UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
_____________________________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-14337
-------
PENTON MEDIA, INC.
------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 36-2875386
-------- ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
1300 East Ninth Street, Cleveland, OH 44114
-------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
216-696-7000
------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date (November 11, 2002).
Common Stock: 32,451,862 shares
PENTON MEDIA, INC.
FORM 10-Q
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2002
and December 31, 2001 3
Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 2002 and 2001 5
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 36
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 58
Item 4. Controls and Procedures 59
PART II - OTHER INFORMATION
Item 2. Change in Securities and use of proceeds 60
Item 6. Exhibits and Reports on Form 8-K 60
Signature 62
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PENTON MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
September 30, December 31,
2002 2001
----------- -----------
ASSETS (unaudited)
------
CURRENT ASSETS:
Cash and cash equivalents $ 20,674 $ 20,191
Accounts and notes receivable, less allowance for doubtful
accounts of $9,895 and $10,976 in 2002 and 2001, respectively 42,020 56,452
Income taxes receivable 19,585 14,750
Inventories 894 1,351
Deferred tax assets -- 6,645
Prepayments, deposits and other 12,439 7,854
---------- ----------
95,612 107,243
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Land, buildings and improvements 8,870 8,846
Machinery and equipment 63,723 62,056
---------- ----------
72,593 70,902
Less: accumulated depreciation 45,990 40,726
---------- ----------
26,603 30,176
---------- ----------
OTHER ASSETS:
Goodwill 253,132 493,141
Other intangibles, less accumulated amortization of
$13,943 and $21,384 in 2002 and 2001, respectively 33,776 56,800
Deferred tax assets -- 7,468
Investments -- 5,649
---------- ----------
286,908 563,058
---------- ----------
$ 409,123 $ 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)
September 30, December 31,
2002 2001
---------- ----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
Senior secured credit facility $ -- $ 16,489
Note payable -- 2,804
Accounts payable 8,238 12,094
Income taxes payable 1,087 3,674
Accrued earnouts -- 6,572
Accrued compensation and benefits 12,976 12,411
Other accrued expenses 36,399 24,705
Unearned income, principally trade
show and conference deposits 35,228 36,939
---------- ----------
93,928 115,688
---------- ----------
LONG-TERM LIABILITIES AND DEFERRED CREDITS:
Senior secured credit facility -- 164,098
Senior secured notes, net of discount 156,770 --
Senior subordinated notes, net of discount 171,359 180,957
Note payable 417 417
Net deferred pension credits 13,469 15,140
Minority interest 886 1,127
Other 2,059 2,520
---------- ----------
344,960 364,259
---------- ----------
Mandatorily redeemable convertible preferred stock, par value $0.01 per share;
50,000 shares authorized, issued and outstanding;
redeemable at $1,000 per share 45,513 --
---------- ----------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, par value $0.01 per share; 1,950,000 shares
authorized; none issued or outstanding -- --
Common stock, par value $0.01 per share; 155,000,000 shares
authorized; 32,451,862 shares at September 30, 2002 (net of 115,712 treasury
shares) and 31,895,621 shares at December 31, 2001
issued and outstanding 325 319
Capital in excess of par value 229,427 227,245
Retained earnings (deficit) (292,431) 6,724
Notes receivable officers/directors (9,703) (10,824)
Accumulated other comprehensive loss (2,896) (2,934)
---------- ----------
(75,278) 220,530
---------- ----------
$ 409,123 $ 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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUES $ 48,609 $ 61,523 $ 177,793 $ 280,993
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Editorial, production and circulation 23,888 33,148 78,545 117,160
Selling, general and administrative 26,483 36,655 92,389 136,291
Restructuring charges 3,354 9,468 10,860 15,035
Impairment of assets 223,288 9,663 223,424 9,663
Depreciation and amortization 5,351 11,211 15,491 33,925
------------ ------------ ------------ ------------
282,364 100,145 420,709 312,074
------------ ------------ ------------ ------------
OPERATING LOSS (233,755) (38,622) (242,916) (31,081)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (9,532) (8,772) (28,452) (21,841)
Interest income 133 509 593 1,328
Gain on sale of investments -- -- 1,491 --
Minority interest 268 64 159 (1,155)
Miscellaneous, net (106) (858) (338) (1,089)
------------ ------------ ------------ ------------
(9,237) (9,057) (26,547) (22,757)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES, EXTRAORDINARY
ITEM, AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE (242,992) (47,679) (269,463) (53,838)
Benefit (provision) for income taxes (172) 18,184 9,842 17,582
------------ ------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE (243,164) (29,495) (259,621) (36,256)
Extraordinary item, net of taxes -- -- 166 --
Cumulative effect of accounting change, net of taxes -- -- (39,700) --
------------ ------------ ------------ ------------
NET LOSS (243,164) (29,495) (299,155) (36,256)
Amortization of deemed dividend and
accretion of preferred stock (652) -- (45,513) --
------------ ------------ ------------ ------------
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS $ (243,816) $ (29,495) $ (344,668) $ (36,256)
============ ============ ============ ============
NET LOSS PER COMMON SHARE - Basic and diluted
Loss from operations $ (7.49) $ (0.92) $ (9.48) $ (1.14)
Extraordinary item, net of taxes -- -- -- --
Cumulative effect of accounting change, net of taxes -- -- (1.23) --
------------ ------------ ------------ ------------
Net loss applicable to common stockholders $ (7.49) $ (0.92) $ (10.71) $ (1.14)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING:
Basic and diluted 32,548 31,935 32,179 31,914
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
5
PENTON MEDIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED; DOLLARS IN THOUSANDS)
Nine Months Ended
September 30,
2002 2001
------------ -----------
Net cash provided by (used for) operating activities $ 1,125 $ (14,752)
---------- ----------
Cash flows from investing activities:
Capital expenditures (2,900) (8,378)
Acquisitions, including earnouts paid, net of cash acquired (5,520) (20,260)
Proceeds from sale of Jupitermedia Corporation common stock 5,801 --
---------- ----------
Net cash used for investing activities (2,619) (28,638)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of preferred stock
and warrants, net of issue costs 46,111 --
Proceeds from issuance of senior subordinated notes -- 180,836
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) (163,207)
Proceeds from senior secured credit facility -- 45,000
Payment of short term note payable (2,804) (201)
Payments for employee stock purchase plan (359) (197)
Proceeds from deferred shares and options exercised -- 1,145
Payment of financing fees (9,450) (1,246)
Proceeds from repayment of officers/directors loans 703 --
Dividends paid -- (1,912)
---------- ----------
Net cash provided by financing activities 1,956 60,218
---------- ----------
Effect of exchange rate changes on cash 21 (28)
---------- ----------
Net increase in cash and cash equivalents 483 16,800
Cash and cash equivalents at beginning of period 20,191 11,605
---------- ----------
Cash and cash equivalents at end of period $ 20,674 $ 28,405
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
6
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
These financial statements have been prepared by management in accordance with
generally accepted accounting principles for interim financial information and
the applicable rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles 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.
NEW ACCOUNTING PRONOUNCEMENTS
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, and 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
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
lease modifications that have economic effects similar to sale-leaseback
transactions to be accounted for in the same manner as sale-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.
In June 2002, the FASB issued SFAS No. 146 "Accounting for costs associated with
exit or disposal activities." This statement addresses financial accounting and
reporting for costs associated with exit or disposal activities. This statement
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring)." This Statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred as opposed to recognizing
the liability at the date of an entity's commitment to an exit plan. This
Statement is effective for exit or disposal activities that are initiated after
December 31, 2002. The Company is currently in the
7
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
process of evaluating this Statement but does not expect its adoption to have a
material impact on its financial statements or results of operations.
NOTE 2 - GOODWILL AND OTHER INTANGIBLES
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," ("SFAS 142").
During the third quarter of 2002, Penton completed its initial impairment test
for January 1, 2002 and recorded a non-cash charge of $39.7 million to reduce
the carrying value of goodwill for two of our seven identified reporting units.
Penton utilizes a third party valuation company to determine the fair value of
the reporting units. Both of these reporting units are part of the Company's
Technology Media segment. The charge is reflected as a Cumulative Effect of
Accounting Change in the accompanying Statements of Operations.
During the third quarter, a number of events occurred which indicated that a
possible impairment of goodwill might exist. These events include our
announcement in July of lower than expected revenues and EBITDA results for the
year; a letter from the New York Stock Exchange indicating that the Company had
fallen below minimum listing standards; a significant decline in the Company's
stock price; and the decision by management to potentially sell or dispose of
certain non-core assets. As a result of these triggering events and
circumstances, the Company completed an additional SFAS 142 impairment review
at September 30, 2002. This review resulted in a non-cash charge of
approximately $203.3 million to further reduce the carrying value of goodwill
for these two reporting units in our Technology Media segment. This charge is
reflected as an Impairment of Assets in the accompanying Statements of
Operations. The fair value of the reporting units for the initial and interim
impairment test was determined using the income approach, which is similar to
the discounted cash flows approach. The Company has also selected September 30
of each year to perform its annual impairment review.
A summary of changes in the Company's goodwill during the first nine months of
2002, by business segment is as follows (in thousands):
GOODWILL
--------------------------------------------------------------------------------------------
DECEMBER 31, CUMULATIVE EFFECT OF ACTIVITY AND SEPTEMBER 30,
2001 ACCOUNTING CHANGE EARNOUTS IMPAIRMENTS 2002
------------- -------------------- ------------- ----------- -------------
Industry Media $ 37,237 $ -- $ -- $ -- $ 37,237
Technology Media 336,790 (39,700) 2,991 (203,300) 96,781
Lifestyle Media 84,924 -- -- -- 84,924
Retail Media 34,190 -- -- -- 34,190
----------- ----------- ----------- ----------- -----------
Total $ 493,141 $ (39,700) $ 2,991 $ (203,300) $ 253,132
=========== =========== =========== =========== ===========
Because of the events noted above, Penton also completed an assessment in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), and recorded a non-cash charge of $20.0
million. This charge is also reflected as an Impairment of Assets in the
accompanying Statements of Operations and primarily relates to the write-off of
mailing/exhibitor lists and sponsor relationship for properties in our
Technology Media segment. SFAS 144 requires long-lived assets to be grouped
with other assets and liabilities at the lowest level for which there are
identifiable cash flows that are largely independent of the cash flows of other
groups of assets and liabilities. An impairment exists only if the carrying
amount of the long-lived assets, or group, is not recoverable and exceeds its
fair value. The fair value of the asset group(s) was determined using the
income approach, which is similar to the discounted cash flows approach.
8
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
A reconciliation of the reported net loss applicable to common stockholders and
net loss applicable to common stockholders per common share to the amounts
adjusted for the exclusion of amortization of goodwill and the cumulative effect
of a change in accounting principle for the three and nine months ended
September 30, 2002 and 2001, respectively, had the provisions of SFAS 142 been
applied on January 1, 2001 is as follows (amounts in thousands, except per share
data):
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Loss before extraordinary item and cumulative
effect of accounting change $ (243,164) $ (29,495) $ (259,621) $ (36,256)
Extraordinary item, net of tax -- -- 166 --
Cumulative effect of accounting change, net of tax -- -- (39,700) --
------------ ------------ ------------ ------------
Net loss (243,164) (29,495) (299,155) (36,256)
Goodwill amortization, net of tax -- 4,114 -- 12,478
------------ ------------ ------------ ------------
Adjusted net loss (243,164) (25,381) (299,155) (23,778)
Amortization of deemed dividend and accretion of
preferred stock (652) -- (45,513) --
------------ ------------ ------------ ------------
Adjusted net loss applicable to
common stockholders $ (243,816) $ (25,381) $ (344,668) $ (23,778)
============ ============ ============ ============
Basic and diluted earnings per share:
Loss before extraordinary item and cumulative
effect of accounting change $ (7.49) $ (0.92) $ (9.48) $ (1.14)
Extraordinary item, net of tax -- -- -- --
Cumulative effect of accounting change, net of tax -- -- (1.23) --
Goodwill amortization, net of tax -- 0.13 -- 0.39
------------ ------------ ------------ ------------
Adjusted net loss applicable to
common stockholders $ (7.49) $ (0.79) $ (10.71) $ (0.75)
============ ============ ============ ============
Weighted-average shares outstanding:
Basic and diluted 32,548 31,935 32,179 31,914
============ ============ ============ ============
9
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
The following pro forma financial information compares the Company's loss before
extraordinary item and cumulative effect of accounting change, net loss and net
loss applicable to common stockholders for the year to date periods ended March
31, June 30 and September 30, 2002, respectively, had the transitional goodwill
impairment charge of $39.7 million been recorded on January 1, 2002 (amounts in
thousands, except per share data):
FOR THE YTD PERIODS ENDED
MARCH 31, JUNE 30, SEPTEMBER 30,
----------- ----------- ------------
Loss before extraordinary item and cumulative
effect of accounting change $ (4,399) $ (16,457) $ (259,621)
Extraordinary item, net of tax 166 166 166
Cumulative effect of accounting change, net of tax (39,700) (39,700) (39,700)
----------- ----------- -----------
Adjusted net loss (43,933) (55,991) (299,155)
Amortization of deemed dividend and accretion of
preferred stock (363) (44,861) (45,513)
----------- ----------- -----------
Adjusted net loss applicable to
common stockholders $ (44,296) $ (100,852) $ (344,668)
=========== =========== ===========
Basic and diluted earnings per share:
Loss from operations $ (0.15) $ (1.92) $ (9.48)
Extraordinary item, net of tax 0.01 -- --
Cumulative effect of accounting change, net of tax (1.25) (1.24) (1.23)
----------- ----------- -----------
Adjusted net loss applicable to
common stockholders $ (1.39) $ (3.16) $ (10.71)
=========== =========== ===========
Weighted-average shares outstanding:
Basic and diluted 31,970 32,018 32,179
=========== =========== ===========
Identifiable intangible assets, exclusive of goodwill, as of September 30, 2002,
are recorded in Other Intangibles in the Consolidated Balance Sheets and are
comprised of:
GROSS NET
CARRYING ACCUMULATED BOOK
VALUE AMORTIZATION VALUE
----------- ------------ -----------
Trade names $ 12,268 $ (2,537) $ 9,731
Mailing/exhibitor lists 11,941 (4,990) 6,951
Advertiser relationships 7,200 (2,061) 5,139
Subscriber relationships 2,100 (460) 1,640
Noncompete agreements 1,336 (1,033) 303
----------- ----------- -----------
Balance at September 30, 2002 $ 34,845 $ (11,081) $ 23,764
=========== =========== ===========
10
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
Total amortization expense for identifiable intangible assets was $9.0 million
and $5.1 million for the nine months ended September 30, 2002 and 2001,
respectively. Amortization expense for these intangibles is estimated for the
remainder of 2002 and each of the five succeeding years as follows:
YEAR ENDED
DECEMBER 31, AMOUNT
------------ ------
2002 $ 8,361
2003 $ 3,982
2004 $ 3,771
2005 $ 3,281
2006 $ 3,001
2007 $ 2,119
NOTE 3 - 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 September 30, 2002, Penton had no amounts accrued for contingent
consideration. In the third quarter, the Company issued $1.5 million in shares
of common stock (527,951 shares) and paid $4.1 million in cash to settle certain
contingent liabilities. For the nine months ended September 30, 2002, total cash
payments of $5.5 million were made for contingent consideration.
At September 30, 2002, the remaining maximum potential liability for future
contingent consideration is approximately $56.5 million. Contingent
consideration is payable based on achieving specified performance goals, such as
reaching certain revenue or EBITDA levels. The earnout period for $37.2 million
of the total contingent consideration expires at December 31, 2002; $0.4 million
expires at January 31, 2003; and $18.9 million expires at December 31, 2003.
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 under SFAS 142.
NOTE 4 - INVESTMENTS
In January 2002, Penton sold its remaining 11.8% ownership interest, or
2,973,383 shares, in Jupitermedia Corporation, (formerly known as 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. Interest is payable on the Secured Notes
semi-annually on April 1 and October 1. The Secured Notes are fully and
unconditionally, jointly and severally guaranteed on a senior basis by all of
the assets of Penton's domestic subsidiaries, which are 100% owned by the
Company, and also the stock of certain subsidiaries. Condensed consolidating
financial information is presented in Note 16 - Guarantor and Non-Guarantor
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 105.9% and 100.0% of the principal amount,
11
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
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 $0.05 million for the nine months ended
September 30, 2002. Costs representing underwriting fees and other professional
fees of $6.6 million are being amortized, using the effective interest method,
over the term of the Secured Notes. Net proceeds of $150.1 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 $8.3 million (excluding interest). The remaining
net proceeds of $9.2 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 $0.4 million at September 30, 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. The Company's ability to obtain dividends from its subsidiaries
is only restricted if Penton is in default under its debt arrangement or if the
Company has exceeded its limitation of additional indebtedness, as specified in
such agreement.
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 fully
and unconditionally, jointly and severally guaranteed, on a senior subordinated
basis, by the assets of Penton's domestic subsidiaries, which are 100% owned by
the Company. Condensed consolidating financial information is presented in Note
16 - Guarantor and Non-Guarantor Subsidiaries. The notes may be redeemed in
whole or in part 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 $0.3 million for the nine months ended September 30, 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. The
Company's ability to obtain dividends from it's subsidiaries is only restricted
if Penton is in default under it's debt arrangement or if the Company has
exceeded it's limitation of additional indebtedness, as specified in such
agreement.
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
In March 2002, Penton amended and restated its senior credit facility and repaid
in full its term loan A and term loan B facilities from the proceeds received
from the sale of preferred shares (see Note 6 - Mandatorily Redeemable
12
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
Convertible Preferred Stock), proceeds received from the sale of Jupitermedia
Corporation 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 as mentioned above. The amended and restated credit agreement
provides for a revolving credit facility of up to a maximum of $40.0 million.
Availability under the revolving credit facility is determined by a borrowing
base that is limited to 80% of eligible receivables. In order to access the
revolver, Penton 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 showing compliance with the borrowing base. Penton is required to
pay-down the revolver in the event that it has loans outstanding in excess of
the borrowing base, or it has more than $7.5 million in cash and cash
equivalents at the end of any month. The amended and restated credit facility
has no financial covenants. In connection with the amendment and restatement of
the credit facility, the interest rate on the revolving credit facility was
increased. In addition, further restrictions were placed on Penton's ability to
make certain restricted payments, to make capital expenditures in excess of
certain amounts, to incur additional debt and contingent obligations, to make
acquisitions and investments, and to sell assets.
The revolving credit facility bears interest, at Penton's option, at either The
Bank of New York's prime rate or at LIBOR, plus, in each case, an additional
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 September
30, 2002, based upon the calculation of the borrowing base, $23.4 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 0.5%, based on Penton's consolidated
leverage ratio, on the average unused portion of the revolving credit facility
commitment.
The repayment of the term loans in March 2002 resulted in an 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 nine months ended September 30, 2002 and 2001 was
$20.6 million and $14.0 million, respectively.
NOTE PAYABLE
The note payable at September 30, 2002 represents indebtedness resulting from
the acquisition of Hillgate Communications Ltd. in February 2001. In May 2002,
Loan note A in the amount of $2.8 million was paid in full. 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.
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 $46.1 million from the issuance of the preferred stock and
warrants, net of issue costs of $3.8 million, were 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 $4.0 million of the net
proceeds were allocated to the warrants and were recorded in additional paid in
capital resulting in a discount to the preferred stock. The fair value of the
warrants were determined using the Black-Scholes pricing model.
13
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
The balance of the net proceeds, of approximately $42.1 million, were allocated
to the preferred stock, which because of the mandatory redemption date and other
redemption provisions, were classified outside of permanent equity. Pursuant to
the provisions of EITF 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios" and
EITF 00-27, "Application of Issue 98-5 to Certain Convertible Instruments," the
entire amount of $42.1 million was initially recorded as a beneficial conversion
feature in Capital in Excess of Par Value resulting in an additional discount to
the preferred stock. The amount of the beneficial conversion feature was
determined pursuant to Issue 2 of EITF 00-27. As such, the most beneficial
"accounting conversion price" at the issue date of the preferred shares was
compared to the closing market price of the stock on that date and the intrinsic
spread was multiplied by the number of most beneficial shares that the preferred
shares can be converted into. This beneficial conversion feature was 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 was also initially 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.
In April 2002, the Company reached an agreement with the preferred stockholders
to eliminate the scheduled 10 year redemption date of the preferred stock and on
May 31, 2002, the stockholders approved an amendment to remove the scheduled
redemption feature. In exchange for removing the scheduled redemption date, the
Company agreed to grant the holders of the preferred stock the right to require
Penton to seek a buyer for substantially all of our assets or issued and
outstanding capital stock beginning on March 19, 2008, if any preferred stock
remains outstanding. The Company sought the amendment to eliminate the
requirement to accrete the preferred stock to the maximum possible redemption
amount by such date. However, it did not seek to eliminate the preferred
stockholders' right to require the Company to redeem the security upon the
occurrence of certain contingent events, including a change in control or
liquidation, dissolution or winding up of Penton. To the extent that redemption
of the preferred stock becomes probable 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.
Prior to the stockholders approval to remove the scheduled redemption date, the
Company was required to accrete a portion of the maximum redemption amount.
Accordingly, approximately $2.2 million was accreted, using the interest method,
prior to May 31, 2002. In addition, certain features of the preferred stock had
to be accounted for as embedded derivatives, which required mark to market
accounting that could have potentially resulted in significant swings in net
income and earnings per share. The preferred shares agreement has a number of
conversion and redemption provisions which represented derivatives under
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS 133") prior to the elimination of the
mandatory redemption date. The Company determined that certain of these
derivatives do not qualify for scope exemption and are not clearly and closely
related to the host contract. As such these embedded derivatives were required
to be bifurcated and recorded at fair value. The fair value of these derivatives
were calculated using the Black Scholes methodology.
As a result of stockholder approval on May 31, 2002, accretion is no longer
required and the $42.1 million of unamortized beneficial conversion feature was
recognized immediately as a charge to capital in excess of par and as a
reduction of income available to common stockholders in the Consolidated
Statements of Operations. In addition, mark to market accounting for the
embedded derivatives is no longer required subsequent to May 31, 2002. Pursuant
to SFAS 133, the elimination of the mandatory redemption feature made the
preferred shares agreement more akin to an equity instrument than a debt
instrument. Consequently, the embedded derivatives noted above, which related to
the conversion or redemption options, either qualified for a scope exemption or
did not constitute a derivative pursuant to SFAS 133. Therefore, the elimination
of the mandatory redemption feature also eliminated the requirement to mark to
market these derivatives.
14
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
The elimination of the mandatory redemption date does not alter the mezzanine
classification of the preferred shares in the balance sheet because of the
existence of other redemption provisions in the preferred shares agreement, such
as the optional redemption in the event of a change in control by the holder of
the preferred shares. Dividends on the preferred stock will continue to be
accrued and will be reflected as a reduction in earnings per share available to
common stockholders.
The following is a description of the material terms of the preferred stock and
warrants reflecting the effects of the stockholder approval of the transaction
and the elimination of the mandatory redemption date:
Liquidation Preference
The preferred stock has preferences over the common stock 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, subject to the satisfaction of Penton's obligations under the indentures
governing the Company's 10 3/8% Senior Subordinated Notes and 11 7/8% Senior
Secured Notes.
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. The liquidation preference
is the liquidation value plus accrued and unpaid dividends.
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 preference
and the accrued dividends thereon at an annual rate of 5% per annum. From and
after March 19, 2008, the dividends will accrue solely from and including such
date at a rate of 15% per annum. Preferred dividends of $1.4 million were
accrued for at September 30, 2002 ($0.04 per diluted share).
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.
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 and Penton'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 and 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. 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 and the greater of the
volume weighted-average closing share price of Penton's common stock for the
preceding 30 trading
15
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
days, or the applicable minimum share price derived from the following schedule
(as 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
The preferred stockholders' have the right to require the Company to redeem the
security upon the occurrence of certain contingent events, including a change in
control or liquidation, dissolution or winding up of Penton.
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 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) until such failure is no
longer in existence, and every 90 days thereafter, the conversion price shall be
reduced by an additional $0.76 up to a maximum reduction of $3.80 (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. In addition, 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.
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. 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. 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 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.
16
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
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 and
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.
Covenants
The terms of the preferred stock have several financial and non-financial
covenants. As of September 30, 2002, Penton was in compliance with all such
covenants.
Sales Rights
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.
In exchange for removing the scheduled redemption date, the Company agreed to
grant the holders of the preferred stock the right to require us to seek a buyer
for substantially all of our assets or issued and outstanding capital stock
beginning on March 19, 2008. The holders of the preferred stock will not have
this right if less than 3,500 shares of preferred stock (as adjusted for stock
splits and similar transactions) are then outstanding.
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.
17
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 Statement of
Financial Accounting Standard No. 128, "Earnings Per Share." Computations of
basic and diluted earnings per share for the three and nine months ended
September 30, 2002 and 2001 are as follows (in thousands, except per share
amounts):
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2002 2001 2002 2001
---- ---- ---- ----
Net loss applicable to common stockholders $ (243,816) $ (29,495) $ (344,668) $ (36,256)
============ ============ ============ ============
Number of shares:
Weighted average shares outstanding -
basic and diluted 32,548 31,935 32,179 31,914
============ ============ ============ ============
Per share amount - basic and diluted:
Net loss applicable to common stockholders $ (7.49) $ (0.92) $ (10.71) $ (1.14)
============ ============ ============ ============
The preferred stock is a participating security, such that in the event a
dividend is declared or paid on the common stock, the Company must
simultaneously declare and pay a dividend on the preferred stock 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 and nine months
ended September 30, 2002, preferred stock was excluded from the calculation of
basic earnings per share, as the result was not dilutive. The preferred stock
has been considered in the diluted earnings per share calculation under the
"if-converted" method.
Due to the net loss applicable to common stockholders for the nine months ended
September 30, 2002, 1,686,555 stock options, 603,003 performance shares, 796,879
deferred shares, 56,079 restricted stock units, 1,600,000 warrants and 50,000
redeemable preferred shares were excluded from the calculation of diluted
earnings per share, as the result would have been anti-dilutive. Due to the net
loss applicable to common stockholders for the nine months ended September 30,
2001, 1,871,855 stock options, 296,039 performance shares, 56,249 deferred
shares, and 57,449 restricted stock units, 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
In May 2002, the stockholders approved an amendment to increase the number of
authorized shares from 60.0 million to 155.0 million.
STOCKHOLDERS RIGHTS AGREEMENT
The Company has a Stockholders Rights Agreement (the "Rights Agreement") to
protect stockholders 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.
18
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
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.
In March 2002, the Rights Agreement was amended by the board of directors to
permit the sale of convertible preferred stock (see Note 6 - Mandatorily
Redeemable Convertible Preferred Stock) and in July 2002, the Rights Agreement
was amended by the board of directors to change the expiration date of the
rights under the Rights Agreement to be effective at the close of business at
Penton's 2003 annual meeting of stockholders, unless the Rights Agreement is
approved by the stockholders at such annual meeting. The Rights Agreement has no
impact on the consolidated financial statements or earnings per share.
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. The discount is
recorded as compensation expense over the minimum vesting period. For the nine
months ended September 30, 2002 and 2001, $0.06 million and $0.1 million,
respectively were recognized as expense. 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 September 30, 2002, 56,079 RSUs were outstanding. During the
first nine months of 2002, 17,472 shares of the Company's common stock were
issued under this plan.
EXECUTIVE LOAN PROGRAM
The Company has an Executive Loan Program, which allowed Penton to issue shares
of Company common stock at fair market value to six key executives, in exchange
for full recourse notes. In December 2001, the loan notes were amended to cease
interest charges as well as to extend the maturity date from the fifth
anniversary of the first loan date to six months following the seventh
anniversary of the first loan date. No payments are required until maturity, at
which time all outstanding amounts are due.
At September 30, 2002, the outstanding loan balance under the Executive Loan
Program was approximately $9.7 million (including $1.0 million of accrued
interest). During the second quarter of 2002, executive loans of $1.1 million
(including $0.1 million of accrued interest) were repaid. The loan balance is
classified in the Stockholders' Equity section of the Consolidated Balance
Sheets as Notes Receivable Officers/Directors.
19
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
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 stock option plans 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.
In July 2002, Penton filed a Tender Offer Statement related to the exchange by
eligible employees of outstanding options to purchase shares of Penton's common
stock issued under the Penton Media, Inc. 1998 Equity and Performance Incentive
Plan (the "Option Plan") with exercise prices greater than or equal to $16.225
per share for new options to purchase shares of common stock to be issued under
the Option Plan ("New Options"). New Options will be granted on or promptly
after February 23, 2003. The exercise price of the New Options shall be the fair
value of our common stock on the grant date. Each eligible employee will receive
a New Option to acquire one share of Penton's common stock for every two shares
of Penton's common stock subject to an eligible option. The offer to exchange
options under the Tender Offer expired on August 22, 2002, at which time 860,100
options, out of a total of 917,600, had been cancelled.
As of September 30, 2002, 1,686,555 stock options were outstanding under the
1998 Equity and Performance Incentive Plan and the 1998 Director Stock Option
Plan. Options granted under the plans 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 September 30, 2002, 796,879 deferred shares were outstanding. Of the
shares outstanding at September 30, 2002, 740,630 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 the date of grant. In the
first nine months of 2002, 37,100 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 nine months ended September 30, 2002 and 2001, approximately $3.1
million and $0.3 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. At September 30, 2002, 603,003 performance shares are
outstanding.
Performance shares are not issuable until earned. Compensation expense for
performance shares is recorded over the performance period based on an estimate
at the end of each reporting period. The estimate takes into account the
probable number of shares that will be earned by the grantee and the share price
of the Company's common stock at the end of the performance period. For the nine
months ended September 30, 2002 and 2001,
20
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
approximately $(1.4) million and $1.5 million, respectively, were charged
(credited) to expense for these shares. In the third quarter 2002, 50,000 shares
were issued under the plan.
TREASURY STOCK
In the second and third quarters of 2002, three executives returned a total of
115,712 shares to the Company to pay down a portion of the executive loan
balance and to cover taxes for shares issued under the Performance Share
Agreement. The treasury stock of $0.4 million was recorded as a decrease in
Capital in Excess of Par Value.
NOTE 9 - COMPREHENSIVE LOSS
Comprehensive loss for the three and nine months ended September 30, 2002 and
2001 is presented in the following tables:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
---- ---- ---- ----
Net loss $(243,164) $ (29,495) $(299,155) $ (36,256)
Other comprehensive loss:
Reclassification adjustment for realized gain on
securities sold -- -- (808) --
Unrealized loss on securities reported at fair value -- (5,083) -- (8,540)
Net loss on cash flow hedges -- (447) -- (2,412)
Reclassification adjustment of net loss on
cash flow hedges discontinuation -- -- 1,438 --
Foreign currency translation adjustment (263) (284) (591) (1,187)
--------- --------- --------- ---------
Total comprehensive loss $(243,427) $ (35,309) $(299,116) $ (48,395)
========= ========= ========= =========
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 fluctuations
in currency rates relative to these markets. Penton, however, does not manage
this risk using derivative instruments.
The Company was exposed to interest rate risk due to the variable interest rates
of its 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, at September 30, 2002, the Company has no
variable-interest rate debt outstanding.
CASH FLOW HEDGES
In 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.
21
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
Management has decided to continue to hold the derivative instruments until
their maturity, and has carried the derivatives at their fair market value on
the balance sheet, recognizing changes in the fair value in current period
earnings. For the nine months ended September 30, 2002, the Company recognized a
net loss of $1.6 million related to such derivative instruments.
At September 30, 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 September 30, 2002, the interest rate instruments had a negative fair value
of $1.3 million, which is recorded as a liability in Other Accrued Expenses on
the Consolidated Balance Sheets.
In October and November 2002, the derivative instruments expired and the Company
made its final interest payments in the amount of $1.3 million.
NOTE 11 - INCOME TAXES
In the third quarter of 2002, the Company recorded a $38.8 million charge to
establish a valuation allowance for its net deferred tax assets. The valuation
allowance was calculated in accordance with the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). As such, management believes that it is more likely than not that the net
deferred tax assets will not be realized. The Company intends to maintain a full
valuation allowance for its net deferred tax assets until such time as
management believes that it is more likely than not that the net deferred tax
assets will be realized. The charge increased the reported net loss by $1.21 per
diluted share for the nine months ended September 30, 2002.
The Company expects that it will receive a tax refund in excess of $20.0 million
as a result of its updated estimate for net operating losses in 2002,
approximately $19.6 million of which has been recorded as a receivable as of
September 30, 2002. Receipt of the tax refund is expected in the first quarter
of 2003. Including the current estimated tax refund of $20.0 million noted
above, the Company believes it has the potential capacity available to carry
back its net tax loss for 2002 of up to $153.1 million, for a total tax refund
capacity of approximately $53.5 million. The remaining potential tax refund has
not been recorded as the Company cannot guarantee that such tax benefits will be
realized.
NOTE 12 - PENSION PLANS
Penton maintains non-contributory retirement plans for substantially all its
current and former domestic employees. In the third quarter of 2002, as a result
of recent restructuring efforts, lump-sum cash payments to plan participants in
exchange for their rights to receive specified pension benefits, triggering a
need for a revised valuation of our defined benefit pension plan as of August
31, 2002. Pursuant to this revised valuation, the Company has recorded a
curtailment gain of $0.8 million and a settlement gain of $1.1 million as of
September 30, 2002. Such amounts have been recorded as part of Selling, General
and Administrative expenses on the Statements of Operations. Due to this revised
valuation, the Company also updated its assumptions and recorded additional
pension expense of $0.5 million for the nine months ended September 30, 2002.
NOTE 13 - MINORITY INTEREST
In May 2000, Penton purchased 50% of the outstanding stock of a German
Corporation, ComMunic GmbH, which produces trade shows, conferences and business
publications in Germany and its German speaking neighboring countries. In light
of the Company's control of its operations, Penton consolidates ComMunic in it's
Balance Sheets and Statements of Operations.
In September 2002, Penton signed an agreement with Neue Medien, ComMunic's other
shareholder, in which Neue Medien would contributed assets valued at
approximately $2.3 million to ComMunic at no cost. The transfer
22
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
would be effective on October 1, 2002. After consolidation, approximately $1.2
million will be recorded as Minority Interest in Penton's Consolidated Balance
Sheets.
NOTE 14 - RESTRUCTURING CHARGES
THIRD QUARTER 2002 CHARGE
In the third quarter of 2002, Penton recorded a restructuring charge of $3.4
million, or $0.10 per diluted share, for employee termination benefits related
to a reduction of 88 positions of which 36 staff reductions had been completed
by September 30, 2002. Employee termination benefits include payments for
severance, costs of outplacement services and continued benefits.
SECOND QUARTER 2002 CHARGE
In the second quarter 2002, Penton recorded a restructuring charge of $7.8
million ($4.7 million after tax, or $0.15 per diluted share). The charge
included $4.4 million of employee termination benefits related to a reduction of
128 positions, including 112 U.S. employees, with the remainder primarily in the
U.K. Staff reductions for 121 of the 128 positions have been completed by
September 30, 2002. Employee termination benefits include payments for
severance, costs of outplacement services and continued benefits.
In addition to termination benefits, the second quarter charge included $2.7
million related to exit costs associated with the closing of five existing
office locations under long term leases expiring through 2010 and $0.6 million
related to other contractual obligations. Charges for other contractual
obligations include costs associated with the cancellation of a trade show
venue.
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 $1.3 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 $1.3 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 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
23
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
obligations. In the third-quarter of 2001, the Company determined that some
first-quarter 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 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 September 30,
2002 (in thousands):
FIRST SECOND THIRD
ACCRUAL QUARTER QUARTER QUARTER CASH ACCRUAL
12/31/01 CHARGES CHARGES CHARGES PAYMENTS 9/30/02
--------- --------- --------- --------- --------- ---------
DESCRIPTION
-----------
Severance, outplacement and
other continued benefits $ 2,115 $ 1,382 $ 4,437 $ 3,058 $ (5,781) $ 5,211
Facility closing costs 9,134 (1,645) 2,722 296 (2,156) 8,351
Other exit costs 383 -- 610 -- (238) 755
--------- --------- --------- --------- --------- ---------
Total $ 11,632 $ (263) $ 7,769 $ 3,354 $ (8,175) $ 14,317
========= ========= ========= ========= ========= =========
The majority of severance related costs are expected to be paid by the end of
March 2003. The balance of facility costs, which include long-term leases, are
expected to be paid through 2013.
NOTE 15 - 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 are not allocated to each segment.
24
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
Summary information by segment for the three months ended September 30, 2002 and
2001 is as follows (in thousands):
INDUSTRY TECHNOLOGY LIFESTYLE RETAIL
MEDIA MEDIA MEDIA MEDIA TOTAL
----- ----- ----- ----- -----
2002
Revenues $ 23,435 $ 16,321 $ 3,294 $ 5,559 $ 48,609
Adjusted EBITDA $ 3,735 $ (3,594) $ (305) $ 1,887 $ 1,723
2001
Revenues $ 26,899 $ 25,536 $ 3,920 $ 5,168 $ 61,523
Adjusted EBITDA $ 2,638 $ (5,942) $ (151) $ 1,305 $ (2,150)
Summary information by segment for the nine months ended September 30, 2002 and
2001 is as follows (in thousands):
INDUSTRY TECHNOLOGY LIFESTYLE RETAIL
MEDIA MEDIA MEDIA MEDIA TOTAL
----- ----- ----- ----- -----
2002
Revenues $ 72,645 $ 68,594 $ 22,049 $ 14,505 $ 177,793
Adjusted EBITDA $ 11,330 $ (1,554) $ 7,622 $ 4,165 $ 21,563
2001
Revenues $ 95,521 $ 148,897 $ 22,060 $ 14,515 $ 280,993
Adjusted EBITDA $ 15,314 $ 22,713 $ 7,625 $ 3,303 $ 48,955
Segment revenues, all of which are realized from external customers, equal
Penton's consolidated revenues. The following is a reconciliation of Penton's
total segment adjusted EBITDA to consolidated loss before income taxes,
extraordinary item and cumulative effect of accounting change (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
---- ---- ---- ----
Total segment adjusted EBITDA $ 1,723 $ (2,150) $ 21,563 $ 48,955
Depreciation and amortization (5,351) (11,211) (15,491) (33,925)
Restructuring charges (3,354) (9,468) (10,860) (15,035)
Impairment of assets (223,288) (9,663) (223,424) (9,663)
Non cash compensation (231) (443) (1,775) (1,888)
Gain on sale of investments -- -- 1,491 --
Interest expense (9,532) (8,772) (28,452) (21,841)
Interest income 133 509 593 1,328
Minority interest 268 64 159 (1,155)
Miscellaneous, net (106) (858) (338) (1,089)
Corporate costs (3,254) (5,687) (12,929) (19,525)
--------- --------- --------- ---------
Consolidated loss before income taxes,
extraordinary item and cumulative
effect of accounting change $(242,992) $ (47,679) $(269,463) $ (53,838)
========= ========= ========= =========
25
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 16 - GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
The following schedules set forth condensed consolidating balance sheets as of
September 30, 2002 and December 31, 2001, and condensed consolidating statements
of operations and condensed consolidating statements of cash flows for the nine
months ended September 30, 2002 and 2001. In the following schedules, "Parent"
refers to Penton Media, Inc., "Guarantor Subsidiaries" refers to Penton's wholly
owned domestic subsidiaries and "Non-guarantor Subsidiaries" refers to Penton's
foreign subsidiaries. "Eliminations" represents the adjustments necessary to (a)
eliminate intercompany transactions and (b) eliminate the investments in
Penton's subsidiaries.
26
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 16 -- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF SEPTEMBER 30, 2002
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 17,685 $ 271 $ 2,718 $ -- $ 20,674
Accounts and notes receivable, net 33,994 2,324 5,702 -- 42,020
Income taxes receivable 19,576 -- 9 -- 19,585
Inventories 486 401 7 -- 894
Prepayments, deposits and other 3,526 2,215 6,698 -- 12,439
--------- --------- --------- --------- ---------
75,267 5,211 15,134 -- 95,612
--------- --------- --------- --------- ---------
Property, plant and equipment, net 20,035 3,970 2,598 -- 26,603
Goodwill, net 123,645 123,407 6,080 -- 253,132
Other intangibles, net 18,653 13,323 1,800 -- 33,776
Investments (86,924) -- -- 86,924 --
--------- --------- --------- --------- ---------
75,409 140,700 10,478 86,924 313,511
--------- --------- --------- --------- ---------
$ 150,676 $ 145,911 $ 25,612 $ 86,924 $ 409,123
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,022 $ 1,345 $ 871 $ -- $ 8,238
Income taxes payable 1,504 -- (417) -- 1,087
Accrued compensation and benefits 11,555 1,253 168 -- 12,976
Other Accrued Expenses 30,951 2,093 3,355 -- 36,399
Unearned income 18,207 8,850 8,171 -- 35,228
--------- --------- --------- --------- ---------
68,239 13,541 12,148 -- 93,928
--------- --------- --------- --------- ---------
Long-term liabilities and deferred credits:
Senior secured notes, net of discount 79,953 76,817 -- -- 156,770
Senior subordinated notes, net of discount 87,393 83,966 -- -- 171,359
Note payable -- -- 417 -- 417
Net deferred pension credits 13,469 -- -- -- 13,469
Minority interest -- -- 886 -- 886
Intercompany advances (70,319) 26,377 37,537 6,405 --
Other 1,706 323 30 -- 2,059
--------- --------- --------- --------- ---------
112,202 187,483 38,870 6,405 344,960
--------- --------- --------- --------- ---------
Mandatorily redeemable convertible
preferred stock 45,513 -- -- -- 45,513
--------- --------- --------- --------- ---------
Stockholders' equity:
Capital in excess of par value 229,752 209,653 16,614 (226,267) 229,752
Retained earnings (deficit) (292,431) (264,766) (39,361) 304,127 (292,431)
Notes receivable officers/directors (9,703) -- -- -- (9,703)
Accumulated other comprehensive loss (2,896) -- (2,659) 2,659 (2,896)
--------- --------- --------- --------- ---------
(75,278) (55,113) (25,406) 80,519 (75,278)
--------- --------- --------- --------- ---------
$ 150,676 $ 145,911 $ 25,612 $ 86,924 $ 409,123
========= ========= ========= ========= =========
27
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 16-- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF DECEMBER 31, 2001
GUARANTOR NON-GUARANTOR PENTON
PARENT(1) SUBSIDIARIES(2) SUBSIDIARIES(2) 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 11,247 12,232 -- 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 19,411 15,925 -- 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 193,473 -- -- (193,473) --
Investments -- 5,649 -- -- 5,649
------------ ------------ ------------ ------------ ------------
370,950 373,603 42,154 (193,473) 593,234
------------ ------------ ------------ ------------ ------------
$ 442,857 $ 393,014 $ 58,079 $ (193,473) $ 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 32,230 5,159 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
------------ ------------ ------------ ------------ ------------
74,620 23,108 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 -- -- 417 -- 417
Net deferred pension credits 15,140 -- -- -- 15,140
Intercompany advances (214,585) 177,975 28,910 7,700 --
Minority Interest -- -- 1,127 -- 1,127
Other 2,097 384 39 -- 2,520
------------ ------------ ------------ ------------ ------------
147,707 178,359 30,493 7,700 364,259
------------ ------------ ------------ ------------ ------------
Stockholders' equity:
Capital in excess of par value 227,564 209,653 16,614 (226,267) 227,564
Retained earnings (deficit) 6,724 (18,914) (4,816) 23,730 6,724
Notes receivable officers/directors (10,824) -- -- -- (10,824)
Accumulated other comprehensive income (loss) (2,934) 808 (2,172) 1,364 (2,934)
------------ ------------ ------------ ------------ ------------
220,530 191,547 9,626 (201,173) 220,530
------------ ------------ ------------ ------------ ------------
$ 442,857 $ 393,014 $ 58,079 $ (193,473) $ 700,477
============ ============ ============ ============ ============
(1) Reflects investments in subsidiaries utilizing the equity method.
(2) Certain amounts have been reclassified to conform to the current year
presentation.
28
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 16-- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
GUARANTOR NON-GUARANTOR PENTON
PARENT(3) SUBSIDIARIES(3) SUBSIDIARIES(3) ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
REVENUES $ 34,560 $ 12,032 $ 2,017 $ -- $ 48,609
------------ ------------ ------------ ------------ ------------
OPERATING EXPENSES
Editorial, production and circulation 17,386 5,803 699 -- 23,888
Selling, general and administrative 9,121 14,856 2,506 -- 26,483
Restructuring charges 2,254 956 144 -- 3,354
Impairment of assets -- 196,638 26,650 -- 223,288
Depreciation and amortization 2,415 2,610 326 -- 5,351
------------ ------------ ------------ ------------ ------------
31,176 220,863 30,325 -- 282,364
------------ ------------ ------------ ------------ ------------
OPERATING LOSS 3,384 (208,831) (28,308) -- (233,755)
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense, net of interest earned (3,947) (5,380) (72) -- (9,399)
Equity in losses of subsidiaries (231,478) -- -- 231,478 --
Minority interest -- -- 268 -- 268
Miscellaneous, net (106) -- -- -- (106)
------------ ------------ ------------ ------------ ------------
(235,531) (5,380) 196 231,478 (9,237)
------------ ------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (232,147) (214,211) (28,112) 231,478 (242,992)
BENEFIT (PROVISION) FOR INCOME TAXES (11,017) 10,269 576 -- (172)
------------ ------------ ------------ ------------ ------------
NET LOSS $ (243,164) $ (203,942) $ (27,536) $ 231,478 $ (243,164)
============ ============ ============ ============ ============
(3) Certain Parent company level expenses, including interest expense, have been
allocated to the Guarantor and Nonguarantor subsidiaries.
29
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 16-- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
GUARANTOR NON-GUARANTOR PENTON
PARENT(1) SUBSIDIARIES(2) SUBSIDIARIES(2) ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
REVENUES $ 40,622 $ 17,943 $ 2,958 $ -- $ 61,523
------------ ------------ ------------ ------------ ------------
OPERATING EXPENSES:
Editorial, production and circulation 20,318 9,690 3,140 -- 33,148
Selling, general and administrative 22,985 11,923 1,747 -- 36,655
Restructuring charges 9,468 -- -- -- 9,468
Impairment of other assets 8,558 910 195 -- 9,663
Depreciation and amortization 9,591 1,380 240 -- 11,211
------------ ------------ ------------ ------------ ------------
70,920 23,903 5,322 -- 100,145
------------ ------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) (30,298) (5,960) (2,364) -- (38,622)
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense, net of interest earned (9,281) 1,094 (76) -- (8,263)
Equity in losses of subsidiaries (9,570) -- -- 9,570 --
Minority interest -- -- 64 -- 64
Miscellaneous, net (592) (228) (38) -- (858)
------------ ------------ ------------ ------------ ------------
(19,443) 866 (50) 9,570 (9,057)
------------ ------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (49,741) (5,094) (2,414) 9,570 (47,679)
BENEFIT (PROVISION) FOR INCOME TAXES 20,246 (2,634) 572 -- 18,184
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (29,495) $ (7,728) $ (1,842) $ 9,570 $ (29,495)
============ ============ ============ ============ ============
(1) Reflects investments in subsidiaries utilizing the equity method.
(2) Certain amounts have been reclassified to conform to the current year
presentation.
30
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 16-- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
GUARANTOR NON-GUARANTOR PENTON
PARENT(3) SUBSIDIARIES(3) SUBSIDIARIES(3) ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
REVENUES $ 118,537 $ 45,928 $ 13,328 $ -- $ 177,793
------------ ------------ ------------ ------------ ------------
OPERATING EXPENSES
Editorial, production and circulation 52,654 20,739 5,152 -- 78,545
Selling, general and administrative 47,796 34,867 9,726 -- 92,389
Restructuring charges 8,301 1,273 1,286 -- 10,860
Impairment of assets -- 196,638 26,786 -- 223,424
Depreciation and amortization 7,103 7,316 1,072 -- 15,491
------------ ------------ ------------ ------------ ------------
115,854 260,833 44,022 -- 420,709
------------ ------------ ------------ ------------ ------------
OPERATING LOSS 2,683 (214,905) (30,694) -- (242,916)
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense, net of interest earned (16,062) (11,577) (220) -- (27,859)
Gain on sale of investments 1,491 -- -- -- 1,491
Equity in losses of subsidiaries (280,397) -- -- 280,397 --
Minority interest -- -- 159 -- 159
Miscellaneous, net (457) -- 119 -- (338)
------------ ------------ ------------ ------------ ------------
(295,425) (11,577) 58 280,397 (26,547)
------------ ------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES, EXTRAORDINARY ITEM
AND CUMULATIVE EFFECTS OF ACCOUNTING CHANGE (292,742) (226,482) (30,636) 280,397 (269,463)
BENEFIT (PROVISION) FOR INCOME TAXES (6,579) 15,091 1,330 -- 9,842
------------ ------------ ------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE (299,321) (211,391) (29,306) 280,397 (259,621)
EXTRAORDINARY ITEM, NET OF TAXES 166 -- -- -- 166
CUMULATIVE EFFECT OF ACCOUNTING CHANGE -- (34,461) (5,239) -- (39,700)
------------ ------------ ------------ ------------ ------------
NET LOSS $ (299,155) $ (245,852) $ (34,545) $ 280,397 $ (299,155)
============ ============ ============ ============ ============
(3) Certain Parent Company level expenses, including interest expense, have been
allocated to the Guarantor and Nonguarantor subsidiaries.
31
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 16-- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
GUARANTOR NON-GUARANTOR PENTON
PARENT(1) SUBSIDIARIES(2) SUBSIDIARIES(2) ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
REVENUES $ 153,553 $ 95,842 $ 31,598 $ -- $ 280,993
------------ ------------ ------------ ------------ ------------
OPERATING EXPENSES:
Editorial, production and circulation 68,016 36,481 12,663 -- 117,160
Selling, general and administrative 79,218 43,591 13,482 -- 136,291
Restructuring charges 15,035 -- -- -- 15,035
Impairment of other assets 8,558 910 195 -- 9,663
Depreciation and amortization 28,947 4,435 543 -- 33,925
------------ ------------ ------------ ------------ ------------
199,774 85,417 26,883 -- 312,074
------------ ------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) (46,221) 10,425 4,715 -- (31,081)
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense, net of interest earned (23,909) 3,665 (269) -- (20,513)
Equity in losses of subsidiaries 11,374 -- -- (11,374) --
Minority interest -- -- (1,155) -- (1,155)
Miscellaneous, net (808) (228) (53) -- (1,089)
------------ ------------ ------------ ------------ ------------
(13,343) 3,437 (1,477) (11,374) (22,757)
------------ ------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (59,564) 13,862 3,238 (11,374) (53,838)
BENEFIT (PROVISION) FOR INCOME TAXES 23,308 (4,544) (1,182) -- 17,582
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (36,256) $ 9,318 $ 2,056 $ (11,374) $ (36,256)
============ ============ ============ ============ ============
(1) Reflects investments in subsidiaries utilizing the equity method.
(2) Certain amounts have been reclassified to conform to the current year
presentation.
32
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 16-- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
CASH FLOWS PROVIDED BY (USED FOR) OPERATING
ACTIVITIES $ 1,483 $ (7,380) $ 7,022 $ -- $ 1,125
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,418) (102) (380) -- (2,900)
Acquisitions, including earnouts paid,
net of cash acquired (687) (41) (4,792) -- (5,520)
Proceeds from sale of Jupitermedia Corporation
stock -- 5,801 -- -- 5,801
------------ ------------ ------------ ------------ ------------
Net cash provided by (used for)
investing activities (3,105) 5,658 (5,172) -- (2,619)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of mandatorily
redeemable convertible preferred stock 46,111 -- -- -- 46,111
Proceeds from senior secured notes 156,717 -- -- -- 156,717
Repayment of senior subordinated notes (8,375) -- -- -- (8,375)
Repayment of senior credit facility (180,587) -- -- -- (180,587)
Payment of short term note payable -- -- (2,804) -- (2,804)
Employee stock purchase plan (351) -- (8) -- (359)
Payment of financing costs (9,450) -- -- -- (9,450)
Proceeds from repayment of
officers/directors loans 703 -- -- -- 703
------------ ------------ ------------ ------------ ------------
Net cash provided by (used for)
financing activities 4,768 -- (2,812) -- 1,956
------------ ------------ ------------ ------------ ------------
Effect of exchange rate 21 -- -- -- 21
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and
equivalents 3,167 (1,722) (962) -- 483
Cash and equivalents at beginning of period 14,518 1,993 3,680 -- 20,191
------------ ------------ ------------ ------------ ------------
Cash and equivalents at end of period $ 17,685 $ 271 $ 2,718 $ -- $ 20,674
============ ============ ============ ============ ============
33
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 16-- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
CASH FLOWS PROVIDED BY (USED FOR) OPERATING
ACTIVITIES $ (20,958) $ (2,243) $ 7,406 $ 1,043 $ (14,752)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,995) (1,620) (2,763) -- (8,378)
Acquisitions, including earnouts paid,
net of cash acquired (14,839) (2,442) (2,979) -- (20,260)
------------ ------------ ------------ ------------ ------------
Net cash used for investing activities (18,834) (4,062) (5,742) -- (28,638)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior subordinated notes 180,836 -- -- -- 180,836
Repayment of senior debt facility (163,207) -- -- -- (163,207)
Proceeds from senior debt facility 45,000 -- -- -- 45,000
Repayment of notes payable -- -- (201) -- (201)
Employee stock purchase plan payments (197) -- -- -- (197)
Proceeds from deferred shares and options
exercised 1,145 -- -- -- 1,145
Payment of financing costs (1,246) -- -- -- (1,246)
Dividends paid (1,912) -- -- -- (1,912)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used for)
financing activities 60,419 -- (201) -- 60,218
------------ ------------ ------------ ------------ ------------
Effect of exchange rate (28) -- -- -- (28)
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and
equivalents 20,599 (6,305) 1,463 1,043 16,800
Cash and equivalents at beginning of period -- 8,678 3,970 (1,043) 11,605
------------ ------------ ------------ ------------ ------------
Cash and equivalents at end of period $ 20,599 $ 2,373 $ 5,433 $ -- $ 28,405
============ ============ ============ ============ ============
34
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 17 -- SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
The following transactions did not provide for or require the use of cash and,
accordingly, are not reflected in the Consolidated Statements of Cash Flows.
For the nine months ended September 30, 2002, Penton issued 527,951 common
shares as contingent consideration, 17,472 shares under the Management Stock
Purchase Plan, 37,100 shares under the Deferred Shares Plan and 50,000 shares
under the Performance Share Plan to several officers and other key employees. In
addition, three executives returned a total of 115,712 shares to the Company to
pay down a portion of the executive loan balance and to cover taxes for shares
issued under the Performance Share Plan. Furthermore, for the nine months ended
September 30, 2002, Penton recorded amortization of deemed dividend and
accretion on preferred stock of $45.5 million.
For the nine months ended September 30, 2001, Penton marked to market its
investment in Jupitermedia Corporation stock by a negative $0.9 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.
35
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, fluctuations in advertising revenue
with general economic cycles; the performance of Internet/broadband trade shows
and conferences; the seasonality of revenue from publishing and trade shows and
conferences; the success of new products; increases in paper and postage costs;
the infringement or invalidation of Penton's intellectual property rights; the
inability to dispose of assets on acceptable terms or to realize the full
benefits of its disposition strategy; pending litigation, government regulation,
competition, technological change, and international operations.
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 RETAIL 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
NYSE LISTING
In the third quarter of 2002, the New York Stock Exchange (NYSE) notified the
Company that it had fallen below its minimum listing standards. In October 2002,
the Company submitted a plan to the NYSE outlining
36
how it intends to comply with the NYSE's continued listing criteria. After
reviewing Penton's plan, the NYSE will either accept it (following which the
Company will be monitored for compliance), or not accept it (in which event the
Company's common stock will be subject to trading suspension and delisting).
The NYSE is expected to make a determination by early December 2002 as to
whether to accept Penton's plan. If Penton's shares cease to be traded on the
NYSE, the Company will pursue having its shares included on the over-the-counter
bulletin board to facilitate future trading.
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
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 (as amended on
June 4, 2002 on Form S-3/A) 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 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.
- Dividends accrue at an annual rate of 5% per annum. 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 can 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 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). Until such failure is no longer
in existence, every 90 days the conversion price shall be reduced by an
additional $0.76 up to a maximum reduction of $3.80 (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
37
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.
- We have registered the common stock issuable upon conversion of the
convertible preferred stock and exercise of the warrants.
- 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. Interest is payable on the Secured Notes
semi-annually on April 1 and October 1. The Secured Notes are fully and
unconditionally, jointly and severally, guaranteed on a senior basis by all of
our domestic subsidiaries, which are 100% owned by the Company. We may redeem
the Secured Notes, in whole or in part, during the periods October 1, 2005
through October 1, 2006 and thereafter at redemption prices of 105.9375% and
100.0000% of the principal amount, respectively, together with accrued and
unpaid interest. 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 $150.1 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 $8.3 million
(excluding interest). The remaining net proceeds of $9.2 million were used for
general corporate purposes. The Secured Notes rank senior in right to all of our
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 $0.4 million at September 30, 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. Our ability to obtain dividends from our
subsidiaries is only restricted if we are in default under our debt arrangement
or if we have exceeded our limitation of additional indebtedness, as specified
in such agreement.
In March 2002, Penton amended and restated its senior credit facility and repaid
in full 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 Jupitermedia
Corporation 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 as mentioned above. The amended and restated credit agreement
provides for a revolving credit facility of up to a maximum amount of $40.0
million. Availability under the revolving credit facility is determined by a
borrowing base that is limited to 80% of eligible receivables. In order to
access the revolver, Penton 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 showing compliance with the borrowing base. Penton is required to prepay
the revolver in the event that it has loans outstanding in excess of the
borrowing base, or it has more than $7.5 million in cash and cash equivalents at
the end of any month. The amended and restated credit facility has no financial
covenants. In connection with the amendment and restatement of the credit
facility, the interest rate on the revolving credit facility was increased. In
addition, further restrictions were placed on Penton's ability to made certain
restricted payments, to make capital expenditures in excess of certain amounts,
to incur additional debt and contingent obligations, to make acquisitions and
investments, and to sell assets.
38
EXPENSE REDUCTION INITIATIVES
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 have included workforce reductions, elimination
of unprofitable properties, and the shutdown or consolidation of certain
facilities. Through the first nine months of 2002, operating costs were reduced
by $82.5 million, or 32.6%, compared with the same period in 2001. Specific
actions taken are as follows:
- We reduced staffing levels in 2002 by nearly 400 positions through
terminations and attrition.
- We imposed a company-wide hiring freeze, as well as a salary freeze for
higher-paid employees.
- We shut down or consolidated more than 25 facilities worldwide.
- We reduced benefit costs by increasing employee contributions for
health care, temporarily suspending the company match for our defined
contribution plan, and reducing year-end discretionary bonuses.
- We eliminated unprofitable properties, including 7 magazines, more than
30 events and nearly 20 Web sites.
- We restructured various under-performing events by either eliminating
these events or by co-locating with other events and realigning
management structures.
- 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 commenced a plan to centralize all information technology and
accounting services.
- We effectively outsourced various corporate and divisional functions.
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2001
TOTAL COMPANY
Our revenues, net loss, net loss applicable to common stockholders, diluted
earnings per share, adjusted EBITDA, and adjusted EBITDA margin for the three
months ended September 30, 2002 and 2001 are as follows:
2002 2001 VARIANCE
---- ---- --------
Revenues $ 48,609 $ 61,523 $ (12,914)
=========== =========== ===========
Net loss $ (243,164) $ (29,495) $ (213,669)
=========== =========== ===========
Net loss applicable to
common stockholders $ (243,816) $ (29,495) $ (214,321)
=========== =========== ===========
Net loss applicable to common
stockholders per share - diluted $ (7.49) $ (0.92) $ (6.57)
=========== =========== ===========
Adjusted EBITDA $ (1,531) $ (7,837) $ 6,306
=========== =========== ===========
Adjusted EBITDA margin (3.1)% (12.7)% 9.6%
=========== =========== ===========
39
Operating results for the three months ended September 30, 2002 continued 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. Our media properties serving
the technology markets, including information technology, Internet/broadband,
and telecommunications, continued to show a downward trend, as did our
properties serving the manufacturing sector. However, our products which serve
the natural products food/retail, government/compliance, and mechanical
systems/construction markets performed well during the quarter.
Our revenues decreased $12.9 million, or 21.0%, from $61.5 million for the three
months ended September 30, 2001 to $48.6 million for the same period in 2002.
The decrease was due primarily to: (i) a decrease in publishing revenues of $7.6
million, or 15.3%, from $49.8 million for the three months ended September 30,
2001 to $42.1 million for the same period in 2002; and (ii) a decrease in trade
show and conference revenues of $5.4 million, or 61.4%, from $8.8 million for
the three months ended September 30, 2001 to $3.4 million for the same period in
2002. These decreases were slightly offset by a $0.1 million increase in online
media revenues.
We reported a net loss for the three months ended September 30, 2002 of $243.2
million compared with a net loss of $29.5 million for the same period in 2001.
The 2002 results reflect: (i) the elimination of the amortization of goodwill of
approximately $4.1 million, pursuant to our adoption of SFAS 142 on January 1,
2002; (ii) a non-cash impairment charge of $203.3 million, or $6.25 per diluted
share after tax, related to a goodwill impairment review as of September 30,
2002; (iii) a non-cash impairment charge related to other intangible assets of
approximately $20.0 million, or $0.61 per diluted share after tax; and (iv) a
restructuring charge of $3.4 million, or $0.10 per diluted share after tax,
related to staff reductions. Unusual items in the third quarter of 2001 include:
(i) a non-cash impairment charge of $9.6 million, or $0.18 per diluted share
after tax, for goodwill write-downs and asset impairments; and (ii) a
restructuring charge of $9.5 million, or $0.18 per diluted share after tax,
related to the discontinuation of certain media properties, staff reductions and
facility closings.
The net loss applicable to common stockholders of $243.8 million, or $7.49 per
diluted share, for the three months ended September 30, 2002, includes $0.7
million ($0.02 per diluted share) for accrued dividends on the Company's
mandatorily redeemable preferred stock.
Total adjusted EBITDA increased $6.3 million, or 80.5%, from a loss of $7.8
million for the three months ended September 30, 2001 to a loss of $1.5 million
for the same period in 2002. Adjusted EBITDA margin increased from a negative
12.7% for the third quarter of 2001 to a negative 3.1% for the same period in
2002. The improvements in both our adjusted EBITDA and adjusted EBITDA margin
during the third quarter of 2002 compared with the third quarter of 2001 were
primarily due to a decrease of over $4.0 million in general and administrative
costs, as well as an improvement of $1.4 million for our online media products.
Online media margin improved from a negative 26.5% in 2001 to a positive 21.2%
in 2002. Publishing adjusted EBITDA improved approximately $0.6 million
quarter-over-quarter, as publishing margin improved from 15.3% for the third
quarter of 2001 to 19.6% for the third quarter of 2002. Trade show and
conference adjusted EBITDA improved slightly from a negative $6.1 million for
the three months ended September 30, 2001 to negative $5.9 million for the same
period in 2002.
40
A reconciliation of our net loss to our total adjusted EBITDA for the three
months ended September 30, 2002 and 2001, is as follows (in thousands):
2002 2001
---- ----
Net loss $ (243,164) $ (29,495)
Interest expense 9,532 8,772
Interest income (133) (509)
Restructuring charges 3,354 9,468
Impairment of assets 223,288 9,663
Non-cash compensation 231 443
Provision (benefit) for income taxes 172 (18,184)
Depreciation and amortization 5,351 11,211
Minority interest (268) (64)
Miscellaneous, net 106 858
------------ ------------
Adjusted EBITDA $ (1,531) $ (7,837)
============ ============
OPERATING EXPENSES
Operating expenses increased $182.2 million, or 182.0%, from $100.1 million for
the three months ended September 30, 2001 to $282.4 million for the same period
in 2002. The increase was primarily due to the impairment charge of $223.3
million taken in the third quarter. As a percentage of revenues, excluding
restructuring, impairment of asset, and depreciation and amortization charges,
operating costs decreased from 113% in 2001 to 104% in 2002. The decrease in
operating expenses as a percentage of revenues was primarily due to reduced
costs of $19.2 million attributable to cost cutting and restructuring
activities implemented by the Company.
Editorial, Production and Circulation
Editorial, production and circulation expenses decreased to $23.9 million for
the three months ended September 30, 2002, compared to $33.1 million for the
same period in 2001, representing a decrease of $9.3 million, or 27.9%. The
decrease was due to our various expense reduction initiatives, including
eliminating unprofitable properties, reducing production costs through process
improvements and selective reductions in frequency and circulation levels, the
outsourcing of various functions throughout the organization, and the effects of
staff reductions in 2002 and the second half of 2001.
As a percentage of revenues, editorial, production and circulation expenses
decreased from 53.9% in the third quarter of 2001 to 49.1% in the same period of
2002. The decrease was due to the expense reduction initiatives discussed above.
Selling, General and Administrative
Selling, general and administrative expenses declined $9.9 million, or 27.5%,
from $36.2 million for the three months ended September 30, 2001 to $26.3
million for the same period in 2002, primarily due to cost savings associated
with office closings and staff reductions realized from the restructuring
actions taken in the second half of 2001 and in 2002.
As a percentage of revenues, selling, general and administrative expenses
decreased from 58.9% in 2001 to 54.0% in 2002. The decrease was primarily due to
the cost savings indicated above.
41
Impairment of Assets
As a result of certain triggering events (See Note 2 - Goodwill and Other
Intangibles) the Company completed an impairment review at September 30, 2002
and recorded a non-cash charge of approximately $203.3 million to reduce the
carrying value of goodwill for two reporting units in our Technology Media
segment.
The Company also completed an assessment at September 30, 2002 in accordance
with SFAS 144, and recorded a non-cash charge of $20.0 million. See Note 2 -
Goodwill and Other Intangibles.
Restructuring Charge
The restructuring charge of $3.4 million, or $0.06 per diluted share after tax,
primarily consists of employee termination benefits costs. Personnel costs
include payments for severance, costs of outplacement services and a provision
for continued health benefits. See Note 14 - Restructuring Charges, for
information on related cash payments.
Depreciation and Amortization
Depreciation and amortization declined $5.9 million, or 52.3%, from $11.2
million for the three months ended September 30, 2001 to $5.4 million for the
three months ended September 30, 2002 due to lower amortization expense
resulting from the adoption of SFAS 142 on January 1, 2002.
OTHER INCOME (EXPENSE)
Interest expense increased $0.8 million, or 8.7%, from $8.8 million for the
three months ended September 30, 2001, to $9.5 million for the three months
ended September 30, 2002. The increase was primarily due to the higher interest
rate on our senior secured notes of 11.875% in 2002 compared with the rate on
our senior secured credit facility of approximately 8.0% in 2001 offset by lower
average levels of debt outstanding during the period.
EFFECTIVE TAX RATES
The effective tax rates were 38.1% and 0% for the three months ended September
30, 2001 and 2002, respectively. 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 and the valuation allowance
established for net deferred tax assets as of September 30, 2002. In the third
quarter of 2002, the Company recorded a valuation allowance of $38.8 million
against its net deferred tax assets. In recording the valuation allowance,
management considered it was more likely than not that all of the net deferred
tax asset would not be realized.
SEGMENTS
We manage our business based on four operating segments: Industry Media,
Technology Media, Lifestyle Media and Retail Media (previously called 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, legal and information systems, which are
not allocated to each segment. See Note 15 - Segment Information, for a
reconciliation of segment total adjusted EBITDA to consolidated net loss before
taxes, extraordinary item, and cumulative effect of accounting change.
42
Financial information by segment for the three months ended September 30, 2002
and 2001 is summarized in the following table (in thousands):
ADJUSTED EBITDA
REVENUES ADJUSTED EBITDA MARGIN
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
Industry Media $ 23,435 $ 26,899 $ 3,735 $ 2,638 15.9% 9.8%
Technology Media 16,321 25,536 (3,594) (5,942) (22.0)% (23.3)%
Lifestyle Media 3,294 3,920 (305) (151) (9.3)% (3.9)%
Retail Media 5,559 5,168 1,887 1,305 33.9% 25.3%
-------- -------- -------- --------
Total $ 48,609 $ 61,523 $ 1,723 $ (2,150)
======== ======== ======== ========
Industry Media
Our Industry Media segment, which represented 48.2% of total Company revenues in
the third 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 September 30, 2002, decreased $3.5 million, or 12.9%, from
$26.9 million in 2001 to $23.4 million in 2002. The decrease was primarily due
to lower revenues from publications of $2.6 million and lower revenues from
trade shows and conferences of $0.9 million when comparing the third quarter of
2002 to the same period in 2001. The decrease in publication revenues was
primarily due to revenue declines in products serving the design/engineering and
supply chain sectors, which were impacted by the downturn in the U.S. economy.
Most significantly affected were, Machine Design, Motion System Design and
Material Handling Management magazines which accounted for approximately $0.8
million of the decrease. The decrease in trade show and conference revenues was
primarily due to products serving the manufacturing sector which accounted for
approximately $1.3 million of the decrease, offset in part by increases in our
supply chain and construction sectors. The decrease in the manufacturing sector
was primarily due to cancelled trade shows. The increase in the supply chain
sector was due to the move of the Supply Chain & Logistics Conference and Expo
from the second quarter of 2001 to the third quarter of 2002.
Total adjusted EBITDA for the Industry Media segment increased $1.1 million, or
41.6%, from $2.6 million for the three months ended September 30, 2001, to $3.7
million during the same period in 2002. General and administrative and facility
cost improvements accounted for $1.0 million of this increase. Adjusted EBITDA
margin increased from 9.8% in 2001 to 15.9% in 2002 due primarily to the cost
savings noted above.
Technology Media
Our Technology Media segment, which represented 33.6% of total company revenues
in the third quarter of 2002, serves customers in the electronics, information
technology and Internet/broadband markets. Total revenues for this segment
decreased $9.2 million, or 36.1%, from $25.5 million for the three months ended
September 30, 2001 to $16.3 million for the same period in 2002. The decrease
was primarily due to lower revenues from publications of $5.4 million and lower
revenues from trade shows and conferences of $3.9 million. Publications such as
Electronic Design, Microwaves & RF, EE Product News, Windows & .Net Magazine,
iSeries NEWS, Internet World and Boardwatch magazines were the most
significantly impacted and accounted for approximately $3.6 million of the
publishing decrease. Trade show revenues in our Internet/broadband sector
accounted for $3.3 million of the total trade show and conference decrease with
our Internet World Summer, Internet World Australia, and Internet World India
shows accounting for $3.0 million of the sectors decrease due to the
cancellation of these shows. Online revenues increased $0.1 million from $2.3
million for the three months ended September 30, 2001 to $2.4 million in the
same 2002 period.
Total adjusted EBITDA for the Technology Media segment improved $2.3 million, or
39.5%, from a loss of $5.9 million for the three months ended September 30, 2001
to a loss of $3.6 million for the same period in 2002. The
43
increase was primarily due to an increase of $0.9 million in the segment's
online media portfolio, as well as a decrease of $2.3 million in general and
administrative, and facility costs. These improvements were offset by a decrease
in trade show and conference adjusted EBITDA of $0.8 million. Adjusted EBITDA
for publishing was flat as compared with last year.
Lifestyle Media
Our Lifestyle Media segment, which represented 6.8% of total-company revenues in
the third quarter of 2002, serves customers in the natural products industry
sector. Total revenues for this segment decreased by $0.6 million, or 16.0%,
from $3.9 million for the three months ended September 30, 2001 to $3.3 million
for the same period in 2002. Declines in trade show revenues accounted for all
of the decrease for this segment as publication and online media revenues were
flat when compared with the same prior-year period. The decrease in trade show
revenues was primarily due to a shift in the timing of our Nutracon conference
from the third quarter in 2001 to the first quarter in 2002.
Total adjusted EBITDA for Lifestyle Media decreased $0.1 million, or 102.0%,
from a loss of $0.2 million for the three months ended September 30, 2001, to a
loss of $0.3 million for the same period in 2002 due primarily to the move of
the Nutracon conference, as noted above. Adjusted EBITDA margin decreased from a
negative 4.0% in 2001 to a negative 9.3% in 2002.
Retail Media
Our Retail Media segment, which represented 11.4% of total-company revenues for
the third quarter of 2002, serves customers in the food/retail and
leisure/hospitality sectors. Total revenues for this segment increased $0.4
million, or 7.6%, from $5.2 million for the three months ended September 30,
2001 to $5.6 million for the comparable period in 2002. Publishing revenues for
this segment accounted for $0.2 million of the increase, while trade shows and
conferences and online media revenues accounted for the other $0.2 million of
the increase.
Total adjusted EBITDA for Retail Media increased $0.6 million, or 44.6%, from
$1.3 million for the three months ended September 30, 2001, to $1.9 million for
the same 2002 period. Publishing and trade shows and conferences, each accounted
for $0.3 million of the increase.
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 are not allocated. Our
calculation of adjusted EBITDA by product for the three months ended September
30, 2002 and 2001 is as follows (in thousands):
2002 2001
---------- --------
Publishing $ 8,243 $ 7,625
Trade shows & conferences (5,868) (6,083)
Online media 653 (777)
--------- ---------
Subtotal 3,028 765
General and administrative (4,559) (8,602)
---------- ---------
Adjusted EBITDA $ (1,531) $ (7,837)
========== =========
44
For the three months ended September 30, 2002, adjusted EBITDA for the Company's
publishing operations increased $0.6 million, or 8.1%, when compared with the
same prior-year period. Although revenue declined in the Company's publishing
properties, adjusted EBITDA increased due to the cost reduction initiatives
noted above. The increase was not due to any particular individual title but
rather a general increase across a number of various titles between the periods
presented.
The third quarter is historically Penton's lightest quarter for trade show
activity. For the three months ended September 30, 2002, adjusted EBITDA for the
Company's trade show and conference operations improved $0.2 million, or 3.5%,
when compared with the same prior-year period. Year-on-year comparisons were
primarily impacted by the cancellation of several global Internet industry
events and small regional manufacturing events, as well as by the shift in
timing of four small events.
Adjusted EBITDA for the Company's online media operations increased from a loss
of $0.8 million for the three months ended September 30, 2001, to income of $0.7
million for the same period in 2002. The improvement was due primarily to
year-on-year growth of online products, organic product development within the
Technology Media segment, and the elimination of unprofitable properties in
2001.
For the three months ended September 30, 2002, general and administrative costs
decreased $4.0 million, or 47%, when compared with the same prior-year period.
The decrease was primarily due to staff reductions and other cost cutting
efforts implemented in the second half of 2001 and in 2002.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2001
TOTAL COMPANY
Our revenues, net loss, net loss applicable to common stockholders, diluted
earnings per share, adjusted EBITDA, and adjusted EBITDA margin for the nine
months ended September 30, 2002 and 2001 are as follows:
2002 2001 VARIANCE
---- ---- --------
Revenues $ 177,793 $ 280,993 $ (103,200)
============ =========== ===========
Net loss $ (299,155) $ (36,256) $ (262,899)
============ =========== ===========
Net loss applicable to
common stockholders $ (344,668) $ (36,256) $ (308,412)
============ =========== ===========
Net loss applicable to common
stockholders per share - diluted $ (10.71) $ (1.14) $ (9.57)
============ =========== ===========
Adjusted EBITDA $ 8,634 $ 29,430 $ (20,796)
============ =========== ===========
Adjusted EBITDA margin 4.9% 10.5% (5.6)%
============ =========== ===========
Operating results for the nine months ended September 30, 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. Our media properties serving
the technology markets, including information technology, Internet/broadband,
and telecommunications, continued to show a downward trend. Our manufacturing
media products are also experiencing declines, although our products serving the
natural products, food/retail, government/compliance, and mechanical
systems/construction markets performed well.
45
Our revenues decreased $103.2 million, or 36.7%, from $281.0 million for the
nine months ended September 30, 2001 to $177.8 million for the same period in
2002. The decrease was due primarily to: (i) a decrease in publishing revenues
of $38.3 million, or 23.2%, from $165.3 million for the nine months ended
September 30, 2001 to $127.0 million for the same period in 2002; (ii) a
decrease in trade show and conference revenues of $64.7 million, or 61.0%, from
$106.2 million for the nine months ended September 30, 2001 to $41.5 million for
the same period in 2002; and (iii) a decrease in online media revenues of $0.1
million, from $9.5 million for the nine months ended September 30, 2001 to $9.3
million for the same period in 2002. Specifically, weak performance in our
global portfolio of Internet/broadband trade shows held during the year
represented $61.1 million, or 59.2%, of the total revenue decline. In addition,
significant declines were also experienced in our electronics, information
technology and manufacturing markets, which accounted for approximately $29.0
million, or 28.1% of the decline.
We reported a net loss for the nine months ended September 30, 2002 of $299.2
million compared with a net loss of $36.3 million for the same period in 2001.
The 2002 results reflect: (i) the elimination of the amortization of goodwill of
approximately $12.5 million, pursuant to our adoption of SFAS 142 on January 1,
2002; (ii) a non-cash transitional goodwill impairment charge of $39.7 million
net of taxes, or $1.22 per diluted share after tax, which is recorded as a
cumulative effect of accounting change on the Consolidated Statements of
Operations; (iii) a non-cash impairment charge of $203.3 million, or $6.32 per
diluted share after tax, related to an additional goodwill impairment review as
of September 30, 2002; (iv) a non-cash impairment charge related to other
intangible assets of approximately $20.0 million, or $0.62 per diluted share
after tax; and (v) a restructuring charge of $10.9 million, or $0.34 per diluted
share after tax, related to staff reductions and office closing. Unusual items
for the nine months ended September 30, 2001 include: (i) an non-cash impairment
charge of $9.6, or $0.18 per diluted share after tax, for goodwill write-downs
and asset impairments; and (ii) a restructuring charge of $15.0 million, or
$0.28 per diluted share after tax, related to the discontinuation of certain
media properties, staff reductions and facility closings.
The net loss applicable to common stockholders of $344.7 million, or $10.71 per
diluted share, for the nine months ended September 30, 2002, includes a $45.5
million ($1.41 per diluted share) one-time, non-cash charge, which was the
result of stockholder approval on May 31, 2002, to remove the 10-year mandatory
redemption date on the preferred stock. Subsequent to this approval, the Company
ceased accretion on the preferred stock and was required to recognize the
unamortized beneficial conversion feature of the stock immediately as a charge
to capital in excess of par value.
Total adjusted EBITDA decreased $20.8 million, or 70.7%, from $29.4 million for
the nine months ended September 30, 2001 to $8.6 million for the same period in
2002. Adjusted EBITDA margin decreased from 10.5% for the first nine months of
2001 to 4.9% for the same period in 2002. The decrease in both our adjusted
EBITDA and adjusted EBITDA margin was primarily due to the decrease in our trade
show and conference operations of $32.4 million, or 92.1%, from $35.2 million
for the nine months ended September 30, 2001 to $2.8 million for the same period
in 2002. Adjusted EBITDA margin for trade shows and conferences decreased from
33.2% in the first nine months of 2001 to 6.8% for the same period in 2002. Weak
performance in our global portfolio of Internet/broadband trade shows held in
2002 represented 117.1% of the total decrease in adjusted EBITDA. Publishing
adjusted EBITDA decreased $1.9 million, or 8.4%, from $23.0 million for the nine
months ended September 30, 2001 to $21.0 million for the same period in 2002.
These decreases were somewhat offset by a reduction in general and
administrative costs of $8.8 million, or 34.0%, from $26.1 million in the first
nine months of 2001 to $17.2 million for the same period in 2002 as well as an
improvement in Online media adjusted EBITDA of $4.7 million from a negative $2.7
million for the nine months ended September 30, 2001 to a positive $2.0 million
for the same period in 2002.
46
A reconciliation of our net loss to our adjusted EBITDA for the nine months
ended September 30, 2002 and 2001 is as follows (in thousands):
2002 2001
---- ----
Net loss $ (299,155) $ (36,256)
Interest expense 28,452 21,841
Interest income (593) (1,328)
Gain on sale of investments (1,491) -
Restructuring charges 10,860 15,035
Impairment of assets 223,424 9,663
Non-cash compensation 1,775 1,888
Benefit for income taxes (9,842) (17,582)
Depreciation and amortization 15,491 33,925
Extraordinary item (166) -
Minority interest (159) 1,155
Cumulative effect of accounting change 39,700 -
Miscellaneous, net 338 1,089
------------ --------------
Adjusted EBITDA $ 8,634 $ 29,430
============ ==============
OPERATING EXPENSES
Operating expenses increased $108.6 million, or 34.8%, from $312.1 million for
the nine months ended September 30, 2001 to $420.7 million for the same period
in 2002. Excluding restructuring, impairment of asset, and depreciation and
amortization charges, operating costs decreased $82.5 million, or 32.6%, from
$253.5 million for the nine months ended September 30, 2001 to $170.9 million
for the same period in 2002, although operating expenses as a percentage of
revenues increased from 90.2% in 2001 to 96.1% in 2002. The increase in
operating expenses as a percentage of revenues was primarily due to the $103.2
million decline in revenues, which was attributable to the impact of the economy
on our business, only partially offset by the effects from cost reduction
initiatives and restructuring activities through the first nine months of 2002.
Editorial, Production and Circulation
Editorial, production and circulation expenses decreased to $78.5 million for
the nine months ended September 30, 2002, compared to $117.2 million for the
same period in 2001, representing a decrease of $38.6 million, or 33.0%. The
decrease was due to the effects of our expense reduction initiatives, including
eliminating unprofitable properties, reducing production costs through process
improvements and selective reduction in frequency and circulation levels, the
outsourcing of various functions throughout the organization, and the effects of
staff reductions made in the second half of 2001 and in 2002.
As a percentage of revenues, editorial, production and circulation expenses
increased from 41.7% for the nine months ended September 30, 2001 to 44.2% for
the same period of 2002. The increase was due to the general decrease in
revenues across all of our products, particularly our Internet/broadband trade
shows.
Selling, General and Administrative
Selling, general and administrative expenses declined $43.8 million, or 32.6%,
from $134.4 million for the nine months ended September 30, 2001 to $90.6
million for the same period in 2002. The decrease was primarily due to cost
savings associated with office closings and staff reductions realized from the
restructuring actions taken in the second half of 2001 and in 2002.
47
As a percentage of revenues, selling, general and administrative expenses
increased from 47.8% in 2001 to 51.0% in 2002. The increase was primarily due to
lower revenues realized across all of our products, particularly our
Internet/broadband trade shows.
Restructuring Charge
The restructuring charge of $10.9 million, or $0.34 per diluted share after tax,
for the nine months ended September 30, 2002 was comprised of approximately $8.9
million of employee termination costs, $1.4 million related to exit costs
associated with office space under long-term leases, and $0.6 million related to
other contractual obligations. See Note 14 - Restructuring Charges for
information on related cash payments. Additional detail concerning the principal
components of the 2002 charge is as follows:
- Personnel costs of $8.9 million are associated with the elimination of
approximately 265 positions, of which 243 are from the U.S., with the
remainder primarily in the U.K. Personnel costs include payments for
severance, costs of outplacement services and a provision for continued
health benefits.
- In 2002, the Company closed or downsized an additional five offices
representing approximately $2.7 million in charges. These amounts were
offset in part by the reversal of approximately $1.6 million related to
lease reserves of $3.4 million recorded in the second half of 2001 for our
New York, NY, and Burlingame, CA, offices for long-term leases that we were
able to sublease. 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.
Impairment of Assets
As a result of certain triggering events (See Note 2 - Goodwill and Other
Intangibles) the Company completed an impairment review at September 30, 2002
and recorded a non-cash charge of approximately $203.3 million to reduce the
carrying value of goodwill for two reporting units in our Technology Media
segment.
The Company also completed an assessment at September 30, 2002 in accordance
with SFAS 144, and recorded a non-cash charge of $20.0 million. See Note 2 -
Goodwill and Other Intangibles.
Depreciation and Amortization
Depreciation and amortization declined $18.4 million, or 54.3%, from $33.9
million for the nine months ended September 30, 2001 to $15.5 million for the
nine months ended September 30, 2002 due to lower amortization resulting from
the adoption of SFAS 142 on January 1, 2002.
OTHER INCOME (EXPENSE)
Interest expense increased $6.6 million from $21.8 million for the nine months
ended September 30, 2001, to $28.5 million for the nine months ended September
30, 2002. The increase was primarily due to a higher average debt balance during
the first nine months of 2002 when compared with the same period in 2001 as well
as an increase in the average interest rates on our debt from approximately 8.0%
in 2001 to 12.0% in 2002.
In January 2002, Penton sold its remaining 11.8% ownership interest in
Jupitermedia Corporation, (formerly known as INT Media Group, Inc.) for $5.8
million and recognized a $1.5 million gain from its sale.
48
EXTRAORDINARY ITEM, NET
The extraordinary item for the nine months ended September 30, 2002, of $0.2
million consisted of two separate items, which net to a gain. 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 ($0.8 million net
of taxes). This gain was offset by the write-off of unamortized deferred finance
costs of approximately $1.1 million ($0.7 million, net of taxes) associated with
the payoff of our term loan A and term loan B facilities, which also occurred in
March 2002.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
On January 1, 2002, the Company adopted SFAS 142. Under SFAS 142, goodwill
impairment is deemed to exist if the net book value of a reporting unit exceeds
its estimated fair value. During the third quarter of 2002, Penton completed
its initial impairment test for January 1, 2002 and recorded a non-cash
charge of approximately $39.7 million, to reduce the carrying value of goodwill
for two of our seven identified reporting units. Both of these reporting units
are part of our Technology Media segment. See Note 2 - Goodwill and Other
Intangibles for further details.
EFFECTIVE TAX RATES
The effective tax rates were 32.7% and 3.7% for the nine months ended September
30, 2001 and 2002, respectively. 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 and the valuation allowance
established for net deferred tax assets as of September 30, 2002.
SEGMENTS
We manage our business based on four operating segments: Industry Media,
Technology Media, Lifestyle Media and Retail Media (previously called 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, legal and information systems, which are
not allocated to each segment. See Note 15 - Segment Information, for a
reconciliation of segment total adjusted EBITDA to consolidated loss before
taxes and extraordinary item.
Financial information by segment for the nine months ended September 30, 2002
and 2001 is summarized in the following table (in thousands):
ADJUSTED EBITDA
REVENUES ADJUSTED EBITDA MARGIN
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
Industry Media $ 72,645 $ 95,521 $ 11,330 $ 15,314 15.6% 16.0%
Technology Media 68,594 148,897 (1,554) 22,713 (2.3)% 15.3%
Lifestyle Media 22,049 22,060 7,622 7,625 34.6% 34.6%
Retail Media 14,505 14,515 4,165 3,303 28.7% 22.8%
---------- ------------ ---------- ----------
Total $ 177,793 $ 280,993 $ 21,563 $ 48,955
========== ============ ========== ==========
Industry Media
Our Industry Media segment, which represented 40.9% of total company revenues
for the nine months ended September 30, 2002, serves customers in the
manufacturing, design/engineering, mechanical
49
systems/construction, government/compliance, supply chain and aviation
industries. Total revenues for this segment for the nine months ended September
30, 2002, decreased $22.9 million, or 23.9%, from $95.5 million in 2001 to $72.6
million in 2002. The decrease was primarily due to lower revenues from
publications of $17.3 million when comparing the first nine months of 2001 to
the same period in 2002, and lower revenues from trade shows and conferences of
$5.0 million when comparing the first nine months of 2001 to the same period in
2002. The decrease in publication revenues was primarily due to revenue declines
in products serving the design/engineering, supply chain and manufacturing
sectors, which were impacted by the downturn in the U.S. economy. Most
significantly impacted were Industry Week, Machine Design, American Machinist,
New Equipment Digest, Transportation & Distribution, 33 Metalproducing,
Hydraulics & Pneumatics, Motion Systems Design, Air Transport World, Supply
Chain Technology News and Material Handling Management magazines, which
accounted for approximately $13.5 million of the decrease. The remaining
decrease in publication revenues was due to declines in a variety of our other
magazines. Of the decrease in trade show and conference revenues, approximately
$4.5 million was due to revenue declines in products serving our manufacturing
and construction sectors.
Total adjusted EBITDA for the Industry Media segment decreased $4.0 million, or
26.0%, from $15.3 million for the nine months ended September 30, 2001, to $11.3
million during the same period in 2002. Industry Media publications decreased
$5.9 million, while trade shows and conferences decreased $1.3 million. These
decreases were partially offset by an increase of $0.4 million in the segment's
online media portfolio, as well as a decrease in general and administrative and
facility costs of $2.8 million as a result of staff reductions and office
closures. Adjusted EBITDA margin decreased from 16.0% in 2001 to 15.6% in 2002.
The decrease in adjusted EBITDA was primarily due to declines in the
aforementioned magazines and trade shows.
Technology Media
Our Technology Media segment, which represented 38.6% of total company revenues
for the first nine months of 2002, serves customers in the electronics,
information technology and Internet/broadband markets. Total revenues for this
segment decreased $80.3 million, or 53.9%, from $148.9 million for the nine
months ended September 30, 2001 to $68.6 million for the same period in 2002.
The decrease was primarily due to lower revenues from publications of $20.9
million and lower revenues from trade shows and conferences of $59.7 million.
Publications such as Electronic Design, EE Product News, Windows & .Net
Magazine, Internet World, iSeries News, Microwaves and RF, and Boardwatch
magazines were the most significantly impacted and accounted for approximately
$16.6 million of the decrease. Trade show revenues in our Internet/broadband
sector accounted for $55.9 million of the total decrease in trade show revenues
with our Internet World Spring, Service Networks Spring, Internet World Berlin,
Internet World UK and Streaming Media West shows accounting for $35.6 million of
the sector decrease. Online revenues increased $0.4 million from $7.2 million
for the nine months ended September 30, 2001 to $7.6 million in the same 2002
period.
Total adjusted EBITDA for the Technology Media segment decreased $24.3 million,
or 106.8%, from $22.7 million for the nine months ended September 30, 2001 to a
loss of $1.6 million for the same period in 2002. Publications accounted for
only $0.2 million of the decrease, while trade shows and conferences accounted
for $33.3 million of the decrease. These decreases were partially offset by an
increase in the segment's online media portfolio of $2.8 million, when compared
with the same period in 2001, as well as lower general and administrative and
facility costs of $6.5 million, as a result of staff reductions and office
closings. The adjusted EBITDA decline for trade shows and conferences mirrored
revenue declining trends.
Lifestyle Media
Our Lifestyle Media segment, which represented 12.4% of total-company revenues
for the nine months ended September 30, 2002, serves customers in our natural
products industry sector. Total revenues for this segment were flat for the
first nine months of 2002 when compared with the same period in 2001.
50
Total adjusted EBITDA for Lifestyle Media of $7.6 million for the nine months
ended September 30, 2002 was flat with the same period in 2001. Trade show and
conference adjusted EBITDA decreased $0.7 million, from $8.6 million for the
nine months ended September 30, 2001, to $7.9 million for the same period in
2002. This decrease was offset by an increase in online media adjusted EBITDA of
$0.6 million from a loss of $0.7 million for the nine months ended September 30,
2002 compared with a loss of $0.1 million for the same period in 2002. Adjusted
EBITDA margin were 34.6% for the nine months ended September 30, 2001 and 2002.
Retail Media
Our Retail Media segment, which represented 8.1% of total-company revenues for
the nine months ended September 30, 2002, serves customers in the food/retail
and leisure/hospitality sectors. Total revenues for this segment of $14.5
million were flat for the nine months ended September 30, 2002 when compared
with the same period in 2001.
Total adjusted EBITDA for Retail Media increased $0.9 million, or 26.1%, from
$3.3 million for the nine months ended September 30, 2001, to $4.2 million for
the same 2002 period, primarily due to cost reduction efforts.
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 are not allocated. Our
calculation of adjusted EBITDA by product for the nine months ended September
30, 2002 and 2001 is as follows (in thousands):
2002 2001
---- ----
Publishing $ 21,018 $ 22,957
Trade shows & conferences 2,801 35,233
Online media 2,021 (2,707)
--------- ----------
Subtotal 25,840 55,483
General and administrative (17,206) (26,053)
--------- ----------
Adjusted EBITDA $ 8,634 $ 29,430
========= ==========
For the nine months ended September 30, 2002, adjusted EBITDA for the Company's
publishing operations decreased $1.9 million, or 8.4%, when compared with the
same prior-year period. Adjusted EBITDA for publications was primarily affected
by declines of approximately $6.1 million from magazines such as Windows & .Net,
Machine Design, American Machinist, Electronic Design and EE Product News. These
declines were somewhat offset by approximately $3.5 million related to adjusted
EBITDA improvements from our Internet World magazine, the discontinuation of our
Streaming Media and Internet World Asia magazines, which both reported a loss in
2001, and year-over-year improvements of approximately $1.1 million from SQL
Server and Netronics magazines.
For the nine months ended September 30, 2002, adjusted EBITDA for the Company's
trade show and conference operations decreased $32.4 million, or 92.1%, when
compared with the same prior-year period. The decline was due primarily to the
significant drop in revenues in our Internet/broadband events, with the Internet
World Spring, Service Networks Spring, Internet World UK, Internet World Berlin
and Streaming Media West shows accounting for approximately $28.8 million of the
decrease in adjusted EBITDA.
51
Adjusted EBITDA for the Company's online media operations increased from a loss
of $2.7 million for the nine months ended September 30, 2001, to income of $2.0
million for the same period in 2002. The improvement was due primarily to the
elimination of unprofitable online media properties in 2001, organic product
development within the Technology Media segment, as well as year-on-year revenue
growth.
For the nine months ended September 30, 2002, general and administrative costs
decreased $8.8 million, when compared with the same prior-year period. The
decrease was primarily due to staff reductions and other cost-cutting efforts
implemented in the second half of 2001 and in 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.
LIQUIDITY AND CAPITAL RESOURCES
Analysis of Cash Flows:
During the periods presented, we financed our operations primarily with cash
generated from operating activities, borrowings under our senior secured credit
facility, proceeds from the issuance of senior notes, proceeds from the sale of
investments, and the issuance of preferred shares.
Penton's total cash and cash equivalents was $20.7 million at September 30,
2002, compared to $20.2 million at December 31, 2001. Cash provided by operating
activities was $1.1 million for the nine months ended September 30, 2002,
compared with a cash use of $14.8 million for the same period in 2001. Operating
cash flows for the nine months ended September 30, 2002, reflect a net loss of
$299.2 million, offset by a net working capital increase of approximately $13.0
million and non-cash charges (primarily impairment, depreciation and
amortization, and restructuring charges) of approximately $287.3 million.
Operating cash flows for the nine months ended September 30, 2001 reflect a net
loss of $36.3 million, offset by a net working capital decrease of approximately
$36.6 million and non-cash charges (primarily impairment, depreciation and
amortization, and restructuring charges) of approximately $58.1 million.
The increase in operating cash flows for the nine months ended September 30,
2002, compared with the same 2001 period was due primarily to decreases 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 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 used $2.6 million of cash for the nine months ended
September 30, 2002, and included proceeds of $5.8 million from the sale of
approximately 3.0 million shares of Jupitermedia Corporation common stock. These
proceeds were partially offset by capital expenditures of approximately $2.9
million and earnout payments of approximately $5.5 million. Investing activities
used $28.6 million of cash for the nine months ended September 30, 2001,
primarily due to cash of $20.3 million paid for earnouts and nine acquisitions
completed during the period and capital expenditures of approximately $8.4
million.
Financing activities provided $2.0 million of cash for the nine months ended
September 30, 2002, due to the issuance of our 11 7/8% senior secured notes and
the sale of 50,000 shares of Series B mandatorily redeemable convertible
preferred stock to an investor group led by ABRY Mezzanine Partners, L.P. These
proceeds were
52
primarily offset by the paydown of the balance of our senior secured credit
facility; 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 senior secured notes, and the payment of the short-term portion of our note
payable. Financing activities provided $60.2 million for the nine months ended
September 30, 2001, primarily from borrowings under our revolving credit
facility and proceeds from the issuance of our senior subordinated notes, offset
partially by debt repayments and dividends paid to stockholders.
Capital expenditures in the first nine months of 2002 were approximately $2.9
million. We anticipate that we will spend between $3.0 million and $4.0 million
on capital expenditures in 2002, primarily for expenditures related to computers
and management information systems.
Debt Financing Activities:
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 2011. Interest on the notes is payable
semi-annually, on June 15 and December 15. The Subordinated Notes are fully and
unconditionally, jointly and severally guaranteed, on a senior subordinated
basis, by the assets of our domestic subsidiaries, which are 100% owned by the
Company, and may be redeemed, in whole or in part, on or after June 15, 2006. In
addition, we may redeem up to 35% of the aggregate principal amount of the
Subordinated Notes before June 15, 2004, with the proceeds of certain equity
offerings. The Subordinated Notes, which were offered at a discount of $4.2
million, are being amortized using the interest method, over the term of the
Subordinated Notes. Costs representing underwriting fees and other professional
fees of approximately $1.7 million are being amortized over the term of the
Subordinated Notes. The net proceeds of $180.2 million were used to pay down the
$136.0 million outstanding balance of the revolving credit facility, $12.8
million of the term loan A facility and $7.2 million of the term loan B
facility. The remaining proceeds were used for general corporate purposes. The
Subordinated Notes are our unsecured senior subordinated obligations,
subordinated in right of payment to all existing and future senior indebtedness,
including the senior secured credit facility and the 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 certain 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. Our ability
to obtain dividends from our subsidiaries is only restricted if we are in
default under our debt arrangement or if we have exceeded our limitation of
additional indebtedness, as specified in such agreement.
In January 2002, we received $5.8 million in net proceeds from the sale of our
remaining investment in Jupitermedia Corporation common stock.
In March 2002, we entered into an agreement with a group of investors 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
53
common stock for $50.0 million. We received gross proceeds of $40.0 million from
the sale of 40,000 shares of preferred stock and warrants to purchase 1,280,000
shares of our common stock on March 19, 2002 and gross proceeds of $10.0 million
from the sale of 10,000 shares of preferred stock and warrants to purchase
320,000 shares of our common stock on March 28, 2002 (See Note 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
Jupitermedia Corporation 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
"Secured Notes") due in 2007. Interest is payable on the Secured Notes
semi-annually on April 1 and October 1. The Secured Notes are fully and
unconditionally, jointly and severally guaranteed, on a senior basis, by all of
our domestic subsidiaries, which are 100% owned by the Company, and also the
stock of certain subsidiaries. We may redeem the Secured Notes, in whole or in
part, during the periods October 1, 2005 through October 1, 2006 and thereafter
at redemption prices of 105.9375% and 100.0000% of the principal amount,
respectively, together with accrued and unpaid interest to the date of
redemption. In addition, at any time prior to October 1, 2005, upon certain
public equity offerings of our common stock, up to 35% of the aggregate
principal amount of the Secured Notes may be redeemed at our option, within 90
days of such public equity offering, with cash proceeds from the offering at a
redemption price equal to 111.875% of the principal amount, together with
accrued and unpaid interest to the date of redemption.
The Secured Notes were offered at a discount of $0.8 million, which is being
amortized, using the interest method, over the term of the Secured Notes. Costs
representing underwriting fees and other professional fees of $6.6 million are
being amortized over the term of the Secured Notes. Net proceeds of $150.1
million were used to pay down $83.6 million of term loan A and $49.0 million of
term loan B, and net proceeds of $8.3 million were used to repurchase $10.0
million of our Subordinated Notes. The remaining net proceeds of $9.2 million
were used for general corporate purposes. The Secured Notes rank senior in right
to all of our senior subordinated indebtedness, including our Subordinated
Notes, and equal in right of payment with all of our other senior indebtedness,
which is approximately $0.4 million at September 30, 2002. The guarantees are
senior secured obligations of each of our subsidiary guarantors and rank senior
in right of payment to all subordinated indebtedness of the subsidiary
guarantors, including the guarantees of our 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 stock of our other foreign
subsidiaries. The indenture governing the Secured Notes contain covenants that,
among other things, restrict our and our subsidiaries' ability to borrow money;
pay dividends on or repurchase capital stock; make certain 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. Our ability to obtain dividends from our subsidiaries is only
restricted if we are in default under our debt arrangement or if we have
exceeded our limitation of additional indebtedness, as specified in such
agreement.
In March 2002, we amended and restated our senior credit facility and repaid our
term loan A facility and our term loan B facility under our senior credit
facility from the proceeds received from the sale of preferred shares and the
issuance of the $157.5 million in Secured Notes, as noted above. The amended and
restated facility provides for a revolving credit facility of up to a maximum
amount of $40.0 million. Availability under the revolving credit facility is
determined by a borrowing base that is limited to 80% of eligible receivables.
In order to access the revolver, Penton 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
54
extension of credit showing compliance with the borrowing base. Penton is
required to prepay the revolver in the event that it has loans outstanding in
excess of the borrowing base, or it has more than $7.5 million in cash and cash
equivalents available at the end of any month. The commitment under the amended
and restated credit facility decreases by 15% in 2003, 30% in 2004, 35% in 2005,
and 20% in 2006. The amended and restated credit facility has no financial
covenants. In connection with the amendment and restatement of the credit
facility, the interest rate on the revolving credit facility was increased. In
addition, further restrictions were placed on Penton's ability to make certain
restricted payments, to make capital expenditures in excess of certain amounts,
to incur additional debt and contingent obligations, to make acquisitions and
investments, and to sell assets. At September 30, 2002, $23.4 million was
available under the revolving credit facility; however, no amounts were
outstanding.
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.
In September 2002, Moody's Investors Service took the following ratings actions
regarding Penton, including (i) confirmation of the B3 rating on the Company's
$157.5 million 11 7/8% Secured Notes, (ii) downgraded the Company's $171.3
million 10 3/8% Subordinated Notes due 2011 from Caa2 to Ca, (iii) downgrading
the Company's senior implied rating from B3 to Caa3, and (iv) downgrading the
Company's senior unsecured issuer rating from Caa1 to Ca.
Current Liquidity:
We anticipate adequate liquidity for operations and expect to meet all interest
payment obligations on our bonds. We have no principal repayment requirements
until maturity of our Senior Secured notes in October 2007. In addition, we have
no bank debt and no maintenance covenants on our existing bond debt. Penton does
have access to an asset-based, maintenance-free revolver of up to $40.0 million.
The revolver is currently undrawn, and the current borrowing base is $23.4
million.
As another possible means of enhancing liquidity, the Company is considering
strategic alternatives for a few small, non-core assets, which could generate
cash through the combination of sale proceeds and/or tax benefits. However, the
Company cannot be assured of its ability to execute asset sales in the existing
merger and acquisition environment for business-to-business media properties.
The Company expects that it will receive a tax refund in excess of $20.0 million
as a result of its updated estimate for net operating losses in 2002,
approximately $19.6 million of which has been recorded as a receivable as of
September 30, 2002. Receipt of the tax refund is expected in the first quarter
of 2003. Including the current estimated tax refund of $20.0 million noted
above, the Company believes it has the potential capacity available to carry
back its net tax loss for 2002 of up to $153.1 million, for a total tax refund
capacity of approximately $53.5 million. The remaining potential tax refund has
not been recorded as the Company cannot guarantee that such tax benefits will be
realized.
Our ability to meet current and anticipated operating requirements depends upon
our future performance, which is subject to general economic conditions and to
financial, competitive, business and other factors, including factors beyond our
control. If we are unable to meet our debt obligations or fund our other
liquidity needs, we may be required to raise 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.
55
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 those
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.
NEW ACCOUNTING PRONOUNCEMENTS
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, and 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 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 lease modifications
that have economic effects similar to sale-leaseback transactions to be
accounted for in the same manner as sale-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.
In June 2002, the FASB issued SFAS No. 146 "Accounting for costs associated with
exit or disposal activities." This statement addresses financial accounting and
reporting for costs associated with exit or disposal activities. This statement
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring)." This Statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred as opposed to recognizing
the liability at the date of an entity's commitment to an exit plan. This
Statement is effective for exit or disposal activities that are initiated after
December 31, 2002. The Company is currently in the process of evaluating this
Statement but does not expect its adoption to have a material impact on its
financial statements or results of operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management believes that the accounting policies discussed below are important
to an understanding of our financial statements because they require management
to exercise judgment and estimate the effects of uncertain matters in the
preparation and reporting of financial results. Accordingly, management cautions
that these policies and the judgments and estimates involved are subject to
revision and adjustment in the future. Management believes that a review of Note
2 - Summary of Significant Accounting Policies, and the Critical Accounting
Policies and Estimates section of our MD&A, included in our Annual Report on
Form 10-K for the year ended December 31, 2001, are important to an
understanding of our financial statements.
Deferred Tax Asset Valuation
The Company's provision for income taxes is based on the estimated annual
effective tax rate, which generally differs from the federal statutory rate of
35% principally due to state income taxes and certain nondeductible items. In
the third quarter of 2002, the Company recorded a valuation allowance of $38.8
million against its net
56
deferred tax assets. In recording the valuation allowance, management considered
it was more likely than not that all of the net deferred tax asset would not be
realized.
Impairment of Assets
We evaluate our long-lived assets for impairment whenever circumstances indicate
that an impairment may exist pursuant to the provisions of SFAS 144. Factors
indicating that an impairment may exist includes permanent declines in cash
flows, continued decreases in utilization of a long-lived asset or a change in
business strategy. The determination of impairment is subjective and based on
facts and circumstances specific to our Company and the relevant long-lived
asset. The process involves management determining if the cash flows expected to
be generated from the use of a long-lived asset (group) and its eventual
disposition (undiscounted and without interest charges) is less than the
carrying amount of the asset (group). If the criteria is met, the fair value
must be determined using appropriate assumptions to determine the present value
of these future cash flows. The determination and calculation of impairment
requires management's judgment and estimations, including among other items,
establishing asset groupings, and determining discount rates.
We adopted SFAS 142 as of January 1, 2002. SFAS 142 requires that goodwill and
intangible assets that have indefinite useful lives not be amortized but,
instead, be tested as least annually for impairment. The Company utilized a
third party valuation company to determine the fair value of the reporting
units. The determination of the fair values involves significant judgements and
estimations. See Note 2--Goodwill and Other Intangibles for more details.
Pension Plans:
In the third quarter of 2002, as a result of recent restructuring efforts,
lump-sum cash payments to plan participants in exchange for their rights to
receive specified pension benefits exceeded the combined service costs and
interest costs for the plans for the same period, triggering a valuation of our
defined benefit pension plan as of August 31, 2002. Due to staff reductions and
a discount rate of 6.75% at August 31, 2002 compared to 7.25% at December 31,
2001, the valuation resulted in the recognition of a net settlement gain of $1.1
million and a net curtailment gain of $0.8 million. For the nine months ended
September 30, 2002, the charge recognized for the Company's pension plans was
$0.5 million.
Penton has not made any cash contributions to its defined benefit pension plan
in 2001 or 2002. The Company could be required to contribute between $10.0
million and $20.0 million to its defined benefit pension plan by the end of
2007. Future funding requirements are dependent upon factors such as interest
rate levels, changes to pension plan benefits, funded status, regulatory
requirements for funding purposes, and the level and timing of asset returns as
compared with the level and timing of expected benefit disbursements. Due to the
presence of significant variables, actual future contributions may differ
materially.
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, the conversion to the euro did
not have a material effect on our results of operations or financial condition.
57
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 September 30, 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 interest rate risk exposure related to
our long-term debt. However, the fair value of our senior notes fluctuates with
the market, as they are publicly traded.
During the first quarter of 2002, we discontinued hedge accounting of our
interest rate swap and cap agreements as we paid down our variable rate
borrowings. At September 30, 2002, we continue to hold these derivative
instruments, which are scheduled to mature in the fourth quarter of 2002. The
derivative instruments are recorded at fair value. Due to the short time period
to maturity, we do not believe that the Company is exposed to significant
interest rate risk. As of September 30, 2002, the notional amount of our
derivatives is $107.4 million with average fixed rates of approximately 6.9% and
we expected the average variable rate for 2002 to be approximately 6.0%. In
October and November 2002, the derivative instruments expired and the Company
made its final interest payments in the amount of $1.3 million. (See Note 10 -
Hedging Activities).
The following table shows the carrying amounts and fair values of our cash and
cash equivalents, long-term debt and derivative instruments as of September 30,
2002 (in thousands):
CARRYING FAIR
VALUE VALUE
----- -----
Cash and cash equivalents $ 20,674 $ 20,674
Senior subordinated notes $ 171,359 $ 49,694
Senior secured notes $ 156,770 $ 107,387
Derivative instruments $ 1,328 $ 1,328
The table below provides information about the expected cash flows associated
with our long-term debt obligations (in thousands):
EXPECTED MATURITY DATE
----------------------
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
FAIR
2002 2003 2004 2005 2006 THEREAFTER TOTAL VALUE
---- ---- ---- ---- ---- ---------- ----- -----
Long-Term Debt:
Senior Subordinated Notes -- -- -- -- -- $175,000 $175,000 $ 49,694
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 $107,387
Average interest rate 11 7/8% 11 7/8% 11 7/8% 11 7/8% 11 7/8% 11 7/8% 11 7/8%
We maintain assets and operations in the U.K. and in various other countries. As
a result, we may be exposed to fluctuations in currency rates relative to these
markets. At September 30, 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.
58
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation, as of a date within 90 days of the filing date of
this Form 10-Q, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures (as defined in Rule
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended)
are effective. There have been no significant changes in internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
59
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 1, 2002, the Company issued 527,951 shares of common
stock to R. Douglas Greene, a Director of the Company, as part
of the final contingent payment required for the acquisition
of New Hope in 1999. The issuance of these shares was exempt
from registration under the Securities Act of 1933 pursuant to
Section 4(2) of that act.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
99.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of CFO Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K AND/OR 8-K/A
Date of Report Items Reported
-------------- --------------
July 26, 2002 Item 5. Other Events
Item 7. Financial Statements,
Pro Forma Financial
Information and Exhibits
August 9, 2002 Item 5. Other Events
Item 7. Financial Statements,
Pro Forma Financial
Information and Exhibits
August 15, 2002 Item 9. Regulation FD Disclosure
60
August 20, 2002 Item 5. Other Events
Item 7. Financial Statements,
Pro Forma Financial
Information and Exhibits
October 24, 2002 Item 5. Other Events
Item 7. Financial Statements,
Pro Forma Financial
Information and Exhibits
61
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Penton Media, Inc.
(Registrant)
By: /s/ PRESTON L. VICE
--------------------------------
Preston L. Vice
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
Date: November 14, 2002
62
CERTIFICATIONS
I, Thomas L. Kemp, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Penton Media
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
By: /s/ THOMAS L. KEMP
--------------------------------
Thomas L. Kemp
Chief Executive Officer
and Director (Principal
Executive Officer)
Date: November 14, 2002
63
CERTIFICATIONS
I, Preston L. Vice, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Penton Media
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
By: /s/ PRESTON L. VICE
--------------------------------
Preston L. Vice
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
Date: November 14, 2002
64
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
99.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of CFO Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
65