxes included in discontinued operations are as follows:

 

     Years Ended
December 31,
    $ Change
Favorable/
(Unfavorable)
    % Change
Favorable/
(Unfavorable)
 
     2009     2008      
     (Dollars in thousands)  

Provision for tax benefit on pre-tax loss

   $ (1,779   $ 15,046      $ (16,825   (111.8 )% 

Benefit for 2008 extended NOL carryback

     9,347               9,347      N/A   

Provision for tax benefit on gain on sale of businesses

            1,227        (1,227   (100.0

Change in liability for uncertain tax positions

     (6,687     (1,347     (5,340   (396.4

Changes in estimates included in prior year tax provision

     179        5,540        (5,361   (96.8
                          

Total benefit for income taxes

   $ 1,060      $ 20,466      $ (19,406   (94.8
                          

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. We paid the total settlements of $5.0 million in March 2009. During the year ended December 31, 2009, the Company recorded an increase in reserves for litigation-related losses of $3.3 million, which is included in discontinued operations, and paid an additional $0.5 million. As of December 31, 2009 and December 31, 2008, the Company had established reserves for litigation-related losses of $5.8 million and $8.0 million, respectively. See Note 20, “Commitments and Contingencies,” to our consolidated financial statements contained elsewhere in this Report for more information.

As is more fully discussed in Note 20, “Commitments and Contingencies,” to our consolidated financial statements contained elsewhere in this Report, 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

 

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building and satellite time leases. During the fourth quarter of 2009, we reassumed the building lease on behalf of Workplace Learning and entered into a sublease with the current tenant for a portion of the space for a period of 51 months, with an early termination option, which would reduce the term of the sublease to 17 months. The sublease provides for a monthly rent payment and a set reimbursement percentage for operating expenses. We are currently undertaking efforts to sublease additional vacant space in the building to further offset our obligations under the lease. This transaction did not have a material impact on our recorded liability. Historically, each month, our liability has been reduced either by fulfilling our liability as lessee under the building lease or due to a sub-lessee’s or successor-in-interest’s performance under the terms of the sublease, which results in income for us. During the years ended December 31, 2009 and 2008, as a result of the assignee’s or successor in interest’s performance, we recorded $0.3 million and $3.0 million in income, respectively, which is included in adjustments to accrued operating lease liabilities in the table above.

In the third quarter of 2007, we sold our PEM segment. In connection with the sale, we entered into a sublease agreement with the buyer for office space where PEM was headquartered. On April 27, 2009, the buyer filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. In the bankruptcy proceedings, the sublease was rejected, a new sublease was entered into with the buyer at a reduced rate, and the buyer put certain of the space back to us. As a result, during the second quarter of 2009, we recorded a charge of $2.7 million, which is included in adjustments to accrued operating lease liabilities in the table above, to adjust our remaining liability under our lease for all of the office space, to record brokerage fees related to the new sublease and to write off certain amounts receivable from the buyer.

Insurance-related expenses decreased because during 2009, we experienced a reduction in the cost of settlements for general liability and workers’ compensation claims, primarily for PEM.

The decrease in write-off of receivables and other assets is due to the write-offs, primarily related to PEM, PRIMEDIA Healthcare and the Auto Guides division, during 2008.

There was an increase in tax-related contingencies in 2009 due to a reduction of our estimated liability for tax-related contingencies of $6.6 million during 2009, compared to $0.5 million during 2008, primarily as a result of the lapsing of the statutes of limitations.

From December 31, 2008 to December 31, 2009, there was a total decrease in total benefit for income taxes of $19.4 million. There was a change in pre-tax income on discontinued operation as discussed above that increased the provision for income taxes by $16.8 million year over year. We recorded a tax benefit of $9.3 million related to the elected extended carryback of the 2008 tax loss under the “Workers, Homeownership, and Business Assistance Act of 2009” (the “Assistance Act”). We also recorded an increase to our uncertain tax positions liability related to this extended carryback of the 2008 tax loss decreasing the benefit for income taxes year over year by $5.3 million. Additionally, the recorded changes in estimates included in prior year tax provision compared to filed tax returns decreased by $5.4 million year over year.

During the year ended December 31, 2009, we recognized a tax benefit in discontinued operations of $1.1 million. We recognized $9.3 million tax benefit as a result of our ability, under the Assistance Act, to elect to carryback our 2008 federal NOLs to recover income taxes previously paid. This tax benefit was partially offset by the 2009 tax expense of $(1.7) million and a $(6.6) million expense for uncertain tax positions on certain temporary items.

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 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.

 

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2008 Compared to 2007

Consolidated Results

Revenue, Net

 

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

Revenue Component

   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, Rentals.com and RentalHouses.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 served 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%.

Generally, premium print advertising spending by property management company advertisers is driven by local market factors outside our control, including occupancy rates and effective rent levels. For example, 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 all discretionary spending, including advertising. For these reasons, occupancy rates in excess of 95% or below 90% ordinarily result in a decrease in revenue per community served. However, the effects of occupancy rates can be mitigated or exacerbated by effective rent levels, which are essentially average rent amounts after giving effect to free months of rent and other incentives.

New Homes

The New Home Guide, NewHomeGuide.com and AmericanHomeGuides.com 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.

 

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Distribution Revenue

Distribution revenue, which relates to our distribution function, 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 during 2008; 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 from publishers within the resale home, automobile sales and employment classifieds sectors scaling back or ceasing operations or providing an Internet-only product.

Costs and Expenses

 

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

Costs and Expenses Component

   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) expense, 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 directories, including reductions in both paper size and weight, as well as printing fewer directories, 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 contained elsewhere in this Report. 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) expense, net increased due to a loss on debt redemptions, during 2007, on 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 – Income Taxes and Tax-Related Liabilities.”

 

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Discontinued Operations

In accordance with GAAP, we have classified the results of our divested entities as discontinued operations in the consolidated statement of operations for all periods presented.

The components of discontinued operations included in the consolidated statement of operations are as follows:

 

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

Total revenue, net

   $ 3,353      $ 358,794      $ (355,441   (99.1 )% 
                              

Income (loss) from operations:

        

PEM segment

   $      $ 69,683      $ (69,683   (100.0 )% 

Channel One

            (4,104     4,104      100.0   

Films Media Group

            622        (622   (100.0

PRIMEDIA Healthcare

     132        446        (314   (70.4

Auto Guides division

     (1,668     (8,006     6,338      79.2   

Provision for litigation reserves and settlements

     (6,000     (2,000     (4,000   (200.0

Professional fees

     (2,287     (768     (1,519   (197.8

Adjustments to accrued operating lease liabilities

     2,123        1,030        1,093      106.1   

Insurance-related expenses

     (1,488     (742     (746   (100.5

Write-off of receivables and other assets

     (1,164     (1,091     (73   (6.7

Deal and other costs related to the divesture of PEM segment

            (3,675     3,675      100.0   

Tax-related contingencies

     462        (481     943      196.0   

Other

     (960     13        (973   (7,484.6
                          

(Loss) income from operations before benefit (provision) for income taxes

     (10,850     50,927        (61,777   (121.3

Gain (loss) on sale of businesses:

        

Outdoors group

            57,547        (57,547   (100.0

PEM segment

     651        460,988        (460,337   (99.9

Channel One

            (7,050     7,050      100.0   

Films Media Group

            170        (170   (100.0

PRIMEDIA Healthcare

     132               132      N/A   

Auto Guides division

     42               42      N/A   

Final adjustments for disposition in previous years

            (674     674      100.0   

Benefit (provision) for income taxes

     20,466        (14,785     35,251      238.4   
                          

Discontinued operations, net of tax (including gain (loss) on sale of businesses)

   $ 10,441      $ 547,123      $ (536,682   (98.1
                          

The components of the benefit for income taxes included in discontinued operations are as follows:

 

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

Provision for tax benefit on pre-tax income (loss)

   $ 15,046      $ 28,937      $ (13,891   (48.0 )% 

Provision for tax benefit (expense) on gain (loss) on sale of businesses

     1,227        (44,901     46,128      102.7   

Change in liability for uncertain tax positions

     (1,347     (4,911     3,564      72.6   

Changes in estimates included in prior year tax provision

     5,540        6,090        (550   (9.0
                          

Total benefit (expense) for income taxes

   $ 20,466      $ (14,785   $ 35,251      238.4   
                          

 

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During 2008, we had an increase in costs for professional fees, including legal fees. This increase was partially offset by a decrease in adjustments to accrued operating lease liabilities primarily related to Workplace Learning, as well as, a decrease in deal and other costs related to the divesture of PEM’s segment in 2007.

From December 31, 2007 to December 31, 2008, there was a total increase in total benefit for income taxes of $35.3 million. As a result of the gains on the sale of businesses during 2007, we recorded a provision of $44.9 million compared to a benefit of $1.2 million in 2008, creating a $46.1 million change year over year. We also recorded a decrease to our uncertain tax positions liability creating a decrease in the provision for income taxes year over year by $3.6 million. These favorable changes were partially offset by a change in pre-tax income (loss) on discontinued operation as discussed above that decreased the provision for tax benefit on pre-tax income (loss) by $13.9 million year over year due to a decrease in 2008 pre-tax loss and a decrease in deferred tax assets being utilized in 2008.

Additional details about our divestitures are included in Note 3, “Discontinued Operations,” to our consolidated financial statements contained elsewhere in this Report.

As is more fully discussed in Note 20, “Commitments and Contingencies,” to our consolidated financial statements contained elsewhere in this Report, 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. During the fourth quarter of 2009, we reassumed the building lease on behalf of Workplace Learning and entered into a sublease with the current tenant for a period of 51 months, with an early termination option, which would reduce the term of the sublease to 17 months. The sublease provides for a monthly rent payment and a set reimbursement percentage for operating expenses. We are currently undertaking efforts to sublease additional vacant space in the building to further offset our obligations under the lease. This transaction did not have a material impact on our recorded liability. Historically, each month, our liability has been reduced either by fulfilling our liability as lessee under the building lease or due to a sub-lessee’s or successor-in-interest’s performance under the terms of the sublease, which results in income for us. During the year ended December 31, 2009 and 2008, as a result of the assignee’s or successor in interest’s performance, we recorded $0.3 million and $3.0 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 our consolidated financial statements contained elsewhere 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 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. 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.

 

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Liquidity, Capital and Other Resources

Highlights of our liquidity position are as follows:

 

     As of and for the Years Ended December 31,  
     2009     2008     2007  
     (Dollars in thousands)  

Cash and cash equivalents

   $ 9,472      $ 31,470      $ 14,709   

Current assets

     52,759        89,036        72,516   

Current liabilities

     56,103        77,518        72,853   

Working capital

     (3,344     11,518        (337

Current debt (current maturities of long-term debt and revolving credit facility)

     2,922        16,245        5,262   

Long-term debt

     222,349        245,531        247,575   

Net debt (current debt and long-term debt, less cash and cash equivalents)

     215,799        230,306        238,128   

Cash flows from operating activities

     31,650        21,096        (45,545

Cash flows from investing activities

     (8,951     468        1,261,589   

Cash flows from financing activities

     (44,697     (4,803     (1,207,163

Additions to property and equipment

     11,211        12,977        20,352   

Capital lease payments

     607        506        739   

Free cash flow (net cash provided by operating activities adjusted for additions to property, equipment and other, net, exclusive of acquisitions, and capital lease payments)

     19,832        7,613        (66,636

Cash dividends paid

     12,347        12,359        95,010   

Repayments of senior notes and borrowings under credit agreements

     30,631        5,179        1,388,535   

Unused bank commitments

     85,174        70,966        91,715   

Leverage ratio (as defined in bank credit facility)

     2.8        3.2        2.9   

Overview

Management believes that our cash flows from operating activities will generally be sufficient to support our business operations and service our debt. Our cash flows from operating activities are somewhat seasonal in nature, primarily due to the timing of payments made under the terms of our RDAs, which generally occur in the first half of the year. To the extent that our cash flows from operating activities are not sufficient to meet our liquidity needs, including funds for our capital expenditures, our payment of dividends to stockholders and our contractual obligations, we may, from time to time, utilize amounts available under our $88.0 million Revolving Facility, which is discussed in further detail under Financing Arrangements below.

Outlook

Over the next 12 months, our primary uses of cash are expected to represent expenditures related to:

 

   

the ongoing operations of our business;

   

capital expenditures of $13.0 million to $17.0 million;

   

required principal payments of our outstanding debt, including capital leases, of $2.9 million;

   

interest on our outstanding debt;

   

obligations arising from RDA restructuring activities of $13.4 million;

   

obligations arising from other restructuring activities, including real estate leases of $10.3 million;

   

the payment of dividends to our stockholders;

   

the opportunistic repurchase of outstanding shares of our common stock, if any; and

   

the opportunistic repurchase of debt outstanding under our Term Loan B Facility, if any.

 

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Working Capital

The decrease in working capital, representing current assets less current liabilities, in 2009 compared to 2008 was primarily due to the repayment, during 2009, of the $13.2 million outstanding under our Revolving Facility outstanding at December 31, 2008. The increase in 2008 compared to 2007 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 used to offset 2007 taxable income. The deferred tax assets were classified as current because we expected to realize the benefit within the following twelve months.

Net Debt

During 2009, we reduced our net debt by $14.5 million, primarily through the repurchase and retirement of $20.3 million in principal of our Term Loan B Facility and the repayment of $13.2 million outstanding under our Revolving Facility. During 2008, we reduced our net debt by $7.8 million, primarily through the $2.5 million scheduled repayment of principal under our Term Loan B Facility and the early redemption of the outstanding $2.6 million of our 8% Senior Notes.

Cash Flows from Operating Activities

Our cash flows from operating activities are summarized as follows:

 

     Years Ended
December 31,
    $ Change
From 2008
    $ Change
From 2007
 
     2009     2008     2007      
     (Dollars in thousands)  

Net income

   $ 3,488      $ 59,468      $ 491,445      $ (55,980   $ (431,977

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

               

Depreciation and amortization

     17,141        18,407        19,692        (1,266     (1,285

Impairment of cost-method investment

     1,500        914               586        914   

Gain on sale of cost-method investments

     (2,260                   (2,260       

Gain on sale of businesses, net

            (2,049     (459,135     2,049        457,086   

Accretion of acquisition obligation and other

                   3,240               (3,240

(Gain) loss on repurchase and redemption of debt

     (4,967     103        44,339        (5,070     (44,236

Stock-based compensation

     1,281        2,108        486        (827     1,622   

Deferred income taxes

     5,626        (27,233     (59,796     32,859        32,563   

Bad debt expense

     4,100        3,817        3,282        283        535   

Loss on disposal of property and equipment

     18        1,251        5,963        (1,233     (4,712

(Increase) decrease in:

          

Accounts receivable, net

     (919     (2,310     (7,226     1,391        4,916   

Inventories

     504        (194     2,868        698        (3,062

Prepaid expenses and other

     9,425        (21,162     (351     30,587        (20,811

(Decrease) increase in:

          

Accounts payable

     (3,831     2,690        (4,870     (6,521     7,560   

Accrued expenses and other

     (2,347     (7,157     (87,392     4,810        80,235   

Deferred revenue

     (1,700     (1,652     (1,726     (48     74   

Other non-current liabilities

     4,591        (5,910     442        10,501        (6,352

Other, net

            5        3,194        (5     (3,189
                                        

Net cash provided by (used in) operating activities

   $ 31,650      $ 21,096      $ (45,545   $ 10,554      $ 66,641   
                                        

Net cash provided by operating activities increased in 2009 from 2008, primarily due to less cash paid for interest and taxes of $3.4 million and $27.9 million, respectively, offset by less cash flows provided by operating activities

 

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of businesses that were discontinued and sold in 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.

Net cash provided by operating activities increased in 2008 from 2007, 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.

Cash Flows from Investing Activities

Our cash flows from investing activities are summarized as follows:

 

     Years Ended
December 31,
    $ Change
From
2008
    $ Change
From

2007
 
     2009     2008     2007      
     (Dollars in thousands)  

Purchase of available for sale securities

   $      $      $ (247,426   $      $ 247,426   

Proceeds from sales of available for sale securities

            15,425        232,001        (15,425     (216,576

Payments for investments

            (14            14        (14

Proceeds from sale of cost-method investments

     2,260               289        2,260        (289

Additions to property and equipment

     (11,211     (12,977     (20,352     1,766        7,375   

Payments for businesses acquired, net of cash acquired

                   (34,129            34,129   

Payments related to the sale of businesses

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

Proceeds from sale of businesses

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

Net cash (used in) provided by investing activities

   $ (8,951   $ 468      $ 1,261,589      $ (9,419   $ (1,261,121
                                        

The decrease in net cash provided by investing activities in 2009 from 2008 was primarily due to the cash proceeds received from the sale of available for sale securities during 2008 and payments related to the sale of businesses in 2008.

The decrease in net cash provided by investing activities in 2008 from 2007 was primarily due to the cash proceeds received from the sale of businesses during 2007. Through the end of 2007, we used auction rate securities as an investment vehicle for our excess cash. We discontinued this practice in early 2008.

Cash Flows from Financing Activities

Our cash flows from financing activities are summarized as follows:

 

     Years Ended December 31,     $ Change
From
2008
    $ Change
From 2007
 
     2009     2008     2007      
     (Dollars in thousands)  

Payment of dividends on common stock

   $ (12,347   $ (12,359   $ (95,010   $ 12      $ 82,651   

Net (repayments) borrowings under revolving credit facility

     (13,200     13,200               (26,400     13,200   

Payments for deferred and other financing fees

     (510            (6,287     (510     6,287   

Payments for repurchase and redemption of debt

     (14,931     (2,679     (859,735     (12,252     857,056   

Borrowings under credit agreements

                   282,800               (282,800

Repayments of borrowings under credit agreements

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

Capital lease payments

     (607     (506     (739     (101     233   

(Payments) proceeds related to issuances of common stock, net of value of shares withheld for employee taxes

     (175     42        722        (217     (680

Repurchases of common stock

     (427                   (427       

Other

            (1     (114     1        113   
                                        

Net cash used in financing activities

   $ (44,697   $ (4,803   $ (1,207,163   $ (39,894   $ 1,202,360   
                                        

 

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Index to Financial Statements

The increase in net cash used in financing activities in 2009 from 2008 was primarily due to net borrowings in 2008 of $7.5 million compared to net repayment of debt of approximately $31.2 million in 2009.

The decrease in net cash used in financing activities in 2008 from 2007 was primarily due to net borrowings in 2008 of $7.5 million compared to net repayment of debt of approximately $1,106.5 million in 2007, as well as a decrease in cash dividends paid on our common stock of $82.7 million.

Free Cash Flow

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,     $ Change
From
2008
    $ Change
From
2007
     2009     2008     2007      
     (Dollars in thousands)

Net cash provided by (used in) operating activities

   $ 31,650      $ 21,096      $ (45,545   $ 10,554      $ 66,641

Additions to property and equipment

     (11,211     (12,977     (20,352     1,766        7,375

Capital lease payments

     (607     (506     (739     (101     233
                                      

Free cash flow

   $ 19,832      $ 7,613      $ (66,636   $ 12,219      $ 74,249
                                      

Our free cash flow improved in 2009, 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 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.

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 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

 

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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, 2009 was 1.98%. 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, 2009 was 2.50%.

On June 30, 2009, our bank credit facility was amended (the “Amendment”). Among other things, the Amendment gives us the right, subject to the conditions set forth therein, to prepay or otherwise acquire with or for cash, on either a pro rata or non-pro rata basis, principal outstanding under the Term Loan B Facility and held by lenders who consent to such prepayment or acquisition, at a discount to the par value of such principal at any time and from time to time on and after June 30, 2009 and on or prior to the second anniversary of such date; provided that the aggregate amounts we expend in connection with all such prepayments or acquisitions do not exceed $35.0 million. All such principal prepaid or acquired will be retired and extinguished and deemed paid effective upon such prepayment or acquisition.

The Amendment also memorializes the reduction of the Revolving Facility commitment of Lehman Commercial Paper Inc., a subsidiary of Lehman Brothers Inc. (“Lehman”) to $0.0 million, and, as a consequence thereof, the total capacity under the Revolving Facility has now been confirmed to have been reduced by $12.0 million to $88.0 million. We believed and previously disclosed that the total capacity under the Revolving Facility had been effectively reduced by $12.0 million as a result of bankruptcy proceedings related to Lehman Brothers Holdings Inc., the parent company of Lehman. The commitment under the Revolving Facility for each other lender remains unchanged from each such lender’s commitment immediately prior to such reduction. Additionally, effective June 30, 2009, Lehman ceased to be a co-documentation agent under the bank credit facility. We do not presently expect that any lender under our Revolving Facility will be unable to fund their portion of amounts we may borrow in the future.

In connection with the Amendment, we incurred approximately $0.5 million in modification fees, which were paid to the creditors and will be expensed over the remaining term of the loan.

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 payable on March 31, June 30, September 30 and December 31 of each year, followed by a final repayment of $213.5 million on the Term Loan B Maturity Date. Additionally, through August 1, 2009, we were 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 89.0% of the unpaid principal balance of the Term Loan B Facility in a designated hedging relationship at December 31, 2009.

The bank credit facilities consisted of the following as of December 31, 2009:

 

     Revolving
Facility
    Term
Loan B
Facility
    Total  
     (Dollars in thousands)  

Bank credit facilities

   $ 88,000      $ 224,700      $ 312,700   

Borrowings outstanding

            (224,700     (224,700

Letters of credit outstanding

     (2,826            (2,826
                        

Unused bank commitments

   $ 85,174      $      $ 85,174   
                        

The use of our cash and unused credit facilities is subject to customary conditions contained in our debt agreement.

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 EBITDA ratio, as defined in the bank credit facilities agreement, on the daily average aggregate unutilized commitment under the revolving loan

 

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commitment. The weighted-average of our commitment fees under the new bank credit facilities agreement for 2009, 2008 and for the five months it was outstanding during 2007 was 0.33%, 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.

Term Loan B Facility Repurchases

During 2009, we repurchased and retired $20.3 million in principal of our Term Loan B Facility for $14.9 million. In connection with the repurchase, we also wrote off $0.4 million in deferred financing fees, resulting in a net gain of approximately $5.0 million, which is included in other (income) expense, net in the consolidated statement of operations.

Revolving Facility Borrowings

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. We repaid $8.8 million of the outstanding balance in March 2009 and the remaining $4.4 million in June 2009. In early July 2009, we borrowed $5.0 million against our Revolving Facility and repaid the entire amount borrowed in late July 2009. In early February 2010, we borrowed $9.0 million against our Revolving Facility.

8% Senior Notes

On May 15, 2008, we redeemed all $2.6 million in outstanding 8% Senior Notes. The Notes were redeemed at a 4% premium of the aggregate outstanding principal amount, which was approximately $0.1 million and is included in other (income) expense, net in the consolidated statement of operations. 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, 2009, we were party to three interest rates swaps with an aggregate notional amount of $200.0 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. The following is a summary of our outstanding interest rate swaps at December 31, 2009 (dollars in thousands):

 

Maturity Date

   Notional
Amount

December 31, 2010

   $ 50,000

September 30, 2011

     50,000

December 31, 2011

     100,000

As a result of these interest rate swaps, we expect the weighted-average cost of our Term Loan B Facility to be approximately 4.0% during the three months ended March 31, 2010.

 

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Contractual Obligations

Our contractual obligations as of December 31, 2009 are as follows:

 

Contractual Obligations

  Total   Less than 1
Year
  1-3 Years   4-5 Years   After 5 Years
    (Dollars in thousands)

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

  $ 224,700   $ 2,500   $ 5,000   $ 217,200   $ —  

Capital lease obligations, including current portion

    571     422     149     —       —  

Interest on capital lease obligations

    89     82     7     —       —  

Operating lease obligations(2)

    118,300     21,964     40,992     35,174     20,170

Retail display allowances(3)

    26,256     23,704     2,552     —       —  
                             

Total

  $ 369,916   $ 48,672   $ 48,700   $ 252,374   $ 20,170
                             

 

(1) Interest related to our long-term debt obligations is 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 2.50% at December 31, 2009. See the discussion above under Bank Credit Facilities. Liabilities for interest rate swaps designated in cash flow hedging relationships against changes in the benchmark interest rate of our long-term debt have also been excluded from this table because the quarterly fixed-rate payments due to the counterparty are settled net of the variable-rate payments due to us by the counterparty.

 

(2) Future rental commitments for operating leases have not been reduced by minimum noncancelable sublease income aggregating $52.5 million as of December 31, 2009. Operating lease obligations include certain restructuring liabilities.

 

(3) Retail display allowances include certain restructuring liabilities.

The contractual obligations table above does not reflect any of our $82.2 million in unrecognized tax benefits at December 31, 2009, which resulted in a recorded liability of $28.3 million that has been accrued in accordance with GAAP related to accounting for uncertainty in income taxes, because we are unable to determine when, or if, payment of these amounts will be made.

The bank credit facilities rank senior in right of payment to all subordinated obligations which PRIMEDIA Inc. (a holding company) may incur.

We have no balance outstanding at December 31, 2009 under our Revolving Facility. In early February 2010, we borrowed $9.0 million against our Revolving Facility. We have other commitments in the form of letters of credit of $2.8 million aggregate face value, which expire on or before October 15, 2010.

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 June 2009, our senior debt ratings from Moody’s and Standard and Poor’s were Ba3 and B+, respectively.

We announced on March 4, 2010 that our Board of Directors had authorized a cash dividend of $0.07 per share of common stock, payable on or about March 24, 2010, to stockholders of record on March 15, 2010. We expect to pay this dividend out of our existing cash balance. Additionally, we currently expect that we will continue to pay a regular quarterly dividend for the foreseeable future, at the discretion of our Board of Directors, dependent on such factors, including but not limited to, 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 entities or off balance sheet obligations other than as related to operating leases in the ordinary course of business.

 

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Covenant Compliance

Under the most restrictive covenants contained in our 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 EBITDA of the Restricted Group. As of December 31, 2009, this leverage ratio was approximately 2.8 to 1, compared to 3.2 to 1 at December 31, 2008.

At December 31, 2009, we were in compliance with all of our debt covenants.

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 our consolidated financial statements contained elsewhere in this Report for a description of certain of these lawsuits and payments made in settlement of certain lawsuits. 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.

Stock Repurchase Plan

Our Board of Directors has authorized the Repurchase Program to repurchase up to $5.0 million of our common stock through December 31, 2010. 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 Repurchase Program. During the three months ended March 31, 2009, we repurchased 0.2 million shares of our common stock for approximately $0.4 million at a weighted-average price (including brokerage commissions) of $1.79 per share. We did not repurchase any shares of our common stock during the year ended December 31, 2009 beyond those discussed above. The reacquired shares have been designated as treasury shares. As of December 31, 2009, we had $4.6 million available under the Repurchase Program for further share repurchases, which we may make.

Recent Accounting Pronouncements

See Note 2, “Summary of Significant Accounting Policies—Recent Accounting Pronouncements,” to the consolidated financial statements contained elsewhere in this Report.

 

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Impact of Inflation and Other Costs

Our largest exposure to inflation relates to the cost of paper. The cost of paper decreased 21% when comparing the fourth quarter of 2009 to the fourth quarter of 2008. We presently anticipate moderate increases in paper prices in 2010.

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 Rentals.com as that business declines in the winter months. This business represents a relatively small part of the total business.

   

Our cash flows from operating activities are somewhat seasonal in nature, primarily due to the timing of payments made under the terms of our RDAs, which generally occur in the first half of the year.

 

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 $224.7 million as of December 31, 2009. 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 as of December 31, 2009. 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

 

Interest Rate

Change (in Basis

   December 31,  

Points)

   2009     2008  
     (Dollars in thousands)  

+100

   $ 238      $ 466   

+50

     119        233   

-50

     (119     (233

-100

     (238     (466

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

   45

Report of Independent Registered Public Accounting Firm

   48

Consolidated Balance Sheet as of December 31, 2009 and 2008

   49

Consolidated Statement of Operations for the Years Ended December 31, 2009, 2008 and 2007

   50

Consolidated Statement of Changes in Stockholders’ Deficiency for the Years Ended December  31, 2009, 2008 and 2007

   51

Consolidated Statement of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007

   52

Notes to Consolidated Financial Statements

   53

Selected Quarterly Data

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

 

    Year Ended December 31, 2009  
    First
Quarter
    Second
Quarter
    Third
Quarter(1)
    Fourth
Quarter
    Total  
    (Unaudited)  
    (Dollars in thousands, except per share data)  

Revenue, net

  $ 68,458      $ 65,206      $ 63,014      $ 61,253      $ 257,931   

(Provision) benefit for income taxes

    (503     4,043        (2,103     (3,535     (2,098

(Loss) income from continuing operations(2)(3)(4)

  $ (277   $ (8,348   $ 5,696      $ 7,469      $ 4,540   

Discontinued operations, net of tax(5)(6)

    665        (3,439     (1,957     3,679        (1,052
                                       

Net income (loss)

  $ 388      $ (11,787   $ 3,739      $ 11,148      $ 3,488   
                                       

Basic and diluted (loss) income per common share(7):

         

Continuing operations

  $ (0.01   $ (0.19   $ 0.13      $ 0.17      $ 0.10   

Discontinued operations

    0.02        (0.08     (0.05     0.08        (0.02
                                       

Net income (loss)

  $ 0.01      $ (0.27   $ 0.08      $ 0.25      $ 0.08   
                                       

Basic common shares outstanding (weighted-average)

    44,119,293        44,084,940        44,146,959        44,146,959        44,124,538   

Diluted common shares outstanding (weighted-average)

    44,119,293        44,084,940        44,167,675        44,207,002        44,214,003   

 

(1) Includes an other-than-temporary impairment charge in continuing operations of approximately $1.5 million during the third quarter related to a cost-method investment. Cost-method investments are more fully discussed in Note 8, “Other Non-Current Assets,” to the Company’s consolidated financial statements.

 

(2) Includes provision for restructuring costs of $4.3 million, $21.5 million, $(0.2) million and less than $(0.1) million during the first quarter, second quarter, third quarter and fourth quarter, respectively. Restructuring costs are more fully discussed in Note 16, “Provision for Restructuring Costs,” to the Company’s consolidated financial statements.

 

(3) Includes gain on sale of cost-method investments of approximately $1.8 million and $0.5 million during the first quarter and second quarter, respectively. Gain on sale of cost-method investments is more fully discussed in Note 8, “Other Non-Current Assets,” to the Company’s consolidated financial statements.

 

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(4) Includes a net gain related to repurchasing and retiring principal of the Company’s Term Loan B Facility of approximately $3.6 million and $1.3 million during the second quarter and fourth quarter, respectively. Repurchasing and retiring of the Company’s Term Loan B Facility is more fully discussed in Note 10, “Borrowings,” to the Company’s consolidated financial statements.

 

(5) Includes provision for litigation reserves and settlements in discontinued operations of $1.5 million and $1.8 million during the third quarter and fourth quarter, respectively. Litigation reserves and settlements are more fully discussed in Note 20, “Commitments and Contingencies,” to the Company’s consolidated financial statements.

 

(6) Includes income tax benefit related to discontinued operations of $0.2 million, $0.1 million, $0.3 million and $0.5 million for the first quarter, second quarter, third quarter and fourth quarter, respectively. Income taxes related to discontinued operations are more fully discussed in Note 11, “Income Taxes,” to the Company’s consolidated financial statements.

 

(7) 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.

 

    Year Ended December 31, 2008
    First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter

(1)(2)(3)(4)
    Total
    (Unaudited)
    (Dollars in thousands, except per share data)

Revenue, net

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

(Provision) benefit for income taxes

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

Income from continuing operations(5)

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

Discontinued operations, net of tax(6)(7)

    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 income (loss) per common share(8):

         

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

 

(1) During the fourth quarter of 2008, the Company released valuation allowance of approximately $29.3 million on net deferred tax assets. The release of valuation allowance is more fully discussed in Note 11, “Income Taxes,” to the Company’s consolidated financial statements.

 

(2) Includes reduction of expense in continuing operations of $2.6 million related to a reversal of an annuity obligation due to the death of a former PRIMEDIA CEO during the fourth quarter. This reduction of expense is more fully discussed in Note 17, “Severance,” to the Company’s consolidated financial statements.

 

(3) Includes provision for litigation reserves and settlements in discontinued operations of $6.0 million during the fourth quarter. Litigation reserves and settlements are more fully discussed in Note 20, “Commitments and Contingencies,” to the Company’s consolidated financial statements.

 

(4) Includes an other-than-temporary impairment charge in continuing operations of approximately $0.9 million during the fourth quarter related to a cost-method investment. Cost-method investments are more fully discussed in Note 8, “Other Non-Current Assets,” to the Company’s consolidated financial statements.

 

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(5) Includes provision for restructuring costs of $0.5 million, $1.2 million, $0.2 million and $3.3 million during the first quarter, second quarter, third quarter and fourth quarter, respectively. Restructuring costs are more fully discussed in Note 16, “Provision for Restructuring Costs,” to the Company’s consolidated financial statements.

 

(6) Includes gain on sale of businesses before income taxes of $0.1 million, $0.1 million and $0.6 million for the first quarter, second quarter and third quarter, respectively. The gain on sale of businesses is more fully discussed in Note 3, “Discontinued Operations,” to the Company’s consolidated financial statements.

 

(7) Includes income tax benefit related to discontinued operations, including income taxes related to the gain on sale of businesses, of $12.0 million, $0.5 million, $4.4 million and $3.6 million for the first quarter, second quarter, third quarter and fourth quarter, respectively. Income taxes related to discontinued operations are more fully discussed in Note 11, “Income Taxes,” to the Company’s consolidated financial statements.

 

(8) 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.

 

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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, 2009 and 2008, 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, 2009. 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, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, 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.

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, 2009, 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 10, 2010 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

Atlanta, Georgia

March 10, 2010

 

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PRIMEDIA INC. AND SUBSIDIARIES

Consolidated Balance Sheet

 

     December 31,  
     2009     2008  
     (Dollars in thousands, except
per share data)
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 9,472      $ 31,470   

Accounts receivable (net of allowance for doubtful accounts of $1,217 and $1,528, respectively)

     24,802        27,983   

Inventories

     432        936   

Prepaid expenses and other

     16,583        26,545   

Deferred tax asset, net

     1,470        2,102   
                

Total current assets

     52,759        89,036   

Property and equipment (net of accumulated depreciation and amortization of $80,932 and $83,203, respectively)

     17,997        18,765   

Intangible assets, net

     20,667        23,637   

Goodwill

     129,305        129,305   

Deferred tax asset—non-current, net

     8,275        12,867   

Other non-current assets

     10,726        12,544   
                

Total assets

   $ 239,729      $ 286,154   
                

Liabilities and stockholders’ deficiency

    

Current liabilities:

    

Accounts payable

   $ 11,788      $ 14,792   

Accrued expenses and other

     39,294        44,491   

Deferred revenue

     2,099        1,990   

Revolving credit facility

            13,200   

Current maturities of long-term debt and capital lease obligations

     2,922        3,045   
                

Total current liabilities

     56,103        77,518   

Long-term debt

     222,349        245,531   

Deferred revenue

     7,650        9,350   

Other non-current liabilities

     55,786        51,043   
                

Total liabilities

     341,888        383,442   

Commitments and contingencies (Note 20)

    

Stockholders’ deficiency:

    

Common stock—par value $0.01; 350,000,000 shares authorized; 45,793,697 and 45,595,618 shares issued, respectively; 44,146,959 and 44,188,550 shares outstanding, respectively

     457        455   

Additional paid-in capital (including warrants of $31,690 at December 31, 2009 and 2008)

     2,373,684        2,372,578   

Accumulated deficit

     (2,398,469     (2,389,610

Common stock in treasury, at cost (1,646,738 and 1,407,068 shares, respectively)

     (76,304     (75,877

Accumulated other comprehensive loss

     (1,527     (4,834
                

Total stockholders’ deficiency

     (102,159     (97,288
                

Total liabilities and stockholders’ deficiency

   $ 239,729      $ 286,154   
                

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,  
     2009     2008     2007  
     (Dollars in thousands, except per share data)  

Revenue, net:

      

Advertising

   $ 224,571      $ 250,704      $ 257,164   

Distribution

     33,360        53,401        57,636   
                        

Total revenue, net

     257,931        304,105        314,800   

Costs and expenses:

      

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

     23,369        32,420        34,655   

Marketing and selling

     77,635        75,722        81,064   

Distribution and circulation

     60,931        85,218        83,561   

General and administrative expenses

     37,906        48,700        57,747   

Depreciation and amortization of property and equipment

     13,256        14,475        12,612   

Amortization of intangible assets

     2,970        2,870        3,492   

Provision for restructuring costs

     25,627        5,238        10,496   

Interest expense

     15,670        19,338        77,660   

Amortization of deferred financing costs

     915        922        1,743   

Other (income) expense, net

     (6,986     (2,821     40,176   
                        

Total costs and expenses

     251,293        282,082        403,206   

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

     6,638        22,023        (88,406

(Provision) benefit for income taxes

     (2,098     27,004        32,728   
                        

Income (loss) from continuing operations

     4,540        49,027        (55,678

Discontinued operations, net of tax (including gain on sale of businesses, net of tax, of $0, $2,049 and $459,135, respectively)

     (1,052     10,441        547,123   
                        

Net income

   $ 3,488      $ 59,468      $ 491,445   
                        

Basic and diluted earnings (loss) per common share:

      

Continuing operations

   $ 0.10      $ 1.11      $ (1.26

Discontinued operations

     (0.02     0.24        12.40   
                        

Net income

   $ 0.08      $ 1.35      $ 11.14   
                        

Dividends declared per share of common stock outstanding

   $ 0.28      $ 0.28      $ 2.15   
                        

Weighted-average basic shares of common stock outstanding

     44,124,538        44,176,398        44,118,943   
                        

Weighted-average diluted shares of common stock outstanding

     44,214,003        44,197,590        44,118,943   
                        

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, 2007

   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

Comprehensive income:

                

Net income

                    3,488                      3,488   

Other comprehensive loss

                

Net unrealized gains on cash flow hedges

                                  3,307        3,307   
                      

Total comprehensive income

                   6,795   

Non-cash charges for stock-based compensation

             1,281                             1,281   

Issuances of common stock, net of shares withheld for employee taxes and other

   198,079      2      (175                          (173

Repurchases of common stock

                           (427            (427

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

                    (12,347                   (12,347
                                                    

Balance at December 31, 2009

   45,793,697    $ 457    $ 2,373,684      $ (2,398,469   $ (76,304   $ (1,527   $ (102,159
                                                    

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,  
     2009     2008     2007  
     (Dollars in thousands)  

Operating activities:

      

Net income

   $ 3,488      $ 59,468      $ 491,445   

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

      

Depreciation and amortization

     17,141        18,407        19,692   

Impairment of cost-method investment

     1,500        914          

Gain on sale of cost-method investments

     (2,260              

Gain on sale of businesses, net

            (2,049     (459,135

Accretion of acquisition obligation and other

                   3,240   

(Gain) loss on repurchase and redemption of debt

     (4,967     103        44,339   

Stock-based compensation

     1,281        2,108        486   

Deferred income taxes

     5,627        (27,233     (59,796

Bad debt expense

     4,100        3,817        3,282   

Loss on disposal of property and equipment

     18        1,251        5,963   

(Increase) decrease in:

      

Accounts receivable, net

     (919     (2,310     (7,226

Inventories

     504        (194     2,868   

Prepaid expenses and other

     9,425        (21,162     (351

(Decrease) increase in:

      

Accounts payable

     (3,831     2,690        (4,870

Accrued expenses and other

     (2,348     (7,157     (87,392

Deferred revenue

     (1,700     (1,652     (1,726

Other non-current liabilities

     4,591        (5,910     442   

Other, net

            5        3,194   
                        

Net cash provided by (used in) operating activities

     31,650        21,096        (45,545
                        

Investing activities:

      

Purchase of available for sale securities

                   (247,426

Proceeds from sales of available for sale securities

            15,425        232,001   

Payments for investments

            (14       

Proceeds from sale of cost-method investments

     2,260               289   

Additions to property and equipment

     (11,211     (12,977     (20,352

Payments for businesses acquired, net of cash acquired

                   (34,129

Payments related to the sale of businesses

            (4,355     (21,420

Proceeds from sale of businesses

            2,389        1,352,626   
                        

Net cash (used in) provided by investing activities

     (8,951     468        1,261,589   
                        

Financing activities:

      

Payment of dividends on common stock

     (12,347     (12,359     (95,010

Net (repayments) borrowings under revolving credit facility

     (13,200     13,200          

Payments for deferred and other financing fees

     (510            (6,287

Payments for repurchase and redemption of debt

     (14,931     (2,679     (859,735

Borrowings under credit agreements

                   282,800   

Repayments of borrowings under credit agreements

     (2,500     (2,500     (528,800

Capital lease payments

     (607     (506     (739

(Payments) proceeds related to issuances of common stock, net of value of shares withheld for employee taxes

     (175     42        722   

Repurchases of common stock

     (427              

Other

            (1     (114
                        

Net cash used in financing activities

     (44,697     (4,803     (1,207,163
                        

(Decrease) increase in cash and cash equivalents

     (21,998     16,761        8,881   

Cash and cash equivalents, beginning of period

     31,470        14,709        5,828   
                        

Cash and cash equivalents, end of period

   $ 9,472      $ 31,470      $ 14,709   
                        

Supplemental information:

      

Cash paid for interest, including interest on capital leases and restructuring liabilities

   $ 15,916      $ 19,323      $ 90,037   
                        

Cash (refunded) paid for income taxes, net

   $ (20,193   $ 7,746      $ 41,755   
                        

Noncash investing and financing activities:

      

Equipment acquisitions under capital leases

   $ 102      $ 1,321      $   
                        

Businesses acquired:

      

Fair value of assets acquired

   $      $      $ 34,435   

(Liabilities assumed) net of deferred purchase price payments

                   (306
                        

Payments for businesses acquired, net of cash acquired

   $      $      $ 34,129   
                        

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 a targeted media company that provides consumers with tools and information they need to find a place to live. The Company’s consumer directories are targeted primarily for the apartment and other rental property sectors of the residential real estate industry and are provided free to consumers through a combination of Internet, print and mobile platforms. The Company derives advertising revenue by providing its advertiser clients, principally property management companies, private owners/landlords, new home builders and real estate professionals, with products and services that generate measurable results in the form of cost-effective, quality leads.

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 (“PEM”), 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, 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.

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, 2009, cash equivalents include money market accounts.

The Company’s banking arrangements allow it to fund outstanding checks drawn on zero-balance disbursement accounts when presented to the financial institution for payment, resulting in book overdrafts. Book overdrafts in the amount of $3.7 million and $2.9 million are recorded in accounts payable in the consolidated balance sheet as of December 31, 2009 and 2008, respectively, and are reflected as an operating activity in the consolidated statements of cash flows.

Investment Securities. Investment securities are classified according to management’s intent with respect to the securities. In accordance with GAAP, 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”).

 

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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 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, 2009.

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 GAAP. Consistent with GAAP, 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 both 2009 and 2008). 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.

The Company’s impairment testing under GAAP did not result in any impairments of indefinite-lived intangible assets for any periods presented.

In April 2008, the Financial Accounting Standards Board (“FASB”) issued new GAAP on the 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, an entity is required 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.

The Company adopted the new GAAP effective January 1, 2009, and the adoption did not have a material impact on its financial condition, results of operations or cash flows.

Long-Lived Assets. Consistent with GAAP, the Company reviews long-lived assets for impairment whenever events and circumstances indicate assets might be impaired. When such reviews are conducted, the Company

 

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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.

As is more fully discussed in Notes 3 and 7, the Company assessed certain of its intangible assets for impairment during 2007 and 2009 due to events that arose indicating the carrying value of the assets might not be recoverable.

Income Taxes. Income taxes are accounted for in accordance with GAAP, 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.

In July 2006, the FASB issued new GAAP on the accounting for uncertainty in income taxes effective for fiscal years beginning after December 15, 2006, which 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. The new GAAP 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 the new GAAP and the amounts reported after adoption were accounted for as a cumulative-effect adjustment recorded to the beginning balance of accumulated deficit. The new GAAP also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The Company adopted the provisions of the new GAAP 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 liability for uncertain tax positions 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. The Company expenses the fair value of stock-based compensation for all grants, modifications or settlements. The cost of stock-based compensation 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 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. The Company’s revenue is presented net of sales allowances, which are not material.

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 GAAP. Revenue from barter transactions was approximately $1.2 million, $1.8 million and $2.5 million for the years ended December 31, 2009, 2008 and 2007, 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 accordance with GAAP, 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 accordance with GAAP, direct internal and external costs associated with the development of the features and functionality of the Company’s websites 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 GAAP.

Derivative Financial Instruments. In March 2008, the FASB issued new GAAP intended to improve financial reporting about derivative financial 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.

It 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.

To meet those objectives, the new GAAP 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. Comparative disclosures are required only for periods subsequent to initial adoption.

The Company adopted the new GAAP effective January 1, 2009 (see Note 19).

 

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In accordance with GAAP, 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 GAAP, 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 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.

Fair Value Measurements. In September 2006, the FASB issued new GAAP related to fair value measurements, which provided 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. This new GAAP created a common definition of fair value and prescribes methods for measuring fair value, which are intended to make the measurement of fair value more consistent and comparable across companies.

 

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The new GAAP established 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.

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 new GAAP also expands the related disclosure requirements in an effort to provide greater transparency around fair value measures and was effective as of the beginning of fiscal years beginning after November 15, 2007.

In February 2008, the FASB issued new GAAP, which delayed the effective date of previously issued GAAP on fair value measurements 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 applied include, but were 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 the new GAAP on January 1, 2008 for its financial assets and liabilities and on January 1, 2009 for its nonfinancial assets and liabilities, and the adoption did not have a material impact on the Company’s financial condition, results of operations or cash flows (see Note 19).

In February 2007, the FASB issued new GAAP that 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.

 

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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.

This new GAAP became 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 on January 1, 2008, resulting in no impact on its financial condition, results of operations or cash flows.

In April 2009, the FASB issued new GAAP enhancing consistency in financial reporting by increasing the frequency of fair value disclosures under the scope of GAAP on fair value measurements. This new GAAP is effective for interim and annual periods ending after June 15, 2009.

The Company adopted the new GAAP effective June 30, 2009 (see Note 19).

Recent Accounting Pronouncements

In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 (the “Codification”). The Codification, effective for financial statements issued for interim and annual periods ending after September 15, 2009, became the single source of authoritative GAAP, superseding various existing authoritative accounting pronouncements. The Codification eliminates the GAAP hierarchy contained in SFAS No. 162 and establishes one level of authoritative GAAP. All other literature is considered non-authoritative. The Company adopted the Codification in the third quarter of 2009, and the adoption had no impact on the Company’s consolidated financial statements other than changes in reference to various authoritative accounting pronouncements in the notes to the consolidated financial statements.

Business Combinations

In December 2007, the FASB established new GAAP 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;

   

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.

 

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In April 2009, the FASB issued additional GAAP requiring an asset or a liability arising from a contingency in a business combination to be recognized at fair value if fair value can be reasonably determined and provides additional guidance on how to make that determination. If the fair value of an asset or liability cannot be reasonably determined, the new GAAP requires that an asset or liability be recognized at the amount that would be recognized in accordance with other applicable GAAP for liabilities and at an amount using similar criteria for assets. The new GAAP also amends the subsequent measurement and accounting guidance and the disclosure requirements for assets and liabilities arising from contingencies in a business combination. This new GAAP is effective for assets or liabilities arising from contingencies in 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.

The Company adopted the new GAAP related to business combinations effective January 1, 2009, and the adoption did not have a material impact on its financial condition, results of operations or cash flows.

Noncontrolling Interests in Consolidated Financial Statements

In December 2007, the FASB also issued new related GAAP regarding noncontrolling interests in consolidated financial statements. This new GAAP requires:

 

   

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