In response to a weakening economy and a widespread advertising downturn in fiscal 2001, management took steps to reduce the number of Meredith employees, including a one-time, voluntary early retirement program. Other selective workforce reductions were achieved through attrition, realignments and job eliminations. Approximately 200 positions were eliminated in fiscal 2001 and early fiscal 2002. The company also wrote-off certain Internet investments. These actions were the primary factors in a fiscal 2001 fourth-quarter nonrecurring charge of $25.3 million for personnel costs ($18.4 million), asset write-downs and other ($8.2 million), offset by the reversal of excess accruals ($1.3 million). The accrual balance remaining was $1.3 million at June 30, 2003. Details of the activities affecting the accrual since that date follow:

Payments made during the quarter were for enhanced retirement benefits. These payments will continue for approximately five years.

Major components of inventories are summarized below. Of total inventory values shown, approximately 23 percent are under the LIFO method at September 30, 2003 and 30 percent at June 30, 2003.

Intangible assets and goodwill consisted of the following:

Amortization expense for intangible assets was $0.1 million for the three months ended September 30, 2003. Annual amortization expense for intangible assets is expected to be as follows: $0.6 million in fiscal 2004, $0.6 million in fiscal 2005, $0.4 million in fiscal 2006, $0.3 million in fiscal 2007, and $0.1 million in fiscal 2008. The noncompete agreements are being amortized on a straight-line basis over periods of 3 or 5 years.

The changes in the carrying amounts of goodwill during the first quarter of fiscal 2004 and 2003 are as follows:

In connection with the asset-backed commercial paper facility, Meredith entered into a revolving agreement to sell all of its rights, title and interest in the majority of its accounts receivable related to advertising, book and miscellaneous revenues to Meredith Funding Corporation, a special purpose entity established to purchase accounts receivable from Meredith. At September 30, 2003, $149.7 million of accounts receivable, net of reserves, were outstanding under the agreement. Meredith Funding Corporation in turn sells receivable interests to an asset-backed commercial paper conduit administered by Bank One, N.A. In consideration of the sale, Meredith receives cash and a subordinated note, bearing interest at the prime rate (4.00 percent at September 30, 2003), from Meredith Funding Corporation. The agreement is structured as a true sale under which the creditors of Meredith Funding Corporation will be entitled to be satisfied out of the assets of Meredith Funding Corporation prior to any value bein g returned to Meredith or its creditors. The accounts of Meredith Funding Corporation are fully consolidated in Meredith's Condensed Consolidated Financial Statements. The asset-backed commercial paper facility renews annually in April. Meredith has the ability and the intent to renew the facility each year and, therefore, the principal is reflected as due on April 9, 2007, the facility termination date.

At September 30, 2003, Meredith had interest rate swap contracts to pay fixed-rates of interest (average 5.3 percent) and receive variable-rates of interest (average 3-month LIBOR rate of 1.1 percent) on $135.0 million notional amount of indebtedness. These contracts expire in June 2004. The average notional amount outstanding under the contracts is expected to be $132 million in fiscal 2004. The fair market value of the interest rate swap contracts was a liability of $4.0 million at September 30, 2003.

As a result of the debt refinancing completed in April 2002 and subsequent debt repayments, Meredith had interest rate swap contracts that no longer met the qualifications for hedge accounting. Those swap contracts were deemed to be ineffective and dedesignated as hedge contracts. Therefore, all changes in the fair market value of those contracts are recorded in interest expense. Changes in the fair market value of the dedesignated swaps resulted in a $1.1 million reduction of interest expense in the quarter ended September 30, 2003 compared with a $1.3 million increase in interest expense in the quarter ended September 30, 2002.

Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from nonowner sources. Comprehensive income includes net earnings as well as foreign currency translation adjustments and changes in the fair market value of interest rate swap contracts. Total comprehensive income (loss) (in thousands) for the three-month periods ended September 30, 2003 and 2002, was $20,121 and $(69,657), respectively.

There are three principal financial measures reported to the chief executive officer for use in assessing segment performance and allocating resources. Those measures are operating profit, adjusted operating profit and earnings before interest, taxes, depreciation and amortization (EBITDA). Operating profit, disclosed below, is revenues less operating costs excluding any nonrecurring charges, nonoperating income, interest income and expense, and unallocated corporate expenses. Segment operating costs include allocations of certain centrally incurred costs such as employee benefits, occupancy, information systems, accounting services, internal legal staff and human resources administration expense. These costs are allocated based on actual usage or other appropriate methods, primarily number of employees. Unallocated corporate expenses are corporate overhead expenses not attributable to the operating groups. Adjusted operating profit assumes the amortization provisions of SFAS No. 142, Goodwill and Other Intangible Assets, were effective for all periods reported. Segment EBITDA also excludes any nonrecurring charges, nonoperating income, and unallocated corporate expenses. In accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, adjusted operating profit and EBITDA are not presented below.

The following discussion presents the key factors that have affected the businesses of Meredith Corporation in the first quarters of fiscal 2004 and fiscal 2003. This commentary should be read in conjunction with the consolidated financial statements presented elsewhere in this report and with the Company's Form 10-K for the fiscal year ended June 30, 2003.

Sections of this report-and management's public commentary from time to time-may contain certain forward-looking statements that are subject to risks and uncertainties. The words expect, anticipate, believe, likely, will, and similar terms generally identify forward-looking statements. These statements are based on management's current knowledge and estimates of factors affecting the Company's operations. Readers are cautioned not to place undue reliance on such forward-looking information; actual results may differ materially from those currently anticipated.

Factors that could adversely affect future results include but are not limited to downturns in national and/or local economies; a softening of the domestic advertising market; world, national or local events that could disrupt broadcast television; increased consolidation among major advertisers or other events depressing the level of advertising spending; the unexpected loss of one or more major clients; changes in consumer reading, purchase, and/or television viewing patterns; unanticipated increases in paper, postage, printing, or syndicated programming costs; changes in television network affiliation agreements; technological developments affecting products or methods of distribution; changes in government regulations affecting the Company's industries; unexpected changes in interest rates; and any acquisitions and/or dispositions. The Company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise.

Meredith adopted Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets, effective July 1, 2002. SFAS No. 142 requires that goodwill and intangible assets with indefinite lives no longer be amortized to earnings but be reviewed at least annually for impairment. The provisions of SFAS No. 142 that pertain to the impairment of goodwill and intangible assets not being amortized have superceded the impairment related provisions in SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. Under SFAS No. 121, the impairment review was based generally on future undiscounted cash flows. Under SFAS No. 142, the impairment review must be based on a fair-value approach. The estimated fair values of these assets are determined by developing discounted future cash flow analyses.

SFAS No. 142 required an initial review of goodwill and intangible assets with indefinite lives as of the beginning of the fiscal year of adoption and another review later in the same fiscal year. The Company's initial review resulted in transitional impairment losses of $139.9 million ($85.7 million after tax), or $1.68 per diluted share. The impairment losses reflected the write-down of Federal Communication Commission (FCC) television licenses/network affiliation agreements ($33.7 million) and goodwill at certain television stations ($106.2 million). The majority of the impaired assets related to the acquisition of television station WGCL-Atlanta in March 1999. The charge was recorded net of tax as the cumulative effect of a change in accounting principle in the first quarter of fiscal 2003. The subsequent annual review for impairment was performed as of May 31, 2003. No further adjustments were required as a result of that review.

Financial measures included in this Management's Discussion and Analysis of Financial Condition and Results of Operations that are not in accordance with generally accepted accounting principles (GAAP) are referred to as non-GAAP financial measures. While management believes these measures contribute to an understanding of the Company's financial performance, they should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. Management uses and presents non-GAAP financial measures, along with GAAP results, to evaluate and communicate the performance of the Company and its segments. Management believes the non-GAAP financial measures provide an additional analytic tool to understand the Company's results from core operations and underlying trends. Management believes that adjusted earnings calculations are helpful in making period-to-period comparisons because they eliminate the effect of certain accounting changes. Each section of Management's Discussion and Analysis of Financial Condition and Results of Operations reporting non-GAAP financial measures includes reconciliations to the most directly comparable GAAP financial measures.

Meredith's primary use of non-GAAP financial measures relates to earnings before interest, taxes, depreciation, and amortization (EBITDA) which excludes nonoperating income (expense) and nonrecurring charges. Meredith's management uses EBITDA along with operating profit and other GAAP measures to evaluate the financial performance of the Company's broadcasting segment. EBITDA is a common alternative measure of performance in the broadcasting industry and is used by investors and financial analysts. The calculation of EBITDA may vary between companies.

Revenues
First quarter revenues increased 9 percent to $272.7 million from $250.1 million for the same quarter a year ago. Exclusive of the impact of the American Baby Group acquisition, first quarter revenues increased 4 percent reflecting higher advertising revenues and increased book and integrated marketing sales. Comparable advertising revenues increased 4 percent despite a $5.9 million decline in net political advertising revenues at the broadcasting stations due to the biennial nature of election campaigns.

Operating costs and expenses
Operating costs and expenses increased 9 percent from the prior first quarter. Exclusive of the impact of the American Baby Group acquisition, first quarter operating costs and expenses increased 5 percent. Comparable production, distribution, and editorial costs increased 8 percent primarily reflecting volume related increases in magazine paper and postage costs, book royalties and integrated marketing production costs. Comparable selling, general, and administrative expenses increased 2 percent reflecting investments in marketing and promotion activities in both publishing and broadcasting as well as higher employee costs and corporate governance expenses. Depreciation and amortization expenses increased slightly in the first quarter compared with the prior first quarter.

Interest
Net interest expense was $5.8 million compared with $8.3 million in the first quarter of fiscal 2003. The decrease resulted primarily from changes in the fair market value adjustments on interest rate swap contracts. Those adjustments resulted in a $1.1 million reduction in interest expense in the current quarter compared with a $1.3 million increase in interest expense in the prior first quarter.

Income taxes
The Company's effective tax rate for the quarter just ended and the previous first quarter was 38.7 percent.

Earnings and earnings per share
Fiscal 2004 first quarter net earnings were $19.8 million (38 cents per diluted share) compared with prior first quarter earnings before the cumulative effect of a change in accounting principle of $16.5 million (32 cents per diluted share). The earnings improvement reflected the addition of the American Baby Group, increased advertising revenues, higher operating profit from book sales, and lower interest expense.

Meredith recorded an after-tax charge of $85.7 million ($1.68 per diluted share) for the cumulative effect of a change in accounting principle in the first quarter of the prior fiscal year. The charge related to the adoption of SFAS No. 142, Goodwill and Other Intangible Assets, effective July 1, 2002. Including that charge the Company recorded a net loss of $69.3 million ($1.36 per diluted share) in the fiscal 2003 first quarter.

Revenues
Publishing revenues increased 11 percent to $206.7 million from $185.9 million in the first quarter of fiscal 2003 largely due to the acquisition of the American Baby Group in December 2002. Excluding the American Baby Group, revenues increased 4 percent reflecting higher revenues from magazine advertising, book sales and integrated marketing. To enhance comparability, the following discussions exclude revenues from the American Baby Group.

Comparable magazine advertising revenues increased 6 percent reflecting growth in the number of advertising pages sold. Most magazines reported higher advertising pages and revenues, with double-digit percentage growth in ad pages reported by Ladies' Home Journal, Country Home, Traditional Home, Midwest Living, and MORE magazines. The increase in revenues from additional advertising pages was partially offset by lower average revenues per page at many titles. The decline in average revenues per page reflects the difficult advertising marketplace and management's efforts to increase market share. Advertising categories showing strength in the quarter included home and building, cosmetics, food and beverages, pharmaceuticals and automobiles.

Comparable magazine circulation revenues decreased 4 percent from the prior first quarter. The decline reflected lower average subscription revenue per copy at several titles due to an increase in the term of direct mail offers and lower newsstand sales of Special Interest Publications due to industrywide weakness at the newsstand and fewer issues on sale in the current quarter.

Comparable other publishing revenues increased 17 percent from the prior first quarter due to strong growth in book sales and higher revenues from integrated marketing operations. Book revenues increased approximately 25 percent largely due to the release of three books based on The Learning Channel® cable network's popular Trading Spaces® decorating show. The increase in integrated marketing revenues resulted from new business growth.

Operating costs
Publishing operating costs including the American Baby Group increased 11 percent compared with the prior first quarter. Excluding the American Baby Group, the increase was approximately 5 percent. The increase in comparable costs reflected volume related increases in magazine paper and postage costs, book royalties and integrated marketing production costs. In addition average paper prices increased approximately 3 percent and employee compensation, marketing and editorial costs were up. The increase in marketing and editorial costs reflected investments in a brand awareness campaign and special design projects that will benefit several titles. These cost increases were partially offset by lower subscription acquisition costs.

Operating profit
Publishing operating profit was $33.0 million in the fiscal 2004 first quarter, up 14 percent from $28.9 million in the prior first quarter primarily reflecting the addition of operating profit from the American Baby Group and higher book operating profit.

Revenues
First quarter broadcasting revenues were $66.0 million, up 3 percent from $64.2 million reported for the same quarter a year ago. The increase in revenues was achieved in spite of net political advertising revenues declining from $6.3 million in the prior-year quarter to $0.4 million in the current quarter due to the biennial nature of election campaigns. Political revenues displace a certain amount of nonpolitical advertising revenues and therefore are not entirely incremental. The increase in nonpolitical advertising revenues reflected growth in both local and, to a lesser extent, national advertising. The increase in revenues was widespread among the Company's stations with most stations reporting higher advertising revenues.

Operating costs increased 3 percent. The cost increase resulted primarily from investments in marketing programs, higher legal expenses and higher production costs related to additional sports programming in certain markets. These costs increases were partially offset by lower employee compensation and broadcast rights amortization expenses.

Operating profit
Operating profit was $11.6 million in the first quarter, up 3 percent from $11.3 million in the prior-year first quarter. The increase in operating profit resulted from the growth in advertising revenues.

Supplemental disclosure of broadcasting EBITDA
Meredith's broadcasting EBITDA is defined as broadcasting segment operating profit plus depreciation and amortization expense. EBITDA is not a GAAP financial measure and should not be considered in isolation or as a substitute for GAAP financial measures. The following table provides reconciliations between broadcasting segment operating profit and EBITDA. The EBITDA margin is defined as segment EBITDA divided by segment revenues.

Cash and cash equivalents decreased $12.9 million in the current quarter; they decreased $11.5 million in the same period a year ago. The change reflected a decline in cash provided by operating activities that was largely offset by reduced use of cash for investing and financing activities. Cash provided by operating activities was $20.0 million compared with $29.2 million in the prior first quarter. The increase in earnings before the noncash charge for a change in accounting principle was more than offset by increased use of cash for working capital requirements related to volume increases in magazine advertising and book sales. The increase in cash used for working capital requirements primarily reflected increases in accounts receivable and inventories, net of an increase in accounts payable.

Management expects that cash on hand, cash flow from operations, and available debt capacity under existing credit agreements will provide funds for operating and recurring cash needs (e.g., working capital and cash dividends) for the foreseeable future.

Tax deductible contributions to qualified pension plans totaled $12.0 million in fiscal 2003. Though not required to do so, the Company expects to contribute approximately $9.0 million to these plans in fiscal 2004.

The Company was in compliance with these and all other debt covenants at September 30, 2003 and expects to remain so in the future.

Meredith uses interest rate swap contracts to manage interest cost and risk associated with possible increases in variable interest rates. The swap contracts expire in June 2004. The average notional amount of indebtedness outstanding under the contracts is expected to be $132 million in fiscal 2004. The Company is exposed to credit-related losses in the event of nonperformance by counterparties to the contracts. Given the strong creditworthiness of the counterparties, management does not expect any of them to fail to meet their obligations. The weighted-average interest rate on debt outstanding at September 30, 2003, including the effect of the hedged interest rate swap contracts, was approximately 6.5 percent.

As a result of the debt refinancing completed in April 2002 and subsequent debt repayments, Meredith had interest rate swap contracts that no longer met the qualifications for hedge accounting. These contracts were deemed to be ineffective and dedesignated as hedge contracts. Therefore, all changes in the fair market value of these contracts are recorded in interest expense.

Share repurchase program
As part of Meredith's ongoing share repurchase program, the Company spent $4.7 million to repurchase an aggregate of 100,000 shares of Meredith Corporation common stock at then current market prices in the first quarter of fiscal 2004. This compares with spending of $8.2 million for the repurchase of 214,000 shares in the prior-year first quarter. The Company expects to continue to repurchase shares from time to time in the foreseeable future, subject to market conditions. As of September 30, 2003, approximately 700,000 shares were authorized for future repurchase. The status of this program is reviewed at each quarterly Board of Directors meeting.

Dividends
Dividends paid in the first quarter of fiscal 2004 were $4.8 million, or 9.5 cents per share. Dividends paid in the prior-year first quarter were $4.5 million, or 9 cents per share.

Capital expenditures
First quarter spending for property, plant and equipment was $6.3 million compared with prior-year first quarter spending of $8.6 million. The decrease resulted from prior-year spending for equipment and remodeling associated with the consolidation of the Portland duopoly and for the initial transition to digital technology at five stations that did not reoccur. The Company has no material commitments for capital expenditures. Funds for capital expenditures are expected to come from operating activities or, if necessary, borrowings under credit agreements.

Outlook for Remainder of Fiscal 2004
The following statements reflect Meredith's current expectations for the second quarter and the remainder of fiscal 2004.

Second quarter publishing advertising revenues are running up in the high twenties, on a percentage basis, from the same quarter a year ago. Excluding the American Baby Group, the increase is in the high teens. Meredith continues to experience issue-to-issue advertising volatility in magazines which is exacerbated by delayed decision-making on pages. Second quarter broadcasting revenue comparisons will be especially challenging because of $14.1 million in net political advertising revenues that were recorded in the prior-year quarter. As of the date of this report, advertising bookings for the second quarter are pacing down in the low double digits on a percentage basis. Excluding political advertising, bookings are up in the mid-to-high single digits. Television advertising bookings are a snapshot in time and change frequently.

On October 29, 2003, management stated their belief that the then current First Call consensus earnings estimates of 36 cents per share for the second quarter and $2.05 for all of fiscal 2004 were achievable.

Meredith is exposed to certain market risks as a result of its use of financial instruments, in particular the potential market value loss arising from adverse changes in interest rates. Readers are referred to Item 7A. Quantitative and Qualitative Disclosures about Market Risk of the Company's fiscal 2003 Form 10-K for a more complete discussion of these risks.

Long-term debt
At September 30, 2003, Meredith had outstanding $55 million in variable-rate long-term debt and $300 million in fixed-rate long-term debt. There are no material earnings or liquidity risks associated with the Company's variable-rate debt because of interest rate swap contracts that reduce exposure to interest rate fluctuations by effectively converting variable-rate debt to fixed-rate debt. The fair market value of the variable-rate debt approximates the carrying amount. There also are no earnings or liquidity risks associated with the Company's fixed-rate debt. The fair market value of the fixed-rate debt (based on discounted cash flows reflecting borrowing rates currently available for debt with similar terms and maturities) varies with fluctuations in interest rates. A 10 percent decrease in interest rates would have changed the fair market value of the fixed-rate debt to $325.2 million from $321.9 million at September 30, 2003.

Interest rate swap contracts
Meredith has an interest rate swap contract outstanding that is designated as a cash flow hedge and effectively converts a portion of the Company's variable-rate debt to fixed-rate debt. There are no earnings or liquidity risks associated with this swap contract. The fair market value of the interest rate swap contract is the estimated amount (based on discounted cash flows) the Company would pay or receive to terminate the swap contract. A 10 percent decrease in interest rates would have had no material affect on the $1.2 million cost to terminate the swap contract at September 30, 2003.

As a result of the April 2002 debt refinancing, Meredith also has interest rate swap contracts outstanding that are no longer designated as hedges against variable-rate obligations. While there is no liquidity risk associated with these swap contracts, changes in interest rates expose the Company to earnings risk because all changes in the fair market value of the swap contracts are recorded in interest expense. At September 30, 2003, a 10 percent decrease in interest rates would have increased the cost to terminate these swap contracts to $2.9 million from $2.8 million.

Broadcast rights payable
There has been no material change in the market risk associated with broadcast rights payable since June 30, 2003.

Meredith's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this Form 10-Q, that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that Meredith files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms.