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 products and services; expenses of or adverse results from litigation; increases in fuel and paper costs; 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 nine months ended September 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 generate quality leads for our advertiser clients through publishing and distributing print and online guides, primarily for the apartment and other residential 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 are the websites associated with our print publications and Internet-only offerings, including ApartmentGuide.com, Rentals.com, RentalHouses.com, NewHomeGuide.com and AmericanHomeGuide.com.

Fiscal 2009 Third Quarter Results

We had total revenue of $63.0 million, representing a $13.4 million year-over-year decrease, primarily due to a $5.2 million decrease in New Homes advertising revenue and a $6.2 million decrease in distribution revenue. We had income from continuing operations of $5.7 million, or $0.13 per diluted common share, for the quarter ended September 30, 2009, compared to income from continuing operations of $8.6 million, or $0.20 per diluted common share, for the quarter ended September 30, 3008. The change was primarily due to lower revenue of $13.4 million, a $1.5 million other-than-temporary impairment charge on a cost-method investment, and an increase in provision for income taxes of $2.0 million, partially offset by a $13.9 million net reduction in other costs and expenses. Net income decreased by $8.2 million to $3.7 million, or $0.08 per diluted common share, due to the factors above as well as a $5.3 million decrease from discontinued operations, net of tax, primarily related to a tax benefit from our ability to carry back and utilize net operating losses ("NOLs") during the third quarter of 2008.

2009 Business Trends and Outlook

During the remainder of 2009, we intend to continue to grow our customer count in our largest division, Apartments, as we enhance our product portfolio. We will continue to increase our investment in search engine optimization and marketing over the prior year. We currently anticipate that Apartments division revenue for full year 2009 is likely to be down 2% to 3% year over year.

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 for these businesses to be approximately 53% to 54% and 37% to 38%, respectively, compared to 2008. We remain focused on reducing costs for these businesses and managing our client relationships to best position us for opportunities as macroeconomic conditions improve. Since June 30, 2008, we have suspended 11 New Home Guide print publications and currently publish New Home 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 2009 annual operating expense base, which is comprised of cost of goods sold, marketing and selling, distribution and circulation, and general and administrative expenses, by at least $25.0 million compared to our 2008 operating expense base. Management's discussion and analysis of our Costs and Expenses for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008, below, 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 September 30, 2009 Compared to Three Months Ended
September 30, 2008

Consolidated Results

Revenue, Net




                               Three Months Ended        $ Change            % Change
                                 September 30,          Favorable/          Favorable/
 Revenue Component              2009         2008      (Unfavorable)       (Unfavorable)
                                      (Dollars in thousands)
 Apartments                  $    51,674   $ 53,621   $        (1,947 )             (3.6 )%
 New Homes                         4,100      9,311            (5,211 )            (56.0 )

 Total advertising revenue        55,774     62,932            (7,158 )            (11.4 )
 Distribution                      7,240     13,482            (6,242 )            (46.3 )

 Total revenue, net          $    63,014   $ 76,414   $       (13,400 )            (17.5 )

Apartments

Apartment Guide, ApartmentGuide.com, Rentals.com and RentalHouses.com, representing approximately 93% of advertising revenue during the three months ended September 30, 2009, experienced a decrease in revenue of 3.6% compared to the same period in 2008, primarily due to a 7.0% decrease in revenue per community served, which was partially offset by a 4.3% increase in apartment communities served.

During the three months ended September 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. However, lower occupancy rates and effective rent levels have led apartment owners to reduce spending on our premium print products.

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.

During the third quarter of 2009, occupancy rates in Apartment Guide markets ranged from 86% to 96%, with an average of 92.1%, compared to 93.6% in 2008, with the majority of markets experiencing occupancy levels between 88% and 95%. In our print markets, effective rents were down 5.5% for the third quarter of 2009 compared to the same period in 2008.

Rentals.com revenue declined by 5.2% during the third quarter of 2009 compared to the same period in 2008. The decline in Rentals.com revenue was primarily due to a decrease in new paid listings through the self-provisioning feature of its websites, partially offset by an increase in the number of listings generated from property managers.

New Homes

The New Home Guide, NewHomeGuide.com and AmericanHomeGuides.com business, representing approximately 7% of advertising revenue during the three months ended September 30, 2009, decreased 56.0% compared to the same period in 2008. The decrease in revenue was primarily due to a 42.2% decrease in new home communities served and a 24.0% 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 third 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 September 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 46.3% during the three months ended September 30, 2009 compared to the same period in 2008. We realized a 28.8% decrease in the number of pockets sold in our display racks and a 24.6% 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 activities further discussed in Note 12 to the condensed consolidated financial statements contained elsewhere in this Report. 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
                                                September 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)                    $   5,645      $  7,994      $       (2,349 )           (29.4 )%
Marketing and selling                         18,832        17,926                 906               5.1
Distribution and circulation                  12,971        21,491              (8,520 )           (39.6 )
General and administrative expenses            8,873        10,964              (2,091 )           (19.1 )
Depreciation and amortization of
property and equipment                         3,130         3,774                (644 )           (17.1 )
Amortization of intangible assets                617           636                 (19 )            (3.0 )
Provision for restructuring costs               (156 )         202                (358 )          (177.2 )
Interest expense                               3,897         4,741                (844 )           (17.8 )
Amortization of deferred financing costs         233           224                   9               4.0
Other expense (income), net                    1,173          (314 )             1,487             473.6


Total cost and expenses                    $  55,215      $ 67,638      $      (12,423 )           (18.4 )

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.

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 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 nine months of 2009 related to actions we took to reduce our ongoing distribution costs.

General and administrative expenses declined, primarily due to a $0.3 million reduction in costs associated with the hiring of a new Chief Executive Officer ("CEO") in 2008; a decrease of $0.6 million in stock-based compensation; $0.7 million resulting from position eliminations, insurance premium reductions and lower facilities costs attributable to our cost-cutting initiatives; and $0.7 million resulting from reductions in franchise tax and sales and use tax. These decreases were partially offset by additional legal expenses of $0.2 million.

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 a result of our ongoing efforts to reduce the costs associated with RDAs, we reached an agreement to modify the terms of previously restructured RDAs with certain retailers that resulted in a reduction of restructuring expense of $4.7 million. This decrease was partially offset by other RDA-related expenses related to our 2009 restructuring plan of $3.4 million. The RDA-related charges 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. In addition, there was an increase of $1.5 million in expense related to revised estimates of our liability for previously restructured properties, partially offset by lower severance of $0.5 million.

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.

The change in other expense (income), net is due to an other-than-temporary impairment charge of $1.5 million in 2009 related to a cost-method investment.

Income Taxes

Our effective tax rate on income from continuing operations for the three months ended September 30, 2009 was 27.0%, compared to 1.5% for the three months ended September 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 September 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 expense from continuing operations for the three months ended September 30, 2009 was $2.1 million, which was comprised of approximately $2.8 million federal and state tax income tax reduction of previously recorded tax benefit on pre-tax income from continuing operations and $(0.7) million related to reserves for prior years' uncertain tax positions.

Discontinued Operations

In accordance with generally accepted accounting principles, 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 for the three months ended September 30, 2009 and 2008 included in the condensed consolidated statement of operations are as follows:

                                                          Three Months Ended September 30,
                                                           2009                     2008
                                                               (Dollars in thousands)
Total revenue, net                                    $            -           $            -


Provision for litigation reserves and settlements     $        (1,500 )        $            -
Professional fees                                                (387 )                   (639 )
Adjustments to accrued operating lease
liabilities                                                      (193 )                    106
Insurance-related expenses                                         28                      (21 )
Write-off of receivables and other assets                          -                      (772 )
Other                                                            (225 )                   (327 )

Loss before benefit for income taxes and gain on
sale of businesses                                             (2,277 )                 (1,653 )
Gain on sale of businesses before income taxes                     -                       588
Benefit for income taxes                                          320                    4,377

Discontinued operations, net of tax (including
gain on sale of businesses)                           $        (1,957 )        $         3,312

The components of the benefit for income taxes included in discontinued operations for the three months ended September 30, 2009 and 2008 are as follows:

                                                         Three Months Ended September 30,
                                                          2009                  2008
                                                              (Dollars in thousands)
Provision for tax benefit on pre-tax losses           $        134      $              2,980
Change in liability for uncertain tax positions                120                    (3,826 )
Changes in estimates included in prior year tax
provision                                                       66                     5,223

Total benefit for income taxes                        $        320      $              4,377

During the three months ended September 30, 2008, the final adjustment to the net proceeds from the sale of PEM was recorded and resulted in an additional gain on sale of business of $0.6 million, net of tax benefits.

As is more fully discussed in Note 16 to our condensed consolidated financial statements, 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 three months ended September 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.

During the three months ended September 30, 2008, we recognized a tax benefit of $3.0 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 the nine months ended September 30, 2008. We also recognized a tax benefit of $5.2 million in discontinued operations during the three months ended September 30, 2008, primarily as a result of changes in our estimate of our ability to utilize certain NOLs to offset 2007 taxable income.

Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008

Consolidated Results

Revenue, Net




                               Nine Months Ended        $ Change            % Change
                                 September 30,         Favorable/          Favorable/
 Revenue Component             2009        2008       (Unfavorable)       (Unfavorable)
                                     (Dollars in thousands)
 Apartments                  $ 155,609   $ 157,986   $        (2,377 )             (1.5 )%
 New Homes                      14,764      31,495           (16,731 )            (53.1 )

 Total advertising revenue     170,373     189,481           (19,108 )            (10.1 )
 Distribution                   26,305      41,215           (14,910 )            (36.2 )

 Total revenue, net          $ 196,678   $ 230,696   $       (34,018 )            (14.7 )

Apartments

Apartment Guide, ApartmentGuide.com, Rentals.com and RentalHouses.com, representing approximately 91% of advertising revenue during the nine months ended September 30, 2009, experienced a decrease in revenue of 1.5% compared to the same period in 2008, primarily due to a 4.6% decrease in revenue per community served, which was partially offset by a 3.8% increase in apartment communities served.

During the nine months ended September 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. However, lower occupancy rates and effective rent levels have led apartment owners to reduce spending on our premium print products.

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.

During the first nine months of 2009, occupancy rates in Apartment Guide markets ranged from 83% to 99%, with an average of 92.0%, compared to 93.1% during the first nine months of 2008, and with the majority of markets experiencing occupancy levels between 88% and 95%. In our print markets, effective rents were down 4.3% for the first nine months of 2009 compared to the same period in 2008.

Rentals.com revenue grew by 0.7% during the first nine months of 2009 compared to the same period in 2008. The growth in Rentals.com revenue was primarily due to an increase in the number of listings generated from property managers, significantly offset by a decrease in new paid listings through the self-provisioning feature of its websites.

New Homes

The New Home Guide, NewHomeGuide.com and AmericanHomeGuides.com business, representing approximately 9% of advertising revenue during the nine months ended September 30, 2009, decreased 53.1% compared to the same period in 2008. The decrease in revenue was primarily due to a 41.6% decrease in new home communities served and a 20.1% 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 nine months 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 September 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 36.2% during the nine months ended September 30, 2009 compared to the same period in 2008. We realized a 20.5% decrease in the number of pockets sold in our display racks and a 19.7% 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 activities further discussed in Note 12 to the condensed consolidated financial statements contained elsewhere in this Report. 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




. . .