UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date (May 14, 2002).
Common Stock: 31,867,825 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 March 31, 2002 and December 31, 2001 3
Consolidated Statements of Operations for the Three Months Ended
March 31, 2002 and 2001 5
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 30
Item 3. Quantitative and Qualitative Disclosure About Market Risk 44
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 45
Signature 46
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PENTON MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
March 31, December 31,
2002 2001
---------- -----------
ASSETS (unaudited)
------
CURRENT ASSETS:
Cash and cash equivalents $ 36,547 $ 20,191
Accounts and notes receivable, less allowance for doubtful
accounts of $9,493 and $10,976 in 2002 and 2001, respectively 49,977 56,452
Income taxes receivable 2,480 14,750
Inventories 1,100 1,351
Deferred tax assets 6,645 6,645
Prepayments, deposits and other 11,337 7,854
---------- -----------
108,086 107,243
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PROPERTY, PLANT AND EQUIPMENT:
Land, buildings and improvements 8,824 8,846
Machinery and equipment 61,201 62,056
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70,025 70,902
Less: accumulated depreciation 41,603 40,726
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28,422 30,176
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OTHER ASSETS:
Goodwill, less accumulated amortization of
$76,517 in 2002 and 2001, respectively 493,837 493,141
Other intangibles, less accumulated amortization of
$21,798 and $21,384 in 2002 and 2001, respectively 61,146 56,800
Deferred tax assets 8,006 7,468
Investments - 5,649
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562,989 563,058
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$ 699,497 $ 700,477
========== ===========
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)
March 31, December 31,
2002 2001
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(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Senior secured credit facility $ - $ 16,489
Note payable 2,804 2,804
Accounts payable 9,780 12,094
Income taxes payable 1,471 3,674
Accrued earnouts 6,272 6,572
Accrued compensation and benefits 13,614 12,411
Other accrued expenses 24,662 24,705
Unearned income, principally trade
show and conference deposits 30,885 36,939
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89,488 115,688
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LONG-TERM LIABILITIES AND DEFERRED CREDITS:
Senior secured credit facility - 164,098
Senior secured notes, net of discount 156,717 -
Senior subordinated notes, net of discount 171,236 180,957
Note payable 417 417
Net deferred pension credits 15,441 15,140
Other 3,303 3,647
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347,114 364,259
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Mandatorily redeemable convertible preferred stock; par value $0.01 per share;
50,000 shares issued and outstanding; redeemable
at $1,000 per share 363 -
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01 per share; 1,950,000 shares
authorized; none issued or outstanding - -
Common stock, par value $0.01 per share; 60,000,000 shares
authorized; 31,910,325 shares issued and outstanding 319 319
Capital in excess of par value 273,464 227,245
Retained earnings 2,128 6,724
Notes receivable officers/directors (10,824) (10,824)
Accumulated other comprehensive loss (2,555) (2,934)
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262,532 220,530
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$ 699,497 $ 700,477
========== ===========
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
MARCH 31,
----------------------
2002 2001
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REVENUES $ 63,175 $ 112,693
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OPERATING EXPENSES:
Editorial, production and circulation 25,853 40,841
Selling, general and administrative 32,647 51,944
Restructuring charge (credit) (263) 5,567
Depreciation and amortization 4,456 11,579
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62,693 109,931
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OPERATING INCOME 482 2,762
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OTHER INCOME (EXPENSE):
Interest expense, net of interest earned (9,056) (6,001)
Gain on sale of investments 1,491 -
Miscellaneous, net (139) 51
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(7,704) (5,950)
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LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (7,222) (3,188)
BENEFIT FOR INCOME TAXES 2,823 1,910
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LOSS BEFORE EXTRAORDINARY ITEM (4,399) (1,278)
EXTRAORDINARY ITEM, net of taxes 166 -
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NET LOSS (4,233) (1,278)
AMORTIZATION OF DEEMED DIVIDEND
AND ACCRETION OF PREFERRED STOCK (363) -
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NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (4,596) $ (1,278)
============= =============
NET LOSS PER COMMON SHARE - Basic and diluted
Loss from operations $ (0.15) $ (0.04)
Extraordinary item, net of taxes 0.01 -
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Net loss per common share $ (0.14) $ (0.04)
============= =============
WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 31,970 31,876
============= =============
Diluted 31,970 31,876
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
5
PENTON MEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED; DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
------------------------------
2002 2001
------------ -----------
Net cash provided by (used for) operating activities $ 6,010 $ (9,927)
---------- -----------
Cash flows from investing activities:
Capital expenditures (578) (2,385)
Acquisitions, including earnouts paid, net of cash acquired (300) (16,993)
Proceeds from sale of INT Media Group, Inc. common stock 5,801 -
---------- -----------
Net cash provided by (used for) investing activities 4,923 (19,378)
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Cash flows from financing activities:
Proceeds from issuance of preferred stock
and warrants, net of issue costs 46,122 -
Proceeds from issuance of senior secured notes 156,717 -
Purchase of $10.0 million of senior subordinated notes (8,375) -
Repayment of senior secured credit facility (180,587) (1,938)
Proceeds from senior secured credit facility - 35,000
Payments for employee stock purchase plan (299) (23)
Proceeds from deferred shares and options exercised - 888
Payment of financing fees (8,145) -
Dividends paid - (955)
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Net cash provided by financing activities 5,433 32,972
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Effect of exchange rate changes on cash (10) (79)
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Net increase in cash and cash equivalents 16,356 3,588
Cash and cash equivalents at beginning of period 20,191 11,605
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Cash and cash equivalents at end of period $ 36,547 $ 15,193
========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
6
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 1 - NATURE OF BUSINESS AND FINANCIAL STATEMENT 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 for complete financial statements.
However, in the opinion of management, the interim financial statements reflect
all adjustments 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, 2001.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2001 financial statements to
conform to the 2002 presentation.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles 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.
NOTE 2 - GOODWILL AND OTHER INTANGIBLES
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. SFAS 141 also specifies the criteria applicable to
intangible assets acquired in a purchase method business combination to be
recognized and reported apart from goodwill. SFAS 142 requires that goodwill and
intangible assets with indefinite useful lives are no longer required to be
amortized, but instead be tested for impairment, at least annually. SFAS 142
also requires that intangible assets with definite useful lives be amortized
over their respective estimated useful lives to their estimated residual values,
and be reviewed for impairment pursuant to the provisions of SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets."
The Company adopted SFAS 141 and SFAS 142 effective January 1, 2002. The
adoption of SFAS 141 did not have a material impact on the Company. In adopting
SFAS 142, the Company no longer amortizes goodwill. All other intangibles are
considered to have definite lives, which have been reassessed by the Company as
of January 1, 2002. Penton expects to complete its goodwill impairment test
under SFAS 142 by September 30, 2002. The Company's impairment analysis for
other intangibles did not result in any impairment charges.
The following pro forma financial information compares the Company's net loss
for the three months ended March 31, 2002 and 2001 had the provisions of SFAS
142 been applied on January 1, 2001 (amounts in thousands, except per share
data):
7
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
2002 2001
------------ ------------
Net loss $ (4,233) $ (1,278)
Goodwill amortization, net of tax - 3,689
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Adjusted net income (loss) (4,233) 2,411
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Amortization of deemed dividend and accretion of
preferred stock (363) -
------------ ------------
Reported net loss applicable to common stockholders $ (4,596) $ 2,411
============= ============
Basic and diluted earnings per share:
Reported net loss applicable to common stockholders $ (0.14) $ (0.04)
Goodwill amortization, net of tax - 0.12
------------ ------------
Adjusted net income (loss) applicable to
common stockholders $ (0.14) $ 0.08
============ ============
Weighted-average shares outstanding 31,970 31,876
============ ============
Identifiable intangible assets, exclusive of goodwill, as of March 31, 2002, are
recorded in Other Intangibles in the Consolidated Balance Sheets and comprise
of:
GROSS NET
CARRYING ACCUMULATED BOOK
VALUE AMORTIZATION VALUE
------------ ------------- -----------
Trade names $ 14,225 $ (4,524) $ 9,701
Mailing/ exhibitor lists 40,214 (11,783) 28,431
Advertiser relationships 7,200 (1,290) 5,910
Acquisition costs 5,039 (2,234) 2,805
Subscriber relationships 2,100 (153) 1,947
Sponsor relationships 2,112 (528) 1,584
Noncompete agreements 1,509 (984) 525
------------ ------------ -----------
Balance at March 31, 2002 $ 72,399 $ (21,496) $ 50,903
============ ============ ===========
Total amortization expense for identifiable intangible assets was $2.3 million
and $1.7 million for the three months ended March 31, 2002 and 2001,
respectively. Amortization expense is estimated for each of the five succeeding
years as follows:
AMOUNT
Fiscal year ended December 31:
2002 $ 9,644
2003 $ 8,371
2004 $ 5,688
2005 $ 5,217
2006 $ 4,981
2007 $ 4,400
8
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 3 - ACQUISITIONS
2001 ACQUISITIONS
In 2001, Penton acquired nine companies for an aggregate purchase price of
approximately $9.7 million in cash and $3.5 million in promissory notes, with
potential contingent consideration of up to $4.8 million based on the
achievement of specified business targets through 2003. The excess of the
aggregate purchase price over the fair market value of net assets acquired was
approximately $11.5 million.
At March 31, 2002, Penton had $6.3 million accrued for contingent consideration.
Of the amount accrued, approximately $1.5 million is payable in shares of common
stock with the balance payable in cash. The Company expects to issue the shares
of common stock and pay approximately $1.2 million in cash during the second
quarter of 2002, with the balance payable in the second half of the year. Cash
of $0.3 million was paid in the first quarter of 2002 for contingent
considerations.
At March 31, 2002, the remaining maximum potential liability for future
contingent consideration is approximately $56.5 million. Contingent
considerations are payable based on achieving specified performance goals, such
as reaching certain revenue or EBITDA levels. The earnout period for $52.2
million of the total contingent consideration expires at December 31, 2002; $0.4
million expires at January 31, 2003; and $3.9 million expires at December 31,
2003. If the contingent consideration based on attaining certain revenue levels
for Duke Communications International, Inc. does not equal at least $15.0
million at the end of 2002, an additional year will be added to achieve up to,
but not more than, a total cumulative revenue contingent payment of $15.0
million. Contingent payments earned are recorded as additional goodwill,
pursuant to the provisions of EITF 95-8, "Accounting for Contingent
Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase
Business Combination," and tested for impairment at least annually as required
under SFAS 142.
NOTE 4 - INVESTMENTS
In January 2002, Penton sold its remaining 11.8% ownership interest, or
2,973,383 shares, in INT Media Group, Inc. for approximately $5.8 million in
cash, and recognized a gain of approximately $1.5 million.
NOTE 5 - DEBT
SENIOR SECURED NOTES
In March 2002, Penton issued $157.5 million of 11 7/8% senior secured notes (the
"Secured Notes") due in 2007 to qualified institutional buyers pursuant to Rule
144A of the Securities Act of 1933, as amended. Interest is payable on the
Secured Notes semi-annually on April 1 and October 1. The Secured Notes are
fully and unconditionally guaranteed on a senior basis by all of Penton's
domestic subsidiaries. Penton may redeem the Secured Notes, in whole or in part,
during the periods October 1, 2005 through September 30, 2006 and October 1,
2006 and thereafter at redemption prices of 105.9375% and 100.0000% of the
principal amount, respectively, together with accrued and unpaid interest. In
addition, at any time prior to October 1, 2005, up to 35% of the aggregate
principal amount of the Secured Notes may be redeemed at Penton's option, within
90 days of certain public equity offerings of its common stock, at a redemption
price equal to 111.875% of the principal amount, together with accrued and
unpaid interest.
The Secured Notes were offered at a discount of $0.8 million, which is being
amortized, using the interest method, over the term of the Secured Notes.
Amortization of the discount was not material for the three months ended March
31, 2002. Costs representing underwriting fees and other professional fees of
$6.6 million are
9
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
being amortized over the term of the Secured Notes. Net proceeds of $150.9
million were used to pay down $83.6 million of Penton's term loan A facility and
$49.0 million of its term loan B facility, and to repurchase $10.0 million of
the Company's 10 3/8% senior subordinated notes for $8.7 million. The remaining
net proceeds of $9.6 million were used for general corporate purposes. The
Secured Notes rank senior in right to all of Penton's subordinated indebtedness,
including the 10 3/8% senior subordinated notes due in 2011, and equal in right
of payment with all of the Company's other senior indebtedness, which is
approximately $3.2 million at March 31, 2002. The Secured Notes contain
covenants that will, among other things, limit the Company's ability to pay
dividends, incur additional debt, sell assets, and enter into mergers or
consolidations.
SENIOR SUBORDINATED NOTES
In June 2001, Penton issued $185.0 million of 10 3/8% senior subordinated notes
(the "Subordinated Notes") due in 2011. Interest is payable on the Subordinated
Notes semi-annually on June 15 and December 15. The Subordinated Notes are
guaranteed, on a senior subordinated basis, by the Company's domestic
subsidiaries and may be redeemed on or after June 15, 2006. In addition, the
Company 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,
which is being amortized using the interest method, over the term of the
Subordinated Notes. Amortization of the discount was $0.06 million for the three
months ended March 31, 2002. Costs representing underwriting fees and other
professional fees of $1.7 million are being amortized over the term of the
Subordinated Notes. Net proceeds of $180.2 million were used to pay down $136.0
million under the revolving credit facility, $12.8 million of term loan A and
$7.2 million of term loan B. The remaining net proceeds of $24.2 million were
used for general corporate purposes. The Subordinated Notes are unsecured senior
subordinated obligations of the Company, subordinated in right of payment to all
existing and future senior indebtedness of the Company, including the credit
facility. The Subordinated Notes contain covenants that will, among other
things, restrict the Company's ability to borrow money, pay dividends on or
repurchase capital stock, make investments, sell assets, and enter into mergers
or consolidations.
In March 2002, the Company repurchased $10.0 million of the Subordinated Notes
with $8.7 million of the proceeds from the Secured Note offering, resulting in
an extraordinary gain of $0.8 million ($0.03 per diluted share), net of $0.6
million in taxes.
SENIOR SECURED CREDIT FACILITY
Penton maintained a credit agreement with several banks under which it could
borrow up to $400.0 million. The agreement provided for a revolving credit
facility of up to $185.0 million, a long-term loan of $140.0 million ("term loan
A") and a long-term loan of $75.0 million ("term loan B"). At December 31, 2001,
Penton had no amounts outstanding under the revolving credit facility, $113.8
million outstanding under term loan A and $66.7 million outstanding under term
loan B.
In March 2002, Penton amended its senior credit facility and paid off its term
loan A and term loan B facilities from the proceeds received from the sale of
preferred shares (see Note 6 - Mandatorily Redeemable Convertible Preferred
Stock), proceeds received from the sale of INT Media Group, Inc. common stock
(see Note 4 - Investments), cash on hand from a tax refund of approximately
$12.2 million, and the issuance of $157.5 million in Secured Notes mentioned
above. The amended and restated facility provides for a maximum revolving credit
facility of $40.0 million, which is limited to 80% of eligible receivables. In
order to access the revolver, the Company must not have more than $7.5 million
of cash and cash equivalents available, must be in compliance with the loan
documents and must submit a borrowing base certificate immediately prior to each
extension of credit. In addition, the Company is required to prepay the revolver
in the event that it is overextended on its eligible receivables, or it has more
than $7.5 million in cash and cash equivalents at the end of any month. The
amended agreement has no financial covenants; however, the amendment increases
the interest rate on the revolver, places additional restrictions on
10
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
certain payments, limits additional debt and contingent obligations, requires
additional collateral, restricts additional acquisitions and investments, limits
Penton's ability to sell assets, and limits capital expenditures.
The revolving credit facility bears interest, at Penton's option, at either the
Alternative Base Rate ("ABR"), defined as the higher of the Administrative
Agent's Prime Rate or the Federal Funds Rate plus 0.50%, or at LIBOR, plus a
rate margin ranging from 2.75% to 4.25% based on Penton's consolidated leverage
ratio, defined as the ratio of total debt to total adjusted EBITDA. At March 31,
2002, $26.6 million was available under the revolving credit facility, however,
no amounts were outstanding. The commitment under the revolving credit facility
decreases by 15% in 2003, 30% in 2004, 35% in 2005 and 20% in 2006. Penton has
agreed to pay a commitment fee ranging from 0.375% to 0.50%, based on Penton's
consolidated leverage ratio, on the average unused portion of the revolving
credit facility commitment.
The extinguishment of the term loans resulted in a non-cash extraordinary charge
of $0.7 million ($0.02 per diluted share), net of $0.5 million in taxes,
relating to the write-off of unamortized deferred finance costs.
Cash paid for interest for the three months ended March 31, 2002 and 2001 was
$2.0 million and $5.4 million, respectively. The drop in interest paid in the
first quarter of 2002 compared with 2001 is due to the timing of interest
payments on the Secured Notes and the Subordinated Notes compared with the
requirements under our term loans. Included in interest expense in the
Consolidated Statements of Operations are $0.2 million and $0.5 million of
interest income for the three months ended March 31, 2002 and 2001,
respectively.
NOTES PAYABLE
The notes payable at March 31, 2002 represents indebtedness resulting from the
acquisition of Hillgate Communications Ltd. in February 2001. Loan note A in the
amount of $2.8 million bears interest at 1% and matures in April 2004. However,
the holders of loan note A have the option to demand payment anytime after April
30, 2002. Loan note B in the amount of $0.4 million bears interest at 0.5% and
matures in July 2004. However, the holders of loan note B have the option to
demand payment anytime after April 30, 2004. Both notes are denominated in
British pounds. In May 2002, loan note A was paid in full.
NOTE 6 - MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
On March 19, 2002, the Company issued 40,000 shares of its Series B Convertible
Preferred Stock, par value $0.01 per share (the "preferred stock"), and warrants
(the "warrants") to purchase 1,280,000 shares of Penton's common stock, par
value $0.01 per share, for $40.0 million in a private placement to institutional
investors and affiliated entities. On March 28, 2002, the Company issued an
additional 10,000 shares of preferred stock, par value $0.01 per share, and
warrants to purchase an additional 320,000 shares of Penton's common stock, par
value $0.01 per share, for $10.0 million to the same group of investors. The net
proceeds from the sale of the preferred stock and warrants were used to repay
the term loan indebtedness under Penton's senior credit facility (see Note 5 -
Debt.)
The net proceeds of $46.2 million from the issuance of the preferred stock and
warrants, net of issue costs of $3.8 million, have been allocated to the
preferred stock and warrants based on the relative fair values of each security
as of the respective commitment dates noted above. Approximately $4.1 million
was allocated to the warrants and was recorded in additional paid in capital
resulting in a discount to the preferred stock, which is being amortized as
preferred stock dividends from the issuance date to the mandatory redemption
date. The fair value of the warrants was determined using the Black-Scholes
pricing model.
The balance of the net proceeds, approximately $42.1 million was allocated to
the preferred stock, which because of its mandatory redemption date is
classified outside of permanent equity. Pursuant to the provisions of EITF 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable
11
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
Conversion Ratios" and EITF 00-27, "Application of Issue 98-5 to Certain
Convertible Instruments," the entire amount of $42.1 million has been recorded
as a beneficial conversion feature in Capital in Excess of Par Value resulting
in an additional discount to the preferred stock. This beneficial conversion
feature is being recognized, using the interest method, as a deemed dividend to
the preferred stockholders and an increase in the carrying value of the
preferred stock from the issuance date to the 10 year mandatory redemption date.
The preferred stock is also being accreted to its maximum redemption amount
possible pursuant to Topic D-98, "Classification and Measurement of Redeemable
Securities" using the interest method from the issuance date to the 10-year
mandatory redemption date. For the three months ended March 31, 2002, the
amortization of the warrant and beneficial conversion feature discounts together
with accretion of the preferred stock to its maximum redemption price resulted
in an aggregate charge to retained earnings of $0.4 million which increased the
loss applicable to common stockholders by this amount.
Pursuant to the provisions of SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities," the preferred stock agreement contains certain embedded
derivative features that are required to be bifurcated from the preferred stock
and recognized at fair value with changes in fair value reflected in income.
These features principally relate to certain contingent payment provisions that
are indexed to the company's equity security prices. As of March 31, 2002,
however, the estimated fair value of those embedded derivative features
requiring bifurcation from the preferred stock was not significant.
The following is a description of the material terms of the preferred stock and
warrants:
Liquidation Preference:
The preferred stock has preferences in the event of liquidation, dissolution,
winding up, or change in control. Upon the occurrence of any such event, the
preferred stockholder will be entitled to be paid in cash.
The initial liquidation value of the preferred stock is $1,000 per share. If the
preferred stock is not converted or redeemed prior to March 19, 2008, the
liquidation value will increase to $4,570 per share if stockholder approval of:
(i) the issuance of common stock upon the conversion of the Series B preferred
stock and upon exercise of the warrants and (ii) authorization of an increase to
the number of authorized common shares has been obtained as of such date or, to
$9,140 per share if such approval has not been obtained.
Dividends:
From the date of issuance until March 19, 2008, the dividends on the preferred
stock will accrue daily on the sum of the then-applicable liquidation value and
the accrued dividends thereon at an annual rate of 7% per annum unless, at any
time during such period, the stockholder approval has been obtained. The
dividend rate will decrease to 5% per annum upon receipt of the stockholder
approval. The dividend rate will decrease to 5% per annum retroactive to the
date of issuance of the preferred stock, to the extent of any preferred stock
still outstanding, if Penton obtains the stockholder approval by September 19,
2002. Otherwise, the reduced dividend will apply only from and after the date
such approval is obtained. From and after March 19, 2008, the dividends will
accrue at a rate of 15% per annum.
Dividends are payable semi-annually in cash only if declared by Penton's board
of directors and approved by holders of no less than 75% of the preferred stock
then outstanding. The provisions of Penton's debt instruments limit its ability
to pay dividends in cash, and the Company has no present intention to either
declare or pay cash dividends on the preferred stock.
12
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
Upon the occurrence of certain triggering events, the dividend rate increases by
one percentage point, with additional one-percentage-point increases per quarter
up to a maximum increase of five percentage points.
Conversion Provisions:
Each share of preferred stock is convertible, at any time, subject to certain
restrictions, at the holder's option into a number of shares of Penton's common
stock, computed by multiplying the number of shares of preferred stock to be
converted by the liquidation value, plus accrued but unpaid dividends, divided
by the conversion price. The conversion price for the preferred stock initially
will be $7.61 per share, subject to certain anti-dilution adjustments.
The Company also can convert the preferred stock, subject to certain
restrictions, into a number of common shares, computed by multiplying the number
of shares of preferred stock to be converted by the liquidation value, plus
accrued but unpaid dividends, divided by the conversion price. Among others, the
restrictions include the market price of the common shares being equal to or
greater than the applicable share minimum noted below.
Company's Redemption Provisions:
The Company can redeem the preferred stock at any time, in whole or in part, at
a cash redemption price equal to the product of the number of shares of common
stock into which the preferred shares can be converted, without actually
requiring such conversion, and the greater of the volume weighted-average
closing share price of Penton's common stock for the preceding 30 trading days,
or the applicable minimum share price derived from the following schedule (as
the same may be adjusted for stock splits and similar transactions):
If being redeemed prior to the third anniversary $15.18
If being redeemed after the third, but before the fourth anniversary $17.51
If being redeemed after the fourth, but before the fifth anniversary $19.31
If being redeemed after the fifth, but before the sixth anniversary $23.26
Holder's Redemption Provisions:
Any holder of preferred stock may require Penton to redeem all of its preferred
stock at the redemption price noted above in the event of a change of control.
On the 10th anniversary of the original date of issuance, the Company will
redeem all of the preferred stock then outstanding at a redemption price per
share equal to the greater of the liquidation value of such shares (plus unpaid
dividends) or the applicable optional redemption price noted above.
Scheduled Redemption:
In April 2002, Penton reached an agreement with its preferred stockholders to
eliminate the scheduled redemption date of the preferred stock. Penton is
seeking an amendment of the preferred stock indenture to eliminate the
contractual redemption in ten years, which if obtained will eliminate the
present requirement to accrete the preferred stock to the maximum possible
redemption amount by such date. However, Penton is not seeking to eliminate the
preferred stockholders' right to require the Company to redeem the security upon
the occurrence of certain contingent events. To the extent that redemption of
the preferred stock becomes probable of occurring in the future pursuant to a
contingent redemption provision of the preferred stock, accretion to the maximum
redemption amount will be required at such time. In order to amend the terms of
the preferred stock, the affirmative vote of the holders of a majority our
outstanding common and preferred stock is required. If stockholders do not
approve this amendment to the terms of the preferred stock, we intend to
eliminate the scheduled
13
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
redemption date by exchanging the outstanding preferred stock for a new series
of preferred stock that will not have a scheduled redemption date.
Conversion Prices:
The initial conversion price is $7.61 per share (subject to certain
anti-dilution adjustments) until the sixth anniversary of issuance, at which
time the price may be adjusted to the lesser of (a) the conversion price in
effect on the sixth anniversary, or (b) the greater of 90% of the market price
of the Company's common stock on the conversion date or $4.50.
If Penton does not obtain the stockholder approval of (i) the issuance of common
stock upon the conversion of the Series B preferred stock and upon exercise of
the warrants and (ii) authorization of an increase to the number of authorized
common shares on or prior to June 28, 2002, the conversion price will be
automatically reduced by 20%. Thereafter, until Penton obtains such approval,
every 90 days the conversion price will be reduced by 20% of the conversion
price then in effect. In no event will the conversion price reduction related to
the failure to timely obtain the stockholder approval exceed 50% of the
conversion price that would have been in effect had Penton not failed to obtain
the stockholder approval, and upon the Company's receipt of the stockholder
approval, the conversion price will be readjusted as if no adjustments for
failure to timely obtain the stockholder approval had occurred.
In addition, if Penton fails to comply with specific covenants contained in the
purchase agreement, the conversion price of the preferred stock will be reduced
by $0.76 (adjusted for stock splits and similar transactions). The conversion
price will adjust to what it would have been absent such breach (to the extent
of any shares of preferred stock still outstanding) once the breach is cured. No
such reduction to the conversion price will be made at any time that
representatives of the investors constitute a majority of the board of
directors. Finally, if Penton's leverage ratio (as defined in the purchase
agreement) exceeds 7.5 to 1.0 for any quarterly period beginning on December 31,
2002, and such leverage ratio remains in excess of 7.5 to 1.0 for a period of 90
days, the conversion price of the preferred stock will be reduced by $0.76
(adjusted for stock splits and similar transactions). Thereafter, until the
leverage ratio reduces below 7.5 to 1.0, every 90 days the conversion price will
be reduced by another $0.76 (adjusted for stock splits and similar
transactions), subject to a maximum reduction not to exceed $3.80 (adjusted for
stock splits and similar transactions). 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 reduces below 7.5 to 1.0. No
such reduction to the conversion price will be made at any time that
representatives of the investors constitute a majority of the board of
directors.
Board Representation:
The preferred stock entitles the holders thereof initially to three board seats.
On March 19, 2008, the holders of a majority of the preferred stock then
outstanding, if any, will be entitled to appoint one less than a minimum
majority of the board of directors. However, at such time as the holders of
preferred stock cease to hold shares of preferred stock having an aggregate
liquidation preference of at least $25 million, they will lose the right to
appoint the director for one of these board seats. At such time as the holders
of preferred stock cease to hold shares of preferred stock having an aggregate
liquidation preference of at least $10 million, and such holders' beneficial
ownership of Penton's preferred stock and common stock constitutes less than 5%
of the aggregate voting power of the Company's voting securities, the holders of
preferred stock will no longer have the right to appoint any directors to the
board of directors.
In addition, upon the occurrence of certain triggering events, the holders of a
majority of the preferred stock may appoint a minimum majority of Penton's board
of directors. At such time as the holders of preferred stock cease to hold
shares of preferred stock having an aggregate liquidation preference of at least
$10 million and such holders' beneficial ownership of Penton's preferred stock
and common stock constitutes less than 5% of the
14
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
aggregate voting power of the Company's voting securities, the holders of
preferred stock will no longer have the right to appoint additional directors
upon these events.
Penton has also granted the holders of the preferred stock the right to have
representatives attend meetings of the board of directors after such time as
they are no longer entitled to appoint any members to the board of directors
until such time as they no longer own any preferred stock, warrants or shares of
common stock issued upon conversion of the preferred stock and exercise of the
warrants.
Voting Rights:
The holders of the preferred stock are entitled to vote on all matters submitted
to a vote of Penton's stockholders, voting as a single class with the common
stockholders on an as-converted basis. In addition, Penton may not, without the
affirmative vote of the holders of not less than 75% of the preferred stock then
outstanding, declare and pay dividends, impact the existing classes of capital
stock, and increase the size of the board, among other conditions.
Covenant:
The terms of the preferred stock have several financial and non-financial
covenants. As of March 31, 2002, Penton was in compliance with all such
covenants.
Sales Rights:
In addition, the terms of the preferred stock require that Penton maintain a
leverage ratio, defined as debt less cash balances in excess of $5.0 million
plus the accreted value of the preferred stock, to EBITDA of 7.5 to 1.0 for the
12 month period ending on the last day of December, March, June, and September
of each year beginning with the period ending on December 31, 2002. If Penton is
in violation of this covenant for four consecutive fiscal quarters, then the
holders of a majority of the preferred stock have the right to cause the Company
to seek a buyer for all of its assets or all of its issued and outstanding
capital stock. The holders of preferred stock will not have this right if their
representatives constitute a majority of the board of directors.
Warrants:
The initial exercise price of the warrants is $7.61 per share. The warrants are
subject to anti-dilution and other adjustments that mirror those applicable to
the preferred stock. The warrants are immediately exercisable and expire 10
years after issuance.
15
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
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 months ended March 31, 2002 and 2001 are as follows (in thousands,
except per share amounts):
THREE MONTHS
ENDED MARCH 31,
---------------
2002 2001
---- ----
Net loss applicable to common stockholders $(4,596) $(1,278)
======= =======
Number of shares:
Weighted average shares outstanding - (basic and diluted) 31,970 31,876
======= =======
Per share amount:
Loss from operations - (basic and diluted) $ (0.14) $ (0.04)
======= =======
The preferred stock is a participating security, in that in the event a dividend
is declared or paid on the common stock, the Corporation must simultaneously
declare and pay a dividend on the preferred stock as if the preferred stock 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 preferred stock be included in the computation of basic earnings per
share if the effect of inclusion is dilutive. The Company's accounting policy
requires the use of the two-class method for its participating securities for
earnings per share calculations. For the three months ended March 31, 2002 and
2001, preferred stock was excluded from the calculation of basic earnings per
share as the result was not dilutive. The preferred stock is included in diluted
earnings per share under the "if-converted" method.
Due to the net loss applicable to common stockholders for the three months ended
March 31, 2002 and 2001, stock options, performance shares and preferred stock
were excluded from the calculation of diluted earnings per share, as the result
would have been anti-dilutive.
NOTE 8 - COMMON STOCK AND COMMON STOCK AWARD PROGRAMS
STOCKHOLDERS RIGHTS AGREEMENT
The Company adopted a Stockholders Rights Agreement (the "Rights Agreement") to
protect stockholder rights in the event of a proposed takeover of the Company.
Under the plan, the rights will initially trade together with the Company's
common stock and will not be exercisable. In the absence of further board
action, the rights generally will become exercisable and allow the holder to
acquire the Company's common stock at a discounted price if any person or group
acquires 20% or more of the outstanding shares of the Company's common stock.
Rights held by the persons who exceed the applicable threshold will be void.
Under certain circumstances, the rights will entitle the holder to buy shares in
an acquiring entity at a discounted price. The plan also includes an exchange
option. In general, after the rights become exercisable, the Penton board may,
at its option, effect an exchange of part or all of the rights, other than
rights that have become void, for shares of Penton common stock. Under this
option, Penton would issue one share of common stock for each right, subject to
adjustment in certain circumstances.
The Penton board may, at its option, redeem all rights for $0.01 per right,
generally at any time prior to the rights becoming exercisable. The rights will
expire June 27, 2010, unless earlier redeemed, exchanged or amended by the
Penton board. The Rights Agreement has no impact on the consolidated financial
statements or earnings per
16
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
share. In 2002, the Rights Agreement was amended by the board to permit the sale
of convertible preferred stock. (See Note 6 - Mandatorily Redeemable Convertible
Preferred Stock.)
EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan, which allows employees the
opportunity to purchase shares of Penton at a discount. The plan allows
employees to purchase common stock at 85% of the lower of the market price at
the beginning or end of each quarter. This plan was deemed to be
non-compensatory pursuant to the appropriate sections of the Internal Revenue
Service Codes.
MANAGEMENT STOCK PURCHASE PLAN
The Company has a Management Stock Purchase Plan for designated officers and
other key employees. Participants in the plan may elect to receive restricted
stock units ("RSUs") in lieu of a designated portion of up to 100% of their
annual incentive bonus. Each RSU represents the right to receive one share of
Penton common stock. RSUs are granted at a 20% discount from fair market value
on the date awarded. RSUs vest two years after the date of grant and are
settled in shares of common stock after a period of deferral (of no less than
two years) selected by the participant, or upon termination of employment. In
February 2002 and 2001, 21,976 and 31,942 RSUs were granted at a fair market
value of $7.38 and $25.10 per share, respectively. At March 31, 2002, 63,398
RSUs were outstanding. The discount is recorded as compensation expense over
the minimum vesting period. At March 31, 2002 and 2001, approximately $0.02 and
$0.04 respectively, was recognized as expense related to the discount. During
the first quarter of 2002, 14,704 shares of the Company's common stock were
issued under this plan.
EXECUTIVE LOAN PROGRAM
The Company established the Executive Loan Program, which allowed Penton to
issue an aggregate of up to 400,000 shares of Penton common stock at fair market
value to six key executives, in exchange for full recourse notes. In December
2001, the loan notes were amended such that interest was no longer compounded
semi-annually at a rate equal to the applicable interest rate as published by
the Internal Revenue Service. Furthermore, the maturity dates were changed from
the fifth anniversary of the first loan date to six months following the seventh
anniversary of the first loan date. No principal or interest payments are
required until maturity, at which time all outstanding amounts are due. The
Executive Loan Program will be accounted for using variable plan accounting from
the amendment date forward.
At March 31, 2002, the outstanding loan balance under the Executive Loan Program
was approximately $10.8 million (including $1.2 million of accrued interest).
The loan balance is classified in the Stockholders' Equity section of the
Consolidated Balance Sheets as Notes Receivable Officers/Directors.
EQUITY AND PERFORMANCE INCENTIVE PLAN
In May 2001, the stockholders approved an amendment to increase the number of
shares of common stock reserved for issuance under the 1998 Equity and
Performance Incentive Plan from 2.5 million shares to 5.5 million shares.
STOCK OPTIONS
The Company has a stock option plan under which employees and directors may be
granted options to purchase shares of the Company's common stock. In May 2001,
the stockholders approved an amendment to increase the number of shares of
common stock reserved for issuance under the 1998 Director Stock Option Plan
from 100,000 shares to 250,000 shares.
17
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
In February and November 2001, 539,500 and 1,029,000 options, respectively, were
granted under the Company's Performance Incentive Plan. Options granted under
the plan generally vest equally over three years from the date of grant.
However, most options granted are not exercisable until the third anniversary.
All options granted pursuant to the plan will expire no later than 10 years from
the date the option was granted. Option grants do not have any associated
compensation charge, as all grants are issued at fair market value.
DEFERRED SHARES
The Company's long-term incentive plan also provides for the award of deferred
shares. At March 31, 2002, deferred shares of 397,749 were outstanding. Of the
shares outstanding at March 31, 2002, 341,500 shares vest one-fourth on each
three-month anniversary following the date of grant, 47,553 shares vest on the
third anniversary of the grant date and the remaining 8,696 shares vest at the
rate of 20% per year over a five-year period from date of grant. In August 2001,
6,780 fully vested deferred shares were issued for common stock of Penton.
Compensation expense is being recognized over the related vesting period based
on the fair value of the shares on the date of grant. For the three months ended
March 31, 2002 and 2001, approximately $0.6 million and $0.09 million,
respectively, were charged to expense under this plan.
PERFORMANCE SHARES
In February 2002, the board of directors approved a grant of 495,000 performance
shares to certain key executives, subject to the attainment of certain
performance goals over a three-year period from January 1, 2002 through December
31, 2004. Each grantee is eligible to receive between 50% and 150% of the
granted shares.
In February 2001, the board of directors approved a grant of 101,485 performance
shares to certain key executives, subject to the attainment of certain
performance goals over a three-year period from January 1, 2001 through December
31, 2003. Each grantee is eligible to receive between 50% and 150% of the
granted shares.
In October 2000, the board of directors approved a grant of 15,000 performance
shares to a key executive, subject to the attainment of certain performance
goals over a three-year period from January 1, 2001 through December 31, 2003.
The grantee is eligible to receive between 17% and 150% of the granted shares.
In June 2000, the board of directors approved a grant of 20,000 performance
shares to two key executives, subject to the attainment of certain performance
goals over a three-year period from January 1, 2000 through December 31, 2002.
Each grantee is eligible to receive between 10% and 150% of the granted shares.
In February 2000, the board of directors approved a grant of 136,054 performance
shares to certain key executives, subject to the attainment of certain
performance goals over a three-year period from January 1, 2000 through December
31, 2002. For 99,000 of the shares, each grantee is eligible to receive between
50% and 150% of the granted shares.
Performance shares are not issuable until earned. Compensation expense related
to these shares is recorded, pursuant to variable plan accounting, over the
performance period based on an estimate, at the end of each reporting period, of
the probable number of shares that will be earned by the grantee. For the three
months ended March 31, 2002 and 2001, approximately $(0.2) million and $0.6
million, respectively, were charged (credited) to expense for these shares.
18
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 9 - COMPREHENSIVE LOSS
Total comprehensive loss for the three months ended March 31, 2002 and
2001 was $3.9 million and $8.1 million, respectively, (in thousands).
NOTES ACCUMULATED
CAPITAL IN RECEIVABLE OTHER
COMMON EXCESS OF RETAINED OFFICERS/ COMPREHENSIVE
STOCK PAR VALUE EARNINGS DIRECTORS INCOME/(LOSS) TOTAL
-------------------------------------------------------------------------------
Balance at December 31, 2001 $ 319 $ 227,245 $ 6,724 $ (10,824) $ (2,934) $ 220,530
--------- ---------- --------- ----------- ----------- -----------
Comprehensive loss:
Net loss before amortization of
deemed dividend and accretion
of preferred stock - - (4,233) - - (4,233)
Other comprehensive loss:
Reclassification adjustment for
realized gain on securities - - - - (808) (808)
Net loss on cash flow hedges - - - - 1,438 1,438
Foreign currency translation
adjustment - - - - (251) (251)
-----------
Comprehensive loss (3,854)
-----------
Issuance of common stock:
Deferred shares and stock options - 396 - - - 396
Employee stock purchase plan - (299) - - - (299)
Issuance of 50,000 shares of preferred
stock - 42,037 - - - 42,037
Warrants issued with preferred stock - 4,085 - - - 4,085
Amortization of deemed dividend and
ccretion of preferred stock - - (363) - - (363)
--------- ---------- --------- ----------- ----------- -----------
Balance at March 31, 2002 $ 319 $ 273,464 $ 2,128 $ (10,824) $ (2,555) $ 262,532
========= ========== ========= =========== =========== ===========
NOTE 10 - HEDGING ACTIVITIES
RISK MANAGEMENT
In the ordinary course of business, the Company is exposed to fluctuations in
interest rates and foreign currency rates. The Company maintains assets and
operations in Europe and Asia, and as a result, may be exposed to cost increases
relative to the markets in which it sells; however, the Company does not manage
this risk using derivative instruments.
The Company was exposed to interest rate risk due to the variable interest rate
of the senior secured credit facility. In March 2002, the Company paid down term
loans A and B of the credit facility with certain debt and equity offerings (see
Note 5 - Debt). As a result, as of March 31, 2002, the Company has no
variable-interest rate debt outstanding.
The Company is also exposed to changes in the fair value of its fixed-rate
senior secured notes and senior subordinated notes. As of March 31, 2002, the
Company did not manage this risk using derivative instruments.
CASH FLOW HEDGES
Effective March 2002, the Company discontinued hedge accounting for its cash
flow hedges as the Company paid down its outstanding variable rate debt. The
entire net deferred loss on cash flow hedges of $1.4 million recorded in Other
Comprehensive Income was reclassified to earnings.
19
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
Management has decided to continue to hold the derivative instruments until
their maturity, and will carry the derivatives at their fair market value on the
balance sheet, recognizing changes in the fair value in current period earnings.
As of March 31, 2002, the Company recognized a gain of $0.4 million related to
change in fair value of the derivative instruments.
At March 31, 2002, the Company had the following interest rate instruments in
effect (in thousands):
NOTIONAL FIXED
AMOUNT RATE PERIOD
------ ---- ------
Interest rate swap $26,875 6.22% 1/00-10/02
Interest rate swap $35,832 6.77% 5/00-11/02
Interest rate swap $17,916 5.95% 9/99-10/02
Interest rate cap $26,875 8.50% 10/99-10/02
At March 31, 2002, the interest rate instruments had a negative fair value of
$3.0 million recorded as a liability in Other Accrued Expenses on the
Consolidated Balance Sheet.
The Company is exposed to credit loss in the event of non-performance by the
other parties to the interest rate swap agreements. However, the Company does
not anticipate non-performance by the other counter-parties as they are major
financial institutions. The weighted average implied forward variable interest
rate is approximately 6.58% for 2002.
NOTE 11 - RESTRUCTURING CHARGES
FIRST QUARTER 2002 CHARGE
The restructuring charge credit of $0.3 million ($0.2 million after tax, or $0.1
per diluted share) as of March 31, 2002, comprises approximately $1.4 million of
additional employee termination benefits accrued in the first quarter of 2002,
offset by the reversal of approximately $1.6 million related to lease reserves
established in the third quarter of 2001 for Penton's New York, NY and
Burlingame, CA, offices, for long-term leases which the Company was able to
sublease. Personnel costs of $1.4 million are associated with the elimination of
approximately 50 positions in the U.S. Personnel costs include payments for
severance, costs of outplacement services and a provision for continued benefits
to personnel. The New York and Burlingame office closure costs totaling $3.4
million were charged in the second half of 2001. At that time, no assumptions
for subleases were made by the Company, due to the inherent limitations in
estimating the future trends of the real estate marketplace, the economic
conditions present in New York city at the time, and the remote probability of a
successful sublease. However, in March 2002, due to continuing efforts by the
Company, it finalized a contract to sublease its New York office space for the
remainder of the lease term, or approximately 7.25 years. In addition, in April
2002, Penton subleased its Burlingame office for the remainder of the lease
term, or approximately 3.8 years. Penton remains ultimately responsible for the
payment of both of these leases.
2001 CHARGE
In February 2001, Penton announced a restructuring program with the intent of
discontinuing certain Internet operations that had not demonstrated revenue
growth, customer acceptance and near-term opportunity for profit. The charge of
$5.6 million ($3.3 million after tax, or $0.10 per share on a basic and diluted
basis) included the write-off of capitalized software development costs
associated with the discontinuance of the industry exchange component of New
Hope Natural Media's Healthwell.com; personnel costs, including the reduction of
approximately 60 employees at Healthwell.com as well as a reduction of workforce
related to a number of other Internet initiatives throughout Penton; and exit
costs associated with existing office spaces under lease and other contractual
obligations. In the third-quarter of 2001, the Company determined that some
first-quarter
20
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
restructuring initiatives would not require the level of spending that had
been originally estimated. Based on the Company's third-quarter estimates,
approximately $1.0 million was reversed from the first-quarter charge and the
total amount of the charge was adjusted to $4.6 million ($2.7 million after tax,
or $0.09 per share on a basic and diluted basis). The majority of the remaining
costs incurred in connection with the first-quarter restructuring plan have been
paid.
In the second half of 2001, the Company implemented a number of expense
reduction and restructuring initiatives to more closely align its cost structure
with the business environment. Restructuring charges of $9.5 million ($5.7
million after tax, or $0.18 per share on a diluted basis), net of the $1.0
million reversal noted above in the third quarter and $3.7 million ($2.3 million
after tax, or $0.07 per share on a diluted basis) in the fourth quarter resulted
primarily from strategic decisions to restructure a number of businesses and
support departments, including reducing Penton's overhead infrastructure by
consolidating and closing several branch offices, centralizing information
technology and outsourcing certain corporate functions. Of the total charges,
$4.7 million relates to employee termination benefits for the elimination of
nearly 340 positions, of which 294 terminations and $2.7 million in payments had
been completed by year end. Approximately 84% of the positions eliminated or to
be eliminated are in the U.S., with the remaining positions predominantly in the
United Kingdom and Germany. The remaining $8.5 million of the restructuring
charges relates to the closing of more than 20 Penton offices worldwide, and
includes costs associated with existing office spaces under lease and other
contractual obligations.
The following table summarizes the restructuring and impairment charges, the
amounts paid and the ending accrual balances for the period ended March 31, 2002
(in thousands):
FIRST
ACCRUAL QUARTER CASH ACCRUAL
12/31/01 CHARGES PAYMENTS 3/31/02
-------- -------- -------- --------
DESCRIPTION
Severance, outplacement and
other personnel costs $ 2,115 $ 1,382 $ (2,369) $ 1,128
Facility closing costs 9,134 (1,645) (523) 6,966
Other exit costs 383 - - 383
-------- --------- -------- --------
Total $ 11,632 $ (263) $ (2,892) $ 8,477
======== ========= ======== ========
The majority of the severance costs are expected to be paid by the end of
September 2002, while the balance of facility costs, which include long-term
leases, is expected to be paid through the end of the respective lease term.
NOTE 12 - 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 EBITDA. Adjusted EBITDA is defined as net income (loss) before
interest, taxes, depreciation and amortization, non-cash compensation and
unusual items. Adjusted EBITDA for segments also excludes corporate-level costs.
Corporate-level costs include costs for centralized functions, such as finance,
accounting and information systems, which cannot be reasonably allocated to each
segment.
21
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
Summary information by segment for the three months ended March 31, 2002 and
2001 is as follows (in thousands):
INDUSTRY TECHNOLOGY LIFESTYLE
MEDIA MEDIA MEDIA OTHER TOTAL
----- ----- ----- ----- -----
2002
Revenues $ 23,037 $ 21,083 $ 14,470 $ 4,585 $ 63,175
Adjusted EBITDA $ 3,197 $ (2,058) $ 8,694 $ 1,026 $ 10,859
2001
Revenues $ 31,382 $ 61,839 $ 14,429 $ 5,043 $112,693
Adjusted EBITDA $ 5,041 $ 14,775 $ 8,384 $ 1,115 $ 29,315
Segment revenues, all of which are realized from external customers, equal
Penton's consolidated revenues. Following is a reconciliation of Penton's total
segment adjusted EBITDA to consolidated loss before income taxes and
extraordinary item (in thousands):
THREE MONTHS ENDED MARCH 31,
---------------------------
2002 2001
---- ----
Total segment adjusted EBITDA $ 10,859 $ 29,315
Depreciation and amortization (4,456) (11,579)
Restructuring charge 263 (5,567)
Non-cash compensation (355) (765)
Gain on sale of investments 1,491 -
Interest expense, net of interest earned (9,056) (6,001)
Miscellaneous, net (139) 51
Corporate costs (5,829) (8,642)
-------- ---------
Consolidated loss before taxes and extraordinary item $ (7,222) $ (3,188)
======== =========
NOTE 13 - GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
The following schedules set forth condensed consolidating balance sheets as of
March 31, 2002 and December 31, 2001, and condensed consolidating statements of
operations and condensed consolidating statements of cash flows for the three
months ended March 31, 2002 and 2001. In the following schedules, "Parent
Company" refers to the combined balances of Penton Media, Inc., "Guarantor
Subsidiaries" refers to Penton's wholly owned domestic subsidiaries and
"Non-guarantor Subsidiaries" refers to Penton's foreign subsidiaries.
"Eliminations" represents the adjustments necessary to (a) eliminate
intercompany transactions and (b) eliminate the investments in Penton's
subsidiaries.
22
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 13 -- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF MARCH 31, 2002
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 32,125 $ 879 $ 3,543 $ - $ 36,547
Accounts and notes receivable, net 29,599 91,107 11,271 (82,000) 49,977
Income taxes receivable 2,480 - - - 2,480
Inventories 844 245 11 - 1,100
Deferred tax asset 4,715 1,962 (32) - 6,645
Prepayments, deposits and other 5,639 2,955 2,743 - 11,337
--------- --------- --------- --------- ---------
75,402 97,148 17,536 (82,000) 108,086
--------- --------- --------- --------- ---------
Property, plant and equipment, net 21,070 4,847 2,505 - 28,422
Goodwill, net 123,646 333,165 37,026 - 493,837
Other intangibles, net 19,929 39,115 2,102 - 61,146
Deferred tax asset 6,961 1,045 - - 8,006
Investments 221,902 146,303 - (368,205) --
--------- --------- --------- --------- ---------
393,508 524,475 41,633 (368,205) 591,411
--------- --------- --------- --------- ---------
$ 468,910 $ 621,623 $ 59,169 $(450,205) $ 699,497
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable $ - $ - $ 2,804 $ - $ 2,804
Accounts payable and accrued expenses 36,985 (3,626) 8,826 - 42,185
Accrued compensation and benefits 11,664 1,208 742 - 13,614
Unearned income 6,934 17,202 6,749 - 30,885
--------- --------- --------- --------- ---------
55,583 14,784 19,121 - 89,488
--------- --------- --------- --------- ---------
Long-term liabilities and deferred credits:
Senior secured notes, net of discount 156,717 - - - 156,717
Senior subordinated notes, net
of discount 171,236 - - - 171,236
Note payable 82,000 - 417 (82,000) 417
Net deferred pension credits 15,441 - - - 15,441
Deferred tax liability (9,501) 9,501 - - --
Intercompany advances (312,531) 267,990 44,541 - --
Other 2,001 404 898 - 3,303
--------- --------- --------- --------- ---------
105,363 277,895 45,856 (82,000) 347,114
--------- --------- --------- --------- ---------
Mandatorily redeemable convertible
preferred stock 363 - - - 363
Stockholders' equity:
Common stock 273,838 355,888 1,465 (357,408) 273,783
Retained earnings 44,779 (26,944) (4,910) (10,797) 2,128
Notes receivable officers/directors (10,824) - - - (10,824)
Accumulated other comprehensive loss (192) - (2,363) - (2,555)
--------- --------- --------- --------- ---------
307,601 328,944 (5,808) (368,205) 262,532
--------- --------- --------- --------- ---------
$ 468,910 $ 621,623 $ 59,169 $(450,205) $ 699,497
========= ========= ========= ========= =========
23
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 13-- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF DECEMBER 31, 2001
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 14,518 $ 1,993 $ 3,680 $ - $ 20,191
Accounts and notes receivable, net 32,973 93,247 12,232 (82,000) 56,452
Income tax receivable 14,750 - - - 14,750
Inventories 1,090 248 13 - 1,351
Deferred tax asset 4,683 1,962 - - 6,645
Prepayments, deposits and other 3,893 3,961 - - 7,854
--------- --------- --------- --------- ---------
71,907 101,411 15,925 (82,000) 107,243
--------- --------- --------- --------- ---------
Property, plant and equipment, net 22,563 4,694 2,919 - 30,176
Goodwill, net 124,828 331,570 36,743 - 493,141
Other intangibles, net 13,624 40,684 2,492 - 56,800
Deferred tax asset 16,462 (8,994) - - 7,468
Investment in subsidiaries 221,915 146,235 - (368,150) -
Investments - 5,649 - - 5,649
--------- --------- --------- --------- ---------
399,392 519,838 42,154 (368,150) 593,234
--------- --------- --------- --------- ---------
$ 471,299 $ 621,249 $ 58,079 $(450,150) $ 700,477
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Senior secured credit facility $ 16,489 $ - $ - $ - $ 16,489
Note payable - - 2,804 - 2,804
Accounts payable and accrued expenses 38,969 (1,580) 9,656 - 47,045
Accrued compensation and benefits 10,562 1,226 623 - 12,411
Unearned income 15,339 16,723 4,877 - 36,939
--------- --------- --------- --------- ---------
81,359 16,369 17,960 - 115,688
--------- --------- --------- --------- ---------
Long-term liabilities and deferred credits:
Senior secured credit facility 164,098 - - - 164,098
Senior subordinated notes, net
of discount 180,957 - - - 180,957
Note payable 82,000 - 417 (82,000) 417
Net deferred pension credits 15,140 - - - 15,140
Intercompany advances (310,773) 266,714 44,059 - -
Other 2,097 384 1,166 - 3,647
--------- --------- --------- --------- ---------
133,519 267,098 45,642 (82,000) 364,259
--------- --------- --------- --------- ---------
Stockholders' equity:
Common stock 227,564 355,888 1,465 (357,353) 227,564
Retained earnings 41,251 (18,914) (4,816) (10,797) 6,724
Notes receivable officers/directors (10,824) - - - (10,824)
Accumulated other comprehensive
income (loss) (1,570) 808 (2,172) - (2,934)
--------- --------- --------- --------- ---------
256,421 337,782 (5,523) (368,150) 220,530
--------- --------- --------- --------- ---------
$ 471,299 $ 621,249 $ 58,079 $(450,150) $ 700,477
========= ========= ========= ========= =========
24
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 13-- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ -------------
(DOLLARS IN THOUSANDS)
REVENUES $ 46,806 $ 12,862 $ 3,507 $ - $ 63,175
-------- -------- -------- -------- --------
OPERATING EXPENSES:
Editorial, production and circulation 16,971 7,542 1,340 - 25,853
Selling, general and administrative 21,787 7,454 3,406 - 32,647
Restructuring charges 1,020 (1,283) - - (263)
Depreciation and amortization 2,095 2,001 360 - 4,456
-------- -------- -------- -------- --------
41,873 15,714 5,106 - 62,693
-------- -------- -------- -------- --------
OPERATING INCOME (LOSS) 4,933 (2,852) (1,599) - 482
-------- -------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense, net of income earned (9,714) 722 (64) - (9,056)
Gain on sale of investments 1,491 - - - 1,491
Miscellaneous, net (329) - 190 - (139)
-------- -------- -------- -------- --------
(8,552) 722 126 - (7,704)
-------- -------- -------- -------- --------
LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (3,619) (2,130) (1,473) - (7,222)
BENEFIT FOR INCOME TAXES 1,529 852 442 - 2,823
-------- -------- -------- -------- --------
LOSS BEFORE EXTRAORDINARY ITEM (2,090) (1,278) (1,031) - (4,399)
EXTRAORDINARY ITEM, NET OF TAXES 166 - - - 166
-------- -------- -------- -------- --------
NET LOSS $ (1,924) $ (1,278) $ (1,031) $ - $ (4,233)
======== ======== ======== ======== ========
25
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 13-- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
REVENUES $ 60,070 $ 47,556 $ 5,067 $ - $ 112,693
--------- --------- --------- ------- ---------
OPERATING EXPENSES:
Editorial, production and circulation 20,675 15,620 4,546 - 40,841
Selling, general and administrative 32,129 18,654 1,161 - 51,944
Restructuring charges 5,567 - - - 5,567
Depreciation and amortization 9,797 1,646 136 - 11,579
--------- --------- --------- ------- ---------
68,168 35,920 5,843 - 109,931
--------- --------- --------- ------- ---------
OPERATING INCOME (LOSS) (8,098) 11,636 (776) - 2,762
--------- --------- --------- ------- ---------
OTHER INCOME (EXPENSE):
Interest expense, net of income earned (7,213) 1,313 (101) - (6,001)
Miscellaneous, net 51 - - - 51
--------- --------- --------- ------- ---------
(7,162) 1,313 (101) - (5,950)
--------- --------- --------- ------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (15,260) 12,949 (877) - (3,188)
BENEFIT (PROVISION) FOR INCOME TAXES 9,137 (7,758) 531 - 1,910
--------- --------- --------- ------- ---------
NET INCOME (LOSS) $ (6,123) $ 5,191 $ (346) $ - $ (1,278)
========= ========= ========= ======= =========
26
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 13-- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED MARCH 31, 2002
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
CASH FLOWS PROVIDED BY (USED FOR)
OPERATING ACTIVITIES $ 13,112 $ (7,006) $ (96) $ - $ 6,010
--------- --------- --------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (531) (2) (45) - (578)
Acquisitions, including earnouts paid,
net of cash acquired (300) - - - (300)
Proceeds from sale of INT Media Group,
Inc. stock and interests - 5,801 - - 5,801
--------- --------- --------- -------- ---------
Net cash provided by (used for)
investing activities (831) 5,799 (45) - 4,923
--------- --------- --------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of mandatorily
redeemable convertible preferred stock 50,000 - - - 50,000
Proceeds from senior secured notes 156,717 - - - 156,717
Purchase of senior subordinated notes (8,375) - - - (8,375)
Repayment of senior credit facility (180,587) - - - (180,587)
Employee stock purchase plan (292) - (7) - (299)
Payment of financing costs (12,023) - - - (12,023)
--------- --------- --------- -------- ---------
Net cash provided by (used for)
financing activities 5,440 - (7) - 5,433
--------- --------- --------- -------- ---------
Effect of exchange rate (10) - - - (10)
--------- --------- --------- -------- ---------
Net increase (decrease) in cash and
equivalents 17,711 (1,207) (148) - 16,356
Cash and equivalents at beginning of period 14,518 1,993 3,680 - 20,191
--------- --------- --------- -------- ---------
Cash and equivalents at end of period $ 32,229 $ 786 $ 3,532 $ - $ 36,547
========= ========= ========= ======== =========
27
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 13-- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED MARCH 31, 2001
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
CASH FLOWS PROVIDED BY (USED FOR)
OPERATING ACTIVITIES $(19,877) $ 3,689 $ 5,218 $ 1,043 $ (9,927)
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,360) (13) (1,012) - (2,385)
Acquisitions, including earnouts paid,
net of cash acquired (12,062) (3,529) (1,402) - (16,993)
-------- -------- -------- -------- --------
Net cash used for investing activities (13,422) (3,542) (2,414) - (19,378)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of senior credit facility (1,938) - - - (1,938)
Proceeds from senior credit facility 35,000 - - - 35,000
Employee stock purchase plan payments (23) - - - (23)
Proceeds from deferred shares and options
exercised 888 - - - 888
Dividends paid (955) - - - (955)
-------- -------- -------- -------- --------
Net cash provided by
financing activities 32,972 - - - 32,972
-------- -------- -------- -------- --------
Effect of exchange rate (79) - - - (79)
-------- -------- -------- -------- --------
Net increase (decrease) in cash
and equivalents (406) 147 2,804 1,043 3,588
Cash and equivalents at beginning of period - 8,678 3,970 (1,043) 11,605
-------- -------- -------- -------- --------
Cash and equivalents at end of period $ (406) $ 8,825 $ 6,774 $ - $ 15,193
======== ======== ======== ======== ========
28
NOTE 14 -- SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
For the three months ended March 31, 2002, Penton issued 14,704 common shares to
several officers and other key employees under the Management Stock Purchase
Plan and reported amortization of deemed dividend and accretion on preferred
stock of $0.4 million.
For the three months ended March 31, 2001, Penton marked to market its
investment in INT Media Group, Inc. stock by approximately $6.5 million, and
declared dividends of $1.0 million. In addition, Penton acquired Hillgate
Communications Ltd. for approximately $4.1 million, of which $3.5 million was in
the form of notes payable.
The foregoing transactions did not provide for or require the use of cash and,
accordingly, are not reflected in the Consolidated Statements of Cash Flows.
29
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
operations. Penton considers portions of this information to be forward-looking
statements within the meaning of Section 27A of the Securities Exchange 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, pending litigation, government
regulation, competition, technological change, intellectual property rights,
capital spending, international operations and Penton's acquisition and Internet
strategies.
OVERVIEW
We believe we are a leading, global 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 Web
businesses, including electronic newsletters. Our products serve 12 industry
sectors, which we group into four segments:
INDUSTRY MEDIA TECHNOLOGY MEDIA
-------------- ----------------
Manufacturing Internet/Broadband
Design/Engineering Information Technology
Mechanical Systems/Construction Electronics
Supply Chain
Government/Compliance OTHER MEDIA
Aviation -----------
Food/Retail
Leisure/Hospitality
LIFESTYLE MEDIA
---------------
Natural Products
We believe we have leading media products in each 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
FINANCING
On March 19, 2002, the Company issued 40,000 shares of its Series B Convertible
Preferred Stock, par value $0.01 per share (the "preferred stock"), and warrants
(the "warrants") to purchase 1,280,000 shares of Penton's common stock, par
value $0.01 per share, for $40.0 million in a private placement to institutional
investors and affiliated entities. On March 28, 2002, the Company issued an
additional 10,000 shares of preferred stock, par value $0.01 per share, and
warrants to purchase an additional 320,000 shares of Penton's common stock, par
30
value $0.01 per share, for $10.0 million to the same group of investors. The net
proceeds from the sale of the preferred stock and warrants were used to repay
the term loan indebtedness under our senior credit facility.
(See Note 5 - Debt.)
A copy of the amended and restated Series B Convertible Preferred Stock and
Warrant Purchase Agreement and the Certificate of Designations and Form of
Warrants Agreement were filed with the Securities and Exchange Commission on
March 19, 2002 as exhibits to a Current Report on Form 8-K. The following is a
description of the material terms of the preferred stock and warrants, and is
qualified in its entirety by reference to that Current Report on Form 8-K and
the applicable agreements. Significant terms of the new preferred stock are as
follows:
- Holders of the preferred shares will have a liquidation preference
over holders of common stock.
- The initial liquidation value per share will be $1,000. If the
preferred stock is not converted or redeemed prior to the sixth
anniversary of the date of issuance, the liquidation value will
increase to $4,570 per share if stockholder approval has been obtained
on certain matters. If the stockholder approval has not been obtained,
the liquidation value will increase to $9,140 per share.
- Dividends accrue at an annual rate of 7% from issuance until year six
unless stockholder approval is obtained on certain matters, at which
time the rate will decrease to 5% per annum. If the stockholder
approval is obtained within six months of the date of issuance, the
rate will decrease retroactive to the date of issuance. After the
sixth anniversary, dividends accrue at an annual rate of 15%. Upon
certain triggering events, the dividend rate may increase by one
percentage point per quarter up to a maximum increase of five
percentage points.
- The dividends are payable semi-annually in cash only if declared by
our board of directors and approved by holders of no less than 75% of
the convertible preferred stock then outstanding. The provisions of
our debt instruments limit our ability to pay dividends in cash.
Currently we have no intention to pay dividends in cash.
- Shares of preferred stock will be convertible at any time at each
investor's option into a number of shares of our common stock equal to
the liquidation value plus accrued but unpaid dividends, divided by
the conversion price. The conversion price will initially be $7.61,
and is subject to certain anti-dilution and other adjustments. Subject
to certain restrictions, we have the option to convert the preferred
stock at any time.
- If stockholder approval of certain matters is not obtained by June 28,
2002, the conversion price will automatically be reduced by 20%.
Thereafter, until such approval is obtained, every 90 days the
conversion price will be reduced by 20% of the conversion price then
in effect. In no event will the conversion price reduction related to
the failure to timely obtain stockholder approval exceed 50% of the
conversion price that would have been in effect had we obtained
stockholder approval. Upon our receipt of the stockholder approval,
the conversion price will be readjusted as if no adjustments had
occurred for failure to timely obtain stockholder approval.
- If we fail to comply with specific covenants contained in the purchase
agreement, the conversion price will be reduced by $0.76 (adjusted for
stock splits and similar transactions). The conversion price will
adjust to what it would have been, absent such breach, once the breach
is cured.
- We may redeem the preferred stock at any time, in whole or in part,
provided that the redemption price is equivalent to the amount the
holders would receive on an as-converted basis using a trailing 30-day
period and subject to certain minimum share prices based on the year
redeemed.
- The preferred stock initially entitles the holders to three seats on
our board of directors. Upon the occurrence of certain triggering
events, the holders may appoint up to one less than a minimum majority
of our board of directors or a minimum majority upon the occurrence of
certain events of bankruptcy or insolvency. See the further discussion
of these triggering events in the "Risk Factors" section of the
Company's Annual Report on Form 10-K for the year ended December 31,
2001.
- The holders of the convertible preferred stock are entitled to vote on
all matters submitted to a vote of our common stockholders.
31
- We have agreed to register the common stock issuable upon conversion
of the convertible preferred stock and exercise of the warrants within
45 days after closing and use our best efforts to have the
registration statement declared effective within 90 days of filing.
- The terms of the convertible preferred stock subject us to various
covenants, which among other things, limits our ability to sell
assets, make any restricted payments or restricted investments, enter
into various agreements and grant certain options.
- Warrants were issued to purchase an aggregate of 1.6 million shares of
our common stock at an initial exercise price of $7.61 per share,
subject to certain anti-dilution and other adjustments that mirror
those applicable to the convertible preferred stock. The warrants are
immediately exercisable and expire 10 years after issuance.
In March 2002, Penton issued $157.5 million of 11 7/8% senior secured notes (the
"Secured Notes") due 2007 to qualified institutional buyers pursuant to Rule
144A of the Securities Act of 1933, as amended. Interest is payable on the
Secured Notes semi-annually on April 1 and October 1. The Secured Notes are
fully and unconditionally guaranteed on a senior basis by all of our domestic
subsidiaries. We may redeem the Secured Notes, in whole or in part, during the
periods October 1, 2005 through September 30, 2006 and October 1, 2006 and
thereafter at redemption prices of 105.9375% and 100.0000% of the principal
amount, respectively, together with accrued and unpaid interest. In addition, at
any time prior to October 1, 2005, up to 35% of the aggregate principal amount
of the Secured Notes may be redeemed at our option, within 90 days of certain
public equity offerings of our common stock, at a redemption price equal to
111.875% of the principal amount, together with accrued and unpaid interest.
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. Net
proceeds of $150.9 million were used to pay down $83.6 million of our term loan
A facility, and $49.0 million of our term loan B facility, and to repurchase
$10.0 million of our 10 3/8% senior subordinated notes for $8.7 million. The
remaining net proceeds of $9.6 million were used for general corporate purposes.
The Secured Notes rank senior in right to all of our subordinated indebtedness,
including our 10 3/8% senior subordinated notes due in 2011, and equal in right
of payment with all of our other senior indebtedness, which is approximately
$3.2 million at March 31, 2002. The Secured Notes contain covenants that will,
among other things, limit the Company's ability to pay dividends, incur
additional debt, sell assets, and enter into mergers or consolidations.
In March 2002, we amended our senior credit facility and paid off our term loan
A and term loan B facilities from the proceeds received from the sale of
preferred shares (see Note 6 - Mandatorily Redeemable Convertible Preferred
Stock), proceeds received from the sale of our INT Media Group, Inc. common
stock (see Note 4 - Investments), cash on hand from a tax refund of
approximately $12.2 million, and the issuance of $157.5 million in Secured Notes
mentioned above. The amended and restated facility provides for a maximum
revolving credit facility of $40.0 million, which is limited to 80% of eligible
receivables. In order to access the revolver, the Company must not have more
than $7.5 million of cash and cash equivalents available, it must be in
compliance with the loan documents and must submit a borrowing base certificate
immediately prior to each extension of credit. In addition, the Company is
required to prepay the revolver in the event that it is overextended on its
eligible receivables, or it has more than $7.5 million in cash and cash
equivalents at the end of any month. The amended agreement has no financial
covenants, however, the amendment increases the interest rate on the revolver
and places additional restrictions on certain payments, limits additional debt
and contingent obligations, requires additional collateral, restricts additional
acquisitions and investments, limits our ability to sell assets and limits
capital expenditures.
EXPENSE REDUCTION INITIATIVES
Results for the first quarter of 2002 show some of the benefits of our
aggressive cost reduction programs implemented in 2001 and the first quarter of
2002. We have implemented a number of expense reduction and restructuring
initiatives to more closely align our cost structure with the current business
environment. The cost reduction initiatives included workforce reductions,
elimination of unprofitable properties, significant reductions in
32
capital spending, the shutdown and consolidation of certain facilities and other
cost reductions. Specific actions taken, most of which occurred in the second
half of 2001, are as follows:
- We reduced staffing through terminations.
- We imposed a company-wide hiring freeze, as well as a salary freeze
for higher-paid employees, until we return to profitability.
- We shut down and consolidated more than 20 offices worldwide.
- We reduced benefit costs by increasing employee contributions for
health care, temporarily suspending the company match for our defined
contribution plan, and eliminating year-end discretionary bonuses.
- We eliminated unprofitable properties, including seven magazines, more
than 20 events and nearly 20 Web sites.
- We reduced the production cost of various under-performing magazines
through process improvements, automation of pre-press work, new
printing and paper supply contracts, and selective reduction in
frequency and circulation levels.
- We restructured various under-performing events by either eliminating
these events or by co-locating with other events and realigning
management structures.
- We implemented a plan to centralize all information technology
services.
- We effectively outsourced various corporate and division functions.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2001
TOTAL COMPANY
In the analysis that follows, we have used adjusted EBITDA, which we define as
net income (loss) before interest, taxes, depreciation and amortization,
non-cash compensation and unusual items, as the primary measure of profitability
in evaluating our operations. We believe that investors find adjusted EBITDA to
be a useful tool for measuring a company's ability to generate cash. Adjusted
EBITDA does not represent cash flow from operations, as defined by generally
accepted accounting principles, and is not calculated in the same way by all
companies. In addition, you should not consider adjusted EBITDA a substitute for
net income or net loss, or as an indicator of our operating performance or cash
flow, or as a measure of liquidity. Adjusted EBITDA margin is calculated by
dividing adjusted EBITDA by total revenues.
Our revenues, net loss, adjusted EBITDA, diluted earnings per share and adjusted
EBITDA margins for the three months ended March 31, 2002 and 2001 are as
follows:
2002 2001 VARIANCE
---- ---- --------
Revenues $63,175 $112,693 $(49,518)
======= ======== ========
Net loss $(4,233) $ (1,278) $ (2,955)
======= ======== ========
Adjusted EBITDA $ 5,030 $ 20,673 $(15,643)
======= ======== =========
Net loss per common share - diluted $ (0.14) $ (0.04)
======= ========
Adjusted EBITDA margins 8.0% 18.3%
======= ========
Operating results for the three months ended March 31, 2002 continue to be
impacted by the downturn in the U.S. economy and, to a lesser extent, by the
slowing of economies throughout Europe and Asia. The weakness in the market we
experienced in the fourth quarter of 2001 carried over into the first quarter of
2002. However, we have
33
seen a modest recovery in a number of our media sectors. Our media properties
serving the technology markets, including information technology, Internet, and
telecommunications, continue to show a downward trend.
Our revenues decreased $49.5 million, or 43.9%, from $112.7 million for the
three months ended March 31, 2001 to $63.2 million for the same period in 2002.
The decrease was due primarily to: (i) a decrease in publishing revenues of
$15.6 million, or 27.3%, from $57.2 million for the three months ended March 31,
2001 to $41.6 million for the same period in 2002; (ii) a decrease in trade show
and conference revenues of $33.5 million, or 64.1%, from $52.3 million for the
three months ended March 31, 2001 to $18.7 million for the same period in 2002;
(iii) and a decrease in online media revenues of $0.4 million, from $3.3 million
for the three months ended March 31, 2001 to $2.9 million for the same period in
2002. Results for the first quarter of 2002 were impacted by the timing of our
Internet World Spring and CRM trade shows, which took place in the first quarter
of 2001 but were held in the second quarter of 2002. Adjusting for the timing
shift of the 2001 first quarter events, revenues declined by $29.6 million.
We reported a net loss for the three months ended March 31, 2002 of $4.2
million, or $0.13 per diluted share. These results reflect the elimination of
the amortization of goodwill pursuant to our adoption of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
on January 1, 2002. First quarter 2001 net income, adjusted as if the Company
had adopted the accounting change at the beginning of 2001, would have been $2.4
million, or $0.08 per diluted share, compared with a reported net loss of $1.3
million, or $0.04 per diluted share. Unusual items in the first quarter of 2002
included: (i) a restructuring charge credit of $0.3 million (or $0.01 per
diluted share) related to staff reductions, which were more than offset by the
sublease of two offices, for which we had previously taken reserves; (ii) a
pretax gain of $1.5 million ($0.03 per diluted share after tax) on our sale of
INT Media Group, Inc. common stock; and (iii) an extraordinary item of $0.2
million (less than $0.01 per diluted share after tax) related to a gain on the
repurchase of $10.0 million of senior subordinated notes, partially offset by
the write-off of unamortized finance fees associated with the refinancing of our
senior credit facility. Unusual items in the first quarter of 2001 included a
restructuring charge of $5.6 million (or $0.10 per diluted share after tax)
related to the discontinuation of certain online media properties.
Total adjusted EBITDA decreased $15.6 million, or 75.7%, from $20.7 million for
the three months ended March 31, 2001 to $5.0 million for the same period in
2002. Adjusted EBITDA margins decreased from 18.3% for the first quarter of 2001
to 8.0% for the same period in 2002. The decrease in both our adjusted EBITDA
and adjusted EBITDA margins were primarily due to a decrease in adjusted EBITDA
from our trade show and conference operations of $18.8 million, or 74.2%, from
$25.4 million in the first quarter of 2001 to $6.6 million for the same period
in 2002. Margins for trade shows and conferences decreased from 48.5% in the
first quarter of 2001 to 34.9% for the same period in 2002. The decrease in our
adjusted EBITDA was somewhat offset by a decrease in general and administrative
costs of $3.1 million, or 29.3%, from $10.5 million in the first quarter of 2001
to $7.4 million for the same period in 2002. As noted previously, results for
the quarter were impacted by the shift in the timing of the Internet World
Spring and CRM trade shows. Adjusting for this shift of trade show timing, total
adjusted EBITDA declined by $0.4 million for the three months ended March 31,
2002 compared to the same prior year period.
34
A reconciliation of our net loss to our total adjusted EBITDA is as follows (in
thousands):
THREE MONTHS ENDED
MARCH 31,
--------
2002 2001
---- ----
Net loss $ (4,233) $ (1,278)
Interest expense, net of interest earned 9,056 6,001
Gain on sale of investments (1,491) -
Restructuring charge (263) 5,567
Non-cash compensation 355 765
Benefit for income taxes (2,823) (1,910)
Depreciation and amortization 4,456 11,579
Extraordinary item (166) -
Miscellaneous, net 139 (51)
-------- --------
Adjusted EBITDA $ 5,030 $ 20,673
======== ========
OPERATING EXPENSES
Operating expenses decreased $47.2 million, or 43.0%, from $109.9 million for
the three months ended March 31, 2001 to $62.7 million for the same period in
2002. As a percentage of revenues, after excluding restructuring charges and
depreciation and amortization charges, operating costs increased from 82.3% in
2001 to 92.6% in 2002. The increase in operating expenses as a percentage of
revenues was primarily due to the $49.5 million decline in revenues, which is
attributed to the impact of the economy on our business, along with the shift in
timing of the Internet World Spring and CRM shows from March 2001 to April 2002.
Editorial, Production and Circulation
Editorial, production and circulation expenses decreased to $25.9 million for
the three months ended March 31, 2002, compared to $40.8 million for the same
period in 2001, representing a change of $15.0 million, or 36.7%. The decrease
was due to the shift in the timing of the Internet World Spring and CRM shows
noted previously since direct show costs are deferred and recognized in the
month the shows are held. The decrease was also due to the effects of editorial
and production staff reductions made in the second half of 2001 and the first
quarter of 2002.
As a percentage of revenues, editorial, production and circulation expenses
increased from 36.2% in the first quarter of 2001 to 40.9% in the same period of
2002. The increase was due to the shift in timing of the Internet World Spring
and CRM shows, both of which produced high margins in 2001.
Selling, General and Administrative
Selling, general and administrative expenses declined $19.3 million, or 37.1%,
from $51.9 million for the three months ended March 31, 2001 to $32.6 million
for the same period in 2002. The decrease was primarily due to the timing of the
Internet World Spring and CRM shows since direct show costs are deferred and
recognized in the month the shows are held, and to cost savings associated with
office closings and staff reductions realized from the restructuring actions
taken in 2001 and 2002.
As a percentage of revenues, selling, general and administrative expenses
increased from 46.1% in 2001 to 51.7% in 2002. The increase was due to lower
margins on trade shows held in the quarter as a result of the shift in timing of
the Internet World Spring and CRM shows, both of which produced high margins in
2001.
35
Restructuring Charge
The restructuring charge credit of $0.3 million ($0.2 million after tax, or $0.1
per diluted share) was comprised of approximately $1.4 million of employee
termination benefits costs in the first quarter of 2002, offset by the reversal
of approximately $1.6 million related to lease reserves recorded in the second
half of 2001 for our New York, NY and Burlingame, CA, offices, for long-term
leases which we were able to sublease. See Note 11 - Restructuring Charges for
information on related cash payments. Additional detail concerning the principal
components of the first quarter 2002 charge is as follows:
- Personnel costs of $1.4 million are associated with the elimination of
approximately 50 positions located in the U.S. Personnel costs include
payments for severance, costs of outplacement services and a provision for
continued health benefits.
- The New York, NY, and Burlingame, CA, office closing costs totaling $3.4
million were charged in the second half of 2001. At that time, no
assumptions for subleases were made by the Company, due to the inherent
limitations in estimating the future trends of the real estate marketplace,
the economic conditions present in New York city at the time, and the
remote probability of a successful sublease. However, in March 2002, due to
continuing efforts by the Company, we finalized a contract to sublease our
New York office space for the remainder of the lease term, or approximately
7.3 years. In addition, in April 2002, we subleased our Burlingame office
for the remainder of the lease term, or approximately 3.8 years. Penton
remains ultimately responsible for both of these leases.
Depreciation and Amortization
Depreciation and amortization declined $7.1 million, or 61.5%, from $11.6
million for the three months ended March 31, 2001 to $4.5 million for the three
months ended March 31, 2002. Lower amortization expense was due to the adoption
of SFAS No. 142, "Goodwill and Other Intangible Assets," on January 1, 2002.
Depreciation expense was also lower due to the impact of more than 20 office
closings that occurred in 2001.
OPERATING INCOME
Overall, Penton's operating income decreased $2.3 million, from $2.8 million for
the three months ended March 31, 2001, to $0.5 million for the same period in
2002. Operating income as a percentage of revenue decreased from 2.5% in 2001 to
0.8% in 2002.
36
OTHER INCOME (EXPENSE)
Interest expense, net of interest earned, increased $3.1 million from $6.0
million for the three months ended March 31, 2001, to $9.1 million for the three
months ended March 31, 2002. The increase was primarily due to a higher average
debt balance during the first quarter of 2002 when compared with the same period
in 2001 and an increase in the average interest rates of our debt from
approximately 7.0% in 2001 to just over 11.0% in 2002.
In January 2002, Penton sold its remaining 11.8% ownership interest in INT Media
for $5.8 million and recognized a $1.5 million gain from its sale.
EXTRAORDINARY ITEM, NET
The extraordinary item for the three months ended March 31, 2002, of $0.2
million consisted of two separate items, which net to a gain. With respect to
the first item, 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 or $0.8 million, net of taxes. The second item involved the
payoff of our term loan A and term loan B facilities, which resulted in the
write-off of unamortized deferred finance costs of approximately $1.1 million or
$0.7 million, net of taxes.
EFFECTIVE TAX RATES
The effective tax rates were 59.9% and 39.1% for the three months ended March
31, 2001 and 2002, respectively. Penton used the annual effective tax rate
approach for March 31, 2001 and 2002. The related decrease in the effective tax
rate year over year was primarily due to the effect of the accounting change for
goodwill amortization, effective January 1, 2002.
SEGMENTS
We manage our business based on four operating segments: Industry Media,
Technology Media, Lifestyle Media and Other Media. All four segments derive
their revenues from the production of publications, trade shows and conferences,
and online media products, and serve customers in 12 industry sectors. Adjusted
EBITDA for segments is calculated as previously defined except that segment
adjusted EBITDA also excludes corporate-level costs. Corporate-level costs
include costs for centralized functions, such as finance, accounting and
information systems, which cannot be reasonably allocated to each segment. See
Note 12 - Segment Information, for a reconciliation of segment total adjusted
EBITDA to consolidated loss before taxes and extraordinary item. Financial
information by segment for the three months ended March 31, 2002 and 2001 is
summarized in the following table (in thousands):
REVENUE ADJUSTED EBITDA MARGINS
------- --------------- -------
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
Industry Media $ 23,037 $ 31,382 $ 3,197 $ 5,041 13.9% 16.1%
Technology Media 21,083 61,839 (2,058) 14,775 (9.8)% 23.9%
Lifestyle Media 14,470 14,429 8,694 8,384 60.1% 58.1%
Other Media 4,585 5,043 1,026 1,115 22.4% 22.1%
-------- --------- -------- --------
Total $ 63,175 $ 112,693 $ 10,859 $ 29,315
======== ========= ======== ========
Industry Media
Our Industry Media segment, which represented 36.5% of total company revenues in
the first quarter of 2002, serves customers in the manufacturing,
design/engineering, mechanical systems/construction, government/compliance,
supply chain and aviation industries. Total revenues for this segment for the
three months ended March 31, 2002, decreased $8.3 million, or 26.6%, from $31.4
million in 2001 to $23.0 million in
37
2002. The decrease was primarily due to lower revenues from publications serving
the manufacturing, supply chain and design/engineering sectors, which were
impacted by the downturn in the U.S. economy. IndustryWeek, Machine Design,
American Machinist, New Equipment Digest, Transportation & Distribution and
Material Handling Management magazines were most significantly affected. The
decline was also due to lower revenues from our trade shows serving the
industrial markets.
Total adjusted EBITDA for the Industry Media segment decreased $2.2 million, or
40.8%, from $5.4 million for the three months ended March 31, 2001, to $3.2
million during the same 2002 period. Adjusted EBITDA margins decreased from
17.2% in 2001 to 13.9% in 2002. The decrease in adjusted EBITDA was primarily
due to declines in the aforementioned magazines and trade shows. Adjusted EBITDA
for the segment's online media portfolio increased $0.09 million for the three
months ended March 31, 2002, when compared with the same period in 2001.
Technology Media
Our Technology Media segment, which represented 33.4% of total company revenues
in the first quarter of 2002, serves customers in the electronics, information
technology and Internet/broadband markets. Total revenues for this segment
decreased $40.8 million, or 65.9%, from $61.8 million for the three months ended
March 31, 2001 to $21.1 million for the same period in 2002. Revenue declines
for the first quarter in 2002 compared with 2001 results were significantly
impacted by the shift of the Internet World Spring and CRM trade shows from the
March time slot in 2001 to April in 2002, as well as by current depressed market
conditions, especially in the information technology, Internet and
telecommunications markets. Declines in advertising revenues significantly
impacted Electronic Design, EE Product News, Windows & .Net Magazine, Internet
World and Boardwatch magazines. Online advertising revenues declined $0.1
million from $2.4 million for the three months ended March 31, 2001 to $2.3
million in the same 2002 period.
Total adjusted EBITDA for the Technology Media segment decreased $16.8 million,
or 113.9%, from $14.8 million for the three months ended March 31, 2001 to a
loss of $2.1 million for the same period in 2002. Adjusted EBITDA declines
mirrored revenue trends for publishing, trade shows and conferences and online
media products. Overall, 2002 results continue to be impacted by the decline in
the technology market.
Lifestyle Media
Our Lifestyle Media segment, which represented 22.9% of total company revenues
in the first quarter of 2002, serves customers in our natural products industry
sector. Total revenues for this segment grew by $0.04 million, or 0.3%, from
$14.4 million for the three months ended March 31, 2001 to $14.5 million for the
same period in 2002. Trade show revenues increased for the three months ended
March 31, 2002 compared to the same period in 2001 due to the move of the
Nutracon event from the third quarter in 2001 to the first quarter in 2002.
Publication revenues for Lifestyle Media were positively impacted by The Natural
Foods Merchandiser magazine which was offset by revenue declines in New Product
Review, Nutrition Science News, and Delicious Living magazines.
Total adjusted EBITDA for Lifestyle Media increased $0.3 million, or 3.7%, from
$8.4 million for the three months ended March 31, 2001, to $8.7 million for the
same period in 2002. Adjusted EBITDA margins increased from 58.1% in 2001 to
60.1% in 2002. The increase was due primarily to the shutdown of Healthwell.com
Industry Exchange in February 2001.
Other Media
Our Other Media segment, which represented 7.3% of total company revenues for
the first quarter of 2002, serves customers in the food/retail and
leisure/hospitality sectors. Total revenues for this segment decreased $0.5
38
million, or 9.1%, from $5.0 million for the three months ended March 31, 2001 to
$4.6 million for the comparable period in 2002. The decrease was due primarily
to year-over-year revenue declines for Lodging Hospitality and Convenience Store
Decisions magazines and the discontinuance of the Leisure Hospitality conference
in 2001 resulting from the economic slowdown.
Total adjusted EBITDA for Other Media decreased $0.1 million, or 8.0%, from $1.1
million for the three months ended March 31, 2001, to $1.0 million for the same
2002 period.
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. Adjusted EBITDA for products is calculated as previously
defined, except that product adjusted EBITDA also excludes general and
administrative costs. General and administrative costs include corporate-level
costs, as defined previously under Segments, and other general and
administrative costs related to product offerings, which cannot be reasonably
allocated. Our calculation of adjusted EBITDA by product is as follows (in
thousands):
THREE MONTHS ENDED
MARCH 31,
2002 2001
-------- --------
Publishing $ 5,558 $ 6,769
Trade shows & conferences 6,550 25,360
Online media 323 (987)
------- --------
Subtotal 12,431 31,142
General and administrative (7,401) (10,469)
-------- --------
Adjusted EBITDA $ 5,030 $ 20,673
======== ========
For the three months ended March 31, 2002, adjusted EBITDA for the Company's
publishing operations decreased $1.2 million, or 17.9%, when compared with the
same prior-year period. Adjusted EBITDA for publications was primarily affected
by declines in Penton's technology, manufacturing and electronic magazines.
For the three months ended March 31, 2002, adjusted EBITDA for the Company's
trade show and conference operations decreased $18.8 million, or 74.2% when
compared with the same prior year period. The decline was due primarily to the
shift in timing of the Internet World Spring and CRM trade shows as previously
noted.
Adjusted EBITDA for the Company's online media operations increased from a loss
of $1.0 million for the three months ended March 31, 2001, to income of $0.3
million for the same period in 2002. The improvement was due primarily to the
elimination of unprofitable online media properties in 2001.
For the three months ended March 31, 2002, general and administrative costs
decreased $3.1 million, when compared with the same prior year period. The
decrease is primarily due to staff reductions in connection with certain
corporate support functions that occurred in the second half of 2001 and in the
first quarter of 2002.
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 year.
There were no significant foreign currency transaction gains or losses for the
periods presented.
39
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 2002 and 2001, we financed our operations primarily
with cash generated from operating activities, borrowings under our senior
credit facility, proceeds from the issuance of senior notes, and proceeds from
the sale of investments and preferred shares.
Cash provided by (used for) operating activities was $6.0 million and $(9.9)
million for the three months ended March 31, 2002 and 2001, respectively.
Operating cash flows for the three months ended March 31, 2002, reflected a net
loss of $4.3 million, offset by a net working capital increase of approximately
$5.4 million and non-cash charges (primarily depreciation and amortization) of
approximately $4.8 million. Operating cash flows for the three months ended
March 31, 2001 reflect a net loss of $1.3 million, offset by a net working
capital increase of approximately $27.1 million and non-cash charges (primarily
depreciation and amortization and restructuring charges) of approximately $18.5
million.
The increase in operating cash flows for the three months ended March 31, 2002,
compared with the same 2001 period was due primarily to increases in working
capital items. The most significant working capital changes in 2002 were
attributable to accounts receivable, income taxes receivable, accounts payable
and accrued expenses. The accounts receivable decrease reflects lower
first-quarter sales in 2002 compared with 2001 and the timing of payments
received. The change in the receivable for income taxes reflects the receipt of
an income tax refund of $12.2 million in the first quarter of 2002. The decrease
in accounts payable and accrued expenses was due primarily to the timing of
vendor and other payments, which can fluctuate based on when particular trade
shows are held.
Investing activities provided $4.9 million of cash for the three months ended
March 31, 2002, and included proceeds of $5.8 million from the sale of nearly
3.0 million shares of INT Media Group, Inc. common stock. These proceeds were
partially offset by capital expenditures and earnout paid during the quarter.
Investing activities used $19.4 million for the three months ended March 31,
2001, and included earnout payments, acquisitions and investments, as well as
capital expenditures.
Financing activities provided $5.4 million for the three months ended March 31,
2002, due to the issuance of our 11 7/8% senior secured notes and the sale of
50,000 shares of a new series of mandatorily redeemable convertible preferred
stock to an investor group led by ABRY Mezzanine Partners, L.P. These proceeds
were primarily offset by the paydown of the balance of our senior secured term
loans; the purchase of $10.0 million face value of our 10 3/8% senior
subordinated notes at prevailing market prices; the payment of financing fees
associated with the amendment to our senior credit facility, and the issuance of
our 11 7/8% senior secured notes. All of these activities took place in the
first quarter. Financing activities provided $33.0 million in the first quarter
of 2001, primarily from borrowings under our revolving credit facility, offset
partially by debt repayments and dividends paid to stockholders.
On September 1, 1999, we entered into a $340.0 million credit agreement with
several banks. The agreement provided for a revolving credit facility of up to
$125.0 million, a term loan A of $140.0 million and a term loan B of $75.0
million. In October 2000, we amended our credit facility to give us the ability
to increase our term loan A facility, term loan B facility and/or revolving
credit facility up to an aggregate of $100.0 million prior to September 30,
2001. At that time, we increased the commitment under the revolving credit
facility by $60.0 million to $185.0 million. The remaining $40.0 million could
not be requested on more than three separate occasions, and any increase had to
take place by September 30, 2001. We did not exercise this option. As described
in the following paragraphs, we amended our credit facility and paid off our
term A and term B loans in the first quarter of 2002.
In June 2001, we issued $185.0 million of 10 3/8% senior subordinated notes (the
"Subordinated Notes") due June 15, 2011. Interest on the notes is payable
semi-annually, on June 15 and December 15 of each year. The Subordinated Notes
are guaranteed, on a senior subordinated basis, by our domestic subsidiaries,
and may be redeemed 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,
40
which were offered at a discount of $4.2 million, are being amortized 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 11 7/8%
senior secured notes discussed below. The Subordinated Notes are jointly and
severally irrevocably and unconditionally guaranteed on a senior subordinated
basis by each of our present and future domestic subsidiaries. The indenture
governing the Subordinated Notes contain covenants that, among other things,
restrict our and our subsidiaries' ability to borrow money; pay dividends on or
repurchase capital stock; make investments; enter into agreements that restrict
our subsidiaries from paying dividends or other distributions, making loans or
otherwise transferring assets to us or to any other subsidiaries; create liens
on assets; engage in transactions with affiliates; sell assets, including
capital stock of our subsidiaries; and merge, consolidate or sell all or
substantially all or our assets and the assets of our subsidiaries.
In January 2002, we received $5.8 million in net proceeds from the sale of our
remaining investment in INT Media Group, Inc. common stock.
In February 2002, we received a tax refund of approximately $12.2 million. For
federal income tax purposes, we were allowed to carryback losses we incurred in
2001 to previous tax years.
In March 2002, we entered into an agreement with a group of investors led by
ABRY Mezzanine Partners, L.P. 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
million shares of our common stock on March 28, 2002. (See Note 6 - Mandatorily
Redeemable Convertible Preferred Stock.) Net proceeds from the sale of the
preferred stock, along with the net proceeds from our recent sale of our INT
Media Group, Inc. common stock, and cash on hand from our 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% senior secured notes (the
"Senior Notes") due in 2007 to qualified institutional buyers pursuant to Rule
144A of the Securities Act of 1933, as amended. Interest is payable on the
Senior Notes semi-annually on April 1 and October 1. The Senior Notes are fully
and unconditionally guaranteed on a senior basis by all of our domestic
subsidiaries. We may redeem the Senior Notes, in whole or in part, during the
periods October 1, 2005 through September 30, 2006 and October 1, 2006 and
thereafter at redemption prices of 105.9375% and 100.0000% of the principal
amount, respectively, together with accrued and unpaid interest. 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 Senior 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.
The Senior Notes were offered at a discount of $0.8 million, which is being
amortized, using the interest method, over the term of the Senior Notes. Costs
representing underwriting fees and other professional fees of $6.6 million are
being amortized over the term of the Senior Notes. Net proceeds of $150.9
million were used to pay down $83.6 million of term loan A and $49.0 million of
term loan B, and $8.7 million to repurchase $10.0 million of our 10 3/8% senior
subordinated notes. The remaining net proceeds of $9.6 million were used for
general corporate purposes. The Senior Notes rank senior in right to all of our
senior subordinated indebtedness, including our 10 3/8% Subordinated Notes due
in 2011, and equal in right of payment with all of our other senior
indebtedness, which is approximately $3.2 million at March 31, 2002. The
guarantees are senior secured obligations of each of our subsidiary guarantors
and rank senior in right of payment to all subordinated
41
indebtedness of the subsidiary guarantors, including the guarantees of our 10
3/8% Subordinated Notes, and equal in right of payment with all of our senior
indebtedness. 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. Excluded assets consist of, among other things, the capital
stock of Duke Communications International, Inc. and Internet World Media, Inc.,
the capital stock of our foreign subsidiaries directly owned by us or the
subsidiary guarantors which exceed 65% of the outstanding capital stock or
equity interest of such foreign subsidiaries, and all of the capital of our
other foreign subsidiaries. The Senior Notes contain covenants that will, among
other things, limit the Company's and our subsidiaries' ability to pay
dividends; redeem capital stock; incur additional debt; enter into agreements
that restrict our subsidiaries from paying dividends or other distributions,
making loans or otherwise transferring assets to us or to any other
subsidiaries; sell assets; and enter into mergers or consolidations.
In March 2002, we paid off our term loan A facility and our term loan B facility
from the proceeds received from the sale of preferred shares and the issuance of
$157.5 million in senior notes, as noted above, and amended our credit facility.
The amended and restated facility provides for a maximum revolving credit
facility of $40.0 million, which is limited to 80% of eligible receivables. At
March 31, 2002, $26.6 million was available under the revolving credit facility;
however, no amounts were outstanding. In order to access the revolver, the
Company must not have more than $7.5 million of cash and cash equivalents
available and it must be in compliance with the loan documents and must submit a
borrowing base certificate immediately prior to each extension of credit. In
addition, the Company is required to prepay the revolver in the event that it is
over-extended on its eligible receivables, or it has more than $7.5 million in
cash and cash equivalents at the end of any month. The commitment under the
revolving credit facility decreases by 15% in 2003, 30% in 2004, 35% in 2005 and
20% in 2006. The amended agreement has no financial covenants; however, it
increases the interest rate on the revolver and places additional restrictions
on certain payments, limits additional debt and contingent obligations, requires
additional collateral, restricts additional acquisitions and investments, limits
our ability to sell assets and limits capital expenditures.
The extinguishment of the term loans resulted in a non-cash extraordinary charge
of $0.7 million, net of $0.5 million in taxes ($0.02 per diluted share after
tax), relating to the write-off of unamortized deferred finance costs.
Based upon current and anticipated levels of operations, we believe that cash on
hand and cash flow from operations, combined with the borrowing capacity under
our credit facilities, will be sufficient to enable us to meet current and
anticipated cash operating requirements, including scheduled interest and
principal payments, capital expenditures and working capital needs. However,
actual capital requirements may change. Our ability to meet current and
anticipated operating requirements will depend upon our future performance,
which, in turn, will be 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 additional capital through additional financing
arrangements or the issuance of private or public debt or equity securities. We
cannot assure you that such additional financing will be available at acceptable
terms. In addition, the terms of our convertible preferred stock and warrants
issued, including the conversion price, dividend and liquidation adjustment
provisions that could result in substantial dilution to stockholders, the
redemption price premiums and board representation rights, could negatively
impact our ability to access the equity markets in the future.
SEASONALITY
The majority of our trade shows and conferences are held in the second and
fourth quarters and, accordingly, the majority of revenue is recognized in these
quarters. Penton may also 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.
INFLATION
The impact of inflation on our results of operations has not been significant in
recent years.
42
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations." SFAS
No. 141 requires that all business combinations be accounted for under the
purchase method of accounting. In addition, this Statement addresses financial
accounting and reporting for goodwill and other intangible assets acquired in a
business combination at acquisition. The Statement also provides criteria for
the separate recognition of intangible assets acquired in a business
combination. Penton adopted this Statement effective January 1, 2002. (See Note
2 - Goodwill and Other Intangibles.)
In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses financial accounting and reporting for
intangible assets acquired individually or with a group of other assets at
acquisition. SFAS No. 142 presumes that goodwill and certain intangible assets
have indefinite useful lives. Accordingly, goodwill and certain intangibles will
not be amortized but rather will be tested at least annually for impairment.
SFAS No. 142 also addresses accounting and reporting for goodwill and other
intangible assets subsequent to their acquisition. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001. Penton adopted this statement
effective January 1, 2002. (See Note 2 - Goodwill and Other Intangibles.)
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This Statement requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes the
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The Company is
required to adopt this Statement for fiscal 2004. The Company does not expect
that the adoption of this Statement will have a material effect on the Company's
consolidated financial position, results of operations or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement, which supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," provides a single accounting model for long-lived assets to be
disposed of. Although retaining many of the fundamental recognition and
measurement provisions of SFAS No. 121, the Statement significantly changes the
criteria that would have to be met to classify an asset as held-for-sale. Penton
adopted this statement effective January 1, 2002.
In May 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44, and
64, Amendment of SFAS 13, and Technical Corrections as of April 2002". The
provisions of this Statement related to the rescission of SFAS No. 4 are
effective for fiscal years beginning after May 15, 2002, while provisions
related to SFAS No. 13 are effective for transactions occurring after May 15,
2002, and all remaining provisions of this Statement shall be effective for
financial statements issued on or after May 15, 2002. This Statement eliminates
SFAS No. 4, as a result, gains and losses from extinguishment of debt should be
classified as extraordinary items if they meet the criteria of APB Opinion No.
30, "Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". This Statement also eliminates SFAS No. 44, which was
established to provide accounting requirements for effects of transition for
provisions of the Motor Carrier Act of 1980. The deregulation of intrastate
operating rights and transition to the provisions of those laws being complete
has necessitated the rescission of SFAS No. 44. This Statement also eliminates
the need to have SFAS 64, which was an amendment to SFAS 4 and has been
rescinded with this Statement. Lastly, this Statement amends SFAS 13, requiring
leases modifications that have economic effects similar to sale-leaseback
transactions to be accounted for in the same manner as sales-leaseback
transactions. The Company is currently in the process of evaluating this
Statement and does not expect the adoption of this Statement to have a material
impact on its financial statements and results of operations.
43
EURO CONVERSION
On January 1, 2002, the introduction of the single European currency, the euro,
was completed with the launch of euro bank notes and coins as legal currency
within 12 of the 15 member states of the European Union. Businesses in
participating countries will conduct transactions in the euro and must convert
their financial records and reports to be euro based.
Although we generate revenues in some of the participating countries, we do not
anticipate that the conversion to the euro will have a material effect on our
results of operations or financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates
and prices, such as foreign currency exchange and interest rates. We do not
enter into financial instruments for trading or speculative purposes.
Our cash and cash equivalents are not subject to significant interest rate risk
due to the short maturities of these instruments. As of March 31, 2002, the
carrying value of our cash and cash equivalents approximates fair value.
Our long-term debt consists of senior notes with interest at fixed rates.
Consequently, we do not have significant cash flow exposure on our long-term
debt. However, the fair value of our senior notes fluctuates with the market.
The following table shows the fair values of our investment and long-term debt
as of March 31, 2002 (in thousands):
CARRYING FAIR
VALUE VALUE
--------- ---------
Cash and cash equivalents $ 36,547 $ 36,547
Senior subordinated notes $ 171,236 $ 145,250
Senior secured notes $ 156,717 $ 160,650
Derivative instruments $ 107,498 $ 107,498
The table below provides information about our risk exposure associated with
changing interest rates on long-term debt obligations that impact the fair
value of these obligations.
Expected Maturity Date
----------------------------------------------------------------- Fair
2002 2003 2004 2005 2006 Thereafter Total Value
------ ------ ------ ------ ------ ---------- ----- -----
Long-Term Debt:
Senior subordinated notes - - - - - $175,000 $175,000 $145,250
Average interest rate 10 3/8% 10 3/8% 10 3/8% 10 3/8% 10 3/8% 10 3/8% 10 3/8%
Senior Secured notes - - - - - $157,500 $157,500 $160,650
Average interest rate 11 7/8% 11 7/8% 11 7/8% 11 7/8% 11 7/8% 11 7/8% 11 7/8%
During the first quarter, we discontinued hedge accounting of our interest rate
swap and cap agreements as we paid down our variable rate borrowings. At March
31, 2002, we continue to hold these derivative instruments until their maturity
throughout 2002. Due to the short time period to maturity, we do not believe
that the Company is exposed to significant interest rate risk. (See Note 10 -
Hedging Activities)
We maintain assets and operations in the United Kingdom and in various other
countries. As a result, we may be exposed to cost increases relative to the
markets in which we sell. At March 31, 2002, a hypothetical 10% strengthening or
weakening of the U.S. dollar relative to the currencies of foreign countries in
which we operate would have resulted in an immaterial impact on our financial
results.
44
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
(b) REPORTS ON FORM 8-K AND/OR 8-K/A
Date of Report Items Reported
-------------- --------------
March 12, 2002 Item 5. Other Events
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits
March 13, 2002 Item 5. Other Events
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits
March 19, 2002 Item 5. Other Events
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits
March 22, 2002 Item 5. Other Events
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits
March 28, 2002 Item 5. Other Events
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits
45
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
Interim Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
Date: May 15, 2002
46