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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-14337
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PENTON MEDIA, INC.
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 36-2875386
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(State of Incorporation) (I.R.S. Employer Identification No.)
1300 East Ninth Street, Cleveland, OH 44114
- -------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
216-696-7000
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer as
defined in Rule 12b-2 of the Exchange Act. Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date (November 4, 2003).
Common Stock: 33,203,470 shares
PENTON MEDIA, INC.
FORM 10-Q
INDEX
Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2003 and December 31, 2002 3
Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2003 and 2002 5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2003 and 2002 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk 47
Item 4. Controls and Procedures 48
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 49
Signature 50
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PENTON MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
September 30, December 31,
2003 2002
---------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 42,034 $ 6,771
Restricted cash 183 677
Accounts receivable, less allowance for doubtful
accounts of $3,725 and $4,323 in 2003 and 2002, respectively 31,948 34,842
Income taxes receivable 289 53,547
Notes receivable 465 2,124
Inventories 949 1,025
Prepayments, deposits and other 8,392 5,094
Current assets of discontinued operations - 2,049
---------- -----------
Total current assets 84,260 106,129
---------- -----------
Property, plant and equipment:
Land, buildings and improvements 8,586 8,878
Machinery and equipment 62,188 61,935
---------- -----------
70,774 70,813
Less: accumulated depreciation 51,312 46,896
---------- -----------
19,462 23,917
---------- -----------
Other assets:
Goodwill, net 214,411 251,972
Other intangibles, less accumulated amortization of
$14,899 and $13,137 in 2003 and 2002, respectively 20,113 32,754
Other 438 -
---------- -----------
234,962 284,726
---------- -----------
$ 338,684 $ 414,772
========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
3
PENTON MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
September 30, December 31,
2003 2002
---------- -----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Senior secured credit facility $ - $ 4,500
Accounts payable 6,409 9,464
Accrued compensation and benefits 7,609 11,835
Other accrued expenses 28,067 24,355
Unearned income, principally trade
show and conference deposits 20,129 23,026
Current liabilities of discontinued operations - 1,050
---------- -----------
Total current liabilities 62,214 74,230
---------- -----------
Long-term liabilities and deferred credits:
Senior secured notes, net of discount 156,884 156,797
Senior subordinated notes, net of discount 171,628 171,423
Note payable - 417
Net deferred pension 14,506 13,762
Other accrued expenses 12,105 13,052
---------- -----------
355,123 355,451
---------- -----------
Commitments and contingencies
Mandatorily redeemable convertible preferred stock, par value $0.01
per share; 50,000 shares authorized, issued and outstanding;
redeemable at $1,000 per share 50,669 46,174
Redeemable common stock, par value $0.01 per share; 13,518 and
1,068,343 shares issued and outstanding at September 30, 2003 and
December 31, 2002, respectively 10 1,118
Stockholders' deficit:
Preferred stock, par value $0.01 per share; 1,950,000 shares
authorized; none issued or outstanding - -
Common stock, par value $0.01 per share; 155,000,000 shares
authorized; 33,166,286 and 31,687,194 shares issued and outstanding
at September 30, 2003 and December 31, 2002, respectively 332 317
Capital in excess of par value 230,372 229,779
Retained deficit (355,443) (279,600)
Notes receivable officers, less reserve of $7,600 at September 30, 2003 (1,887) (9,720)
Accumulated other comprehensive loss (2,706) (2,977)
---------- -----------
(129,332) (62,201)
---------- -----------
$ 338,684 $ 414,772
========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
4
PENTON MEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED; DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------------ ------------ ----------- -----------
Revenues $ 54,119 $ 47,194 $ 158,977 $ 171,269
------------ ------------ ----------- -----------
Operating expenses:
Editorial, production and circulation 23,500 23,158 69,320 75,701
Selling, general and administrative 22,372 25,306 68,605 88,097
Impairment of assets 45,797 223,288 45,797 223,424
Provision for loan impairment - - 7,600 -
Restructuring charges and other expenses 1,519 3,340 3,336 10,782
Depreciation and amortization 3,320 5,156 10,823 14,846
------------ ------------ ----------- -----------
96,508 280,248 205,481 412,850
------------ ------------ ----------- -----------
Operating loss (42,389) (233,054) (46,504) (241,581)
Other income (expense):
Interest expense (10,480) (9,532) (30,230) (28,452)
Interest income 102 133 339 586
Gain on extinguishment of debt - - - 277
Gain on sale of investments - - - 1,491
Miscellaneous, net 38 163 (270) (177)
------------ ------------ ----------- -----------
(10,340) (9,236) (30,161) (26,275)
------------ ------------ ----------- -----------
Loss from continuing operations before income taxes
and cumulative effect of accounting change (52,729) (242,290) (76,665) (267,856)
Benefit (provision) for income taxes 236 (172) 45 9,731
----------- ------------ ----------- -----------
Loss from continuing operations before cumulative
effect of accounting change (52,493) (242,462) (76,620) (258,125)
Discontinued operations:
Income (loss) from operations of discontinued
components (including gain on disposal of
$1,200 in 2003), net of taxes 99 (702) 777 (1,330)
------------ ------------ ----------- -----------
Loss before cumulative effect of accounting change (52,394) (243,164) (75,843) (259,455)
Cumulative effect of accounting change, net of taxes - - - (39,700)
------------ ------------ ----------- -----------
Net loss (52,394) (243,164) (75,843) (299,155)
Amortization of deemed dividend and accretion
of preferred stock (1,980) (652) (4,495) (45,513)
------------ ------------ ----------- -----------
Net loss applicable to common stockholders $ (54,374) $ (243,816) $ (80,338) $ (344,668)
============ ============ =========== ===========
Net loss per common share - basic and diluted:
Loss from continuing operations applicable
to common stockholders $ (1.63) $ (7.47) $ (2.44) $ (9.44)
Discontinued operations, net of taxes - (0.02) 0.02 (0.04)
Cumulative effect of accounting change, net of taxes - - - (1.23)
------------ ------------ ----------- -----------
Net loss applicable to common stockholders $ (1.63) $ (7.49) $ (2.42) $ (10.71)
============ ============ =========== ===========
Weighted-average number of shares outstanding:
Basic and diluted 33,358 32,548 33,225 32,179
============ ============ =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
5
PENTON MEDIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED; DOLLARS IN THOUSANDS)
Nine Months Ended
September 30,
2003 2002
------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 39,311 $ 1,125
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,323) (2,900)
Earnouts paid (7) (5,520)
Proceeds from sale of Jupitermedia Corporation stock - 5,801
Proceeds from sale of discontinued operations 3,250 -
---------- -----------
Net cash provided by (used for) investing activities 920 (2,619)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of mandatorily redeemable
convertible preferred stock - 46,111
Proceeds from senior secured notes - 156,717
Repurchase of senior subordinated notes - (8,375)
Repayment of senior secured credit facility (4,500) (180,587)
Proceeds from note receivable, net 1,659 -
Payment of notes payable (417) (2,804)
Employee stock purchase plan payments (113) (359)
Proceeds from repayment of officers loans 250 703
Payment of financing costs (1,917) (9,450)
---------- -----------
Net cash provided by (used for) financing activities (5,038) 1,956
---------- -----------
Effect of exchange rate changes on cash 70 21
---------- -----------
Net increase in cash and cash equivalents 35,263 483
Cash and cash equivalents at beginning of period 6,771 20,191
---------- -----------
Cash and cash equivalents at end of period $ 42,034 $ 20,674
========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
6
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
These financial statements have been prepared by management in accordance with
generally accepted accounting principles ("GAAP") for interim financial
information and the applicable rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all information and
footnotes required by GAAP for complete financial statements. However, in the
opinion of management, the interim financial statements reflect all adjustments,
which are of a normal recurring nature, necessary for a fair presentation of the
results of the periods presented. The results of operations for the interim
periods are not necessarily indicative of the results of operations to be
expected for the full year.
The accompanying unaudited interim consolidated financial statements should be
read together with the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2002 financial statements to
conform to the 2003 presentation. These reclassifications did not change
previously reported net income (loss), cash flows or stockholders' deficit.
USE OF ESTIMATES
The preparation of financial statements in accordance with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In October 2003, the Financial Accounting Standards Board ("FASB") Staff issued
a FASB Staff Position ("FSP") on Interpretation 46, "Consolidation of Variable
Interest Entities" ("FIN 46"), FSP FIN 46-6, "Effective Date of FASB
Interpretation No. 46, Consolidation of Variable Interest Entities" ("FSP
46-6"). FSP 46-6 delays the effective date of FIN 46 to December 31, 2003 for
companies with a year-end of December 31 for (1) interests held by public
entities in variable interest entities or potential variable interest entities
created before February 1, 2003 and (2) non-registered investments. Certain
disclosures required by FIN 46 were not deferred by FSP 46-6. In May 2000,
Penton acquired a 50% interest in Penton Media Germany ("PM Germany"). PM
Germany may potentially qualify as a variable interest entity under FIN 46. The
Company currently consolidates PM Germany, which produces trade shows,
publications, and Web sites. Included in Penton's consolidated statements of
operations for the nine months ended September 30, 2003, are revenues of $1.9
million and a net loss of $2.8 million related to PM Germany. At September 30,
2003, Penton's consolidated balance sheets include assets of $1.8 million,
liabilities of $6.0 million and minority interest of $2.3 million related to PM
Germany. Penton estimates that its maximum exposure to loss would be
approximately $0.4 million.
In April 2003, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" ("SFAS 149"). This statement amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 149 is effective for contracts entered into or
modified after June 30, 2003. The adoption of SFAS 149 did not have a
significant effect on the Company's results of operations or its financial
condition.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 changes the accounting for certain financial instruments with
characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities in the statement of financial position.
Previously, many of those financial instruments were classified as equity. SFAS
150 is effective for financial instruments entered into or modified after May
31, 2003 and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150 did not have any impact
on the Company's financial condition or results of operations.
In May 2003, the Emerging Issues Task Force ("EITF") reached a consensus on EITF
Issue 01-8, "Determining Whether an Arrangement is a Lease" ("EITF 01-8"). EITF
01-8 provides guidance on how to determine whether an arrangement contains a
7
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
lease that is within the scope of SFAS No. 13, "Accounting For Leases" and is
effective for arrangements entered into or modified after June 30, 2003. The
adoption of EITF 01-8 did not have a significant effect on the Company's results
of operations or its financial condition.
NOTE 2 - GOODWILL AND OTHER INTANGIBLES
During the third quarter of 2003, Penton completed its annual impairment test of
goodwill and other intangible assets under the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142") and recorded a non-cash
charge of $37.6 million related to the reduction of the carrying value of
goodwill in three of the seven identified reporting units. Penton utilized a
third-party valuation company to determine the fair value of the reporting
units. Two of the reporting units are part of the Company's Technology Media
segment and one of the reporting units is part of the Retail Media segment. The
charge is reflected as an impairment of assets in the accompanying consolidated
statements of operations. The fair value of the reporting units for the
impairment test was determined using the income approach, which is similar to
the discounted cash flows approach.
During the third quarter of 2002, Penton completed its transitional goodwill
impairment test for January 1, 2002, under the provisions of SFAS 142 and
recorded a non-cash charge of $39.7 million to reduce the carrying value of
goodwill in two of the seven identified reporting units. Both of these reporting
units are part of the Technology Media segment. The charge is reflected as a
cumulative effect of accounting change in the accompanying consolidated
statements of operations for the nine months ended September 30, 2002.
During the third quarter of 2002, a number of events occurred that indicated an
additional possible impairment of goodwill might exist. These events included
our determination in July of lower-than-expected revenues and adjusted EBITDA
results for the year; a letter from the New York Stock Exchange indicating that
the Company had fallen below minimum listing standards; a significant decline in
the Company's stock price; and the decision by management to potentially sell or
dispose of certain non-core assets. As a result of these triggering events and
circumstances, the Company completed an additional SFAS 142 impairment review at
September 30, 2002. This review resulted in a non-cash charge of approximately
$203.3 million to further reduce the carrying value of goodwill for these two
reporting units in the Technology Media segment. This charge is reflected as an
impairment of assets in the accompanying consolidated statements of operations.
The fair value of the reporting units for the initial and interim impairment
tests in 2002 was determined using the income approach, which is similar to the
discounted cash flows approach.
A summary of changes in the Company's goodwill by business segment during the
first nine months of 2003 is as follows (in thousands):
GOODWILL
-----------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30,
2002 EARNOUTS IMPAIRMENTS 2003
---------------- -------------- ----------------- ----------------
Industry Media $ 36,278 $ - $ - $ 36,278
Technology Media 96,580 7 (29,202) 67,385
Lifestyle Media 84,924 - - 84,924
Retail Media 34,190 - (8,366) 25,824
---------------- -------------- ----------------- ----------------
Total $ 251,972 $ 7 $ (37,568) $ 214,411
================ ============== ================= ================
Identifiable intangible assets, exclusive of goodwill, as of September 30, 2003,
are recorded in other intangibles in the consolidated balance sheets and are
comprised of (in thousands):
GROSS NET
CARRYING ACCUMULATED BOOK
VALUE AMORTIZATION VALUE
------------ ------------ -----------
Trade names $ 5,261 $ (3,637) $ 1,624
Mailing/exhibitor lists 9,350 (4,782) 4,568
Advertiser relationships 7,200 (3,089) 4,111
Subscriber relationships 2,100 (870) 1,230
Noncompete agreements 176 (160) 16
------------ ------------ -----------
Balance at September 30, 2003 $ 24,087 $ (12,538) $ 11,549
============ ============ ===========
8
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Total amortization expense for identifiable intangible assets was $3.2 million
and $7.7 million for the nine months ended September 30, 2003 and 2002,
respectively. Estimated amortization expense for these intangible assets for
2003 and each of the four succeeding years is as follows (in thousands):
YEAR ENDED
DECEMBER 31, AMOUNT
------------ ----------
2003 $ 3,426
2004 $ 2,473
2005 $ 2,418
2006 $ 2,114
2007 $ 1,282
Due to the impairment of goodwill in three of the seven reporting units in the
third quarter of 2003 and because of the events in the third quarter of 2002 as
discussed above, the Company also completed an assessment in accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS 144") at September 30, 2003 and 2002, respectively, and recorded non-cash
charges of $8.2 million and $20.0 million, respectively. These charges are
reflected as an impairment of assets in the accompanying consolidated statements
of operations, and relate primarily to the write-off of trade names and
advertiser relationships for properties in our Technology Media segment. The
fair value of the asset groups was determined using the income approach, which
is similar to the discounted cash flows approach.
At December 31, 2002, the net assets of our Professional Trade Show group
("PTS") were classified as held for sale and as such were reflected as
discontinued operations on the consolidated balance sheets (see Note 3 -
Disposals). Approximately $1.0 million of goodwill related to PTS was
written-off as part of the sale in January 2003.
NOTE 3 - DISPOSALS
At December 31, 2002, the net assets of PTS were classified as held for sale.
The assets were sold in January 2003 for approximately $3.8 million, including
an earnout of $0.6 million based on reaching certain performance objectives in
2003. The sale resulted in a gain of $1.2 million, which was recorded as part of
discontinued operations on the consolidated statements of operations. The
results of PTS are reported as discontinued operations for all periods
presented. PTS was part of our Industry Media segment.
In December 2002, the Company sold the net assets of Penton Media Australia ("PM
Australia"), which was part of our Technology Media segment. The results of PM
Australia are reported as discontinued operations for all periods presented. The
$0.8 million of income recognized for the nine months ended September 30, 2003,
is primarily due to a gain of approximately $1.2 million associated with the
sale of PTS, offset by one month of operations for PTS, and settlement costs for
certain pending lawsuits related to PM Australia.
Operating results for the discontinued operations, which include PM Australia
and PTS, for the three and nine months ended September 30, 2003 and 2002 are as
follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ----------- ----------- -----------
Revenues $ - $ 1,416 $ - $ 6,524
============ =========== =========== ===========
Income (loss) from operations before income taxes $ 99 $ (702) $ (443) $ (1,330)
Gain on sale of properties - - 1,220 -
------------ ----------- ----------- -----------
Income (loss) from discontinued operations $ 99 $ (702) $ 777 $ (1,330)
============ =========== =========== ===========
In addition, the Company sold four other properties in December 2002. Three of
these properties, Streaming Media, Boardwatch and ISPCON, were part of our
Technology Media segment. The other property, A/E/C, was part of our Industry
Media segment.
9
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the three and nine months ended September 30, 2002, there is approximately
$0.5 million and $5.8 million, respectively, included in revenues and $19.9
million and $27.6 million, respectively, included in operating expenses
associated with these properties, as they did not qualify for discontinued
operations treatment.
At December 31, 2002, assets and liabilities related to PTS were classified
separately on the consolidated balance sheets as current assets of discontinued
operations and current liabilities of discontinued operations, respectively. The
carrying amounts of the major classes of assets and liabilities included in
these balances are as follows:
DECEMBER 31,
2002
-------------
Goodwill, net $ 959
Other intangibles, net 759
Other assets 331
-------------
Current assets of discontinued operations $ 2,049
=============
Unearned revenue $ 1,050
-------------
Current liabilities of discontinued operations $ 1,050
=============
NOTE 4 - DEBT
SENIOR SECURED CREDIT FACILITY
In August 2003, the Company replaced its senior secured credit facility with a
new four-year loan and security agreement. Pursuant to the terms of the
revolving loan and security agreement, the Company can borrow up to the lesser
of (i) $40.0 million; (ii) 2.5x the Company's last twelve months adjusted EBITDA
measured monthly during the first year, 2.25x during the second year and 2.0x
thereafter; (iii) 40% of the Company's last six months of revenues; or (iv) 25%
of the Company's enterprise value, as determined annually by a third party. The
revolving credit facility bears interest at LIBOR plus 5.0% subject to a LIBOR
minimum of 1.5%. The Company must comply with a quarterly financial covenant
limiting the ratio of maximum bank debt to the last twelve months adjusted
EBITDA to 2.5x through March 31, 2004, 2.25x from June 30, 2004 through March
31, 2005 and 2.0x thereafter. The loan agreement permits the Company to sell
assets of up to $12.0 million in the aggregate during the term or $5.0 million
in any single asset sale; and complete acquisitions of up to $5.0 million per
year. Included in the loan agreement is a stand-by letter of credit of $0.1
million required by one of the Company's facility leases. The amount of the
letter of credit reduces the availability under the credit facility. As of
September 30, 2003, no amounts were drawn under the stand-by letter of credit.
Costs representing bank fees and other professional fees of $1.8 million are
being amortized over the life of the loan agreement. As of September 30, 2003,
$39.9 million was available under the loan agreement. There were no amounts
outstanding.
During the third quarter of 2003, approximately $1.0 million of unamortized
financing fees related to the previous credit facility were written off. This
charge has been classified as part of interest expense in the consolidated
statements of operations.
In January 2003, the Company amended its senior secured credit facility. The
amended agreement, which was replaced in August 2003, as noted above, permitted
the Company to sell certain properties in excess of the $5.0 million aggregate
limit required by the original amended agreement. In return, the revolving
commitment was reduced from $40.0 million to $32.0 million. At the end of
January 2003, when the aggregate sum of Penton's cash and cash equivalents
exceeded $40.0 million, an additional one-time reduction of $10.0 million was
required under the amended credit facility. Furthermore, upon the sale of PTS
(see Note 3 - Disposals), the revolving commitment was further reduced by 50% of
the aggregate gross proceeds, as defined, from this sale, or approximately $1.9
million. The amended facility also increased the maximum commitment fee from
0.50% to 0.75%. The commitment under the credit facility was scheduled to
decrease by 15% in 2003, 30% in 2004, 35% in 2005 and 20% in 2006.
The reduction of the revolver from $40.0 million to $20.1 million in January
2003 and the reduction of the revolver from $185.0 million to $40.0 million in
March 2002 resulted in the write-off of unamortized financing fees of $0.9
million and $0.7 million, respectively. These charges have been classified as
part of interest expense on the consolidated statements of operations.
The repayment of the credit facility term loan A and term loan B in March 2002
resulted in a non-cash extraordinary charge of $0.7 million, net of $0.5 million
in taxes, relating to the write-off of unamortized deferred financing costs. In
addition, in March 2002,
10
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
the Company repurchased $10.0 million of its 10 3/8% Senior Subordinated Notes
("Subordinated Notes") with $8.7 million of the proceeds from the 11 7/8% Senior
Secured Notes ("Secured Notes") offering completed in March 2002, resulting in
an extraordinary gain of $0.8 million, net of $0.6 million in taxes. In the
first quarter 2003, these 2002 extraordinary charges were reclassified to gain
on extinguishment of debt in the consolidated statements of operations in
accordance with the provisions of SFAS No. 145, "Rescission of SFAS Nos. 4, 44,
and 64, Amendment of SFAS 13, and Technical Corrections as of April 2002."
In March 2002, the Company discontinued hedge accounting for its cash flow
hedges as the Company paid down its outstanding variable rate debt. As a result
of the hedge discontinuation, the Company included in interest expense a net
deferred loss on cash flow hedges of $1.4 million for the nine months ended
September 30, 2002. Also included in interest expense for the three and nine
months ended September 30, 2002 is $0.4 million and $0.1 million, respectively,
related to net gains and losses on interest rate swaps that did not qualify as
hedges under SFAS 133.
For the nine months ended September 30, 2003 and 2002, cash paid for interest
was $18.5 million and $11.3 million, respectively.
NOTE PAYABLE
In the second quarter 2003, the Company paid off the $0.4 million Loan note B
related to the acquisition of Hillgate Communications Ltd. in February 2001.
There are no other notes payable outstanding.
NOTE 5 - MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
At September 30, 2003, an event of non-compliance continues to exist under our
Series B Convertible Preferred Stock because the Company's leverage ratio
(defined as debt less cash balances in excess of $5.0 million plus the
liquidation value of the preferred stock and unpaid dividends divided by
adjusted EBITDA) exceeds 7.5. When the event of non-compliance initially
occurred on April 1, 2003, the holders of a majority of the preferred stock were
able to nominate two additional members to our Board of Directors. Since the
event of non-compliance was not cured by June 30, 2003, the holders of a
majority of the preferred stock then outstanding had the right to elect one less
than a minimum majority of our Board of Directors. As the holders of the
preferred stock already maintained one less than a minimum majority of our
board, no change was necessary. In addition, upon the occurrence of this event
of non-compliance, the 5% dividend rate on the preferred stock increased by one
percentage point as of April 1, July 1, and October 1, 2003 and the rate may
increase by one percentage point each subsequent quarter, up to a maximum rate
of 10%. The dividend rate is currently 8%. The conversion price on the preferred
stock decreased by $0.76 as of April 1, July 1, and October 1, 2003 and may
decrease by $0.76 each subsequent quarter up to a maximum reduction of $3.80.
The conversion price is currently $5.33. The conversion price will adjust to
what it would have been absent such event (to the extent of any preferred shares
still outstanding) once the leverage ratio is less than 7.5. Furthermore, the
dividend rate will adjust back to 5% as of the date on which the leverage ratio
is less than 7.5. Under the preferred stock agreement, if the leverage ratio
exceeds 7.5 for four consecutive quarters, the preferred stockholders will have
the right to cause the Company to seek a buyer for all of the assets or issued
and outstanding capital stock of the Company. The Company is not expected to be
able to correct the event of non-compliance before the maximum dividend rate and
conversion price reductions are reached. The leverage ratio event of
non-compliance does not represent an event of default or violation under any of
the Company's outstanding notes or the loan agreement. As such, there will not
be an acceleration of any outstanding indebtedness as a result of this event. In
addition, this event of non-compliance and the resulting consequences do not
result in any cash outflow from the Company.
Under the conversion terms of the preferred stock, each holder has a right to
convert dividends into additional shares of common stock. At September 30, 2003,
no dividends have been declared. However, in light of each holder's conversion
right and considering the increase in the dividend rate and the concurrent
reduction of the conversion price as noted above, the Company has recognized a
deemed dividend for the beneficial conversion feature inherent in the
accumulated dividend based on the original commitment date(s). All such accruals
have been reported as an increase in the carrying value of the preferred stock
and a charge to additional paid in capital in light of the stockholders'
deficit.
NOTE 6 - COMMON STOCK AND COMMON STOCK AWARD PROGRAMS
In June 2003, the Company was notified by the New York Stock Exchange ("NYSE")
that it would begin delisting procedures of the Company's common stock. The NYSE
reached its decision because Penton had been unable to comply with the NYSE's
continued listing criteria, which include minimum levels for stock price, market
capitalization, and stockholders' equity. The NYSE took this action at this time
because Penton was not expected to be able to increase its book equity to the
minimum listing
11
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
requirements within the required time frame. On June 17, 2003, Penton's stock
began trading on the Over-the-Counter Bulletin Board under the symbol PTON.
In February 2003, Penton's Board of Directors approved a proposal to effect a
reverse stock split to be submitted for stockholder approval at the Company's
annual meeting on June 12, 2003. This corrective share action was part of a plan
submitted by Penton to the NYSE to meet the Exchange's $1.00 stock price listing
requirement. At its annual meeting, stockholders voted to approve the reverse
stock split which gave the Company's Board of Directors the authority to effect
a reverse split at one of three ratios within one year. Due to the Company's
delisting, as noted above, the Board of Directors does not currently expect to
act on its authority to effect the reverse split in the near term.
REDEEMABLE COMMON STOCK
Redeemable common stock relates to common stock that may be subject to
rescissionary rights. The purchase of common stock by certain employees in the
Company's 401(k) plan from May 2001 through March 2003 was not registered under
the federal securities laws (the "unregistered purchases"). As a result, such
purchasers of our common stock during that period have the right to rescind
their purchases for an amount equal to the purchase price paid for the shares,
plus interest from the date of purchase, unless the employee has released the
Company from such obligation as noted below. Any rescissionary rights will lapse
one year from the date of any such purchase. The Company may also be subject to
civil and other penalties by regulatory authorities. The unregistered purchases
did not cause an event of default under the Subordinated Notes, the Secured
Notes or the senior secured credit facility. However, an event of default could
occur as an indirect result of the unregistered purchases, if for instance, such
unregistered purchases lead to restricted payments under the indentures and/or
the loan agreement. On March 31, 2003, the Company filed a Form S-8 registration
and registered 6.0 million additional shares to be offered under the 401(k)
plan.
In April 2003, the Company offered to reimburse employees who had purchased
Penton common stock through the Company's 401(k) plan between March 25, 2002 and
March 25, 2003. Employees who signed a release were reimbursed the amount by
which the price they paid for the common stock exceeded the closing price of the
stock on the date they executed the release, or if the stock had been sold, the
amount by which the price paid by the employee exceeded the sales price.
Employees who did not sign the release by May 22, 2003, retain any rights they
may have under the Federal securities laws. Over eighty percent of the employees
who were offered the reimbursement have accepted the terms of the release,
representing a liability of approximately $0.6 million at June 30, 2003, which
was deposited into each individuals 401(k) account in July 2003. This amount is
included in restructuring charges and other expenses in the consolidated
statements of operations.
At September 30, 2003, the Company has classified 13,518 shares, related to the
potential rescissionary rights, outside of stockholders' deficit because the
redemption of the stock is not within the control of the Company.
EMPLOYEE STOCK PURCHASE PLAN
In the first quarter of 2003, 65,711 shares were purchased for employees under
the Company's Employee Stock Purchase Plan for employees who participated in the
plan during the fourth quarter of 2002. With this purchase, the maximum number
of shares available to employees under the plan of 750,000 shares was reached.
The plan was subsequently terminated by the Company.
MANAGEMENT STOCK PURCHASE PLAN
For the nine months ended September 30, 2003 and 2002, respectively, an
immaterial amount of expense was recognized related to the Management Stock
Purchase Plan. In February 2003, a total of 99,876 restricted stock units
("RSUs") were granted at $0.34 per share, which represents 80% of fair market
value on the date of grant. At September 30, 2003, 134,938 RSUs were
outstanding. During the first nine months of 2003, 20,835 shares of the
Company's common stock were issued under this plan.
EXECUTIVE LOAN PROGRAM
The Company has an executive loan program, which allowed it to issue shares of
Company common stock at fair market value to seven key executives, in exchange
for full recourse notes. In December 2001, the loan notes were amended to cease
interest charges and to extend the maturity date from the fifth anniversary of
the first loan date to six months following the seventh anniversary of the first
loan date. No payments are required until maturity, at which time all
outstanding amounts are due.
12
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
At September 30, 2003, the outstanding balance under the executive loan program
was approximately $9.5 million (including $1.1 million of accrued interest). For
the nine months ended September 30, 2003 and 2002, executive loans of $0.3
million and $1.1 million, respectively, were repaid. The loan balance is
classified in the stockholders' deficit section of the consolidated balance
sheets as notes receivable officers.
The Company's ability to collect amounts due from each executive is largely
dependent on the fair market value of assets held by each executive, including
Company stock. Factors such as the length of time before the loans are due; the
value of the executives' assets, including Company stock; the continued
employment by the executives with the Company, and other relevant factors, are
considered in assessing the collectibility of these loans.
During the second quarter of 2003, the Company determined that the executives
would probably be unable to repay a significant portion of the outstanding
balance due under their loans without a significant recovery in the Company's
stock price. Consequently, the Company recorded a provision for loan impairment
in the amount of $7.6 million during the second quarter of 2003, reflecting the
amount by which the carrying value of each individual's loan exceeded the
underlying estimated fair value of the assets available to repay the loan. The
Company will recognize any recoveries of amounts reserved only upon payment of
the loans. The notes are full recourse loans and the Company intends to pursue
collection of all amounts when due. In addition to the factors noted above,
additional considerations in determining whether a reserve was necessary
included the continued low price of the Company's stock, the delisting of the
Company's stock from the NYSE in the second quarter, and the continued
uncertainty of an economic recovery in the markets served by the Company. The
Company continues to monitor the collectibility of the notes to determine if
additional reserves are required.
EQUITY AND PERFORMANCE INCENTIVE PLAN
Stock Options
In July 2002, Penton filed a Tender Offer Statement related to the exchange by
eligible employees of outstanding options to purchase shares of Penton's common
stock issued under the Penton Media, Inc. 1998 Equity and Performance Incentive
Plan with exercise prices greater than or equal to $16.225 per share for new
options to purchase shares of common stock to be issued under the Option Plan
("New Options"). Each eligible employee received a New Option to acquire one
share of Penton's common stock for every two shares of Penton's common stock
subject to an eligible option. In February 2003, 334,850 New Options were
granted at an exercise price of $0.37 per share. No compensation expense was
recorded by the Company as a result of the Tender Offer Statement.
In addition, in February 2003, 264,000 options were granted to certain
executives and other eligible employees and 20,000 options were granted to
Penton's Directors under the 1998 Director Stock Option Plan at an exercise
price of $0.37 per share. As of September 30, 2003, a total of 1,995,305 options
were outstanding. No compensation expense was recorded by the Company due to
these grants. No options were exercised in the first nine months of 2003.
Deferred Shares
For the nine months ended September 30, 2003 and 2002, approximately $1.3
million and $3.1 million, respectively, were recognized as expense related to
deferred shares. In February 2003, 391,360 deferred shares were granted to
certain executives. In April 2003, 372,916 shares of the Company's common stock
were issued under this plan. As of September 30, 2003, 400,056 deferred shares
remain outstanding.
Performance Shares
For the nine months ended September 30, 2002, approximately $1.4 million was
credited to compensation expense related to performance shares. For the nine
months ended September 30, 2003, the amount charged to expense was not material.
During the first nine months of 2003, 30,516 shares of common stock were issued
under this plan. At September 30, 2003, a total of 471,487 performance shares
remain outstanding. Performance shares are not issuable until earned.
13
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Performance Units
In the second quarter of 2003, the Company granted 490,155 performance units to
certain key executives. Subject to the attainment of certain performance goals
over a three-year period from January 1, 2003 through December 31, 2005, each
grantee can earn a cash award in respect to each performance unit. For the nine
months ended September 30, 2003, approximately $0.2 million was recognized as
expense related to these performance units.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Pro
forma information regarding net income (loss) and earnings per share is required
by SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation Transition and
Disclosure," and has been determined as if Penton had accounted for its employee
stock options under SFAS 123.
Had compensation cost for Penton's stock-based compensation plans been
determined based on the fair value methodologies pursuant to SFAS 123, Penton's
net loss and earnings per share for the three and nine months ended September
30, 2003 and 2002 would have been as follows (in thousands, except per share
data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
---- ---- ---- ----
Net loss applicable to common stockholders:
As reported $ (54,374) $(243,816) $(80,338) $ (344,668)
Add: Compensation expense included in net loss,
net of related tax effects 55 139 1,294 1,065
Less: Total stock-based compensation expense determined under fair
value based methods for all awards, net of related tax effects... (591) (1,293) (3,168) (2,921)
---------- ---------- --------- -----------
Pro forma............................................................... $ (54,910) $(244,970) $(82,212) $ (346,524)
========== ========== ========= ===========
Basic and diluted earnings per share:
As reported.......................................................... $ (1.63) $ (7.49) $ (2.42) $ (10.71)
Pro forma............................................................ $ (1.65) $ (7.53) $ (2.47) $ (10.77)
NOTE 7 - EARNINGS PER SHARE
Earnings per share have been computed pursuant to the provisions of SFAS No.
128, "Earnings Per Share." Computations of basic and diluted earnings per share
for the three and nine months ended September 30, 2003 and 2002 are as follows
(in thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
---- ---- ---- ----
Net loss applicable to common stockholders $ (54,374) $ (243,816) $ (80,338) $ (344,668)
============ =========== ========== ===========
Number of shares:
Weighted average shares outstanding -
basic and diluted 33,358 32,548 33,225 32,179
============ =========== =========== ===========
Per share amount:
Loss applicable to common stockholders -
basic and diluted $ (1.63) $ (7.49) $ (2.42) $ (10.71)
============ =========== =========== ===========
The preferred stock and RSUs are participating securities, such that in the
event a dividend is declared or paid on the common stock, the Company must
simultaneously declare and pay a dividend on the preferred stock and the RSUs as
if the preferred stock and the
14
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
RSUs had been converted into common stock. Topic D-95, "Effect of Participating
Convertible Securities on the Computation of Basic Earnings per Share" requires
that the participating securities be included in the computation of basic
earnings per share if the effect of inclusion is dilutive. Vested RSUs are
always included in the computation of basic earnings per share as they are
considered equivalent to common stock. For all other participating securities,
the Company's accounting policy requires the use of the two-class method to
determine whether the inclusion of such securities is dilutive or not. For the
three and nine months ended September 30, 2003 and 2002, preferred stock and
non-vested RSUs were excluded from the calculation of basic earnings per share
as the results were anti-dilutive.
For the three and nine months ended September 30, 2003, 1,995,305 stock options,
471,487 performance shares, 235,704 non-vested deferred shares, 120,329
non-vested RSUs, 50,000 redeemable preferred shares and 1,600,000 warrants were
excluded from the calculation of diluted earnings per share, as the result would
have been anti-dilutive. Due to the loss from continuing operations before
cumulative effect of accounting change and after amortization of deemed dividend
and accretion of preferred stock for the three and nine months ended September
30, 2002, 1,686,555 stock options, 603,003 performance shares, 552,639
non-vested deferred shares, 47,677 non-vested RSUs, 50,000 redeemable preferred
shares, and 1,600,000 warrants were excluded from the calculation of diluted
earnings per share as the result would have been anti-dilutive.
NOTE 8 - COMPREHENSIVE LOSS
The after-tax component of comprehensive loss for the three and nine months
ended September 30, 2003 and 2002 are as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
---- ---- ---- ----
Net loss $ (52,394) $ (243,164) $ (75,843) $ (299,155)
Other comprehensive loss:
Reclassification adjustment for realized gain on
securities sold, net of taxes of $0.3 million - - - (808)
Reclassification adjustment for cash flow
hedges, net of taxes of $0.6 million - - - 863
Change in accumulated translation adjustment 43 (263) 271 (591)
------------- ------------- ------------ ------------
Total comprehensive loss $ (52,351) $ (243,427) $ (75,572) $ (299,691)
============= ============= ============ ============
NOTE 9 - RELATED PARTY TRANSACTIONS
In January 2003, the Company sold PTS to Cygnus Expositions, a division of
Cygnus Business Media, Inc., (see Note 3 - Disposals) which is owned by ABRY
Partners IV, L.P. ABRY Partners, LLC and its affiliates hold a significant
portion of our preferred stock and currently have two partners who are on the
Company's Board of Directors.
At September 30, 2003, PM Germany has a note receivable from Neue Medien Ulm
Holdings GmbH ("Neue Medien") of $0.4 million. Neue Medien has ownership
interests in PM Germany. This amount is included in the notes receivable balance
on the consolidated balance sheets.
NOTE 10 - RESTRUCTURING CHARGES
THIRD QUARTER 2003 CHARGES AND ADJUSTMENTS
In the third quarter of 2003, the Company recorded a restructuring charge of
$1.5 million, net of adjustments of $0.8 million. The charge includes $1.0
million of employee termination costs, primarily severance and benefit costs. In
addition, the Company recorded facility closing costs of $1.3 million, net of
estimated sublease rentals, related to the partial closure of office space at
one location under a long term lease expiring in 2010. The related operations
were relocated to a different floor at the same location where the Company
leases only part of the floor. This partial floor had been previously vacated by
the Company as part of its
15
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
second quarter 2002 restructuring efforts. As a result, the restructuring
accrual, net of estimated sub-lease rentals, related to the partial floor that
was re-occupied was reversed in the amount of approximately $0.8 million.
SECOND QUARTER 2003 CHARGES AND ADJUSTMENTS
In the second quarter of 2003, the Company recorded a restructuring charge of
$0.8 million. The charge includes $0.4 million of employee termination costs,
primarily severance and benefits costs. The charge also includes $0.3 million of
facility closing costs associated with the partial closure of office space at
one location under a long term lease expiring in 2009, net of estimated sublease
rentals. Charges for other exit costs of $0.1 million include costs associated
with the cancellation of certain contractual obligations.
In the second quarter 2003, the Company made an adjustment of $0.5 million to
the restructuring charge for an office lease originally recorded in the second
quarter 2002 resulting primarily from the bankruptcy filing by the sublessee of
the property.
2002 AND 2001 CHARGES
As of September 30, 2003, a majority of the restructuring initiatives undertaken
in 2002 and 2001, including the elimination of nearly 716 positions, the closure
of nearly 30 Penton offices worldwide and the cancellation of other contractual
obligations, primarily trade show venue contracts, hotel contracts and service
agreements, have been completed. As of September 30, 2003, all employees whose
positions were eliminated have left the Company. The Company has vacated the
offices for which a restructuring charge has been recorded. However, Penton
remains ultimately liable for all lease payments, which are expected to continue
through 2013.
SUMMARY OF 2003 RESTRUCTURING ACTIVITIES
The following table summarizes quarterly charges, adjustments, cash amounts paid
and the ending accrual balance at September 30, 2003 for all restructuring
activities during the first nine months of 2003 (in thousands):
SEVERANCE
AND OTHER FACILITY OTHER
DESCRIPTION PERSONNEL COSTS CLOSING COSTS EXIT COSTS TOTAL
- ----------- ----------------- -------------- ---------- -----------
Accrual at December 31, 2002 $ 5,123 $ 10,786 $ 1,015 $ 16,924
First quarter adjustments (9) 48 (112) (73)
Second quarter charges 428 322 99 849
Second quarter adjustments 2 474 (2) 474
Third quarter charges 956 1,292 38 2,286
Third quarter adjustments 19 (1,082) 233 (830)
Cash payments (5,227) (2,376) (946) (8,549)
---------------- ------------- --------- ----------
Accrual at September 30, 2003 $ 1,292 $ 9,464 $ 325 $ 11,081
================ ============= ========= ==========
The majority of severance costs are expected to be fully paid by the first
quarter of 2005. Facility closing costs include long-term leases and are
expected to be paid through 2013, while the balance of other exist costs are
expected to be paid by the end of 2004.
16
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Restructuring charges by segment, net of adjustments, for the nine months ended
September 30, 2003, are as follows:
FIRST SECOND THIRD
QUARTER QUARTER QUARTER
ADJUSTMENTS CHARGES, NET CHARGES, NET TOTAL
-------------- -------------- ------------ --------------
Industry Media $ (48) $ 216 $ 475 $ 643
Technology Media 45 1,103 282 1,430
Lifestyle Media - 45 - 45
Retail Media - - 633 633
Corporate (70) (41) 66 (45)
-------------- -------------- ------------ --------------
Total $ (73) $ 1,323 $ 1,456 $ 2,706
============== ============== ============ ===============
These amounts are included in restructuring charges and other expenses in the
accompanying consolidated statements of operations.
NOTE 11 - SEGMENT INFORMATION
Penton has four segments, which derive their revenues from the production of
publications, trade shows, and conferences and online media products, including
Web sites serving customers in 12 industry sectors. Penton measures segment
profitability using adjusted segment EBITDA. Adjusted segment EBITDA is defined
as operating income (loss) before depreciation and amortization, provision for
loan impairment, restructuring charges and other expenses, non-cash
compensation, impairment of assets and corporate and shared service general and
administrative costs. Corporate and shared service general and administrative
costs include functions such as finance, accounting, human resources, and
information systems, which are not allocated to each segment. Previously,
certain of these shared service costs were allocated to segments. In 2003,
management decided to evaluate the performance of the segments before such
costs. Adjusted segment EBITDA for the three and nine months ended September 30,
2002 has been restated to conform to the current year presentation, which does
not allocate these costs. Management believes that this is a more meaningful
presentation.
Summary information by segment for the three months ended September 30, 2003 and
2002, adjusted for discontinued operations, is as follows (in thousands):
INDUSTRY TECHNOLOGY LIFESTYLE RETAIL
MEDIA MEDIA MEDIA MEDIA TOTAL
-------- ---------- --------- ------ -----
2003
Revenues $ 20,634 $ 14,256 $ 10,340 $ 8,889 $ 54,119
Adjusted EBITDA $ 4,249 $ 811 $ 4,800 $ 2,917 $ 12,777
2002
Revenues $ 22,584 $ 15,794 $ 3,256 $ 5,560 $ 47,194
Adjusted EBITDA $ 4,295 $ (3,014) $ (82) $ 1,361 $ 2,560
Summary information by segment for the nine months ended September 30, 2003 and
2002, adjusted for discontinued operations, is as follows (in thousands):
INDUSTRY TECHNOLOGY LIFESTYLE RETAIL
MEDIA MEDIA MEDIA MEDIA TOTAL
-------- ---------- --------- ------ -----
2003
Revenues $ 60,994 $ 49,532 $ 28,751 $ 19,700 $ 158,977
Adjusted EBITDA $ 12,313 $ 4,876 $ 13,435 $ 5,099 $ 35,723
2002
Revenues $ 67,746 $ 67,007 $ 22,010 $ 14,506 $ 171,269
Adjusted EBITDA $ 11,895 $ 754 $ 8,452 $ 2,585 $ 23,686
17
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Segment revenues, all of which are realized from external customers, equal
Penton's consolidated revenues. The following is a reconciliation of Penton's
total adjusted segment EBITDA to loss from continuing operations before income
taxes and cumulative effect of accounting change (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
---- ---- ---- ----
Total adjusted segment EBITDA $ 12,777 $ 2,560 $ 35,723 $ 23,686
Depreciation and amortization (3,320) (5,156) (10,823) (14,846)
Provision for loan impairment - - (7,600) -
Restructuring charges and other expenses (1,519) (3,340) (3,336) (10,782)
Impairment of assets (45,797) (223,288) (45,797) (223,424)
Non cash compensation (48) (231) (1,316) (1,775)
Gain on sale of investments - - - 1,491
Interest expense (10,480) (9,532) (30,230) (28,452)
Interest income 102 133 339 586
Gain on extinguishment of debt - - - 277
Miscellaneous, net 38 163 (270) (177)
General and administrative costs (4,482) (3,599) (13,355) (14,440)
-------------- ------------ -------------- -----------
Loss from continuing operations before income
taxes and cumulative effect of accounting change $ (52,729) $ (242,290) $ (76,665) $ (267,856)
============== ============ ============== ===========
NOTE 12 - GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
The following schedules set forth condensed consolidating balance sheets as of
September 30, 2003, and December 31, 2002, and condensed consolidating
statements of operations for the three and nine months ended September 30, 2003
and 2002, and condensed consolidating statements of cash flows for the nine
months ended September 30, 2003 and 2002. In the following schedules, "Parent"
refers to Penton Media, Inc., "Guarantor Subsidiaries" refers to Penton's wholly
owned domestic subsidiaries, and "Non-guarantor Subsidiaries" refers to Penton's
foreign subsidiaries. "Eliminations" represent the adjustments necessary to (a)
eliminate intercompany transactions and (b) eliminate the investments in
Penton's subsidiaries.
18
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 12 -- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF SEPTEMBER 30, 2003
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 38,967 $ 167 $ 2,900 $ - $ 42,034
Restricted cash - - 183 - 183
Accounts receivable, net 20,766 6,517 4,665 - 31,948
Income taxes receivable 72 - 217 - 289
Notes receivable - - 465 - 465
Inventories 579 365 5 - 949
Prepayments, deposits and other 5,369 217 2,806 - 8,392
------------- ------------- ------------- ------------- -------------
65,753 7,266 11,241 - 84,260
------------- ------------- ------------- ------------- -------------
Property, plant and equipment, net 15,541 2,521 1,400 - 19,462
Goodwill, net 122,290 90,754 1,367 - 214,411
Other intangibles, net 13,814 6,099 200 - 20,113
Other - - 438 - 438
Investments (1) (170,747) - - 170,747 -
------------- ------------- ------------- ------------- -------------
(19,102) 99,374 3,405 170,747 254,424
------------- ------------- ------------- ------------- -------------
$ 46,651 $ 106,640 $ 14,646 $ 170,747 $ 338,684
============= ============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 28,618 $ 3,571 $ 2,287 $ - $ 34,476
Accrued compensation and benefits 6,349 1,133 127 - 7,609
Unearned income 9,683 3,680 6,766 - 20,129
------------- ------------- ------------- ------------- -------------
44,650 8,384 9,180 - 62,214
------------- ------------- ------------- ------------- -------------
Long-term liabilities and deferred credits:
Senior secured notes, net of discount 80,011 76,873 - - 156,884
Senior subordinated notes, net of discount 87,530 84,098 - - 171,628
Net deferred pension credits 14,506 - - - 14,506
Intercompany advances (106,520) 67,396 32,766 6,358 -
Other accrued expenses 5,127 2,675 4,303 - 12,105
------------- ------------- ------------- ------------- -------------
80,654 231,042 37,069 6,358 355,123
------------- ------------- ------------- ------------- -------------
Mandatorily redeemable convertible
preferred stock 50,669 - - - 50,669
Redeemable common stock 10 - - - 10
Stockholders' deficit:
Common stock and capital in excess
of par value 230,704 209,653 16,615 (226,268) 230,704
Retained deficit (355,443) (342,439) (45,512) 387,951 (355,443)
Notes receivable officers, net (1,887) - - - (1,887)
Accumulated other comprehensive loss (2,706) - (2,706) 2,706 (2,706)
------------- ------------- ------------- ------------- -------------
(129,332) (132,786) (31,603) 164,389 (129,332)
------------- ------------- ------------- ------------- -------------
$ 46,651 $ 106,640 $ 14,646 $ 170,747 $ 338,684
============= ============= ============= ============= =============
(1) Reflects investments in subsidiaries utilizing the equity method.
19
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 12-- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF DECEMBER 31, 2002
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 5,165 $ 460 $ 1,146 $ - $ 6,771
Restricted cash 241 - 436 - 677
Accounts receivable, net 21,120 8,784 4,938 - 34,842
Income taxes receivable 33,470 19,895 182 - 53,547
Notes receivable - - 2,124 - 2,124
Inventories 757 262 6 - 1,025
Prepayments, deposits and other 2,299 821 1,974 - 5,094
Current assets of discontinued operations 2,049 - - - 2,049
------------- ------------- ------------- ------------- -------------
65,101 30,222 10,806 - 106,129
------------- ------------- ------------- ------------- -------------
Property, plant and equipment, net 18,717 3,116 2,084 - 23,917
Goodwill, net 122,651 124,891 4,430 - 251,972
Other intangibles, net 15,742 13,339 3,673 - 32,754
Investment in subsidiaries (1) (98,098) - - 98,098 -
------------- ------------- ------------- ------------- -------------
59,012 141,346 10,187 98,098 308,643
------------- ------------- ------------- ------------- -------------
$ 124,113 $ 171,568 $ 20,993 $ 98,098 $ 414,772
============= ============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Senior secured credit facility $ 4,500 $ - $ - $ - $ 4,500
Accounts payable and accrued expenses 25,504 5,388 2,927 - 33,819
Accrued compensation and benefits 10,713 1,031 91 - 11,835
Unearned income 13,619 5,296 4,111 - 23,026
Current liabilities of discontinued operations 1,050 - - - 1,050
------------- ------------- ------------- ------------- -------------
55,386 11,715 7,129 - 74,230
------------- ------------- ------------- ------------- -------------
Long-term liabilities and deferred credits:
Senior secured notes, net of discount 79,966 76,831 - - 156,797
Senior subordinated notes, net of discount 87,426 83,997 - - 171,423
Note payable - - 417 - 417
Net deferred pension credits 13,762 - - - 13,762
Intercompany advances (102,694) 65,062 31,545 6,087 -
Other accrued expenses 5,176 2,934 4,942 - 13,052
------------- ------------- ------------- ------------- -------------
83,636 228,824 36,904 6,087 355,451
------------- ------------- ------------- ------------- -------------
Mandatorily redeemable convertible
preferred stock 46,174 - - - 46,174
Redeemable common stock 1,118 - - - 1,118
Stockholders' deficit:
Common stock and capital in excess
of par value 230,096 209,653 16,614 (226,267) 230,096
Retained deficit (279,600) (278,624) (36,677) 315,301 (279,600)
Notes receivable officers (9,720) - - - (9,720)
Accumulated other comprehensive loss (2,977) - (2,977) 2,977 (2,977)
------------- ------------- ------------- ------------- -------------
(62,201) (68,971) (23,040) 92,011 (62,201)
------------- ------------- ------------- ------------- -------------
$ 124,113 $ 171,568 $ 20,993 $ 98,098 $ 414,772
============= ============= ============= ============= =============
(1) Reflects investments in subsidiaries utilizing the equity method.
20
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 12-- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
REVENUES $ 38,236 $ 10,240 $ 5,643 $ - $ 54,119
------------- ------------- ------------- ------------- -------------
OPERATING EXPENSES:
Editorial, production and circulation 16,530 4,806 2,164 - 23,500
Selling, general and administrative 12,204 7,106 3,062 - 22,372
Impairment of assets 363 39,550 5,884 - 45,797
Restructuring charges and other expenses 659 716 144 - 1,519
Depreciation and amortization 2,048 815 457 - 3,320
------------- ------------- ------------- ------------- -------------
31,804 52,993 11,711 - 96,508
------------- ------------- ------------- ------------- -------------
OPERATING INCOME (LOSS) 6,432 (42,753) (6,068) - (42,389)
------------- ------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest expense, net of income earned (5,275) (5,029) (74) - (10,378)
Equity in losses of subsidiaries (53,631) - - 53,631 -
Miscellaneous, net (22) 1 59 - 38
------------- ------------- ------------- ------------- -------------
(58,928) (5,028) (15) 53,631 (10,340)
------------- ------------- ------------- ------------- -------------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (52,496) (47,781) (6,083) 53,631 (52,729)
Benefit (provision) for income taxes 3 (5) 238 - 236
------------- ------------- ------------- ------------- -------------
LOSS FROM CONTINUING OPERATIONS (52,493) (47,786) (5,845) 53,631 (52,493)
Income from operations of discontinued
components 99 - - - 99
------------- ------------- ------------- ------------- -------------
NET LOSS $ (52,394) $ (47,786) $ (5,845) $ 53,631 $ (52,394)
============= ============= ============= ============= =============
21
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 12-- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
REVENUES $ 33,145 $ 12,032 $ 2,017 $ - $ 47,194
------------- ------------- ------------- ------------- -------------
OPERATING EXPENSES:
Editorial, production and circulation 16,656 5,803 699 - 23,158
Selling, general and administrative 5,934 16,865 2,507 - 25,306
Impairment of assets - 196,638 26,650 - 223,288
Restructuring charges and other expenses 2,795 401 144 - 3,340
Depreciation and amortization 2,218 2,591 347 - 5,156
------------- ------------- ------------- ------------- -------------
27,603 222,298 30,347 - 280,248
------------- ------------- ------------- ------------- -------------
OPERATING INCOME (LOSS) 5,542 (210,266) (28,330) - (233,054)
------------- ------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest expense, net of income earned (5,439) (3,888) (72) - (9,399)
Equity in losses of subsidiaries (241,896) - - 241,896 -
Miscellaneous, net (106) - 269 - 163
------------- ------------- ------------- ------------- -------------
(247,441) (3,888) 197 241,896 (9,236)
------------- ------------- ------------- ------------- -------------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (241,899) (214,154) (28,133) 241,896 (242,290)
Benefit (provision) for income taxes (563) - 391 - (172)
------------- ------------- ------------- ------------- -------------
LOSS FROM CONTINUING OPERATIONS (242,462) (214,154) (27,742) 241,896 (242,462)
------------- ------------- ------------- ------------- -------------
Loss from operations of discontinued
components (702) - - - (702)
------------- ------------- ------------- ------------- -------------
NET LOSS $ (243,164) $ (214,154) $ (27,742) $ 241,896 $ (243,164)
============= ============= ============= ============= =============
22
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 12-- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
REVENUES $ 112,066 $ 33,257 $ 13,654 $ - $ 158,977
------------- ------------- ------------- ------------- -------------
OPERATING EXPENSES:
Editorial, production and circulation 47,642 15,992 5,686 - 69,320
Selling, general and administrative 36,834 22,809 8,962 - 68,605
Impairment of assets 363 39,550 5,884 - 45,797
Provision for loan impairment 7,600 - - - 7,600
Restructuring charges and other expenses 1,328 1,323 685 - 3,336
Depreciation and amortization 6,725 2,764 1,334 - 10,823
------------- ------------- ------------- ------------- -------------
100,492 82,438 22,551 - 205,481
------------- ------------- ------------- ------------- -------------
OPERATING INCOME (LOSS) 11,574 (49,181) (8,897) - (46,504)
------------- ------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest expense, net of income earned (15,176) (14,482) (233) - (29,891)
Equity in losses of subsidiaries (72,649) - - 72,649 -
Miscellaneous, net (391) (146) 267 - (270)
------------- ------------- ------------- ------------- -------------
(88,216) (14,628) 34 72,649 (30,161)
------------- ------------- ------------- ------------- -------------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (76,642) (63,809) (8,863) 72,649 (76,665)
Benefit (provision) for income taxes (134) (15) 194 - 45
------------- ------------- ------------- ------------- -------------
LOSS FROM CONTINUING OPERATIONS (76,776) (63,824) (8,669) 72,649 (76,620)
Income (loss) from operations of discontinued
components 933 9 (165) - 777
------------- ------------- ------------- ------------- -------------
NET LOSS $ (75,843) $ (63,815) $ (8,834) $ 72,649 $ (75,843)
============= ============= ============= ============= =============
23
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 12-- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
REVENUES $ 112,013 $ 45,928 $ 13,328 $ - $ 171,269
------------- ------------- ------------- ------------- -------------
OPERATING EXPENSES
Editorial, production and circulation 49,810 20,739 5,152 - 75,701
Selling, general and administrative 43,546 34,867 9,684 - 88,097
Impairment of assets 136 196,638 26,650 - 223,424
Restructuring charges 9,095 401 1,286 - 10,782
Depreciation and amortization 6,458 7,316 1,072 - 14,846
------------- ------------- ------------- ------------- -------------
109,045 259,961 43,844 - 412,850
------------- ------------- ------------- ------------- -------------
OPERATING INCOME (LOSS) 2,968 (214,033) (30,516) - (241,581)
------------- ------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest expense, net of interest earned (16,022) (11,624) (220) - (27,866)
Gain on extinguishment of debt 277 - - - 277
Gain on sale of investments 1,491 - - - 1,491
Equity in losses of subsidiaries (295,308) - - 295,308 -
Miscellaneous, net (467) - 290 - (177)
------------- ------------- ------------- ------------- -------------
(310,029) (11,624) 70 295,308 (26,275)
------------- ------------- ------------- ------------- -------------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND CUMULATIVE
EFFECTS OF ACCOUNTING CHANGE (307,061) (225,657) (30,446) 295,308 (267,856)
Benefit (provision) for income taxes 9,236 - 495 - 9,731
------------- ------------- ------------- ------------- -------------
LOSS FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (297,825) (225,657) (29,951) 295,308 (258,125)
Loss from operations of discontinued
components (1,330) - - - (1,330)
Cumulative effect of accounting change - (34,572) (5,128) - (39,700)
------------- ------------- ------------- ------------- -------------
NET LOSS $ (299,155) $ (260,229) $ (35,079) $ 295,308 $ (299,155)
============= ============= ============= ============= =============
24
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 12-- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------ ------------
(DLLARS IN THOUSANDS)
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 38,557 $ 142 $ 612 $ - $ 39,311
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,801) (428) (94) - (2,323)
Earnouts paid - (7) - - (7)
Proceeds from sale of discontinued components 3,250 - - - 3,250
------------- -------------- ------------- ------------ --------------
Net cash provided by (used for)
investing activities 1,449 (435) (94) - 920
------------- -------------- ------------- ------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of senior secured credit facility (4,500) - - - (4,500)
Proceeds from note receivable, net - - 1,659 - 1,659
Payment of note payable - - (417) - (417)
Employee stock purchase plan payments (107) - (6) - (113)
Proceeds from repayment of officers loans 250 - - - 250
Payment of financing costs (1,917) - - - (1,917)
------------- -------------- ------------- ------------ --------------
Net cash provided by (used for)
financing activities (6,274) - 1,236 - (5,038)
------------- -------------- ------------- ------------ --------------
Effect of exchange rate changes on cash 70 - - - 70
------------- -------------- ------------- ------------ --------------
Net increase (decrease) in cash and
equivalents 33,802 (293) 1,754 - 35,263
Cash and equivalents at beginning of period 5,165 460 1,146 - 6,771
------------- -------------- ------------- ------------ --------------
Cash and equivalents at end of period $ 38,967 $ 167 $ 2,900 $ - $ 42,034
============= ============== ============= ============ ==============
25
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 12-- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
CASH FLOWS PROVIDED BY (USED FOR) OPERATING
ACTIVITIES $ 1,483 $ (7,380) $ 7,022 $ - $ 1,125
------------- -------------- ------------ ----------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,418) (102) (380) - (2,900)
Earnouts paid (687) (41) (4,792) - (5,520)
Proceeds from sale of Jupitermedia Corporation
stock - 5,801 - - 5,801
------------- -------------- ------------- ------------ --------------
Net cash provided by (used for)
investing activities (3,105) 5,658 (5,172) - (2,619)
------------- -------------- ------------- ------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of mandatorily
redeemable convertible preferred stock 46,111 - - - 46,111
Proceeds from issuance of senior secured notes 79,926 76,791 - - 156,717
Repayment of senior subordinated notes (4,271) (4,104) - - (8,375)
Repayment of senior credit facility (180,587) - - - (180,587)
Payment of short term note payable - - (2,804) - (2,804)
Employee stock purchase plan (351) - (8) - (359)
Payment of financing costs (9,450) - - - (9,450)
Proceeds from repayment of
officers/directors loans 703 - - - 703
------------- -------------- ------------- ------------ --------------
Net cash provided by (used for)
financing activities (67,919) 72,687 (2,812) - 1,956
------------- -------------- ------------- ------------ --------------
Effect of exchange rate 21 - - - 21
------------- -------------- ------------- ------------ --------------
Net increase (decrease) in cash and
equivalents (69,520) 70,965 (962) - 483
Cash and equivalents at beginning of period 14,518 1,993 3,680 - 20,191
------------- -------------- ------------- ------------ --------------
Cash and equivalents at end of period $ (55,002) $ 72,958 $ 2,718 $ - $ 20,674
============= ============== ============= ============ ==============
26
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 13 - SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
The following transactions did not provide for or require the use of cash and
accordingly, are not reflected in the condensed consolidated statements of cash
flows.
For the nine months ended September 30, 2003, Penton issued 20,835 shares under
the Management Stock Purchase Plan, 372,916 deferred shares and 30,516
performance shares to several officers and other key employees. In addition, in
February 2003, 618,850 stock options, 99,876 RSUs and 391,360 deferred shares
were granted. Furthermore, for the nine months ended September 30, 2003, Penton
recorded amortization of deemed dividend and accretion on preferred stock of
$4.5 million.
For the nine months ended September 30, 2002, Penton issued 527,951 common
shares as contingent consideration, 17,472 shares under the Management Stock
Purchase Plan, 37,100 shares under the Deferred Shares Plan and 50,000 shares
under the Performance Share Plan to certain officers and other key employees. In
addition, three executives returned a total of 115,712 shares to the Company to
pay down a portion of the executive loan balance and to cover taxes for shares
issued under the Performance Share Plan. The returned shares were recorded as
treasury stock. Furthermore, for the nine months ended September 30, 2002,
Penton recorded amortization of deemed dividend and accretion on preferred stock
of $45.5 million.
NOTE 14 - INCOME TAXES
The Company assesses the recoverability of its deferred tax assets in accordance
with the provisions of SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109").
As of December 31, 2002 and September 30, 2003 the valuation allowance for its
net deferred tax assets and net operating loss carryforwards totaled $36.2
million and $49.7 million, respectively.
In January 2003, the Company received a tax refund of $52.7 million and in
February 2002, the Company received a tax refund of $12.2 million. These amounts
are included in net cash provided by operating activities in the condensed
consolidated statements of cash flows.
NOTE 15 - CONTINGENCIES
In connection with the acquisition of Mecklermedia Corporation on December 1,
1998, a lawsuit was brought against the Company by Ariff Alidina (the
"Plaintiff"), a former stockholder of Mecklermedia Corporation, in the United
States Federal District Court in the Southern District of New York for an
unspecified amount, as well as other relief. The Plaintiff has claimed that the
Company violated the federal securities laws by selling Mr. Meckler, a
beneficial owner of approximately 26% of the shares of Mecklermedia, an 80.1%
interest in Jupitermedia Corporation for what the Plaintiff alleges was a
below-market price, thereby giving to Mr. Meckler more consideration for his
common stock in Mecklermedia Corporation than was paid to other stockholders of
Mecklermedia Corporation. The Company intends to vigorously defend this suit.
In the normal course of business, Penton is subject to a number of lawsuits and
claims, both actual and potential in nature. While management believes that
resolution of existing claims and lawsuits will not have a material adverse
effect on Penton's financial statements, management is unable to estimate the
magnitude or financial impact of claims and lawsuits that may be filed in the
future.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and the notes thereto. Historical results and percentage
relationships set forth in the consolidated financial statements, including
trends that might appear, should not be taken as indicative of future results.
Penton considers portions of this information to be forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, both as amended, with respect to
expectations for future periods. Although Penton believes that the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, it can give no assurance that its expectations will be achieved.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates" and similar expressions are intended to identify forward-looking
statements. A number of important factors could cause Penton's results to differ
materially from those indicated by such forward-looking statements, including,
among other factors, fluctuations in advertising revenue with general economic
cycles; economic uncertainty exacerbated by potential terrorist attacks on the
United States or the impact of the war with Iraq, and related geopolitical
events; the performance of our natural products industry trade shows; the
seasonality of revenue from trade shows and conferences; our ability to launch
new products that fit strategically with and add value to our business; our
ability to penetrate new markets internationally; increases in paper and postage
costs; the effectiveness of our cost-saving efforts; the infringement or
invalidation of Penton's intellectual property rights; pending litigation;
government regulation; competition; technological change; and international
operations.
Except as expressly required by the federal securities laws, Penton does not
undertake any obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events, changed
circumstances, or any other reason.
OVERVIEW
We are a diversified business-to-business media company. We provide media
products that deliver proprietary business information to owners, operators,
managers and professionals in the industries we serve. Through these products,
we offer industry suppliers multiple ways to reach their customers and prospects
as part of their sales and marketing efforts. We publish specialized trade
magazines, produce trade shows and conferences, and maintain a variety of online
media products, including Web businesses and electronic newsletters. Our
products serve 12 industry sectors, which we group into four segments:
INDUSTRY MEDIA TECHNOLOGY MEDIA
-------------- ----------------
Manufacturing Internet Technologies
Design/Engineering Information Technology
Mechanical Systems/Construction Electronics
Supply Chain
Government/Compliance RETAIL MEDIA
Aviation ------------
Food/Retail
Leisure/Hospitality
LIFESTYLE MEDIA
---------------
Natural Products
We believe we have leading media products in most of the industry sectors we
serve. We are structured along segment and industry lines rather than by product
lines. This enables us to promote our related group of products, including
publications, trade shows and conferences, and online media products to our
customers.
RECENT DEVELOPMENTS
NEW CREDIT FACILITY
In August 2003, the Company replaced its senior secured credit facility with a
new four-year loan and security agreement. Pursuant to the terms of the
revolving loan and security agreement, the Company can borrow up to the lesser
of (i) $40.0 million; (ii) 2.5x the Company's last 12 months adjusted EBITDA
measured monthly during the first year, 2.25x during the second year and 2.0x
thereafter; (iii) 40% of the Company's last six months of revenues; or (iv) 25%
of the Company's enterprise value, as determined annually by a third party. The
revolving credit facility bears interest at LIBOR plus 5.0% subject to a LIBOR
minimum of 1.5%.
28
The Company must comply with a quarterly financial covenant limiting the ratio
of maximum bank debt to the last twelve months EBITDA to 2.5x through March 31,
2004, 2.25x from June 30, 2004 through March 31, 2005 and 2.0x thereafter. The
loan agreement permits the Company to sell assets of up to $12.0 million in the
aggregate during the term or $5.0 million in any single asset sale; and complete
acquisitions of up to $5.0 million per year. Included in the loan agreement is a
stand-by letter of credit of $0.1 million required by one of the Company's
facility leases. The amount of the letter of credit reduces the availability
under the credit facility. As of September 30, 2003, no amounts were drawn under
the stand-by letter of credit. Costs representing bank fees and other
professional fees of $1.8 million are being amortized over the life of the loan
agreement. As of September 30, 2003, $39.9 million was available under the loan
agreement. There were no amounts outstanding.
During the third quarter of 2003, approximately $1.0 million of unamortized
financing fees related to the previous credit facility were written off. This
charge has been classified as part of interest expense in the consolidated
statements of operations.
DELISTING
On June 11, 2003, the Company received notice from the New York Stock Exchange
("NYSE") that it would begin delisting procedures related to the Company's
common stock. The NYSE reached its decision because the Company was unable to
comply with the NYSE's continued listing criteria, which included minimal levels
for stock price, market capitalization, and stockholders' equity. On June 17,
2003, trading of the Company's common stock was transferred from the NYSE to the
Over-the-Counter Bulletin Board, and is currently traded under the symbol PTON.
DISPOSITIONS
In January 2003, we completed the sale of the assets of our Professional Trade
Show group ("PTS"), which was part of our Industry Media segment, to Cygnus
Expositions, a division of Cygnus Business Media, Inc., for total consideration
of approximately $3.8 million, including a potential earnout of $0.6 million
based on reaching certain performance objectives in 2003. The cash received from
the sale was used to pay down the amounts outstanding under the Company's credit
facility. The Company recognized a gain of approximately $1.2 million on the
sale, which is included as a component of discontinued operations in the
accompanying consolidated statements of operations.
AMENDED CREDIT FACILITY
In January 2003, the Company amended its senior secured credit facility, which
was replaced in August 2003, as discussed above. The amended agreement permitted
the Company to sell certain properties in excess of the $5.0 million aggregate
limit required by the original amended agreement. In return, the revolving
commitment was reduced from $40.0 million to $32.0 million. At the end of
January 2003, when the aggregate sum of Penton's cash and cash equivalents
exceeded $40.0 million, an additional one-time reduction of $10.0 million was
required under the amended credit facility. Furthermore, upon the sale of PTS,
as discussed above, the revolving commitment was further reduced by 50% of the
aggregate gross proceeds, as defined, from this sale, or approximately $1.9
million. The amended facility allowed for additional asset sales, transfers,
leases, and other dispositions and the issuance of equity interests by our
subsidiaries up to a maximum of approximately $3.6 million. The amended facility
also increased the maximum commitment fee from 0.50% to 0.75%. The commitment
under the credit facility was scheduled to decrease by 15% in 2003, 30% in 2004,
35% in 2005 and 20% in 2006.
The reduction of the revolver from $40.0 million to $20.1 million in January
2003 resulted in the write-off of unamortized financing fees of $0.9 million.
This charge has been classified as part of interest expense in the consolidated
statements of operations.
TAX REFUND
In January 2003, the Company received a tax refund of $52.7 million.
REVERSE STOCK SPLIT
In February 2003, Penton's Board of Directors approved a proposal to effect a
reverse stock split to be submitted for stockholder approval at the Company's
annual meeting on June 12, 2003. This corrective share action was part of a plan
submitted by Penton to the NYSE to meet the Exchange's $1.00 stock price listing
requirement. At its annual meeting, stockholders voted to approve the
29
reverse stock split, which gave the Company's Board of Directors the authority
to effect a reverse split at one of three ratios within one year. Due to the
Company's delisting, as noted above, the Board of Directors does not expect to
act on its authority to effect the reverse split in the near term.
PREFERRED STOCK LEVERAGE RATIO EVENT OF NON-COMPLIANCE
An event of non-compliance continues to exist under our Series B Convertible
Preferred Stock because the Company's leverage ratio (defined as debt less cash
balances in excess of $5.0 million plus the liquidation value of the preferred
stock and unpaid dividends divided by adjusted EBITDA) exceeds 7.5. When the
event of non-compliance initially occurred on April 1, 2003, the holders of a
majority of the preferred stock were able to nominate two additional members to
our Board of Directors. Since the event of non-compliance was not cured by June
30, 2003, the holders of a majority of the preferred stock then outstanding had
the right to elect one less than a minimum majority of our Board of Directors.
As the holders of the preferred stock already maintained one less than a minimum
majority of our board, no change was necessary. In addition, upon the occurrence
of this event of non-compliance, the 5% dividend rate on the preferred stock
increased by one percentage point as of April 1, July 1, and October 1, 2003 and
the rate may increase by one percentage point each subsequent quarter, up to a
maximum rate of 10%. The dividend rate is currently 8%. The conversion price on
the preferred stock decreased by $0.76 as of April 1, July 1, and October 1,
2003 and may decrease by $0.76 each subsequent quarter up to a maximum reduction
of $3.80. The conversion price is currently $5.33. The conversion price will
adjust to what it would have been absent such event (to the extent of any
preferred shares still outstanding) once the leverage ratio is less than 7.5.
Furthermore, the dividend rate will adjust back to 5% as of the date on which
the leverage ratio is less than 7.5. Under the preferred stock agreement, if the
leverage ratio exceeds 7.5 for four consecutive quarters, the preferred
stockholders will have the right to cause the Company to seek a buyer for all of
the assets or issued and outstanding capital stock of the Company. The Company
is not expected to be able to correct the event of non-compliance before the
maximum dividend rate and conversion price reductions are reached. The leverage
ratio event of non-compliance does not represent an event of default or
violation under any of the Company's outstanding notes or the loan agreement. As
such, there will not be an acceleration of any outstanding indebtedness as a
result of this event. In addition, this event of non-compliance and the
resulting consequences do not result in any cash outflow from the Company.
Under the conversion terms of the preferred stock, each holder has a right to
convert dividends into additional shares of common stock. At September 30, 2003,
no dividends have been declared. However, in light of each holder's conversion
right and considering the increase in the dividend rate and the concurrent
reduction of the conversion price as noted above, the Company has recognized a
deemed dividend for the beneficial conversion feature inherent in the
accumulated dividend based on the original commitment date(s). All such accruals
have been reported as an increase in the carrying value of the preferred stock
and a charge to additional paid in capital in light of the stockholder's
deficit.
REDEEMABLE COMMON STOCK
In March 2003, it was discovered that certain Company employees had purchased
approximately 1.1 million shares of common stock in the Company's 401(k) plan,
from May 2001 through March 2003, which were not registered under the federal
securities laws (the "unregistered purchases"). As a result, such purchasers of
our common stock during that period have the right to rescind their purchases
for an amount equal to the purchase price paid for the shares, plus interest
from the date of purchase, unless the employees have released the Company from
such obligations as noted below. Any rescissionary rights will lapse one year
from the date of any such purchase. The Company may also be subject to civil and
other penalties by regulatory authorities. The unregistered purchases did not
cause an event of default under the 10 3/8% Senior Subordinated Notes
("Subordinated Notes"), the 11 7/8% Senior Secured Notes ("Secured Notes") or
the senior secured credit facility. However, an event of default could occur as
an indirect result of the unregistered purchases, if for instance, such
unregistered purchases lead to restricted payments under the indentures and/or
our loan agreement. On March 31, 2003, the Company filed a Form S-8 registration
and registered 6.0 million additional shares to be offered under the 401(k)
plan.
In April 2003, the Company offered to reimburse employees who had purchased
Penton common stock through the Company's 401(k) plan between March 25, 2002 and
March 25, 2003. Employees who signed the release were reimbursed the amount by
which the price they paid for the common stock exceeded the closing price of the
stock on the date they executed the release, or if the stock had been sold, the
amount by which the price paid by the employee exceeded the sale price.
Employees who did not sign the release by May 22, 2003, retain any rights they
may have under the Federal securities laws. Over 80% of the employees who were
offered the reimbursement have accepted the terms of the release, representing a
liability of approximately $0.6 million, which was deposited into each
individual's 401(k) account in July 2003. This amount was included in
restructuring charges and other expenses in the consolidated statements of
operations in the second quarter of 2003.
30
At September 30, 2003, the Company classified 13,518 shares, related to the
potential rescissionary rights, outside of stockholders' deficit because the
redemption of the stock is not within the control of the Company.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THE
THREE MONTHS ENDED SEPTEMBER 30, 2002
CONSOLIDATED RESULTS
The following table summarizes our results of operations for the three months
ended September 30, 2003 and 2002 (in thousands, except per share data).
2003 2002 VARIANCE
---- ---- --------
Revenues $ 54,119 $ 47,194 $ 6,925
=========== =========== ===========
Operating expenses $ 96,508 $ 280,248 $ (183,740)
=========== =========== ===========
Loss from continuing operations $ (52,493) $ (242,462) $ 189,969
Discontinued operations, net of taxes 99 (702) 801
----------- ----------- -----------
Net loss $ (52,394) $ (243,164) $ 190,770
=========== =========== ===========
Net loss applicable to
common stockholders $ (54,374) $ (243,816) $ 189,442
=========== =========== ===========
Net loss per diluted share applicable
to common stockholders $ (1.63) $ (7.49) $ 5.86
=========== =========== ===========
REVENUES
Total revenues increased $6.9 million, or 14.7%, from $47.2 million for the
three months ended September 30, 2002, to $54.1 million for the same period in
2003. The increase was primarily due to an increase in trade show and conference
revenues of $11.3 million, from $2.4 million for the three months ended
September 30, 2002, to $13.7 million for the same period in 2003, and to an
increase in online media revenues of $0.2 million, or 6.5%, from $3.1 million
for the three months ended September 30, 2002, to $3.3 million for the same
period in 2003. The increase was partially offset by a decrease in publishing
revenues of $4.5 million, or 10.9%, from $41.7 million for the three months
ended September 30, 2002, to $37.2 million for the same period in 2003. Included
in total revenues for the three months ended September 30, 2002, were revenues
of $0.5 million associated with properties sold in December 2002, which were not
classified as discontinued operations.
The improvement in our trade show and conference revenues was due primarily to
an increase of $7.1 million in our Lifestyle Media segment due to the shift in
timing of our Natural Products Expo East show from the fourth quarter in 2002 to
the third quarter in 2003 and an increase of $3.1 million in our Retail Media
segment due to the shift in timing of our International Leisure Industry Week
trade show from the fourth quarter of 2002 to the third quarter of 2003. The
improvement was also due to an increase of approximately $0.8 million in
revenues from our Technology Media segment.
The decrease in publishing revenues was due primarily to a $1.9 million decrease
in our Industry Media segment and a $2.6 million decrease in our Technology
Media segment. Within these segments, our manufacturing, design/engineering,
Internet Technologies and information technology markets accounted for nearly
all of the decrease.
OPERATING EXPENSES
Operating expenses decreased $183.7 million, or 65.6%, from $280.2 million for
the three months ended September 30, 2002, to $96.5 million for the same period
in 2003. Included in operating expenses for the three months ended September 30,
2003, are
31
restructuring charges of $1.5 million, impairment of asset charges of
$45.8 million and depreciation and amortization charges of $3.3 million.
Included in operating expenses for the three months ended September 30, 2002,
are restructuring charges of $3.3 million, impairment of asset charges of $223.3
million, and depreciation and amortization charges of $5.2 million. The overall
decrease in operating expenses was due primarily to the impairment of asset
charges in the third quarter of 2003 of $45.8 million compared with the
impairment of asset charges in the same period last year of $223.3 million,
along with the effects of cost reduction initiatives and restructuring
activities throughout 2002 and 2003.
EDITORIAL, PRODUCTION AND CIRCULATION
Editorial, production and circulation expenses increased to $23.5 million for
the three months ended September 30, 2003, compared to $23.2 million for the
same period in 2002, representing an increase of $0.3 million, or 1.5%. The
slight increase in expenses was primarily due to additional costs of $2.3
million from the shift in timing of the two trade shows, as previously noted,
from the fourth quarter in 2002 to the third quarter in 2003. These costs were
partially offset by the elimination of editorial, production and circulation
costs from the properties sold in December 2002, which were not classified as
discontinued operations, and due to the cost reduction initiatives undertaken in
2002 and 2003.
Editorial, production and circulation expenses as a percentage of revenues
decreased from 49.1% for the three months ended September 30, 2002, to 43.4% for
the same period in 2003. The decrease was due to the increase in revenues for
the three months ended September 30, 2003, as compared to the same period in
2002, primarily due to the timing of the two trade shows noted above.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses declined $2.9 million, or 11.6%,
from $25.3 million for the three months ended September 30, 2002, to $22.4
million for the same period in 2003. These decreases were due primarily to cost
savings associated with office closings and staff reductions in 2002 and 2003,
and the elimination of approximately $1.0 million of such costs as a result of
the sale of four properties in December 2002, which were not classified as
discontinued operations. These decreases were partially offset by additional
costs of nearly $1.4 million from the two trade shows held this quarter instead
of the fourth quarter in 2002, as previously noted.
Selling, general and administrative expenses as a percentage of revenues
decreased from 53.6% for the three months ended September 30, 2002, to 41.3% for
the same period in 2003 due primarily to the items noted above, as well as the
increase in revenues in 2003 compared with the same 2002 period.
IMPAIRMENT OF ASSETS
The Company completed its annual goodwill impairment review in accordance with
Statement of Financial Accounting Standard ("SFAS") SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142") as of September 30, 2003, which resulted
in a non-cash charge of approximately $37.6 million and reduced the carrying
value of goodwill for two reporting units in the Technology Media segment and
one reporting unit in the Retail Media segment. As a result of the impairment of
goodwill for three of the seven reporting units, the Company also completed an
assessment at September 30, 2003, of its other intangibles in accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS 144"), and recorded a non-cash charge of $8.2 million.
As a result of certain triggering events (see Note 2 - Goodwill and Other
Intangibles) the Company completed an impairment review at September 30, 2002,
and recorded a non-cash charge of approximately $203.3 million to reduce the
carrying value of goodwill for two reporting units in our Technology Media
segment. The Company also completed an assessment at September 30, 2002, in
accordance with SFAS 144, and recorded a non-cash charge of $20.0 million.
RESTRUCTURING CHARGES AND OTHER EXPENSES
The Company recorded a restructuring charge of $1.5 million, net of adjustments
of $0.8 million, in the third quarter 2003. The cost reduction initiatives
include workforce reductions and the partial closure of one location. The charge
includes $1.0 million of employee severance and termination benefits and $1.3
million, net of estimated sublease rentals, related to non-cancelable
obligations under a continuing lease contract. See Note 10 - Restructuring
Charges, for additional information. The following sets forth additional detail
concerning the principal components of the charge:
32
- - Personnel costs of $1.0 million are associated with the elimination of 19
positions, all of which were in the United States. Payments for severance
and benefits related to these positions are expected to be significantly
completed by the end of the first quarter of 2005.
- - The Company recorded facility closing costs of $1.3 million, net of
estimated sublease rentals, related to the partial closure of office space
at one location under a long term lease expiring in 2010. The related
operations were relocated to a different floor at the same location where
the Company leases only part of the floor. This partial floor had been
previously vacated by the Company as part of its second quarter 2002
restructuring efforts. As a result, the restructuring accrual, net of
estimated sub-lease rentals, related to the partial floor that was
re-occupied was reversed in the amount of approximately $0.8 million. For
properties that the Company no longer occupies, management makes
assumptions, including the number of years a property will be subleased,
square footage, market trends, the price per square foot, and considers
where the property is located, to estimate sublease income. These
assumptions involve significant judgments and estimations. Where possible,
management bases its assumptions on discussions with real estate brokers
and/or parties that have shown interest in the space. Actual and estimated
future lease and sublease payments are recorded on a discounted basis.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization declined $1.9 million, or 35.6%, from $5.2 million
for the three months ended September 30, 2002, to $3.3 million for the same
period in 2003, due to lower amortization expense related to intangible assets
of properties sold in December 2002, and in January 2003, as well as the
write-off of approximately $20.0 million of intangibles in the third quarter of
2002, as previously noted.
OTHER INCOME (EXPENSE)
Interest expense increased $1.0 million from $9.5 million for the three months
ended September 30, 2002, to $10.5 million for the same period in 2003. Included
in interest expense in 2003 is approximately $1.0 million related to the
write-off of unamortized financing fees associated with the replacement of our
senior secured credit facility in August 2003 with a new four-year loan
agreement (see Recent Developments and Note 4 - Debt).
EFFECTIVE TAX RATES
The effective tax rates were zero for the three months ended September 30, 2003
and 2002, respectively, due to the net operating loss available for carryforward
being offset by a valuation allowance for the Company's net deferred tax assets
and net operating loss carryforwards not expected to be utilized. The tax
benefit (provision) for the three months ended September 30, 2003 and 2002,
classified on the consolidated statements of operations, relates to state and
foreign taxes.
DISCONTINUED OPERATIONS
Discontinued operations for all periods presented include the results of Penton
Media Australia ("PM Australia"), which was sold in December 2002, and the
results of PTS, which was sold in January 2003. PM Australia was part of our
Technology Media segment and PTS was part of our Industry Media segment. Income
for the three months ended September 30, 2003, primarily includes the reversal
of specific estimated accruals that are not expected to be needed in the future.
Revenues for these properties were approximately $1.4 million for the three
months ended September 30, 2002.
NET LOSS
Due to the factors noted above, the Company reported a net loss for the three
months ended September 30, 2003, of $52.4 million compared to a net loss of
$243.2 million for the same period in 2002.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
The net loss applicable to common stockholders of $54.4 million, or $1.63 per
diluted share, for the three months ended September 30, 2003, includes $2.0
million of amortization of deemed dividends and accretion of preferred stock.
For the three months ended September 30, 2002, the net loss applicable to common
stockholders of $243.8 million, or $7.49 per diluted share, includes $0.7
million of amortization of deemed dividends and accretion of preferred stock.
33
SEGMENTS
We manage our business based on four operating segments: Industry Media,
Technology Media, Lifestyle Media and Retail Media. All four segments derive
their revenues from publications, trade shows and conferences, and online media
products. See Note 11 - Segment Information, for the definition of adjusted
segment EBITDA and a reconciliation of total adjusted segment EBITDA to loss
from continuing operations before income taxes and cumulative effect of
accounting change.
Financial information by segment for the three months ended September 30, 2003
and 2002, is summarized in the following table (in thousands):
ADJUSTED
REVENUES SEGMENT EBITDA
2003 2002 2003 2002
---- ---- ---- ----
Industry Media $ 20,634 $ 22,584 $ 4,249 $ 4,295
Technology Media 14,256 15,794 811 (3,014)
Lifestyle Media 10,340 3,256 4,800 (82)
Retail Media 8,889 5,560 2,917 1,361
----------- ---------- ---------- -----------
Total $ 54,119 $ 47,194 $ 12,777 $ 2,560
=========== ========== ========== ===========
INDUSTRY MEDIA
Our Industry Media segment, which represented 38.1% of total Company revenues
for the three months ended September 30, 2003, serves customers in the
manufacturing, design/engineering, mechanical systems/construction,
government/compliance, supply chain and aviation industries. Revenues for this
segment decreased $2.0 million, or 8.6%, from $22.6 million in the third quarter
of 2002, to $20.6 million for the same period in 2003. The decrease was due
primarily to lower revenues from publications, which accounted for $1.9 million
of the decrease. Trade show and conference revenues and online media revenues
for this segment were flat when compared to three months ended September 30,
2002.
The decrease in publication revenues was due primarily to year-on-year
advertising declines in products serving the design/engineering and
manufacturing sectors, which accounted for approximately $1.5 million of the
segment's publishing decrease. These two sectors continue to be impacted by the
downturn in the U.S. economy.
Adjusted segment EBITDA for the Industry Media segment was flat for the three
months ended September 30, 2003, when compared to the same period in 2002, due
primarily to the impact of cost reduction measures implemented in 2002 and 2003.
TECHNOLOGY MEDIA
Our Technology Media segment, which represented 26.3% of total Company revenues
for the third quarter of 2003, serves customers in the electronics, enterprise
information technology and business technology markets. Revenues for this
segment decreased $1.5 million, or 9.7%, from $15.8 million for the three months
ended September 30, 2002, to $14.3 million for the same period in 2003. The
decrease was due primarily to lower revenues from publications of $2.5 million,
which were partially offset by an increase in trade show and conference revenues
of $0.8 million and an increase in online revenues of $0.2 million.
The publishing decrease was mainly due to advertising weakness in our
information technology and Internet technologies sectors, which accounted for
$1.7 million of the decrease when comparing third quarter 2003 to the same 2002
period. The elimination of revenues from properties sold in December 2002
accounted for an additional $0.5 million of the decrease. The trade show and
conference revenue increase was due primarily to our information technology
sector.
Adjusted segment EBITDA for the Technology Media segment increased $3.8 million
from a loss of $3.0 million for the three months ended September 30, 2002, to
income of $0.8 million for the same period in 2003. The increase was due
primarily to an increase in trade shows and conferences of approximately $3.8
million and an improvement of $0.6 million in the segment's general and
administrative costs due to the impact of cost reduction measures implemented in
2002 and 2003. These improvements were partially offset by adjusted EBITDA
declines in publications and online media of approximately $0.6 million.
34
The trade show and conference adjusted EBITDA increase was primarily due to the
sale of unprofitable technology properties in December 2002, the elimination of
trade shows that were held in 2002 but not held in 2003 due to market
conditions, aggressive cost reductions efforts, and portfolio management
initiatives.
LIFESTYLE MEDIA
Our Lifestyle Media segment, which represented 19.1% of total Company revenues
for the third quarter of 2003, serves customers in the natural products industry
sector. Revenues for this segment increased $7.0 million, from $3.3 million for
the three months ended September 30, 2002, to $10.3 million for the same period
in 2003. The increase was due primarily to revenues from trade shows and
conferences caused by the shift in timing of our Natural Products Expo East show
from the fourth quarter in 2002 to the third quarter in 2003.
Adjusted segment EBITDA for the Lifestyle Media segment increased $4.9 million,
from a loss of $0.1 million for the three months ended September 30, 2002, to
income of $4.8 million for the same period in 2003. The increase was due
primarily to the change in timing of the Natural Products Expo East show, as
noted previously.
RETAIL MEDIA
Our Retail Media segment, which represented 16.4% of total Company revenues for
the third quarter of 2003, serves customers in the food/retail and
leisure/hospitality sectors. Revenues for this segment increased $3.3 million,
or 59.9%, from $5.6 million for the three months ended September 30, 2002, to
$8.9 million for the same period in 2003. This increase was primarily due to an
increase in trade show and conference revenues due to the change in timing of
the International Leisure Industry Week trade show from the fourth quarter of
2002 to the third quarter of 2003, which accounted for $3.0 million of the
increase.
Adjusted segment EBITDA for the Retail Media segment increased $1.6 million, or
114.3%, from $1.4 million for the three months ended September 30, 2002, to $2.9
million for the same period in 2003. The increase was due primarily to the
change in timing of the trade show previously noted and to cost reduction
efforts undertaken in 2002 and 2003.
PRODUCTS
We publish specialized trade magazines, produce trade shows and conferences, and
maintain a variety of online media products, including Web businesses and
electronic newsletters. Revenues by product line for the three months ended
September 30, 2003 and 2002 were as follows (in thousands):
THREE MONTHS ENDED
SEPTEMBER 30,
2003 2002
---- ---- -
Publishing $ 37,187 $ 41,723
Trade shows and conferences 13,680 2,417
Online media 3,252 3,054
--------- ----------
Total revenues $ 54,119 $ 47,194
========= ==========
Publishing revenues decreased by $4.5 million, or 10.9%, from $41.7 million for
the three months ended September 30, 2002, to $37.2 million for the same period
in 2003. The decrease in publishing revenues was due primarily to year-over-year
advertising declines in products serving the design/engineering and
manufacturing sectors, which accounted for $1.5 million of the decrease. These
two markets continue to be impacted by the downturn in the U.S. economy.
Advertising weakness in our information technology and Internet technologies
sectors accounted for another $1.7 million of the decrease.
Trade show and conference revenues increased by $11.3 million from $2.4 million
for the three months ended September 30, 2002, to $13.7 million for the same
period in 2003. The increase in trade show and conference revenues was due
primarily to the change in timing for our International Leisure Industry Week
trade show and our Natural Products Expo East trade show from the fourth quarter
of 2002 to the third quarter of 2003, which accounted for $10.0 million of the
increase.
Online media revenues increased $0.2 million, or 6.5%, from $3.1 million for the
three months ended September 30, 2002, to $3.3 million for the same period in
2003. The increase was due to the success of online products across several of
our markets.
35
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH
THE NINE MONTHS ENDED SEPTEMBER 30, 2002
CONSOLIDATED RESULTS
The following table summarizes our results of operations for the nine months
ended September 30, 2003 and 2002 (in thousands, except per share data):
2003 2002 VARIANCE
---- ---- --------
Revenues $ 158,977 $ 171,269 $ (12,292)
=========== =========== ===========
Operating expenses $ 205,481 $ 412,850 $ (207,369)
=========== =========== ===========
Loss from continuing operations before
cumulative effect of accounting
change $ (76,620) $ (258,125) $ 181,505
Discontinued operations, net of taxes 777 (1,330) 2,107
Cumulative effect of accounting
change, net of taxes - (39,700) 39,700
----------- ----------- -----------
Net loss $ (75,843) $ (299,155) $ 223,312
=========== =========== ===========
Net loss applicable to
common stockholders $ (80,338) $ (344,668) $ 264,330
=========== =========== ===========
Net loss per diluted share applicable
to common stockholders $ (2.42) $ (10.71) $ 8.29
=========== =========== ===========
REVENUES
Total revenues decreased $12.3 million, or 7.2%, from $171.3 million for the
nine months ended September 30, 2002, to $159.0 million for the same period in
2003. The decrease was due primarily to a decrease in publishing revenues of
$12.3 million, or 9.8%, from $125.7 million for the nine months ended September
30, 2002, to $113.4 million for the same period in 2003, and a decrease in trade
show and conference revenues of $1.0 million, or 2.6%, from $36.3 million for
the nine months ended September 30, 2002, to $35.3 million for the same period
in 2003. These decreases were partially offset by online media revenues, which
increased $1.0 million, or 10.8%, from $9.2 million for the nine months ended
September 30, 2002, to $10.2 million for the same period in 2003. Included in
total revenues for the nine months ended September 30, 2002 were revenues of
$5.8 million associated with properties sold in December 2002, which were not
classified as discontinued operations.
The decrease in publishing revenues was due primarily to the decrease in our
Industry Media and Technology Media segments. Our manufacturing,
design/engineering, Internet technologies and information technology sectors
accounted for $10.8 million of the decrease.
The decrease in our trade show and conference revenues was due primarily to a
decrease of $10.4 million in our Technology Media segment, and a decrease of
$1.2 million in our Industry Media segment. These declines were partially offset
by revenue improvements in our Lifestyle Media segment of $6.5 million and an
increase in our Retail Media segment of $4.1 million.
The increase in online media revenues was primarily due to an increase in our
Technology Media segment of $0.7 million.
OPERATING EXPENSES
Operating expenses decreased $207.4 million, or 50.2%, from $412.9 million for
the nine months ended September 30, 2002, to $205.5 million for the same period
in 2003. Included in operating expenses for the nine months ended September 30,
2003, are
36
restructuring charges and other expenses of $3.3 million, impairment
of asset charges of $45.8 million, depreciation and amortization of $10.8
million, and a provision for loan impairment of $7.6 million. Included in
operating expenses for the nine months ended September 30, 2002 are
restructuring charges of $10.8 million, impairment of asset charges of $223.4
million, and depreciation and amortization of $14.8 million. The overall
decrease in operating expenses was due primarily to the $177.6 million decrease
in the impairment of asset charge between 2002 and 2003, the effects of cost
reduction initiatives and impact of restructuring activities throughout 2002 and
2003 and the effect of properties sold in December 2002 and in January 2003.
EDITORIAL, PRODUCTION AND CIRCULATION
Editorial, production and circulation expenses decreased $6.4 million, or 8.4%,
from $75.7 million for the nine months ended September 30, 2002, to $69.3
million for the same period in 2003. The decrease was due to the effects of our
expense reduction initiatives, including the sale of properties sold in December
2002, which were not classified as discontinued operations, which accounted for
$2.5 million of the decrease; the elimination of unprofitable properties;
reduction of production costs through process improvements and selective
reduction in frequency and circulation levels; outsourcing of various functions
in the organization; and staff reductions made in 2002 and 2003. These
reductions were partially offset by increased expenses of $2.3 million due to
the previously noted shift in timing of the two trade shows.
Editorial, production and circulation expenses as a percentage of revenues
decreased from 44.2% for the nine months ended September 30, 2002, to 43.6% for
the same period in 2003. The slight decrease was due to the effects of our
expense reduction initiatives and the trade show timing shifts previously noted,
as well as due to the increase in revenues.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses decreased $19.5 million, or 22.1%,
from $88.1 million for the nine months ended September 30, 2002, to $68.6
million in the same period in 2003. The decrease was due primarily to cost
savings associated with office closings and staff reductions in 2002 and 2003
and the sale of properties in December 2002, which were not classified as
discontinued operations, which accounted for $3.9 million of the decrease. These
decreases were partially offset by additional costs of nearly $1.4 million
associated with the shift in timing of the two trade shows, as previously noted.
Selling, general and administrative expenses as a percentage of revenues
decreased from 51.4% for the nine months ended September 30, 2002, to 43.2% for
the same period in 2003 due primarily to the items noted above, as well as the
increase in revenues in 2003 compared with the same 2002 period.
IMPAIRMENT OF ASSETS
The Company completed its annual goodwill impairment review in accordance with
SFAS 142, at September 30, 2003, which resulted in a non-cash charge of
approximately $37.6 million and reduced the carrying value of goodwill for two
reporting units in our Technology Media segment and one reporting unit in our
Retail Media segment. The Company also completed an assessment at September 30,
2003, of other intangibles in accordance with SFAS 144 and recorded a non-cash
charge of $8.2 million.
As a result of certain triggering events (see Note 2 - Goodwill and Other
Intangibles) the Company completed an impairment review at September 30, 2002
and recorded a non-cash charge of approximately $203.3 million to reduce the
carrying value of goodwill for two reporting units in our Technology Media
segment. The Company also completed an assessment at September 30, 2002 in
accordance with SFAS 144, and recorded a non-cash charge of $20.0 million.
PROVISION FOR LOAN IMPAIRMENT
At September 30, 2003, the outstanding balance under the executive loan program
was approximately $9.5 million (including $1.1 million of accrued interest). For
the nine months ended September 30, 2003 and 2002, executive loans of $0.3
million and $1.1 million, respectively, were repaid. The loan balance is
classified in the stockholders' deficit section of the consolidated balance
sheets as notes receivable officers.
The Company's ability to collect amounts due from each executive is largely
dependent on the fair market value of assets held by each executive, including
Company stock. Factors such as the length of time before the loans are due; the
value of the executives'
37
assets, including Company stock; the continued employment by the executives
with the Company, and other relevant factors, are considered in assessing the
collectibility of these loans.
During the second quarter of 2003, the Company determined that the executives
would probably be unable to repay a significant portion of the outstanding
balance due under their loans without a significant recovery in the Company's
stock price. Consequently, the Company recorded a provision for loan impairment
in the amount of $7.6 million during the second quarter of 2003, reflecting the
amount by which the carrying value of each individual's loan exceeded the
underlying estimated fair value of the assets available to repay the loan. The
Company will recognize any recoveries of amounts reserved only upon payment of
the loans. The notes are full recourse loans and the Company intends to pursue
collection of all amounts when due. In addition to the factors noted above,
additional considerations in determining whether a reserve was necessary
included the continued low price of the Company's stock, the delisting of the
Company's stock from the NYSE in the second quarter, and the continued
uncertainty of an economic recovery in the markets served by the Company. The
Company continues to monitor the collectibility of the notes to determine if
additional reserves are required.
RESTRUCTURING CHARGES AND OTHER EXPENSES
The Company has implemented several additional expense reduction and
restructuring initiatives to align its cost structure with the prevailing
business environment. In the first nine months of 2003, the Company recorded
restructuring charges of $2.7 million, net of adjustments of $0.4 million, and
other expenses of $0.6 million as discussed below. The cost reduction
initiatives include workforce reductions, the partial shutdown of two facilities
and the cancellation of certain contractual obligations. The charge includes
$1.4 million of employee severance and termination benefits, $1.6 million
related to non-cancelable obligations under continuing lease contracts, net of
estimated sublease income, and $0.1 million related to other contractual
obligations. The following sets forth additional detail concerning the principal
components of the charge:
- - Personnel costs of $1.4 million are associated with the elimination of 45
positions, of which approximately 87% were in the United States and the
remaining positions in the United Kingdom and Germany. Payments for
severance and benefits related to these positions are expected to be
significantly completed by the end of the first quarter 2005.
- - Office closure costs of $1.6 million, net of estimated sublease income of
$2.2 million, relate to the partial closure in 2003 of two offices in the
United States and include costs associated with existing office space under
lease. For properties that the Company no longer occupies, management makes
assumptions including the number of years a property will be subleased,
square footage, market trends, the price per square foot and considers
where the property is located, to estimate sublease income. These
assumptions involve significant judgments and estimations. Where possible,
management bases its assumptions on discussions with real estate brokers
and/or parties that have shown interest in the space. Actual and estimated
future lease and sublease payments are recorded on a discounted basis.
- - Other exit costs of $0.1 million include costs associated with the
cancellation of certain contractual obligations.
In addition, during the first nine months of 2003, the Company made net credit
adjustments to the restructuring charge of $0.4 million. Of this amount $0.8
million is the reversal of a charge recorded in the second quarter of 2002. When
we partially closed one office in the third quarter of 2003, the related
operations were relocated to a different floor that had been previously vacated
by the Company as part of its second quarter 2002 restructuring efforts. As a
result, the remaining restructuring accrual related to the floor that was
re-occupied of $0.8 million, net of estimated sublease income, was reversed. In
addition, $0.5 million relates to an office lease originally recorded in the
second quarter 2002 resulting from the bankruptcy filing by the sublessee of the
property. Other adjustments include updated calculations related to estimated
sublease rentals and an amendment to a sublease for one location in the United
States.
Also included in expense for the nine months ended September 30, 2003 is
approximately $0.6 million relating to the settlement with employees with
rescissionary rights under the Company's 401(k) plan. See Redeemable Common
Stock in the Recent Development section of Management's Discussion and Analysis
of Financial Condition and Results of Operations for additional details.
38
DEPRECIATION AND AMORTIZATION
Depreciation and amortization declined $4.0 million, or 27.1%, from $14.8
million for the nine months ended September 30, 2002, to $10.8 million for the
same period in 2003 due to lower amortization expense related to intangible
assets of properties sold in December 2002 and January 2003, as well as the
write-off of approximately $20.0 million of intangibles in the third quarter of
2002.
OTHER INCOME (EXPENSE)
Interest expense increased $1.7 million from $28.5 million for the nine months
ended September 30, 2002, to $30.2 million for the same period in 2003. Included
in interest expense in 2003 is approximately $0.9 million related to the
write-off of unamortized financing fees associated with the commitment reduction
of our credit facility revolver in January 2003 from $40.0 million to $20.1
million. Also included in interest expense in 2003 is approximately $1.0 million
related to the write-off of unamortized financing fees associated with the
replacement of our senior secured credit facility in August 2003 with a new
four-year loan agreement (see Recent Developments and Note 4 - Debt). Included
in interest expense in 2002 is approximately $0.7 million related to the
write-off of unamortized finance fees associated with the commitment reduction
of our credit facility revolver from $185.0 million to $40.0 million in March
2002 and approximately $1.4 million related to hedging activities. The increase
in interest expense also reflects the higher weighted-average interest rate in
the first nine months of 2003 compared with the same period in 2002.
In 2002, the gain on extinguishment of debt of $0.3 million was classified as an
extraordinary item. In 2003, in accordance with the provisions of SFAS No. 145,
"Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS 13, and Technical
Corrections as of April 2002" ("SFAS 145"), this gain was reclassified to gain
on extinguishment of debt on the consolidated statements of operations. In March
2002, we purchased $10.0 million face value of our Subordinated Notes at
prevailing market prices, resulting in a gain of $1.4 million. This gain was
offset by the write-off of unamortized deferred financing costs of approximately
$1.1 million associated with the payoff of our term loan A and term loan B
facilities, which also occurred in March 2002.
In January 2002, Penton sold its remaining 11.8% ownership interest in
Jupitermedia Corporation for $5.8 million and recognized a $1.5 million gain
from its sale.
EFFECTIVE TAX RATES
The effective tax rates for the nine months ended September 30, 2003 and 2002
were zero and a benefit of 3.7%, respectively. The effective tax rate for the
nine months ended September 30, 2003, is due to the net operating loss available
for carryforward being offset by a valuation allowance for the Company's net
deferred tax assets and net operating loss carryforwards not expected to be
utilized. The difference in the effective tax rate between the periods is due to
the establishment of the valuation allowance in the third-quarter of 2002. The
tax benefit for the nine months ended September 30, 2003 and 2002, classified on
the consolidated statements of operations, relates to state and foreign taxes.
DISCONTINUED OPERATIONS
Discontinued operations for all periods presented include the results of PM
Australia, which was sold in December 2002, and the results of PTS, which was
sold in January 2003. PM Australia was part of our Technology Media segment and
PTS was part of our Industry Media segment. The $0.8 million of income
recognized for the nine months ended September 30, 2003, was primarily due to a
gain of approximately $1.2 million associated with the sale of PTS, offset by
one month of operations for PTS, and settlement costs for certain pending
lawsuits related to PM Australia. Revenues for these properties were
approximately $6.5 million for the nine months ended September 30, 2002.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
During the third quarter of 2002, Penton completed its transitional goodwill
impairment test for January 1, 2002, under the provisions of SFAS 142 and
recorded a non-cash charge of $39.7 million to reduce the carrying value of
goodwill for two of our seven identified reporting units in our Technology Media
segment. The charge is reflected as a cumulative effect of accounting change in
the accompanying consolidated statements of operations.
39
NET LOSS
Due to the factors noted above, the Company reported a net loss for the nine
months ended September 30, 2003, of $75.8 million compared to a net loss of
$299.2 million for the same period in 2002.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
The net loss applicable to common stockholders of $80.3 million, or $2.42 per
diluted share, for the nine months ended September 30, 2003, includes $4.5
million of amortization of deemed dividends and accretion of preferred stock.
For the nine months ended September 30, 2002, the net loss applicable to common
stockholders of $344.7 million, or $10.71 per diluted share, includes a $42.1
million non-cash charge related to the immediate recognition in retained
earnings of the unamortized beneficial conversion feature resulting from the
stockholders' approval to remove Penton's preferred stock mandatory redemption
date and $3.4 million of amortization of deemed dividend and accretion of
preferred stock.
SEGMENTS
We manage our business based on four operating segments: Industry Media,
Technology Media, Lifestyle Media and Retail Media. All four segments derive
their revenues from publications, trade shows and conferences, and online media
products. See Note 11 - Segment Information, for the definition of adjusted
segment EBITDA and a reconciliation of total adjusted segment EBITDA to loss
from continuing operations before income taxes and cumulative effect of
accounting change.
Financial information by segment for the nine months ended September 30, 2003
and 2002, adjusted for discontinued operations, is summarized in the following
table (in thousands):
ADJUSTED
REVENUES SEGMENT EBITDA
2003 2002 2003 2002
---- ---- ---- ----
Industry Media $ 60,994 $ 67,746 $ 12,313 $ 11,895
Technology Media 49,532 67,007 4,876 754
Lifestyle Media 28,751 22,010 13,435 8,452
Retail Media 19,700 14,506 5,099 2,585
----------- ---------- ---------- -----------
Total $ 158,977 $ 171,269 $ 35,723 $ 23,686
=========== ========== ========== ===========
INDUSTRY MEDIA
Our Industry Media segment, which represented 38.4% of total Company revenues
for the nine months ended September 30, 2003, serves customers in the
manufacturing, design/engineering, mechanical systems/construction,
government/compliance, supply chain and aviation industries. Revenues for this
segment decreased $6.7 million, or 10.0%, from $67.7 million for the nine months
ended September 30, 2002, to $61.0 million for the same period in 2003. The
decrease was due primarily to lower revenues from publications of $5.8 million
and lower revenues from trade shows and conferences of $1.2 million. These
decreases were partially offset by the increases in revenues of approximately
$0.3 million from online media products.
The decrease in publication revenues was due primarily to year-on-year
advertising declines in products serving the design/engineering and
manufacturing sectors, which accounted for approximately $4.0 million of the
segment's publishing decrease. These two sectors continue to be impacted by the
downturn in the U.S. economy. The decrease in trade show and conference revenues
was due primarily to the absence the A/E/C Spring show, which was held in the
second quarter of 2002 but was sold in December 2002.
Adjusted segment EBITDA for Industry Media increased $0.4 million, or 3.5%, from
$11.9 million for the nine months ended September 30, 2002, to $12.3 million for
the same period in 2003. Performance of online media products and trade shows
and conferences accounted for $0.5 million of the increase, while lower general
and administrative costs accounted for an additional $0.9 million of the
increase. These increases were partially offset by a decrease in adjusted
segment EBITDA of $1.0 million from publications.
40
The decrease in the segment's general and administrative costs of $0.9 million
was due primarily to the effects of our 2002 and 2003 expense reduction
initiatives, including the elimination of unprofitable properties and staff
reductions. The decrease in the segment's publishing adjusted EBITDA was due
primarily to the continued year-on-year advertising declines in products serving
the design/engineering and manufacturing sectors.
TECHNOLOGY MEDIA
Our Technology Media segment, which represented 31.2% of total Company revenues
for the nine months ended September 30, 2003, serves customers in the
electronics, information technology and Internet technologies markets. Revenues
for this segment decreased $17.5 million, or 26.1%, from $67.0 million for the
nine months ended September 30, 2002, to $49.5 million for the same period in
2003. The decrease was due primarily to lower revenues from publications of $7.7
million and lower revenues from trade shows and conferences of $10.5 million.
These decreases were partially offset by an online revenue increase of $0.7
million in the first nine months of 2003 compared with the same 2002 period.
Advertising decreases of $5.5 million and the elimination of revenues from
properties sold in December 2002 of approximately $1.1 million accounted for the
majority of the publishing decrease. Lower trade show and conference revenues
were due primarily to the absence of revenues from trade shows that were held in
the first nine months of 2002 but were sold in December 2002, which accounted
for $3.0 million of the decrease; the change in timing of the Internet World
Berlin trade show from the second quarter of 2002 to the fourth quarter of 2003,
which accounted for $2.2 million of the decrease; lower revenues year-over-year
from the Internet World Spring show, and the elimination of revenues from
technology events that were held in the first nine months of 2002 but not
repeated in the first nine months of 2003 due to unfavorable market conditions.
Adjusted segment EBITDA for Technology Media increased $4.1 million from $0.8
million for the nine months ended September 30, 2002, to $4.9 million for the
same period in 2003. The increase was due primarily to trade shows and
conferences which increased $2.6 million, publishing and online media products
which increased by approximately $0.1 million and lower general and
administrative costs of $1.4 million.
The trade show and conference adjusted segment EBITDA increase was due primarily
to the sale of unprofitable technology properties in December 2002, shows that
were held in 2002 but not held in 2003 due to market conditions, aggressive cost
reduction efforts, and portfolio management initiatives. These improvements were
partially offset by approximately $1.0 million from the change in timing of the
event previously noted from the second quarter of 2002 to the fourth quarter of
2003.
The lower segment general and administrative costs of $1.4 million was due
primarily to the impact of cost reduction measures implemented in 2002 and 2003.
LIFESTYLE MEDIA
Our Lifestyle Media segment, which represented 18.1% of total Company revenues
for the nine months ended September 30, 2003, serves customers in the natural
products industry sector. Revenues for this segment increased $6.7 million, or
30.6%, from $22.0 million for the nine months ended September 30, 2002, to $28.8
million for the same period in 2003. The increase was due primarily to higher
revenues from trade shows and conferences caused by the change in timing of the
Natural Products Expo East show from the fourth quarter of 2002 to the third
quarter of 2003, which accounted for $6.2 million of the increase.
Adjusted segment EBITDA for the Lifestyle Media segment increased $5.0 million,
or 59.0%, from $8.5 million for the nine months ended September 30, 2002, to
$13.4 million for the same period in 2003. The increase was primarily due to the
trade show timing shift noted above.
RETAIL MEDIA
Our Retail Media segment, which represented 12.4% of total Company revenues for
the nine months ended September 30, 2003, serves customers in the food/retail
and leisure/hospitality sectors. Revenues for this segment increased $5.2
million, or 35.8%, from $14.5 million for the nine months ended September 30,
2002, to $19.7 million for the same period in 2003. The increase was due
primarily to an increase in trade show and conference revenues due to the change
in timing of our International Leisure Industry Week trade show from the fourth
quarter in 2002 to the third quarter in 2003, which accounted for $3.0 million
of the increase.
41
Adjusted segment EBITDA for the Retail Media segment increased $2.5 million, or
97.3%, from $2.6 million for the nine months ended September 30, 2002, to $5.1
million for the same period in 2003. The increase was due primarily to the trade
show timing shift noted above and cost reduction efforts undertaken in 2002 and
2003.
PRODUCTS
We publish specialized trade magazines, produce trade shows and conferences, and
maintain a variety of online media products, including Web businesses and
electronic newsletters. Revenues by product line for the nine months ended
September 30, 2003 and 2002 were as follows (in thousands):
NINE MONTHS ENDED
SEPTEMBER 30,
2003 2002
---- ----
Publishing $ 113,389 $ 125,737
Trade shows and conferences 35,348 36,286
Online media 10,240 9,246
--------- ----------
Total revenues $ 158,977 $ 171,269
========= ==========
Publishing revenues decreased $12.3 million from $125.7 million for the nine
months ended September 30, 2002, to $113.4 million for the same period in 2003.
This decrease in publishing revenues was due primarily to a year-on-year
advertising decline of $5.2 million in products serving the design/engineering,
manufacturing, and supply chain sectors, which continue to be impacted by the
downturn in the U.S. economy; advertising weakness in our information
technology, Internet technologies, and electronics sectors, which accounted for
$5.5 million of the decrease; the elimination of revenues from technology events
that were held in the first nine months of 2002 but not repeated in the first
nine months of 2003 due to unfavorable market conditions; and the elimination of
revenues from properties sold in December 2002, which accounted for $1.1 million
of the decrease.
Trade show and conference revenues decreased by $0.9 million, or 2.6%, from
$36.3 million for the nine months ended September 30, 2002, to $35.3 million for
the same period in 2003. The decrease in trade show and conference revenues was
due primarily to a year-over-year decline of an event in the electronics market
and an event in the Internet information market; the elimination of revenues
from properties sold in December 2002, which accounted for $4.3 million of the
decrease; and the elimination of technology events that were held in the first
nine months of 2002 but not repeated in the first nine months of 2003 due to
unfavorable market conditions. These decreases were partially offset by the
shift in timing of the two trade shows discussed previously.
Online media revenues increased $1.0 million, or 10.8%, from $9.2 million for
the nine months ended September 30, 2002, to $10.2 million for the same period
in 2003. The increase was due to the success of online products across several
of our markets.
LIQUIDITY AND CAPITAL RESOURCES
ANALYSIS OF CASH FLOWS
Penton's total cash and cash equivalents was $42.0 million at September 30,
2003, compared with $6.8 million at December 31, 2002. Cash provided by
operating activities was $39.3 million for the nine months ended September 30,
2003, compared with $1.1 million for the same period in 2002. Operating cash
flows for the nine months ended September 30, 2003, reflected a net loss of
$75.8 million, offset by a net increase in working capital items (primarily due
to a tax refund of $52.7 million) of approximately $43.4 million and non-cash
charges (primarily impairment of asset charges, depreciation and amortization
and provision for loan impairment) of approximately $71.8 million. Operating
cash flows for the nine months ended September 30, 2002, reflected a net loss of
$299.2 million, which was offset by a net working capital increase of
approximately $12.7 million and non-cash charges (primarily impairment of asset
charges, cumulative effect of accounting change and depreciation and
amortization) of approximately $287.5 million.
The increase in operating cash flows for the nine months ended September 30,
2003, compared with the same 2002 period was due primarily to the tax refund
received in January 2003 of approximately $52.7 million, compared with a tax
refund of $12.2 million received in February of 2002.
42
Investing activities provided $0.9 million of cash for the nine months ended
September 30, 2003, and included proceeds of $3.3 million from the sale of PTS
in January 2003. These proceeds were partially offset by capital expenditures of
approximately $2.3 million. Investing activities used $2.6 million of cash for
the nine months ended September 30, 2002, primarily for earnout payments of
approximately $5.5 million and capital expenditures of $2.9 million. These uses
were partially offset by proceeds of $5.8 million from the sale of approximately
3.0 million shares of Jupitermedia Corporation common stock.
Financing activities used $5.0 million of cash for the nine months ended
September 30, 2003, due primarily to the repayment of $4.5 million of our senior
secured credit facility, the payment of financing fees of approximately $1.9
million, and the payoff of a note payable of $0.4 million. These uses were
partially offset by net proceeds of $1.7 million received on notes receivable
and proceeds of approximately $0.3 million from the partial repayment of an
officer's loan. Financing activities provided cash of $2.0 million for the nine
months ended September 30, 2002, due to the issuance of our Secured Notes and
the sale of 50,000 shares of mandatorily redeemable convertible preferred stock.
These proceeds were primarily offset by the paydown of the balance of our senior
secured credit facility term loans; the purchase of $10.0 million face value of
our Subordinated Notes at prevailing market prices; the payment of financing
fees associated with the amendment to our senior secured credit facility; and
the pay down of our note payable.
Capital expenditures in the first nine months of 2003 were approximately $2.3
million. We anticipate that we will spend approximately $3.0 million to $4.0
million on capital expenditures in 2003, primarily for expenditures related to
computers and management information systems.
FINANCING ACTIVITIES
In June 2001, we issued $185.0 million of 10 3/8% Subordinated Notes due June
2011. Interest on the notes is payable semiannually, on June 15 and December 15.
The Subordinated Notes are fully and unconditionally, jointly and severally
guaranteed, on a senior subordinated basis, by the assets of our domestic
subsidiaries, which are 100% owned by the Company, and may be redeemed, in whole
or in part, on or after June 15, 2006. In addition, we may redeem up to 35% of
the aggregate principal amount of the Subordinated Notes before June 15, 2004
with the proceeds of certain equity offerings. The Subordinated Notes were
offered at a discount of $4.2 million. This discount is being amortized using
the interest method, over the term of the Subordinated Notes. Costs representing
underwriting fees and other professional fees of approximately $1.7 million are
being amortized over the term of the Subordinated Notes. The net proceeds of
$180.2 million were used to pay down the $136.0 million outstanding balance of
the revolving credit facility, $12.8 million of the term loan A facility and
$7.2 million of the term loan B facility. The remaining proceeds were used for
general corporate purposes. The Subordinated Notes are our unsecured senior
subordinated obligations, subordinated in right of payment to all existing and
future senior indebtedness, including the loan agreement and the Secured Notes
discussed below.
In January 2002, we received $5.8 million in net proceeds from the sale of our
remaining investment in Jupitermedia Corporation common stock.
In March 2002, we entered into an agreement with a group of investors to sell
50,000 shares of Series B Convertible Preferred Stock and warrants to purchase
1.6 million shares of our common stock for $50.0 million. We received gross
proceeds of $40.0 million from the sale of 40,000 shares of preferred stock and
warrants to purchase 1,280,000 shares of our common stock on March 19, 2002, and
gross proceeds of $10.0 million from the sale of 10,000 shares of preferred
stock and warrants to purchase 320,000 shares of our common stock on March 28,
2002. Net proceeds from the sale of the preferred stock, along with the net
proceeds from the sale of our Jupitermedia Corporation common stock, and cash on
hand from a tax refund were used to repay $48.0 million of amounts outstanding
under our term loans.
In March 2002, Penton issued $157.5 million of 11 7/8% Secured Notes due in
2007. Interest is payable on the Secured Notes semiannually on April 1 and
October 1. The Secured Notes are fully and unconditionally, jointly and
severally guaranteed, on a senior basis, by all of our domestic subsidiaries,
which are 100% owned by the Company, and also the stock of certain subsidiaries.
We may redeem the Secured Notes, in whole or in part, during the period October
1, 2005 through October 1, 2006, and thereafter at redemption prices of
105.9375% and 100.0000% of the principal amount, respectively, together with
accrued and unpaid interest to the date of redemption. In addition, at any time
prior to October 1, 2005, upon certain public equity offerings of our common
stock, up to 35% of the aggregate principal amount of the Secured Notes may be
redeemed at our option, within 90 days of such public equity offering, with cash
proceeds from the offering at a redemption price equal to 111.875% of the
principal amount, together with accrued and unpaid interest to the date of
redemption.
The Secured Notes were offered at a discount of $0.8 million, which is being
amortized, using the interest method, over the term of the Secured Notes. Costs
representing underwriting fees and other professional fees of $6.6 million are
being amortized over the
43
term of the Secured Notes. Net proceeds of $150.1 million were used to pay down
$83.6 million of term loan A and $49.0 million of term loan B, and $8.3 million
were used to repurchase $10.0 million of our Subordinated Notes. The remaining
net proceeds of $9.2 million were used for general corporate purposes. The
Secured Notes rank senior in right to all of our senior subordinated
indebtedness, including our Subordinated Notes. The guarantees are senior
secured obligations of each of our subsidiary guarantors and rank senior in
right of payment to all subordinated indebtedness of the subsidiary guarantors,
including the guarantees of our Subordinated Notes. The notes and guarantees are
secured by a lien on substantially all of our assets and those of our subsidiary
guarantors, other than specified excluded assets.
In March 2002, we amended and restated our senior secured credit facility and
repaid our term loan A facility and our term loan B facility under our credit
facility from the proceeds received from the sale of preferred stock and the
issuance of the Secured Notes, as noted above. The amended and restated facility
provided for a revolving credit facility of up to a maximum amount of $40.0
million. Availability under the revolving credit facility was subject to a
borrowing base limited to 80% of eligible receivables. In order to access the
revolver, Penton could not have more than $7.5 million of cash and cash
equivalents available, had to be in compliance with the loan documents and had
to submit a borrowing base certificate immediately prior to each extension of
credit showing compliance with the provisions of the borrowing base. Penton was
required to prepay the revolver in the event that it had loans outstanding in
excess of the borrowing base, or it had more than $7.5 million in cash and cash
equivalents available at the end of any month. The commitment under the amended
and restated credit facility was scheduled to decrease by 15% in 2003, 30% in
2004, 35% in 2005, and 20% in 2006. Restrictions were placed on Penton's ability
to make certain restricted payments, to make capital expenditures in excess of
certain amounts, to incur additional debt and contingent obligations, make
acquisitions and investments, and to sell assets. As noted below, the credit
facility was further amended in January 2003 and replaced in August 2003.
The repayment of the term loans in March 2002 resulted in a non-cash
extraordinary charge of $0.7 million, net of $0.5 million in taxes, relating to
the write-off of unamortized deferred finance costs. In the first quarter of
2003, this extraordinary charge was reclassified to gain on extinguishment of
debt in the consolidated statements of operations in accordance with the
provisions of SFAS 145.
In September 2002, Moody's Investors Service took the following rating actions
regarding Penton: (i) confirmed the B3 rating on the Company's Secured Notes,
(ii) downgraded the Company's Subordinated Notes due 2011 from Caa2 to Ca, (iii)
downgraded the Company's senior implied rating from B3 to Caa3, and (iv)
downgraded the Company's senior unsecured issuer rating from Caa1 to Ca. These
changes in the rating of our debt instruments by the outside rating agencies did
not negatively impact our ability to use our revolver.
In December 2002, the Company sold four properties for approximately $0.9
million, which was used to repay outstanding amounts under the Company's credit
facility.
In January 2003, the Company amended its senior secured credit facility, which
was replaced in August 2003, as discussed below. The amended agreement permitted
the Company to sell certain properties in excess of the $5.0 million aggregate
limit required by the original amended agreement. In return, the revolving
commitment was reduced from $40.0 million to $32.0 million. At the end of
January 2003, when the aggregate sum of Penton's cash and cash equivalents
exceeded $40.0 million, an additional one-time reduction of $10.0 million was
required under the amended credit facility. Furthermore, upon the sale of PTS,
the revolving commitment was further reduced by 50% of the aggregate gross
proceeds, as defined, from this sale, or approximately $1.9 million. The amended
facility allowed for additional asset sales, transfers, leases, and other
dispositions and the issuance of equity interests by our subsidiaries up to a
maximum of approximately $3.6 million. The amended facility also increased the
maximum commitment fee from 0.50% to 0.75%.
The reduction of the revolver from $40.0 million to $20.1 million in January
2003, and the reduction of the revolver from $185.0 million to $40.0 million in
March 2002, resulted in the write-off of unamortized finance fees related to the
revolver of $0.9 million and $0.7 million, respectively. These charges have been
classified as part of interest expense on the consolidated statements of
operations.
In January 2003, the Company paid down the $4.5 million that was outstanding
under the credit facility.
In January 2003, the Company also completed the sale of the assets of PTS for
approximately $3.8 million, including an earnout of $0.6 million. The cash
received from the sale was used to pay down the Company's outstanding credit
facility.
44
In August 2003, the Company replaced its senior secured credit facility with a
new four-year loan and security agreement. Pursuant to the terms of the
revolving loan and security agreement, the Company can borrow up to the lesser
of (i) $40.0 million; (ii) 2.5x the Company's last twelve months EBITDA measured
monthly during the first year, 2.25x during the second year and 2.0x thereafter;
(iii) 40% of the Company's last six months of revenues; or (iv) 25% of the
Company's enterprise value, as determined annually by a third party. The
revolving credit facility bears interest at LIBOR plus 5.0% subject to a LIBOR
minimum of 1.5%. The Company must comply with a quarterly financial covenant
limiting the ratio of maximum bank debt to the last twelve months EBITDA to 2.5x
through March 31, 2004, 2.25x from June 30, 2004 through March 31, 2005 and 2.0x
thereafter. The loan agreement permits the Company to sell assets of up to $12.0
million in the aggregate during the term or $5.0 million in any single asset
sale; and complete acquisitions of up to $5.0 million per year. Included in the
loan agreement is a stand-by letter of credit of $0.1 million required by one of
the Company's facility leases. The amount of the letter of credit reduces the
availability under the credit facility. As of September 30, 2003, no amounts
were drawn under the stand-by letter of credit. As of September 30, 2003, $39.9
million was available under the loan agreement. There were no amounts
outstanding.
During the third quarter, approximately $1.0 million of unamortized financing
fees related to the previous credit facility were written off. This charge has
been classified as part of interest expense in the consolidated statements of
operations.
The Company has no special purpose entities or off-balance sheet debt other than
operating leases in the ordinary course of business.
CURRENT LIQUIDITY
Our primary future cash needs will be to fund working capital, debt service,
capital expenditures, and our business restructuring charges and related
expenses. We expect capital expenditures in 2003 to be approximately $3.0
million to $4.0 million, as we continue to review our spending as a result of
continued economic and business uncertainty. We expect to make cash payments for
the remainder of 2003 related to our business restructuring initiatives of
approximately $0.9 million, which is comprised of $0.4 million for employee
separation costs and $0.5 million for lease obligations.
The Company has implemented and continues to implement various cost reduction
programs and cash conservation plans, which involve the limitation of capital
expenditures and the control of working capital.
We anticipate adequate liquidity from operations and have available cash on hand
to meet all interest payments on our bonds and our other obligations through
2003 of approximately $18.4 million. We have no principal repayment requirements
until maturity of our Secured Notes in October 2007. In addition, we have no
bank debt and no maintenance covenants on our existing bond debt. As noted
above, Penton does have access to a revolving credit facility of up to $40.0
million.
Our ability to meet cash operating requirements depends upon our future
performance, which is subject to general economic conditions and to financial,
competitive, business and other factors, including factors beyond our control.
If we are unable to meet our debt obligations or fund our other liquidity needs,
we may be required to raise capital through additional financing arrangements or
the issuance of private or public debt or equity securities. We cannot assure
you that such additional financing will be available at acceptable terms. In
addition, the terms of our convertible preferred stock and warrants, including
the conversion price, dividend and liquidation adjustment provisions, the
redemption price premiums, and board representation rights could negatively
impact our ability to access the equity markets in the future.
We may from time to time seek to retire our outstanding debt through cash
purchases on the open market, privately negotiated transactions or otherwise.
Such repurchases, if any, will depend on the prevailing market conditions, our
liquidity requirements, contractual restrictions and other factors. The amounts
involved may be material.
Penton did not make any cash contributions to its defined benefit pension plan
in 2001 or 2002. Based on the current value of the assets in our benefit plans,
we will not be required to make any cash contributions during 2003. Future
funding requirements are dependent upon factors such as interest rate levels,
changes to pension plan benefits, funded status, regulatory requirements for
funding purposes, and the level and timing of asset returns as compared with the
level and timing of expected benefit disbursements. Based on current estimates
the Company expects to make a contribution of approximately $1.5 million in the
third quarter of 2004 for calendar year 2003. In addition, quarterly estimated
contributions must be made in 2004 based on 2003 calculations. Due to the
presence of significant variables, actual future contributions may differ
materially.
45
The purchase of common stock under the 401(k) plan from May 2001 through March
2003 in excess of the number of shares registered by the Company on Form S-8
with the Securities and Exchange Commission under the Securities Act of 1933
could have a material adverse impact on our financial condition. These
unregistered purchases did not cause an event of default under the indentures
governing our Subordinated Notes or Secured Notes or our senior secured credit
facility. However, an event of default could occur as an indirect result of the
unregistered purchases. For example, an event of default would occur under (a)
the indentures if the unregistered purchases were to result in (i) unsatisfied
judgments not covered by insurance aggregating in excess of $5 million being
rendered against the Company and not stayed, bonded or discharged within 60 days
after such judgment became final and nonappealable or (ii) the Company's failure
to observe the covenant limiting the Company's ability to make restricted
payments (as defined in the indentures) if, for example, the Company made a
rescission offer and as a result repurchased shares, which could be considered
the payment on account of the purchase, redemption or other acquisition or
retirement for value of equity interest (as defined in the indentures) or (b)
under certain provision of the loan agreement. The foregoing is not, and no
inference should be drawn that the foregoing is, an exclusive list of
circumstances that could result in an event of default under the indentures or
the loan agreement as a consequence of the unregistered sales. If an event of
default occurs, all our indebtedness would be immediately due and payable, and
we cannot assure you that our business will generate sufficient cash flow to
enable us to service our debt obligations. In addition, we cannot assure you
that the Company will be able to obtain alternative sources of funding (see Risk
Factors section of our 2002 Annual Report on Form 10-K).
In March 2003, we classified approximately 1.2 million shares of our common
stock as redeemable common stock as a result of rescissionary rights that
certain of our common stockholders may have in connection with the unregistered
purchases from May 2001 through March 2003 noted above. A number of remedies may
be available to regulatory authorities and the employees who purchased the
common stock, including, without limitation, a right of rescission and other
damages that could be imposed by regulatory authorities, unless the employees
have released the Company from such obligation as noted below. Pursuant to the
rescission rights, employees may be entitled to return their shares to the
Company and receive back from us the full price they paid, plus interest. The
rescission rights lapse one year from the date of any such purchase. Although
the payments under the rescissionary rights are not anticipated to have a
material adverse impact on our financial condition, we have no control over any
civil or other damages that regulatory authorities could impose on the Company,
the result of which could have a material adverse effect on our financial
condition. See Note 6 - Common Stock and Common Stock Award Programs for further
details.
In April 2003, the Company offered to reimburse employees who had purchased
unregistered Penton common stock through the Company's 401(k) plan between March
25, 2002 and March 25, 2003. Employees who signed a release were reimbursed the
amount by which the price they paid for the common stock exceeded the closing
price of the stock on the date they executed the release, or if the stock had
been sold, the amount by which the price paid by the employee exceeded the sales
price. Employees who did not sign the release by May 22, 2003, retain any rights
they may have under the Federal securities laws. Over eighty percent of the
employees who were offered the reimbursement have accepted the terms of the
release, resulting in a payment of approximately $0.6 million, which was
deposited into each individual's 401(k) account in July 2003. This amount is
included in restructuring charges and other expenses in the consolidated
statements of operations.
At September 30, 2003, the Company has classified 13,518 shares, and related
amounts, related to the potential rescissionary rights, outside of stockholders'
deficit because the redemption of the stock is not within the control of the
Company.
NEW ACCOUNTING PRONOUNCEMENTS
In October 2003, the Financial Accounting Standards Board ("FASB") Staff issued
a FASB Staff Position ("FSP") on Interpretation 46, "Consolidation of Variable
Interest Entities" ("FIN 46"), FSP FIN 46-6, "Effective Date of FASB
Interpretation No. 46, Consolidation of Variable Interest Entities" ("FSP
46-6"). FSP 46-6 delays the effective date of FIN 46 to December 31, 2003 for
companies with a year-end of December 31 for (1) interests held by public
entities in variable interest entities or potential variable interest entities
created before February 1, 2003 and (2) non-registered investments. Certain
disclosures required by FIN 46 were not deferred by FSP 46-6. In May 2000,
Penton acquired a 50% interest in Penton Media Germany ("PM Germany.") PM
Germany may potentially qualify as a variable interest entity under FIN 46. The
Company currently consolidates PM Germany, which produces trade shows,
publications, and Web sites. Included in Penton's consolidated statements of
operations for the nine months ended September 30, 2003, are revenues of $1.9
million and a net loss of $2.8 million related to PM Germany. At September 30,
2003, Penton's consolidated balance sheets include assets of $1.8 million,
liabilities of $6.0 million and minority interest of $2.3 million related to PM
Germany. Penton estimates that its maximum exposure to loss would be
approximately $0.4 million.
46
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). This statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 149 is
effective for contracts entered into or modified after June 30, 2003. The
adoption of SFAS 149 did not have a significant effect on the Company's results
of operations or its financial condition.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 changes the accounting for certain financial instruments with
characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities in the statement of financial position.
Previously, many of those financial instruments were classified as equity. SFAS
150 is effective for financial instruments entered into or modified after May
31, 2003 and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150 did not have any impact
on the Company's financial condition or results of operations.
In May 2003, the Emerging Issues Task Force ("EITF") reached a consensus on EITF
Issue 01-8, "Determining Whether an Arrangement is a Lease" ("EITF 01-8"). EITF
01-8 provides guidance on how to determine whether an arrangement contains a
lease that is within the scope of SFAS No. 13, "Accounting For Leases" and is
effective for arrangements entered into or modified after June 30, 2003. The
adoption of EITF 01-8 did not have a significant effect on the Company's results
of operations or its financial condition.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Impairment of Long-Lived Assets
The Company completed its annual SFAS 142 impairment review at September 30,
2003. This review resulted in a non-cash impairment charge of approximately
$37.6 million to reduce the carrying value of goodwill for two reporting units,
which are part of our Technology Media segment and one reporting unit which, is
part of our Retail Media segment.
The Company's SFAS 142 evaluations were performed by an independent valuation
firm, utilizing assumptions and projections we believe to be reasonable and
supportable, and that reflect management's best estimate of projected future
cash flows. Considerable judgment was required in selecting discount rates,
developing cash flow projections and developing balance sheets for each
reporting unit. Slight changes in any of these assumptions could create a
material impact on the impairment charge recorded by the Company.
We evaluate our long-lived assets for impairment whenever circumstances indicate
that an impairment may exist pursuant to the provisions of SFAS 144. Factors
indicating that an impairment may exist includes permanent declines in cash
flows, continued decreases in utilization of a long-lived asset, or a change in
business strategy. The process involves management determining if the cash flows
expected to be generated from the use of a long-lived asset (group) and its
eventual disposition (undiscounted and without interest charges) are less than
the carrying amount of the asset (group). If the criteria is met, the fair value
is determined using appropriate assumptions. The determination and calculation
of impairment requires management's judgment and estimates, including among
other items, establishing asset groupings and determining discount rates.
FOREIGN CURRENCY
The functional currency of our foreign operations is their local currency.
Accordingly, assets and liabilities of foreign operations are translated to U.S.
dollars at the rates of exchange on the balance sheet date; income and expense
are translated at the average rates of exchange prevailing during the period.
There were no significant foreign currency transaction gains or losses for the
periods presented.
SEASONALITY
We may experience seasonal fluctuations as trade shows and conferences held in
one period in the current year may be held in a different period in future
years.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our long-term debt consists of senior notes with interest at fixed rates.
Consequently, we do not have significant interest rate risk exposure related to
our long-term debt. However, the fair value of our senior notes fluctuates with
the market, as they are publicly traded. During the nine months ended September
30, 2003, the fair value of our Subordinated Notes and Secured Notes increased
by $36.1 million, or 48%, and $18.1 million, or 14%, respectively, compared to
December 31, 2002. At September 30, 2003, the fair value of the Subordinated
Notes and the Secured Notes was $111.6 million and $149.0 million, respectively,
compared to $75.5 million and $130.9 million, respectively, at December 31,
2002. The fair value of the notes is determined by the price investors in the
open market are willing to pay. The Company currently does not manage the fair
value risk related to its senior notes.
The table below provides information about the expected cash flows associated
with our long-term debt obligations and their fair value at September 30, 2003
(in thousands):
EXPECTED MATURITY DATE
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
FAIR
2003 2004 2005 2006 2007 2011 TOTAL VALUE
---- ---- ---- ---- ---- ---- ----- -----
Long-Term Debt:
Senior Subordinated Notes - - - - - $175,000 $175,000 $111,558
Interest rate 10-3/8% 10-3/8% 10-3/8% 10-3/8% 10-3/8% 10-3/8% 10-3/8%
Senior Secured Notes - - - - $157,500 - $157,500 $149,040
Interest rate 11-7/8% 11-7/8% 11-7/8% 11-7/8% 11-7/8% 11-7/8% 11-7/8%
During the nine months ended September 30, 2003, there were no other significant
changes related to the Company's market risk exposure.
47
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures (as defined
in Rule 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as
amended) are effective as of the end of the quarterly period covered by this
report on Form 10-Q. There have been no significant changes in internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses, except as follows: the
Company's employees purchased common stock under the Company's 401(k) Retirement
Savings Plan (the "Plan") in excess of the number of shares registered by the
Company on Form S-8 with the Securities and Exchange Commission under the
Securities Act of 1933 from May 2001 through March 2003. The Company took
corrective actions immediately upon discovery, and filed an amendment to the
Form S-8 on March 31, 2003, to register additional shares. For further details,
see:
- - Liquidity and Capital Resources section of the Management's Discussion and
Analysis of Financial Condition and Results of Operations.
- - Note 6 - Common Stock and Common Stock Award Programs of the consolidated
financial statements.
- - The Company's Annual Report on Form 10-K for the year ended December 31,
2002.
48
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
10.1 Loan and security agreement by and among Penton Media, Inc. as
borrower and the Lenders that are signatories hereto, as the Lenders,
and Wells Fargo Foothill, Inc., as the arranger and administrative
agent (filed as Exhibit 10.1 to the Company's Form 8-K on August 15,
2003, and incorporated herein by reference).
31.1 Principal executive officer's certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Principal financial officer's certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
DATE OF REPORT ITEMS REPORTED
-------------- --------------
August 7, 2003 Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits
Item 12. Results of Operations and Financial
Conditions
August 15, 2003 Item 5. Other Events
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits
49
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Penton Media, Inc.
(Registrant)
By: /s/ PRESTON L. VICE
------------------------------
Preston L. Vice
Chief Financial Officer
(Duly Authorized Officer
and Principal Financial
Officer)
Date: November 13, 2003
50
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
10.1 Loan and security agreement by and among Penton Media, Inc. as
borrower and the Lenders that are signatories hereto, as the Lenders,
and Wells Fargo Foothill, Inc., as the arranger and administrative
agent (filed as Exhibit 10.1 to the Company's Form 8-K on August 15,
2003, and incorporated herein by reference).
31.1 Principal executive officer's certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Principal financial officer's certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
51