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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-14337
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PENTON MEDIA, INC.
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 36-2875386
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(State of Incorporation) (I.R.S. Employer Identification No.)
1300 EAST NINTH STREET, CLEVELAND, OH 44114
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(Address of Principal Executive Offices) (Zip Code)
216-696-7000
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date (November 13, 2001).
Common Stock 31,935,051
PENTON MEDIA, INC.
FORM 10-Q
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2001 and December 31, 2000 3
Consolidated Statements of Income for the Three and Nine Months Ended
September 30, 2001 and 2000 5
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2001 and 2000 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 26
Item 3. Quantitative and Qualitative Disclosure About Market Risk 36
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 37
Signature 38
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PENTON MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
September 30, December 31,
2001 2000
---------- -----------
ASSETS (unaudited)
------
CURRENT ASSETS:
Cash and cash equivalents $ 28,405 $ 11,605
Accounts and notes receivable, less allowance for doubtful
accounts of $6,517 and $3,863 in 2001 and 2000, respectively 67,594 70,059
Income tax receivable 18,905 -
Inventories, net 1,386 798
Deferred tax assets 5,562 5,562
Prepayments, deposits and other 23,824 11,763
---------- -----------
145,676 99,787
---------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Land, buildings and improvements 8,969 8,205
Machinery and equipment 62,246 63,998
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71,215 72,203
Less: Accumulated depreciation (39,392) (36,706)
---------- ------------
31,823 35,497
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OTHER ASSETS:
Goodwill, less accumulated amortization of
$69,939 and $49,142 in 2001 and 2000, respectively 558,589 574,626
Other intangibles, less accumulated amortization of
$20,019 and $14,901 in 2001 and 2000, respectively 51,703 54,122
Investments 3,419 17,725
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613,711 646,473
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$ 791,210 $ 781,757
========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
3
PENTON MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
September 30, December 31,
2001 2000
---------- -----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Senior debt facility $ 14,908 $ 11,250
Accounts payable 7,742 12,054
Income taxes payable - 3,260
Accrued earnouts 2,868 14,704
Accrued compensation and benefits 13,843 18,485
Other accrued expenses 32,198 15,024
Unearned income, principally trade
show and conference deposits 60,322 55,772
---------- -----------
131,881 130,549
---------- -----------
LONG-TERM LIABILITIES AND DEFERRED CREDITS:
Revolving credit facility - 91,000
Senior debt facility 169,010 199,875
Senior subordinated notes, net of discount 180,896 -
Notes payable 3,325 -
Net deferred pension credits 15,771 15,395
Deferred tax liability 286 5,978
Other 3,344 2,391
---------- -----------
372,632 314,639
---------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, none issued - -
Common stock, par 319 318
Capital in excess of par value 228,143 226,446
Retained earnings 74,574 112,745
Notes receivable officers (11,467) (10,207)
Accumulated other comprehensive income (4,872) 7,267
---------- -----------
286,697 336,569
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$ 791,210 $ 781,757
========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
4
PENTON MEDIA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED; DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
2001 2000 2001 2000
--------- -------- -------- --------
REVENUES $ 61,523 $ 76,720 $ 280,993 $ 261,603
---------- ---------- --------- ----------
OPERATING EXPENSES:
Editorial, production and circulation 33,148 33,427 117,160 98,631
Selling, general and administrative 36,655 36,156 136,291 111,797
Impairment of assets 9,663 - 9,663 1,051
Restructuring charge 9,468 - 15,035 -
Depreciation and amortization 11,211 7,851 33,925 22,880
---------- ---------- --------- ----------
100,145 77,434 312,074 234,359
---------- ---------- --------- ----------
OPERATING INCOME (LOSS) (38,622) (714) (31,081) 27,244
---------- ---------- --------- ----------
OTHER INCOME (EXPENSE):
Interest expense, net of interest earned (8,263) (3,129) (20,513) (8,305)
Gain on sale of investments - - - 110,210
Miscellaneous, net (794) 87 (2,244) (357)
----------- ---------- ---------- ----------
(9,057) (3,042) (22,757) 101,548
----------- ---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (47,679) (3,756) (53,838) 128,792
PROVISION (BENEFIT) FOR INCOME TAXES (18,184) (2,512) (17,582) 54,918
---------- ---------- --------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS (29,495) (1,244) (36,256) 73,874
LOSS FROM OPERATIONS OF
DISCONTINUED BUSINESS, NET - - - (85)
---------- ---------- --------- ----------
NET INCOME (LOSS) $ (29,495) $ (1,244) $ (36,256) $ 73,789
=========== ========== ========== ==========
EARNINGS PER SHARE - Basic
Income (loss) from continuing operations $ (0.92) $ (0.04) $ (1.14) $ 2.33
Discontinued operations - - - -
---------- ---------- --------- ----------
Net income (loss) $ (0.92) $ (0.04) $ (1.14) $ 2.33
=========== =========== ========== ==========
EARNINGS PER SHARE - Diluted
Income (loss) from continuing operations $ (0.92) $ (0.04) $ (1.14) $ 2.30
Discontinued operations - - - -
---------- ---------- --------- ----------
Net income (loss) $ (0.92) $ (0.04) $ (1.14) $ 2.30
=========== =========== ========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 31,935 31,819 31,914 31,730
========== ========== ========= ==========
Diluted 31,935 31,819 31,914 32,014
========== ========== ========= ==========
The accompanying notes are an integral part of these
consolidated financial statements.
5
PENTON MEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED; DOLLARS IN THOUSANDS)
2001 2000
------------ -----------
Net cash provided by (used for) operating activities $ (14,752) $ 3,694
---------- -----------
Cash flows from investing activities:
Capital expenditures (8,378) (12,379)
Acquisitions and investments, net of cash acquired (8,285) (198,642)
Earnouts paid (11,975) (4,780)
Proceeds from sale of INT Media Group, Inc. stock - 113,100
Proceeds from sale of Direct Mail Segment - 4,000
---------- -----------
Net cash used for investing activities (28,638) (98,701)
---------- -----------
Cash flows from financing activities:
Proceeds from senior subordinated notes 180,836 -
Repayment of senior credit facility (163,207) (1,937)
Proceeds from senior credit facility 45,000 80,000
Employee stock purchase plan payments (197) (348)
Proceeds from deferred shares and options exercised 1,145 779
Repayment of notes payable (201) -
Payment of financing costs (1,246) -
Dividends paid (1,912) (2,861)
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Net cash provided by financing activities 60,218 75,633
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Effect of exchange rate changes on cash and cash equivalents (28) (276)
---------- -----------
Net increase (decrease) in cash and equivalents 16,800 (19,650)
Cash and equivalents at beginning of period 11,605 30,370
---------- -----------
Cash and equivalents at end of period $ 28,405 $ 10,720
========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
6
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED; DOLLARS IN THOUSANDS; EXCEPT PER SHARE DATA)
NOTE 1 - NATURE OF BUSINESS AND FINANCIAL STATEMENT PRESENTATION
These financial statements have been prepared by management in
accordance with generally accepted accounting principles for interim financial
information and the applicable rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all information and
footnotes required by generally accepted accounting principles for complete
financial statements. However, in the opinion of management, the interim
financial statements reflect all adjustments necessary for a fair presentation
of the results of the periods presented. The results of operations for the
interim periods are not necessarily indicative of the results of operations to
be expected for the full year.
The accompanying unaudited interim consolidated financial statements
should be read together with the Company's Annual Report on Form 10-K for the
year ended December 31, 2000.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2000 financial
statements to conform to the 2001 presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued FAS No. 142 "Goodwill and Other
Intangible Assets". FAS 142 addresses financial accounting and reporting for
intangible assets acquired individually or with a group of other assets at
acquisition. FAS No. 142 presumes that goodwill and certain intangible assets
have indefinite useful lives. Accordingly, goodwill and certain intangibles will
not be amortized but rather will be tested at least annually for impairment. FAS
No. 142 also addresses accounting and reporting for goodwill and other
intangible assets subsequent to their acquisition. FAS No. 142 is effective for
fiscal years beginning after December 15, 2001. We anticipate that the adoption
of this Statement will lead to the elimination of approximately $27.4 million of
goodwill amortization in 2002. We are currently in the process of evaluating the
impact of the other provisions of this Statement on Penton.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
NOTE 2 - ACQUISITIONS
2001 ACQUISITIONS
In 2001, Penton acquired nine companies for an aggregate purchase price
of approximately $9.7 million in cash and $3.5 million in promissory notes, with
potential contingent consideration of up to $4.8 million based on the
achievement of specified business targets through 2003. The excess of the
aggregate purchase price over the fair market value of net assets acquired of
approximately $11.5 million is being amortized over periods ranging from 5 to 40
years.
7
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2000 ACQUISITIONS
In September 2000, Penton acquired the assets of Duke Communications
International ("Duke") for $100.0 million in cash plus contingent consideration
of up to $50.0 million based on the achievement of specified business targets
through 2002. The excess of the aggregate purchase price over the fair market
value of net assets acquired of approximately $103.3 million is being amortized
over periods ranging from 15 to 40 years. Duke is a leading integrated media
company serving the AS/400 and Windows 2000 operating systems markets and other
technology operating platform markets.
In September 2000, Penton acquired the stock of Streaming Media, Inc.,
for $65.0 million in cash plus contingent consideration of up to $35.0 million
based on the achievement of specified business targets in 2001. The excess of
the aggregate purchase price over the fair market value of net assets acquired
of approximately $62.9 million is being amortized over periods ranging from 15
to 20 years. Streaming Media, Inc. is a leading integrated media company serving
the streaming media market.
In September 2000, Penton acquired the assets of Professional Trade
Shows ("PTS") for $17.0 million in cash. The excess of the aggregate purchase
price over the fair market value of net assets acquired of approximately $16.1
million is being amortized over 20 years. PTS produces 50 regional trade shows
for the plant engineering and maintenance, material handling, buildings and
facilities maintenance, design engineering, and machine tool industries.
In addition, Penton acquired five companies in 2000 for an aggregate
purchase price of approximately $3.8 million in cash with potential contingent
consideration based on the achievement of specified business targets through
2001. The excess of the aggregate purchase price over the fair market value of
net assets acquired of approximately $3.7 million is being amortized over
periods ranging from 5 to 20 years.
NOTE 3 - DISCONTINUED OPERATIONS
During the first quarter of 2000, Penton completed the sale of the net
assets of its Direct Mail segment for $4.0 million in cash. An additional
operating loss for the nine months ended September 30, 2000 of $0.08 million,
net of a tax benefit of $0.06 million, was recorded and classified as
discontinued operations in the accompanying consolidated financial statements.
This loss was in addition to the $0.06 million that was accrued for in 1999.
NOTE 4 - INCOME TAX RECEIVABLE
The income tax receivable of $18,905 at September 30, 2001 relates to
federal income tax refunds expected on net operating loss carrybacks.
NOTE 5 - INVESTMENTS
In February 2000, Penton sold 2.0 million shares of INT Media Group,
Inc. (formerly known as internet.com Corporation) stock as part of a 3.75
million-share secondary offering. Penton received cash of $113.1 million and
recognized a pre-tax gain of approximately $110.2 million. At September 30,
2001, Penton maintains an 11.8% ownership interest in INT Media Group, Inc., or
approximately 3.0 million shares. Penton treats its investment as
available-for-sale; accordingly, Penton marks to market its investment in INT
Media Group, Inc. At September 30, 2001, Penton's investment totaled $3.4
million, including a cumulative mark to market decrease of $0.9 million and
related decrease in long-term deferred tax liability of $0.5 million and other
comprehensive income of $0.4 million.
8
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information for the nine
months ended September 30, 2000 assumes that the significant 2000 acquisitions
occurred as of the beginning of the period, after giving effect to certain
adjustments, including the amortization of intangible assets, interest expense
on acquisition debt and related income tax effects. The pro forma financial
information excludes the effects of synergies and cost reduction initiatives
directly related to these acquisitions. These actions have already commenced and
are expected to continue through the fourth quarter of 2001. Pro forma results
for the nine months ended September 30, 2001 have not been presented because the
impact of the 2001 acquisitions is immaterial.
The pro forma information is presented for information purposes only
and is not necessarily indicative of the results of operations that actually
would have been achieved had these transactions been consummated at the
beginning of the period presented:
Nine Months Ended
September 30, 2000
Pro forma revenues $ 306,398
===========
Pro forma income from continuing operations $ 67,294
===========
Pro forma net income applicable
to common stockholders $ 67,209
===========
Per share data:
Earnings per common share - basic:
Income from continuing operations $ 2.12
===========
Net income $ 2.12
===========
Earnings per common share - diluted:
Income from continuing operations $ 2.10
===========
Net income $ 2.10
===========
The pro forma financial information above does not reflect the 2001
acquisitions as the impact of the pro forma historical information is
immaterial.
NOTE 7 - DEBT
SENIOR SUBORDINATED NOTES
In June 2001, Penton issued $185.0 million of 10 3/8% Senior
Subordinated Notes ("the Notes") due 2011 to qualified institutional buyers
pursuant to Rule 144A of the Securities Act of 1933, as amended. Interest is
payable on the Notes semiannually on June 15 and December 15. The Notes are
guaranteed, on a senior subordinated basis, by the Company's domestic
subsidiaries and may be redeemed on or after June 15, 2006. In addition, the
Company may redeem up to 35% of the aggregate principal amount of the Notes
before June 15, 2004 with the proceeds of certain equity offerings. The Notes
were offered at a discount of $4.2 million, which is being amortized over the
term of the Notes. Amortization of the discount was not material for the nine
months ended September 30, 2001. Costs representing underwriting fees and other
professional fees of $1.5 million are being amortized over the term of the
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 are being used for
general corporate purposes. The Notes are unsecured senior subordinated
obligations of the Company, subordinated in right of payment to all existing and
future senior
9
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
indebtedness of the Company, including the credit facility. The 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 or enter into mergers or consolidations.
In October 2001, the Company filed Form S-4 with the Securities and
Exchange Commission as required with respect to the debt offering completed in
June 2001.
SENIOR CREDIT FACILITY
Penton maintains a credit agreement with several banks under which it
may borrow up to $340.0 million. The agreement provides for a revolving credit
facility of up to $125.0 million, a long-term loan of $140.0 million ("Term Loan
A") and a long-term loan of $75.0 million ("Term Loan B"). In October 2000,
Penton amended its Credit Agreement to give the Company the option to increase,
in the aggregate, its Term Loan A, Term Loan B and/or its Revolver by $100.0
million. The Term Loans and the Revolver could not be increased on more than
three separate occasions, and any increase had to take place by September 30,
2001. Concurrent with the closing of the amendment, the Company obtained
committed financing in the amount of $60.0 million of the $100.0 million under
the Revolver, thereby increasing the total available under the Revolver to
$185.0 million. The option to increase Term Loan A, Term Loan B and/or the
Revolver by an additional $40.0 million by September 30, 2001 was not exercised
by the Company.
The credit facility is collateralized by all tangible and intangible
assets of Penton, including the equity interests in all of its U.S. subsidiaries
and not less than 65% of the equity interests of any of its foreign
subsidiaries. Under the terms of the agreement, Penton is required to meet
certain covenants. The agreement also prohibits Penton from incurring certain
additional indebtedness; limits certain investments, advances or loans; and
restricts substantial asset sales and cash dividends. At September 30, 2001,
Penton was in compliance with all covenants. See discussion in liquidity and
capital resources section of Management's Discussion and Analysis regarding
expected violation of certain covenants in the fourth quarter of 2001.
The revolving credit facility bears interest, at Penton's option, at
either the Alternative Base Rate ("ABR"), defined as the higher of the
Administrative Agent's Prime Rate or the Federal Funds Rate plus 0.50%, or at
LIBOR, plus a rate margin ranging from 0.25% to 2.125% based on Penton's
consolidated leverage ratio, as defined. Up to the full amount of the revolving
credit facility may be borrowed, repaid and reborrowed until maturity on August
31, 2006; however, the revolving credit facility commitment shall be reduced as
of September 30, 2003, by 7.5% per quarter until September 30, 2005, at which
time it will be reduced by 10% per quarter until maturity. At September 30,
2001, no amounts were outstanding under the revolving credit facility. Penton
has agreed to pay a commitment fee ranging from 0.375% to 0.50%, based on
Penton's consolidated leverage ratio, on the average unused portion of the
revolving credit facility commitment. At September 30, 2001, $185.0 million was
available under the facility.
Term Loan A bears interest, at Penton's option, at either the ABR rate
or at LIBOR, plus a rate margin ranging from 0.25% to 2.125%, based on Penton's
consolidated leverage ratio. Interest on ABR loans is payable quarterly in
arrears, while interest on LIBOR loans is payable in arrears at the end of each
applicable interest period not to exceed three months. At September 30, 2001,
the rate in effect was 4.50%. The loan, which requires quarterly principal
payments, will mature on June 30, 2006. At September 30, 2001, $117.0 million
was outstanding under Term Loan A.
Term Loan B bears interest, at Penton's option, at either the ABR rate
or at LIBOR, plus a rate margin ranging from 0.5% to 2.50%, based on Penton's
consolidated leverage ratio. Interest on ABR loans is payable quarterly in
arrears, while interest on LIBOR loans is payable in arrears at the end of each
applicable interest period not to exceed three months. At September 30, 2001,
the rate in effect was 5.00%. The loan requires quarterly principal payments of
approximately $0.2 million, and four balloon payments of $17.6 million
10
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
beginning in September 2006, and will mature on June 30, 2007. At September 30,
2001, $66.9 million was outstanding under Term Loan B.
Cash paid for interest for the nine months ended September 30, 2001 and
2000, was $14.0 million and $12.1 million, respectively. Included in interest
expense in the Consolidated Statements of Income are $1.3 million and $5.1
million of interest income for the nine months ended September 30, 2001 and
2000, respectively.
NOTES PAYABLE
The Company's long-term notes payable at September 30, 2001 of $3.3
million represents indebtedness resulting from the acquisition of Hillgate in
February 2001. Loan Note A in the amount of $2.9 million, bears interest at 1%
and matures in April 2004. Loan Note B in the amount of $0.4 million, bears
interest at 0.5% and matures in July 2004. Both notes are denominated in British
pounds.
NOTE 8 - NET INCOME PER COMMON SHARE
The following table sets forth the reconciliation of basic and diluted
weighted average shares (shares in thousands) for the three and nine months
ended September 30, 2001 and 2000:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2001 2000 2001 2000
---- ---- ---- ----
Numerator:
Income (loss) applicable to
common shareholders $ (29,495) $ (1,244) $(36,256) $ 73,789
========== ========== ========= =========
Denominator (Number of shares):
Basic - weighted average shares outstanding 31,935 31,819 31,914 31,730
Effect of dilutive securities:
Stock options - - - 284
Diluted - weighted average shares outstanding 31,935 31,819 31,914 32,014
========== ========= ======== =========
Due to the net loss from operations for the three months ended
September 30, 2001 and 2000, and the net loss from operations for the nine
months ended September 30, 2001, stock options, restricted stock units and
deferred shares were excluded from the calculation of diluted earnings per share
as the result would have been antidilutive.
NOTE 9 - COMMON STOCK AND COMMON STOCK AWARD PROGRAMS
STOCK OFFERINGS
In September 2000, Penton arranged a secondary offering in which
existing stockholders, other than management, offered 3,638,320 shares of common
stock at a price of $30.00 per share. The Company did not receive any proceeds
from this offering.
STOCKHOLDERS RIGHTS AGREEMENT
In June 2000, the Company adopted a Stockholders Rights Agreement (the
"Rights Agreement"). 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
11
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the Company's common stock at a discounted price if any person or group acquires
20 percent or more of the outstanding shares of the Company's common stock.
Rights held by the persons who exceed the applicable threshold will be void.
Under certain circumstances, the rights will entitle the holder to buy
shares in an acquiring entity at a discounted price. The plan also includes an
exchange option. In general, after the rights become exercisable, the Penton
Board may, at its option, effect an exchange of part or all of the rights, other
than rights that have become void, for shares of Penton common stock. Under this
option, Penton would issue one share of common stock for each right, subject to
adjustment in certain circumstances.
The Penton Board may, at its option, redeem all rights for $0.01 per
right, generally at any time prior to the rights becoming exercisable. The
rights will expire June 27, 2010, unless earlier redeemed, exchanged or amended
by the Penton Board. The Rights Agreement has no impact on the consolidated
financial statements or earnings per share.
EMPLOYEE STOCK PURCHASE PLAN
Effective January 2000, the Company established an Employee Stock
Purchase Plan, with the intent of aligning the interests of Penton's employees
and its stockholders by allowing employees the opportunity to purchase shares of
Penton at a discount. The plan, which was effective January 1, 2000, 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
Effective January 2000, the Company established a Management Stock
Purchase Plan for designated officers and other key employees. Participants in
the plan may elect to receive restricted stock units ("RSUs") in lieu of a
designated portion of up to 100% of their annual incentive bonus. Each RSU
represents the right to receive one share of Penton common stock. RSUs are
granted at a 20% discount from fair market value on the date awarded. RSUs vest
two years after the date of grant and are settled in shares of common stock
after a period of deferral (of no less than two years) selected by the
participant, or upon termination of employment. In February 2001 and 2000,
31,942 and 25,507 RSUs were granted at a fair market value of $25.10 and $25.94
per share, respectively. At September 30, 2001, 57,449 RSUs were outstanding.
The discount, which is immaterial for the periods presented, is recorded as
compensation expense over the minimum vesting period.
EXECUTIVE LOAN PROGRAM
In January 2000, the Company established the Executive Loan Program,
which allowed Penton to issue an aggregate of up to 400,000 shares of Penton
common stock at fair market value to six key executives, in exchange for full
recourse notes. In addition, on October 27, 2000, the Board of Directors
authorized one additional executive to borrow up to $1.0 million under the
Executive Loan Program for the purchase of Penton stock at fair value in
exchange for full recourse notes. All notes bear interest compounded
semi-annually at a rate equal to the applicable interest rate as published by
the Internal Revenue Service and mature on or before the fifth anniversary of
the first loan date. No principal or interest payments are required until
maturity, at which time all outstanding amounts are due.
At September 30, 2001, 449,430 shares had been issued under the
Executive Loan Program and the outstanding loan balance was approximately $11.5
million (including $1.1 million of accrued interest), which is classified in the
Stockholders' Equity section of the balance sheet as notes receivable from
officers.
12
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
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 February 2001 and 2000, 539,500 options and 512,600 options,
respectively, were granted under the Company's Performance Incentive Plan.
Options granted under the plan generally vest equally over three years from the
date of grant. However, most options granted are not exercisable until the third
anniversary. All options granted pursuant to the plan will expire no later than
10 years from the date the option was granted. Option grants do not have any
associated compensation charge as all grants are issued at fair market value.
Deferred Shares
In August 2001, 6,780 fully vested deferred shares were issued for
common stock of Penton. At September 30, 2001 and 2000, respectively, 56,249 and
63,029 deferred shares, which were granted in 1998 and 1999, were outstanding.
Of the shares outstanding at September 30, 2001, 47,553 shares vest on the third
anniversary of the grant date, while the remaining 8,696 shares vest at the rate
of 20% per year over a five-year period from date of grant. Compensation expense
is being recognized over the related vesting period based on the fair value of
the shares at the date of grant. For the nine months ended September 30, 2001
and 2000, approximately $0.3 million, respectively, were charged to expense for
these shares.
Performance Shares
In February 2001, the Board of Directors approved a grant of 139,985
performance shares to certain key executives, subject to the attainment of
certain performance goals over a three-year period from January 1, 2001 through
December 31, 2003. Each grantee is eligible to receive between 50% and 150% of
the granted shares.
In June 2000, the Board of Directors approved a grant of 20,000
performance shares to two key executives, subject to the attainment of certain
performance goals over a three-year period from January 1, 2000 through December
31, 2002. Each grantee is eligible to receive between 10% and 150% of the
granted shares.
In February 2000, the Board of Directors approved a grant of 136,054
performance shares to certain key executives, subject to the attainment of
certain performance goals over a three-year period from January 1, 2000 through
December 31, 2002. For 99,000 of the shares, each grantee is eligible to receive
between 50% and 150% of the granted shares.
Performance shares are not issuable until earned. Compensation expense
related to these shares is recorded over the performance period. For the nine
months ended September 30, 2001 and 2000, approximately $1.5 million and $1.6
million, respectively, were charged to expense for these shares.
13
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - COMPREHENSIVE INCOME
Total comprehensive loss for the nine months ended September 30, 2001
and 2000 was $48.4 million and $25.2 million, respectively.
COMMON ACCUMULATED
STOCK, CAPITAL IN NOTES OTHER
PAR EXCESS OF RETAINED RECEIVABLE COMPREHENSIVE
VALUE PAR VALUE EARNINGS OFFICERS INCOME TOTAL
--------- --------- --------- --------- --------- ---------
Balance at December 31, 2000 $ 318 $ 226,446 $ 112,745 $ (10,207) $ 7,267 $ 336,569
Comprehensive loss:
Net loss -- -- (36,256) -- -- (36,256)
Unrealized loss on securities
reported at fair value -- -- -- -- (8,540) (8,540)
Net loss on cash flow hedges -- -- -- -- (2,412) (2,412)
Foreign currency translation
adjustment -- -- -- -- (1,187) (1,187)
---------
Total comprehensive loss (48,395)
---------
Dividends -- -- (1,915) -- -- (1,915)
Issuance of common stock:
Executive loan shares issued -- 750 -- -- -- 750
Deferred shares and options
exercised 1 1,144 -- -- -- 1,145
Employee Stock Purchase Plan -- (197) -- -- -- (197)
Receivable from officers -- -- -- (1,260) -- (1,260)
--------- --------- --------- --------- --------- ---------
Balance at September 30, 2001 $ 319 $ 228,143 $ 74,574 $ (11,467) $ (4,872) $ 286,697
========= ========= ========= ========= ========= =========
NOTE 11 - HEDGING ACTIVITIES
ADOPTION OF FAS 133
The Company adopted Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities, as amended by
Statement of Financial Accounting Standards No. 137, Accounting for Derivative
Instruments and Hedging Activities Deferral of the Effective Date of FASB
Statement No. 133, an amendment of FASB Statement No. 133, and Statement of
Financial Accounting Standards No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement No.
133 (collectively referred to hereafter as "FAS 133"), on January 1, 2001.
The Company recorded a $1.4 million, net-of-tax, cumulative-effect
adjustment in other comprehensive income as of January 1, 2001. The transition
adjustment recorded in other comprehensive income will be reclassified to
earnings on a quarterly basis as interest payments occur. The Company expects
that within the twelve months following the date of initial application it will
reclassify to earnings $0.9 million of the transition adjustment that was
recorded in accumulated other comprehensive income.
14
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company had the following activity in other comprehensive income
related to derivatives:
Total cumulative effect of adoption on other comprehensive
income at January 1, 2001 $ 1,351
Net change related to hedging transactions in the period 941
Net amount reclassified to earnings (115)
----------
Net deferred loss on cash flow hedges at March 31, 2001 2,177
----------
Net change related to hedging transactions in the period (30)
Net amount reclassified to earnings (182)
----------
Net deferred loss on cash flow hedges at June 30, 2001 1,965
----------
Net change related to current quarter hedging transactions 828
Net amount reclassified to earnings (381)
----------
Net deferred loss on cash flow hedges at September 30, 2001 $ 2,412
==========
ACCOUNTING POLICY FOR DERIVATIVES AND HEDGING ACTIVITIES
All derivatives are recognized on the balance sheet at their fair
value. On the date that the Company enters into a derivative contract, it
designates the derivative as (1) a hedge of (a) the fair value of a recognized
asset or liability or (b) an unrecognized firm commitment (a "fair value"
hedge); (2) a hedge of (a) a forecasted transaction or (b) the variability of
cash flows that are to be received or paid in connection with a recognized asset
or liability (a "cash flow" hedge); (3) a foreign currency fair value or cash
flow hedge (a "foreign currency" hedge); (4) a hedge of a net investment in a
foreign operation; or (5) an instrument that is held for trading or non-hedging
purposes (a "trading" or "non-hedging" instrument).
Changes in the fair value of a derivative that are highly effective as,
and that are designated and qualify as, a fair value hedge, along with changes
in the fair value of the hedged asset or liability that are attributable to the
hedged risk (including changes that reflect losses or gains on firm
commitments), are recorded in current period earnings. The Company did not have
any fair value hedges during the nine months ended September 30, 2001.
Changes in the fair value of a derivative that are highly effective as,
and that are designated and qualify as, a cash flow hedge, to the extent that
the hedges are effective, are recorded in other comprehensive income, until
earnings are affected by the variability of cash flows of the hedged transaction
(e.g., until periodic settlements of a variable rate asset or liability are
recorded in earnings). Any hedge ineffectiveness (which represents the amount by
which the changes in the fair value of the derivative exceed the variability in
the cash flows of the forecasted transaction) is recorded in current period
earnings. The Company had interest rate swaps and caps which were designated as
cash flow hedges for the nine months ended September 30, 2001.
Changes in the fair value of a derivative that are highly effective as,
and that are designated and qualify as, a foreign currency hedge are recorded in
either current period earnings or other comprehensive income, depending on
whether the hedging relationship satisfies the criteria for a fair value or cash
flow hedge. If, however, a derivative is used as a hedge of a net investment in
a foreign operation, the changes in the derivative's fair value, to the extent
that the derivative is effective as a hedge, are recorded in the cumulative
translation adjustment account within other comprehensive income. Changes in the
fair value of derivative trading and non-hedging instruments are reported in
current period earnings. For the nine months ended September 30, 2001, the
Company did not have any foreign currency or net investment hedges.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as fair value, cash flow, or foreign
currency hedges to (1) specific assets and liabilities on the balance sheet or
(2) specific firm commitments or forecasted transactions. The
15
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company also formally assesses (both at the hedge's inception and on an ongoing
basis) whether the derivatives that are used in hedging transactions have been
highly effective in offsetting changes in the fair value or cash flows of hedged
items and whether those derivatives may be expected to remain highly effective
in future periods. When it is determined that a derivative is not (or has ceased
to be) highly effective as a hedge, the Company discontinues hedge accounting
prospectively, as discussed below.
The Company discontinues hedge accounting prospectively when (1) it
determines that the derivative is no longer effective in offsetting changes in
the fair value or cash flows of a hedged item (including hedged items such as
firm commitments or forecasted transactions); (2) the derivative expires or is
sold, terminated, or exercised; (3) it is no longer probable that the forecasted
transaction will occur; (4) a hedged firm commitment no longer meets the
definition of a firm commitment; or (5) management determines that designating
the derivative as a hedging instrument is no longer appropriate. In all
situations in which hedge accounting is discontinued and the derivative remains
outstanding, the Company will carry the derivative at its fair value on the
balance sheet, recognizing changes in the fair value in current period earnings.
At September 30, 2001, Penton had the following interest rate
instruments in effect:
NOTIONAL
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 $25,000 7.09% 6/00-12/01
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, 2001, the interest rate instruments had a negative
fair value of $4.2 million recorded as a liability in Other Accrued Expenses on
the balance sheet. The Company is exposed to credit loss in the event of
non-performance by the other parties to the interest rate swap agreements.
However, the Company does not anticipate non-performance by the other
counter-parties as they are major financial institutions. The Company controls
the credit risk of its interest rate swap agreements through credit approvals,
limits and monitoring procedures. The Company also maintains a policy requiring
that all swap derivative contracts be pursuant to the International Swaps and
Derivatives Association Master Agreement.
RISK MANAGEMENT
In the ordinary course of business, Penton is exposed to fluctuations
in interest rates and foreign currency rates. Penton maintains assets and
operations in Europe and Asia, and as a result, may be exposed to cost increases
relative to the markets in which it sells; however, Penton does not manage this
risk using derivative instruments. The Company is exposed to interest rate risk
due to the variable interest rate of the Credit Agreement. The Company maintains
an overall interest rate risk-management strategy that incorporates the use of
derivative instruments to minimize significant unplanned fluctuations in
earnings that are caused by interest rate volatility. Derivative instruments
that are used as part of the Company's interest rate risk-management strategy
include primarily interest rate swaps and interest rate caps.
CASH FLOW HEDGES
The Company uses interest rate swaps to convert a portion of its
variable-rate debt to fixed-rate debt. The specific terms and notional amounts
of the swaps are determined based on management's assessment of future interest
rates, the requirements under the Credit Agreement (see Note 7), and other
factors. The Company purchases interest rate caps and swaps to minimize its
exposure to volatility in LIBOR. The level of fixed rate debt, after the effects
of interest rate swaps and caps have been considered, is maintained at a level
that is greater than 50% of the total Company debt.
16
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine months ended September 30, 2001, the Company recognized a
net loss of $0.7 million (reported as interest expense in the Consolidated
Statements of Income), which represents the total ineffectiveness of all cash
flow hedges, including the time value of option contracts. All components of
each derivative's gain or loss were included in the assessment of hedge
effectiveness except for the time value of interest rate caps (option
contracts).
During the nine months ended September 30, 2001, the Company
reclassified $0.7 million from accumulated other comprehensive income to current
period earnings (reported as interest expense in the Consolidated Statements of
Income). The net deferred loss recorded in accumulated other comprehensive
income will be reclassified to earnings on a quarterly basis as interest
payments occur. As of September 30, 2001, $1.1 million of deferred losses on
derivative instruments accumulated in other comprehensive income are expected to
be reclassified as earnings during the next twelve months. As of September 30,
2001, the maximum term over which the Company is hedging its exposure to the
variability of future cash flows is thirteen months.
NOTE 12 - RESTRUCTURING AND IMPAIRMENT CHARGES
THIRD QUARTER:
During the third quarter of 2001, the Company recorded asset
impairments of $9.7 million ($5.8 million after tax, or $0.18 per share on a
diluted basis), and restructuring charges of $9.5 million ($5.7 million after
tax, or $0.18 per share on a diluted basis).
Asset impairments of $9.7 million include the write-down of goodwill by
$7.1 million on five small acquisitions, and $1.7 million for various Web sites
which were shut down. In addition, $0.9 million of circulation software costs
were written off at one of our business units due to a management decision to
discontinue the development of the software and to outsource that function.
Restructuring charges of $9.5 million resulted primarily from strategic
decisions to restructure a number of businesses and support departments,
including reducing our overhead infrastructure by consolidating and closing
several branch offices, centralizing information technology, and outsourcing
certain corporate functions. Of the total charge, $3.5 million relates to
employee termination benefits for the elimination of 240 positions, of which 107
positions and $1.1 million in payments have already been completed.
Approximately 88% 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 $6.0 million of the restructuring charge relates to the
closure of 15 Penton offices worldwide and include costs associated with
existing office spaces under lease including rent and common area maintenance
costs in addition to costs to vacate the space. The majority of cost savings
related to these initiatives will be realized in 2002 and beyond.
An analysis of third-quarter restructuring charges recorded for the
quarter ended September 30, 2001, are as follows:
Ending
Cash Accrual
Description Provision Payments Balance
----------- --------------------------------------------
Severance, outplacement and
other personnel costs $ 3,501 $ 1,131 $ 2,370
Facility closing costs 5,967 - 5,967
---------- ---------- ----------
Total $ 9,468 $ 1,131 $ 8,337
========== ========== ==========
The majority of the remaining costs incurred in connection with the
plan are expected to be paid by the end of 2002 with the balance to be paid
through the end of 2010.
17
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST QUARTER:
In February 2001, Penton announced a restructuring program with the
intent of discontinuing certain Internet operations that have not demonstrated
revenue growth, customer acceptance and near-term opportunity for profit. During
the first quarter of 2001, Penton incurred a pre-tax charge of $5.6 million for
this restructuring. The charge was reported as a component of operating
expenses.
An analysis of first quarter restructuring charges recorded as of
September 30, 2001, are as follows:
Ending
DESCRIPTION Cash Other Accrual
----------- Provision Payments Adjustments Balance
--------- -------- ----------- -------
Severance, outplacement and
other personnel costs $ 1,913 $ 1,722 $ 23 $ 168
Impaired assets 2,054 567 1,487 -
Other exit costs 1,600 638 541 421
----------- ----------- --------- ---------
Total $ 5,567 $ 2,927 $ 2,051 $ 589
=========== =========== ========= =========
Asset impairment costs primarily 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
include 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. Such personnel costs include payments for severance,
outplacement services and provision for continued benefits to personnel. Costs
to exit activities reflect the costs associated with existing office spaces
under lease and other contractual obligations. During the third quarter, $0.1
million in cash payments were charged against the reserve. Other adjustments
reflect the write-off of impaired assets and other items that did not involve
the use of cash during the nine months ended September 30, 2001.
The majority of the remaining costs incurred in connection with the
first quarter restructuring plan are expected to be paid by the end of 2001.
NOTE 13 - SEGMENT INFORMATION
Historically, Penton had three reportable segments: Media Services,
Printing, and Direct Mail. Due to the sale of the Printing segment in 1999 and
the Direct Mail segment in 2000, Penton currently has only one segment. The
Media Services segment serves specific industries with integrated media product
offerings.
NOTE 14 - GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
The following schedules set forth condensed consolidating balance
sheets as of September 30, 2001 and December 31, 2000 and condensed
consolidating statements of income and condensed consolidating statements of
cash flows for the nine months ended September 30, 2001 and 2000. In the
following schedules, "Parent Company" refers to the combined balances of Penton
Media, Inc., "Guarantor Subsidiaries" refers to Penton's wholly owned domestic
subsidiaries, and "Non-guarantor Subsidiaries" refers to Penton's foreign
subsidiaries. "Eliminations" represent the adjustments necessary to (a)
eliminate intercompany transactions and (b) eliminate the investments in our
subsidiaries.
18
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14-- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF SEPTEMBER 30, 2001
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- --------- --------- --------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 20,398 $ 2,373 $ 5,634 $ -- $ 28,405
Accounts and notes receivable, net 46,591 89,687 11,316 (80,000) 67,594
Income tax receivable 18,905 -- -- -- 18,905
Inventories 948 406 32 -- 1,386
Deferred tax asset 3,600 1,962 -- -- 5,562
Prepayments, deposits and other 8,373 7,791 7,660 -- 23,824
--------- --------- --------- --------- ---------
98,815 102,219 24,642 (80,000) 145,676
--------- --------- --------- --------- ---------
Property, plant and equipment, net 23,795 4,949 3,079 -- 31,823
Goodwill, net 131,142 392,051 35,396 -- 558,589
Other intangibles, net 12,460 36,960 2,283 -- 51,703
Deferred tax asset 7,818 -- -- (7,818) --
Investment in subsidiaries -- -- -- -- --
Investments 238,468 147,654 -- (382,703) 3,419
--------- --------- --------- --------- ---------
413,683 581,614 40,758 (390,521) 645,534
--------- --------- --------- --------- ---------
$ 512,498 $ 683,833 $ 65,400 $(470,521) $ 791,210
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Senior debt facility $ 14,908 $ -- $ -- $ -- $ 14,908
Accounts payable and accrued expenses 34,471 (3,553) 11,890 -- 42,808
Accrued compensation and benefits 13,545 1,388 (1,090) -- 13,843
Unearned income 21,316 27,356 11,650 -- 60,322
--------- --------- --------- --------- ---------
84,240 25,191 22,450 -- 131,881
--------- --------- --------- --------- ---------
LONG-TERM LIABILITIES AND DEFERRED CREDITS:
Senior debt facility 169,010 -- -- -- 169,010
Senior subordinated notes 180,896 -- -- -- 180,896
Notes payable 80,000 -- 3,325 (80,000) 3,325
Net deferred pension credits 15,771 -- -- -- 15,771
Deferred tax liability -- 8,102 2 (7,818) 286
Intercompany advances (262,181) 242,969 19,212 -- --
Other 1,714 375 1,255 -- 3,344
--------- --------- --------- --------- ---------
185,210 251,446 23,794 (87,818) 372,632
--------- --------- --------- --------- ---------
STOCKHOLDERS' EQUITY:
Common stock 228,463 349,426 16,615 (366,042) 228,462
Retained earnings 28,507 58,300 4,428 (16,661) 74,574
Notes receivable officers/directors (11,467) -- -- -- (11,467)
Accumulated other comprehensive income (2,455) (530) (1,887) -- (4,872)
--------- --------- --------- --------- ---------
243,048 407,196 19,156 (382,703) 286,697
--------- --------- --------- --------- ---------
$ 512,498 $ 683,833 $ 65,400 $(470,521) $ 791,210
========= ========= ========= ========= =========
19
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14-- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF DECEMBER 31, 2000
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- --------- --------- --------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ -- $ 8,678 $ 3,970 $ (1,043) $ 11,605
Accounts and notes receivable, net 40,592 96,850 12,617 (80,000) 70,059
Inventories 495 282 21 -- 798
Deferred tax asset 3,600 1,962 -- -- 5,562
Prepayments, deposits and other 5,282 4,710 1,771 -- 11,763
--------- --------- --------- --------- ---------
49,969 112,482 18,379 (81,043) 99,787
--------- --------- --------- --------- ---------
Property, plant and equipment, net 28,951 5,462 1,084 -- 35,497
Goodwill, net 139,023 405,987 29,616 -- 574,626
Other intangibles, net 26,548 25,562 2,012 -- 54,122
Deferred tax asset 2,472 -- 6 (2,478) --
Investment in subsidiaries 238,788 144,235 -- (383,023) --
Investments -- 17,725 -- -- 17,725
--------- --------- --------- --------- ---------
435,782 598,971 32,718 (385,501) 681,970
--------- --------- --------- --------- ---------
$ 485,751 $ 711,453 $ 51,097 $(466,544) $ 781,757
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Senior debt facility $ 11,250 $ -- $ -- $ -- $ 11,250
Accounts payable and accrued expenses 32,273 7,412 6,400 (1,043) 45,042
Accrued compensation and benefits 15,200 2,985 300 -- 18,485
Unearned income 17,253 28,860 9,659 -- 55,772
--------- --------- --------- --------- ---------
75,976 39,257 16,359 (1,043) 130,549
--------- --------- --------- --------- ---------
LONG-TERM LIABILITIES AND DEFERRED CREDITS:
Revolving credit facility 91,000 -- -- -- 91,000
Senior debt facility 199,875 -- -- -- 199,875
Notes payable 80,000 -- -- (80,000) --
Net deferred pension credits 15,395 -- -- -- 15,395
Deferred tax liability -- 8,456 -- (2,478) 5,978
Intercompany advances (273,733) 257,298 16,435 -- --
Other 2,395 25 (29) -- 2,391
--------- --------- --------- --------- ---------
114,932 265,779 16,406 (82,478) 314,639
--------- --------- --------- --------- ---------
STOCKHOLDERS' EQUITY:
Common stock 226,764 349,428 16,614 (366,042) 226,764
Retained earnings 78,372 48,982 2,372 (16,981) 112,745
Notes receivable officers/directors (10,207) -- -- -- (10,207)
Accumulated other comprehensive income (86) 8,007 (654) -- 7,267
--------- --------- --------- --------- ---------
294,843 406,417 18,332 (383,023) 336,569
--------- --------- --------- --------- ---------
$ 485,751 $ 711,453 $ 51,097 $(466,544) $ 781,757
========= ========= ========= ========= =========
20
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14-- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- --------- ------------- ------------ ---------
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
Depreciation and amortization 28,947 4,435 543 -- 33,925
Impairment of other assets 8,558 910 195 -- 9,663
Restructuring charges 15,035 -- -- -- 15,035
--------- --------- --------- --------- ---------
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 income earned (23,909) 3,665 (269) -- (20,513)
Miscellaneous, net (808) (228) (1,208) -- (2,244)
--------- --------- --------- --------- ---------
(24,717) 3,437 (1,477) -- (22,757)
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (70,938) 13,862 3,238 -- (53,838)
PROVISION (BENEFIT) FOR INCOME TAXES (23,308) 4,544 1,182 -- (17,582)
--------- --------- --------- --------- ---------
NET INCOME (LOSS) $ (47,630) $ 9,318 $ 2,056 $ -- $ (36,256)
========= ========= ========= ========= =========
21
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14-- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
REVENUES $ 166,806 $ 78,325 $ 16,472 $ -- $ 261,603
--------- --------- --------- --------- ---------
OPERATING EXPENSES:
Editorial, production and circulation 67,978 24,556 6,097 -- 98,631
Selling, general and administrative 77,904 27,431 6,462 -- 111,797
Depreciation and amortization 19,810 2,834 236 -- 22,880
Restructuring charges -- -- -- -- --
Impairment of other assets 1,051 -- -- -- 1,051
--------- --------- --------- --------- ---------
166,743 54,821 12,795 -- 234,359
--------- --------- --------- --------- ---------
OPERATING INCOME (LOSS) 63 23,504 3,677 -- 27,244
--------- --------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense, net of income earned (8,714) 780 (371) -- (8,305)
Gain on sale of investments 110,210 -- -- -- 110,210
Miscellaneous, net (671) (128) 442 -- (357)
--------- --------- --------- --------- ---------
100,825 652 71 -- 101,548
--------- --------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 100,888 24,156 3,748 -- 128,792
PROVISION FOR INCOME TAXES 42,978 10,816 1,124 -- 54,918
--------- --------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 57,910 13,340 2,624 -- 73,874
DISCONTINUED OPERATIONS:
Loss from discontinued operations, net (85) -- -- -- (85)
--------- --------- --------- --------- ---------
NET INCOME $ 57,825 $ 13,340 $ 2,624 $ -- $ 73,789
========= ========= ========= ========= =========
22
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14-- 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
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 and investments, net of cash
acquired (4,631) (675) (2,979) -- (8,285)
Earnouts paid (10,208) (1,767) -- -- (11,975)
--------- --------- --------- --------- ---------
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
Proceeds from senior debt facility 45,000 -- -- -- 45,000
Repayment of senior debt facility (163,207) -- -- -- (163,207)
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 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
========= ========= ========= ========= =========
23
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14-- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
PENTON MEDIA, INC
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- --------- --------- --------- ---------
CASH FLOWS PROVIDED BY (USED FOR) OPERATING
ACTIVITIES $ (11,338) $ 7,048 $ 7,984 $ -- $ 3,694
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (9,482) (2,719) (178) -- (12,379)
Acquisitions and investments, net of cash
acquired (192,389) (1,664) (4,589) -- (198,642)
Earnouts paid (3,205) (980) (595) -- (4,780)
Proceeds from sale of INT Media Group Inc.
stock 113,100 -- -- -- 113,100
Net proceeds from sale of discontinued operations 4,000 -- -- -- 4,000
--------- --------- --------- --------- ---------
Net cash provided by investing activities (87,976) (5,363) (5,362) -- (98,701)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior debt facility 80,000 -- -- -- 80,000
Repayment of senior debt facility (1,937) -- -- -- (1,937)
Employee stock purchase plan payments (348) -- -- -- (348)
Proceeds from deferred shares and options
exercised 779 -- -- -- 779
Dividends paid (2,861) -- -- -- (2,861)
--------- --------- --------- --------- ---------
Net cash used for financing activities 75,633 -- -- -- 75,633
--------- --------- --------- --------- ---------
Effect of exchange rate (276) -- -- -- (276)
Net increase in cash and equivalents (23,957) 1,685 2,622 -- (19,650)
Cash and equivalents at beginning of period 24,664 2,918 2,788 -- 30,370
--------- --------- --------- --------- ---------
Cash and equivalents at end of period $ 707 $ 4,603 $ 5,410 $ -- $ 10,720
========= ========= ========= ========= =========
24
NOTE 15 -- SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
For the nine months ended September 30, 2001, Penton issued 39,430
shares to an officer under the executive loan program, and marked to market its
investment in INT Media Group, Inc. stock by negative $0.9 million. In addition,
Penton acquired Hillgate in February 2001 for approximately $4.1 million, of
which $3.3 million was in the form of notes payable.
For the nine months ended September 30, 2000, Penton issued 52,920
common shares valued at approximately $1.4 million in connection with New Hope's
earnout; issued 400,000 shares to officers; and marked to market its investment
in INT Media Group, Inc. stock by approximately $47.8 million.
The foregoing transactions did not provide for or require the use of
cash and, accordingly, are not reflected in the Consolidated Statements of Cash
Flows.
NOTE 16 - SUBSEQUENT EVENTS
In October 2001, Penton sold the stock of Meko, Ltd., back to the
original owner for one pound Sterling. In accordance with SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", the Company recorded an impairment charge of $0.4 million
related to the assets of Meko, Ltd. as of September 30, 2001. This charge was
recorded to write-down the assets of Meko to fair market value.
In October 2001, the Company filed Form S-4 with the Securities and
Exchange Commission with respect to the Company's $185.0 million of 10 3/8%
Senior Subordinated Notes due 2011.
25
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 which 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 Penton's expectations for future periods. Although Penton
believes that the expectations reflected in such forward-looking statements are
based upon reasonable assumptions, it can give no assurance that its
expectations will be achieved. For this purpose, any statements contained herein
that are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes," "anticipates,"
"plans," "expects," "seeks," "estimates" and similar expressions are intended to
identify forward-looking statements. A number of important factors could cause
Penton's results to differ materially from those indicated by such
forward-looking statements, including, among other factors, pending litigation,
government regulation, competition, technological change, intellectual property
rights, capital spending, international operations and Penton's acquisition and
Internet strategies.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2000
REVENUES
Total revenues decreased $15.2 million, or 19.8%, from $76.7 million
for the three months ended September 30, 2000 to $61.5 million for the same
period in 2001.
Publishing revenues decreased $4.7 million, or 8.7%, from $54.5 million
for the three months ended September 30, 2000 to $49.8 million in the same
period in 2001. The decrease was due primarily to revenue declines from
technology magazines, especially Internet World magazine, as well as from select
magazines serving the manufacturing industry and electronics OEM markets. These
declines were primarily caused by the continued weakness in advertising
resulting from the extended slowdown of the U.S. economy and, more recently, by
struggling economies throughout Europe and Asia. These declines were partially
offset by the following: (i) the addition of Windows 2000 Magazine, Business
Finance Magazine, SQL Server Magazine and iSeries NEWS magazine, which were part
of the Duke acquisition in September 2000; (ii) the addition of IT Consultant,
m-CommerceWorld, ISPWorld, and Service Management magazines, which were part of
the Hillgate acquisition in February 2001, and (iii) the addition of iTgraphics
Magazine, and the Australian editions of Computer Reseller News and Information
Week magazines, which were all part of the DWR Media acquisition completed in
May 2001.
Trade show and conference revenues decreased $12.5 million, or 58.6%,
from $21.3 million for the three months ended September 30, 2000 to $8.8 million
for the same period in 2001, due primarily to the shift in timing of the Natural
Products Expo East, International Leisure Industry Week, and CLEC Expo Fall (now
titled Last Mile) trade shows, which were held in the third quarter of 2000 and
will be held in the fourth quarter of 2001, as well as a decline in revenues
year-over-year in the Internet World Summer show. These declines were somewhat
offset by the Wireless Developer conference, which was acquired in June 2001;
the IW Australia show which was held in the second quarter of 2000 compared with
the third quarter of 2001; and several regional industrial shows held during the
quarter, which were part of the PTS acquisition in September 2000.
Online media revenues increased $2.0 million, from $0.9 million for the
three months ended September 30, 2000 to $2.9 million for the same period in
2001, due primarily to the addition of Duke's online media business, which was
acquired in September 2000.
26
OPERATING EXPENSES
Operating expenses increased $22.7 million, or 29.3%, from $77.4
million for the three months ended September 30, 2000 to $100.1 million for the
same period in 2001. As a percentage of revenues, operating costs increased from
100.9% in 2000 to 162.8% in 2001. The increase in operating expenses as a
percentage of revenues was due primarily to the $19.1 million impairment of
asset and restructuring charges taken in the quarter, the shift in timing of the
three trade shows noted above, higher depreciation and amortization expense
resulting from acquisitions completed in 2000 and 2001, as well as an increase
in capitalized costs related to the relocation of the Company's corporate
headquarters in the fourth quarter of 2000.
Editorial, Production and Circulation
Editorial, production and circulation expenses decreased to $33.1
million for the three months ended September 30, 2001, compared to $33.4 million
for the same period in 2000, representing a change of $0.3 million, or 0.8%. The
decrease was due primarily to the shift in the timing of the three trade shows
noted previously since direct costs related to those shows are deferred and
recognized when the show is held in the fourth quarter. This decrease was
partially offset by editorial, production and circulation costs incurred by
Duke, Streaming Media and PTS, which were acquired in September 2000 as well as
additional costs related to the acquisitions completed in the first half of
2001.
As a percentage of revenues, editorial, production and circulation
expenses increased from 43.6% in 2000 to 53.9% in 2001. The increase was due
largely to the shift in timing of the higher margin trade shows, as noted above.
Higher margin trade shows only represented 14.4% of revenues for the quarter
compared with 27.8% of revenues for the same period in 2000.
Selling, General and Administrative
Selling, general and administrative expenses grew $0.5 million, or
1.4%, from $36.2 million for the three months ended September 30, 2000 to $36.7
million for the same period in 2001. The increase was due primarily to selling,
general and administrative costs incurred by Duke, Streaming Media and PTS,
which were acquired in September 2000, as well as additional costs related to
the acquisitions completed in the first half of 2001. These increases were
partially offset by the shift in the timing of the three trade shows noted
previously since direct costs related to those shows are deferred and recognized
when the show is held in the fourth quarter.
As a percentage of revenues, selling, general and administrative
expenses increased from 47.1% in 2000 to 59.6% in 2001. The increase was due
largely to the timing of the trade shows, as noted above.
Impairment of Assets
In connection with an ongoing review of its portfolio of businesses,
Penton recorded asset and goodwill impairment charges of $9.7 million ($5.8
million after tax, or $0.18 per diluted share). In addition to the goodwill
write-down of $7.1 million, asset impairments of $1.7 million were written down
for various Web sites that were shut down. In addition, $0.9 million of
circulation software costs were written off at one of our business units due to
a management decision to discontinue the development of the software and to
outsource that function.
Restructuring Charge
Restructuring charges of $9.5 million ($5.7 million after tax, or $0.18
per diluted share) resulted primarily from strategic decisions to restructure a
number of businesses and support departments, and to reduce our overhead
infrastructure by consolidating and closing several branch offices, centralizing
information technology, and outsourcing certain corporate functions. Of the
total charge, $3.5 million relates to employee termination benefits and $6.0
million relates to the closure of 15 Penton offices worldwide. The charge is
reported as a
27
component of operating expenses. See Note 12 - Restructuring and Impairment
Charges for additional information on related cash payments. The following sets
forth additional detail concerning the principal components of the charge:
- Personnel costs of $3.5 million primarily are associated with the
elimination of 240 positions, of which, 107 positions and payments
of $1.1 million have already been completed. Approximately 88% of
the positions eliminated or to be eliminated are in the U.S. with
the remaining positions predominantly in the United Kingdom and
Germany. Personnel costs include payments for severance, costs of
outplacement services and a provision for continued benefits to
personnel.
- Office closure costs of $6.0 million relate to the closure of 15
Penton offices worldwide and include costs associated with
existing office spaces under lease including rent and common area
maintenance costs in addition to costs to vacate the space.
Depreciation and Amortization
Depreciation and amortization increased $3.4 million, or 42.8%, to
$11.2 million for the three months ended September 30, 2001. The higher expense
primarily was the result of the amortization of goodwill and intangible assets
related to acquisitions completed in 2000 and 2001, as well as increased
depreciation associated with capital expenditures related to the corporate
headquarters relocation in the fourth quarter of 2000.
OPERATING INCOME (LOSS)
Overall, Penton's operating loss increased $37.9 million, from a loss
of $0.7 million for the three months ended September 30, 2000 to a loss of $38.6
million for the same period in 2001. Operating income as a percentage of revenue
increased from a loss of 0.9% in 2000 to a loss of 62.8% in 2001.
OTHER INCOME (EXPENSE)
Interest expense, net of interest earned, increased $5.1 million to
$8.3 million for the three months ended September 30, 2001, compared to the same
prior year period of $3.1 million, due to a higher average debt balance
outstanding for the three months ending September 30, 2001 when compared with
the same prior year period, as well as a decrease in interest earned on Penton's
lower average cash balance compared with the prior year.
EFFECTIVE TAX RATES
The effective tax rates were 38.1% and 66.9% for the three months ended
September 30, 2001 and 2000, respectively. During the second quarter of 2001,
Penton changed its method for calculating its interim tax provision from the use
of the annual effective tax rate approach to the discrete period approach. The
tax provision change was made due to the limited forward visibility on results
of operations for the remainder of 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2000
REVENUES
Total revenues increased $19.4 million, or 7.4%, from $261.6 million
for the nine months ended September 30, 2000 to $281.0 million for the same
period in 2001.
Publishing revenues increased $1.9 million, or 1.2%, from $163.4
million for the nine months ended September 30, 2000 to $165.3 million in the
same period in 2001, due primarily to the following: (i) the addition of Windows
2000 Magazine, Business Finance Magazine, SQL Server Magazine and iSeries NEWS
magazine, which were part of the Duke acquisition in September 2000; (ii) the
addition of IT Consultant, m-CommerceWorld, ISPWorld, and Service Management
magazines, which were part of the Hillgate acquisition in
28
February 2001; (iii) the addition of Contractor magazine, which was acquired in
April 2001; (iv) the addition of Group Computing magazine, which was acquired in
December 2000; (v) the launch of Medical Design News magazine in the fourth
quarter of 2000, and (vi) the launch of Netronics magazine in May 2001. These
increases were partially offset by revenue declines from technology magazines,
especially Internet World magazine, as well as from select magazines serving the
manufacturing industry and electronics OEM markets and due to the timing of a
major directory, which was published in the first quarter of 2000 and is
scheduled to be published in the fourth quarter of 2001.
Trade show and conference revenues increased $10.1 million, or 10.5%,
from $96.1 million for the nine months ended September 30, 2000 to $106.2
million for the same period in 2001, due primarily to the following: (i) added
results of acquired properties, including Internet World Berlin, Streaming Media
West and PTS regional events; (ii) the successful launches of Internet World
Wireless East, ASPCON London, Streaming Media events in Berlin, Hong Kong and
Tokyo, ASPCON Spring and m-Commerce World; and (iii) strong year-on-year growth
of events, including Internet World UK, ISPCON London, Natural Product Expo West
and Natural Products Expo Europe. Revenues were partially offset by a
significant decline in the high-margin Internet World Spring show held in the
first quarter of 2001, as well as the shift in timing of the Natural Products
Expo East, International Leisure Industry Week, and CLEC Expo Fall (now titled
Last Mile) trade shows which were held in the third quarter of 2000 and will be
held in the fourth quarter of 2001.
Online media revenues increased $7.4 million, from $2.0 million for the
nine months ended September 30, 2000 to $9.5 million for the same period in
2001, due primarily to the addition of Duke's online media business, which was
acquired in September 2000.
OPERATING EXPENSES
Operating expenses increased $77.7 million, or 33.2%, from $234.4
million for the nine months ended September 30, 2000 to $312.1 million for the
same period in 2001. As a percentage of revenues, operating costs increased from
89.6% in 2000 to 111.1% in 2001. The increase in operating expenses as a
percentage of revenues was due primarily to the $24.7 million of impairment of
asset and restructuring charges recognized during the year, the shift in timing
of the three trade shows as previously discussed, lower margins earned from
certain trade shows and magazines due to market conditions, and higher
depreciation and amortization expense resulting from acquisitions completed in
2000 and 2001 as well as the corporate headquarters relocation costs incurred in
the fourth quarter of 2000.
Editorial, Production and Circulation
Editorial, production and circulation expenses grew to $117.2 million
for the nine months ended September 30, 2001 compared with $98.6 million for the
same period in 2000, representing an increase of $18.5 million, or 18.8%. The
increase in costs was due primarily to the acquisitions of Duke, Streaming Media
and PTS in September 2000, as well as the nine acquisitions completed in the
first half of 2001. The increase was offset, in part, by the shift in the timing
of the three trade shows noted previously since direct costs related to those
shows have been deferred and will be recognized when the shows are held in the
fourth quarter.
As a percentage of revenues, editorial, production and circulation
expenses increased from 37.7% in 2000 to 41.7% in 2001. The increase in
percentage was due largely to lower margins earned from both trade shows and
conferences and magazines in 2001 when compared with the same period in 2000,
period costs associated with the acquisitions acquired in September 2000, as
well as the timing of the three trade shows as previously discussed.
29
Selling, General and Administrative
Selling, general and administrative expenses grew $24.5 million, or
21.9%, from $111.8 million for the nine months ended September 30, 2000 to
$136.3 million for the same period in 2001. The increase in costs was due
primarily to the acquisition of Duke, Streaming Media and PTS in September 2000,
as well as the nine acquisitions completed in the first half of 2001. The
increase was offset, in part, by the shift in the timing of the three trade
shows noted previously since direct costs related to those shows have been
deferred and will be recognized when the shows are held in the fourth quarter.
As a percentage of revenues, selling, general and administrative
expenses increased from 42.7% in 2000 to 48.5% in 2001. The increase was due
largely to period costs associated with the acquisitions acquired in September
2000 as well as the first half of 2001, and to increased health care costs
year-over-year.
Impairment of Assets
For the nine months ended September 30, 2001, in connection with an
ongoing review of its portfolio of businesses, Penton recorded asset and
goodwill impairment charges of $9.7 million ($5.8 million after tax, or $0.18
per diluted share). In addition to the goodwill write-down of $7.1 million,
asset impairments of $1.7 million were written down for various Web sites that
were shut down. In addition, $0.9 million of circulation software costs were
written off at one of our business units due to a management decision to
discontinue the development of the software and to outsource that function.
For the nine months ended September 30, 2000, the Company recorded a
$1.1 million non-cash charge in the second quarter of 2000 to write down the
carrying value of certain leasehold improvements, furniture and fixtures, and
computer equipment to fair value.
Restructuring Charge
Third Quarter
Restructuring charges of $9.5 million ($5.7 million after tax, or $0.18
per diluted share) resulted primarily from strategic decisions to restructure a
number of businesses and support departments, and to reduce our overhead
infrastructure by consolidating and closing several branch offices, centralizing
information technology, and outsourcing certain corporate functions. Of the
total charge, $3.5 million relates to employee termination benefits and $6.0
million relates to the closure of 15 Penton offices worldwide. The charge is
reported as a component of operating expenses. See Note 12 - Restructuring and
Impairment Charges for additional information on related cash payments. The
following sets forth additional detail concerning the principal components of
the charge:
- Personnel costs of $3.5 million primarily are associated with the
elimination of 240 positions, of which, 107 positions and payments
of $1.1 million have already been completed. Approximately 88% of
the positions eliminated or to be eliminated are in the U.S. with
the remaining positions predominantly in the United Kingdom and
Germany. Personnel costs include payments for severance, costs of
outplacement services and a provision for continued benefits to
personnel.
- Office closure costs of $6.0 million relate to the closure of 15
Penton offices worldwide and include costs associated with
existing office spaces under lease including rent and common area
maintenance costs in addition to costs to vacate the space.
30
First Quarter
As a result of economic conditions, Penton adjusted its portfolio of
online media products to focus on those that are demonstrating revenue growth,
customer acceptance and near-term opportunity for profit. To that end, Penton
announced a restructuring program in February 2001 with the intent of
discontinuing certain online media operations that did not met these objectives.
Penton incurred a pre-tax charge of $5.6 million for this restructuring program
in the first quarter of 2001. The charge was reported as a component of
operating expenses. See Note 12 - Restructuring and Impairment Charges for
additional information on related cash payments. The following sets forth
additional detail concerning the principal components of the charge:
- Asset impairment costs totaled $2.1 million. These costs
primarily included the write-off of capitalized software costs
associated with the discontinuance of the industry exchange
component of New Hope Natural Media's Healthwell.com.
- Personnel costs of $1.9 million primarily are associated with
the separation of 60 employees at Healthwell.com as well as a
reduction of workforce in a number of other online media
initiatives at Penton. Personnel costs included payments for
severance, costs of outplacement services and provision for
continued benefits to personnel.
- Exit costs of $1.6 million reflecting the costs associated
with existing office spaces under lease and other contractual
obligations.
Depreciation and Amortization
Depreciation and amortization increased $11.0 million, or 48.3%, to
$33.9 million for the nine months ended September 30, 2001. The higher expense
is primarily the result of the amortization of goodwill and intangible assets
from acquisitions completed in 2000, primarily Streaming Media, PTS and Duke,
and 2001, as well as increased depreciation associated with capital expenditures
related to the corporate headquarters relocation in the fourth quarter of 2000.
OPERATING INCOME (LOSS)
Overall, Penton's operating income decreased $58.3 million, or 214.1%,
from income of $27.2 million for the nine months ended September 30, 2000 to a
loss of $31.1 million for the same period in 2001. As a percentage of revenue,
the Company had operating income of 10.4% in 2000 and an operating loss of 11.1%
in 2001.
OTHER INCOME (EXPENSE)
Interest expense increased $12.2 million to $20.5 million for the nine
months ended September 30, 2001, compared to $8.3 million in the same prior-year
period, due to a higher average debt balance outstanding, as well as a
significant decrease in interest earned on the Company's lower average cash
balance compared with the prior year.
In February 2000, Penton sold 2.0 million shares of INT Media Group,
Inc. stock as part of a 3.75 million-share secondary offering. Penton received
cash of $113.1 million and recognized a pre-tax gain of approximately $110.2
million.
Miscellaneous net expense increased $1.9 million to $2.2 million for
the nine months ended September 30, 2001 compared with $0.4 million in the same
prior-year period. The increase is due primarily to minority equity interests
and various professional fees related to unsuccessful potential acquisitions
which were written off.
31
EFFECTIVE TAX RATES
The effective tax rates were 32.7% and 42.6% for the nine months ended September
30, 2001 and 2000, respectively. During the second quarter of 2001, Penton
changed its method for calculating its interim tax provision from use of the
annual effective tax rate approach to the discrete period approach. The tax
provision change was made due to the limited forward visibility on results for
the remainder of 2001. The effective tax rate for the nine months ended
September 30, 2000 was affected by Penton's sale of a portion of its investment
in INT Media Group, Inc. stock, which resulted in the recognition of a pre-tax
gain of $110.2 million.
ADJUSTED EBITDA
Net income before interest, taxes, depreciation and amortization, and
one-time items ("adjusted EBITDA") is a widely used and commonly reported
standard measure utilized by analysts and investors in the analysis of companies
in the media industry. Adjusted EBITDA is not a measure of performance under
GAAP because it excludes those items listed above that are significant
components in understanding and evaluating Penton's financial performance.
However, the following adjusted EBITDA information can be helpful in determining
Penton's ability to meet its debt service requirements and in comparative
analyses for operating performance relative to other media companies. Penton's
calculation of adjusted EBITDA is as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ------------------------
2001 2000 2001 2000
---------- -------- ---------- ----------
Net income (loss) $ (29,495) $ (1,244) $ (36,256) $ 73,789
Interest expense, net of interest earned 8,263 3,129 20,513 8,305
Restructuring charge 9,468 - 15,035 -
Gain on sale of investments - - - (110,210)
Provision for income taxes (18,184) (2,512) (17,582) 54,918
Depreciation and amortization 11,211 7,851 33,925 22,880
Impairment of assets 9,663 - 9,663 1,051
Discontinued operation - - - 85
Miscellaneous, net 794 (87) 2,244 357
----------- --------- ---------- ----------
Adjusted EBITDA $ (8,280) $ 7,137 $ 27,542 $ 51,175
=========== ========= ========== ==========
For the three months ended September 30, 2001, the Company's adjusted
EBITDA decreased $15.4 million, or 216.0%, to a loss of $8.3 million from income
of $7.1 million for the same period in 2000. Adjusted EBITDA margins decreased
to a loss of 13.5% for the quarter compared with income of 9.3% in the same year
ago period. The decease in both adjusted EBITDA and adjusted EBITDA margins were
primarily due to the shift in the timing of the three higher margin trade shows
noted previously, significant declines on certain high-margin properties serving
technology markets, declines on select manufacturing titles, and increased
period costs primarily associated with the three larger acquisitions completed
in September 2000.
For the nine months ended September 30, 2001, the Company's adjusted
EBITDA decreased $23.6 million, or 46.2%, to $27.5 million from $51.2 million
for the same period in 2000. Adjusted EBITDA margins were 9.8% for the nine
months ended September 30, 2001 compared to 19.6% for the same period in 2000.
The decreases reflect the timing of the three trade shows noted above,
significant declines from certain high-margin properties serving technology
markets, and declines from select manufacturing titles, partially offset by
added results from acquisitions and profit improvements on certain existing
properties.
32
Penton's calculation of adjusted EBITDA by product is as follows (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ----------------------
2001 2000 2001 2000
---------- --------- --------- -------- -
Publishing $ 7,625 $ 12,233 $ 22,957 $ 37,319
Trade shows & conferences (6,083) 4,782 35,233 41,451
Online media (777) (1,812) (2,707) (3,958)
---------- --------- ---------- -----------
Subtotal 765 15,203 55,483 74,812
General and administrative (9,045) (8,066) (27,941) (23,637)
---------- --------- ---------- -----------
Adjusted EBITDA $ (8,280) $ 7,137 $ 27,542 $ 51,175
========== ========= ========== ===========
For the three months ended September 30, 2001, adjusted EBITDA for the
Company's publishing operations decreased $4.6 million, or 37.7%, when compared
with the same prior year period. Adjusted EBITDA was heavily impacted by
declines from Penton's technology magazines, most significantly Internet World;
and declines from select manufacturing and electronic titles, partially offset
by results of acquisitions.
For the three months ended September 30, 2001, adjusted EBITDA for the
Company's trade show and conference operations decreased $10.9 million, or
227.2% when compared with the same prior year period. The decline was due
primarily to the shift in timing of the three trade shows previously mentioned,
and period costs associated with acquisitions primarily acquired in September
2000.
For the three months ended September 30, 2001, adjusted EBITDA for the
Company's online media operations decreased from a loss of $1.8 million to a
loss of $0.8 million. The improvement was due primarily to the addition of
Duke's online media business, acquired in September 2000.
For the three months ended September 30, 2001, general and
administrative costs increased $1.0 million, when compared with the same prior
year period, primarily due to an increase in health care costs and acquisitions
completed in 2000 and 2001.
For the nine months ended September 30, 2001, adjusted EBITDA for the
Company's publishing operations decreased $14.4 million, or 38.5%, when compared
with the prior year period, as a result of declines on high-margin magazines
serving technology markets, primarily Internet World; as well as select
manufacturing and electronic magazines; investments in magazine launches; and
the timing of a major directory, which was published in the first quarter of
2000 and is scheduled to be published in December 2001.
For the nine months ended September 30, 2001 adjusted EBITDA for the
Company's trade show and conference operations decreased $6.2 million, or 15.0%.
This decrease was due to a significant decline in the high-margin Internet World
Spring show held in the first quarter of 2001, as well as the shift in timing of
the three trade shows noted above. These declines were offset partially by added
results of acquired properties, including Internet World Berlin, Streaming Media
West and PTS regional events; successful launches, including Internet World
Wireless East, ASPCON London, Streaming Media events in Berlin, Hong Kong and
Tokyo, and m-Commerce World; and strong year-on-year growth of events, including
Internet World UK, Service Management Europe, ISPCON London, Natural Products
Expo West and Natural Products Expo Europe.
For the nine months ended September 30, 2001, adjusted EBITDA for the
Company's online media operations decreased from a loss of $4.0 million in 2000,
to a loss of $2.7 million for the same period in 2001. The improvement was due
primarily to the addition of Duke's online media business, acquired in September
2000.
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For the nine months ended September 30, 2001, general and
administrative costs increased $4.3 million, when compared with the same
prior-year period. The increase was primarily due to higher compensation
expense, a significant year-over-year increase in healthcare costs, and
acquisitions completed during 2000 and 2001.
FOREIGN CURRENCY
The functional currency of the Company's foreign operations is their
local currency. Accordingly, assets and liabilities of foreign operations are
translated to U.S. Dollars at the rates of exchange on the balance sheet date;
income and expense are translated at the average rates of exchange prevailing
during the period. There were no significant foreign currency transaction gains
or losses for the periods presented.
LIQUIDITY AND CAPITAL RESOURCES
During the periods presented, Penton financed its operations primarily
through cash generated from operating activities, borrowings under its credit
facilities, the issuance of senior subordinated notes and the sale of
investments.
Cash used by operating activities was $14.8 million for the nine
months ended September 30, 2001, reflecting the Company's net loss of $36.3
million in addition to a net working capital decrease of $36.6 million and
non-cash charges of approximately $58.1 million. Cash provided by operating
activities was $3.7 million for the nine months ended September 30, 2000
reflecting the Company's net income of $73.8 million in addition to a net
working capital increase of approximately $15.1 million and non-cash items of
approximately $85.2 million.
Investing activities used $28.6 million for the nine months ended
September 30, 2001, primarily due to the nine acquisitions completed in 2001,
earnout payments related to 2000 and capital expenditures. For the nine months
ended September 30, 2000, investing activities used $98.7 million, due to
proceeds from the sale of 2.0 million shares of INT Media Group, Inc. stock and
proceeds from the sale of the Direct Mail segment, offset by the use of cash for
acquisitions and investments, earnout payments related to 1999, and capital
expenditures.
Financing activities provided $60.2 million for the nine months ended
September 30, 2001, primarily from borrowings under the Company's revolving
credit facility and proceeds from the senior subordinated notes, offset
partially by repayments under the credit facility, dividends paid to
stockholders, and the payment of financing fees. Financing activities provided
$75.6 million in 2000, primarily from borrowings under the Company's revolving
credit facility, offset partially by the payment of dividends to stockholders.
In June 2001, Penton issued $185.0 million of 10 3/8% Senior
Subordinated Notes ("the Notes") due 2011 to qualified institutional buyers
pursuant to Rule 144A of the Securities Act of 1933, as amended. Interest is
payable on the Notes semiannually on June 15 and December 15. The Notes are
guaranteed, on a senior subordinated basis, by the Company's domestic
subsidiaries and may be redeemed on or after June 15, 2006. In addition, the
Company may redeem up to 35% of the aggregate principal amount of the Notes
before June 15, 2004 with the proceeds of certain equity offerings. The Notes
were offered at a discount of $4.2 million, which is being amortized over the
term of the Notes. Amortization of the discount was not material for the
nine-month period ended September 30, 2001. Costs representing underwriting fees
and other professional fees of $1.5 million are being amortized over the term of
the Notes. 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
Term Loan A and $7.2 million of Term Loan B. The remaining proceeds will be used
for general corporate purposes. The 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
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, or enter into mergers or consolidations.
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In October 2000, Penton amended its Credit Agreement to give the
Company the option to increase, in the aggregate, its Term Loan A, Term Loan B
and/or its Revolver by $100.0 million. Concurrent with the closing of the
amendment, the Company obtained committed financing in the amount of $60.0
million of the $100.0 million under the Revolver, thereby increasing the total
available under the Revolver to $185.0 million. The remaining $40.0 million
could not be requested on more than three separate occasions, and any increase
had to have taken place by September 30, 2001. The Company did not exercise this
option.
Because of recent economic conditions, we expect that in the fourth
quarter we will be in violation of some of the financial covenants that we are
required to maintain pursuant to the terms of our credit facility. We have
informed the administrative agent of our credit facility of these matters and
are currently in negotiations to amend the credit facility or to obtain a waiver
so that we will not be in violation of any financial covenants. However, we
cannot assure you that we will be able to obtain an amendment to, or waiver of,
the covenants under our credit facility. This would impact our ability to borrow
further under the credit facility.
Based upon current and anticipated levels of operations, management
believes that cash on hand and cash flow from operations, combined with
borrowings available under Penton's credit facilities, will be sufficient to
enable Penton to meet current and anticipated cash operating requirements,
including scheduled interest and principal payments, capital expenditures and
working capital needs. However, actual capital requirements may change,
particularly as a result of any acquisitions that Penton may make. Penton's
ability to meet current and anticipated operating requirements will depend upon
its future performance, which, in turn, will be subject to general economic
conditions and to financial, business and other factors, including factors
beyond Penton's control. Depending on the nature, size and timing of future
acquisitions, Penton may be required to raise additional capital through
additional financing arrangements or the issuance of private or public debt or
equity securities. Management cannot assure that such additional financing will
be available at acceptable terms. Substantially all of Penton's debt bears
interest at floating rates. Therefore, Penton's liquidity and financial
condition are, and will continue to be, affected by changes in prevailing
interest rates.
SEASONALITY
The majority of our trade shows and conferences are held in the second
and fourth quarters and, accordingly, the majority of revenue is recognized in
these quarters. Penton may also experience seasonal fluctuations as trade shows
and conferences held in one period in the current year may be held in a
different period in future years.
INFLATION
The impact of inflation on Penton's results of operations has not been
significant in recent years.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 141 "Business
Combinations". FAS No. 141 requires that all business combinations be accounted
for under the purchase method of accounting. In addition, this Statement
addresses financial accounting and reporting for goodwill and other intangible
assets acquired in a business combination at acquisition. The Statement also
provides criteria for the separate recognition of intangible assets acquired in
a business combination. FAS No. 141 is effective for all business combinations
initiated after June 30, 2001.
In July 2001, the FASB issued FAS No. 142 "Goodwill and Other
Intangible Assets". FAS 142 addresses financial accounting and reporting for
intangible assets acquired individually or with a group of other assets at
acquisition. FAS No. 142 presumes that goodwill and certain intangible assets
have indefinite useful lives. Accordingly, goodwill and certain intangibles will
not be amortized but rather will be tested at least annually for impairment. FAS
No. 142 also addresses accounting and reporting for goodwill and other
intangible assets subsequent to their acquisition. FAS No. 142 is effective for
fiscal years beginning after December 15, 2001. We
35
anticipate that the adoption of this Statement will lead to the elimination of
approximately $27.4 million of goodwill amortization in 2002. We are currently
in the process of evaluating the impact of the other provisions of this
Statement on Penton.
In August 2001, the FASB issued FAS No. 143, "Accounting for Asset
Retirement Obligations". This Statement requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred. When the liability is initially recorded, the entity capitalizes
the cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The Company is
required to adopt this Statement for fiscal 2004. The Company is analyzing the
effect of this Statement, and does not expect it to have a material effect on
the Company's consolidated financial position, results of operations or cash
flows.
In October 2001, the FASB issued FAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This Statement, which supersedes
FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", provides a single accounting model for
long-lived assets to be disposed of. Although retaining many of the fundamental
recognition and measurement provisions of FAS No. 121, the Statement
significantly changes the criteria that would have to be met to classify an
asset as held-for-sale. The Company is analyzing the effect of this Statement
and does not expect it to have a material effect on the Company's consolidated
financial position, results of operations or cash flows.
EURO CONVERSION
On January 1, 1999, 11 of the 15 participating countries that are
members of the European Union established a new uniform currency known as the
Euro. The currency existing prior to such date in the participating countries
will be phased out during the transition period commencing January 1, 1999, and
ending January 1, 2002. During this transition period, both the Euro and the
existing currency will be available in the participating countries. Although
Penton generates revenues in some of the participating countries, the
introduction and use of the Euro has not materially affected Penton's business,
results of operations or financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in
market rates and prices, such as foreign currency exchange and interest rates.
Penton does not enter into financial instruments for trading or speculative
purposes.
In the normal course of business, Penton manages fluctuations in
interest rates through interest rate swap and cap agreements to hedge at least
50% of its floating rate borrowings. Penton's objective in managing this
exposure is to reduce fluctuations in earnings and cash flows associated with
changes in interest rates.
Penton maintains assets and operations in the United Kingdom and in
various other countries. As a result, it may be exposed to cost increases
relative to the markets in which it sells. At September 30, 2001, a hypothetical
10% strengthening of the U.S. dollar relative to the currencies of foreign
countries in which Penton operates was not material.
36
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
None
(B) REPORTS ON FORM 8-K AND/OR 8-K/A
DATE OF REPORT ITEMS REPORTED
September 20, 2001 Item 5. Other Events
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits
October 30, 2001 Item 5. Other Events
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits
37
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/ Joseph G. Necastro
--------------------------------
Joseph G. NeCastro
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
Date: November 14, 2001
38