Introduction

In this Form 10-Q, which we refer to as 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, related adverse trends and conditions in the apartment leasing and new home sales sectors of the residential real estate industry; changes in technology and competition; the implementation and results of our ongoing strategic and cost-cutting initiatives; the demand by customers for our premium services; expenses of or adverse results from litigation; increases in fuel and paper costs; the inability to maintain the New York Stock Exchange's continued listing standards for our common stock; and numerous other matters of national, regional and local market scale, including those of a political, economic, business, competitive and regulatory nature. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements.

The following discussion and analysis summarizes our financial condition and results of operations during the three months ended March 31, 2009 and 2008 and should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Report.

Executive Summary

Our Business

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

2009 First Quarter Results

• Total revenue was $68.5 million, representing a $9.0 million decrease compared to first quarter 2008, due to lower New Homes and DistribuTech revenue.

• Apartments, our largest division, representing 90% of first quarter advertising revenue, grew revenue slightly on a year-over-year basis.

• Income from continuing operations decreased $2.5 million to ($0.3) million, or ($0.01) per common share, primarily due to lower revenue, partially offset by decreased costs.

• Net income was $0.4 million, or $0.01 per common share.

2009 Business Trends and Outlook

During 2009, we intend to continue to grow customer count and market share in Apartment Guide and pursue enhancements to its product portfolio and market segment expansion. We also intend to aggressively grow our Rentals.com business by focusing on driving revenue growth and improving site engineering and performance, while increasing traffic. However, we currently anticipate that Apartments revenue for 2009 is likely to be essentially flat to slightly down compared to last year, primarily due to decreased demand for premium supplemental products as clients struggle with the weakened economy.

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

During 2008, we suspended publication of two New Home Guide Professional Editions. In the first quarter of 2009, we suspended our New Home Guide print publications in Columbus, Ohio and St. Louis, while focusing on Internet offerings in those markets. We also suspended our Today's Custom Home print publications in Atlanta and Charlotte, as well as two map supplements to our New Home Guide print publications. In the second quarter of 2009, we expect to suspend our New Home Guide print publications in Seattle and Kansas City, while focusing on Internet offerings in those markets, as well as three map supplements. It may become necessary to suspend print publications in additional markets as we continue to reduce our cost structure for this business to offset expected revenue losses.

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

Transition Plan

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

Results of Operations

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

Consolidated Results

Revenue, Net




                                Three Months Ended        $ Change           % Change
                                    March 31,            Favorable/         Favorable/
  Revenue Component              2009         2008      (Unfavorable)      (Unfavorable)
                                       (Dollars in thousands)
  Apartments                  $    52,009   $ 51,967   $            42               0.1 %
  New Homes                         6,031     11,606            (5,575 )           (48.0 )

  Total advertising revenue        58,040     63,573            (5,533 )            (8.7 )
  Distribution                     10,418     13,915            (3,497 )           (25.1 )

  Total revenue, net          $    68,458   $ 77,488   $        (9,030 )           (11.7 )

Apartments

Apartment Guide, ApartmentGuide.com and Rentals.com, representing approximately 90% of advertising revenue during the three months ended March 31, 2009, experienced an increase in revenue of 0.1% compared to the same period in 2008, primarily due to a 3.2% increase in apartment communities served by Apartment Guide, which was offset by a 2.7% decrease in revenue per community served. Rentals.com revenue also grew by 5.2% during the first quarter of 2009.

Approximately 0.3% of the revenue for the first quarter of 2009 from Apartment Guide was derived from markets that had high occupancy rates, which we consider to be 95% or higher. This compares to 9.4% for the same period in 2008. As of March 31, 2009, occupancy rates in Apartment Guide markets ranged from 86% to 99%, with an average of 91.8% in the first quarter of 2009, compared to 92.6.% in the first quarter of 2008, and with the majority of markets experiencing occupancy levels between 88% and 95%. As occupancy rates increase beyond 95%, apartment communities tend to reduce their advertising spend because they require fewer prospective tenants. As occupancy rates fall below 90%, apartment communities tend to cut back on spending, including advertising. For these reasons, occupancy rates in excess of 95% or below 90% ordinarily result in a decrease in our advertising income.

During the three months ended March 31, 2009, the number of communities served by Apartment Guide increased primarily due to promotional offerings designed to attract additional apartment communities. These promotional offerings, along with declines in premium advertising spending, resulted in a decrease in revenue per community served.

The growth in Rentals.com revenue was primarily due to an increase in customer listings, which resulted from growth in the number of listings by property managers.

New Homes

The New Home Guide and NewHomeGuide.com business, representing approximately 10% of advertising revenue during the three months ended March 31, 2009, decreased 48.0% compared to the same period in 2008. The decrease in revenue was primarily due to a 38.2% decrease in new home communities served and a 16.7% decrease in revenue per community served. These decreases resulted from declines in standard and premium advertising spending by many new home builders, driven by continued weakness in the new home sales sector.

The difficult conditions for new home builders continued to cause further pressure in the first quarter of 2009, as the general macroeconomic environment, including higher unemployment rates and declining home prices across most of the markets we serve, worsened. We believe pressure in this business will continue to increase over the near term and remain challenging for the foreseeable future. In response to this environment, in the first quarter of 2009, we suspended our New Home Guide print publications in Columbus, Ohio and St. Louis, while focusing on Internet offerings in those markets. We also suspended our Today's Custom Home print publications in Atlanta and Charlotte as well as two map supplements to our New Home Guide print publications.

Distribution Revenue

Distribution revenue decreased by 25.1% during the three months ended March 31, 2009 compared to the same period in 2008. We realized a 10.7% decrease in the number of pockets sold in our display racks and a 16.2% 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 and automotive sectors scaling back or ceasing operations or providing an Internet-only product.

Costs and Expenses




                                              Three Months Ended           $ Change          % Change
                                                   March 31,             (Favorable)/      (Favorable)/
Costs and Expenses Component                   2009          2008        Unfavorable       Unfavorable
                                                      (Dollars in thousands)
Cost of goods sold (exclusive of
depreciation and amortization of property
and equipment)                              $    6,535     $  8,744     $       (2,209 )          (25.3 )%
Marketing and selling                           20,313       20,158                155              0.8
Distribution and circulation                    19,234       21,177             (1,943 )           (9.2 )
General and administrative expenses             11,382       14,554             (3,172 )          (21.8 )
Depreciation and amortization of property
and equipment                                    3,476        3,316                160              4.8
Amortization of intangible assets                  619          755               (136 )          (18.0 )
Provision for restructuring costs                4,289          496              3,793            764.7
Interest expense                                 4,248        5,002               (754 )          (15.1 )
Amortization of deferred financing costs           225          242                (17 )           (7.0 )
Other income, net                               (2,089 )       (172 )           (1,917 )       (1,114.5 )


Total cost and expenses                     $   68,232     $ 74,272     $       (6,040 )           (8.1 )

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

Our distribution and circulation costs decreased slightly as a result of ongoing renegotiations of certain of our retail display allowances ("RDAs") with retailers since the third quarter of 2008. As is more fully discussed in Note 12 to the condensed consolidated financial statements, other of our RDAs are part of a restructuring charge we incurred in the first quarter of 2009 related to actions we took to reduce our ongoing distribution costs, and we expect to incur additional restructuring charges related to RDAs throughout 2009.

General and administrative expenses declined, primarily due to decreases in corporate overhead of $2.2 million, resulting from the relocation of our headquarters from New York to Norcross; a $1.3 million reduction in professional fees and legal expenses associated with a derivative lawsuit that was expensed during the first quarter of 2008; and $0.9 million resulting from position eliminations, insurance premium reductions and lower facilities costs attributable to our cost-cutting initiatives. This was partially offset by an increase of $0.8 million in bad debt expense and an increase of $0.4 million in stock-based compensation.

The provision for restructuring costs increased due to an additional $1.4 million in lease-related expenses, related to an additional 10 properties that were restructured during the first quarter of 2009 as part of the 2008 restructuring plan. There was also an additional $2.6 million in expense related to the 2009 plan, which was comprised of expense associated with the termination or modification of certain RDA contracts that were underperforming and vacating certain leased office space (see Note 12 to the condensed consolidated financial statements). This was slightly offset by a $0.2 million reduction in severance expense as a result of fewer positions that were eliminated during the first quarter of 2009 than during the first quarter of 2008.

Other income, net increased primarily due to a gain on the sale of a cost-method investment of $1.8 million.

Discontinued Operations

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

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

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

There was no revenue related to discontinued operations for the three months ended March 31, 2009. Discontinued operations for the three months ended March 31, 2008 included revenue of $1.8 million. Income (loss) before taxes for the three months ended March 31, 2009 and 2008 was $0.5 million and $(0.7) million, respectively, which excludes gain on sale of business. The gain on sale of businesses was $0.1 million for the three months ended March 31, 2008. There was no gain on sale of business for the three months ended March 31, 2009.

In 2005, we sold substantially all of the assets of Workplace Learning for the assumption of ongoing liabilities, while retaining a secondary liability as the assignor of the building and satellite time leases. Each month, our liability is reduced either by fulfilling our secondary liability as the assignor of the building lease or due to assignee's performance under the terms of the lease, which results in income for us. During the three months ended March 31, 2009 and 2008, as a result of the assignee's performance, we recorded $0.3 million and $1.2 million in income, respectively, which is included in discontinued operations.

During the three months ended March 31, 2008, we recognized a tax benefit of $12.0 million in discontinued operations of which $11.3 million was as a result of our ability to carry back a projected 2008 net operating loss ("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 the three months ended March 31, 2008.

During the three months ended March 31, 2009, we recognized a tax benefit of $0.2 million in discontinued operations, primarily as a result of recording an adjustment due to differences between income tax returns that were filed and estimates that were made at the time the tax provision was recorded.

Liquidity, Capital and Other Resources

During the first quarter of 2009, we reduced long-term debt by $0.7 million, primarily through the scheduled repayment of principal on our bank credit facilities. As of March 31, 2009, we had cash and cash equivalents and unused credit facilities of $94.6 million, as further detailed below under Financing Arrangements, compared to $102.4 million as of December 31, 2008. The use of this cash and cash equivalents and unused credit facilities is subject to customary conditions contained in our debt agreements. Our asset sales, debt redemptions and investment in organic growth have facilitated our objective to become a better strategically focused company, while strengthening our balance sheet and improving liquidity.

In September 2008, we borrowed $13.2 million against our revolving credit facility and repaid $8.8 million of the amount outstanding in March 2009. As of March 31, 2009, the remaining availability under our revolving credit facility is approximately $80.2 million, which also reflects letters of credit outstanding and an effective reduction in available borrowing capacity related to the bankruptcy filing of Lehman Brothers Holdings Inc., the parent company of Lehman Brothers Inc. ("Lehman"), a participating lender in our $100.0 million facility. Lehman's commitment under the revolving credit facility is $12.0 million. Our ability to borrow under our revolving credit facility could be further impaired if any other participating lender in the facility were unwilling or unable to honor its contractual obligation to lend to us.

We have required debt repayments, including capital leases, of $3.0 million during the next 12 months, which does not include the $4.4 million balance outstanding under our revolving credit facility. We believe our liquidity, capital resources and cash flows from operations are sufficient to fund planned capital expenditures, working capital requirements, interest and principal payments on our debt and other anticipated expenditures, including amounts that may arise from our efforts to terminate or modify certain of our RDA agreements, for the foreseeable future. We have no significant required debt repayments until 2014.

Working Capital

Consolidated working capital, which includes current maturities of long-term debt, was $10.0 million as of March 31, 2009, compared to $11.5 million at December 31, 2008. The difference is primarily attributable to a $17.1 million reduction in cash and cash equivalents, an $8.8 million repayment of our revolving credit facility, a $6.1 million increase in prepaid expenses and other, a $2.8 million reduction in accounts payable, and a $1.5 million reduction in accrued expenses and other, partially offset by a $2.8 million reduction in accounts receivable, net.

Cash Flow-Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

Net cash used in operating activities was $3.6 million during the three months ended March 31, 2009 compared to $16.6 million during the three months ended March 31, 2008. The decrease in cash used was primarily due to lower cash paid for taxes, net of refunds received, of $15.5 million, lower cash paid for RDAs, and lower payments for severance and stay bonuses during the first quarter of 2009 compared to the same period in 2008. This was offset by additional cash paid during the first quarter of 2009 of $5.0 million related to legal settlements, additional cash paid due to timing of bonus payments, a decrease in accounts payable due to timing of payments and less cash received during the first quarter of 2009 resulting from lower revenue.

Cash Flows from Investing Activities

Our cash (used in) provided by investing activities is summarized as follows:



                                                   Three Months Ended March 31,
                                                    2009                  2008            $ Change
                                                              (Dollars in thousands)
Proceeds from sales of available for sale
securities                                     $           -         $       15,425       $ (15,425 )
Proceeds from sale of cost-method
investment                                              1,798                    -            1,798
Additions to property and equipment                    (2,037 )              (2,809 )           772
Proceeds from sale of business                             -                    248            (248 )

Net cash (used in) provided by investing
activities                                     $         (239 )      $       12,864       $ (13,103 )

The decrease in net cash provided by investing activities was primarily due to the proceeds from the sale of available for sale securities during the three months ended March 31, 2008, offset by the $1.8 million in cash proceeds from the sale of a cost-method investment during the three months ended March 31, 2009.

Cash Flows from Financing Activities

Our cash used in financing activities is summarized as follows:



                                                   Three Months Ended March 31,
                                                     2009                 2008           $ Change
                                                              (Dollars in thousands)
Payment of dividends on common stock            $        (3,083 )     $      (3,093 )    $      10
Net payments under revolving credit facility             (8,800 )                -          (8,800 )
Repayments of borrowings under credit
agreements                                                 (625 )              (625 )           -
Capital lease payments                                     (191 )              (112 )          (79 )
(Payments) proceeds related to issuances of
common stock,
net of value of shares withheld for employee
taxes                                                       (60 )                53           (113 )
Repurchases of common stock                                (427 )                -            (427 )

Net cash used in financing activities           $       (13,186 )     $      (3,777 )    $  (9,409 )

The increase in net cash used in financing activities primarily related to net payments under our revolving credit facility of $8.8 million and $0.4 million used to repurchase shares of our common stock.

Why We Use the Term Free Cash Flow

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

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

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

The following table presents our free cash flow:

                                                     Three Months Ended
                                                          March 31,
                                                     2009            2008
                                                   (Dollars in thousands)
         Net cash used in operating activities   $     (3,628 )    $ (16,642 )
         Additions to property and equipment           (2,037 )       (2,809 )
         Capital lease payments                          (191 )         (112 )

         Free cash flow                          $     (5,856 )    $ (19,563 )

The improvement in free cash flow was primarily due to post-Enthusiast Media sale obligations of approximately $14.4 million settled in the first quarter of 2008, partially offset by $5.0 million in settlement of litigation in the first quarter of 2009. We invested $2.0 million in capital expenditures in the first quarter of 2009 compared to $2.8 million in the first quarter 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.

Financing Arrangements

Bank Credit Facilities

Our 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").

Amounts borrowed under the Revolving Facility bear interest, at our option, at an annual rate of either the base rate plus an applicable margin ranging from 0.625% to 1.00% or the eurodollar rate plus an applicable margin ranging from 1.625% to 2.00%. The interest rate on the Revolving Facility at March 31, 2009 was 2.52%. 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 . . .