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 and six months ended June 30, 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 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.

Fiscal 2009 Second Quarter Results

We had total revenue of $65.2 million, representing an $11.6 million year-over-year decrease, primarily due to a decrease in New Homes advertising revenue and distribution revenue. We incurred a loss from continuing operations of $(8.3) million, or $(0.19) per diluted common share, for the quarter ended June 30, 2009, compared to income from continuing operations of $3.4 million, or $0.08 per diluted common share, for the quarter ended June 30, 3008. The change was primarily due to lower revenue of $11.6 million and an increase in provision for restructuring costs of $20.3 million, partially offset by a $10.7 million reduction in other costs and expenses, a $3.6 million gain on redemption of debt, a $0.5 million gain on sale of cost-method investments and an additional income tax benefit of $5.3 million. Net income decreased by $13.7 million to $(11.8) million, or $(0.27) per diluted common share, due to the factors above as well as a $1.9 million increase in loss, net of tax from discontinued operations, primarily related to a change in the estimated liability for office space related to a divested entity.

2009 Business Trends and Outlook

During the remainder of 2009, we intend to continue to grow our customer count in our largest business, Apartment Guide, as we expand our product offerings to appeal to new categories of advertisers. We will continue to increase our investment in search engine optimization and marketing over the prior year. We also intend to aggressively grow our Rentals.com business by focusing on driving revenue growth and improving site engineering and performance, while increasing traffic, primarily through search engine optimization.

We anticipate continued pressure on our New Homes and DistribuTech businesses during the remainder of 2009, with full year levels of percentage decline in revenue that could exceed those experienced during the second quarter of 2009 compared to the same period in 2008. We remain focused on reducing costs for these businesses to offset expected revenue losses and managing our client relationships to best position us for opportunities as macroeconomic conditions improve. Over the past 12 months, we have suspended 11 New Home Guide print publications and currently publish Guides in 21 markets. We may suspend publication of additional, less effective print publications as we manage the cost structure of this business to offset revenue losses, and increase our focus on Internet offerings.

DistribuTech continues to be impacted by lower revenue from customers that publish free publications, particularly those within the resale home, automobile sales and employment classifieds sectors, and are scaling back or ceasing operations or providing an Internet-only product. For the remainder of the year, we intend to continue to reduce the cost structure of this business to offset, in part, revenue losses. Our overall goal is to create a more efficient distribution network for the longer term by streamlining the expense structure of this business through real estate consolidation, process automation and, as is further discussed in Note 12 to the condensed consolidated financial statements contained elsewhere in this Report, optimizing the distribution footprint by eliminating less effective locations.

We now expect to reduce our annual expense base, which is comprised of cost of goods sold, marketing and selling, distribution and circulation, and general and administrative expenses, by at least $20.0 million compared to 2008, an improvement of $5.0 million from the objective that we announced earlier this year. Management's Discussion and Analysis of our Costs and Expenses for the six months ended June 30, 2009 compared to the six months ended June 30, 2008 includes more detail on numerous reductions in various cost and expense components.

Transition Plan

We completed the relocation of our corporate headquarters from New York to Norcross, Georgia during the second quarter of 2008. We continued to utilize certain of our New York based functions through the first half of 2008 and incurred their associated costs.

Results of Operations

Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008

Consolidated Results

Revenue, Net




                               Three Months Ended        $ Change            % Change
                                    June 30,            Favorable/          Favorable/
 Revenue Component              2009         2008      (Unfavorable)       (Unfavorable)
                                      (Dollars in thousands)
 Apartments                  $    51,926   $ 52,440   $          (514 )             (1.0 )%
 New Homes                         4,633     10,536            (5,903 )            (56.0 )

 Total advertising revenue        56,559     62,976            (6,417 )            (10.2 )
 Distribution                      8,647     13,818            (5,171 )            (37.4 )

 Total revenue, net          $    65,206   $ 76,794   $       (11,588 )            (15.1 )

Apartments

Apartment Guide, ApartmentGuide.com, Rentals.com and RentalHouses.com, representing approximately 92% of advertising revenue during the three months ended June 30, 2009, experienced a decrease in revenue of 1.0% compared to the same period in 2008, primarily due to a 4.1% decrease in revenue per community served, which was partially offset by a 3.8% increase in apartment communities served.

During the three months ended June 30, 2009, the number of communities served by Apartment Guide increased as a result of expanding our product offerings to appeal to new categories of advertisers that have not historically been part of our customer base. Lower-priced offerings associated with this expansion, along with declines in premium advertising spending by our larger property management company advertisers, resulted in a decrease in revenue per community served.

Generally, premium advertising spending by our larger 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.

During the second quarter of 2009, occupancy rates in Apartment Guide markets ranged from 85% to 99%, with an average of 92.1% in 2009, compared to 93.2% in 2008, and with the majority of markets experiencing occupancy levels between 89% and 95%. On a national basis, we believe effective rents are down approximately 2% for the second quarter of 2009 compared to the same period in 2008.

Rentals.com revenue grew by 2.9% during the second quarter of 2009 compared to the same period in 2008. 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 as well as new listings through the self-provisioning feature of the Rentals.com website, which we refer to as our "Ad Store."

New Homes

The New Home Guide, NewHomeGuide.com and AmericanHomeGuides.com business, representing approximately 8% of advertising revenue during the three months ended June 30, 2009, decreased 56.0% compared to the same period in 2008. The decrease in revenue was primarily due to a 44.8% decrease in new home communities served and a 20.7% decrease in revenue per community served. These 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 persisted in the second quarter of 2009, as the general macroeconomic environment, including higher unemployment rates and declining home prices across most of the markets we serve, remained substantially unchanged from the first quarter of 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 suspended 11 print publications that were considered less effective and, as of June 30, 2009, we published New Home Guides in 21 markets. We may suspend additional New Home Guide print publications. We continue to focus on Internet offerings across all markets.

Distribution Revenue

Distribution revenue decreased by 37.4% during the three months ended June 30, 2009 compared to the same period in 2008. We realized a 21.6% decrease in the number of pockets sold in our display racks and a 20.2% decrease in the average revenue per pocket due to softness in demand as well as a reduction in the number of retail locations serviced due to restructuring. 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




                                             Three Months Ended            $ Change           % Change
                                                  June 30,               (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)                    $   5,948      $  8,267      $       (2,319 )           (28.1 )%
Marketing and selling                         20,198        19,459                 739               3.8
Distribution and circulation                  15,826        21,438              (5,612 )           (26.2 )
General and administrative expenses           10,050        13,008              (2,958 )           (22.7 )
Depreciation and amortization of
property and equipment                         3,392         3,299                  93               2.8
Amortization of intangible assets                617           652                 (35 )            (5.4 )
Provision for restructuring costs             21,509         1,200              20,309           1,692.4
Interest expense                               4,207         4,856                (649 )           (13.4 )
Amortization of deferred financing costs         224           231                  (7 )            (3.0 )
Other income, net                             (4,374 )        (357 )            (4,017 )        (1,125.2 )


Total cost and expenses                    $  77,597      $ 72,053      $        5,544               7.7

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 as a result of ongoing action with certain of our retail display allowances ("RDAs") 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 half 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 $0.4 million, resulting from the relocation of our headquarters from New York to Norcross; a $1.8 million reduction in costs associated with the hiring of a new Chief Executive Officer ("CEO") in 2008; and $2.2 million resulting from position eliminations, insurance premium reductions and lower facilities costs attributable to our cost-cutting initiatives. These decreases were partially offset by additional legal fees of $1.2 million and an increase of $0.1 million in bad debt expense.

The provision for restructuring costs increased due to an additional $20.6 million in RDA-related expenses for certain of our RDAs that were underperforming. The charge included the costs associated with discontinuing service to and vacating some locations covered and determining to forego distribution rights in certain locations that are not currently being serviced. This was slightly offset by a $0.1 million reduction in charges related to vacated office space and $0.2 million reduction in severance charges.

The change in interest expense is primarily related to principal reductions in long-term debt and overall lower interest rates, slightly offset by additional interest on restructuring liabilities.

Other income, net increased due to a gain on the redemption of debt of $3.6 million and a gain on sale of cost-method investments of $0.5 million.

Income Taxes

Our effective tax rate on income from continuing operations for the three months ended June 30, 2009 was (32.6)%, compared to 26.7% for the three months ended June 30, 2008.

We have used our year-to-date effective tax rate to determine the appropriate amount of tax benefit to record for the three months ended June 30, 2009. We did not use our estimated annual effective tax rate because we cannot reliably estimate our annual effective tax rate due to the effect that small changes to income would have on the annual effective tax rate.

The total tax benefit from continuing operations for the three months ended June 30, 2009 was $(4.0) million, which was comprised of approximately $(4.4) million federal and state tax income tax benefit recorded on pre-tax income from continuing operations, $0.1 million related to reserves for prior years' uncertain tax positions, $0.2 million related to the reversal of deferred tax assets for stock-based compensation that was distributed to the award recipients, and $0.1 million due to differences between income tax returns that were filed and estimates that were made at the time the tax provision was recorded.

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 June 30, 2009. Discontinued operations for the three months ended June 30, 2008 included revenue of $1.6 million. Loss before taxes for the three months ended June 30, 2009 and 2008 was $(3.5) million and $(2.1) million, respectively, which excludes gain on sale of businesses. The gain on sale of business was $1.3 million for the three months ended June 30, 2008. There was no gain on sale of business for the three months ended June 30, 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 or successor in interest's performance under the terms of the lease, which results in income for us. During the three months ended June 30, 2009 and 2008, as a result of the assignee's or the successor in interest's performance, we recorded $0.0 million and $0.7 million in income, respectively, which is included in discontinued operations.

In July 2007, we sold our Enthusiast Media ("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 discontinued operations, 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.

During the three months ended June 30, 2008, we recognized a tax benefit of $0.5 million in discontinued operations, primarily 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 six months ended June 30, 2008.

During the three months ended June 30, 2009, we recognized a tax benefit of $0.1 million in discontinued operations, primarily as a result of federal and state income tax benefit recorded on a pre-tax loss from discontinued operations.

Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008

Consolidated Results

Revenue, Net




                               Six Months Ended         $ Change            % Change
                                   June 30,            Favorable/          Favorable/
 Revenue Component             2009        2008       (Unfavorable)       (Unfavorable)
                                     (Dollars in thousands)
 Apartments                  $ 103,935   $ 104,365   $          (430 )             (0.4 )%
 New Homes                      10,664      22,184           (11,520 )            (51.9 )

 Total advertising revenue     114,599     126,549           (11,950 )             (9.4 )
 Distribution                   19,065      27,733            (8,668 )            (31.3 )

 Total revenue, net          $ 133,664   $ 154,282   $       (20,618 )            (13.4 )

Apartments

Apartment Guide, ApartmentGuide.com, Rentals.com and RentalHouses.com, representing approximately 91% of advertising revenue during the six months ended June 30, 2009, experienced a decrease in revenue of 0.4% compared to the same period in 2008, primarily due to a 3.4% decrease in revenue per community served, which was partially offset by a 3.5% increase in apartment communities served.

During the six months ended June 30, 2009, the number of communities served by Apartment Guide increased as a result of expanding our product offerings to appeal to new categories of advertisers that have not historically been part of our customer base. Lower-priced offerings associated with this expansion, along with declines in premium advertising spending by our larger property management company advertisers, resulted in a decrease in revenue per community served.

Generally, premium advertising spending by our larger 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.

During the first six months of 2009, occupancy rates in Apartment Guide markets ranged from 85% to 99%, with an average of 91.9%, compared to 93.0% during the first six months of 2008, and with the majority of markets experiencing occupancy levels between 88% and 95%. On a national basis, we believe effective rents are down approximately 2% for the second quarter of 2009 compared to the same period in 2008.

Rentals.com revenue grew by 4.0% during the first six months of 2009 compared to the same period in 2008. 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 as well as new listings through the Rentals.com Ad Store.

New Homes

The New Home Guide, NewHomeGuide.com and AmericanHomeGuides.com business, representing approximately 9% of advertising revenue during the six months ended June 30, 2009, decreased 51.9% compared to the same period in 2008. The decrease in revenue was primarily due to a 41.4% decrease in new home communities served and an 18.5% decrease in revenue per community served. These 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 persisted in the first six months of 2009, as the general macroeconomic environment, including higher unemployment rates and declining home prices across most of the markets we serve, worsened during the first quarter and remained substantially unchanged during the second quarter. We believe pressure in this business will continue over the near term and remain challenging for the foreseeable future. At June 30, 2008, we published 32 New Home Guide print publications. We subsequently suspended 11 print publications that were considered less effective and, as of June 30, 2009, we published 21 New Home Guide print publications. We may suspend additional New Home Guide print publications. We continue to focus on Internet offerings across all markets.

Distribution Revenue

Distribution revenue decreased by 31.3% during the six months ended June 30, 2009 compared to the same period in 2008. We realized a 16.2% decrease in the number of pockets sold in our display racks and an 18.0% decrease in the average revenue per pocket due to softness in demand as well as a reduction in the number of retail locations serviced due to restructuring. 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




                                               Six Months Ended             $ Change           % Change
                                                   June 30,               (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)                    $  12,483      $  17,011      $       (4,528 )           (26.6 )%
Marketing and selling                         40,511         39,617                 894               2.3
Distribution and circulation                  35,060         42,615              (7,555 )           (17.7 )
General and administrative expenses           21,432         27,562              (6,130 )           (22.2 )
. . .