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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
------------------------------------------------
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 June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-14337
PENTON MEDIA, INC.
------------------
(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
------------
(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 (August 2, 2004).
Common Stock: 33,821,208 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 June 30, 2004 and December 31, 2003 3
Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 2004 and 2003 5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2004 and 2003 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 31
Item 3. Quantitative and Qualitative Disclosures About Market Risk 43
Item 4. Controls and Procedures 44
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 45
Item 6. Exhibits and Reports on Form 8-K 45
Signature 47
Exhibit index 48
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PENTON MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED; DOLLARS IN THOUSANDS)
June 30, December 31,
2004 2003
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 15,919 $ 29,626
Restricted cash 193 -
Accounts receivable, less allowance for doubtful
accounts of $3,329 and $3,703 in 2004 and 2003, respectively 31,671 29,721
Notes receivable 760 571
Inventories 905 875
Prepayments, deposits and other 11,282 4,898
---------- -----------
Total current assets 60,730 65,691
---------- -----------
Property, plant and equipment:
Land, buildings and improvements 8,503 8,639
Machinery and equipment 47,706 46,450
---------- -----------
56,209 55,089
Less: accumulated depreciation 39,636 36,286
---------- -----------
16,573 18,803
---------- -----------
Other assets:
Goodwill 214,411 214,411
Other intangibles, less accumulated amortization of
$14,279 and $13,189 in 2004 and 2003, respectively 9,677 10,883
Other non-current assets 7,442 9,102
---------- -----------
231,530 234,396
---------- -----------
$ 308,833 $ 318,890
========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
PENTON MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED; DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
June 30, December 31,
2004 2003
---------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 6,925 $ 6,300
Accrued compensation and benefits 9,279 7,158
Other accrued expenses 27,846 19,216
Unearned income, principally trade
show and conference deposits 21,559 24,780
---------- -----------
Total current liabilities 65,609 57,454
---------- -----------
Long-term liabilities and deferred credits:
Senior secured notes, net of discount 156,979 156,915
Senior subordinated notes, net of discount 171,847 171,698
Net deferred pension credits 10,764 11,040
Other non-current liabilities 8,222 9,163
---------- -----------
347,812 348,816
---------- -----------
Commitments and contingencies
Minority interest 2,461 2,487
Mandatorily redeemable convertible preferred stock, par value $0.01 per share;
50,000 shares authorized, issued and outstanding;
redeemable at $1,000 per share 63,661 55,060
Redeemable common stock, par value $0.01 per share; 4,191
shares issued and outstanding at December 31, 2003 - 2
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; 33,353,610 and 33,220,877 shares issued and outstanding
at June 30, 2004 and December 31, 2003, respectively 332 332
Capital in excess of par value 218,280 226,266
Retained deficit (387,187) (367,449)
Notes receivable from officers, less reserve of $5,848 and $7,600 at
June 30, 2004 and December 31, 2003, respectively - (1,897)
Accumulated other comprehensive loss (2,135) (2,181)
---------- -----------
(170,710) (144,929)
---------- -----------
$ 308,833 $ 318,890
========== ===========
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 Six Months Ended
June 30, June 30,
2004 2003 2004 2003
------------ ------------ ----------- -----------
Revenues $ 50,936 $ 50,466 $ 105,403 $ 104,858
------------ ------------ ----------- -----------
Operating expenses:
Editorial, production and circulation 23,765 23,467 45,146 45,820
Selling, general and administrative
(including $0.3 million and $2.7 million
of executive separation costs for the
three and six months ended June 30, 2004,
respectively) 24,114 22,592 48,613 46,233
Provision for loan impairment 1,717 7,600 1,717 7,600
Restructuring and other charges 3,524 1,901 4,392 1,817
Depreciation and amortization 2,965 3,781 5,981 7,503
------------ ------------ ----------- -----------
56,085 59,341 105,849 108,973
------------ ------------ ----------- -----------
Operating loss (5,149) (8,875) (446) (4,115)
Other income (expense):
Interest expense (9,362) (9,412) (18,820) (19,750)
Interest income 64 128 166 237
Other, net (10) 66 (16) (308)
------------ ------------ ----------- -----------
(9,308) (9,218) (18,670) (19,821)
------------ ------------ ----------- -----------
Loss from continuing operations before income taxes (14,457) (18,093) (19,116) (23,936)
Provision for income taxes (74) (65) (622) (191)
----------- ------------ ----------- -----------
Loss from continuing operations (14,531) (18,158) (19,738) (24,127)
Discontinued operations:
Income (loss) from discontinued operations
(including gain on disposal of $1.4 million
for the six months ended June 30, 2003),
net of taxes - (188) - 678
------------ ------------ ----------- -----------
Net loss (14,531) (18,346) (19,738) (23,449)
Amortization of deemed dividend and accretion
of preferred stock (3,408) (1,860) (8,601) (2,515)
------------ ------------ ----------- -----------
Net loss applicable to common stockholders $ (17,939) $ (20,206) $ (28,339) $ (25,964)
============ ============ =========== ===========
Net loss per common share - basic and diluted:
Loss from continuing operations applicable
to common stockholders $ (0.53) $ (0.59) $ (0.84) $ (0.80)
Discontinued operations, net of taxes - (0.01) - 0.02
------------ ------------ ----------- -----------
Net loss applicable to common stockholders $ (0.53) $ (0.60) $ (0.84) $ (0.78)
============ ============ =========== ===========
Weighted-average number of shares outstanding:
Basic and diluted 33,583 33,508 33,559 33,272
============ ============ =========== ===========
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)
Six Months Ended
June 30,
2004 2003
---------- -----------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES $ (11,757) $ 34,722
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,519) (1,343)
Earnouts paid - (7)
Net notes receivable (188) 1,549
Proceeds from sale of Professional Trade Shows group - 3,250
---------- -----------
Net cash provided by (used for) investing activities (1,707) 3,449
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of senior secured credit facility - (4,500)
Payment of notes payable - (417)
Employee stock purchase plan payments - (113)
Proceeds from repayment of officers loans - 250
(Increase) decrease in restricted cash (193) 267
Payment of financing costs (6) (200)
Increase (decrease) in book overdrafts (63) 193
---------- -----------
Net cash used for financing activities (262) (4,520)
---------- -----------
Effect of exchange rate changes on cash 19 (52)
---------- -----------
Net increase (decrease) in cash and cash equivalents (13,707) 33,599
Cash and cash equivalents at beginning of period 29,626 6,771
---------- -----------
Cash and cash equivalents at end of period $ 15,919 $ 40,370
========== ===========
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, 2003.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2003 financial statements to
conform to the 2004 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.
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"
("APB 25"). Pro forma information regarding net income (loss) and earnings per
share is required by Statement of Financial Accounting Standards ("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 stock-based
compensation under SFAS 123.
The weighted-average fair value of options granted during the first six months
of 2004 and 2003 was $0.84 and $0.32, respectively. The fair value of the
options was estimated on the date of grant using the Black-Scholes
option-pricing model, under the following assumptions:
2004 2003
------ ------
Risk-free interest rate 3.65% 3.62%
Dividend yield 0.00% 0.00%
Expected volatility 136.29% 104.79%
Expected life 7 years 7 years
7
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Had compensation cost for Penton's stock-based compensation plans been
determined based on the fair value methodologies consistent with SFAS 123,
Penton's net loss and earnings per share for the three and six months ended June
30, 2004 and 2003 would have been as follows (in thousands, except per share
data):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
---------- ---------- --------- -----------
Net loss applicable to common stockholders:
As reported............................................................. $ (17,939) $ (20,206) $ (28,339) $ (25,964)
Add: Compensation expense included in net loss applicable to common
stockholders, net of related tax effects ............................ 576 339 702 1,240
Less: Total stock-based compensation expense determined under fair
value based methods for all awards, net of related tax effects....... (2,544) (939) (2,901) (2,577)
---------- ---------- --------- -----------
Pro forma............................................................... $ (19,907) $ (20,806) $ (30,538) $ (27,301)
========== ========== ========= ===========
Basic and diluted earnings per share:
As reported.......................................................... $ (0.53) $ (0.60) $ (0.84) $ (0.78)
Pro forma............................................................ $ (0.59) $ (0.62) $ (0.91) $ (0.82)
NEW ACCOUNTING PRONOUNCEMENTS
In March 2004, the Emerging Issues Task Force ("EITF") reached a final consensus
on EITF Issue 03-6, "Participating Securities and the Two-Class Method Under
FASB Statement 128, Earnings Per Share" ("EITF 03-6"). EITF 03-6 addresses the
computation of earnings per share by companies that have issued securities other
than common stock that participate in dividends and earnings of the issuing
entity. EITF 03-6 is effective for the quarter ended June 30, 2004 and requires
the restatement of previously reported earnings per share. The adoption of this
issue did not have an effect on the Company's earnings per share as the Company
already used the two-class method for its participating securities.
In December 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS 132-R"). The provisions of this statement do not
change the measurement and recognition provisions of SFAS No. 87, "Employers'
Accounting for Pensions," SFAS No. 88, "Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,"
and SFAS No. 106, "Employers' Accounting for Postretirement Benefits other than
Pensions." SFAS 132-R replaces SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" and adds additional disclosures.
SFAS 132-R is effective for fiscal years ending after December 15, 2003. The
Company adopted SFAS 132-R as of December 31, 2003 and has included all required
disclosures in these consolidated financial statements.
In January 2003, FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities" ("FIN 46") was issued which, among other things, provides guidance on
identifying variable interest entities ("VIE") and determining when assets,
liabilities, non-controlling interests, and operating results of a VIE should be
included in a company's consolidated financial statements, and also requires
additional disclosures by primary beneficiaries and other significant variable
interest holders. In December 2003, the FASB issued a revision of FIN 46 ("FIN
46-R"), clarifying certain provisions and partially deferring the effective
dates. The Company presently does not hold an interest in any variable interest
entity; therefore, application of FIN 46-R has not affected the Company's
consolidated financial statements, results of operations or disclosures.
8
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2 - GOODWILL AND OTHER INTANGIBLES
There were no changes in the Company's goodwill for the first six months of
2004. Following is a summary, by business segment, of the balances in goodwill
as of June 30, 2004 (in thousands):
GOODWILL
-----------------------------------------------------
DECEMBER 31, JUNE 30,
2003 ACTIVITY 2004
---------------- -------------- -----------------
Industry $ 36,278 $ - $ 36,278
Technology 67,385 - 67,385
Lifestyle 84,924 - 84,924
Retail 25,824 - 25,824
---------------- -------------- -----------------
Total $ 214,411 $ - $ 214,411
================ ============== =================
At June 30, 2004, other intangibles recorded in the consolidated balance sheets
are comprised of the following (in thousands):
GROSS NET
CARRYING ACCUMULATED BOOK
VALUE AMORTIZATION VALUE
------------ ----------- -----------
Trade names $ 5,282 $ (3,983) $ 1,299
Mailing/exhibitor lists 9,350 (5,239) 4,111
Advertiser relationships 7,200 (3,859) 3,341
Subscriber relationships 2,100 (1,178) 922
Noncompete agreements 24 (20) 4
------------ ----------- -----------
Balance at June 30, 2004 $ 23,956 $ (14,279) $ 9,677
============ =========== ===========
Other intangibles are being amortized over 3 to 10 years. Total amortization
expense for the six months ended June 30, 2004 and 2003 was $1.2 million and
$2.2 million, respectively. Amortization expense estimated for these intangibles
for 2004 through 2008 are as follows (in thousands):
YEAR ENDED
DECEMBER 31, AMOUNT
- ----------- ----------
2004 $ 2,474
2005 $ 2,441
2006 $ 2,214
2007 $ 1,300
2008 $ 404
NOTE 3 - DISPOSALS
At December 31, 2002, the net assets of our Professional Trade Shows ("PTS")
were classified as held for sale. The sale was completed in January 2003 for
approximately $3.8 million, including an earnout of $0.6 million based on
reaching certain performance objectives in 2003, which were not met. The sale
resulted in a gain of approximately $1.4 million, which was recorded in the
first quarter of 2003. The results of PTS are reported as discontinued
operations for all periods presented. PTS was part of the Company's Industry
segment.
9
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Operating results for discontinued operations are as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2003 2003
----------- -----------
Revenues $ - $ -
=========== ===========
Loss from operations, net of taxes $ (188) $ (709)
Gain on sale of properties, net of taxes - 1,387
----------- -----------
Income (loss) from discontinued operations $ (188) $ 678
=========== ===========
NOTE 4 - DEBT
LOAN AND SECURITY AGREEMENT
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 are two stand-by letters of credit of $0.1
million and $0.2 million, respectively, required by two of the Company's
facility leases. The amounts of the letters of credit reduce the availability
under the credit facility. As of June 30, 2004, no amounts were drawn under the
stand-by letters of credit. Costs representing bank fees and other professional
fees of $1.9 million are being amortized over the life of the loan agreement. As
of June 30, 2004, $39.7 million was available under the loan and security
agreement. There were no amounts outstanding.
The loan and security agreement contains several provisions, that could have a
significant impact as to the classification as well as the acceleration of
payments for borrowings outstanding under the agreement, including the
following: (i) the obligation of the lender to provide any advances under the
loan agreement is subject to no material adverse change events; (ii) reserves
may be established against the borrowing base for sums that the Company is
required to pay, such as taxes and assessments and other types of required
payments, and has failed to pay; (iii) in the event of a default under the loan
agreement, the lender has the right to direct all cash that is deposited in the
Company's lock boxes to be sent to the lender to pay down outstanding
borrowings; (iv) the loan agreement establishes cross-defaults to the Company's
other indebtedness (such as the 11-7/8% senior secured notes and 10-3/8% senior
subordinated notes) such that a default under the loan agreement could cause a
default under the note agreements and vice versa; however, default-triggering
thresholds are different in the loan agreement and the notes; and (v) if the
Company is in default of any material agreement to which it is a party and the
counter-party to that agreement has the right to terminate such agreement as a
result of the default, this constitutes an event of default under the loan
agreement. Under the loan agreement, the lenders reserve the right to deem the
notes in default, and in those limited circumstances, could accelerate payment
of any outstanding loan balances should the Company undergo a material adverse
event. Even though the criteria defining a material adverse event are
subjective, the Company does not believe exercise of the lenders' right is
probable nor does it foresee any material adverse events in 2004. In addition,
the Company believes that the note agreements are long-term in nature.
Accordingly, the Company continues to classify its notes as long term. At June
30, 2004, the Company was in compliance with all of the above provisions.
SENIOR SECURED CREDIT FACILITY
In January 2003, the Company amended its senior secured credit facility, and as
noted above, this facility was replaced in August 2003. The amendment
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 ultimately reduced from $40.0 million to $20.1 million.
The reduction of the revolver resulted in the write-off of unamortized financing
fees of $0.9
10
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
million. This charge has been classified as part of interest expense on the
consolidated statement of operations for the six months ended June 30, 2003.
SENIOR SECURED NOTES
In March 2002, Penton issued $157.5 million of 11-7/8% senior secured notes (the
"Secured Notes") due in 2007. Interest is payable on the Secured Notes
semiannually on April 1 and October 1. 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. Amortization of the discount was immaterial
for the six months ended June 30, 2004 and 2003.
SENIOR SUBORDINATED NOTES
In June 2001, Penton issued $185.0 million of 10-3/8% senior subordinated notes
(the "Subordinated Notes") due in 2011. Interest is payable on the Subordinated
Notes semiannually on June 15 and December 15. The Subordinated Notes were
offered at a discount of $4.2 million, which is being amortized using the
interest method, over the term of the Subordinated Notes. Amortization of the
discount was approximately $0.1 million for the six months ended June 30, 2004
and 2003, respectively.
INTEREST PAYMENTS
Interest payments of $18.4 million and $18.5 million were made during the six
months ended June 30, 2004 and 2003, respectively. Interest of $5.4 million was
accrued at June 30, 2004 and December 31, 2003, respectively, and included in
other accrued expenses on the consolidated balance sheets.
NOTE 5 - MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
PREFERRED STOCK LEVERAGE RATIO EVENT OF NON-COMPLIANCE
At June 30, 2004, an event of non-compliance continues to exist under our Series
B Convertible Preferred Stock (the "preferred stock") because the Company's
leverage ratio of 14.7 (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. Upon the occurrence of this event of
non-compliance, the 5% per annum dividend rate on the preferred stock increased
by one percentage point as of April 1, June 30, September 28 and December 27,
2003 and March 26, 2004 to the current maximum rate of 10% per annum. The
conversion price of the preferred stock decreased by $0.76 as of April 1, June
30, September 28 and December 27, 2003 and March 26, 2004 to its maximum
reduction related to this event of non-compliance of $3.80 per share. The
conversion price will adjust to what it would have been absent such event (to
the extent any preferred shares are still outstanding) once the leverage ratio
is less than 7.5. No such reduction to the conversion price will be made at any
time that representatives of the preferred stockholders constitute a majority of
the Board of Directors. In July 2004 at the Company's annual stockholders'
meeting, changes were made to the Board of Directors such that the preferred
stockholders now constitute a majority of the Board, and as a result, the
conversion price was restored to $7.61, (see Note 18 - Subsequent Events).
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. As of
December 31, 2003, the leverage ratio had exceeded 7.5 for four consecutive
quarters giving the preferred stockholders the right to cause the Company to
seek a buyer. If the Company had been sold on June 30, 2004, the bondholders
would have been entitled to receive $335.8 million and the preferred
stockholders would have been entitled to receive $232.4 million before the
common stockholders would have received any amounts for their common shares. The
amount the preferred stockholders would be entitled to receive could increase
significantly in the future under certain circumstances. Stockholders are urged
to read the terms of the preferred stock. 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 is no
acceleration of any outstanding indebtedness as a result of this event. In
addition, this event of non-compliance and the resulting consequences have not
resulted 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 June 30, 2004, 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
11
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 capital in excess of par value given that the
Company is in a retained deficit position.
NOTE 6 - EXECUTIVE BONUS AND TERMINATION BENEFITS
On June 21, 2004, Penton's Board of Directors announced the appointment of David
B. Nussbaum as Chief Executive Officer ("CEO") of the Company. In addition to
the Company's standard executive incentive and benefit package, Mr. Nussbaum
received a signing bonus of approximately $1.7 million and 30,000 shares of a
new Series of Preferred Stock upon there issuance (see Note 18 - Subsequent
Events). In addition, the Board accelerated the vesting of 135,000 deferred
shares granted to Mr. Nussbaum on February 3, 2004. Mr. Nussbaum used the net
proceeds from his signing bonus to repay a portion of his outstanding executive
loan balance.
On March 24, 2004, the Company announced that its Chairman and CEO, Thomas L.
Kemp, would be leaving the Company. Mr. Kemp's employment was terminated
effective June 30, 2004 and on July 1, 2004, Mr. Kemp and the Company signed a
Separation Agreement and General Release agreement. The separation agreement
stipulated a lump-sum payment of $2.3 million (including the settlement of Mr.
Kemp's accrued SERP obligation of $0.2 million), the acceleration of 100,000
stock options, and the acceleration of 125,000 performance shares.
In addition, the Board and Mr. Kemp agreed upon a number of provisions related
to Mr. Kemp's outstanding executive loan balance. The underlying goal of these
provisions is to ensure that there are sufficient funds available to pay any
amount due to taxing authorities in case the loan is discharged at a future
date. Specifically, $0.8 million of the $2.3 million lump-sum payment has been
placed in escrow and will be returned to Mr. Kemp only if he pays off the entire
loan balance by its due date. Furthermore, Mr. Kemp has granted Penton a
security interest in approximately 1.1 million shares of Penton common stock.
These pledged securities could be transferred to Penton's ownership under
certain circumstances and used to pay the appropriate taxing authorities or to
pay down the outstanding loan balance.
On June 28, 2004, Mr. Kemp was granted 514,706 deferred shares that vest on
January 3, 2005. In return for these shares, Mr. Kemp agreed to comply with the
terms of certain restrictive covenants, including a non-compete and a
non-solicitation covenant.
On June 27, 2004, the Company announced that its President and Chief Operating
Officer, Daniel J. Ramella, would be leaving the Company as part of a management
restructuring plan. Mr. Ramella's employment was terminated effective June 30,
2004 and on July 1, 2004, Mr. Ramella and the Company signed a Separation
Agreement and General Release agreement. The separation agreement stipulated a
lump-sum payment of $1.7 million (including the settlement of Mr. Ramella's
accrued SERP obligation of $0.2 million), and the acceleration of 139,999 stock
options, 210,000 deferred shares and 90,000 performance shares. In addition, the
Board agreed to discharge the $2.6 million outstanding balance on Mr. Ramella's
executive loan in return for full and final settlement of any claims Mr. Ramella
may have had against the Company.
NOTE 7 - COMMON STOCK AND COMMON STOCK AWARD PROGRAMS
EXECUTIVE LOAN PROGRAM
The Company has an Executive Loan Program, which allowed Penton to issue shares
of Company common stock at fair market value to six key executives in exchange
for full recourse notes. In December 2001, the loan notes were amended to cease
interest charges as well as 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.
In June 2004, Mr. Nussbaum repaid his outstanding loan balance with proceeds
from his signing bonus and 288,710 shares of Penton common stock, which were
returned to the Company. In addition, the Board agreed to discharge the
outstanding balance due on Mr. Ramella's executive loan in exchange for Mr.
Ramella releasing the Company of any claims he may have
12
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
had. The Board also agreed upon a number of provisions related to Mr. Kemp's
outstanding executive loan balance, as previously noted.
EITF 00-23, "Issues Related to the Accounting for Stock Compensation under APB
Opinion No. 25 and FASB Interpretation No. 44" requires that once a Company
forgives all or part of a recourse note it must consider all other existing
recourse notes as nonrecourse prospectively (variable accounting). Consequently,
the Company recognized $0.1 million in additional paid in capital in excess of
par equal to the fair market value of the stock issued in conjunction with the
establishment of the loans. In addition, the Company recorded a $1.8 million
provision for loan impairment on the remaining unreserved loan balance.
Additionally, the Company reversed the $1.0 million reserve established in June
2003 related to Mr. Nussbaum against his signing bonus of $1.7 million which was
recorded in selling, general and administrative expenses on the consolidated
statements of operations. Going forward, all future awards exercised with
recourse notes shall be presumed to be exercised with nonrecourse notes with any
dividends recorded as compensation expense and interest recorded as part of the
exercise price.
At June 30, 2004 and December 31, 2003, the outstanding loan balance due under
the Executive Loan Program was approximately $5.8 million and $9.5 million,
respectively. The loan balance, net of amounts reserved of $5.8 million and $7.6
million at June 30, 2004 and December 31, 2003, respectively, is classified in
the stockholders' deficit section of the consolidated balance sheets as notes
receivable from officers.
REDEEMABLE COMMON STOCK
At December 31, 2003, the Company classified 4,191 common shares outside of
stockholders' deficit because the redemption of the stock was not within the
control of the Company. 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. As a result, such purchasers of
our common stock during that period may have had 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. On March 14, 2004, all rescissionary rights
expired.
MANAGEMENT STOCK PURCHASE PLAN
In February 2004, a total of 595 restricted stock units ("RSUs") were granted at
$0.84 per share, which represented 80% of the fair market value of Penton stock
on the date of grant. During the first six months of 2004, 11,217 shares of the
Company's common stock were issued under this plan leaving a balance of 95,770
RSU's outstanding at June 30, 2004. For the six months ended June 30, 2004 and
2003, respectively, an immaterial amount of expense was recognized related to
the Management Stock Purchase Plan.
EQUITY AND PERFORMANCE INCENTIVE PLAN
Stock Options
In February 2004, 473,700 options were granted to certain executives and other
eligible employees at an exercise price of $0.90 per share. For the first six
months of 2004, 17,000 options were exercised leaving 2,337,680 options
outstanding at June 30, 2004. In June 2004, the Board accelerated the vesting of
239,999 options for two executives, as previously noted.
Deferred Shares
In February 2004, 445,000 deferred shares were granted to certain executives and
in June 2004, the Board granted 514,706 deferred shares to one executive.
Furthermore, in June 2004 the Board also accelerated the vesting of 345,000
deferred shares originally granted in February 2004 to two other executives. For
the six months ended June 30, 2004, 535,056 shares of the Company's common stock
were issued under this plan leaving 824,706 deferred shares outstanding at June
30, 2004. For the six months ended June 30, 2004 and 2003, approximately $0.6
million and $1.3 million, respectively, were recognized as expense related to
deferred shares.
13
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Performance Shares
During the second quarter of 2004, 11,250 performance shares, which were earned
as of December 31, 2003, were issued. Furthermore, a total of 255,000
performance shares were immediately vested in accordance with their respective
performance share agreements when the employment of three executives was
terminated. These shares were issued in July 2004. At June 30, 2004, a total of
370,000 performance shares remain outstanding, including the 255,000 shares as
previously noted. Performance shares are not issuable until earned. For the six
months ended June 30, 2004, $0.1 million was recognized as expense related to
performance shares. For the six months ended June 30, 2003, an immaterial amount
was credited to compensation expense, which resulted from the decrease in the
Company's stock price.
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 six
months ended June 30, 2004, approximately $0.1 million was recognized as expense
related to these performance units. A total of 195,012 performance units worth
$0.4 million were immediately vested in accordance with their respective
performance share agreements when the employment of two executives was
terminated in June 2004.
TREASURY STOCK
In the first six months of 2004, 445,981 shares were returned to the Company by
certain executives to cover taxes on deferred shares issued and by one executive
to pay-down a portion of his executive loan. Treasury stock is carried at cost
and is recorded as a net decrease in capital in excess of par value.
NOTE 8 - EMPLOYEE BENEFIT PLANS
Effective January 1, 2004, the Company's defined benefit plan was amended to
freeze benefit accruals. The Company previously disclosed in its financial
statements for the year ended December 31, 2003 that it is required to
contribute $1.5 million to its defined benefit plan in 2004. As of June 30,
2004, contributions of $0.4 million have been made.
The following table summarizes the components of our defined benefit pension
expenses for the three and six months ended June 30, 2004 and 2003 (in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
----------- ----------- ---------- ----------
Service cost......................................... $ - $ 468 $ - $ 936
Interest cost........................................ 700 660 1,286 1,320
Expected return on plan assets....................... (841) (751) (1,562) (1,502)
Amortization of prior service costs.................. - 17 - 34
Amortization of actuarial gain....................... - (138) - (276)
----------- ----------- ---------- ----------
Net periodic benefit cost (benefit)............... $ (141) $ 256 $ (276) $ 512
=========== =========== ========== ==========
Concurrent with the freeze, the Company began making contributions to a new
retirement account in the 401(k) Plan, which has been renamed the Penton Media,
Inc. Retirement and Savings Plan ("RSP"). The RSP now includes the new
retirement account and the "old" 401(k) savings account. There are no changes to
the 401(k) savings account as a result of this change. Beginning in 2004, the
Company began making monthly contributions to each employee's retirement account
equal to between 3% and 6% of the employee's annual salary, based on age and
years of service. The Company's contributions become fully vested once the
employee has completed five years of service. The Company expects to make
contributions to the RSP of approximately $1.8 million in 2004. During the first
six months of 2004, contributions of $0.9 million were made.
Effective January 1, 2004, Penton's supplemental executive retirement plan
("SERP") was amended to freeze benefits. In place of the SERP, the Company will
accrue an amount equal to between 3% and 6% of the participants' eligible salary
plus an investment return equal to the Moody's Aa Corporate Bond note. The
accrued percentage is based on each executive's age and
14
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
years of service. In July 2004, the Company paid a total of $0.4 million to
settle benefit obligations with respect to two executives in connection with the
termination of their employment.
The following table summarizes the components of our SERP pension expense for
the three and six months ended June 30, 2004 and 2003 (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
----------- ----------- ---------- ----------
Service cost......................................... $ - $ 18 $ - $ 36
Interest cost........................................ 13 13 26 26
Amortization of prior service costs.................. - 7 - 14
----------- ----------- ---------- ----------
Net periodic benefit cost ........................ $ 13 $ 38 $ 26 $ 76
=========== =========== ========== ==========
NOTE 9 - EARNINGS PER SHARE
Earnings per share have been computed pursuant to the provisions of SFAS No.
128, "Earnings Per Share" ("SFAS 128"). Computations of basic and diluted
earnings per share for the three and six months ended June 30, 2004 and 2003 are
as follows (in thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
------------ ----------- ----------- ----------
Net loss applicable to common stockholders $ (17,939) $ (20,206) $ (28,339) $ (25,964)
============ =========== =========== ==========
Number of shares:
Weighted average shares outstanding -
basic and diluted 33,583 33,508 33,559 33,272
============ =========== =========== ==========
Per share amount:
Loss applicable to common stockholders -
basic and diluted $ (0.53) $ (0.60) $ (0.84) $ (0.78)
============ =========== =========== ==========
Our 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 RSUs had been converted into common stock. EITF
03-6, requires that participating securities included in the scope of EITF 03-6
be included in the computation of basic earnings per share if the effect of
inclusion is dilutive. Vested RSUs and deferred shares are always included in
the computation of basic earnings per share as they are considered equivalent to
common stock. Furthermore, non-vested RSUs are excluded from the scope of EITF
03-6 as they are accounted for under APB 25. For participating securities
included in the scope of EITF 03-6, the use of the two-class method to determine
whether the inclusion of such securities is dilutive is required. Furthermore,
non-vested RSU's are included in basic EPS using the two-class method in
accordance with SFAS 128. To the extent not included in basic earnings per
share, the redeemable preferred stock and the non-vested RSUs are considered in
the diluted earnings per share calculation under the "if-converted" method and
"treasury stock" method, respectively. At June 30, 2004 and 2003, redeemable
preferred stock and non-vested RSUs were excluded from the calculation of basic
earnings per share as the results were anti-dilutive.
Due to the loss from continuing operations for the three and six months ended
June 30, 2004, 2,337,680 stock options, 370,000 performance shares, 589,706
non-vested deferred shares, 83,882 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 for the three and six months ended June 30, 2003,
2,110,455 stock options, 471,487 performance shares, 332,890 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.
15
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 10 - COMPREHENSIVE LOSS
Comprehensive loss represents net loss plus the results of certain stockholders'
equity changes not reflected in the consolidated statements of operations. The
after-tax component of comprehensive loss for the three and six months ended
June 30, 2004 and 2003 are as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
-------------- -------------- ------------- --------------
Net loss $ (14,531) $ (18,346) $ (19,738) $ (23,449)
Other comprehensive loss:
Change in accumulated translation adjustment (118) (108) 46 228
-------------- -------------- ------------- --------------
Total comprehensive loss $ (14,649) $ (18,454) $ (19,692) $ (23,221)
============== ============== ============= ==============
NOTE 11 - RELATED PARTY TRANSACTIONS
In the first six months of 2004, 445,981 shares were returned to the Company by
certain executives to cover taxes on deferred shares issued and by one executive
to pay-down a portion of his executive loan.
In December 2003, the Company entered into an agreement with a former employee
to provide trade show and conference services to selected Penton events in 2004
and 2005. Under the agreement, the former employee will receive guaranteed
minimum payments of $0.4 million and $0.7 million in 2004 and 2005,
respectively. In addition, Penton will provide, for an immaterial charge to the
former employee, office space and related office services, including utilities,
computer and office equipment, telephone service, janitorial services and other
typical office services.
At June 30, 2004, Neue Medien Ulm Holdings GmbH ("Neue Medien") owed PM Germany,
a consolidated subsidiary, $0.7 million. This amount is classified on the
consolidated balance sheets as notes receivable. Neue Median and Penton jointly
own PM Germany. The notes are due on demand and bear interest at the German
Federal rate plus 3%, or 4.14% at June 30, 2004.
NOTE 12 - 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").
In the first quarter of 2004 the Company recorded a valuation allowance of $0.4
million against its net foreign deferred tax assets. In recording the valuation
allowance, management considered it more likely than not that all of the foreign
net deferred tax assets would not be realized. At June 30, 2004 and December 31,
2003 the valuation allowance for net deferred tax assets and net operating loss
carryforwards totaled $58.0 million and $55.3 million, respectively.
In January 2003, the Company received a tax refund of $52.7 million. This amount
is included in net cash provided by operating activities in the condensed
consolidated statements of cash flows.
NOTE 13 - CONTINGENCIES
In connection with the acquisition of Mecklermedia Corporation in 1998, a
lawsuit was brought against the Company on December 1, 1998 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 had 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. On May 16, 2001, the United States District Court for
the Southern District of New York granted the Plaintiff's motion for
certification of a class consisting of all former stockholders of Mecklermedia
who tendered their shares in the tender offer. By letter dated November 3, 2003,
plaintiffs' counsel informed the Court that a settlement had been reached in
this case. In July 2004, the Federal District Court approved the settlement
between the former stockholders of Mecklermedia and the Company. At June 30,
2004, the company recorded a liability of approximately $4.6
16
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
million, which reflects its portion of the $7.0 million settlement amount and
separately recorded an insurance receivable in the same amount, (see Note 18 -
Subsequent Events).
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.
NOTE 14 - BUSINESS RESTRUCTURING CHARGES
In 2001, 2002, 2003 and the first half of 2004, the Company implemented a number
of cost reduction initiatives to improve its operating cost structure. The cost
reduction initiatives included workforce reductions, the consolidation and
closure of over 30 facilities, and the cancellation of various contracts.
For facilities that the Company no longer occupies, management makes
assumptions, including the number of years a property will be subleased, square
footage, market trends, property location and the price per square foot based on
discussions with realtors and/or parties that have shown interest in the space
and records estimated sublease income accordingly. The Company is actively
attempting to sublease all vacant facilities.
Personnel costs include payments for severance, benefits and outplacement
services.
2004 RESTRUCTURING PLAN
Reflecting Penton's new CEO's vision to position the Company for growth and
improved performance, the Company restructured its operations by flattening its
organizational structure as well as implementing other cost savings strategies.
The Company recorded restructuring charges of $0.7 million and $2.9 million,
respectively, in the first and second quarters of 2004. These costs are
associated with the elimination of 37 employees, including several executives,
primarily in the United States. As of June 30, 2004, the elimination of 30
positions and payments of $0.4 million had been completed.
Activity and liability balances related to the 2004 restructuring plan are as
follows (in thousands):
SEVERANCE
AND OTHER OTHER
PERSONNEL COSTS EXIT COSTS TOTAL
---------------- ----------------- --------------
Charged to costs and expenses $ 695 $ 37 $ 732
Cash payments (85) (25) (110)
---------------- ----------------- --------------
Restructuring balance, March 31, 2004 610 12 622
Charged to costs and expenses 2,868 79 2,947
Adjustments (5) (7) (12)
Cash payments (254) (20) (274)
---------------- ----------------- --------------
Restructuring balance, June 30, 2004 $ 3,219 $ 64 $ 3,283
================ ================= ==============
Payment of these severance costs is expected to be completed by the second
quarter of 2005.
2003 RESTRUCTURING PLAN
In order to meet continued revenue challenges in 2003, the Company implemented a
number of expense reduction and restructuring activities. The Company recorded
restructuring charges of $4.7 million in 2003. Included in this amount is $2.5
million for personnel costs associated with the elimination of 85 positions,
primarily in the United States. Furthermore, facility closing costs of $3.8
million relate primarily to the closure of one floor at the Company's corporate
headquarters and the partial closure of one additional facility. This charge was
offset by $2.3 million of estimated sublease income related to these facilities.
The charge for other exit costs of $0.7 million relates primarily to equipment
lease payments at closed office facilities, the cancellation of certain
contracts, and broker commissions.
17
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Activity and liability balances related to the 2003 restructuring plan are as
follows (in thousands):
SEVERANCE
AND OTHER FACILITY OTHER
PERSONNEL COSTS CLOSING COSTS EXIT COSTS TOTAL
---------------- ----------------- -------------- --------------
Charged to costs and expenses $ 2,548 $ 1,505 $ 661 $ 4,714
Adjustments 35 (11) - 24
Cash payments (1,105) (500) (233) (1,838)
---------------- ----------------- -------------- --------------
Restructuring balance, December 31, 2003 1,478 994 428 2,900
Adjustments 76 - - 76
Cash payments (1,121) (205) (182) (1,508)
---------------- ----------------- -------------- --------------
Restructuring balance, June 30, 2004 $ 433 $ 789 $ 246 $ 1,468
================ ================= ============== ==============
Payments of severance costs are expected to be completed by the first quarter of
2005. Facility closing costs and other exit costs, which consist of equipment
leases, will be paid over their respective lease terms, which expire at various
dates through 2010.
2002 RESTRUCTURING PLAN
In 2002, the Company announced a number of expense reduction and restructuring
initiatives intended to improve its operating cost structure. The actions
include costs of $5.1 million related to the closure of nine offices worldwide.
These amounts were offset in part by approximately $1.7 million related to our
New York, NY and Burlingame, CA offices that we were able to sublease in 2002.
In addition, the Company reduced the workforce by approximately 316 employees
and recorded a liability for other contractual obligations related primarily to
the cancellation of trade show venues, hotel contracts and service agreements.
Adjustments of $1.7 million primarily relate to rent escalation provisions,
which had not been taken into consideration when the original 2002 liability was
recorded.
Activity and liability balances related to the 2002 restructuring plan are as
follows (in thousands):
SEVERANCE
AND OTHER FACILITY OTHER
PERSONNEL COSTS CLOSING COSTS EXIT COSTS TOTAL
---------------- ----------------- -------------- --------------
Charged to costs and expenses $ 10,344 $ 3,421 $ 1,648 $ 15,413
Adjustments 200 1,705 59 1,964
Cash payments (5,440) (693) (967) (7,100)
---------------- ----------------- -------------- --------------
Restructuring balance, December 31, 2002 5,104 4,433 740 10,277
Adjustments (45) (604) (92) (741)
Cash payments (4,928) (1,469) (375) (6,772)
---------------- ----------------- -------------- --------------
Restructuring balance, December 31, 2003 131 2,360 273 2,764
Adjustments (78) 401 246 569
Cash payments (29) (378) (35) (442)
---------------- ----------------- -------------- --------------
Restructuring balance, June 30, 2004 $ 24 $ 2,383 $ 484 $ 2,891
================ ================= ============== ==============
The balance of severance costs relate to an executive who will be paid through
2007. Other exit costs are expected to be paid in the second half of 2004, and
obligations for the non-cancelable facility leases will be paid over their
respective lease terms, which expire at various dates through 2010.
In 2002, restructuring charges of $1.0 million were classified as part of
discontinued operations.
2001 RESTRUCTURING PLAN
During 2001, as part of a broad cost reduction initiative, the Company announced
certain expense reduction initiatives, including a reduction in workforce, which
reduced headcount by approximately 400 employees, the closure of more than 20
offices worldwide and other exit costs primarily related to the write-off of
computerized software development costs. Adjustments to
18
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
other exit costs of approximately $1.0 million in 2001 and $0.4 million in 2002
primarily relate to the reversal of certain restructuring initiatives that did
not require the level of spending that had originally been estimated.
Activity and liability balances related to the 2001 restructuring plan are as
follows (in thousands):
SEVERANCE
AND OTHER FACILITY OTHER
PERSONNEL COSTS CLOSING COSTS EXIT COSTS TOTAL
---------------- ----------------- -------------- --------------
Charged to costs and expenses $ 6,774 $ 8,669 $ 4,364 $ 19,807
Adjustments (23) - (994) (1,017)
Cash payments (4,468) (267) (2,423) (7,158)
---------------- ----------------- -------------- --------------
Restructuring balance, December 31, 2001 2,283 8,402 947 11,632
Adjustments (135) (459) (422) (1,016)
Cash payments (2,129) (1,590) (250) (3,969)
---------------- ----------------- -------------- --------------
Restructuring balance, December 31, 2002 19 6,353 275 6,647
Adjustments (8) 598 82 672
Cash payments (11) (1,304) (357) (1,672)
---------------- ----------------- -------------- --------------
Restructuring balance, December 31, 2003 - 5,647 - 5,647
Adjustments - 1 - 1
Cash payments - (824) - (824)
---------------- ----------------- -------------- --------------
Restructuring balance, June 30, 2004 $ - $ 4,824 $ - $ 4,824
================ ================= ============== ==============
The Company completed the workforce and other exit cost actions in 2003. The
Company expects to pay the obligations for the non-cancelable leases over their
respective lease terms, which expire at various dates through 2013.
ESTIMATED FUTURE PAYMENTS
At June 30, 2004, the Company had an accrued restructuring balance of $12.5
million. Management expects to make cash payments during the remainder of 2004
of approximately $4.9 million, composed of $3.3 million for employee separation
costs, $1.0 million for facility lease obligations and $0.6 million for other
contractual obligations. The balance of severance costs will be paid through
2007, and the balance of facility costs and other exit costs, primarily
long-term leases, are expected to be paid through the end of the respective
lease terms, which extend through 2013.
Amounts due within one year of approximately $5.8 million and $3.7 million at
June 30, 2004 and December 31, 2003, respectively, are classified in other
accrued expenses on the consolidated balance sheets. Amounts due after one year
of approximately $6.7 million and $7.6 million at June 30, 2004 and December 31,
2003, respectively, are included in other non-current liabilities on the
consolidated balance sheets.
Restructuring charges, including adjustments, for the three and six months ended
June 30, 2004 and 2003 are as follows, by segment:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
----------------- ---------------- ---------------- ---------------
Industry $ 294 $ 216 $ 644 $ 168
Technology 554 1,103 807 1,148
Lifestyle (3) 45 - 45
Retail 681 - 699 -
Corporate 1,997 (41) 2,163 (111)
----------------- ---------------- ---------------- ---------------
Total $ 3,523 $ 1,323 $ 4,313 $ 1,250
================= ================ ================ ===============
Restructuring charges are included in restructuring and other charges on the
consolidated statements of operations.
19
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 15 - SEGMENT INFORMATION
The Company views and manages the business along four segments: Industry,
Technology, Lifestyle and Retail, and groups its industry portfolios within
these segments. A senior manager is in charge of each segment, and these senior
managers report directly to the Chief Executive Officer. Our four segments
derive their revenues from publications, trade shows and conferences, and online
media products serving customers in 12 distinct industries.
The executive management team evaluates performance of each segment based on its
revenues and adjusted segment EBITDA. As such, in the analysis that follows, the
Company uses adjusted segment EBITDA, which is defined as net income (loss)
before interest, taxes, depreciation and amortization, non-cash compensation,
impairment of assets, restructuring charges, executive separation costs,
provision for loan impairment, discontinued operations, general and
administrative costs, and other non-operating items. General and administrative
costs include functions such as finance, accounting, human resources and
information systems, which cannot reasonably be allocated to each segment.
Assets are not allocated to segments and as such have not been presented.
Summary information by segment for the three months ended June 30, 2004 and
2003, is as follows (in thousands):
INDUSTRY TECHNOLOGY LIFESTYLE RETAIL TOTAL
---------- ----------- ------------ ---------- ----------
2004
Revenues $ 20,912 $ 19,956 $ 3,884 $ 6,184 $ 50,936
Adjusted segment EBITDA $ 4,556 $ 3,432 $ (617) $ 1,455 $ 8,826
2003
Revenues $ 20,998 $ 20,064 $ 3,362 $ 6,042 $ 50,466
Adjusted segment EBITDA $ 4,788 $ 3,272 $ (667) $ 1,451 $ 8,844
Summary information by segment for the six months ended June 30, 2004 and 2003,
is as follows (in thousands):
INDUSTRY TECHNOLOGY LIFESTYLE RETAIL TOTAL
---------- ----------- ------------ ---------- ----------
2004
Revenues $ 39,300 $ 34,234 $ 21,108 $ 10,761 $ 105,403
Adjusted segment EBITDA $ 7,629 $ 4,481 $ 10,491 $ 1,982 $ 24,583
2003
Revenues $ 40,360 $ 35,276 $ 18,411 $ 10,811 $ 104,858
Adjusted segment EBITDA $ 8,064 $ 4,065 $ 8,635 $ 2,182 $ 22,946
20
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Segment revenues, all of which are realized from external customers, equal
Penton's consolidated revenues. Following is a reconciliation of Penton's total
adjusted segment EBITDA to consolidated net loss (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
-------------- -------------- --------------- -------------
Total adjusted segment EBITDA $ 8,826 $ 8,844 $ 24,583 $ 22,946
Depreciation and amortization (2,965) (3,781) (5,981) (7,503)
Provision for loan impairment (1,717) (7,600) (1,717) (7,600)
Restructuring and other charges (3,524) (1,901) (4,392) (1,817)
Executive separation costs (347) - (2,701) -
Non-cash compensation (559) (347) (681) (1,268)
Interest expense (9,362) (9,412) (18,820) (19,750)
Interest income 64 128 166 237
Other, net (10) 66 (16) (308)
General and administrative costs (4,863) (4,090) (9,557) (8,873)
-------------- -------------- --------------- -------------
Loss from continuing operations before income
taxes (14,457) (18,093) (19,116) (23,936)
Provision for income taxes (74) (65) (622) (191)
Discontinued operations - (188) - 678
-------------- -------------- --------------- -------------
Net loss $ (14,531) $ (18,346) $ (19,738) $ (23,449)
============== ============== =============== =============
NOTE 16 - SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Portions of the following transactions do not provide or use cash and,
accordingly, are not reflected in the condensed consolidated statements of cash
flows.
For the six months ended June 30, 2004, Penton issued 11,217 shares under the
Management Stock Purchase Plan, 535,056 deferred shares and 17,000 shares under
the stock option plan. In February 2004, 473,700 stock options, 595 RSUs and
445,000 deferred shares were granted and in June 2004, an additional 514,706
deferred shares were granted. As a result of the termination of three executives
in June 2004, 239,999 stock options and 255,000 performance shares were
immediately vested. Furthermore, for the six months ended June 30, 2004, Penton
recorded amortization of deemed dividend and accretion on preferred stock of
$8.6 million.
In June 2004, Mr. Nussbaum returned 288,710 common shares to reduce his
executive loan balance. In addition, Mr. Nussbaum received a signing bonus for
$1.7 million of which $1.1 million was used to pay off the remaining balance of
his executive loan.
For the six months ended June 30, 2003, Penton issued 19,050 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 six months ended June 30, 2003, Penton recorded
amortization of deemed dividend and accretion on preferred stock of $2.5
million.
NOTE 17 - GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
The following schedules set forth condensed consolidated balance sheets as of
June 30, 2004, and December 31, 2003, and condensed consolidated statements of
operations for the three and six months ended June 30, 2004 and 2003, and
condensed consolidated statements of cash flows for the six months ended June
30, 2004 and 2003. 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.
21
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 17 -- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2004
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------- ------------ ------------
Dollars in thousands
ASSETS
Current assets:
Cash and cash equivalents $ 12,447 $ 93 $ 3,379 $ - $ 15,919
Restricted cash 193 - - - 193
Accounts receivable, net 19,710 6,298 5,663 - 31,671
Notes receivable - - 760 - 760
Inventories 515 384 6 - 905
Prepayments, deposits and other 8,406 581 2,295 - 11,282
------------ ----------- ------------ ------------ ------------
41,271 7,356 12,103 - 60,730
------------ ----------- ------------ ------------ ------------
Property, plant and equipment, net 13,001 2,268 1,304 - 16,573
Goodwill 122,289 90,755 1,367 - 214,411
Other intangibles, net 4,660 4,844 173 - 9,677
Other non-current assets 7,243 143 56 - 7,442
Investments in subsidiaries (1) (196,236) - - 196,236 -
------------ ----------- ------------ ------------ ------------
(49,043) 98,010 2,900 196,236 248,103
------------ ----------- ------------ ------------ ------------
$ (7,772) $ 105,366 $ 15,003 $ 196,236 $ 308,833
============ =========== ============ ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 24,651 $ 7,954 $ 2,166 $ - $ 34,771
Accrued compensation and benefits 7,777 1,159 343 - 9,279
Unearned income 11,476 3,212 6,871 - 21,559
------------ ----------- ------------ ------------ ------------
43,904 12,325 9,380 - 65,609
------------ ----------- ------------ ------------ ------------
Long-term liabilities and deferred credits:
Senior secured notes, net of discount 80,059 76,920 - - 156,979
Senior subordinated notes, net of discount 87,642 84,205 - - 171,847
Net deferred pension credits 10,764 - - - 10,764
Intercompany advances (127,357) 86,514 33,891 6,952 -
Other non-current liabilities 4,265 2,014 1,943 - 8,222
------------ ----------- ------------ ------------ ------------
55,373 249,653 35,834 6,952 347,812
------------ ----------- ------------ ------------ ------------
Commitments and contingencies
Minority interest - - 2,461 - 2,461
Mandatorily redeemable convertible
preferred stock 63,661 - - - 63,661
Stockholders' deficit:
Common stock and capital in excess
of par value 218,612 209,653 16,614 (226,267) 218,612
Retained deficit (387,187) (366,265) (47,174) 413,439 (387,187)
Notes receivable from officers, less
reserve of $5,848 - - - - -
Accumulated other comprehensive
income (loss) (2,135) - (2,112) 2,112 (2,135)
------------ ----------- ------------ ------------ ------------
(170,710) (156,612) (32,672) 189,284 (170,710)
------------ ----------- ------------ ------------ ------------
$ (7,772) $ 105,366 $ 15,003 $ 196,236 $ 308,833
============ =========== ============ ============ ============
(1) Reflects investments in subsidiaries utilizing the equity method.
22
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 17 -- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2003
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 27,125 $ 147 $ 2,354 $ - $ 29,626
Accounts receivable, net 19,511 4,901 5,309 - 29,721
Notes receivable - - 571 - 571
Inventories 582 287 6 - 875
Prepayments, deposits and other 2,845 379 1,674 - 4,898
------------ ----------- ------------ ------------ -----------
50,063 5,714 9,914 - 65,691
------------ ----------- ------------ ------------ -----------
Property, plant and equipment, net 14,613 2,656 1,534 - 18,803
Goodwill 122,289 90,755 1,367 - 214,411
Other intangibles, net 5,053 5,639 191 - 10,883
Other non-current assets 8,425 143 534 - 9,102
Investment in subsidiaries (1) (177,677) - - 177,677 -
------------ ----------- ------------ ------------ -----------
(27,297) 99,193 3,626 177,677 253,199
------------ ----------- ------------ ------------ -----------
$ 22,766 $ 104,907 $ 13,540 $ 177,677 $ 318,890
============ =========== ============ ============ ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 17,308 $ 6,506 $ 1,702 $ - $ 25,516
Accrued compensation and benefits 5,838 1,112 208 - 7,158
Unearned income 16,990 3,144 4,646 - 24,780
------------ ----------- ------------ ------------ -----------
40,136 10,762 6,556 - 57,454
------------ ----------- ------------ ------------ -----------
Long-term liabilities and deferred credits:
Senior secured notes, net of discount 80,027 76,888 - - 156,915
Senior subordinated notes, net of discount 87,566 84,132 - - 171,698
Net deferred pension credits 11,040 - - - 11,040
Intercompany advances (110,837) 71,196 32,736 6,905 -
Other non-current liabilities 4,701 2,250 2,212 - 9,163
------------ ----------- ------------ ------------ -----------
72,497 234,466 34,948 6,905 348,816
------------ ----------- ------------ ------------ -----------
Commitments and contingencies
Minority interest - - 2,487 - 2,487
Mandatorily redeemable convertible
preferred stock 55,060 - - - 55,060
Redeemable common stock 2 - - - 2
Stockholders' deficit:
Common stock and capital in excess
of par value 226,598 209,653 16,614 (226,267) 226,598
Retained deficit (367,449) (349,976) (44,904) 394,880 (367,449)
Notes receivable from officers, less
reserve of $7,600 (1,897) - - - (1,897)
Accumulated other comprehensive
income (loss) (2,181) 2 (2,161) 2,159 (2,181)
------------ ----------- ------------ ------------ -----------
(144,929) (140,321) (30,451) 170,772 (144,929)
------------ ----------- ------------ ------------ -----------
$ 22,766 $ 104,907 $ 13,540 $ 177,677 $ 318,890
============ =========== ============ ============ ===========
(1) Reflects investments in subsidiaries utilizing the equity method.
23
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 17 -- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2004
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
REVENUES $ 32,586 $ 11,870 $ 6,480 $ - $ 50,936
------------ ----------- ------------ ------------ -------------
OPERATING EXPENSES:
Editorial, production and circulation 15,527 5,732 2,506 - 23,765
Selling, general and administrative 11,774 8,575 3,765 - 24,114
Provision for loan impairment 1,717 - - - 1,717
Restructuring and other charges 2,307 1,195 22 - 3,524
Depreciation and amortization 2,140 652 173 - 2,965
------------ ----------- ------------ ------------ ------------
33,465 16,154 6,466 - 56,085
------------ ----------- ------------ ------------ ------------
OPERATING INCOME (LOSS) (879) (4,284) 14 - (5,149)
------------ ----------- ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (4,816) (4,467) (79) - (9,362)
Interest income 50 - 14 - 64
Equity in losses of subsidiaries (8,831) - - 8,831 -
Other, net 6 - (16) - (10)
------------ ----------- ------------ ------------ ------------
(13,591) (4,467) (81) 8,831 (9,308)
------------ ----------- ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (14,470) (8,751) (67) 8,831 (14,457)
Provision for income taxes (61) (10) (3) - (74)
------------ ----------- ------------ ------------ ------------
NET LOSS $ (14,531) $ (8,761) $ (70) $ 8,831 $ (14,531)
============ =========== ============ ============ ============
24
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 17 -- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2003
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
REVENUES $ 31,718 $ 12,876 $ 5,872 $ - $ 50,466
------------ ----------- ------------ ------------ ------------
OPERATING EXPENSES:
Editorial, production and circulation 15,117 5,988 2,362 - 23,467
Selling, general and administrative 10,755 8,531 3,306 - 22,592
Provision for loan impairment 7,600 - - - 7,600
Restructuring other charges 798 562 541 - 1,901
Depreciation and amortization 2,316 994 471 - 3,781
------------ ---------- ------------ ----------- -----------
36,586 16,075 6,680 - 59,341
------------ ---------- ------------ ----------- -----------
OPERATING LOSS (4,868) (3,199) (808) - (8,875)
------------ ---------- ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (4,762) (4,565) (85) - (9,412)
Interest income 128 - - - 128
Equity in losses of subsidiaries (8,617) - - 8,617 -
Other, net (68) (145) 279 - 66
------------ ---------- ------------ ------------ ------------
(13,319) (4,710) 194 8,617 (9,218)
------------ ---------- ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (18,187) (7,909) (614) 8,617 (18,093)
Benefit (provision) for income taxes (67) (5) 7 - (65)
------------ ----------- ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (18,254) (7,914) (607) 8,617 (18,158)
Income (loss) from discontinued operations (92) 9 (105) - (188)
------------ ----------- ------------- ------------ -------------
NET LOSS $ (18,346) $ (7,905) $ (712) $ 8,617 $ (18,346)
============ =========== ============= ============ =============
25
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 17 -- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
REVENUES $ 76,163 $ 20,586 $ 8,654 $ - $ 105,403
------------ ----------- ----------- ------------ -------------
OPERATING EXPENSES:
Editorial, production and circulation 31,342 10,119 3,685 - 45,146
Selling, general and administrative 27,421 15,012 6,180 - 48,613
Provision for loan impairment 1,717 - - - 1,717
Restructuring and other charges 2,920 1,432 40 - 4,392
Depreciation and amortization 4,284 1,316 381 - 5,981
------------ ----------- ----------- ------------- ------------
67,684 27,879 10,286 - 105,849
------------ ----------- ----------- ------------- ------------
OPERATING INCOME (LOSS) 8,479 (7,293) (1,632) - (446)
------------ ----------- ----------- ------------- ------------
OTHER INCOME (EXPENSE):
Interest expense (9,674) (8,978) (168) - (18,820)
Interest income 136 - 30 - 166
Equity in losses of subsidiaries (18,559) - - 18,559 -
Other, net 3 - (19) - (16)
------------ ----------- ----------- ------------- ------------
(28,094) (8,978) (157) 18,559 (18,670)
------------ ----------- ----------- ------------- ------------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (19,615) (16,271) (1,789) 18,559 (19,116)
Provision for income taxes (123) (18) (481) - (622)
------------ ----------- ----------- ------------ ------------
NET LOSS $ (19,738) $ (16,289) $ (2,270) $ 18,559 $ (19,738)
============ =========== =========== ============ ============
26
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 17 -- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
REVENUES $ 73,830 $ 23,017 $ 8,011 $ - $104,858
-------- -------- -------- --------- --------
OPERATING EXPENSES:
Editorial, production and circulation 31,112 11,186 3,522 - 45,820
Selling, general and administrative 24,630 15,703 5,900 - 46,233
Provision for loan impairment 7,600 - - - 7,600
Restructuring and other charges 669 607 541 - 1,817
Depreciation and amortization 4,677 1,949 877 - 7,503
-------- -------- -------- --------- --------
68,688 29,445 10,840 - 108,973
-------- -------- -------- --------- --------
OPERATING INCOME (LOSS) 5,142 (6,428) (2,829) - (4,115)
-------- -------- -------- --------- --------
OTHER INCOME (EXPENSE):
Interest expense (10,138) (9,453) (159) - (19,750)
Interest income 237 - - - 237
Equity in losses of subsidiaries (19,018) - - 19,018 -
Other, net (369) (147) 208 - (308)
-------- -------- -------- --------- --------
(29,288) (9,600) 49 19,018 (19,821)
-------- -------- -------- --------- --------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (24,146) (16,028) (2,780) 19,018 (23,936)
Provision for income taxes (137) (10) (44) - (191)
-------- -------- -------- --------- --------
LOSS FROM CONTINUING OPERATIONS (24,283) (16,038) (2,824) 19,018 (24,127)
Income (loss) from discontinued operations 834 9 (165) - 678
-------- -------- -------- --------- --------
NET LOSS $(23,449) $(16,029) $ (2,989) $ 19,018 $(23,449)
======== ======== ======== ========= ========
27
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 17 -- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 2004
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES $ (12,825) $ (15) $ 1,083 $ - $ (11,757)
---------- ------- --------- ------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,449) (39) (31) - (1,519)
Net notes receivable - - (188) - (188)
---------- ------- ---------- ------- ----------
Net cash used for investing activities (1,449) (39) (219) - (1,707)
---------- ------- ---------- ------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of financing costs (6) - - - (6)
Increase in restricted cash (193) - - - (193)
Increase (decrease) in book overdrafts (224) - 161 - (63)
---------- ------- ---------- ------- ----------
Net cash provided by (used for) financing activities (423) - 161 - (262)
---------- ------- ---------- ------- ----------
Effect of exchange rate changes on cash 19 - - - 19
---------- ------- ---------- ------- ----------
Net increase (decrease) in cash and cash equivalents (14,678) (54) 1,025 - (13,707)
Cash and cash equivalents at beginning of period 27,125 147 2,354 - 29,626
---------- ------- ---------- ------- ----------
Cash and cash equivalents at end of period $ 12,447 $ 93 $ 3,379 $ - $ 15,919
========== ======= ========== ======= ==========
28
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 17 -- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 2003
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
NET CASH PROVIDED BY (USED FOR) OPERATING
ACTIVITIES $ 35,298 $ 182 $ (758) $ - $ 34,722
-------- ----- ------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (881) (410) (52) - (1,343)
Earnouts paid - (7) - - (7)
Net notes receivable - - 1,549 - 1,549
Proceeds from sale of Professional Trade
Shows group 3,250 - - - 3,250
-------- ----- ------- --------- --------
Net cash provided by (used for) investing activities 2,369 (417) 1,497 - 3,449
-------- ----- ------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of senior secured credit facility (4,500) - - - (4,500)
Payment of notes payable - - (417) - (417)
Employee stock purchase plan payments (107) - (6) - (113)
Proceeds from repayment of officers loans 250 - - - 250
Decrease in restricted cash 14 - 253 - 267
Increase in book overdrafts 25 - 168 - 193
Payment of financing costs (200) - - - (200)
-------- ----- ------- --------- --------
Net cash used for financing activities (4,518) - (2) - (4,520)
-------- ----- ------- --------- --------
Effect of exchange rate changes on cash (52) - - - (52)
-------- ----- ------- --------- --------
Net increase (decrease) in cash and equivalents 33,097 (235) 737 - 33,599
Cash and cash equivalents at beginning of period 5,165 460 1,146 - 6,771
-------- ----- ------- --------- --------
Cash and cash equivalents at end of period $ 38,262 $ 225 $ 1,883 $ - $ 40,370
======== ===== ======= ========= ========
29
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 18 - SUBSEQUENT EVENTS
CONTINGENCY
In July 2004, the Federal District Court in the Southern District of New York
approved the settlement between the former stockholders of Mecklermedia and the
Company. The class settlement, which amounted to $7.0 million, will be paid
entirely by insurance proceeds. See Note 13 - Contingencies.
BOARD OF DIRECTOR CHANGES
Effective at the annual meeting of stockholders on July 15, 2004, the number of
board members decreased from eleven to eight. At the Company's Board of
Directors meeting held on July 21, 2004, the Board named Mr. Nussbaum as a
director and decreased the number of directors from eight to seven.
With the reduction in members, the holders of the preferred stock have a
majority of the Company's Board of Directors. Upon the preferred holders
obtaining this majority, the conversion price on the Company's preferred stock
adjusted back to $7.61. Had the board changes occurred on June 30, 2004, the
amount the preferred stockholders would have been entitled to receive if the
Company had been sold on June 30, 2004, decreased from $232.4 million to $116.4
million. The amount the preferred stockholders would be entitled to receive
could increase significantly in the future under certain circumstances.
Stockholders are urged to read the terms of the preferred stock.
SERIES M PREFERRED STOCK
At the Board of Directors meeting held on July 21, 2004, the Board authorized
the creation of a new series of preferred stock, $0.01 par value, ("Series M
Preferred Stock") as a long term incentive plan for the Company's management.
The maximum number of shares of Series M Preferred Stock was set at 150,000
shares.
30
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, the transition to the new chief executive officer;
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
revenues 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 provide a range of online
media, including Web sites, electronic newsletters and electronic conferences.
Our products serve 12 industries, which we group into four segments:
INDUSTRY
- --------
Manufacturing
Design/Engineering
Mechanical Systems/Construction
Supply Chain
Government/Compliance
Aviation
TECHNOLOGY
- ----------
Internet Technologies
Enterprise Information Technology
Electronics
RETAIL
- ------
Food/Retail
Leisure/Hospitality
LIFESTYLE
- ---------
Natural Products
We believe we have leading media products in most of the industries 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.
Our business has stabilized during the first half of 2004 and the U.S. economy
appears to have turned the corner. However, the business-to-business print
advertising market continues to suffer in 2004. Based on industry information
that is available, it is clear that the trade magazine industry has not yet
demonstrated any real recovery in advertising pages in spite of improving
economic conditions in most sectors. Some of the sectors that are core to
Penton's business continue to record meaningful declines in print advertising
pages this year, including software, computers, and manufacturing.
31
The continuing decline in print advertising pages across a broad range of
business-to-business markets appears to be tied to the combination of the
historical lag of advertising recovery and the secular changes that are
occurring in our industry. While it is historically consistent for advertising
recovery to lag the recovery of underlying end-markets, we are likely
experiencing a structural change in how our customers are allocating their
marketing budgets even as their business conditions improve.
While the secular changes vary by market and are not consistently applied across
all sectors, we are witnessing increasing adoption of electronic marketing
programs that include search engine advertising, as well as custom marketing
programs including events and print products. The changing marketing strategies
of our customers continue to impact print advertising budgets in several
sectors.
The adoption of non-traditional media channels seems to be driven by a
combination of sales lead generation goals and marketing accountability in
several markets. Brand building and new product introductions, historically the
strength of print advertising programs, are not the primary marketing strategies
for many of our customers at this point in the economic cycle.
In sectors where brands continue to be the primary focus of marketing plans,
such as foodservice and retail, print advertising continues to be the foundation
of marketing programs. As customers in other sectors return to brand building
and introduction of new products, it is likely that print advertising will
recover. However, it is also likely that print advertising recovery will lag the
overall growth in our customers' total marketing budgets.
The secular changes taking place in the business-to-business media industry
drive the Company's strategy of providing a wide range of marketing solutions to
our customers, including e-Media properties, custom marketing programs and
integrated marketing services, in addition to traditional print advertising and
trade show exhibitions.
While e-Media is still a relatively small part of our performance, we expect to
see accelerated growth of this product line as we introduce new digital media
offerings across all of our markets.
RECENT DEVELOPMENTS
NEW CHAIRMAN AND CHIEF EXECUTIVE OFFICER
On June 21, 2004, the Board of Directors announced the appointment of David B.
Nussbaum as Chief Executive Officer ("CEO") of Penton. Mr. Nussbaum succeeds
Thomas L. Kemp. The Company had announced on March 24, 2004, that Mr. Kemp would
be leaving the Company.
Mr. Nussbaum was previously an executive vice president with the Company and
president of the Company's Technology and Lifestyle Media Division. Mr. Nussbaum
joined Penton in 1998 after an 18-year career with Miller Freeman, Inc., where
he was a senior vice president responsible for its New York Division.
In addition, the Board of Directors named Royce Yudkoff as its non-executive
chairman. Mr. Yudkoff is a co-founder of ABRY Partners, an investment holding
company based in Boston, and currently serves as its president and managing
partner.
BOARD OF DIRECTOR CHANGES
Effective at the annual meeting of stockholders on July 15, 2004, the number of
board members was reduced from eleven to eight. With this reduction, the holders
of the preferred stock have a majority of the Company's Board of Directors. Upon
the preferred stockholders obtaining this majority, the conversion price of the
Company's preferred stock adjusted back to $7.61 (see Preferred Stock Leverage
Ratio Event of Non-Compliance below).
The Company announced on June 14, 2004, that the preferred stockholders had
appointed Mr. Yudkoff as a director to replace Daniel C. Budde, who resigned
effective June 11, 2004. At the same meeting, the Board named Mr. Yudkoff its
non-executive chairman.
At the Company's Board of Directors meeting held on July 21, 2004, the Board
named Mr. Nussbaum as a director and decreased the number of directors to seven.
32
MANAGEMENT RESTRUCTURING
On June 24, 2004, the Company announced a reorganization of its corporate
leadership structure. These changes, which are aimed at accelerating product and
service development, driving revenue growth, and flattening the company's
organizational structure, included the following actions:
- Daniel J. Ramella, president and chief operating officer of Penton
Media, Inc. and president of the Company's Industry Media Division,
and William C. Donohue, who managed the Retail Media group
operation, left the Company as of June 30, 2004.
- David B. Nussbaum, the Company's new CEO, assumed the senior
operating responsibilities for the Industry group and Darrell Denny,
president of the Company's IT Media and Lifestyle Media groups,
assumed the operating responsibilities for the Retail group as well
as the IT Media and Lifestyle Media groups.
- Eric Shanfelt, director of eMedia strategy for Penton's IT Media
Group and New Hope Natural Media businesses, assumed the newly
created corporate position of vice president of eMedia Strategy as
Penton moves to expand its e-Media portfolio.
SENIOR EXECUTIVE BONUS AND TERMINATION BENEFITS
As noted above, on June 21, 2004, Penton's Board of Directors announced the
appointment of David B. Nussbaum as Chief Executive Officer of the Company. In
addition to the Company's standard executive incentive and benefit package, Mr.
Nussbaum received a signing bonus of approximately $1.7 million and 30,000
shares of a new Series of Preferred Stock (see Note 18 - Subsequent Events). In
addition, the Board accelerated the vesting of 135,000 deferred shares granted
to Mr. Nussbaum on February 3, 2004. Mr. Nussbaum used the net proceeds from his
signing bonus to repay a portion of his outstanding executive loan balance.
On March 24, 2004, the Company announced that its Chairman and Chief Executive
Officer, Thomas L. Kemp, would be leaving the Company. Mr. Kemp's employment was
terminated effective June 30, 2004 and on July 1, 2004, Mr. Kemp and the Company
signed a Separation Agreement and General Release agreement. Mr. Kemp's
separation agreement includes the following:
- A lump-sum payment of approximately $2.3 million, of
which $0.8 million has been placed in escrow. Included in this
payment is severance of approximately $1.8 million per Mr. Kemp's
employment agreement; $0.3 million related to performance units
granted on May 22, 2003; and $0.2 million related to the settlement
of Mr. Kemp's accrued supplemental executive retirement plan
obligation;
- The accelerated vesting of 100,000 stock options granted to Mr. Kemp
prior to his termination making them immediately exercisable; and
- The immediate vesting of 125,000 performance shares in accordance
with the terms of his performance share agreement dated February 5,
2002.
In addition, the Board and Mr. Kemp agreed upon a number of provisions related
to Mr. Kemp's outstanding executive loan balance. The underlying goal of these
provisions was to mitigate any tax exposure to the Company should the loan be
discharged at a future date. Specifically, $0.8 million of the lump-sum payment
described above has been placed in escrow and will be returned to Mr. Kemp only
if he pays off the entire loan balance by its due date. Furthermore, Mr. Kemp
has granted Penton a security interest in approximately 1.1 million shares of
Penton common stock. These pledged securities could be transferred to Penton's
ownership under certain circumstances and used to pay the appropriate taxing
authorities or to pay down the outstanding loan balance.
On June 28, 2004, Mr. Kemp was granted 514,706 deferred shares that vest on
January 3, 2005. In return for these shares, Mr. Kemp agreed to comply with the
terms of certain restrictive covenants, including a non-compete and a
non-solicitation covenant.
At June 30, 2004, $2.7 million in termination benefits had been accrued for Mr.
Kemp. This amount is included in selling general and administrative on the
consolidated statements of operations.
33
On June 27, 2004, the Company announced that its President and Chief Operating
Officer, Daniel J. Ramella, would be leaving the Company as part of a management
restructuring plan. Mr. Ramella's employment was terminated effective June 30,
2004 and on July 1, 2004, Mr. Ramella and the Company signed a Separation
Agreement and General Release agreement. Mr. Ramella's separation agreement
includes the following:
- A lump-sum payment of approximately $1.7 million. Included in this
payment is severance of approximately $1.4 million per Mr. Ramella's
employment agreement; $0.1 million related to performance units
granted on May 22, 2003; and $0.2 million related to the settlement
of Mr. Ramella's accrued supplemental executive retirement plan
obligation;
- The accelerated vesting of 139,999 stock options granted to Mr.
Ramella prior to his termination making them immediately
exercisable; and
- The immediate vesting of 90,000 performance shares in accordance
with the terms of his performance share agreement dated February 5,
2002.
In addition, the Board agreed to discharge the balance of Mr. Ramella's $2.6
million executive loan in return for the full and final settlement of any claims
Mr. Ramella may have had against the Company.
At June 30, 2004, $1.4 million in termination benefits had been accrued for Mr.
Ramella. This amount is included in restructuring and other charges on the
consolidated statements of operations.
DEFINED BENEFIT PLAN AND SERP FREEZE EFFECTIVE JANUARY 1, 2004
In November 2003, the Company's defined benefit plan was amended to freeze
benefit accruals effective January 1, 2004. Beginning in 2004, the Company began
providing benefits to a new retirement account in the 401(k) Plan, which has
been renamed the Penton Media, Inc. Retirement and Savings Plan ("RSP"). The RSP
will include the new retirement account and the "old" 401(k) savings account.
Under the new plan, the Company will make monthly contributions to each
employee's retirement account equal to between 3% and 6% of the employee's
annual salary, based on age and years of service. The Company's contributions
become fully vested once the employee completes five years of service. The
Company expects to make contributions to the RSP of approximately $1.8 million
in 2004.
In November 2003, Penton's supplemental executive retirement plan ("SERP") was
amended to freeze benefits effective on January 1, 2004. In place of the SERP,
the Company will accrue an amount equal to between 3% and 6% of each
participant's eligible salary plus an investment return equal to the Moody's Aa
Corporate Bond note. The accrued percentage is based on each executive's age and
years of service.
SERIES M PREFERRED STOCK
The Board of Directors, at its meeting held on July 21, 2004, authorized the
creation of a new series of preferred stock, $0.01 par value, ("Series M
Preferred Stock") as a long-term incentive plan for the Company's management.
The maximum number of shares of Series M Preferred Stock was set at 150,000
shares.
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 of 14.7 at June 30, 2004
(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. 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, June 30, September 28 and December 27, 2003 and
March 26, 2004 up to the current maximum rate of 10%. The conversion price on
the preferred stock decreased by $0.76 as of April 1, June 30, September 28 and
December 27, 2003 and March 26, 2004 to the maximum reduction related to this
event of non-compliance of $3.80. 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. No such reduction to the
conversion price will be made at any time that representatives of the preferred
stockholders constitute a majority of the Company's Board of Directors.
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, since
the leverage ratio has exceeded 7.5 for four consecutive quarters, the preferred
stockholders 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. If the Company
had been sold on June 30, 2004, the
34
bondholders would have been entitled to receive $335.8 million and the preferred
stockholders would have been entitled to receive $232.4 million before the
common stockholders would have received any amounts for their common shares.
This value could go significantly higher in the future in certain circumstances.
Stockholders are urged to read the terms of the preferred stock. 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 June 30, 2004, no
dividends had 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 capital in excess of par value since the Company has a stockholders'
deficit.
Effective at the annual meeting of stockholders on July 15, 2004, the number of
board members was reduced from eleven to eight. With this reduction, the holders
of the preferred stock have a majority of the Company's Board of Directors. Upon
the preferred holders obtaining this majority, the conversion price on the
Company's preferred stock adjusted back to $7.61. Consequently, the amount the
preferred stockholders would be entitled to receive if the Company had been sold
on June 30, 2004, decreases from $232.4 million to $116.4 million after the
Board changes. The amount the preferred stockholders would be entitled to
receive could increase significantly in the future under certain circumstances.
Stockholders are urged to read the terms of the preferred stock.
RESULTS OF OPERATIONS
REVENUES
Our magazines generate revenues primarily from the sale of advertising space.
Our magazines are primarily controlled circulation and are distributed free of
charge to qualified subscribers in our target industries. Subscribers to
controlled-circulation publications qualify to receive our trade magazines by
verifying their responsibility for specific job functions, including purchasing
authority. We survey our magazine subscribers annually to verify their
continuing qualification. Trade show exhibitors pay a fixed price per square
foot of booth space. In addition, we receive revenues from attendee fees at
trade shows and from exhibitor sponsorships of promotional media. Our
conferences are supported by either attendee registration fees or marketer
sponsorship fees, or a combination of both.
The following table summarizes our revenues for the three and six months ended
June 30, 2004 and 2003 (in millions):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 CHANGE 2004 2003 CHANGE
---- ---- ------ ---- ---- ------
Revenues............. $ 50.9 $ 50.5 0.9% $105.4 $ 104.9 0.5%
Total revenues increased $0.4 million, or 0.9%, from $50.5 million for the three
months ended June 30, 2003 to $50.9 million for the same period in 2004. The
increase was due primarily to an increase in trade show revenues of $1.4
million, or 21.0%, from $7.1 million for the three months ended June 30, 2003 to
$8.6 million for the same 2004 period and an increase in online media revenues
of $0.9 million, or 22.8%, from $3.9 million for the three months ended June 30,
2003 to $4.8 million for the same 2004 period. These increases were partially
offset by publishing revenue declines of $1.9 million, or 4.9%, from $39.4
million for the three months ended June 30, 2003 to $37.5 million for the same
2004 period.
Total revenues increased $0.5 million, or 0.5%, from $104.9 million for the six
months ended June 30, 2003 to $105.4 million for the same period in 2004. The
increase was due primarily to an increase in trade show revenues of $3.0
million, or 14.0%, from $21.7 million for the six months ended June 30, 2003 to
$24.7 million for the same 2004 period and an increase in online media revenues
of $1.6 million, or 23.6%, from $7.0 million for the six months ended June 30,
2003 to $8.6 million for the same 2004 period. These increases were partially
offset by publishing revenue declines of $4.1 million, or 5.4%, from $76.2
million for the six months ended June 30, 2003 to $72.1 million for the same
2004 period.
35
The $4.1 million, or 5.4%, decrease in publishing revenues was due primarily to
a decrease in our Industry and Technology segments. Our manufacturing and
government/compliance portfolios accounted for $1.4 million of the decrease,
while our Internet technology and enterprise information technology portfolios
accounted for an additional $3.8 million of the decrease. The remaining sectors
either improved slightly or were flat when compared with the prior year. The
absence of revenues from our Internet World magazine, which was shut down in the
second quarter of 2003, represented 22% of the total publishing decline. Of the
$4.1 million decrease in publishing revenues, nearly $3.2 million related to
advertising. Subscription revenues and list rental revenues also declined in
2004 compared with the first six months of 2003.
The $3.0 million, or 14.0%, increase in our trade show and conference revenues
was due primarily to the increase of $2.1 million in our Lifestyle segment and
$1.0 million increase in our Technology segment, partially offset by a decrease
of $0.1 million in our Retail segment. The improvement in our Lifestyle segment
was the result of a highly successful Natural Products Expo West show held in
March 2004. The improvement in our Technology segment was the result of a $1.0
million increase of revenues in our custom roadshow events. Exhibitor revenues,
which represent about 65.1% of the first six months of 2004 trade show and
conference revenues, increased approximately $1.1 million, or 7.6%, due
primarily to increased booth rentals. Sponsorship revenues also improved
compared with the first six months of 2003, increasing by approximately 47%.
The $1.6 million, or 23.6%, increase in online media revenues was due primarily
to an increase in our Technology segment of $1.3 million and an increase in our
Industry segment of $0.3 million. Most of the increase in online revenues was
due to increases in sponsorship revenues for electronic newsletters and online
events.
EDITORIAL, PRODUCTION AND CIRCULATION
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 CHANGE 2004 2003 CHANGE
---- ---- ------ ---- ---- ------
(In millions)
Editorial, production and circulation............... $ 23.8 $ 23.5 1.3% $ 45.1 $ 45.8 (1.5)%
Percent of revenues................................. 46.7% 46.5% 42.8% 43.7%
Our editorial, production and circulation expenses include personnel costs,
purchased editorial costs, hall rental costs, postage charges, circulation
qualification costs and paper costs. The increase in editorial, production and
circulation expenses for the second quarter of 2004 compared with the second
quarter of 2003 primarily reflects slightly higher online media costs,
particularly Web site development costs, and slightly higher exhibit hall
expenses. The decrease in editorial, production and circulation expenses for the
six months ended June 30, 2004 compared with the same period 2003 primarily
reflects lower headcount and personnel-related costs, lower postage costs, and
lower paper and printing costs. These decreases were partially offset by
slightly higher online media costs; particularly Web site development costs, and
slightly higher exhibit hall expenses. The decrease also reflects the
elimination of some unprofitable properties in 2003, particularly Internet World
magazine.
SELLING, GENERAL AND ADMINISTRATIVE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 CHANGE 2004 2003 CHANGE
---- ---- ------ ---- ---- ------
(In millions)
Selling, general and administrative................. $ 24.1 $ 22.6 6.7% $ 48.6 $ 46.2 5.1%
Percent of revenues................................. 47.3% 44.8% 46.1% 44.1%
Our selling, general and administrative ("SG&A") expenses include personnel
costs, independent sales representative commissions, product marketing, and
facility costs. Our SG&A expenses also include costs of corporate functions,
including accounting, finance, legal, human resources, information systems, and
communications. The increase in SG&A expenses for the second quarter of 2004
compared with the second quarter of 2003 was due primarily to Mr. Nussbaum
receiving a signing bonus of approximately $1.7 million and an additional charge
of $0.3 million related to executive separation costs. These costs were
partially offset by the reversal of $1.0 million related to Mr. Nussbaums
executive loan. The increase in SG&A
36
expenses for the six months ended June 2004 compared with the same period 2003
was due primarily to a charge of $2.7 million related to executive separation
costs for Thomas L. Kemp, who left the Company on June 30, 2004. This increase
was partially offset by lower staff costs, lower facility costs and lower
division and corporate overhead costs as a result of past restructuring efforts.
RESTRUCTURING AND OTHER CHARGES
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 CHANGE 2004 2003 CHANGE
---- ---- ------ ---- ---- ------
(In millions)
Restructuring and other charges..................... $ 3.5 $ 1.9 85.4% $ 4.4 $ 1.8 141.7%
Percent of revenues................................. 6.9% 3.8% 4.2% 1.7%
Commencing in 2001 and continuing through the second quarter of 2004, we
implemented a number of cost reduction initiatives to improve our operating cost
structure. For a more detailed discussion of activity under our restructuring
plans, see Note 14 - Business Restructuring Charges of the notes to consolidated
financial statements.
2004 RESTRUCTURING PLAN
Reflecting Penton's new chief executive officer's vision to position the Company
for growth and improved performance, the Company restructured its operations,
flattening its organizational structure for improved operating and cost
efficiency and implemented other cost savings measurements. The Company recorded
restructuring charges of $3.7 million and adjustments of $0.6 million in
the first six months of 2004. These costs are primarily associated with the
elimination of 37 employees, including several executives, primarily in the
United States. As of June 30, 2004, the elimination of 30 positions and payments
of $0.4 million had been completed.
SUMMARY OF RESTRUCTURING ACTIVITIES
The following table summarizes all of the Company's restructuring activity
through June 30, 2004 (in thousands):
SEVERANCE
AND OTHER FACILITY OTHER
PERSONNEL COSTS CLOSING COSTS EXIT COSTS TOTAL
--------------- ------------- ---------- ----------
Charges $ 6,774 $ 8,669 $ 4,364 $ 19,807
Adjustments (23) - (994) (1,017)
Cash payments (4,468) (267) (2,423) (7,158)
---------- ---------- ---------- ----------
Accrual at December 31, 2001 2,283 8,402 947 11,632
Charges 10,344 3,421 1,648 15,413
Adjustments 65 1,246 (363) 948
Cash payments (7,569) (2,283) (1,217) (11,069)
---------- ---------- ---------- ----------
Accrual at December 31, 2002 5,123 10,786 1,015 16,924
Charges 2,548 1,505 661 4,714
Adjustments (18) (17) (10) (45)
Cash payments (6,044) (3,273) (965) (10,282)
---------- ---------- ---------- ----------
Accrual at December 31, 2003 1,609 9,001 701 11,311
Charges 3,563 - 116 3,679
Adjustments (7) 402 239 634
Cash payments (1,489) (1,407) (262) (3,158)
---------- ---------- ---------- ----------
Accrual at June 30, 2004 $ 3,676 $ 7,996 $ 794 $ 12,466
========== ========== ========== ==========
At June 30, 2004, the Company had an accrued restructuring balance of $12.5
million. We expect to make cash payments through the remainder of 2004 of
approximately $4.9 million, comprised of $3.3 million for employee separation
costs, $1.0 million for lease obligations and $0.6 million for other contractual
obligations. The balance of severance and other exit costs will be paid through
2007, and the balance of facility costs, primarily long-term leases, is expected
to be paid through the end
37
of the respective lease terms, which extend through 2013. Amounts due within one
year of approximately $5.8 million and $3.7 million at June 30, 2004 and
December 31, 2003, respectively, are classified in other accrued expenses on the
consolidated balance sheets. Amounts due after one year of approximately $6.7
million and $7.6 million at June 30, 2004 and December 31, 2003, respectively,
are included in other non-current liabilities on the consolidated balance
sheets.
The Company expects to realize sufficient savings from its 2004 restructuring
efforts to recover the employee termination costs by December 31, 2004. Savings
from terminations of contracts and lease costs will be realized over the
estimated lives of the contracts or leases.
OTHER INCOME (EXPENSE)
Other income (expense) consists of the following:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 CHANGE 2004 2003 CHANGE
---- ---- ------ ---- ---- ------
(In millions)
Interest expense................................. $ (9.4) $ (9.4) - % $ 18.8 $ 19.8 (4.7)%
Interest income.................................. $ 0.1 $ 0.1 - % $ 0.2 $ 0.2 - %
Other, net....................................... $ - $ 0.1 n/m $ - $ (0.3) n/m
Included in interest expense in the first quarter of 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.
EFFECTIVE TAX RATES
The effective tax rates for the three months ended June 30, 2004 and 2003 were,
0.5% and 0.4%, respectively, while the rates for the six months ended June 30,
2004 and 2003 were 3.3% and 0.8%, respectively. The higher effective tax rates
for 2004 are due to the establishment of a valuation allowance for the Company's
net foreign deferred tax assets and net operating loss carryforwards not
expected to be utilized. The tax provision for 2004 in the consolidated
statements of operations relates to state taxes. The 2003 provision relates to
state and foreign taxes.
DISCONTINUED OPERATIONS
Discontinued operations in 2003 include the results of PM Australia, which was
sold in December 2002, and the results of Professional Trade Shows ("PTS"),
which was sold in January 2003. PM Australia was part of our Technology segment,
and PTS was part of our Industry segment.
The $0.7 million of income recognized in 2003 was primarily due to a gain of
approximately $1.4 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.
38
SEGMENTS
We manage our business based on four operating segments: Industry, Technology,
Lifestyle and Retail. The segments derive their revenues from publications,
trade shows and conferences, and online media products.
The executive management team evaluates performance of the segments based on
revenues and adjusted segment EBITDA. As such, in the analysis that follows, we
have used adjusted segment EBITDA, which we define as net income (loss) before
interest, taxes, depreciation and amortization, non-cash compensation, executive
separation costs, impairment of assets, restructuring charges, provision for
loan impairment, discontinued operations, general and administrative costs, and
other non-operating items. General and administrative costs include functions
such as finance, accounting, human resources and information systems, which
cannot reasonably be allocated to each segment. See Note 15 - Segment
Information, for a reconciliation of total adjusted segment EBITDA to
consolidated net loss.
Financial information by segment for the three months ended June 30, 2004 and
2003, is summarized as follows (in thousands):
ADJUSTED ADJUSTED SEGMENT
REVENUES SEGMENT EBITDA EBITDA MARGIN
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
Industry $ 20,912 $ 20,998 $ 4,556 $ 4,788 21.8% 22.8%
Technology 19,956 20,064 3,432 3,272 17.2% 16.3%
Lifestyle 3,884 3,362 (617) (667) (15.9)% (19.8)%
Retail 6,184 6,042 1,455 1,451 23.5% 24.0%
--------- --------- --------- ---------
Total $ 50,936 $ 50,466 $ 8,826 $ 8,844
========= ========= ========= =========
Financial information by segment for the six months ended June 30, 2004 and
2003, is summarized as follows (in thousands):
ADJUSTED ADJUSTED SEGMENT
REVENUES SEGMENT EBITDA EBITDA MARGIN
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
Industry $ 39,300 $ 40,360 $ 7,629 $ 8,064 19.4% 20.0%
Technology 34,234 35,276 4,481 4,065 13.1% 11.5%
Lifestyle 21,108 18,411 10,491 8,635 49.7% 46.9%
Retail 10,761 10,811 1,982 2,182 18.4% 20.2%
--------- --------- --------- ---------
Total $ 105,403 $ 104,858 $ 24,583 $ 22,946
========= ========= ========= =========
INDUSTRY
THREE MONTHS
Our Industry segment, which represented 41.1% and 41.6% of total Company
revenues for the three months ended June 30, 2004 and 2003, respectively, serves
customers in the manufacturing, design/engineering, mechanical
systems/construction, supply chain, government/compliance and aviation
industries. For the three months ended June 30, 2004 and 2003, respectively,
94.5% and 96.7% of this segment's revenues were generated from publishing
operations, 1.5% and 0.3% from trade shows and conferences, and 4.0% and 3.0%
from online media products.
Revenues for this segment decreased $0.1 million, or 0.4%, from $21.0 million
for the three months ended June 30, 2003 to $20.9 million for the same period in
2004. The decrease was due primarily to lower revenues from publishing.
Adjusted segment EBITDA for our Industry portfolio decreased $0.2 million, or
4.8%, from $4.8 million for the three months ended June 30, 2003 to $4.6 million
for the same period in 2004. Industry publications decreased $0.5 million, while
online media improved $0.2 million and trade shows and conferences remained
flat. Segment general and administrative costs were lower by approximately $0.1
million, mainly from staff reductions. The decline in adjusted segment EBITDA
margins was due primarily to lower revenues.
39
SIX MONTHS
Our Industry segment represented 37.3% and 38.5% of total Company revenues for
the six months ended June 30, 2004 and 2003, respectively. For the six months
ended June 30, 2004, and 2003, respectively, 95.0% and 96.3% of this segment's
revenues were generated from publishing operations, 1.2% and 0.8% from trade
shows and conferences, and 3.8% and 2.9% from online media products.
Revenues for this segment decreased $1.1 million, or 2.6%, from $40.4 million
for the six months ended June 30, 2003 to $39.3 million for the same period in
2004. The decrease was due primarily to lower revenues from publishing. Print
advertising in our manufacturing portfolio market accounted for nearly all of
the decline.
Adjusted segment EBITDA for our Industry portfolio decreased $0.5 million, or
5.4%, from $8.1 million for the six months ended June 30, 2003 to $7.6 million
for the same period in 2004. Industry publications decreased $1.0 million, while
trade shows and conferences improved $0.1 million and online media improved $0.1
million. Segment general and administrative costs were lower by approximately
$0.3 million, mainly from staff reductions. The decline in adjusted segment
EBITDA margins was due primarily to lower revenues.
TECHNOLOGY
THREE MONTHS
Our Technology segment, which represented 39.2% and 39.8% of total Company
revenues for the three months ended June 30, 2004 and 2003, respectively, serves
customers in the Internet technologies, enterprise information technology and
electronics industries. For the three months ended June 30, 2004 and 2003,
respectively, 46.1% and 54.9% of this segment's revenues were generated from
publishing, 33.0% and 28.4% from trade shows and conferences, and 19.6% and
15.9% from online media products.
Revenues for this segment decreased $0.1 million, or 0.5%, from $20.1 million
for the three months ended June 30, 2003 to $20.0 million for the same period in
2004. The decrease was due primarily to lower revenues from publishing of $1.8
million, partially the result of discontinuing Internet World magazine in the
second quarter of 2003. This decrease was offset in part by improved revenues
from trade show and conferences of $0.9 million. Online media operations also
improved revenues of nearly $0.8 million. Online revenues continue to improve as
customers are increasingly seeking new ways to reach their target markets and
generate sales leads.
Adjusted segment EBITDA for our Technology portfolio increased $0.2 million, or
4.9%, from $3.3 million for the three months ended June 30, 2003 to $3.4 million
for the same period in 2004. Online media and trade shows and conferences
improvements were offset by publishing declines. Segment general and
administrative costs were lower by $0.2 million, mainly from staff reductions.
Prior-year publishing included the results of our Internet World magazine, which
was discontinued in June 2003.
SIX MONTHS
Our Technology segment represented 32.5% and 33.6% of total Company revenues for
the six months ended June 30, 2004 and 2003, respectively. For the six months
ended June 30, 2004 and 2003, respectively, 54.5% and 62.5% of this segment's
revenues were generated from publishing, 25.1% and 21.6% from trade shows and
conferences, and 20.4% and 15.9% from online media products.
Revenues for this segment decreased $1.1 million, or 3.0%, from $35.3 million
for the six months ended June 30, 2003 to $34.2 million for the same period in
2004. The decrease was due primarily to lower revenues from publishing of $3.4
million, partially the result of discontinuing Internet World magazine in the
second quarter of 2003. This decrease was offset in part by improved revenues
from online media operations of nearly $1.4 million. Online revenues continue to
improve as customers are increasingly seeking new ways to reach their target
markets and generate sales leads. Trade show and conference revenues also
improved $0.9 million when compared with the same prior year period primarily
due to improvements in the custom roadshow events in the Enterprise Information
Technology industry.
Adjusted segment EBITDA for our Technology portfolio increased $0.4 million, or
10.2%, from $4.1 million for the six months ended June 30, 2003 to $4.5 million
for the same period in 2004. Online media and trade shows and conferences
improvements of $0.8 million and $0.4 million, respectively, were offset by a
$1.1 million decline in publishing. Segment
40
general and administrative costs were lower by $0.3 million, mainly from staff
reductions. Prior-year publishing included the results of our Internet World
magazine, which was discontinued in June 2003.
LIFESTYLE
THREE MONTHS
Our Lifestyle segment, which represented 7.6% and 6.7% of total Company revenues
for the three months ended June 30, 2004 and 2003, respectively, serves
customers in the natural products industry. For the three months ended June 30,
2004 and 2003, respectively, 72.3% and 74.5% of this segment's revenues were
generated from publishing and 27.7% and 25.5% from trade shows and conferences.
Revenues for this segment increased $0.5 million, or 15.5%, from $3.4 million
for the three months ended June 30, 2003 to $3.9 million for the same period in
2004. Publishing accounted for $0.3 million of the increase while trade shows
and conferences accounted for the remainder. Second-quarter results were
positively impacted by an improvement in The Natural Foods Merchandiser and
Delicious Living magazines for a total of $0.3 million and a $0.2 million
improvement in the Natural Products Expo Europe trade show.
Adjusted segment EBITDA for the Lifestyle segment increased $0.1 million, or
7.5%, from a loss of $0.7 million for the three months ended June 30, 2003 to a
loss of $0.6 million for the same period in 2004. Publishing accounted for $0.2
million of the increase offset by a decline in trade shows and conferences of
$0.1 million.
SIX MONTHS
Our Lifestyle segment represented 20.0% and 17.6% of total Company revenues for
the six months ended June 30, 2004 and 2003, respectively. For the six months
ended June 30, 2004 and 2003, respectively, 29.7% and 31.0% of this segment's
revenues were generated from publishing and 70.2% and 69.0% from trade shows and
conferences.
Revenues for this segment increased $2.7 million, or 14.6%, from $18.4 million
for the six months ended June 30, 2003 to $21.1 million for the same period in
2004. Trade shows and conferences accounted for $2.1 million of the increases
while publishing accounted for the remainder. The first six months of 2004 was
positively impacted by a highly successful 2004 Natural Products Expo West show,
which experienced growth over last year's event in attendance, number of
exhibitors, and number of floored booths. The success of the 2004 Natural
Products Expo West show is not only a positive indicator for the 2005 show but
also should create a positive impact on the Natural Products Expo East event,
which will take place in October in Washington, D.C.
Adjusted segment EBITDA for the Lifestyle segment increased $1.9 million, or
21.5%, from $8.6 million for the six months ended June 30, 2003 to $10.5 million
for the same period in 2004. Trade shows and conferences accounted for $1.5
million of the increase while publishing accounted for the remainder. Adjusted
segment EBITDA margins improved from 46.9% for the first six months of 2003 to
49.7% for the same period in 2004. The improvement was primarily due to
increased revenues and the effect of cost reduction measures taken in 2003.
RETAIL
THREE MONTHS
Our Retail segment, which represented 12.1% and 12.0% of total Company revenues
for the three months ended June 30, 2004 and 2003, respectively, serves
customers in the food/retail and leisure/hospitality industries. For the three
months ended June 30, 2004 and 2003, respectively, 92.0% and 94.0% of this
segment's revenues were generated from publishing, 7.6% and 5.0% from trade
shows and conferences, and 1.1% and 1.7% from online media products.
Revenues for this segment increased $0.1 million, or 2.4%, from $6.1 million for
the three months ended June 30, 2003, to $6.2 million for the same period in
2004. This increase was due primarily to a shift in timing of our spring
National Convenience Store Advisory Group convention, which took place in
January of 2003 and in April of 2004.
Adjusted segment EBITDA for the Retail segment remained flat for the three
months ended June 30, 2003 compared to the same period in 2004.
41
SIX MONTHS
Our Retail segment represented 10.2% and 10.3% of total Company revenues for the
six months ended June 30, 2004 and 2003, respectively. For the six months ended
June 30, 2004 and 2003, respectively, 91.9% and 89.1% of this segment's revenues
were generated from publishing, 7.7% and 9.8% from trade shows and conferences,
and 1.4% and 2.1% from online media products.
Revenues for this segment remained flat for the six months ended June 30, 2003
compared to the same period in 2004.
Adjusted segment EBITDA for the Retail segment decreased $0.2 million, or 9.2%,
from $2.2 million for the six months ended June 30, 2003 to $2.0 million for the
same period in 2004.
LIQUIDITY AND CAPITAL RESOURCES
CURRENT LIQUIDITY
At June 30, 2004, our principal sources of liquidity are our existing cash
reserves of $15.9 million and available borrowing capacity under our credit
facility of $39.7 million.
Our primary 2004 cash needs will be for working capital, debt service, capital
expenditures, business restructuring charges, and severance and other related
costs expected to be paid in connection with the departure of our chief
executive officer in 2004. Our largest annual cash requirements are for our debt
service costs, which are expected to be approximately $36.9 million in 2004.
Capital expenditures in 2004 are expected to be approximately $2.5 million to
$3.0 million, while cash payments in 2004 related to our business restructuring
initiatives are expected to be approximately $4.6 million. Other cash payments
expected to be made in 2004 include contributions of approximately $1.5 million
to our defined benefit pension plan and approximately $1.8 million to the new
Retirement and Savings Plan. Cash payments related to the departure of Thomas L.
Kemp are expected to be approximately $2.7 million in 2004.
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.
We believe that our existing sources of liquidity, along with revenues expected
to be generated from operations, will be sufficient to fund our operations,
anticipated capital expenditures, working capital, and other financing
requirements through at least June 30, 2005. However, we cannot assure you that
this will be the case, and if we continue to incur operating losses and negative
cash flows in the future, we may need to reduce further our operating costs or
obtain alternate sources of financing, or both, to remain in business. 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. The Company's ability to return to sustained
profitability at acceptable levels will depend on a number of risk factors, many
of which are largely beyond the Company's control. If we are unable to meet our
debt obligations or fund our other liquidity needs, particularly if the revenue
environment does not substantially improve, we may be required to raise
additional 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 issued, including the
conversion price, dividend, and liquidation adjustment provisions, could result
in substantial dilution to common stockholders. The redemption price premiums
and board representation rights could negatively impact our ability to access
the equity markets in the future.
The Company has implemented, and continues to implement, various cost-cutting
programs and cash conservation plans, which involve the limitation of capital
expenditures and the control of working capital.
ANALYSIS OF CASH FLOWS
Penton's total cash and cash equivalents was $15.9 million at June 30, 2004,
compared with $29.6 million at December 31, 2003. Cash used for operating
activities was $11.8 million for the six months ended June 30, 2004, compared
with cash provided by operating activities of $34.7 million for the same period
in 2003. Operating cash flows for the six months ended June 30, 2004, reflected
a net loss of $19.7 million and a net decrease in working capital items of
approximately $4.7 million, offset by non-cash charges (primarily depreciation
and amortization and restructuring charges) of approximately $12.5 million.
Operating cash flows for the six months ended June 30, 2003, reflected a net
loss of $23.4 million, offset by a net increase in
42
working capital items of approximately $38.3 million and non-cash charges
(primarily depreciation and amortization and provision for loan impairment) of
approximately $19.9 million.
The decrease in operating cash flows for the six months ended June 30, 2004,
compared with the same 2003 period was due primarily to the tax refund received
in January 2003 of approximately $52.7 million.
Investing activities used $1.7 million of cash for the six months ended June 30,
2004 primarily for capital expenditures. Investing activities provided $3.4
million of cash for the six months ended June 30, 2003, primarily from proceeds
of $3.3 million from the sale of PTS in January 2003 and net proceeds of $1.5
million received on notes receivable offset by capital expenditures of $1.3
million.
Financing activities used $0.3 million of cash for the six months ended June 30,
2004 primarily due to an increase in restricted cash. Financing activities used
$4.5 million of cash for the six months ended June 30, 2003, due primarily to
the repayment of $4.5 million on our senior secured credit facility, the payment
of finance fees, and the payoff of a note payable of $0.4 million. These uses
were partially offset by proceeds of approximately $0.3 million from the
repayment of an officers loan, a decrease in restricted cash and an increase in
book overdrafts.
RISK FACTORS
Management's concerns remain consistent with and should be read in conjunction
with the Risk Factors section of the Company's Annual Report on Form 10-K for
the year ended December 31, 2003.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 1 - Basis of Presentation of the notes to the consolidated financial
statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
During the six months ended June 30, 2004, there were no significant new
critical accounting policies or estimates.
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. At June 30, 2004, the fair value of the
Subordinated Notes and the Secured Notes was $126.0 million and $159.1 million,
respectively, compared to $116.8 million and $153.0 million, respectively, at
December 31, 2003. The fair value of the notes is determined by the price
investors in the open market are willing to pay. We currently do not manage the
fair value risk related to our senior notes.
43
The table below provides information about the expected cash flows associated
with our long-term debt obligations and their fair value at June 30, 2004 (in
thousands):
EXPECTED MATURITY DATE
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------
FAIR
2004 2005 2006 2007 2011 TOTAL VALUE
---- ---- ---- ---- ---- ----- -----
Long-Term Debt:
Senior Subordinated Notes - - - - $175,000 $175,000 $126,000
Interest rate 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 $159,075
Interest rate 11-7/8% 11-7/8% 11-7/8% 11-7/8% 11-7/8% 11-7/8%
During the six months ended June 30, 2004, there were no other significant
changes related to the Company's market risk exposure.
ITEM 4. CONTROLS AND PROCEDURES
As of June 30, 2004, an evaluation was performed under the supervision and with
the participation of our management, including the CEO and CFO, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a - 15(e) and 15d - 15(e)). Based
on that evaluation, the Company's management, including the CEO and CFO,
concluded that Penton's disclosure controls and procedures were adequate and
effective as of June 30, 2004 to ensure that material information relating to
Penton would be made known to them by others within Penton, particularly during
the period in which this Form 10-Q was being prepared. During the period covered
by this report on Form 10-Q, there have been no changes in our internal control
over financial reporting that have materially affected or are likely to
materially affect our internal control over financial reporting.
44
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 15, 2004, the Company held its Annual Meeting of Stockholders. The
matters presented to the stockholders for a vote and the vote on such
matters were as follows:
a) Election of directors for a three-year term expiring in 2007.
For Withheld
--------- ----------
Peni A. Garber 43,071,674 1,536,087
Hannah C. Graven 43,057,123 1,550,638
b) Proposal to ratify the appointment of PricewaterhouseCoopers LLP as the
independent accountants for the fiscal year ending December 31, 2004.
For Against Abstain
- ---------- ------- ---------
35,138,210 331,482 9,138,069
No other matters were submitted to the stockholders for a vote.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
10.1 Separation Agreement and General Release, dated July 1, 2004,
between Penton Media, Inc. and Thomas L. Kemp.
10.2 Separation Agreement and General Release, dated July 1, 2004,
between Penton Media, Inc. and Daniel J. Ramella.
10.3 Amended and Restated Employment Agreement, dated June 23, 2004,
between Penton Media, Inc. and David Nussbaum.
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
The Registrant has filed or furnished the following Current Reports
on Form 8-K during the period covered by this report:
DATE OF REPORT ITEMS REPORTED
-------------- --------------
May 17, 2004 Item 7. Financial Statements, Pro Forma Financial
45
Information and Exhibits
Item 12. Results of Operations and Financial
Conditions
June 14, 2004 Item 5. Other Events
June 22, 2004 Item 5. Other Events
June 24, 2004 Item 5. Other Events
46
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
Date: August 16, 2004
47
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ---------- ------------------------
10.1 Separation Agreement and General Release, dated July 1, 2004,
between Penton Media, Inc. and Thomas L. Kemp.
10.2 Separation Agreement and General Release, dated July 1, 2004,
between Penton Media, Inc. and Daniel J. Ramella.
10.3 Amended and Restated Employment Agreement, dated June 23, 2004,
between Penton Media, Inc. and David Nussbaum.
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.
48