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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-14337
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PENTON MEDIA, INC.
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 36-2875386
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(State of Incorporation) (I.R.S. Employer Identification No.)
1300 East Ninth Street, Cleveland, OH 44114
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(Address of Principal Executive Offices) (Zip Code)
216-696-7000
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark whether the registrant is an accelerated filer as
defined in Rule 12b-2 of the Exchange Act. Yes No X
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date (August 10, 2003).
Common Stock: 33,178,019 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, 2003 and December 31, 2002 3
Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 2003 and 2002 5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2003 and 2002 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk 46
Item 4. Controls and Procedures 46
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 47
Item 6. Exhibits and Reports on Form 8-K 48
Signature 49
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PENTON MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
June 30, December 31,
2003 2002
---------- -----------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 40,370 $ 6,771
Restricted cash 410 677
Accounts receivable, less allowance for doubtful
accounts of $3,818 and $4,323 in 2003 and 2002, respectively 34,588 34,842
Income taxes receivable 53 53,547
Notes receivable 575 2,124
Inventories 953 1,025
Prepayments, deposits and other 8,459 5,094
Current assets of discontinued operations - 2,049
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Total current assets 85,408 106,129
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Property, plant and equipment:
Land, buildings and improvements 8,580 8,878
Machinery and equipment 61,587 61,935
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70,167 70,813
Less: accumulated depreciation 49,878 46,896
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20,289 23,917
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Other assets:
Goodwill 251,979 251,972
Other intangibles, less accumulated amortization of
$15,754 and $13,137 in 2003 and 2002, respectively 29,190 32,754
Other 324 -
---------- -----------
281,493 284,726
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$ 387,190 $ 414,772
========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
PENTON MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
June 30, December 31,
2003 2002
---------- -----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Senior secured credit facility $ - $ 4,500
Accounts payable 5,848 9,464
Accrued compensation and benefits 7,401 11,835
Other accrued expenses 20,168 24,355
Unearned income, principally trade
show and conference deposits 25,212 23,026
Current liabilities of discontinued operations - 1,050
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Total current liabilities 58,629 74,230
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Long-term liabilities and deferred credits:
Senior secured notes, net of discount 156,854 156,797
Senior subordinated notes, net of discount 171,557 171,423
Note payable - 417
Net deferred pension credits 14,262 13,762
Other accrued expenses 12,187 13,052
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354,860 355,451
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Commitments and contingencies
Mandatorily redeemable convertible preferred stock, par value $0.01 per share;
50,000 shares authorized, issued and outstanding;
redeemable at $1,000 per share 48,689 46,174
Redeemable common stock, par value $0.01 per share; 111,401 and
1,068,343 shares issued and outstanding at June 30, 2003 and
December 31, 2002, respectively 48 1,118
Stockholders' deficit:
Preferred stock, par value $0.01 per share; 1,950,000 shares
authorized; none issued or outstanding - -
Common stock, par value $0.01 per share; 155,000,000 shares
authorized; 33,066,619 and 31,687,194 shares issued and outstanding
at June 30, 2003 and December 31, 2002, respectively 331 317
Capital in excess of par value 232,314 229,779
Retained deficit (303,049) (279,600)
Notes receivable officers, less reserve of $7.6 million at June 30, 2003 (1,883) (9,720)
Accumulated other comprehensive loss (2,749) (2,977)
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(75,036) (62,201)
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$ 387,190 $ 414,772
========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
PENTON MEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED; DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
------------ ------------ ----------- -----------
Revenues $ 50,466 $ 62,947 $ 104,858 $ 124,075
------------ ------------ ----------- -----------
Operating expenses:
Editorial, production and circulation 23,467 27,745 45,820 52,543
Selling, general and administrative 22,592 31,332 46,233 62,791
Impairment of assets - 136 - 136
Provision for loan impairment 7,600 - 7,600 -
Restructuring charges and other expenses 1,901 7,705 1,817 7,442
Depreciation and amortization 3,781 5,446 7,503 9,690
------------ ------------ ----------- -----------
59,341 72,364 108,973 132,602
------------ ------------ ----------- -----------
Operating loss (8,875) (9,417) (4,115) (8,527)
Other income (expense):
Interest expense (9,412) (9,646) (19,750) (18,920)
Interest income 128 235 237 453
Gain on extinguishment of debt - - - 277
Gain on sale of investments - - - 1,491
Miscellaneous, net 66 (200) (308) (340)
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(9,218) (9,611) (19,821) (17,039)
------------ ------------ ----------- -----------
Loss from continuing operations before income taxes
and cumulative effect of accounting change (18,093) (19,028) (23,936) (25,566)
Benefit (provision) for income taxes (65) 7,191 (191) 9,903
----------- ------------ ----------- -----------
Loss from continuing operations before cumulative
effect of accounting change (18,158) (11,837) (24,127) (15,663)
Discontinued operations:
Income (loss) from operations of discontinued
components (including gain on disposal of
$1.2 million in 2003), net of taxes (188) (221) 678 (628)
------------ ------------ ----------- -----------
Loss before cumulative effect of accounting change (18,346) (12,058) (23,449) (16,291)
Cumulative effect of accounting change, net of taxes - - - (39,700)
------------ ------------ ----------- -----------
Net loss (18,346) (12,058) (23,449) (55,991)
Amortization of deemed dividend and accretion
of preferred stock (1,860) (44,498) (2,515) (44,861)
------------ ------------ ---------- -----------
Net loss applicable to common stockholders $ (20,206) $ (56,556) $ (25,964) $ (100,852)
============ ============ =========== ===========
Net loss per common share - basic and diluted:
Loss from continuing operations applicable
to common stockholders $ (0.59) $ (1.76) $ (0.80) $ (1.89)
Discontinued operations, net of taxes (0.01) (0.01) 0.02 (0.02)
Cumulative effect of accounting change, net of taxes - - - (1.24)
------------ ------------ ----------- -----------
Net loss applicable to common stockholders $ (0.60) $ (1.77) $ (0.78) $ (3.15)
============ ============ =========== ===========
Weighted-average number of shares outstanding:
Basic and diluted 33,508 32,033 33,272 32,018
============ ============ =========== ===========
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,
2003 2002
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NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES $ 35,182 $ (2,408)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,343) (1,773)
Earnouts paid (7) (1,486)
Proceeds from sale of Jupitermedia Corporation stock - 5,801
Proceeds from sale of discontinued operations 3,250 -
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Net cash provided by investing activities 1,900 2,542
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of mandatorily redeemable
convertible preferred stock - 46,111
Proceeds from senior secured notes - 156,717
Repurchase of senior subordinated notes - (8,375)
Repayment of senior secured credit facility (4,500) (180,587)
Proceeds from note receivable 1,549 -
Payment of notes payable (417) (2,804)
Employee stock purchase plan payments (113) (376)
Proceeds from repayment of officers loans 250 703
Payment of financing costs (200) (9,189)
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Net cash provided by (used for) financing activities (3,431) 2,200
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Effect of exchange rate changes on cash (52) 64
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Net increase in cash and cash equivalents 33,599 2,398
Cash and cash equivalents at beginning of period 6,771 20,191
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Cash and cash equivalents at end of period $ 40,370 $ 22,589
========== ===========
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 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
generally accepted accounting principles ("GAAP") for complete financial
statements. However, in the opinion of management, the interim financial
statements reflect all adjustments, which are of a normal recurring nature,
necessary for a fair presentation of the results of the periods presented. The
results of operations for the interim periods are not necessarily indicative of
the results of operations to be expected for the full year.
The accompanying unaudited interim consolidated financial statements should be
read together with the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2002 financial statements to
conform to the 2003 presentation.
USE OF ESTIMATES
The preparation of financial statements in accordance with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149").
This statement amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities." SFAS 149 is effective for
contracts entered into or modified after June 30, 2003. Management does not
believe that the adoption of SFAS 149 will have a significant effect on the
Company's results of operations or its financial condition.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 changes the accounting for certain financial instruments with
characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities in the statement of financial position.
Previously, many of those financial instruments were classified as equity. SFAS
150 is effective for financial instruments entered into or modified after May
31, 2003 and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150 did not require the
reclassification of any financial instruments on the Company's Consolidated
Balance Sheets.
NOTE 2 - GOODWILL AND OTHER INTANGIBLES
A summary of changes in the Company's goodwill during the first six months of
2003, by business segment are as follows (in thousands):
GOODWILL
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DECEMBER 31, JUNE 30,
2002 EARNOUTS 2003
---------------- ---------------- -------------
Industry Media $ 36,278 $ - $ 36,278
Technology Media 96,580 7 96,587
Lifestyle Media 84,924 - 84,924
Retail Media 34,190 - 34,190
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Total $ 251,972 $ 7 $ 251,979
============ ============ ===========
7
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Identifiable intangible assets, exclusive of goodwill, as of June 30, 2003, are
recorded in Other Intangibles in the Consolidated Balance Sheets and are
comprised of (in thousands):
GROSS NET
CARRYING ACCUMULATED BOOK
VALUE AMORTIZATION VALUE
------------ ------------- -----------
Trade names $ 13,039 $ (3,716) $ 9,323
Mailing/exhibitor lists 9,550 (4,680) 4,870
Advertiser relationships 8,309 (3,109) 5,200
Subscriber relationships 2,100 (768) 1,332
Noncompete agreements 1,286 (1,223) 63
------------ ------------ -----------
Balance at June 30, 2003 $ 34,284 $ (13,496) $ 20,788
============ ============ ===========
Total amortization expense for identifiable intangible assets was $2.2 million
and $5.0 million for the six months ended June 30, 2003 and 2002, respectively.
Amortization expense for these intangible assets for 2003 and each of the four
succeeding years are as follows (in thousands):
YEAR ENDED
DECEMBER 31, AMOUNT
------------ ------
2003 $ 4,127
2004 $ 3,922
2005 $ 3,692
2006 $ 2,875
2007 $ 2,043
During the third quarter of 2002, Penton completed its transitional goodwill
impairment test for January 1, 2002, under the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets" and recorded a non-cash charge of $39.7
million to reduce the carrying value of goodwill for two of our seven identified
reporting units. The charge is reflected as a Cumulative Effect of Accounting
Change in the accompanying Consolidated Statements of Operations for the six
months ended June 30, 2002.
At December 31, 2002, the net assets of our Professional Trade Show group
("PTS") were classified as held for sale and reclassified to Current Assets of
Discontinued Operations and Current Liabilities of Discontinued Operations,
respectively, on the Consolidated Balance Sheets (See Note 3 - Disposals).
Approximately $1.0 million of goodwill related to PTS was written-off as part of
the sale in January 2003.
NOTE 3 - DISPOSALS
At December 31, 2002, the net assets of PTS were classified as held for sale.
The assets were sold in January 2003 for approximately $3.8 million, including
an earnout of $0.6 million based on reaching certain performance objectives in
2003. The sale resulted in a gain of $1.2 million, which was recorded as part of
discontinued operations on the Consolidated Statements of Operations. The
results of PTS are reported as discontinued operations for all periods
presented. PTS was part of our Industry Media segment.
In December 2002, the Company sold the net assets of Penton Media Australia ("PM
Australia"), which was part of our Technology Media segment. The results of PM
Australia are reported as discontinued operations at June 30, 2002. Losses for
the three months ended June 30, 2003 primarily include the settlement of certain
lawsuits that were pending related to PM Australia that were in excess of our
initial estimates.
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Operating results for the discontinued components, which include PM Australia
and PTS for the three and six months ended June 30, 2003 and 2002 are as follows
(in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
------------ ----------- ----------- -----------
Revenues $ - $ 3,062 $ - $ 5,109
============ =========== =========== ===========
Loss from operations before income taxes $ (188) $ (221) $ (542) $ (628)
Gain on sale of properties - - 1,220 -
------------ ----------- ----------- -----------
Income (loss) from discontinued operations $ (188) $ (221) $ 678 $ (628)
============ =========== =========== ===========
In addition to the above properties classified as discontinued operations, the
Company sold four other properties in December 2002. Three of these properties,
Streaming Media, Boardwatch and ISPCON, were part of our Technology Media
segment. The other property, A/E/C, was part of our Industry Media segment. For
the three and six months ended June 30, 2002 there are approximately $4.8
million and $5.3 million, respectively, included in revenues and $4.9 million
and $7.7 million, respectively, included in Operating Expenses associated with
these properties, as they did not qualify for discontinued operations treatment.
At December 31, 2002, assets and liabilities related to PTS were classified
separately on the Consolidated Balance Sheets as current assets of discontinued
operations and current liabilities of discontinued operations, respectively. The
carrying amounts of the major classes of assets and liabilities included in
these balances are as follows:
DECEMBER 31,
2002
-------------
Goodwill $ 959
Other intangibles, net 759
Other assets 331
-------------
Current assets of discontinued operations $ 2,049
=============
Unearned revenue $ 1,050
-------------
Current liabilities of discontinued operations $ 1,050
=============
NOTE 4 - DEBT
SENIOR SECURED CREDIT FACILITY
In January 2003, the Company amended its senior secured credit facility. The
amended agreement permits the Company to sell certain properties in excess of
the $5.0 million aggregate limit required by the original amended agreement. In
return, the revolving commitment was reduced from $40.0 million to $32.0
million. At the end of January 2003, when the aggregate sum of Penton's cash and
cash equivalents exceeded $40.0 million, an additional one-time reduction of
$10.0 million was required under the amended credit facility. Furthermore, upon
the sale of PTS (see Note 3 - Disposals), the revolving commitment was further
reduced by 50% of the aggregate gross proceeds, as defined, from this sale, or
approximately $1.9 million. For any future asset dispositions, the commitment
under the revolver will be reduced by 50% of the aggregate gross proceeds. The
amended facility allows for additional asset sales, transfers, leases, and other
dispositions and the issuance of equity interests by our subsidiaries up to a
maximum of approximately $3.6 million. The amended facility also increased the
maximum commitment fee from 0.50% to 0.75%. The commitment under the credit
facility decreases by 15% in 2003, 30% in 2004, 35% in 2005 and 20% in 2006.
The repayment of the credit facility term loan A and term loan B in March 2002
resulted in a non-cash extraordinary charge of $0.7 million, net of $0.5 million
in taxes, relating to the write-off of unamortized deferred financing costs. In
addition, in March 2002, the Company repurchased $10.0 million of its 10-3/8%
Senior Subordinated Notes ("Subordinated Notes") with $8.7 million of the
proceeds from the 11-7/8% Senior Secured Notes ("Secured Notes") offering
completed in March 2002, resulting in an extraordinary gain of $0.8 million, net
of $0.6 million in taxes. In the first quarter 2003, these 2002 extraordinary
charges were reclassified to Gain on Extinguishment of Debt in the Consolidated
Statements of Operations in accordance with the provisions of SFAS No. 145,
"Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS 13, and Technical
Corrections as of April 2002" ("SFAS 145").
9
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The reduction of the revolver from $40.0 million to $20.1 million in January
2003 and the reduction of the revolver from $185.0 million to $40.0 million in
March 2002 resulted in the write-off of unamortized financing fees of $0.9
million and $0.7 million, respectively. These charges have been classified as
part of Interest Expense on the Consolidated Statements of Operations.
For the six months ended June 30, 2003 and 2002 cash paid for interest was $18.5
million and $11.3 million, respectively.
In August 2003, the Company replaced its senior secured credit facility with a
new loan agreement (see Note 16 - Subsequent Events).
NOTE PAYABLE
In the second quarter 2003, the Company paid off the $0.4 million Loan note B
related to the acquisition of Hillgate Communications Ltd. in February 2001.
There are no other loan note balances outstanding related to the Hillgate
acquisition.
NOTE 5 - MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
At June 30, 2003, an event of non-compliance continues to exist under our Series
B Convertible Preferred Stock because the Company's leverage ratio (defined as
debt less cash balances in excess of $5.0 million plus the liquidation value of
the preferred stock and unpaid dividends divided by adjusted EBITDA) exceeded
7.5 to 1.0. When an event of non-compliance occurs, the holders of a majority of
the preferred stock may nominate two additional members to our board of
directors, which they did effective April 1, 2003. Furthermore, since the event
of non-compliance was not cured by June 30, 2003, the holders of a majority of
the preferred stock then outstanding had the right to elect one less than a
minimum majority of our board of directors. As the holders of the preferred
stock already maintain one less than a minimum majority of our board, no change
was necessary. In addition, upon the occurrence of this event of non-compliance,
the 5% dividend rate on the preferred stock increased by one percentage point as
of April 1 and July 1, 2003 and the rate increases by one percentage point each
subsequent quarter, up to a maximum rate of 10%. Consequently the dividend rate
is currently 7%. The conversion price on the preferred stock decreased by $0.76
as of April 1 and July 1, 2003 and will decrease by $0.76 each subsequent
quarter up to a maximum reduction of $3.80. Consequently, the conversion price
is currently $6.09. The conversion price will adjust to what it would have been
absent such event (to the extent of any shares of preferred stock still
outstanding) once the leverage ratio is less than 7.5 to 1.0. Furthermore, the
dividend rate will adjust back to 5% as of the date on which the leverage ratio
is less than 7.5 to 1.0. Under the preferred stock agreement, if the leverage
ratio exceeds 7.5 to 1.0 for four consecutive quarters, the preferred
stockholders will have the right to cause the Company to seek a buyer for all of
the assets or issued and outstanding capital stock of the Company. The Company
is not expected to be able to correct the event of non-compliance before the
maximum dividend rate and conversion price reduction are reached. The leverage
ratio event of non-compliance does not represent an event of default or
violation under any of the Company's outstanding notes or the senior secured
credit facility. 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, the holder has a right to
convert dividends into additional shares of common stock. At June 30, 2003, no
dividends have been declared. However, in light of the 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 at June 30, 2003 for the beneficial conversion feature inherent in the
accumulated dividend based on the original commitment date(s). All such accruals
have been reported as an increase in the carrying value of the preferred stock
and a charge to Additional Paid in Capital in light of the stockholder's
deficit.
NOTE 6 - COMMON STOCK AND COMMON STOCK AWARD PROGRAMS
In June 2003, the Company was notified by the New York Stock Exchange ("NYSE")
that it would begin delisting procedures of the Company's common stock. The NYSE
reached its decision because Penton has been unable to comply with the NYSE's
continued listing criteria, which include minimal levels of stock price, market
capitalization, and stockholders' equity. The NYSE took this action at this time
because Penton was not expected to be able to increase its book equity to the
minimum listing requirements. On June 17, 2003, Penton's stock began trading on
the Over-the-Counter Bulletin Board under the symbol PTON.
In February 2003, Penton's Board of Directors approved a proposal to effect a
reverse stock split to be submitted for stockholder approval at the Company's
annual meeting on June 12, 2003. This corrective share action was part of a plan
submitted by Penton to the NYSE to meet the Exchange's $1.00 stock price listing
requirement. At its annual meeting, stockholders voted to approve the
10
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
reverse stock split which gave the Company's Board of Directors the authority to
effect a reverse split at one of three ratios within one year. Due to the
Company's delisting, as noted above, the Board of Directors does not currently
expect to act on its authority to effect the reverse split in the near term.
REDEEMABLE COMMON STOCK
Redeemable common stock relates to common stock that may be subject to
rescissionary rights. The purchase of common stock by certain employees in the
Company's 401(k) plan from May 2001 through March 2003 was not registered under
the federal securities laws (the "unregistered purchases"). As a result, such
purchasers of our common stock may have the right to rescind their purchases for
an amount equal to the purchase price paid for the shares, plus interest from
the date of purchase. Any rescissionary rights will lapse one year from the date
of any such purchase. The Company may also be subject to civil and other
penalties by regulatory authorities. The unregistered purchases do not cause an
event of default under the Subordinated Notes, the Secured Notes or the senior
secured credit facility. However, an event of default could occur as an indirect
result of the unregistered purchases, if for instance, such unregistered
purchases lead to restricted payments under the indentures and/or the credit
facility. On March 31, 2003, the Company filed a Form S-8 registration and
registered 6.0 million additional shares to be offered under the 401(k) plan.
In April 2003, the Company offered to reimburse employees who had purchased
Penton common stock through the Company's 401(k) plan between March 25, 2002 and
March 25, 2003. Employees who signed a release were reimbursed the amount by
which the price they paid for the common stock exceeded the closing price of the
stock on the date they executed the release, or if the stock had been sold, the
amount by which the price paid by the employee exceeded the sales price.
Employees who did not sign the release by May 22, 2003, retain any rights they
may have under the Federal securities laws. Over eighty percent of the employees
who were offered the reimbursement have accepted the terms of the release,
representing a liability of approximately $0.6 million, which was deposited into
each individuals 401(k) account in July 2003. This amount is included in
Restructuring Charges and Other Expenses in the Consolidated Statements of
Operations.
At June 30, 2003, the Company has classified 111,401 shares related to the
potential rescissionary rights outside of stockholders' deficit, because the
redemption of the stock is not within the control of the Company.
EMPLOYEE STOCK PURCHASE PLAN
In the first quarter of 2003, 65,711 shares were purchased for employees under
the Company's Employee Stock Purchase Plan for employees who participated in the
plan during the fourth quarter of 2002. With this purchase, the maximum number
of shares available to employees under the plan of 750,000 shares was reached.
The plan was subsequently terminated by the Company.
MANAGEMENT STOCK PURCHASE PLAN
For the six months ended June 30, 2003 and 2002, respectively, an immaterial
amount of expense was recognized related to the Management Stock Purchase Plan.
In February 2003, a total of 99,876 restricted stock units ("RSUs") were granted
at $0.34 per share, which represents 80% of fair market value on the date of
grant. At June 30, 2003, 136,905 RSUs were outstanding. During the first six
months of 2003, 19,050 shares of the Company's common stock were issued under
this plan.
EXECUTIVE LOAN PROGRAM
The Company has an executive loan program, which allowed it to issue shares of
Company common stock at fair market value to six key executives, in exchange for
full recourse notes. In December 2001, the loan notes were amended to cease
interest charges and to extend the maturity date from the fifth anniversary of
the first loan date to six months following the seventh anniversary of the first
loan date. No payments are required until maturity, at which time all
outstanding amounts are due.
At June 30, 2003 the outstanding balance under the executive loan program was
approximately $9.5 million (including $1.1 million of accrued interest). In
2002, executive loans of $1.1 million were repaid and in January 2003, executive
loans of $0.3 million were repaid. The loan balance is classified in the
Stockholders' Deficit section of the Consolidated Balance Sheets as Notes
Receivable Officers.
The Company's ability to collect amounts due from each executive is largely
dependent on the fair market value of assets held by each executive, including
stock of the Company. Factors such as the length of time before the loans are
due; the value of the
11
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
executives' assets, including Company stock; the continued employment by the
executives with the Company, and other relevant factors, were considered in
assessing the collectibility of these loans.
During the second quarter of 2003, the Company determined that these executives
would probably be unable to repay a significant portion of the outstanding
balance due under their loans without a significant recovery in the Company's
stock price. The notes are full recourse loans and the Company intends to pursue
collection of all amounts when due. In addition to the factors noted above,
additional considerations in determining whether a reserve was necessary
included the continued low price of the Company's stock, the delisting of the
Company's stock from the NYSE in the second quarter, and the continued
uncertainty for an economic recovery in the markets served by the Company.
The Company recorded a provision for loan impairment in the amount of $7.6
million during the second quarter of 2003, reflecting the amount by which the
carrying value of each individual's loan exceeded the underlying estimated fair
value of the assets available to repay the loan. The Company will recognize any
recoveries of amounts reserved only upon payment of the loans.
EQUITY AND PERFORMANCE INCENTIVE PLAN
Stock Options
In July 2002, Penton filed a Tender Offer Statement related to the exchange by
eligible employees of outstanding options to purchase shares of Penton's common
stock issued under the Penton Media, Inc. 1998 Equity and Performance Incentive
Plan with exercise prices greater than or equal to $16.225 per share for new
options to purchase shares of common stock to be issued under the Option Plan
("New Options"). Each eligible employee received a New Option to acquire one
share of Penton's common stock for every two shares of Penton's common stock
subject to an eligible option. In February 2003, 334,850 New Options were
granted at an exercise price of $0.37 per share.
In addition, in February 2003, 264,000 options were granted to certain
executives and other eligible employees and 20,000 options were granted to
Penton's Directors under the 1998 Director Stock Option Plan at an exercise
price of $0.37 per share. As of June 30, 2003, a total of 2,110,455 options were
outstanding. No options were exercised in the first six months of 2003.
Deferred Shares
For the six months ended June 30, 2003 and 2002, approximately $1.3 million and
$1.8 million, respectively, were recognized as expense related to deferred
shares. In February 2003, 391,360 deferred shares were granted. In April 2003,
372,916 shares of the Company's common stock were issued under this plan. As of
June 30, 2003, 400,056 deferred shares were outstanding.
Performance Shares
For the six months ended June 30, 2002, approximately $0.2 million was credited
to compensation expense related to performance shares. For the six months ended
June 30, 2003, the amount charged to expense was not material. During the first
six months of 2003, 30,516 shares of common stock were issued under this plan.
At June 30, 2003, a total of 471,487 performance shares were outstanding.
Performance shares are not issuable until earned.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation plans under Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees." Pro
forma information regarding net income (loss) and earnings per share is required
by SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation Transition and
Disclosure," and has been determined as if Penton had accounted for its employee
stock options under SFAS 123.
12
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 pursuant to SFAS 123, Penton's
net loss and earnings per share for the three and six months ended June 30, 2003
and 2002 would have been as follows (in thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
---- ---- ---- ----
Net loss applicable to common stockholders:
As reported $ (20,206) $(56,556) $(25,964) $ (100,852)
Add: Compensation expense included in net loss, net of related
tax effects 339 713 1,240 926
Less: Total stock-based compensation expense determined under fair
value based methods for all awards, net of related tax effects (939) (1,077) (2,577) (1,627)
---------- --------- --------- -----------
Pro forma $ (20,806) $(56,920) $(27,301) $ (101,553)
========== ========= ========= ===========
Basic and diluted earnings per share:
As reported $ (0.60) $ (1.77) $ (0.78) $ (3.15)
Pro forma $ (0.62) $ (1.78) $ (0.82) $ (3.17)
NOTE 7 - EARNINGS PER SHARE
Earnings per share have been computed pursuant to the provisions of SFAS No.
128, "Earnings Per Share." Computations of basic and diluted earnings per share
for the three and six months ended June 30, 2003 and 2002 are as follows (in
thousands, except per share amounts):
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2003 2002 2003 2002
---- ---- ---- ----
Net loss applicable to common stockholders $ (20,206) $ (56,556) $ (25,964) $ (100,852)
============ =========== ========== ===========
Number of shares:
Weighted average shares outstanding -
basic and diluted 33,508 32,033 33,272 32,018
============ =========== =========== ==========
Per share amount:
Loss applicable to common stockholders -
basic and diluted $ (0.60) $ (1.77) $ (0.78) $ (3.15)
============ =========== =========== ==========
The preferred stock and RSUs are participating securities, such that in the
event a dividend is declared or paid on the common stock, the Company must
simultaneously declare and pay a dividend on the preferred stock and the RSUs as
if the preferred stock and the RSUs had been converted into common stock. Topic
D-95, "Effect of Participating Convertible Securities on the Computation of
Basic Earnings per Share" requires that the participating securities be included
in the computation of basic earnings per share if the effect of inclusion is
dilutive. Vested RSUs are always included in the computation of basic earnings
per share as they are considered equivalent to common stock. For all other
participating securities, the Company's accounting policy requires the use of
the two-class method to determine whether the inclusion of such securities is
dilutive or not. For the three and six months ended June 30, 2003 and 2002,
preferred stock and non-vested RSUs were excluded from the calculation of basic
earnings per share as the results were anti-dilutive.
Due to the loss from continuing operations after amortization of deemed dividend
and accretion of preferred stock 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. Due to the loss from
continuing operations after amortization of deemed dividend and accretion of
preferred stock for the three and six months ended June 30, 2002, 2,669,655
stock options, 665,272 performance shares, 727,038 non-vested deferred shares,
50,101 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.
13
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 8 - COMPREHENSIVE LOSS
The after-tax component of comprehensive loss for the three and six months ended
June 30, 2003 and 2002 are as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
---- ---- ---- ----
Net loss $ (18,346) $ (12,058) $ (23,449) $ (55,991)
Other comprehensive loss:
Reclassification adjustment for realized gain on
securities sold, net of taxes of $0.3 million - - - (808)
Reclassification adjustment for cash flow
hedges, net of taxes of $0.6 million - - - 863
Change in accumulated translation adjustment (108) (77) 228 (328)
------------- ------------- ------------ ------------
Total comprehensive loss $ (18,454) $ (12,135) $ (23,221) $ (56,264)
============= ============= ============ ============
NOTE 9 - RELATED PARTY TRANSACTIONS
In January 2003, the Company sold PTS to Cygnus Expositions, a division of
Cygnus Business Media, Inc., (see Note 3 - Disposals) which is owned by ABRY
Partners IV, L.P. ABRY Partners, LLC and its affiliates hold a significant
portion of our preferred stock and currently have two partners who are on the
Company's Board of Directors.
In March 2003, Neue Medien Ulm Holdings GmbH ("Neue Medien") paid down $1.8
million of the notes receivable balance owed to Penton Media Germany ("PM
Germany"). Neue Medien has ownership interests in PM Germany. In the second
quarter 2003, Neue Medien borrowed an additional $0.6 million from PM Germany,
of which $0.3 million was repaid in June 2003, leaving a note receivable balance
from Neue Medien of $0.5 million as of June 30, 2003. This amount is included in
the Notes Receivable balance on the Consolidated Balance Sheets.
In the second quarter 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. In the second
quarter 2003 an immaterial amount was recognized as expense related to these
performance units.
NOTE 10 - RESTRUCTURING CHARGES
SECOND QUARTER 2003 CHARGE
Due to continued revenue challenges, the Company has implemented several
additional expense reduction and restructuring initiatives to align its cost
structure with the prevailing business environment. In the second quarter 2003,
the Company recorded a restructuring charge of $0.8 million. The charge includes
$0.4 million of employee termination costs, primarily severance and benefits
costs.
The charge also includes $0.3 million of facility closing costs associated with
the partial closure of office space at one location under a long term lease
expiring in 2009, net of an assumed sublease. Charges for other exit costs
include costs associated with the cancellation of certain contractual
obligations.
2002 AND 2001 CHARGES
As of June 30, 2003, a majority of the restructuring initiatives undertaken in
2002 and 2001, including the elimination of nearly 716 positions, the closure of
nearly 30 Penton offices worldwide and the cancellation of other contractual
obligations, primarily trade show venue contracts, hotel contracts and service
agreements, have been completed. As of June 30, 2003, all employees whose
positions were eliminated have left the Company, however, severance payments
will continue to be paid to some of those
14
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
employees through the end of 2003. The Company has vacated the offices for which
a restructuring charge has been recorded. However, Penton remains ultimately
liable for all lease payments, which are expected to continue through 2013.
In the second quarter 2003, the Company made an adjustment of $0.5 million to
the restructuring charge for an office lease originally recorded in the second
quarter 2002 resulting primarily from the bankruptcy filing by the sublessor of
the property.
SUMMARY OF 2003 RESTRUCTURING ACTIVITIES
The following table summarizes quarterly adjustments, charges, amounts paid and
the ending accrual balance at June 30, 2003 for all restructuring activity (in
thousands):
FIRST SECOND SECOND
ACCRUAL QUARTER QUARTER QUARTER CASH ACCRUAL
DESCRIPTION 12/31/02 ADJUSTMENTS CHARGES ADJUSTMENTS PAYMENTS 6/30/03
----------- ----------- ----------- ------- ----------- ----------------- ------------
Severance and other
personnel costs $ 5,123 $ (9) $ 428 $ 2 $ (4,555) $ 989
Facility closing costs 10,786 48 322 474 (1,522) 10,108
Other exit costs 1,015 (112) 99 (2) (500) 500
----------- ----------- ------------ ------------- -------------- ------------
Total $ 16,924 $ (73) $ 849 $ 474 $ (6,577) $ 11,597
=========== =========== ============ ============= ============== ============
The severance costs are expected to be fully paid by the end of the first
quarter of 2004. Facility closing costs include long-term leases and are
expected to be paid through 2013, while the balance of other exist costs are
expected to be paid by the end of 2003.
Restructuring charges incurred in 2003 by segment, net of adjustments, are as
follows:
FIRST SECOND YTD NET
QUARTER QUARTER NET CHARGES AS OF
ADJUSTMENTS CHARGES JUNE 30, 2003
------------- -------------- --------------
Industry Media $ (48) $ 216 $ 168
Technology Media 45 1,103 1,148
Lifestyle Media - 45 45
Retail Media - - -
Corporate (70) (41) (111)
-------------- -------------- --------------
Total $ (73) $ 1,323 $ 1,250
============== ============== ================
For the three and six months ended June 30, 2003, adjustments to the
restructuring charges of $0.02 million and $0.03 million, respectively, were
classified as part of discontinued operations as these costs related to
discontinued properties. The remaining charges are presented as Restructuring
Charges and Other Expenses in the accompanying Consolidated Statements of
Operations.
NOTE 11 - SEGMENT INFORMATION
Penton has four segments, which derive their revenues from the production of
trade shows, publications and online media products, including Web sites serving
customers in 12 distinct industry sectors. Penton measures segment profitability
using adjusted segment EBITDA. Adjusted segment EBITDA is defined as operating
income (loss) before depreciation and amortization, provision for loan
impairment, restructuring charges and other expenses, non-cash compensation,
impairment of assets and corporate and shared service general and administrative
costs. Corporate and shared service general and administrative costs include
functions such as finance, accounting, human resources, and information systems,
which cannot reasonably be allocated to each segment. Previously, certain shared
service costs were allocated to segments. Adjusted segment EBITDA for the three
and six months ended June 30, 2002 has been restated to conform to the current
year presentation, which does not allocate these costs. Management believes that
this is a more meaningful presentation.
15
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Summary information by segment for the three months ended June 30, 2003 and
2002, adjusted for discontinued operations, are as follows (in thousands):
INDUSTRY TECHNOLOGY LIFESTYLE RETAIL
MEDIA MEDIA MEDIA MEDIA TOTAL
-------- ---------- --------- ------ -----
2003
Revenues $ 20,998 $ 20,064 $ 3,362 $ 6,042 $ 50,466
Adjusted EBITDA $ 4,788 $ 3,272 $ (667) $ 1,451 $ 8,844
2002
Revenues $ 23,697 $ 30,604 $ 4,284 $ 4,362 $ 62,947
Adjusted EBITDA $ 4,256 $ 4,929 $ (484) $ 659 $ 9,360
Summary information by segment for the six months ended June 30, 2003 and 2002,
adjusted for discontinued operations, are as follows (in thousands):
INDUSTRY TECHNOLOGY LIFESTYLE RETAIL
MEDIA MEDIA MEDIA MEDIA TOTAL
-------- ---------- --------- ------ -----
2003
Revenues $ 40,360 $ 35,276 $ 18,411 $ 10,811 $ 104,858
Adjusted EBITDA $ 8,064 $ 4,065 $ 8,635 $ 2,182 $ 22,946
2002
Revenues $ 45,162 $ 51,213 $ 18,754 $ 8,946 $ 124,075
Adjusted EBITDA $ 7,600 $ 3,768 $ 8,534 $ 1,224 $ 21,126
Segment revenues, all of which are realized from external customers, equal
Penton's consolidated revenues. The following is a reconciliation of Penton's
total adjusted segment EBITDA to loss from continuing operations before income
taxes and cumulative effect of accounting change (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
---- ---- ---- ----
Total segment adjusted EBITDA $ 8,844 $ 9,360 $ 22,946 $ 21,126
Depreciation and amortization (3,781) (5,446) (7,503) (9,690)
Provision for loan impairment (7,600) - (7,600) -
Restructuring charges and other expenses (1,901) (7,705) (1,817) (7,442)
Impairment of assets - (136) - (136)
Non cash compensation (347) (1,189) (1,268) (1,544)
Gain on sale of investments - - - 1,491
Interest expense (9,412) (9,646) (19,750) (18,920)
Interest income 128 235 237 453
Gain on extinguishment of debt - - - 277
Miscellaneous, net 66 (200) (308) (340)
General and administrative costs (4,090) (4,301) (8,873) (10,841)
-------------- ------------ -------------- -----------
Loss from continuing operations before income
taxes and cumulative effect of accounting change $ (18,093) $ (19,028) $ (23,936) $ (25,566)
============== ============ ============== ===========
NOTE 12 - GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
The following schedules set forth condensed consolidating balance sheets as of
June 30, 2003, and December 31, 2002, and condensed consolidating statements of
operations for the three and six months ended June 30, 2003 and 2002, and
condensed consolidating statements of cash flows for the six months ended June
30, 2003 and 2002. In the following schedules, "Parent"
16
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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.
17
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 12 -- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF JUNE 30, 2003
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 38,262 $ 225 $ 1,883 $ - $ 40,370
Restricted cash 227 - 183 - 410
Accounts receivable, net 21,149 8,051 5,388 - 34,588
Income taxes receivable 35 8 10 - 53
Notes receivable - - 575 - 575
Inventories 541 406 6 - 953
Prepayments, deposits and other 5,221 182 3,056 - 8,459
------------- ------------- ------------- ------------- -------------
65,435 8,872 11,101 - 85,408
------------- ------------- ------------- ------------- -------------
Property, plant and equipment, net 16,013 2,706 1,570 - 20,289
Goodwill 122,651 124,898 4,430 - 251,979
Other intangibles, net 13,832 12,106 3,252 - 29,190
Other assets - - 324 - 324
Investments (1) (127,517) - - 127,517 -
------------- ------------- ------------- ------------- -------------
24,979 139,710 9,576 127,517 301,782
------------- ------------- ------------- ------------- -------------
$ 90,414 $ 148,582 $ 20,677 $ 127,517 $ 387,190
============= ============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 21,075 $ 3,390 $ 1,551 $ - $ 26,016
Accrued compensation and benefits 5,862 1,392 147 - 7,401
Unearned income 13,737 4,223 7,252 - 25,212
------------- ------------- ------------- ------------- -------------
40,674 9,005 8,950 - 58,629
------------- ------------- ------------- ------------- -------------
Long-term liabilities and deferred credits:
Senior secured notes, net of discount 79,996 76,858 - - 156,854
Senior subordinated notes, net of discount 87,494 84,063 - - 171,557
Net deferred pension credits 14,262 - - - 14,262
Intercompany advances (110,428) 60,839 32,872 16,717 -
Other accrued expenses 4,715 2,817 4,655 - 12,187
------------- ------------- ------------- ------------- -------------
76,039 224,577 37,527 16,717 354,860
------------- ------------- ------------- ------------- -------------
Mandatorily redeemable convertible
preferred stock 48,689 - - - 48,689
Redeemable common stock 48 - - - 48
Stockholders' deficit:
Common stock and capital in excess
of par value 232,645 209,653 16,615 (226,268) 232,645
Retained deficit (303,049) (294,653) (39,666) 334,319 (303,049)
Notes receivable officers (1,883) - - - (1,883)
Accumulated other comprehensive loss (2,749) - (2,749) 2,749 (2,749)
------------- ------------- ------------- ------------- -------------
(75,036) (85,000) (25,800) 110,800 (75,036)
------------- ------------- ------------- ------------- -------------
$ 90,414 $ 148,582 $ 20,677 $ 127,517 $ 387,190
============= ============= ============= ============= =============
(1) Reflects investments in subsidiaries utilizing the equity method.
18
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 12-- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF DECEMBER 31, 2002
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 5,165 $ 460 $ 1,146 $ - $ 6,771
Restricted cash 241 - 436 - 677
Accounts receivable, net 21,120 8,784 4,938 - 34,842
Income taxes receivable 33,470 19,895 182 - 53,547
Notes receivable - - 2,124 - 2,124
Inventories 757 262 6 - 1,025
Prepayments, deposits and other 2,299 821 1,974 - 5,094
Current assets of discontinued operations 2,049 - - - 2,049
------------- ------------- ------------- ------------- -------------
65,101 30,222 10,806 - 106,129
------------- ------------- ------------- ------------- -------------
Property, plant and equipment, net 18,717 3,116 2,084 - 23,917
Goodwill 122,651 124,891 4,430 - 251,972
Other intangibles, net 15,742 13,339 3,673 - 32,754
Investment in subsidiaries (1) (98,098) - - 98,098 -
------------- ------------- ------------- ------------- -------------
59,012 141,346 10,187 98,098 308,643
------------- ------------- ------------- ------------- -------------
$ 124,113 $ 171,568 $ 20,993 $ 98,098 $ 414,772
============= ============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Senior secured credit facility $ 4,500 $ - $ - $ - $ 4,500
Accounts payable and accrued expenses 25,504 5,388 2,927 - 33,819
Accrued compensation and benefits 10,713 1,031 91 - 11,835
Unearned income 13,619 5,296 4,111 - 23,026
Current liabilities of discontinued
operations 1,050 - - - 1,050
------------- ------------- ------------- ------------- -------------
55,386 11,715 7,129 - 74,230
------------- ------------- ------------- ------------- -------------
Long-term liabilities and deferred credits:
Senior secured notes, net of discount 79,966 76,831 - - 156,797
Senior subordinated notes, net of discount 87,426 83,997 - - 171,423
Note payable - - 417 - 417
Net deferred pension credits 13,762 - - - 13,762
Intercompany advances (102,694) 65,062 31,545 6,087 -
Other accrued expenses 5,176 2,934 4,942 - 13,052
------------- ------------- ------------- ------------- -------------
83,636 228,824 36,904 6,087 355,451
------------- ------------- ------------- ------------- -------------
Mandatorily redeemable convertible
preferred stock 46,174 - - - 46,174
Redeemable common stock 1,118 - - - 1,118
Stockholders' deficit:
Common stock and capital in excess
of par value 230,096 209,653 16,614 (226,267) 230,096
Retained deficit (279,600) (278,624) (36,677) 315,301 (279,600)
Notes receivable officers (9,720) - - - (9,720)
Accumulated other comprehensive loss (2,977) - (2,977) 2,977 (2,977)
------------- ------------- ------------- ------------- -------------
(62,201) (68,971) (23,040) 92,011 (62,201)
------------- ------------- ------------- ------------- -------------
$ 124,113 $ 171,568 $ 20,993 $ 98,098 $ 414,772
============= ============= ============= ============= =============
(1) Reflects investments in subsidiaries utilizing the equity method.
19
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 12 -- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED 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 charges and other expenses 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, net of income earned (4,634) (4,565) (85) - (9,284)
Equity in losses of subsidiaries (8,617) - - 8,617 -
Miscellaneous, 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 operations of discontinued
components (92) 9 (105) - (188)
------------- ------------- ------------- ------------- -------------
NET LOSS $ (18,346) $ (7,905) $ (712) $ 8,617 $ (18,346)
============= ============= ============= ============= =============
20
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 12 -- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2002
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
REVENUES $ 33,869 $ 21,034 $ 8,044 $ - $ 62,947
------------- ------------- ------------- ------------- -------------
OPERATING EXPENSES:
Editorial, production and circulation 17,138 7,395 3,212 - 27,745
Selling, general and administrative 16,765 10,549 4,018 - 31,332
Impairment of assets 136 - - - 136
Restructuring charges and other expenses 6,563 - 1,142 - 7,705
Depreciation and amortization 2,338 2,714 394 - 5,446
------------- ------------- ------------- ------------- -------------
42,940 20,658 8,766 - 72,364
------------- ------------- ------------- ------------- -------------
OPERATING INCOME (LOSS) (9,071) 376 (722) - (9,417)
------------- ------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest expense, net of income earned (5,995) (3,328) (88) - (9,411)
Equity in losses of subsidiaries (5,110) - - 5,110 -
Miscellaneous, net (42) - (158) - (200)
------------- ------------- ------------- ------------- -------------
(11,147) (3,328) (246) 5,110 (9,611)
------------- ------------- ------------- ------------- -------------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (20,218) (2,952) (968) 5,110 (19,028)
Benefit (provision) for income taxes 8,381 (852) (338) - 7,191
-------------- ------------- ------------- ------------- -------------
LOSS FROM CONTINUING OPERATIONS (11,837)$ (3,804) (1,306) 5,110 (11,837)
-------------- ------------- ------------- ------------- -------------
Loss from operations of discontinued
components (221) - - - (221)
------------- ------------- ------------- ------------- -------------
NET LOSS $ (12,058) $ (3,804) $ (1,306) $ 5,110 $ (12,058)
============= ============= ============= ============= =============
21
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 12-- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE 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 charges and other expenses 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, net of income earned (9,901) (9,453) (159) - (19,513)
Equity in losses of subsidiaries (19,018) - - 19,018 -
Miscellaneous, 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 operations of discontinued
components 834 9 (165) - 678
------------- ------------- ------------- ------------- -------------
NET LOSS $ (23,449) $ (16,029) $ (2,989) $ 19,018 $ (23,449)
============= ============= ============= ============= =============
22
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 12-- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
REVENUES $ 78,868 $ 33,896 $ 11,311 $ - $ 124,075
------------- ------------- ------------- ------------- -------------
OPERATING EXPENSES:
Editorial, production and circulation 33,154 14,936 4,453 - 52,543
Selling, general and administrative 37,612 18,002 7,177 - 62,791
Impairment of assets 136 - - - 136
Restructuring charges and other expenses 6,300 - 1,142 - 7,442
Depreciation and amortization 4,240 4,725 725 - 9,690
------------- ------------- ------------- ------------- -------------
81,442 37,663 13,497 - 132,602
------------- ------------- ------------- ------------- -------------
OPERATING LOSS (2,574) (3,767) (2,186) - (8,527)
------------- ------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest expense, net of income earned (10,583) (7,736) (148) - (18,467)
Gain on extinguishment of debt 277 - - - 277
Gain on sale of investments 1,491 - - - 1,491
Equity in losses of subsidiaries (53,412) - - 53,412 -
Miscellaneous, net (361) - 21 - (340)
------------- ------------- ------------- ------------- -------------
(62,588) (7,736) (127) 53,412 (17,039)
------------- ------------- ------------- ------------- -------------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND CUMULATIVE EFFECTS
OF ACCOUNTING CHANGE (65,162) (11,503) (2,313) 53,412 (25,566)
Benefit for income taxes 9,799 - 104 - 9,903
------------- ------------- ------------- ------------- -------------
LOSS FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (55,363) (11,503) (2,209) 53,412 (15,663)
Loss from operations of discontinued
components (628) - - - (628)
------------- ------------- ------------- ------------- -------------
LOSS BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE (55,991) (11,503) (2,209) 53,412 (16,291)
Cumulative effect of accounting change,
net of taxes - (34,572) (5,128) - (39,700)
------------- ------------- ------------- ------------- -------------
NET LOSS $ (55,991) $ (46,075) $ (7,337) $ 53,412 $ (55,991)
============= ============= ============= ============= =============
23
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 12-- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 2003
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- -------------- ------------ ------------ --------------
(DOLLARS IN THOUSANDS)
CASH FLOWS PROVIDED BY (USED FOR) OPERATING
ACTIVITIES $ 35,337 $ 182 $ (337) $ - $ 35,182
------------- -------------- ------------ ----------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (881) (410) (52) - (1,343)
Earnouts paid - (7) - - (7)
Proceeds from sale of discontinued components 3,250 - - - 3,250
------------- -------------- ------------- ------------ --------------
Net cash provided by (used for)
investing activities 2,369 (417) (52) - 1,900
------------- -------------- ------------- ------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of senior secured credit facility (4,500) - - - (4,500)
Proceeds from note receivable - - 1,549 - 1,549
Payment of note payable - - (417) - (417)
Employee stock purchase plan payments (107) - (6) - (113)
Proceeds from repayment of officers loans 250 - - - 250
Payment of financing costs (200) - - - (200)
------------- -------------- ------------- ------------ --------------
Net cash provided by (used for)
financing activities (4,557) - 1,126 - (3,431)
------------- -------------- ------------- ------------ --------------
Effect of exchange rate changes on cash (52) - - - (52)
------------- -------------- ------------- ------------ --------------
Net increase (decrease) in cash
and equivalents 33,097 (235) 737 - 33,599
Cash and equivalents at beginning of period 5,165 460 1,146 - 6,771
------------- -------------- ------------- ------------ --------------
Cash and equivalents at end of period $ 38,262 $ 225 $ 1,883 $ - $ 40,370
============= ============== ============= ============ ==============
24
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 12-- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 2002
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------ ------------ -------------
(DOLLARS IN THOUSANDS)
CASH FLOWS PROVIDED BY (USED FOR) OPERATING
ACTIVITIES $ 1,086 $ (7,393) $ 3,899 $ - $ (2,408)
------------- ------------- ------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,412) (91) (270) - (1,773)
Earnouts paid (687) (24) (775) - (1,486)
Proceeds from sale of Jupitermedia
Corporation stock - 5,801 - - 5,801
------------- ------------- ------------- ------------- -------------
Net cash provided by (used for)
investing activities (2,099) 5,686 (1,045) - 2,542
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of mandatorily
redeemable convertible preferred stock 46,111 - - - 46,111
Proceeds from senior secured notes 79,926 76,791 - - 156,717
Repurchase of senior subordinated notes (4,271) (4,104) - - (8,375)
Repayment of senior secured credit facility (180,587) - - - (180,587)
Payment of short term note payable - - (2,804) - (2,804)
Employee stock purchase plan payments (368) - (8) - (376)
Proceeds from repayment of officers loans 703 - - - 703
Payment of financing costs (9,189) - - - (9,189)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used for)
financing activities (67,675) 72,687 (2,812) - 2,200
------------- ------------- ------------- ------------- -------------
Effect of exchange rate changes on cash 64 - - - 64
------------- ------------- ------------- ------------- -------------
Net increase (decrease) in cash and
equivalents (68,624) 70,980 42 - 2,398
Cash and equivalents at beginning of period 14,518 1,993 3,680 - 20,191
------------- ------------- ------------- ------------- -------------
Cash and equivalents at end of period $ (54,106) $ 72,973 $ 3,722 $ - $ 22,589
============= ============= ============= ============= =============
25
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 13 - SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
The following transactions did not provide for or require the use of cash and,
accordingly, are not reflected in the Condensed Consolidated Statements of Cash
Flows.
For the 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.
For the six months ended June 30, 2002, Penton issued 15,436 common shares under
the Management Stock Purchase Plan and 9,100 deferred shares to certain officers
and other key employees. In addition, one executive returned 52,332 shares to
the Company to pay down a portion of his executive loan balance. The returned
shares were recorded as treasury stock. Furthermore, in the second quarter 2002,
Penton recorded amortization of deemed dividend and accretion on preferred stock
of $44.9 million.
NOTE 14 - INCOME TAXES
The Company assesses the recoverability of its deferred tax assets in accordance
with the provisions of SFAS No. 109 "Accounting for Income Taxes" ("SFAS 109").
As of June 30, 2003 the valuation allowance for its net deferred tax assets and
net operating loss carryforwards totaled $44.2 million.
In January 2003, the Company received a tax refund of $52.7 million and in
February 2002, the Company received a tax refund of $12.2 million. These amounts
are included in net cash provided by operating activities in the Condensed
Consolidated Statements of Cash Flows.
NOTE 15 - CONTINGENCIES
In connection with the acquisition of Mecklermedia Corporation on December 1,
1998, a lawsuit was brought against the Company by Ariff Alidina (the
"Plaintiff"), a former stockholder of Mecklermedia Corporation, in the United
States Federal District Court in the Southern District of New York for an
unspecified amount, as well as other relief. The Plaintiff has claimed that the
Company violated the federal securities laws by selling Mr. Meckler, a
beneficial owner of approximately 26% of the shares of Mecklermedia, an 80.1%
interest in Jupitermedia Corporation for what the Plaintiff alleges was a
below-market price, thereby giving to Mr. Meckler more consideration for his
common stock in Mecklermedia Corporation than was paid to other stockholders of
Mecklermedia Corporation. The Company intends to vigorously defend this suit.
In the normal course of business, Penton is subject to a number of lawsuits and
claims, both actual and potential in nature. While management believes that
resolution of existing claims and lawsuits will not have a material adverse
effect on Penton's financial statements, management is unable to estimate the
magnitude or financial impact of claims and lawsuits that may be filed in the
future.
In connection with the tax-free spinoff of our common stock by Pittway to its
stockholders in August 1998, we agreed not to take any action that would cause
the spinoff to be taxable to Pittway under Section 355 of the Internal Revenue
Code, and to indemnify Pittway for any liability suffered by it in that event.
The spinoff would be taxable to Pittway if, as part of a plan or series of
related transactions, as determined under a facts and circumstances test, one or
more persons, acting independently or in concert, have acquired 50.0% or more of
our common stock. Since August 1998, our common stock has been involved in a
number of transactions. Because of the open-ended nature of the facts and
circumstances test, we believe, but we cannot assure you, that the Internal
Revenue Service could not successfully assert that one or more transactions
involving our common stock were part of a plan or series of related transactions
that has caused the spinoff to be taxable to Pittway. If the spinoff were
taxable to Pittway, our payment to Pittway under our indemnity agreement could
have a material adverse effect on our financial condition.
26
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 16 - SUBSEQUENT EVENTS
In August 2003, the Company replaced its senior secured credit facility with a
new four-year loan and security agreement (the "Loan Agreement"). Under the Loan
Agreement, which is a revolving credit facility, the Company can borrow up to
the lesser of (i) $40.0 million; (ii) 2.5x the Company's last twelve months
EBITDA measured monthly during the first year, 2.25x during the second year and
2.0x thereafter; (iii) forty percent of the Company's last six months of
revenues; or (iv) 25% of the Company's enterprise value, as determined by a
third party. The revolving credit facility bears interest at LIBOR plus 5.0%
subject to a LIBOR minimum of 1.5%. Unamortized financing fees related to the
previous credit facility of approximately $0.9 million, will be written off in
the third quarter.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and the notes thereto. Historical results and percentage
relationships set forth in the consolidated financial statements, including
trends that might appear, should not be taken as indicative of future results.
Penton considers portions of this information to be forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, both as amended, with respect to
expectations for future periods. Although Penton believes that the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, it can give no assurance that its expectations will be achieved.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates" and similar expressions are intended to identify forward-looking
statements. A number of important factors could cause Penton's results to differ
materially from those indicated by such forward-looking statements, including,
among other factors, fluctuations in advertising revenue with general economic
cycles; economic uncertainty exacerbated by potential terrorist attacks on the
United States or the impact of the war with Iraq, and related geopolitical
events; the performance of Internet trade shows and conferences; the seasonality
of revenue from trade shows and conferences; our ability to launch new products
that fit strategically with and add value to our business; our ability to
penetrate new markets internationally; increases in paper and postage costs; the
effectiveness of our cost-saving efforts; the infringement or invalidation of
Penton's intellectual property rights; pending litigation; government
regulation; competition; technological change; and international operations.
OVERVIEW
We are a diversified business-to-business media company. We provide media
products that deliver proprietary business information to owners, operators,
managers and professionals in the industries we serve. Through these products,
we offer industry suppliers multiple ways to reach their customers and prospects
as part of their sales and marketing efforts. We publish specialized trade
magazines, produce trade shows and conferences, and maintain a variety of online
media products, including Web businesses and electronic newsletters. Our
products serve 12 industry sectors, which we group into four segments:
INDUSTRY MEDIA TECHNOLOGY MEDIA
-------------- ----------------
Manufacturing Internet Technologies
Design/Engineering Information Technology
Mechanical Systems/Construction Electronics
Supply Chain
Government/Compliance RETAIL MEDIA
Aviation ------------
Food/Retail
Leisure/Hospitality
LIFESTYLE MEDIA
---------------
Natural Products
We believe we have leading media products in most of the industry sectors we
serve. We are structured along segment and industry lines rather than by product
lines. This enables us to promote our related group of products, including
publications, trade shows and conferences, and online media products to our
customers.
RECENT DEVELOPMENTS
DELISTING
On June 11, 2003, the Company received notice from the New York Stock Exchange
("NYSE") that it would begin delisting procedures related to the Company's
common stock. The NYSE reached its decision because the Company was unable to
comply with the NYSE's continued listing criteria, which included minimal levels
for stock price, market capitalization, and stockholders' equity. On June 17,
2003, trading of the Company's common stock was transferred from the NYSE to the
Over-the-Counter Bulletin Board and is currently traded under the symbol PTON.
28
DISPOSITIONS
In January 2003, we completed the sale of the assets of our Professional Trade
Show group ("PTS"), which was part of our Industry Media segment, to Cygnus
Expositions, a division of Cygnus Business Media, Inc., for total consideration
of approximately $3.8 million, including a potential earnout of $0.6 million
based on reaching certain performance objectives in 2003. The cash received from
the sale was used to pay down the amounts outstanding under the Company's credit
facility. The Company recognized a gain of approximately $1.2 million on the
sale, which is included as a component of discontinued operations in the
accompanying Consolidated Statements of Operations.
AMENDED CREDIT FACILITY
In January 2003, the Company amended its senior secured credit facility, which
was replaced in August 2003, as discussed below. The amended agreement permitted
the Company to sell certain properties in excess of the $5.0 million aggregate
limit required by the original amended agreement. In return, the revolving
commitment was reduced from $40.0 million to $32.0 million. At the end of
January 2003, when the aggregate sum of Penton's cash and cash equivalents
exceeded $40.0 million, an additional one-time reduction of $10.0 million was
required under the amended credit facility. Furthermore, upon the sale of PTS,
as discussed above, the revolving commitment was further reduced by 50% of the
aggregate gross proceeds, as defined, from this sale, or approximately $1.9
million. The amended facility allowed for additional asset sales, transfers,
leases, and other dispositions and the issuance of equity interests by our
subsidiaries up to a maximum of approximately $3.6 million. The amended facility
also increased the maximum commitment fee from 0.50% to 0.75%. The commitment
under the credit facility was scheduled to decrease by 15% in 2003 (7.5% at
September 30, 2003 and 7.5% at December 31, 2003), 30% in 2004, 35% in 2005 and
20% in 2006.
The reduction of the revolver from $40.0 million to $20.1 million in January
2003 resulted in the write-off of unamortized financing fees of $0.9 million.
This charge has been classified as part of Interest Expense on the Consolidated
Statements of Operations.
NEW CREDIT FACILITY
In August 2003, the Company replaced its senior secured credit facility with a
new four-year loan and security agreement (the "Loan Agreement"). Under the Loan
Agreement, which is a revolving credit facility, the Company can borrow up to
the lesser of (i) $40.0 million; (ii) 2.5x the Company's last twelve months
EBITDA measured monthly during the first year, 2.25x during the second year and
2.0x thereafter; (iii) forty percent of the Company's last six months of
revenues; or (iv) 25% of the Company's enterprise value, as determined by a
third party. The revolving credit facility bears interest at LIBOR plus 5.0%
subject to a LIBOR minimum of 1.5%. Unamortized financing fees related to the
previous credit facility of approximately $0.9 million, will be written off in
the third quarter.
TAX REFUND
In January 2003, the Company received a tax refund of $52.7 million.
REVERSE STOCK SPLIT
In February 2003, Penton's Board of Directors approved a proposal to effect a
reverse stock split to be submitted for stockholder approval at the Company's
annual meeting on June 12, 2003. This corrective share action was part of a plan
submitted by Penton to the NYSE to meet the Exchange's $1.00 stock price listing
requirement. At its annual meeting, stockholders voted to approve the reverse
stock split which gave the Company's Board of Directors the authority to effect
a reverse split at one of three ratios within one year. Due to the Company's
delisting, as noted above, the Board of Directors does not currently expect to
act on its authority to effect the reverse split in the near term.
PREFERRED STOCK LEVERAGE RATIO EVENT OF NON-COMPLIANCE
An event of non-compliance continues to exist under our Series B Convertible
Preferred Stock because the Company's leverage ratio (defined as debt less cash
balances in excess of $5.0 million plus the liquidation value of the preferred
stock and unpaid dividends divided by adjusted EBITDA) exceeded 7.5 to 1.0. When
an event of non-compliance occurs, the holders of a majority of the preferred
stock may nominate two additional members to our board of directors, which they
did effective April 1, 2003. Furthermore, since the event of non-compliance was
not cured by June 30, 2003, the holders of a majority of the preferred stock
then outstanding had the right to elect one less than a minimum majority of our
board of directors. As the holders of the preferred stock already maintain one
less than a minimum majority of our board, no change was necessary. In addition,
upon the occurrence
29
of this event of non-compliance, the 5% dividend rate on the preferred stock
increased by one percentage point as of April 1 and July 1, 2003, and the rate
increases by one percentage point each subsequent quarter, up to a maximum rate
of 10%. Consequently, the dividend rate is currently at 7%. The conversion price
on the preferred stock decreased by $0.76 as of April 1 and July 1, 2003, and
will decrease by $0.76 each subsequent quarter up to a maximum reduction of
$3.80. Consequently, the conversion price is currently at $6.09. The conversion
price will adjust to what it would have been absent such event (to the extent of
any shares of preferred stock still outstanding) once the leverage ratio is less
than 7.5 to 1.0. Furthermore, the dividend rate will adjust back to 5% as of the
date on which the leverage ratio is less than 7.5 to 1.0. Under the preferred
stock agreement, if the leverage ratio exceeds 7.5 to 1.0 for four consecutive
quarters, the preferred stockholders will have the right to cause the Company to
seek a buyer for all of the assets or issued and outstanding capital stock of
the Company. The Company is not expected to be able to correct the event of
non-compliance before the maximum dividend rate and conversion price reduction
are reached. The leverage ratio event of non-compliance does not represent an
event of default or violation under any of the Company's outstanding notes or
the senior secured credit facility. 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, the holder has a right to
convert dividends into additional shares of common stock. At June 30, 2003, no
dividends have been declared. However, in light of the 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 at June 30, 2003 for the beneficial conversion feature inherent in the
accumulated dividend based on the original commitment date(s). All such accruals
have been reported as an increase in the carrying value of the preferred stock
and a charge to Additional Paid in Capital in light of the stockholder's
deficit.
REDEEMABLE COMMON STOCK
In March 2003, it was discovered that certain Company employees had purchased
approximately 1.1 million shares of common stock in the Company's 401(k) plan,
from May 2001 through March 2003, which were not registered under the federal
securities laws (the "unregistered purchases"). As a result, such purchasers of
our common stock may have the right to rescind their purchases for an amount
equal to the purchase price paid for the shares, plus interest from the date of
purchase. Any rescissionary rights will lapse one year from the date of any such
purchase. The Company may also be subject to civil and other penalties by
regulatory authorities. The unregistered purchases do not cause an event of
default under the 10-3/8% Senior Subordinated Notes, the 11-7/8% Senior Secured
Notes or the credit facility. However, an event of default could occur as an
indirect result of the unregistered purchases, if for instance, such
unregistered purchases lead to restricted payments under the indentures and/or
the credit facility. On March 31, 2003, the Company filed a Form S-8
registration and registered 6.0 million additional shares to be offered under
the 401(k) plan.
In April 2003, the Company offered to reimburse employees who had purchased
Penton common stock through the Company's 401(k) plan between March 25, 2002 and
March 25, 2003. Employees who signed the release were reimbursed the amount by
which the price they paid for the common stock exceeded the closing price of the
stock on the date they executed the release, or if the stock had been sold, the
amount by which the price paid by the employee exceeded the sale price.
Employees who did not sign the release by May 22, 2003, retain any rights they
may have under the Federal securities laws. Over eighty percent of the employees
who were offered the reimbursement have accepted the terms of the release,
representing a liability of approximately $0.6 million, which was deposited into
each individual's 401(k) account in July 2003. This amount is included in
Restructuring Charges and Other Expenses in the Consolidated Statements of
Operations.
At June 30, 2003, the Company classified 111,401 shares related to the potential
rescissionary rights outside of stockholders' deficit, because the redemption of
the stock is not within the control of the Company.
30
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2002
CONSOLIDATED RESULTS
The following table summarizes our results of operations for the three months
ended June 30, 2003 and 2002 (in thousands). Results in 2002 have been adjusted
for discontinued operations.
2003 2002 VARIANCE
---- ---- --------
Revenues $ 50,466 $ 62,947 $ (12,481)
=========== =========== ===========
Operating expenses $ 59,341 $ 72,364 $ (13,023)
=========== =========== ===========
Loss from continuing operations before
cumulative effect of accounting
change $ (18,158) $ (11,837) $ (6,321)
Discontinued operations (188) (221) 33
----------- ----------- -----------
Net loss $ (18,346) $ (12,058) $ (6,288)
=========== =========== ===========
Net loss applicable to
common stockholders $ (20,206) $ (56,556) $ 36,350
=========== =========== ===========
Net loss per diluted share applicable
to common stockholders $ (0.60) $ (1.77) $ 1.17
=========== =========== ===========
REVENUES
Total revenues decreased $12.5 million, or 19.8%, from $62.9 million for the
three months ended June 30, 2002, to $50.5 million for the same period in 2003.
The decrease was primarily due to a decrease in trade show and conference
revenues of $9.8 million, or 57.7%, from $16.8 million for the three months
ended June 30, 2002, to $7.1 million for the same period in 2003, and a decrease
in publishing revenues of $3.3 million, or 7.8%, from $42.8 million for the
three months ended June 30, 2002, to $39.4 million for the same period in 2003.
Online media revenues increased $0.6 million, or 16.7%, from $3.4 million for
the three months ended June 30, 2002, to $3.9 million for the same period in
2003. Included in total revenues for the three months ended June 30, 2002 were
revenues of $4.8 million associated with properties sold in December 2002, which
were not classified as discontinued operations.
The decrease in our trade show and conference revenues was due primarily to a
decrease of $8.2 million in our Technology Media segment, a decrease of $1.4
million in our Industry Media segment and a $0.9 million decrease in our
Lifestyle Media segment. These decreases were partially offset by revenue
improvements in our Retail Media segment. Our Internet information sector trade
shows accounted for $9.2 million of the Technology Media segment revenue
decrease, which was partially offset by an increase of nearly $1.0 million in
the information technology sector.
The decrease in publishing revenues was primarily due to a $1.5 million decrease
in our Industry Media segment and a $2.8 million decrease in our Technology
Media segment. Our design/engineering, manufacturing, electronics, Internet
information and information technology markets accounted for $4.1 million of the
decrease. These decreases were partially offset by our Retail Media segment
where publishing revenues increased by approximately $1.0 million in the second
quarter of 2003 when compared with the same 2002 period.
OPERATING EXPENSES
Operating expenses decreased $13.0 million, or 18.0%, from $72.4 million for the
three months ended June 30, 2002, to $59.3 million for the same period in 2003.
Included in operating expenses for the three months ended June 30, 2003 are
restructuring charges and other expenses of $1.9 million, depreciation and
amortization charges of $3.8 million and a provision for loan
31
impairment of $7.6 million. Included in operating expenses for the three months
ended June 30, 2002 are restructuring charges of $7.7 million, impairment of
asset charges of $0.1 million, and depreciation and amortization charges of $5.4
million. The overall decrease in operating expenses was due primarily to the
effects of cost reduction initiatives and restructuring activities throughout
2002 and 2003.
EDITORIAL, PRODUCTION AND CIRCULATION
Editorial, production and circulation expenses decreased to $23.5 million for
the three months ended June 30, 2003, compared to $27.7 million for the same
period in 2002, representing a decrease of $4.3 million, or 15.4%. The decrease
was due to the effects of properties sold in December 2002 that were not
classified as discontinued operations, which accounted for $1.1 million of the
decrease; and our expense reduction initiatives, including: the elimination of
unprofitable properties; reduction of production costs through process
improvements and selective reduction in frequency and circulation levels;
outsourcing of various functions in the organization; and staff reductions made
in 2002 and 2003.
Editorial, production and circulation expenses as a percentage of revenues
increased from 44.1% for the three months ended June 30, 2002, to 46.5% for the
same period in 2003. The increase was due to the general decrease in revenues,
which was not fully offset by expense reduction initiatives.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses declined $7.9 million, or 26.2%,
from $31.3 million for the three months ended June 30, 2002, to $22.6 million in
the same period in 2003. Selling, general and administrative expenses as a
percentage of revenues decreased from 49.8% for the three months ended June 30,
2002, to 44.8% for the same period in 2003. These decreases were due primarily
to cost savings associated with office closings and staff reductions in 2002 and
2003.
PROVISION FOR LOAN IMPAIRMENT
During the second quarter of 2003, the Company determined that certain
executives, who have loans under the Company's executive loan program, would
probably be unable to repay a significant portion of the outstanding balances
due under their loans without a significant recovery in the Company's stock
price. The notes are full-recourse loans and the Company intends to pursue
collection of all amounts when due. The Company recorded a provision for loan
impairment in the amount of $7.6 million, reflecting the amount by which the
carrying value of each individual's loan exceeds the underlying estimated fair
value of the assets available to repay the loan. The Company will recognize any
recoveries of amounts reserved only upon payment of the loans.
RESTRUCTURING CHARGES AND OTHER EXPENSES
Due to continued revenue challenges, the Company has implemented several
additional expense reduction and restructuring initiatives to align its cost
structure with the prevailing business environment. In the second quarter 2003,
the Company recorded a restructuring charge of $0.8 million. The cost reduction
initiatives have included workforce reductions, the partial shutdown of one
facility and the cancellation of certain contractual obligations. The charge
includes $0.4 million of employee severance and termination benefits, $0.3
million related to non-cancelable obligations under a continuing lease contract,
and the remaining $0.1 million relates to other contractual obligations. The
following sets forth additional detail concerning the principal components of
the charge:
- Personnel costs of $0.4 million are associated with the elimination of
26 positions, of which approximately 77% were in the United States and
the remaining positions in the United Kingdom and Germany. Payments
for severance and benefits related to these positions are expected to
be completed by the end of the first quarter 2004.
- Office closure costs of $0.3 million, net of estimated sublease income
of $0.4 million, relate to the partial closure in the second quarter
of 2003 of one office in the United States and include costs
associated with existing office space under lease. For properties that
the Company no longer occupies, management makes assumptions including
the number of years a property will be subleased, square footage,
market trends, property location and the price per square foot, to
estimate sublease income. These assumptions involve significant
judgements and estimations. Where possible, management bases its
assumptions on discussions with real estate brokers and/or parties
that have shown interest in the space. Actual and estimated future
lease and sublease payments are recorded on a discounted basis.
32
- Other exit costs of $0.1 million include costs associated with the
cancellation of certain contractual obligations.
In addition, the Company made an adjustment of $0.5 million in the second
quarter 2003 to the restructuring charge primarily for an office lease
originally recorded in the second quarter of 2002 resulting from the bankruptcy
filing by the sublessor of the property.
Also included in expense for the three months ended June 30, 2003 is
approximately $0.6 million relating to the settlement with employees with
rescissionary rights under the Company's 401(k) plan. See the redeemable common
stock section of Note 6 - Common Stock and Common Stock Award Programs, for
additional details.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization declined $1.7 million, or 30.6%, from $5.4 million
for the three months ended June 30, 2002, to $3.8 million for the same period in
2003 due to lower amortization expense related to intangible assets of
properties sold in December 2002 and in the first quarter of 2003, as well as
the write-off of approximately $20.0 million of intangibles in the third quarter
of 2002.
OTHER INCOME (EXPENSE)
Interest expense decreased $0.2 million from $9.6 million for the three months
ended June 30, 2002, to $9.4 million for the same period in 2003.
EFFECTIVE TAX RATES
The effective tax rates for the three months ended June 30, 2003 and 2002 were a
provision of 0.4% and a benefit of 37.8%, respectively. The effective tax rate
for the three months ended June 30, 2003 is due to the net operating loss
available for carryforward being offset by a valuation allowance for the
Company's net deferred tax assets and net operating loss carry-forwards not
expected to be utilized. The difference in the effective tax rate between years
is due to the establishment of the valuation allowance in the third-quarter of
2002. The tax provision for the three months ended June 30, 2003 relates to
state and foreign taxes.
DISCONTINUED OPERATIONS
Discontinued operations for all periods presented include the results of Penton
Media Australia ("PM Australia"), which was sold in December 2002, and the
results of PTS, which was sold in January 2003. PM Australia was part of our
Technology Media segment and PTS was part of our Industry Media segment. Losses
for the three months ended June 30, 2003 primarily include the settlement of
certain lawsuits that were pending related to PM Australia. Revenues for these
properties were approximately $3.1 million for the three months ended June 30,
2002.
NET LOSS
Due to the factors noted above, we reported a net loss for the three months
ended June 30, 2003 of $18.3 million compared to a net loss of $12.1 million for
the same period in 2002.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
The net loss applicable to common stockholders of $20.2 million, or $0.60 per
diluted share, for the three months ended June 30, 2003, includes $1.9 million
of accrued dividends and beneficial conversion accretion on our preferred
stock. For the three months ended June 30, 2002, the net loss applicable to
common stockholders of $56.6 million, or $1.77 per diluted share, includes a
$42.1 million non-cash charge related to the immediate recognition in retained
earnings of the unamortized beneficial conversion feature resulting from
stockholders' approval to remove Penton's preferred stock mandatory redemption
date.
SEGMENTS
We manage our business based on four operating segments: Industry Media,
Technology Media, Lifestyle Media and Retail Media. All four segments derive
their revenues from publications, trade shows and conferences, and online media
products. See Note 11 -
33
Segment Information, for the definition of adjusted segment EBITDA and a
reconciliation of total adjusted segment EBITDA to loss from continuing
operations before income taxes and cumulative effect of accounting change.
Financial information by segment for the three months ended June 30, 2003 and
2002, is summarized in the following table (in thousands):
ADJUSTED
REVENUES SEGMENT EBITDA
2003 2002 2003 2002
---- ---- ---- ----
Industry Media $ 20,998 $ 23,697 $ 4,788 $ 4,256
Technology Media 20,064 30,604 3,272 4,929
Lifestyle Media 3,362 4,284 (667) (484)
Retail Media 6,042 4,362 1,451 659
----------- ---------- ---------- -----------
Total $ 50,466 $ 62,947 $ 8,844 $ 9,360
=========== ========== ========== ===========
INDUSTRY MEDIA
Our Industry Media segment, which represented 41.6% of total Company revenues
for the three months ended June 30, 2003, serves customers in the manufacturing,
design/engineering, mechanical systems/construction, government/compliance,
supply chain and aviation industries. Revenues for this segment decreased $2.7
million, or 11.4%, from $23.7 million in the second quarter of 2002, to $21.0
million for the same period in 2003. The decrease was due primarily to lower
revenues from publications of $1.5 million and lower revenues from trade show
and conferences of $1.4 million. These decreases were partially offset by an
increases of approximately $0.2 million from online media products. The decrease
in publication revenues was due primarily to year-on-year advertising declines
in products serving the design/engineering and manufacturing sectors, which
accounted for approximately $1.4 million of the segment's publishing decrease.
These two sectors continue to be impacted by the downturn in the U.S. economy.
The decrease in trade shows and conferences was due primarily to the absence of
revenues from the A/E/C Spring show, which was held in the second quarter of
2002 but was not held in 2003 because the property was sold in December 2002.
Adjusted segment EBITDA for Industry Media increased $0.5 million, or 12.5%,
from $4.3 million for the three months ended June 30, 2002, to $4.8 million for
the same period in 2003. Performance of online media and improvements in the
segment's general and administrative costs accounted for $0.6 million of the
increase, which was partially offset by lower adjusted segment EBITDA from
publications and trade shows and conferences. The improvement in the segment's
general and administrative costs was due primarily to the effects of our 2002
and 2003 expense reduction initiatives, including eliminating unprofitable
properties and staff reductions. Results for the three months ended June 30,
2002 include adjusted segment EBITDA of approximately $0.4 million related to
the A/E/C properties, which was sold in December 2002.
TECHNOLOGY MEDIA
Our Technology Media segment, which represented 39.8% of total Company revenues
for the second quarter of 2003, serves customers in the electronics, information
technology and Internet technologies markets. Revenues for this segment
decreased $10.5 million, or 34.4%, from $30.6 million for the three months ended
June 30, 2002, to $20.1 million for the same period in 2003. The decrease was
due primarily to lower revenues from publications of $2.8 million and lower
revenues from trade shows and conferences of $8.2 million. Advertising weakness
in our information technology and electronics sectors and the elimination of
revenues from properties sold in December 2002 of approximately $0.4 million,
accounted for the majority of the publishing decrease. Lower trade show and
conference revenues were due primarily to the absence of revenues from trade
shows that were held in the second quarter of 2002 but were sold in December
2002, which accounted for $3.0 million of the decrease; the change in timing of
the Internet World Berlin trade show from the second quarter of 2002 to the
fourth quarter in 2003, which accounted for $2.2 million of the decrease; lower
revenues year-over-year from the Internet World Spring show and the elimination
of revenues from technology events that were held in the second quarter of 2002
but not repeated in the second quarter of 2003 due to unfavorable market
conditions. Online revenues increased by $0.4 million in the second quarter of
2003 compared with the same 2002 period.
Adjusted segment EBITDA for Technology Media decreased $1.7 million from $4.9
million for the three months ended June 30, 2002, to $3.3 million for the same
period in 2003. Trade shows and conferences accounted for $2.5 million of the
decrease which was offset by modest adjusted EBITDA improvements in publications
and online media, as well as a $0.7 million improvement in
34
the segment's general and administrative costs due primarily to the impact of
cost reduction measures implemented in 2002 and 2003. The trade show and
conference decrease was primarily due to the sale of unprofitable technology
properties in December 2002, which accounted for $0.8 million of the decrease,
the change in timing of the event previously noted from the second quarter of
2002 to the fourth quarter of 2003, which accounted for $0.8 million of the
decrease, and lower year-over-year adjusted EBITDA from the Internet World
Spring show.
LIFESTYLE MEDIA
Our Lifestyle Media segment, which represented 6.7% of total Company revenues
for the second quarter of 2003, serves customers in the natural products
industry sector. Revenues for this segment decreased $0.9 million, or 21.5%,
from $4.3 million for the three months ended June 30, 2002, to $3.4 million when
compared with the same period in 2003. The decrease was due primarily to lower
revenues from trade shows and conferences caused by the change in show dates for
Natural Products Expo Asia from the second quarter of 2002 to the fourth quarter
of 2003.
Adjusted segment EBITDA for the Lifestyle Media segment decreased $0.2 million,
or 37.8%, from a loss of $0.5 million for the three months ended June 30, 2002,
to a loss of $0.7 million for the same period in 2003. The decrease was due
primarily to the change in timing of the Natural Products Expo Asia show, as
noted previously.
RETAIL MEDIA
Our Retail Media segment, which represented 12.0% of total Company revenues for
the second quarter of 2003, serves customers in the food/retail and
leisure/hospitality sectors. Revenues for this segment increased $1.7 million,
or 38.5%, from $4.4 million for the three months ended June 30, 2002, to $6.0
million for the same period in 2003. The revenue increase was due to the
strength of publishing properties serving our foodservice and hospitality
markets, which accounted for $0.7 million of the increase.
Adjusted segment EBITDA for the Retail Media segment increased nearly $0.8
million, or 120.2%, from $0.7 million for the three months ended June 30, 2002,
to $1.5 million for the same period in 2003. The increase was due primarily to
improved revenues for the second quarter of 2003 over the second quarter of 2002
and cost reduction efforts undertaken in 2002 and 2003.
PRODUCTS
We publish specialized trade magazines, produce trade shows and conferences, and
maintain a variety of online media products, including Web businesses and
electronic newsletters. Revenues by product line for the three months ended June
30, 2003 and 2002 were as follows (in thousands):
THREE MONTHS ENDED
JUNE 30,
2003 2002
---- ---- -
Publishing $ 39,432 $ 42,779
Trade Shows and Conferences 7,101 16,798
Online Media 3,933 3,370
--------- ----------
Total revenues $ 50,466 $ 62,947
========= ==========
Publishing revenues decreased by $3.3 million from $42.8 million for the three
months ended June 30, 2002, to $39.4 million for the same period in 2003. The
decrease in Publishing revenues was due primarily to year-over-year advertising
declines in products serving the design/engineering and manufacturing sectors,
which accounted for $1.3 million of the decrease. These two markets continue to
be impacted by the downturn in the U.S. economy. Advertising weakness in our
information technology and electronics sectors accounted for another $2.0
million of the decrease, which included revenues from properties sold in
December 2002 of $0.4 million.
Trade Show and Conference revenues decreased by $9.7 million from $16.8 million
for the three months ended June 30, 2002, to $7.1 million for the same period in
2003. The decrease in Trade Show and Conference revenues was due primarily to a
year-over-year decline of nearly $2.9 million from an event in the Internet
information market, the elimination of $4.2 million in revenues from technology
properties sold in December 2002, the change in show dates from the second
quarter of 2002 to the fourth quarter of 2003, which accounted for $2.8 million
of the decrease, and the elimination of technology events that were held in the
second
35
quarter of 2002 but not repeated in the second quarter of 2003 due to
unfavorable market conditions.
Online media revenues increased $0.6 million, or 16.7%, from $3.4 million for
the three months ended June 30, 2002, to $3.9 million for the same period in
2003. The increase was due to the success of online products across several of
our markets.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2002
CONSOLIDATED RESULTS
The following table summarizes our results of operations for the six months
ended June 30, 2003 and 2002 (in thousands). Results in 2002 have been adjusted
for discontinued operations.
2003 2002 VARIANCE
---- ---- --------
Revenues $ 104,858 $ 124,075 $ (19,217)
=========== =========== ===========
Operating expenses $ 108,973 $ 132,602 $ (23,629)
=========== =========== ===========
Loss from continuing operations before
cumulative effect of accounting
change $ (24,127) $ (15,663) $ (8,464)
Discontinued operations 678 (628) 1,306
Cumulative effect of an accounting
change, net of taxes - (39,700) 39,700
----------- ----------- -----------
Net loss $ (23,449) $ (55,991) $ 32,542
=========== =========== ===========
Net loss applicable to
common stockholders $ (25,964) $ (100,852) $ 74,888
=========== =========== ===========
Net loss per diluted share applicable
to common stockholders $ (0.78) $ (3.15) $ 2.37
=========== =========== ===========
REVENUES
Total revenues decreased $19.2 million, or 15.5%, from $124.1 million for the
six months ended June 30, 2002, to $104.9 million for the same period in 2003.
The decrease was due primarily to a decrease in trade show and conference
revenues of $12.2 million, or 36.0%, from $33.9 million for the six months ended
June 30, 2002, to $21.7 million for the same period in 2003, and a decrease in
publishing revenues of $7.8 million, or 9.3%, from $84.0 million for the six
months ended June 30, 2002, to $76.2 million for the same period in 2003. Online
media revenues increased $0.8 million, or 12.9%, from $6.2 million for the six
months ended June 30, 2002, to $7.0 million for the same period in 2003.
Included in total revenues for the six months ended June 30, 2002 were revenues
of $5.3 million associated with properties sold in December 2002, which were not
classified as discontinued operations.
The decrease in our trade show and conference revenues was due primarily to a
decrease of $11.4 million in our Technology Media segment, a decrease of $1.2
million in our Industry Media segment and a decrease of $0.6 million in the
Lifestyle Media segments. These declines were partially offset by revenue
improvements in our Retail Media segment. Our Internet information sector trade
shows accounted for $11.9 million of the decrease in the Technology Media
segment.
The decrease in publishing revenues was due primarily to the $9.0 million
decrease in our Industry Media and Technology Media segments. Our
design/engineering, manufacturing, electronics, Internet information and
information technology sectors accounted for $8.4 million of the decrease. These
decreases were partially offset by our Lifestyle Media and Retail Media
segments, whose publishing revenues increased by approximately $1.2 million in
the first six months of 2003 when compared with the same 2002 period.
36
OPERATING EXPENSES
Operating expenses decreased $23.6 million, or 17.8%, from $132.6 million for
the six months ended June 30, 2002, to $109.0 million for the same period in
2003. Included in operating expenses for the six months ended June 30, 2003 are
restructuring charges and other expenses of $1.8 million, depreciation and
amortization charges of $7.5 million, and a provision for loan impairment of
$7.6 million. Included in operating expenses for the six months ended June 30,
2002 are restructuring charges of $7.4 million, impairment of asset charges of
$0.1 million, and depreciation and amortization charges of $9.7 million. The
overall decrease in operating expenses was due primarily to the effects of cost
reduction initiatives and restructuring activities throughout 2002 and 2003 and
the effect of properties sold in December 2002 and in the first quarter of 2003.
EDITORIAL, PRODUCTION AND CIRCULATION
Editorial, production and circulation expenses decreased $6.7 million, or 12.8%,
from $52.5 million for the six months ended June 30, 2002, to $45.8 million for
the same period in 2003. The decrease was due to the effects of our expense
reduction initiatives, including the effect of properties sold in December 2002
and in the first quarter of 2003, which accounted for $2.1 million of the
decrease; the elimination of unprofitable properties; reduction of production
costs through process improvements and selective reduction in frequency and
circulation levels; outsourcing of various functions in the organization; and
staff reductions made in 2002 and 2003.
Editorial, production and circulation expenses as a percentage of revenues
increased from 42.3% for the six months ended June 30, 2002, to 43.7% for the
same period in 2003. The slight increase was due to the general decrease in
revenues, which was only partially offset by our expense reduction initiatives.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses declined $16.6 million, or 26.4%,
from $62.8 million for the six months ended June 30, 2002, to $46.2 million in
the same period in 2003. Selling, general and administrative expenses as a
percentage of revenues decreased from 50.6% for the six months ended June 30,
2002, to 44.1% for the same period in 2003. These decreases were due primarily
to cost savings associated with office closings and staff reductions in 2002 and
2003.
PROVISION FOR LOAN IMPAIRMENT
During the second quarter of 2003, the Company determined that certain
executives, who have loans under the Company's executive loan program, would
probably be unable to repay a significant portion of the outstanding balances
due under their loans without a significant recovery in the Company's stock
price. The notes are full-recourse loans and the Company intends to pursue
collection of all amounts when due. The Company recorded a provision for loan
impairment in the amount of $7.6 million, reflecting the amount by which the
carrying value of each individual's loan exceeds the underlying estimated fair
value of the assets available to repay the loan. The Company will recognize any
recoveries of amounts reserved only upon payment of the loans.
37
RESTRUCTURING CHARGES AND OTHER EXPENSES
Due to continued revenue challenges, the Company has implemented several
additional expense reduction and restructuring initiatives to align its cost
structure with the prevailing business environment. In the first half of 2003,
the Company recorded a restructuring charge of $0.8 million. The cost reduction
initiatives have included workforce reductions, the partial shutdown of one
facility and the cancellation of certain contractual obligations. The charge
includes $0.4 million of employee severance and termination benefits, $0.3
million related to non-cancelable obligations under a continuing lease contract,
and the remaining $0.1 million related to other contractual obligations. The
following sets forth additional detail concerning the principal components of
the charge:
- Personnel costs of $0.4 million are associated with the elimination of
26 positions, of which approximately 77% were in the United States and
the remaining positions in the United Kingdom and Germany. Payments
for severance and benefits related to these positions are expected to
be completed by the end of the first quarter 2004.
- Office closure costs of $0.3 million, net of estimated sublease income
of $0.4 million, relate to the partial closure in the second quarter
2003 of one office in the United States and include costs associated
with existing office space under lease. For properties that the
Company no longer occupies, management makes assumptions including the
number of years a property will be subleased, square footage, market
trends, property location and the price per square foot to estimate
sublease income. These assumptions involve significant judgements and
estimations. Where possible, management bases its assumptions on
discussions with real estate brokers and/or parties that have shown
interest in the space. Actual and estimated future lease and sublease
payments are recorded on a discounted basis.
- Other exit costs of $0.1 million include costs associated with the
cancellation of certain contractual obligations.
In addition, the Company made an adjustment of $0.5 million in the first half of
2003 to the restructuring charge primarily for an office lease originally
recorded in the second quarter 2002 resulting from the bankruptcy filing by the
sublessor of the property.
Also included in expense for the six months ended June 30, 2003 is approximately
$0.6 million relating to the settlement with employees with rescissionary rights
under the Company's 401(k) plan. See Redeemable Common Stock for additional
details.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization declined $2.2 million, or 22.6%, from $9.7 million
for the six months ended June 30, 2002, to $7.5 million for the same period in
2003 due to lower amortization expense related to intangible assets of
properties sold in December 2002 and January 2003, as well as the write-off of
approximately $20.0 million of intangibles in the third quarter of 2002.
OTHER INCOME (EXPENSE)
Interest expense increased $0.8 million from $18.9 million for the six months
ended June 30, 2002, to $19.8 million for the same period in 2003. Included in
interest expense in 2003 is approximately $0.9 million related to the write-off
of unamortized financing fees associated with the commitment reduction of our
credit facility revolver in January 2003 from $40.0 million to $20.1 million.
Included in interest expense in 2002 is approximately $0.7 million related to
the write-off of unamortized finance fees associated with the commitment
reduction of our credit facility revolver from $185.0 million to $40.0 million
in March 2002 and approximately $1.4 million related to hedging activities. The
increase in interest expense reflects the higher weighted-average interest rate
in the first six months of 2003 compared with the same period in 2002.
In 2002, the gain on extinguishment of debt of $0.3 million was classified as an
extraordinary item. In 2003, in accordance with the provisions of Statement of
Financial Accounting Standard ("SFAS") No. 145, "Rescission of SFAS Nos. 4, 44,
and 64, Amendment of SFAS 13, and Technical Corrections as of April 2002" ("SFAS
145"), this gain was reclassified to Other Income (Expense). The balance
consisted of two items. In March 2002, we purchased $10.0 million face value of
our 10-3/8% senior subordinated notes at prevailing market prices, resulting in
a gain of $1.4 million. This gain was offset by the write-off of unamortized
deferred financing costs of approximately $1.1 million associated with the
payoff of our term loan A and term loan B facilities, which also occurred in
March 2002.
In January 2002, Penton sold its remaining 11.8% ownership interest in
Jupitermedia Corporation for $5.8 million and recognized a $1.5 million gain
from its sale.
38
EFFECTIVE TAX RATES
The effective tax rates for the six months ended June 30, 2003 and 2002 were
provision of 0.8% and a benefit of 38.7%, respectively. The effective tax rate
for the six months ended June 30, 2003 is due to the net operating loss
available for carryforward being offset by a valuation allowance for the
Company's net deferred tax assets and net operating loss carry-forwards not
expected to be utilized. The difference in the effective tax rate between years
is due to the establishment of the valuation allowance in the third-quarter of
2002. The tax provision for the six months ended June 30, 2003 relates to state
and foreign taxes.
DISCONTINUED OPERATIONS
Discontinued operations for all periods presented include the results of PM
Australia, which was sold in December 2002, and the results of PTS, which was
sold in January 2003. PM Australia was part of our Technology Media segment and
PTS was part of our Industry Media segment. The income recognized for the six
months ended June 30, 2003 is primarily due to a gain of approximately $1.2
million associated with the sale of PTS, offset by one month of operations for
PTS, and costs related to the settlement of certain lawsuits that were pending
related to PM Australia. Revenues for these properties were approximately $5.1
million for the six months ended June 30, 2002.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
During the third quarter of 2002, Penton completed its transitional goodwill
impairment test for January 1, 2002, under the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets" and recorded a non-cash charge of $39.7
million to reduce the carrying value of goodwill for two of our seven identified
reporting units. The charge is reflected as a Cumulative Effect of Accounting
Change in the accompanying Consolidated Statements of Operations.
NET LOSS
Due to the factors noted above, we reported a net loss for the six months ended
June 30, 2003 of $23.4 million compared to a net loss of $56.0 million for the
same period in 2002.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
The net loss applicable to common stockholders of $26.0 million, or $0.78 per
diluted share, for the six months ended June 30, 2003, includes $2.5 million of
accrued dividends and beneficial conversion accretion on our preferred stock.
For the six months ended June 30, 2002, the net loss applicable to common stock
holders of $100.9 million, or $3.15 per diluted share, includes a $42.1 million
non-cash charge related to the immediate recognition in retained earnings of
the unamortized beneficial conversion feature resulting from stockholders'
approval to remove Penton's preferred stock mandatory redemption date.
SEGMENTS
We manage our business based on four operating segments: Industry Media,
Technology Media, Lifestyle Media and Retail Media. All four segments derive
their revenues from publications, trade shows and conferences, and online media
products. See Note 11 - Segment Information, for the definition of adjusted
segment EBITDA and a reconciliation of total adjusted segment EBITDA to loss
from continuing operations before income taxes and cumulative effect of
accounting change.
Financial information by segment for the six months ended June 30, 2003 and
2002, adjusted for discontinued operations, is summarized in the following table
(in thousands):
ADJUSTED
REVENUES SEGMENT EBITDA
2003 2002 2003 2002
---- ---- ---- ----
Industry Media $ 40,360 $ 45,162 $ 8,064 $ 7,600
Technology Media 35,276 51,213 4,065 3,768
Lifestyle Media 18,411 18,754 8,635 8,534
Retail Media 10,811 8,946 2,182 1,224
----------- ---------- ---------- -----------
Total $ 104,858 $ 124,075 $ 22,946 $ 21,126
=========== ========== ========== ===========
39
INDUSTRY MEDIA
Our Industry Media segment, which represented 38.5% of total Company revenues
for the six months ended June 30, 2003, serves customers in the manufacturing,
design/engineering, mechanical systems/construction, government/compliance,
supply chain and aviation industries. Revenues for this segment decreased $4.8
million, or 10.6%, from $45.2 million for the six months ended June 30, 2002, to
$40.4 million for the same period in 2003. The decrease was due primarily to
lower revenues from publications of $3.8 million and lower revenues from trade
shows and conferences of $1.2 million. These decreases were partially offset by
the increases in revenues of approximately $0.2 million from online media
products. The decrease in publication revenues was due primarily to year-on-year
advertising declines in products serving the design/engineering and
manufacturing sectors, which accounted for approximately $3.1 million of the
segment's publishing decrease. These two sectors continue to be impacted by the
downturn in the U.S. economy. The decrease in trade show and conference revenues
was due primarily to the absence the A/E/C Spring show, which was held in the
second quarter of 2002 but was sold in December 2002.
Adjusted segment EBITDA for Industry Media increased $0.5 million, or 6.1%, from
$7.6 million for the six months ended June 30, 2002, to $8.1 million for the
same period in 2003. Performance of online media and improvements in the
segment's general and administrative costs accounted for $1.2 million of the
increase, which was offset by lower adjusted segment EBITDA of $0.7 million from
publications. The increase in the segments general and administrative costs was
due primarily to the effects of our 2002 and 2003 expense reduction initiatives,
including the elimination of unprofitable properties and staff reductions. The
decease in the segment's publishing was due primarily to the continued
year-on-year advertising declines in products serving the design/engineering and
manufacturing sectors.
TECHNOLOGY MEDIA
Our Technology Media segment, which represented 33.6% of total Company revenues
for the six months ended June 30, 2003, serves customers in the electronics,
information technology and Internet technologies markets. Revenues for this
segment decreased $15.9 million, or 31.1%, from $51.2 million for the six months
ended June 30, 2002, to $35.3 million for the same period in 2003. The decrease
was due primarily to lower revenues from publications of $5.2 million and lower
revenues from trade shows and conferences of $11.2 million. Advertising weakness
in our information technology and electronics sectors and the elimination of
revenues from properties sold in December 2002 of approximately $0.8 million,
accounted for the majority of the publishing decrease. Lower trade show and
conference revenues were due primarily to the absence of revenues from trade
shows that were held in the first half of 2002 but were sold in December 2002,
which accounted for $4.2 million of the decrease; the change in timing of a
trade show from the second quarter of 2002 to the fourth quarter in 2003, which
accounted for $2.2 million of the decrease; lower revenues year-over-year from
the Internet World Spring show, and the elimination of revenues from technology
events that were held in the first half of 2002 but not repeated in the first
half of 2003 due to unfavorable market conditions. Online revenues increased by
$0.5 million in the first half of 2003 compared with the same 2002 period.
Adjusted segment EBITDA for Technology Media increased $0.3 million from $3.8
million for the six months ended June 30, 2002, to $4.1 million for the same
period in 2003. Publishing and online media accounted for $0.8 million of the
increase, while the segment's general and administrative costs improved by $1.5
million due primarily to the impact of cost reduction measures implemented in
2002 and 2003. These increases were offset by lower adjusted EBITDA of nearly
$2.0 million from trade shows and conferences due primarily to the sale of
unprofitable technology properties in December 2002, which accounted for $0.2
million of the decrease, the change in timing of the event previously noted from
the second quarter of 2002 to the fourth quarter of 2003, which accounted for
$0.8 million of the decrease, and lower year-over-year adjusted EBITDA from the
Internet World Spring show.
LIFESTYLE MEDIA
Our Lifestyle Media segment, which represented 17.6% of total Company revenues
for the six months ended June 30, 2003, serves customers in the natural products
industry sector. Revenues for this segment decreased $0.3 million, or 1.8%, from
$18.8 million for the six months ended June 30, 2002, to $18.4 million when
compared with the same period in 2003. The decrease was due primarily to lower
revenues from trade shows and conferences caused by the change in show dates
for an Expo from the second quarter of 2002 to the fourth quarter of 2003,
which accounted for $0.6 million of the decrease. This decrease was partially
offset by higher publishing revenues of $0.2 million.
Adjusted segment EBITDA for the Lifestyle Media segment increased $0.1 million,
or 1.2%, from $8.5 million for the six months ended June 30, 2002, to $8.6
million for the same period in 2003. The increase was primarily due to higher
publishing revenues.
40
RETAIL MEDIA
Our Retail Media segment, which represented 10.3% of total Company revenues for
the six months ended June 30, 2003, serves customers in the food/retail and
leisure/hospitality sectors. Revenues for this segment increased $1.9 million,
or 20.8%, from $8.9 million for the six months ended June 30, 2002, to $10.8
million for the same period in 2003. The revenue increase was due to the
strength of publishing properties serving our foodservice and hospitality
related markets and the segment's spring event serving the convenience store
retail market.
Adjusted segment EBITDA for the Retail Media segment increased nearly $1.0
million, or 78.3%, from $1.2 million for the six months ended June 30, 2002, to
$2.2 million for the same period in 2003. The increase was due primarily to
improved revenues for the first half of 2003 over the second quarter of 2002 as
noted above and cost reduction efforts undertaken in 2002 and 2003.
PRODUCTS
We publish specialized trade magazines, produce trade shows and conferences, and
maintain a variety of online media products, including Web businesses and
electronic newsletters. Revenues by product line for the six months ended June
30, 2003 and 2002 were as follows (in thousands):
SIX MONTHS ENDED
JUNE 30,
2003 2002
---- ---- -
Publishing $ 76,202 $ 84,014
Trade Shows and Conferences 21,668 33,869
Online Media 6,988 6,192
--------- ----------
Total revenues $ 104,858 $ 124,075
========= ==========
Publishing revenues decreased nearly $7.8 million from $84.0 million for the six
months ended June 30, 2002, to $76.2 million for the same period in 2003. The
decrease in Publishing revenues was due primarily to year-on-year advertising
decline of $2.5 million in products serving the design/engineering and
manufacturing sectors, which continue to be impacted by the downturn in the U.S.
economy; advertising weakness in our information technology and electronics
sectors, which accounted for $2.0 million of the decrease; the elimination of
revenues from technology events that were held in the first half of 2002 but not
repeated in the first half of 2003 due to unfavorable market conditions; and the
elimination of revenues from properties sold in December 2002, which accounted
for $0.8 million of the decrease.
Trade Show and Conference revenues decreased by $12.2 million from $33.9 million
for the six months ended June 30, 2002, to $21.7 million for the same period in
2003. The decrease in Trade Show and Conference revenues was due primarily to a
year-over-year decline of an event in the electronics market and an event in the
Internet information market; the elimination of revenues from technology
properties sold in December 2002, which accounted for $4.2 million of the
decrease; and the elimination of technology events that were held in the first
half of 2002 but not repeated in the first half of 2003 due to unfavorable
market conditions.
Online Media revenues increased $0.8 million, or 12.9%, from $6.2 million for
the six months ended June 30, 2002, to $7.0 million for the same period in 2003.
The increase was due to the success of online products across several of our
markets.
LIQUIDITY AND CAPITAL RESOURCES
ANALYSIS OF CASH FLOWS
Penton's total cash and cash equivalents was $40.4 million at June 30, 2003,
compared with $6.8 million at December 31, 2002. Cash provided by operating
activities was $35.2 million for the six months ended June 30, 2003, compared
with cash used by operating activities of $2.4 million for the same period in
2002. Operating cash flows for the six months ended June 30, 2003, reflected a
net loss of $23.4 million, offset by a net decrease in working capital items
(primarily due to a tax refund of $52.7 million) of approximately $38.7 million
and non-cash charges (primarily depreciation and amortization and provision for
loan impairment) of approximately $19.9 million. Operating cash flows for the
six months ended June 30, 2002, reflected a net loss of $56.0 million and a net
working
41
capital decrease of approximately $3.4 million, which were offset by non-cash
charges (primarily depreciation and amortization and the cumulative effect of
accounting change) of approximately $56.9 million.
The increase in operating cash flows for the six months ended June 30, 2003,
compared with the same 2002 period was due primarily to the tax refund received
in January 2003 of approximately $52.7 million, compared with a tax refund of
$12.2 million received in February of 2002.
Investing activities provided $1.9 million of cash for the six months ended June
30, 2003, and included proceeds of $3.3 million from the sale of PTS in January
2003. These proceeds were partially offset by capital expenditures of
approximately $1.3 million. Investing activities provided $2.5 million of cash
for the six months ended June 30, 2002, primarily from proceeds of $5.8 million
from the sale of approximately 3.0 million shares of Jupitermedia Corporation
common stock. These proceeds were partially offset by earnout payments of
approximately $1.5 million and capital expenditures of $1.8 million.
Financing activities used $3.4 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 $1.5 million
received on notes receivable and proceeds of approximately $0.3 million from the
repayment of an officers loan. Financing activities provided cash of $2.2
million for the six months ended June 30, 2002, due to the issuance of our
11-7/8% senior secured notes ("Secured Notes") and the sale of 50,000 shares of
mandatorily redeemable convertible preferred stock. These proceeds were
primarily offset by the paydown of the balance of our senior secured credit
facility term loans; the purchase of $10.0 million face value of our 10-3/8%
senior subordinated notes ("Subordinated Notes") at prevailing market prices;
the payment of financing fees associated with the amendment to our senior
secured credit facility; and the issuance of our Secured Notes.
Capital expenditures in the first six months of 2003 were approximately $1.3
million. We anticipate that we will spend approximately $3.0 million to $4.0
million on capital expenditures in 2003, primarily for expenditures related to
computers and management information systems.
FINANCING ACTIVITIES
In June 2001, we issued $185.0 million of Subordinated Notes due June 2011.
Interest on the notes is payable semiannually, on June 15 and December 15. The
Subordinated Notes are fully and unconditionally, jointly and severally
guaranteed, on a senior subordinated basis, by the assets of our domestic
subsidiaries, which are 100% owned by the Company, and may be redeemed, in whole
or in part, on or after June 15, 2006. In addition, we may redeem up to 35% of
the aggregate principal amount of the Subordinated Notes before June 15, 2004
with the proceeds of certain equity offerings. The Subordinated Notes were
offered at a discount of $4.2 million. This discount is being amortized using
the interest method, over the term of the Subordinated Notes. Costs representing
underwriting fees and other professional fees of approximately $1.7 million are
being amortized over the term of the Subordinated Notes. The net proceeds of
$180.2 million were used to pay down the $136.0 million outstanding balance of
the revolving credit facility, $12.8 million of the term loan A facility and
$7.2 million of the term loan B facility. The remaining proceeds were used for
general corporate purposes. The Subordinated Notes are our unsecured senior
subordinated obligations, subordinated in right of payment to all existing and
future senior indebtedness, including the senior secured credit facility and the
Secured Notes discussed below.
In January 2002, we received $5.8 million in net proceeds from the sale of our
remaining investment in Jupitermedia Corporation common stock.
In March 2002, we entered into an agreement with a group of investors to sell
50,000 shares of Series B Convertible Preferred Stock and warrants to purchase
1.6 million shares of our common stock for $50.0 million. We received gross
proceeds of $40.0 million from the sale of 40,000 shares of preferred stock and
warrants to purchase 1,280,000 shares of our common stock on March 19, 2002, and
gross proceeds of $10.0 million from the sale of 10,000 shares of preferred
stock and warrants to purchase 320,000 shares of our common stock on March 28,
2002 (see Note 5 - Mandatorily Redeemable Convertible Preferred Stock). Net
proceeds from the sale of the preferred stock, along with the net proceeds from
the sale of our Jupitermedia Corporation common stock, and cash on hand from a
tax refund were used to repay $48.0 million of amounts outstanding under our
term loans.
In March 2002, Penton issued $157.5 million of 11-7/8% Secured Notes due
in 2007. Interest is payable on the Secured Notes semiannually on April 1 and
October 1. The Secured Notes are fully and unconditionally, jointly and
severally guaranteed, on a senior basis, by all of our domestic subsidiaries,
which are 100% owned by the Company, and also the stock of certain subsidiaries.
We may redeem the Secured Notes, in whole or in part, during the period October
1, 2005 through October 1, 2006,
42
and thereafter at redemption prices of 105.9375% and 100.0000% of the principal
amount, respectively, together with accrued and unpaid interest to the date of
redemption. In addition, at any time prior to October 1, 2005, upon certain
public equity offerings of our common stock, up to 35% of the aggregate
principal amount of the Secured Notes may be redeemed at our option, within 90
days of such public equity offering, with cash proceeds from the offering at a
redemption price equal to 111.875% of the principal amount, together with
accrued and unpaid interest to the date of redemption.
The Secured Notes were offered at a discount of $0.8 million, which is being
amortized, using the interest method, over the term of the Secured Notes. Costs
representing underwriting fees and other professional fees of $6.6 million are
being amortized over the term of the Secured Notes. Net proceeds of $150.1
million were used to pay down $83.6 million of term loan A and $49.0 million of
term loan B, and net proceeds of $8.3 million were used to repurchase $10.0
million of our Subordinated Notes. The remaining net proceeds of $9.2 million
were used for general corporate purposes. The Secured Notes rank senior in right
to all of our senior subordinated indebtedness, including our Subordinated
Notes. The guarantees are senior secured obligations of each of our subsidiary
guarantors and rank senior in right of payment to all subordinated indebtedness
of the subsidiary guarantors, including the guarantees of our Subordinated
Notes. The notes and guarantees are secured by a lien on substantially all of
our assets and those of our subsidiary guarantors, other than specified excluded
assets.
In March 2002, we amended and restated our senior secured credit facility and
repaid our term loan A facility and our term loan B facility under our credit
facility from the proceeds received from the sale of preferred stock and the
issuance of the Secured Notes, as noted above. The amended and restated facility
provided for a revolving credit facility of up to a maximum amount of $40.0
million. Availability under the revolving credit facility was subject to a
borrowing base limited to 80% of eligible receivables. In order to access the
revolver, Penton could not have more than $7.5 million of cash and cash
equivalents available, had to be in compliance with the loan documents and had
to submit a borrowing base certificate immediately prior to each extension of
credit showing compliance with the provisions of the borrowing base. Penton was
required to prepay the revolver in the event that it had loans outstanding in
excess of the borrowing base, or it had more than $7.5 million in cash and cash
equivalents available at the end of any month. The commitment under the amended
and restated credit facility was scheduled to decrease by 15% in 2003, 30% in
2004, 35% in 2005, and 20% in 2006. The amended and restated credit facility has
no financial covenants. In connection with the amendment and restatement of the
credit facility, the interest rate on the revolving credit facility was
increased. In addition, further restrictions were placed on Penton's ability to
make certain restricted payments, to make capital expenditures in excess of
certain amounts, to incur additional debt and contingent obligations, make
acquisitions and investments, and to sell assets. As noted below, the credit
facility was further amended in January 2003 and replaced in August 2003.
The repayment of the term loans in March 2002 resulted in a non-cash
extraordinary charge of $0.7 million, net of $0.5 million in taxes, relating to
the write-off of unamortized deferred finance costs. In the first quarter of
2003, the 2002 extraordinary charge was reclassified to Gain on Extinguishment
of Debt in the Consolidated Statements of Operations in accordance with the
provisions of SFAS 145.
In September 2002, Moody's Investors Service took the following rating actions
regarding Penton: (i) confirmed the B3 rating on the Company's Secured Notes,
(ii) downgraded the Company's Subordinated Notes due 2011 from Caa2 to Ca, (iii)
downgraded the Company's senior implied rating from B3 to Caa3, and (iv)
downgraded the Company's senior unsecured issuer rating from Caa1 to Ca. These
changes in the rating of our debt instruments by the outside rating agencies
does not negatively impact our ability to use our revolver.
In December 2002, the Company sold four properties for approximately $0.9
million, which was used to repay outstanding amounts under the Company's credit
facility.
In January 2003, the Company amended its senior secured credit facility, which
was replaced in August 2003, as discussed below. The amended agreement permitted
the Company to sell certain properties in excess of the $5.0 million aggregate
limit required by the original amended agreement. In return, the revolving
commitment was reduced from $40.0 million to $32.0 million. At the end of
January 2003, when the aggregate sum of Penton's cash and cash equivalents
exceeded $40.0 million, an additional one-time reduction of $10.0 million was
required under the amended credit facility. Furthermore, upon the sale of PTS,
the revolving commitment was further reduced by 50% of the aggregate gross
proceeds, as defined, from this sale, or approximately $1.9 million. The amended
facility allowed for additional asset sales, transfers, leases, and other
dispositions and the issuance of equity interests by our subsidiaries up to a
maximum of approximately $3.6 million. The amended facility also increased the
maximum commitment fee from 0.50% to 0.75%.
43
In January 2003, the Company paid down the $4.5 million that was outstanding
under the credit facility. At June 30, 2003, no amounts were outstanding under
the revolver and the commitment was $20.1 million. Availability under the
commitment, which is subject to the Company's eligible accounts receivable, was
$19.7 million at June 30, 2003.
The reduction of the revolver from $40.0 million to $20.1 million in January
2003, and the reduction of the revolver from $185.0 million to $40.0 million in
March 2002, resulted in the write-off of unamortized finance fees related to the
revolver of $0.9 million and $0.7 million, respectively. These charges have been
classified as part of Interest Expense on the Consolidated Statements of
Operations.
In January 2003, the Company also completed the sale of the assets of PTS for
approximately $3.8 million, including an earnout of $0.6 million. The cash
received from the sale was used to pay down the Company's outstanding credit
facility.
In August 2003, the Company replaced its senior secured credit facility with a
new loan and security agreement. Under the Loan Agreement, which is a revolving
credit facility, the Company can borrow up to $40.0 million on a revolving basis
(See Note 16 - Subsequent Events).
The Company has no special purpose entities or off-balance sheet debt other than
operating leases in the ordinary course of business.
CURRENT LIQUIDITY
Our primary future cash needs will be to fund working capital, debt service,
capital expenditures, and our business restructuring charges and related
expenses. We expect capital expenditures in 2003 to be approximately $3.0
million to $4.0 million, as we continue to review our spending as a result of
continued economic and business uncertainty. We expect to make cash payments for
the remainder of 2003 related to our business restructuring initiatives of
approximately $2.2 million, which is comprised of $0.9 million for employee
separation costs, $1.1 million for lease obligations, and $0.2 million for
other contractual obligations.
The Company has implemented and continues to implement various cost reduction
programs and cash conservation plans, which involve the limitation of capital
expenditures and the control of working capital.
We anticipate adequate liquidity from operations and have available cash on hand
to meet all interest payments on our bonds and our other obligations through
2003. We have no principal repayment requirements until maturity of our Secured
Notes in October 2007. In addition, we have no bank debt and no maintenance
covenants on our existing bond debt. As noted above, Penton does have access to
a revolving credit facility of up to $40.0 million.
Our ability to meet cash operating requirements depends upon our future
performance, which is subject to general economic conditions and to financial,
competitive, business and other factors, including factors beyond our control.
If we are unable to meet our debt obligations or fund our other liquidity needs,
we may be required to raise capital through additional financing arrangements or
the issuance of private or public debt or equity securities. We cannot assure
you that such additional financing will be available at acceptable terms. In
addition, the terms of our convertible preferred stock and warrants, including
the conversion price, dividend and liquidation adjustment provisions, the
redemption price premiums, and board representation rights could negatively
impact our ability to access the equity markets in the future.
We may from time to time seek to retire our outstanding debt through cash
purchases on the open market, privately negotiated transactions or otherwise.
Such repurchases, if any, will depend on the prevailing market conditions, our
liquidity requirements, contractual restrictions and other factors. The amounts
involved may be material.
Penton did not make any cash contributions to its defined benefit pension plan
in 2001 or 2002. Based on the current value of the assets in our benefit plans,
we will not be required to make any cash contributions in 2003. Future funding
requirements are dependent upon factors such as interest rate levels, changes to
pension plan benefits, funded status, regulatory requirements for funding
purposes, and the level and timing of asset returns as compared with the level
and timing of expected benefit disbursements. Based on current estimates the
Company expects to make a contribution of approximately $1.5 million in the
third quarter of 2004 for calendar year 2003. In addition, quarterly estimated
contributions must be made in 2004 based on 2003 calculations. Due to the
presence of significant variables, actual future contributions may differ
materially.
The purchase of common stock under the 401(k) plan in excess of the number of
shares registered by the Company on Form S-8 with the Securities and Exchange
Commission under the Securities Act of 1933 could have a material adverse impact
on our
44
financial condition. The unregistered purchases do not cause an event of default
under the indentures governing our Subordinated Notes or Secured Notes or our
senior secured credit facility. However, an event of default could occur as an
indirect result of the unregistered purchases. For example, an event of default
would occur under (a) the indentures if the unregistered purchases were to
result in (i) unsatisfied judgments not covered by insurance aggregating in
excess of $5 million being rendered against the Company and not stayed, bonded
or discharged within 60 days after such judgment became final and nonappealable
or (ii) the Company's failure to observe the covenant limiting the Company's
ability to make restricted payments (as defined in the indentures) if, for
example, the Company made a rescission offer and as a result repurchased shares,
which could be considered the payment on account of the purchase, redemption or
other acquisition or retirement for value of equity interest (as defined in the
indentures) or (b) the credit agreement if the unregistered purchases were to
result in (i) the Company's failure to observe the covenant limiting the
Company's ability to make a restricted payment (as defined in the credit
agreement) if, for example, the Company made a rescission offer and as a result
repurchased shares, which could be considered a restricted payment by the
Company with respect to its equity interests (as defined in the credit
agreement), or (ii) a material adverse change in the business, assets,
operations, prospects or condition, financial or otherwise, of the Company taken
as a whole. The foregoing is not, and no inference should be drawn that the
foregoing is, an exclusive list of circumstances that could result in an event
of default under the indentures or the credit agreement as a consequence of the
unregistered sales. If an event of default occurs, all our indebtedness would be
immediately due and payable, and we cannot assure you that our business will
generate sufficient cash flow to enable us to service our debt obligations. In
addition, we cannot assure you that the Company will be able to obtain
alternative sources of funding (see Risk Factors section of our 2002 Annual
Report on Form 10-K).
In March 2003, we classified approximately 1.1 million shares of our common
stock as redeemable common stock as a result of rescissionary rights that
certain of our common stockholders may have in connection with the unregistered
purchases from May 2001 through March 2003 noted above. A number of remedies may
be available to regulatory authorities and the employees who purchased the
common stock, including, without limitation, a right of rescission and other
damages that could be imposed by regulatory authorities. Pursuant to the
rescission rights, employees may be entitled to return their shares to the
Company and receive back from us the full price they paid, plus interest. The
rescission rights lapse one year from the date of any such purchase. Although
the payments under the rescissionary rights are not anticipated to have a
material adverse impact on our financial condition, we have no control over any
civil or other damages that regulatory authorities could impose on the Company,
the result of which could have a material adverse effect on our financial
condition. Please also refer to Note 6 - Common Stock and Common Stock Award
Programs of the Consolidated Financial Statements for further details.
In April 2003, the Company offered to reimburse employees who had purchased
Penton common stock through the Company's 401(k) plan between March 25, 2002 and
March 25, 2003. Employees who signed a release were reimbursed the amount by
which the price they paid for the common stock exceeded the closing price of the
stock on the date they executed the release, or if the stock had been sold, the
amount by which the price paid by the employee exceeded the sales price.
Employees who did not sign the release by May 22, 2003, retain any rights they
may have under the Federal securities laws. Over eighty percent of the employees
who were offered the reimbursement have accepted the terms of the release,
representing a liability of approximately $0.6 million, which was deposited into
each individual's 401(k) account in July 2003. This amount is included in
Restructuring charges and Other Expenses in the Consolidated Statement of
Operations.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS 149"). This statement amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities". SFAS 149 is effective for contracts entered into or modified after
June 30, 2003. Management does not believe that the adoption of SFAS 149 will
have a significant effect on the Company's results of operations or its
financial condition.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" ("SFAS 150").
SFAS 150 changes the accounting for certain financial instruments with
characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities in the statement of financial position.
Previously, many of those financial instruments were classified as equity. SFAS
150 is effective for financial instruments entered into or modified after May
31, 2003 and otherwise was effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of SFAS 150 did not require
the reclassification of any financial instruments on the Company's Consolidated
Balance Sheets.
45
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 DISCLOSURE ABOUT MARKET RISK
During the six months ended June 30, 2003, there were no significant changes
related to the Company's market risk exposure.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures (as defined
in Rule 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as
amended) are effective as of the end of the quarterly period covered by this
report on Form 10-Q. There have been no significant changes in internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses, except as follows: the
Company's employees purchased common stock under the Company's 401(k) Retirement
Savings Plan (the "Plan") in excess of the number of shares registered by the
Company on Form S-8 with the Securities and Exchange Commission under the
Securities Act of 1933 from May 2001 through March 2003. The Company took
corrective actions immediately upon discovery, and filed an amendment to the
Form S-8 on March 31, 2003, to register additional shares. For further details,
see:
- Liquidity and Capital Resources section of the Management's Discussion
and Analysis of Financial Condition and Results of Operations.
- Note 6 - Common Stock and Common Stock Award Programs of the
consolidated financial statements.
- The Company's Annual Report on Form 10-K for the year ended December
31, 2002.
46
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 12, 2003, 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 2006.
For Withheld
---------- --------
Vincent D. Kelly 35,615,842 891,704
Daniel J. Ramella 35,590,131 917,415
Perry A. Sook 35,637,644 869,902
b) Proposal to ratify the appointment of PricewaterhouseCoopers LLP
as the independent accountants for the fiscal year ending
December 31, 2003.
For Against Abstain
---------- ------- -------
36,133,147 232,750 141,647
c) Proposal to adopt an amendment to Penton's restated certificate
of incorporation to effect a reverse stock split at one of three
ratios.
For Against Abstain
---------- --------- -------
34,765,021 1,631,815 110,710
d) Proposal to adopt an amendment to Section 5A of the Certificate
of Designations governing Penton's Series B Convertible Preferred
Stock to amend the definition of "Change of Control Cap".
For Against Abstain Broker Non-Votes
------------- ----------- ----------- ----------------
18,926,303 2,430,963 5,487,701 9,662,579
e) Proposal to amend Penton's Restated Certificate of Incorporation
to remove the provision limiting the number of Directors to
thirteen.
For Against Abstain Broker Non-Votes
------------ ----------- ----------- ----------------
19,633,444 1,725,703 5,485,820 9,662,579
No other matters were submitted to the stockholders for a vote.
47
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
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 AND/OR 8-K/A
DATE OF REPORT ITEMS REPORTED
-------------- --------------
May 1, 2003 Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits
Item 9. Regulation FD Disclosure
June 11, 2003 Item 5. Other Events
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits
June 12, 2003 Item 5. Other Events
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits
June 17, 2003 Item 5. Other Events
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits
48
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Penton Media, Inc.
(Registrant)
By: /s/ PRESTON L. VICE
--------------------------------
Preston L. Vice
Chief Financial Officer
(Duly Authorized Officer
and Principal Financial
Officer)
Date: August 14, 2003
49
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
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
50