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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
COMMISSION FILE NUMBER 1-14337
PENTON MEDIA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-2875386
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(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1300 EAST NINTH STREET, CLEVELAND, OHIO 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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer as
defined in Exchange Act Rule 12b-2. Yes [ ] No [X]
The aggregate market value of common stock held by non-affiliates as of
June 28, 2002 at a closing price of $2.15 per share as reported by the New York
Stock Exchange was approximately $17,650,580. Shares of common stock held by
each officer and director, their respective spouses, and by each person who owns
or may be deemed to own 10% or more of the outstanding common stock have been
excluded because such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
32,805,103 COMMON SHARES OUTSTANDING AS OF MARCH 25, 2003
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the annual meeting of
stockholders to be held on June 12, 2003 are incorporated by reference into Part
III of this report.
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PENTON MEDIA, INC.
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplemental Data
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Item 13. Certain Relationships and Related Transactions
Item 14. Controls and Procedures
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form
8-K
2
PART I
ITEM 1. BUSINESS
OVERVIEW
We believe we are a leading, global business-to-business media company. We
provide media products that deliver proprietary business information to owners,
operators, managers and professionals in the industries we serve. Through these
products, we offer industry suppliers multiple ways to reach their customers and
prospects as part of their sales and marketing efforts. We publish 53
specialized trade magazines, produce 64 trade shows and conferences, and provide
Web sites, electronic newsletters and other online media products. Our products
serve 12 industry sectors, which we group into four segments:
INDUSTRY MEDIA TECHNOLOGY MEDIA
Manufacturing Internet/Broadband
Design/Engineering Information Technology
Mechanical Systems/Construction Electronics
Supply Chain RETAIL MEDIA
Government/Compliance Food/Retail
Aviation Leisure/Hospitality
LIFESTYLE MEDIA
Natural Products
We believe we have leading media products in each of the industry sectors
we serve. We are structured along segment and industry lines rather than by
product lines. This enables us to promote our related groups of publications,
trade shows and conferences, and online media products to our customers.
Since our founding in 1892, we have grown from an industrial trade magazine
publishing company into a leading, integrated business-to-business media company
serving a wide range of industrial, technology and retail markets. We became an
independent company, incorporated in the State of Delaware, as a result of our
spinoff from Pittway Corporation in August 1998.
Our principal executive offices are located at The Penton Media Building,
1300 East Ninth Street, Cleveland, Ohio 44114 (telephone 216-696-7000).
We maintain a Web site at http://www.penton.com. The information contained
on our Web site is not incorporated by reference in this report, and you should
not consider it a part of this report. Our Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those
reports are available free of charge on our Web site as soon as reasonably
practicable after they are filed with, or furnished to, the Securities and
Exchange Commission.
Unless otherwise noted herein, disclosures in this Annual Report on Form
10-K relate only to our continuing operations. Our discontinued operations
consist of Penton Media Australia Pty, Limited ("PM Australia"), which was sold
in December 2002, and Professional Trade Shows ("PTS"), which was sold in
January 2003.
Unless the context otherwise requires, the terms "we," "our," "us,"
"Company" and "Penton" as used herein refer to Penton Media, Inc. and its
subsidiaries.
OUR BUSINESS STRATEGY
In 2002, we experienced declines in our revenues and adjusted EBITDA as a
result of difficult business conditions across most of our markets and
particularly challenging conditions in our technology and manufacturing-related
media portfolios, which constitute our largest portfolios. Adjusted EBITDA (and
a reconciliation of adjusted EBITDA to operating income (loss)) is defined in
the non-GAAP financial measure section of "Management's Discussion and Analysis
of Financial Conditions and Results of
3
Operations." Due to these challenges and their impact on our financial
performance, we have shifted our business strategy from accelerating growth
through aggressive acquisitions and internal product development to improving
profitability through cost reduction measures.
Reduce Fixed Costs. Penton had built a cost structure to support the
approximately 25% compounded annual revenue growth we experienced between 1996
and 2000. Beginning in 2001, and throughout 2002, we implemented a number of
cost reduction initiatives in an effort to align our cost structure with the
sharp downturn in our business. These efforts included reducing net headcount by
489 positions in 2002, on top of 357 positions we eliminated in 2001 (a combined
46.3% net reduction over the two-year period); freezing salaries and
implementing a hiring freeze; reducing employee benefits; reducing capital
spending; and effectively outsourcing certain corporate and division functions.
We believe our cost reduction efforts will enable us to improve our operating
results for the year ended December 31, 2003, compared with 2002, assuming
revenues do not decline significantly below 2002 levels.
Restructure Product Portfolio. We aggressively began to restructure our
portfolio in the second half of 2001 to improve the profitability of our
publications, trade shows and conferences, and online media products, and in
2002, we continued our restructuring efforts. We canceled several 2002
technology and manufacturing-related trade shows due to weak market conditions;
we divested media properties serving Internet, telecom and other technology
markets due to uncertainty about the near-term recovery prospects for these
markets; and we canceled or postponed the launch of certain properties until
technology markets are strong enough to support these new products. We believe
these restructuring efforts will improve the adjusted EBITDA of our product
lines without compromising the strength and integrity of our core media brands
and their usefulness and value to our customers.
Pursue Low-Risk Organic Product Launches. Due to the uncertain business
environment, we intend to grow our business by launching new products that
require modest capital investment. We launch new products by capitalizing on our
existing knowledge base to identify growth segments within the market sectors we
currently serve, using our proprietary databases to identify buyers and sellers
within those markets, and leveraging our existing sales and marketing
infrastructure to generate revenue without investing significant incremental
capital. Our publication launches require a modest capital investment, but
typically generate positive adjusted EBITDA, before shared expenses, within two
to three years. Our trade show and conference launches require minimal capital
investment and typically generate positive adjusted EBITDA, before general and
administrative expenses (as more fully described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations"), in the first year
because we leverage our existing trade show infrastructure and incubate new
trade shows or conferences within our existing events. We continue to monitor
the profitability of our launches to determine whether they should be eliminated
or restructured.
OUR PRODUCTS AND SERVICES
Our four segments derive their revenues from in-print publications,
in-person trade shows and conferences, and online Web sites and electronic
newsletters to customers in our 12 distinct industry sectors. Content of our
Industry Media publications, trade shows and conferences, and online media
products is geared to customers in the aviation, design/engineering,
government/compliance, manufacturing, mechanical systems/ construction, and
supply chain industries. Content of our Technology Media publications, trade
shows and conferences, and online media products is geared to customers in the
electronics, information technology and Internet/broadband industries. Content
of our Lifestyle Media publications, trade shows and conferences, and online
media products is geared to customers in the natural products industry. The
content of our Retail Media publications, trade shows and conferences, and
online media products is geared to customers in the food/retail and
leisure/hospitality markets.
IN PRINT: PUBLICATIONS
Trade Magazines. We publish specialized trade magazines in the United
States. Of our 34 magazines that are audited by a third-party service, 25, or
74%, hold the number-one or number-two market share position in their target
markets, based on number of advertising pages. Our publications are recognized
for the quality of their editorial content; since 1990 our magazines have won
more than 700 editorial awards.
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We publish 53 trade magazines with a combined circulation of more than 3.4
million subscribers worldwide. Our magazines generate revenues primarily from
the sale of advertising space. Our magazines are primarily controlled
circulation. The magazines are distributed free of charge to qualified
subscribers in our target industries. Subscribers to controlled-circulation
publications qualify to receive our trade magazines by verifying their
responsibility for specific job functions, including purchasing authority. We
survey our magazine subscribers annually to verify their continuing
qualification.
BPA International, an independent auditor of magazine circulation, audits
circulation information for the majority of our publications each year. These
audits verify that we have accurately identified the number and job
responsibilities of qualified subscribers and that those subscribers are
eligible to receive the relevant publication according to our established
criteria.
Each of our publications has its own advertising sales team and rate
structure. Some advertisers may qualify for discounts based on advertising in
multiple publications. We enable marketers to be more cost efficient in their
advertising purchases by providing a single source for integrated products.
In addition, each of our publications has its own editorial staff. To
preserve the editorial integrity of each publication's news reporting and
analysis, we seek to maintain separation between the editorial and sales staffs
of each publication. We believe that our reputation for objective, fair and
credible editorial content contributes significantly to our success. Sixteen of
our publications have served their industries for more than 50 years.
Our editorial staffs meet frequently with readers of their publications to
maintain a current understanding of the information needs and interests of those
readers, in an effort to serve them more effectively. We devote considerable
resources to the study of trends in our industries and strive to make our
publications the most widely used among our targeted audiences. Many of our
editors and contributors are recognized as experts in their fields and are
regularly contacted by the general press to comment on developments and trends
in their respective markets.
Directories and Buyers' Guides. We also publish six industry directories
as well as buyers' guides, which are respected sources of buying information for
industry decision makers. Most of the business directories we publish have
limited competition.
IN PERSON: TRADE SHOWS AND CONFERENCES
We produce 64 trade shows and conferences, which attract attendees with
significant purchasing and specifying responsibility.
In the early 1990s, we entered the trade show and conferences business, and
in the late 1990s, we expanded our trade show business through acquisitions. For
example, the acquisition of New Hope Communications, Inc. in 1999 added the
Natural Products Expo East and West trade shows. In addition, we have expanded
our global presence. In 2000, we acquired control of ComMunic (now known as
Penton Media Germany, "PM Germany"), which produces trade shows, conferences and
business publications in Germany and its German-speaking neighboring countries.
Attendees at our trade shows and conferences are professionals and managers
in the industries we serve. Most trade shows include an extensive conference
program, which provides a forum for the exchange and dissemination of
information relevant to the particular event's focus. In addition, most trade
shows have one or more "keynote" sessions with speakers who are known for their
industry knowledge and expertise.
Trade show exhibitors pay a fixed price per square foot of booth space. In
addition, we receive revenues from attendee fees at trade shows and conferences
and from exhibitor sponsorships of promotional media.
ONLINE: WEB SITES AND ELECTRONIC NEWSLETTERS
We currently maintain dozens of market-specific Web sites serving numerous
market segments. Our online portfolio also includes electronic newsletters.
These electronic newsletters provide timely and focused information to highly
targeted professionals, and typically are sponsored by advertisers interested in
delivering marketing information to our targeted subscribers. We believe we have
a competitive advantage in the online
5
business because of our established customer relationships in the markets we
serve, the industry expertise of our staff and the opportunities we have to
promote our Web sites and electronic newsletters to targeted audiences through
our magazines and trade shows.
OTHER
We also provide ancillary information services that complement our
principal business media platforms. These services include:
- Marketing Services. We provide a variety of marketing services,
including article reprints and database rentals. We use information
from our subscription lists and other available databases to compile
detailed mailing lists and electronic mail address lists for rental by
marketers who want to promote their products and services through
direct mail and electronic marketing programs. We offer these services
to our customers to help them reach their targeted audiences.
- Custom Communications. We produce a range of client-specific
communications services, including newsletters, magazines, Web
conferencing, catalogs, directories, education and training materials,
and other marketing communications.
- Specialized Advertising. We collect and forward reader inquiries to
our advertisers. In addition, classified advertising sections in our
publications and on our Web sites provide a cost-efficient medium for
reaching prospects who are ready to buy specialized products and
services. Also, recruitment advertising provides an effective way to
reach qualified professionals seeking career opportunities.
RECENT DEVELOPMENTS
DISPOSITIONS
Discontinued Operations. In December 2002, the Company completed the sale
of the assets of PM Australia, which was part of our Technology Media segment,
to AJB Publishing Pty Limited for total consideration of approximately $0.1
million. Approximately $0.01 million was paid in cash upon closing, with the
remaining consideration to be paid in 12 equal monthly installments starting in
July 2003. The cash received from the sale was used to pay down the Company's
outstanding credit facility. The related loss on the sale approximates $0.6
million and is included as a component of discontinued operations in the
accompanying consolidated statements of operations.
In January 2003, the Company completed the sale of the assets of its PTS
group, which was part of our Industry Media segment, to Cygnus Business Media,
Inc. for total consideration of approximately $3.8 million, including a
potential earnout of $0.6 million based on reaching certain performance
objectives. The cash received from the sale was used to pay down the Company's
outstanding credit facility. A gain of approximately $1.0 million on the sale
was recorded in the first quarter of 2003. The results of PTS are included as a
component of discontinued operations in the accompanying consolidated statements
of operations.
Other Dispositions. In December 2002, the Company disposed of four other
properties. Three of these properties, Streaming Media, Boardwatch and ISPCON,
were part of our Technology Media segment. The other property, A/E/C, was part
of our Industry Media segment. The aggregate consideration for these properties
was approximately $0.9 million. The cash received from these sales was used to
pay down the Company's outstanding credit facility. The sale of the properties
resulted in a loss of approximately $0.9 million (which is in addition to the
impairment charges recorded for these properties), and is included in operations
as loss on sale of properties in the accompanying consolidated statements of
operations, as these properties did not qualify for discontinued operations
treatment.
VALUATION ALLOWANCE
For 2002, the Company recorded a $36.0 million charge to establish a full
valuation allowance for its net deferred tax assets and net operating loss
carryforwards. The valuation allowance was calculated in accordance with the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes"
6
("SFAS 109"). The Company intends to maintain a full valuation allowance for its
net deferred tax assets and net operating loss carryforwards until sufficient
positive evidence exists to support the reversal of the remaining reserve. Until
such time, except for minor foreign tax provisions, the Company will have no
reported tax provision, net of valuation allowance adjustments. In the event the
Company was to determine, based on the existence of sufficient positive
evidence, that it would be able to realize its deferred tax assets in the future
in excess of its net recorded amount, an adjustment to the valuation allowance
would increase income in the period such determination was made. See Note
10 -- Income Taxes in the Notes to Consolidated Financial Statements of the
Company for additional information regarding income taxes.
AMENDED CREDIT FACILITY
In March 2002, Penton amended and restated its senior credit facility and
repaid in full its term loan A and term loan B facilities. The amended and
restated credit agreement provided for a revolving credit facility of up to a
maximum amount of $40.0 million. Availability under the revolving credit
facility is subject to a borrowing base limited to 80% of eligible receivables.
Penton is required to prepay the revolver in the event that it has loans
outstanding in excess of the borrowing base, or if it has more than $7.5 million
in cash and cash equivalents at the end of any month. The amended and restated
credit facility has no financial covenants. In connection with the amendment and
restatement of the credit facility, the interest rate on the revolving credit
facility were increased. In addition, further restrictions were placed on
Penton's ability to make certain restricted payments, to make capital
expenditures in excess of certain amounts, to incur additional debt and
contingent obligations, to make acquisitions and investments, and to sell
assets.
In January 2003, the Company amended its senior credit facility. The
amended agreement permits the Company to sell certain properties in excess of
the $5.0 million aggregate limit required by the original amended agreement. In
return, the revolving commitment was reduced from $40.0 million to $32.0 million
and, at such time as the aggregate sum of the cash and cash equivalents of
Penton equals or exceeds $40.0 million, an additional one-time reduction of
$10.0 million would be required. In addition, upon the sale of the certain
properties as noted above, the revolving commitment would be further reduced by
50% of the aggregate gross proceeds from those sales, up to a maximum of $6.0
million. For all other asset dispositions, the revolver would be reduced by 50%
of the aggregate gross proceeds. At December 31, 2002 and January 31, 2003, the
revolver commitments under our credit facility were $40.0 million and $20.1
million, respectively. Availability under the commitments, which is subject to
the Company's eligible accounts receivable, was $13.5 million (net of $4.5
million outstanding) and $15.0 million at December 31, 2002 and January 31,
2003, respectively.
The amended facility allows for additional asset sales, transfers, leases,
and other dispositions and the issuance of equity interests by our subsidiaries
up to a maximum of approximately $3.6 million. The amended facility also
increased the maximum commitment fee from 0.50% to 0.75%.
NEW YORK STOCK EXCHANGE NOTIFICATION
On August 15, 2002, we were notified by the New York Stock Exchange
("NYSE") that our common stock was "below criteria" for continued listing
because the average closing price of our common stock for a consecutive 30-day
period prior to notification was below $1.00. On September 9, 2002, the NYSE
also notified us that Penton had fallen below the NYSE's standard requiring the
average total market capitalization of not less than $15 million over a 30-day
trading day period and requested that the Company provide a business plan
demonstrating how it intended to achieve and sustain compliance within 18 months
of receipt of the notification.
On October 24, 2002, the Company submitted its plan to the NYSE outlining
how it intended to comply with the listing criteria. On December 5, 2002, the
NYSE accepted the Company's proposed business plan, subject to quarterly
monitoring by the NYSE for progress against the Company's goals as outlined in
the plan. Failure to achieve the plan's financial and operational goals will
result in the Company being subject to NYSE trading suspension and delisting.
7
In February 2003, Penton's Board of Directors approved a proposal to effect
a reverse stock split to be submitted for shareholder approval at the Company's
annual meeting, set for June 12, 2003. This corrective share action is part of
the plan submitted by Penton to the NYSE to meet the NYSE $1.00 stock price
listing requirement.
PREFERRED STOCK LEVERAGE RATIO EVENT OF NON-COMPLIANCE
As of December 31, 2002, the Company's leverage ratio (defined as debt less
cash balances in excess of $5.0 million plus the liquidation value of the
preferred stock and unpaid dividends divided by Adjusted EBITDA) was 27x, which
will result in an event of non-compliance if not cured by March 31, 2003. Under
our Series B Convertible Preferred Stock Agreement (the "preferred stock") we
are required to maintain a leverage ratio below 7.5 to 1.0. If an event of
non-compliance occurs, the holders of a majority of the preferred stock may
nominate two additional members to our board of directors. If the event of
non-compliance is not cured by the end of the next succeeding quarter, the
holders of a majority of the preferred stock then outstanding may elect one less
than a minimum majority of our board of directors. The Company is not expected
to be able to correct the event of non-compliance within the 90-day cure period.
In addition, upon the occurrence of an event of non-compliance, the 5% dividend
rate on the preferred stock increases by one percentage point each quarter, up
to a maximum rate of 10%, and the conversion price on the preferred stock
decreases by $0.76 per quarter up to a maximum reduction of $3.80. The
conversion price will adjust to what it would have been absent such event (to
the extent of any shares of preferred stock are still outstanding) once the
leverage ratio is less than 7.5 to 1.0. The dividend rate will adjust back to 5%
as of the date on which the leverage ratio is less than 7.5 to 1.0. Under the
preferred stock agreement, if the leverage ratio exceeds 7.5 to 1.0 for four
consecutive quarters, the preferred stock holders will have the right to cause
the Company to seek a buyer for all of the assets or issued and outstanding
capital stock of the Company. The leverage ratio event of non-compliance does
not represent an event of default or violation under any of the Company's
outstanding notes or credit facility. As such, there will not be an acceleration
of any outstanding indebtedness as a result of this event. In addition, this
event of non-compliance and the resulting consequences do not result in any cash
outflow from the Company.
TAX REFUND
In January 2003, the Company received a tax refund of $52.7 million. A
portion of the proceeds was used to pay down the $4.5 million outstanding on the
Company's credit facility.
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.
In September 2000, Penton acquired the stock of Duke Communications
International ("Duke") for $100.0 million in cash plus contingent consideration
of up to $50 million based on the achievement of specified business targets
through 2003. Duke is a leading integrated media company serving the Windows
2000 and AS/400 operating systems markets.
In September 2000, Penton acquired the assets of PTS for $17.0 million in
cash. PTS produces regional trade shows for the plant engineering and
maintenance, material handling, buildings and facilities maintenance, design
engineering, and machine tool industries. As noted earlier, the Company sold PTS
in January 2003.
In September 2000, Penton acquired the stock of Streaming Media, Inc. for
$65.0 million in cash plus contingent consideration of up to $35 million based
on the achievement of specified business targets in 2001, which were not earned.
As noted earlier, the Company sold Streaming Media, Inc. in December 2002.
In 2000, the Company also completed the acquisitions of five smaller
companies (one of which was subsequently sold) for an aggregate purchase price
of approximately $3.8 million in cash, with potential
8
contingent consideration of up to $4.4 million based on the achievement of
specified business targets through 2003.
CUSTOMERS
We serve a diverse group of customers worldwide in our 12 industry sectors.
We market our products directly to customers through our internal marketing and
sales force. None of our customers accounted for more than 0.7% of our total
revenues in 2002. Our top 10 customers accounted for approximately 3.8% of our
total revenues in 2002.
COMPETITION
We experience intense competition for our products and services. We compete
with several much larger international companies that operate in many markets
and have broad product offerings in publishing and trade shows and conferences.
We compete for readers and advertisers in the publishing marketplace, which is
fragmented. According to industry sources, in February 2003, there were about
1,500 publishing companies and 5,200 trade magazine titles. We also compete for
venues, sponsorships, exhibitors and show attendees in the trade show and
conference marketplace. This market is also highly fragmented. In 2003,
approximately 2,500 trade shows are expected to be held in the United States and
Canada. About 1,500 independent companies and industry associations are expected
to produce these shows, according to industry sources. Because our industry is
relatively easy to enter, additional competitors may enter these markets.
Our publications generally compete on the basis of:
- editorial quality;
- quantity and quality of circulation;
- the strength of complementary products serving the same niche;
- the effectiveness of sales and customer service; and
- advertising rates.
Our trade shows and conferences generally compete on the basis of:
- the availability of attractive venues and dates;
- the ability to provide events that meet the needs of particular market
segments;
- the ability to attract qualified attendees; and
- the ability to provide high-quality show services, exhibition space,
and attractive marketing and sponsorship opportunities.
In addition, in our trade show and conference business, we compete with
many industry associations and, in several countries, the trade show and
conference hall owner and operator may also be a competitor.
SEGMENTS
At December 31, 2002, we operated in four business segments: Industry
Media, Technology Media, Lifestyle Media and Retail Media. For information about
the revenues from external customers, adjusted segment EBITDA and total assets
of each of our business segments, see Note 17 -- Segment Information in the
Notes to Consolidated Financial Statements included herein. In addition, Item
7 -- "Management's Discussion and Analysis of Financial Condition and Results of
Operations" provides a description of segment results.
DOMESTIC AND FOREIGN REVENUES AND ASSETS
Domestic revenues of our products and services constituted 89.1%, 86.8% and
89.9% of total revenues for the years ended December 31, 2002, 2001 and 2000,
respectively. Foreign revenues totaled 10.9%, 13.2% and
9
10.1% of our revenues for the years ended December 31, 2002, 2001 and 2000,
respectively. In 2002, 2001 and 2000, 74.9%, 68.7% and 61.3%, respectively, of
these foreign revenues were generated by Penton Media Europe Limited, a
subsidiary of Penton located in the United Kingdom.
See Note 17 -- Segment Information in the Notes to Consolidated Financial
Statements included herein, for a description of the Company's assets located in
the United States and in the United Kingdom.
PRODUCTION AND DISTRIBUTION
In November 1999, we sold our printing facility in Berea, Ohio, to R.R.
Donnelley & Sons Company for approximately $31.0 million and signed a seven-year
service contract providing for the printing of a majority of our 53 specialized
trade magazines. None of the proceeds from the sale were allocated to the
seven-year printing contract because we believe that the terms of the contract
were no more or no less favorable than those that would have been obtained from
other parties. If additional printing capacity is needed, we believe that
additional printing services are readily available at competitive prices.
The principal raw material used in our print publications is paper. We
believe that the existing arrangements providing for the supply of paper are
adequate and, in any event alternative sources are available. Paper costs
accounted for about 8.4%, 9.0% and 10.3% of our total editorial, production and
circulation costs for the years ended December 31, 2002, 2001 and 2000,
respectively. Paper prices are affected by a variety of factors, including
demand, capacity, pulp supply and general economic conditions.
Substantially all of our publications are delivered by the United States
Postal Service within the continental United States. Postage costs represent a
significant expense, accounting for about 14.2%, 12.7% and 11.7% of our total
editorial, production and circulation costs for the years ended December 31,
2002, 2001 and 2000, respectively.
TRADEMARKS AND INTELLECTUAL PROPERTY RIGHTS
We regard our copyrights, trademarks, service marks and similar
intellectual property as critical to our success and rely upon copyright and
trademark laws, as well as confidentiality agreements with our employees and
others, to protect our rights. We pursue the registration of our material
trademarks in the United States and, depending upon use, in other countries.
Effective trademark and copyright protection may not be available in every
country in which our publications and services are available.
We may be subject to claims of alleged infringement of our trademarks or
our licenses of trademarks and other intellectual property rights of third
parties from time to time in the ordinary course of business. We do not believe
that any legal proceedings or claims are likely to have, individually or in the
aggregate, a material adverse effect on our business, financial condition or
results of operations.
SEASONALITY
For a discussion of seasonality, see Item 7 -- "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Seasonality" of
this Form 10-K.
ENVIRONMENTAL MATTERS
We are subject to various federal, state and local environmental laws and
regulations that govern activities and operations that may have adverse
environmental effects or impose liability for the costs of cleaning up. We do
not believe that these matters will have a material impact on our consolidated
financial condition, results of operations or cash flows.
EMPLOYEES
On December 31, 2002, we employed about 980 people, primarily located in
the United States. None of our employees is represented by a labor union, and we
consider relations with our employees to be good.
10
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS
A number of statements contained in this report are not historical or
current facts, but deal with potential future circumstances and developments.
Those statements are qualified by the inherent risks and uncertainties
surrounding future expectations generally, and also may materially differ from
our actual future experience involving any one or more of these matters and
subject areas. We attempted to identify, in context, some of the factors that we
currently believe may cause future experience and results to differ from our
current expectations regarding the relevant matter or subject area. We have
identified some of these forward-looking statements with words such as
"anticipates," "estimates," "believes," "expects," "intends," "may," "will,"
"should" or the negative of those words or other comparable terminology. The
operation and results of our business may be subject to the effect of other
risks and uncertainties, including but not limited to:
- economic uncertainty, exacerbated by terrorist attacks on the United
States or the impact of war with Iraq; and related geopolitical
events;
- the performance of our Internet/broadband industry sector;
- fluctuations in advertising revenue with general economic cycles;
- the effectiveness of our cost-saving efforts;
- the seasonality of revenue from trade shows and conferences;
- our ability to penetrate new markets internationally;
- our ability to launch new products that fit strategically with and add
value to our business;
- the infringement or invalidation of our intellectual property rights;
and
- increases in paper and postage costs.
RISK FACTORS
The following are factors that may affect our actual operating results and
could cause results to differ materially from those in any forward-looking
statements. In addition to the other information contained or incorporated by
reference in this document, you should carefully consider the following risk
factors.
We have a significant amount of debt.
At December 31, 2002, we had total indebtedness of approximately $333.1
million, excluding approximately $3.7 million of original-issue discount on our
10 3/8% senior subordinated notes and approximately $0.8 million of
original-issue discount on our 11 7/8% senior secured notes. Subject to
restrictions in our debt instruments, including a borrowing base formula in our
credit facility, we had the ability to incur additional indebtedness of
approximately $13.5 million under our credit facility at December 31, 2002 and
approximately $15.0 million at January 31, 2003 under the new amended facility.
The level of our indebtedness could have important consequences, including:
- Limiting cash flow available for general corporate purposes, including
capital expenditures, because a substantial portion of our cash flow
from operations must be dedicated to servicing our debt;
- Limiting our ability to obtain additional debt financing in the future
for working capital, capital expenditures or acquisitions;
- Making us more vulnerable in the event of a further downturn in
general economic conditions or in our business; and
- Limiting our flexibility in reacting to competitive and other changes
in our industry.
Our current debt levels have subjected us to the risk described above. If
new debt is added to our current debt levels, these risks could intensify.
11
We may not be able to service our debt.
Our ability to pay or to refinance our indebtedness will depend upon our
future operating performance, which will be affected by general economic,
financial, competitive, business and other factors beyond our control.
We cannot assure you that our business will generate sufficient cash flow
from operations, that currently anticipated revenues and cost-saving efforts
will be realized on schedule or at all, or that future borrowings will be
available to us under our credit facility or otherwise in amounts sufficient to
enable us to service our debt obligations, to pay our indebtedness at maturity
or otherwise, or to fund our other liquidity needs. If we are unable to meet our
debt obligations or fund our other liquidity needs, we may need to further
restructure or refinance our indebtedness, sell assets, or seek additional
equity capital. We cannot assure you that we will be able to accomplish those
actions on satisfactory terms, if at all, which could cause us to default on our
obligations and impair our liquidity. Our ability to restructure or refinance
will depend on the capital markets and our financial condition at such time. Any
refinancing of our debt could be at higher interest rates and may require us to
comply with more onerous covenants, which could further restrict our business
operations. In addition, the terms of the convertible preferred stock and
warrants to purchase common stock, including the conversion price, dividend and
liquidation preference adjustment provisions, could result in substantial
dilution to stockholders. The redemption price premiums, and board
representation rights, could negatively impact our ability to access the equity
markets in the future.
Because a significant portion of our operations are currently conducted
through our subsidiaries, our ability to pay our indebtedness is also dependent
on the cash flows of our subsidiaries and the distribution of those cash flows
to us, or upon loans or other payments of funds by our subsidiaries to us. The
ability of our subsidiaries to make distributions or other payments to us will
depend upon their operating results, applicable laws and any contractual
restrictions contained in the instruments governing their indebtedness. If money
generated by our subsidiaries is not available to us, our ability to repay our
indebtedness may be adversely affected.
The terms of our debt instruments and preferred stock impose financial and
operating restrictions.
The indentures governing our 10 3/8% senior subordinated notes and our
11 7/8% senior secured notes, our credit facility and our convertible preferred
stock contain restrictive covenants that limit our ability to engage in a
variety of transactions, including incurring or guaranteeing additional
indebtedness, making investments, creating liens on our assets, transferring or
selling our assets, paying dividends, or engaging in mergers, acquisitions or
consolidations. The terms of our credit facility prohibit us from voluntarily
prepaying certain indebtedness.
A breach of any of the covenants or other provisions in our debt
instruments could result in a default thereunder. Upon the occurrence of an
event of default under our credit facility, the lenders could elect to declare
all amounts outstanding thereunder to be immediately due and payable and
terminate all commitments to extend further credit, which would adversely affect
our ability to fund our operations. An acceleration of the amounts due under our
credit facility would cause us to be in default under the indenture governing
our 10 3/8% senior subordinated notes and our 11 7/8% senior secured notes,
resulting in the acceleration of all outstanding amounts. If we are unable to
repay any accelerated amounts under the credit facility, the respective lenders
could proceed against the collateral granted to them to secure that
indebtedness. If the lenders under our credit facility accelerate the repayment
of borrowings, we cannot assure you that we will have sufficient assets to repay
all of our indebtedness.
The common stockholders may have reduced board representation.
The terms of the convertible preferred stock entitle the holders thereof
initially to three board seats. However, at such time as the holders of
convertible preferred stock cease to hold shares of convertible preferred stock
having an aggregate liquidation preference of at least $25.0 million, they will
lose the right to appoint a director for one of these three board seats.
12
Upon the occurrence of the following events, the holders of a majority of
the convertible preferred stock may nominate two additional members to our board
of directors and, if such triggering events have not been cured or waived prior
to the end of the next succeeding quarter, may appoint one less than a minimum
majority of our board of directors:
- Failure to comply with the other covenants and obligations contained
in the convertible preferred stock certificate of designations or
purchase agreement, and such failure is not cured within 90 days;
- Any representation or warranty in the convertible preferred stock
purchase agreement is proved to be false or incorrect in any material
respect; and
- Any default that results in the acceleration of indebtedness, where
the principal amount of such indebtedness, when added to the principal
amount of all other indebtedness then in default, exceeds $5.0
million, or final judgments for the payment of money aggregating more
than $1.0 million (net of insurance proceeds) are entered against us
and are not discharged, dismissed or stayed pending appeal within 90
days after entry.
Upon the occurrence of the following events, the holders of a majority of
the convertible preferred stock may appoint one less than a minimum majority of
our board of directors:
- Failure to pay the liquidation preference or any cash dividends, to
the extent declared, when due; and
- Failure to comply with specified covenants and obligations contained
in the convertible preferred stock certificate of designations or
purchase agreement.
Upon the occurrence of the following event, the holders of a majority of
the convertible preferred stock may appoint a minimum majority of our board of
directors:
- We initiate or consent to proceedings under any applicable bankruptcy,
insolvency, composition, or other similar laws; or make a conveyance
or assignment for the benefit of our creditors generally; or any
holders of any lien take possession of, or a receiver, administrator
or other similar officer is appointed for, all or substantially all of
our properties, assets or revenues and is not discharged within 90
days.
As of December 31, 2002, the Company's leverage ratio, as previously
defined, was greater than 7.5x. The Company has until March 31, 2003 to lower
the leverage ratio below 7.5 to 1.0 or an event of non-compliance will occur and
the holders of a majority of the convertible preferred stock can nominate two
additional members to our board of directors. If the event of non-compliance has
not been cured by June 30, 2003, then the holders of a majority of the
convertible preferred stock may elect one less than a minimum majority of our
board of directors.
On March 19, 2008, the holders of a majority of the convertible preferred
stock then outstanding, if any, will be entitled to appoint one less than a
minimum majority of our board of directors, subject to the right to appoint a
minimum majority of our board of directors as described above.
At such time as the holders of convertible preferred stock cease to hold
shares of convertible preferred stock having an aggregate liquidation preference
of at least $10.0 million, and such holders' beneficial ownership of our
convertible preferred stock and common stock constitutes less than 5% of the
aggregate voting power of our voting securities, the holders of convertible
preferred stock will no longer have the right to any directors.
Our stock may be delisted from the New York Stock Exchange if our stock price
and market capitalization do not meet the Exchange's continued listing
standards.
Our common stock trades on the NYSE. The NYSE has a number of continued
listing criteria, including a minimum share price requirement and minimum market
capitalization, which a company must satisfy in order for its securities to
continue trading. On August 15, 2002, we were notified by the NYSE that our
13
common stock was below criteria for continued listing because the average
closing price of our common stock for a consecutive 30-day period prior to
notification was below $1.00. On September 9, 2002, the NYSE also notified us
that Penton had fallen below the NYSE's standard requiring the average total
market capitalization of not less than $15 million over a 30-day trading day
period, and requested that the Company provide a business plan demonstrating how
it intended to achieve and sustain compliance within 18 months of receipt of the
notification. On October 24, 2002, the Company submitted its plan to the NYSE
outlining how it intended to comply with the listing criteria and on December 5,
2002, the NYSE accepted the Company's proposed business plan, subject to
quarterly monitoring for progress against the Company's goals as outlined in the
plan. Failure to achieve the plan's financial and operational goals will result
in the Company being subject to NYSE trading suspension and delisting. Delisting
from the NYSE may result in a reduction in the liquidity of any investment in
our common stock and an adverse effect on the trading price of our common stock.
Delisting could also reduce the ability of holders of our common stock to
purchase or sell shares as quickly and as inexpensively as they have done
historically. This lack of liquidity could make it more difficult for us to
raise capital in the future.
We may effect a reverse stock split, and if we do so, our stock price may
decline after the reverse stock split.
In response to the potential delisting of our common stock due to our
failure to meet the NYSE's minimum share price requirement discussed above, we
expect to ask our stockholders to authorize a reverse stock split at our annual
meeting in June 2003. If the reverse stock split is approved by our stockholders
and we effect the reverse stock split, we would reduce the number of outstanding
shares of our common stock. With fewer shares outstanding, we would expect our
stock price to increase. While a reverse stock split may enable us to cure the
minimum share price deficiency, share prices of companies effecting reverse
stock splits often decline, and we cannot assure you that our stock price would
not decline after a reverse stock split.
Our sale of unregistered shares of the Company's common stock under the
Company's 401(k) Retirement Savings Plan could have a material adverse effect
on our financial condition.
Our sale of common stock under the Company's 401(k) Retirement Savings Plan
(the "401(k) Plan") in excess of the number of shares registered by the Company
on Form S-8 with the Securities and Exchange Commission under the Securities Act
of 1933 (the "unregistered sales") could have a material adverse impact on our
financial condition. The unregistered sales do not cause an event of default
under the indentures governing our 10 3/8% senior subordinated notes or 11 7/8%
senior secured notes or our credit agreement. However, an event of default could
occur as an indirect result of the unregistered sales.
For example, an event of default would occur under (a) the indentures if
the unregistered sales were to result in (i) unsatisfied judgements not covered
by insurance aggregating in excess of $5 million being rendered against the
Company and not stayed, bonded or discharged within 60 days after such judgment
became final and nonappealable or (ii) the Company's failure to observe the
covenant limiting the Company's ability to make restricted payments (as defined
in the indentures) if, for example, the Company made a rescission offer and as a
result repurchased shares, which could be considered the payment on account of
the purchase, redemption or other acquisition or retirement for value of equity
interest (as defined in the indentures) or (b) the credit agreement if the
unregistered sales were to result in (i) the Company's failure to observe the
covenant limiting the Company's ability to make a restricted payment (as defined
in the credit agreement) if, for example, the Company made a rescission offer
and as a result repurchased shares, which could be considered the payment by the
Company with respect to its equity interests (as defined in the credit
agreement), (ii) the Company's inability to file its Form 10-K for the fiscal
year ended December 31, 2002, by its due date of March 31, 2003 (which could be
cured by filing such Form 10-K within 30 days of the due date), or (iii) a
material adverse change in the business, assets, operations, prospects or
condition, financial or otherwise, of the Company taken as a whole. The
foregoing is not, and no inference should be drawn that the foregoing is, an
exclusive list of circumstances that could result in an event of default under
the indentures or the credit agreement as a consequence of the unregistered
sales. If an event of default occurs, all our indebtedness would be immediately
due and payable, and we cannot assure you that our business will generate
sufficient cash flow to enable us to service our debt obligations. In addition,
we cannot assure you that the
14
Company will be able to obtain alternative sources of funding (See Risk Factors
"We may not be able to service our debt.")
We have accounted for approximately 1.1 million shares of our common stock
as redeemable common stock as a result of rescission rights that certain of our
common stockholders may have as a result of the fact that we may have violated
securities laws in connection with the unregistered sales from May 2001 through
March 2003 noted above. In such situations, a number of remedies may be
available to regulatory authorities and the employees who purchased the common
stock, including, without limitation, a right of rescission and other damages
that could be imposed by regulatory authorities. Pursuant to the rescission
rights, employees may be entitled to return their shares to the Company and
receive back from us the full price they paid, plus interest. The rescission
rights lapse on various dates as prescribed in the securities laws. Although the
payments under the rescissionary rights are not anticipated to have a material
adverse impact on our financial condition, we have no control over any civil or
other damages that regulatory authorities could impose on the Company, the
result of which could have a material adverse effect on our financial condition.
Please also refer to Note 13 -- Common Stock and Common Stock Award Programs of
the consolidated financial statements for further details.
A continued decline in trade show and conference attendance could have a
further material adverse effect on our business, results of operations and
financial condition.
Trade show and conference attendance declined significantly in 2002 as a
result of the slowdown of economies in the United States, Europe and Asia, as
well as the reduced travel following the September 11, 2001 terrorist attacks
and the threat of additional attacks and the war with Iraq.
Our 2002 trade shows and conferences revenues decreased $81.2 million, and
trade shows and conferences adjusted product EBITDA, decreased $44.4 million
from prior-year levels. Adjusted product EBITDA (and a reconciliation of
adjusted product EBITDA to operating income (loss)) is defined in the product
sections of "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Because our trade shows and conferences business
typically generates higher margins than our other businesses, decreases in trade
shows and conferences revenues cause a disproportionately greater decrease in
our total adjusted EBITDA than do revenue decreases in our other businesses. The
decline was due primarily to the significant drop in revenues in our global
Internet/broadband trade shows, with our Internet World Spring, Internet World
Fall, Internet World UK, Service Network Spring, and Service Network Fall shows
being the most significantly impacted.
Since September 11, 2001, there has been a decline in air travel due to,
among other things, the public's general reluctance to travel and fears
regarding additional acts of terrorism, as well as reduced operations by
airlines because of decreased demands for air travel, new security directives
and increased costs. The magnitude and duration of these effects are unknown,
but our trade shows and conferences have been negatively affected. Continuing
negative market conditions due to the weakened U.S. economy, any future
occurrences of terrorist activities, or threats of such activities and actions
by the United States and other countries that perpetuate a climate of war, could
cause more disruption of our trade shows and conferences. If we experience an
additional significant reduction in attendance, our business, results of
operations and financial condition could be materially adversely affected.
Our Internet/broadband business has significantly declined, and a continuing
decline could have a further material adverse effect on our business, results
of operations and financial condition.
In 2002, our Internet/broadband industry sector produced 11% of our revenue
compared with 30% in 2001. We have experienced a significant decline in this
sector as a result of both the failure of many Internet products and services
companies and the general U.S. economic decline. Some of our customers went out
of business or chose not to participate in our trade shows and conferences as
part of a general trend toward decreased information technology spending.
Because this industry sector has typically represented a significant portion of
our business and generated high margins, declines in the Internet/broadband
industry sector cause a disproportionately greater decrease in our total
adjusted EBITDA than do declines in our other industry
15
sectors. A continuing decline in the performance of these product offerings, or
a significant decline in our other product offerings in this sector, or an
inability to regain customers lost to date could materially adversely affect our
business, results of operations and financial condition.
We depend on advertising revenues, which decrease during economic downturns
and fluctuate from period to period.
For the year ended December 31, 2002, about 59.7% of our revenue came from
advertising. Our advertising revenues fluctuate with general economic cycles,
and any material decline in these revenues could have a material adverse effect
on our business, results of operations and financial condition. Historically,
advertising revenues have increased during economic recoveries and decreased
during both general economic downturns and regional economic recessions. In a
general economic downturn or a recession, advertisers reduce their advertising
budgets, intensify their attempts to negotiate lower advertising rates and pay
outstanding invoices more slowly. We are experiencing some of these effects. Our
advertising revenues decreased by 20.2% from 2001 to 2002.
If the U.S. economy worsens, the cost-saving efforts we implemented may not be
sufficient to achieve the benefits we expect.
In 2002, we experienced a significant decline in revenue and adjusted
EBITDA, due primarily to weak economic conditions, which were exacerbated by the
threat of additional terrorist attacks and the potential for war with Iraq. We
cannot predict if or when the economy or our revenues and adjusted EBITDA will
improve. We have taken a number of steps designed to improve our profits and
margins despite decreased revenues. We have sold properties that were under
performing, restructured a number of our businesses and support departments, and
reduced overhead infrastructure by consolidating and closing several facilities,
centralizing information technology services and outsourcing certain corporate
functions. As a result, we recorded special charges to our income of $16.3
million in 2002. If the U.S. economy worsens, additional terrorist attacks occur
or the outcome of war with Iraq is not favorable, our revenues may continue to
decline. Decreases in our revenues, especially as they relate to trade shows,
cause disproportionately greater decreases in our adjusted EBITDA. Accordingly,
if revenues decline beyond our expectations, the cost-saving efforts we
implemented in the second half of 2001 and in 2002 will likely not achieve the
benefits we expect. We may be forced to take additional cost-saving steps that
could result in additional charges and otherwise have a material adverse affect
on our business.
The profitability and success of our trade shows and conferences could be
adversely affected if we are unable to obtain desirable dates and locations.
In 2002, about 24.1% of our revenue came from trade shows and conferences.
We increasingly compete for desirable dates and venues for our trade shows and
conferences. As this competition intensifies, we may be unable to schedule
important engagements. If we are unable to obtain desirable dates and venues for
events, the profitability and future success of these events could be adversely
affected. Although we generally reserve venues and dates more than one year in
advance, these reservations are not binding until we sign a contract with a
facility operator. These contracts generally hold venues and dates for only one
year.
Our trade shows and conferences and publishing revenues vary due to the
movement of annual event or publication mailing dates and the timing of our
customers' product launches.
Our trade shows and conferences and publishing revenues are seasonal, due
primarily to the timing of our large trade shows and conferences and publication
of our large industry directories. Because event revenues are recognized when a
particular event is held, and publication revenues are recognized in the month
publications are mailed, we may also experience fluctuations in quarterly
revenues based on the movement of annual events or mailing dates from one
quarter to another. In 2002, about 26.0% of our total revenue was generated
during the first quarter, about 26.8% during the second, about 20.1% during the
third, and about 27.2% of our revenue was generated during the fourth quarter.
16
Our trade shows and conferences revenues may fluctuate from period to
period based on the spending patterns of our customers. Many of our large
customers concentrate their trade show participation around major product
launches. Because we cannot always know or predict when our large customers
intend to launch new products, it is difficult to anticipate any related
fluctuations in our trade shows and conferences revenues.
Loss of key personnel could impair our success.
We benefit from the leadership and experience of our senior management
team, and we depend on its continuing services in order to successfully
implement our business strategy. Although we have entered into employment
agreements with Thomas L. Kemp, Daniel J. Ramella and other executive
management, they and other key personnel may not remain in our employment. The
loss of key personnel could have a material adverse effect on our business,
results of operations and financial condition. We do not maintain "key person"
life insurance with respect to our senior management team.
Competition may adversely affect our earnings and results of operations.
We experience intense competition for our products and services. If we fail
to compete effectively, our earnings and results of operations could be
adversely affected. We compete for readers and advertisers in the publishing
marketplace and for trade show and conference venues, sponsorships, exhibitors,
and show attendees. Because our industry is relatively easy to enter, we
anticipate that additional competitors, some of whom may have greater resources
than we do, may enter these markets and intensify competition.
Our overall operations may be adversely affected by risks associated with
international operations.
We have operations outside the United States. The following risks in
international markets could have a material adverse effect on our future
international operations and, consequently, on our business, results of
operations and financial condition:
- The uncertainty of product acceptance by different cultures;
- The risks of divergent business expectations or cultural
incompatibility inherent in establishing joint ventures with foreign
partners;
- Difficulties in staffing and managing multinational operations;
- Currency fluctuations;
- General economic and political uncertainties and potential for social
unrest;
- Limitations on our ability to enforce legal rights and remedies;
- Reduced protection for intellectual property rights in some countries;
- State-imposed restrictions on the repatriation of funds; and
- Potentially adverse tax consequences.
New product launches or acquired products may reduce our earnings or generate
losses.
Our future success will depend in part on our ability to continue offering
new products and services that gain market acceptance by addressing the needs of
specific audience groups within our targeted industries. Our efforts to
introduce new or to integrate acquired products may not be successful or
profitable. The process of internally researching and developing, launching,
gaining acceptance, and establishing profitability for a new product, or
assimilating and marketing an acquired product, is both risky and costly.
Costs related to the development of new products and services are expensed
as incurred and, accordingly, our profitability from year to year may be
adversely affected by the number and timing of new product launches.
17
The infringement or invalidation of our proprietary rights could have an
adverse effect on our business.
We regard our copyrights and trademarks, including our Internet domain
names, service marks and similar intellectual property, as critical to our
success. We rely on copyright and trademark laws in the United States and other
jurisdictions and on confidentiality agreements with some of our employees and
others to protect our proprietary rights. If any of these rights were infringed
or invalidated, our business could be adversely affected. In addition, our
business activities could infringe upon the proprietary rights of others, who
could assert infringement claims against us. If we are forced to defend against
any such claims, whether they are with or without merit or are determined in our
favor, then we may face costly litigation, diversion of technical and management
personnel, or product and service delays. As a result of such a dispute, we may
have to develop non-infringing technology or enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may be
unavailable on terms acceptable to us, or at all. If there is a successful claim
of infringement against us and we are unable to develop non-infringing
technology or enter into royalty or licensing agreements on a timely basis, our
business could be adversely affected.
We seek to register our trademarks in the United States and elsewhere.
These registrations could be challenged by others or invalidated through
administrative process or litigation. In addition, our confidentiality
agreements with some of our employees or others may not provide adequate
protection of our proprietary rights in the event of unauthorized use or
disclosure of our proprietary information, or if our proprietary information
otherwise becomes known or is independently developed by competitors.
Reliance on principal vendors could adversely affect our business.
We rely on our principal vendors and their ability or willingness to sell
products to us on favorable price and other terms. Many factors outside our
control may harm these relationships and the ability or willingness of these
vendors to sell these products to us on such terms. Currently, our principal
vendors are paper suppliers, the United States Postal Service and printing
suppliers. If any of our principal vendors discontinues or temporarily
terminates its services and we are unable to find adequate alternatives, we may
experience increased prices, interruptions and delays in services. These factors
could adversely affect our business.
Increases in paper or postage costs could cause our expenses to increase and
may adversely affect our business.
Paper and postage are necessary expenses relating to our print products,
magazine distribution and direct mail solicitations. In 2002, these expenses
accounted for approximately 3.6% and 6.1%, respectively, of our total operating
expenses, excluding unusual items. Significant increases in paper prices, which
have been volatile in recent years, or in postage prices may have an adverse
effect on our business. We do not use forward contracts, and all of our paper
supply vendor arrangements provide for price adjustments to reflect then-
prevailing market prices. We use the United States Postal Service for domestic
distribution of substantially all of our magazines and marketing materials.
Contingent tax liability related to the spinoff of our common stock by Pittway
could materially affect our financial condition.
In connection with the tax-free spinoff of our common stock by Pittway to
its stockholders in August 1998, we agreed not to take any action that would
cause the spinoff to be taxable to Pittway under Section 355 of the Internal
Revenue Code, and to indemnify Pittway for any liability suffered by it in that
event. The spinoff would be taxable to Pittway if, as part of a plan or series
of related transactions, as determined under a facts and circumstances test, one
or more persons, acting independently or in concert, have acquired 50.0% or more
of our common stock. Since August 1998, our common stock has been involved in a
number of transactions. Because of the open-ended nature of the facts and
circumstances test, we believe, but we cannot assure you, that the Internal
Revenue Service could not successfully assert that one or more transactions
involving our common stock were part of a plan or series of related transactions
that has caused the spinoff to be taxable to Pittway. If the spinoff were
taxable to Pittway, our payment to Pittway under our indemnity agreement could
have a material adverse effect on our financial condition.
18
ITEM 2. PROPERTIES
The Company leases all of its principal properties. The general
characteristics of the leased properties follow:
LEASE APPROXIMATE
SEGMENT LOCATION PRINCIPAL USE EXPIRATION SQUARE FEET
------- --------------------------------- --------------- ---------- -----------
Industry/Corporate... Cleveland, Ohio(1) General Offices 2010 161,000
Industry/Corporate... Cleveland, Ohio Warehousing 2004 28,000
Technology........... Darien, Connecticut(1) General Offices 2009 18,200
Technology........... Hasbrouck Heights, New Jersey(2) General Offices 2003 25,000
Technology........... Isleworth, Middlesex, U.K. General Offices 2014 7,600
Technology........... Loveland, Colorado General Offices 2005 35,650
Technology........... Loveland, Colorado(3) Warehousing 2002 15,400
Lifestyle............ Boulder, Colorado General Offices 2006 29,000
Retail............... Des Plaines, Illinois General Offices 2007 5,500
---------------
(1) The Company is no longer occupying 38,000 square feet of office space at its
Cleveland, Ohio, facility and 9,100 square feet at its Darien, Connecticut,
facility. The Company is actively seeking to sublet these spaces.
(2) This lease expired in January 2003. A new lease was signed for a space
located in Paramus, New Jersey, with 11,000 rentable square feet. This new
lease expires in March 2008.
(3) In February 2003, this lease was renewed through January 2006. The new lease
has 7,500 rentable square feet.
As part of our cost reduction measures undertaken in 2001 and 2002, we
closed or reduced our square footage requirements in more than 30 offices,
primarily in the United States, with lease terms expiring through 2013. We have
subleased or are currently attempting to sublease these properties.
We have other smaller properties, including sales and/or general offices
under leases expiring through 2014, located in cities throughout the United
States and the United Kingdom. We believe our facilities are suitable and
adequate for our present needs.
ITEM 3. LEGAL PROCEEDINGS
In connection with the acquisition of Mecklermedia Corporation on December
1, 1998, a lawsuit was brought against the Company by Ariff Alidina (the
"Plaintiff"), a former stockholder of Mecklermedia Corporation, in the United
States Federal District Court in the Southern District of New York for an
unspecified amount, as well as other relief. The Plaintiff has claimed that the
Company violated the federal securities laws by selling Mr. Meckler, a
beneficial owner of approximately 26% of the shares of Mecklermedia, an 80.1%
interest in internet.com Corporation (now known as Jupitermedia Corporation) for
what the Plaintiff alleges was a below-market price, thereby giving to Mr.
Meckler more consideration for his common stock in Mecklermedia Corporation than
was paid to other stockholders of Mecklermedia Corporation. On May 16, 2001, the
United States District Court for the Southern District of New York granted the
Plaintiff's motion for certification of a class consisting of all former
stockholders of Mecklermedia who tendered their shares in the tender offer. On
October 17, 2001, the District Court denied the Company's motion for a summary
judgment. On November 26, 2002, the District Court denied a motion for judgment
on the pleadings filed by the Company. Expert discovery is proceeding and a
pretrial conference is scheduled for April 21, 2003. The Company intends to
vigorously defend this suit.
19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the New York Stock Exchange under the symbol
PME. The following table sets forth, for the periods indicated, the high and low
sales prices for the common stock as reported on the New York Stock Exchange.
PRICE RANGE OF
COMMON STOCK
---------------
HIGH LOW
------ ------
Year Ended December 31, 2002:
First Quarter............................................. $9.35 $5.26
Second Quarter............................................ 9.11 1.90
Third Quarter............................................. 2.15 0.19
Fourth Quarter............................................ 1.05 0.21
PRICE RANGE OF
COMMON STOCK
---------------
HIGH LOW
------ ------
Year Ended December 31, 2001:
First Quarter............................................. $27.10 $12.48
Second Quarter............................................ 21.01 13.58
Third Quarter............................................. 17.80 3.55
Fourth Quarter............................................ 8.15 3.25
The Company had approximately 1,010 record holders of its common stock on
February 28, 2003.
Our dividend policy is determined by our board of directors. In July 2001,
a decision was made by our board of directors to discontinue the payment of
dividends. We paid quarterly dividends for the first half of 2001 in the amount
of $0.03 per share. Any decision to pay dividends in the future will be made by
our board of directors from time to time based upon the results of our
operations and financial condition and such other matters as our board of
directors considers relevant. The terms of our outstanding convertible preferred
stock, however, limit the payment of dividends on the common stock until all
accrued dividends have been paid on the convertible preferred stock. We may not
pay accrued dividends on the convertible preferred stock unless approved by the
holders of not less than 75% of the then outstanding shares of convertible
preferred stock.
On August 1, 2002, the Company issued 527,951 shares of common stock to R.
Douglas Greene, a director of the Company, as part of the final contingent
payment required for the acquisition of New Hope Communications, Inc. in 1999.
The issuance of these shares was exempt from registration under the Securities
Act of 1933 pursuant to Section 4(2) of that act.
We have accounted for approximately 1.1 million shares of our common stock
as redeemable common stock as a result of rescissionary rights that certain of
our common stockholders in the Company's 401k plan may have as a result of the
fact that we may have violated federal securities laws in connection with the
unregistered sales from May 2001 through March 2003. In such situations, a
number of remedies may be available to regulatory authorities and the employees
who purchased the common stock, including, without limitation, a right of
rescission and other damages that could be imposed by regulatory authorities.
Pursuant to the rescissionary rights, employees may be entitled to return their
shares to the Company and receive back from us the full price they paid, plus
interest. The rescissionary rights lapse on various dates as prescribed in the
federal securities laws.
20
At December 31, 2002, the Company has classified 1.1 million shares and
$1.1 million related to the potential rescissionary rights outside of
stockholders' equity as redeemable common stock, because the redemption features
are not within the control of the Company. No adjustments have been made to the
net income available for common stockholders as a result of these rescissionary
rights as the amounts involved are insignificant for both 2002 and 2001.
On March 10, 2002, we entered into an agreement with a group of investors
led by ABRY Mezzanine Partners, L.P. to sell 50,000 shares of a new series of
convertible preferred stock and warrants to purchase 1.6 million shares of our
common stock for $50.0 million. On March 19, 2002, we issued 40,000 shares of
the new series of convertible preferred stock and warrants to purchase 1.28
million shares of our common stock for gross proceeds of $40.0 million. On March
28, 2002, we issued an additional 10,000 shares of the new series of convertible
preferred stock and warrants to purchase an additional 0.3 million shares of our
common stock for gross proceeds of $10.0 million. The sales were made in
reliance on the exemption from registration provided by Section 4(2) of the
Securities Act of 1933 and Regulation D promulgated thereunder, as these
transactions did not involve a public offering. See Item 7 -- "Management's
Discussion and Analysis of Financial Condition and Results of Operations", for a
description of the terms of conversion of the convertible preferred stock and
the terms of exercise of the warrants.
In January 2000, the Company established an Executive Loan Program to
enable key executives to purchase an aggregate of up to 400,000 shares of Penton
common stock at fair market value, in exchange for recourse notes. All 400,000
shares were issued in 2000. In issuing such stock, Penton relied upon the
exemption from registration provided by Section 4(2) under the Securities Act,
as these transactions did not involve a public offering.
In June 2000, the Company adopted a Stockholder Rights Agreement (the
"Rights Agreement"). Under the plan, the rights will initially trade together
with Penton Media, Inc. 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 Penton Media, Inc. common stock at a discounted price if
any person or group acquires 20% or more of the outstanding shares of the
Company's common stock. Rights held by the persons who exceed the applicable
threshold will be void. Under certain circumstances, the rights will entitle the
holder to buy shares in an acquiring entity at a discounted price.
The plan also includes an exchange option. In general, after the rights
become exercisable, the Penton board may, at its option, effect an exchange of
part or all of the rights, other than rights that have become void, for shares
of Penton Media, Inc. common stock. Under this option, Penton Media, Inc. 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.
A copy of the Rights Agreement was filed with the Securities and Exchange
Commission in June 2000 as an Exhibit to a Registration Statement on Form 8-A.
The foregoing is a description of the material terms of the rights, and is
qualified in its entirety by reference to that Registration Statement on Form
8-A, as amended and the Rights Agreement.
In March 2002, the Rights Agreement was amended by the board to permit the
sale of the convertible preferred stock and warrants to purchase common stock.
In July 2002, the Rights Agreement was amended by the board of directors to
change the expiration date of the rights under the Rights Agreement to be
effective at the close of business at Penton's 2003 annual meeting of
stockholders to be held on June 12, 2003.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents our selected financial data. The operating
data for each of the three years in the period ended December 31, 2002 and the
balance sheet data as of December 31, 2002 and 2001 have been
21
derived from our audited consolidated financial statements and related notes,
which appear elsewhere in this Form 10-K. The operating data for each of the two
years in the period ended December 31, 1999 and the balance sheet data as of
December 31, 1998, 1999 and 2000 have been derived from our audited consolidated
financial statements and related notes that are not included in this Form 10-K.
You should read the following information together with our audited
consolidated financial statements and related notes and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing
elsewhere herein.
You should also consider the following when reading the statement of
operations data:
- All historical amounts have been restated to reflect the
classification of (i) our former Printing segment, which was sold in
November 1999; (ii) our Direct Mail segment, which was sold in March
2000; (iii) our PM Australia component, which was sold in December
2002; and (iv) our PTS component, which was sold in January 2003, as
discontinued operations.
- The Company believes that, although not prescribed under generally
accepted accounting principles ("GAAP"), adjusted EBITDA provides
stockholders and potential investors with a valuable measure in
evaluating our operating performance. The most directly comparable
GAAP measure, operating income (loss), includes depreciation and
amortization, non-cash compensation, restructuring charges, loss on
sale of properties and impairment charges. Adjusted EBITDA excludes
these items because they do not directly influence the ongoing
operations of the business. In addition, one of our key financial
ratios under our preferred stock agreement is based, in part, on our
adjusted EBITDA. It is important to note, however, that not all
companies calculate adjusted EBITDA in the same manner, and adjusted
EBITDA as presented may not be comparable to similarly titled
measures by other companies.
- Operating expenses include the following charges: (a) impairment of
Internet asset charges of $2.1 million in 2000; (b) impairment of
other asset charges of $223.4 million, $59.8 million, and $1.1
million in 2002, 2001 and 2000, respectively; (c) restructuring
charges of $16.4 million and $18.8 million in 2002 and 2001,
respectively (of which $1.0 million and $.09 million are classified
with discontinued operations in 2002 and 2001, respectively); and
(d) loss on sale of properties of $0.9 million in 2002. See Item 7,
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" for an overview of these items that affect
comparability of the financial data in this five-year summary.
- In 2002, Penton adopted SFAS 142 and recorded a transitional
one-time, non-cash goodwill impairment charge of $39.7 million
related to two of our reporting units, which are part of our
Technology Media segment. The charge was recorded as a cumulative
effect of accounting change. See Note 4 -- Goodwill and Other
Intangibles in the Notes to the Consolidated Financial Statements
appearing elsewhere herein.
- Amortization of deemed dividend and accretion of preferred stock
includes a $42.1 million, one-time, non-cash charge, which was the
result of stockholder approval on May 31, 2002 to remove the 10-year
mandatory redemption date on our preferred stock. 2002 amounts also
include accretion of $2.5 million up to the date of stockholder
approval and accrued dividend of $1.5 million from the date of
approval to the end of the year. Subsequent to this approval, the
Company ceased accretion. See Note 7 -- Mandatorily Redeemable
Convertible Preferred Stock in the Notes to the Consolidated
Financial Statements, appearing elsewhere herein, for further
details.
- The 2002 benefit for income taxes includes a $36.0 million charge to
establish a full valuation allowance for our net deferred tax assets
and net operating loss carryforwards. See Note 10 -- Income Taxes in
the Notes to the Consolidated Financial Statements appearing
elsewhere herein.
22
- Penton sold its stock in Jupitermedia Corporation (formerly known as
INT Media Group, Inc.) and recognized a gain from its sale of $1.5
million, $110.2 million and $5.9 million in 2002, 2000 and 1999,
respectively.
- The extraordinary item of $0.3 million in 2002 consists of a gain on
the purchase of $10.0 million face value of our 10 3/8% senior
subordinated notes in March 2002, at prevailing market prices,
offset by the write-off of unamortized deferred finance costs
associated with the payoff of our term loan A and term loan B
facilities. In 1999, the Company recorded an extraordinary item of
$8.4 million related to the extinguishment of debt.
23
CONSOLIDATED COMPARATIVE SUMMARY OF SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
(DOLLARS AND SHARES IN THOUSANDS, ------------------------------------------------------------
EXCEPT PER SHARE DATA) 2002 2001 2000 1999 1998
--------------------------------- --------- --------- --------- -------- ---------
OPERATING RESULTS
Revenues........................................ $ 235,106 $ 358,871 $ 399,717 $297,272 $ 203,295
Operating expenses.............................. 482,659 440,493 344,444 258,326 177,614
--------- --------- --------- -------- ---------
Operating income (loss)......................... (247,553) (81,622) 55,273 38,946 25,681
Interest expense................................ (38,193) (30,487) (19,485) (21,622) (5,492)
Interest income................................. 768 1,862 5,352 432 --
Gain on sale of investments..................... 1,491 -- 110,210 5,906 --
Writedown of Internet investments............... (41) 824 (9,490) -- --
Miscellaneous, net.............................. (635) (2,839) (45) (170) 976
Benefit (provision) for income taxes............ 40,514 16,318 (61,790) (16,065) (9,442)
--------- --------- --------- -------- ---------
Income (loss) from continuing operations........ (243,649) (95,944) 80,025 7,427 11,723
Income (loss) from discontinued operations...... (3,252) (8,163) (435) 9,196 (833)
Extraordinary item.............................. 277 -- -- (8,413) --
Cumulative effect of accounting change.......... (39,700) -- -- -- --
--------- --------- --------- -------- ---------
Net income (loss)............................... (286,324) (104,107) 79,590 8,210 10,890
--------- --------- --------- -------- ---------
Amortization of deemed dividend and accretion of
preferred stock.............................. (46,174) -- -- -- --
--------- --------- --------- -------- ---------
Net income (loss) applicable to common
stockholders................................. (332,498) (104,107) 79,590 8,210 10,890
========= ========= ========= ======== =========
Earnings per common share -- basic:
Income (loss) from continuing operations..... (8.95) (3.00) 2.52 0.26 0.54
Net income (loss) applicable to common
stockholders............................... (10.27) (3.26) 2.51 0.29 0.50
Basic average share outstanding.............. 32,374 31,917 31,730 28,108 21,882
Earnings per common share -- diluted:
Income (loss) from continuing operations..... (8.95) (3.00) 2.50 0.26 0.54
Net income (loss) applicable to common
stockholders............................... (10.27) (3.26) 2.49 0.29 0.50
Diluted average shares outstanding........... 32,374 31,917 32,010 28,209 21,882
Dividends per common share...................... n/a 0.06 0.12 0.12 0.06
CASH FLOWS AND OTHER DATA
Cash flows
Operating.................................... $ (16,684) $ (20,343) $ 9,240 $ 34,357 $ 25,749
Investing.................................... (2,630) (27,455) (111,168) (27,770) (271,157)
Financing.................................... 6,029 56,326 83,306 19,879 246,993
Capital expenditures............................ 3,855 7,602 27,272 5,884 5,775
Depreciation and amortization................... 19,329 44,048 32,811 27,881 7,600
Adjusted EBITDA................................. 14,503 41,572 93,394 66,827 34,281
24
YEAR ENDED DECEMBER 31,
(DOLLARS AND SHARES IN THOUSANDS, ------------------------------------------------------------
EXCEPT PER SHARE DATA) 2002 2001 2000 1999 1998
--------------------------------- --------- --------- --------- -------- ---------
AT PERIOD END
Total assets of continuing operations........... $ 412,723 $ 700,477 $ 781,757 $805,151 $ 479,301
Current assets of discontinued operations....... 2,049 -- -- 4,228 --
Total assets.................................... 414,772 700,477 781,757 809,379 479,301
Goodwill and other intangibles.................. 284,726 549,941 628,748 451,236 387,612
Current liabilities of discontinued
operations................................... 1,050 -- -- -- --
Total debt...................................... 333,137 364,765 302,125 215,000 307,000
Mandatorily redeemable preferred stock.......... 46,174 -- -- -- --
Redeemable common stock......................... 1,118 -- -- -- --
Stockholders' equity (deficit).................. (62,201) 220,530 336,569 402,601 87,489
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Set forth below is a discussion and analysis of our financial condition and
results of operations. You should read this discussion and analysis in
conjunction with the audited consolidated financial statements of Penton Media,
Inc. included elsewhere in this document. This "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contains
forward-looking statements. See "Uncertainty of Forward-Looking Statements" and
"Risk Factors" in Item 1 of this annual report on Form 10-K for a discussion of
the uncertainties, risks and assumptions associated with these statements.
OVERVIEW
We believe we are a leading, global business-to-business media company. We
provide media products that deliver proprietary business information to owners,
operators, managers and professionals in the industries we serve. Through these
products, we offer industry suppliers multiple ways to reach their customers and
prospects as part of their sales and marketing efforts. We publish specialized
trade magazines, produce trade shows and conferences, and maintain Web
businesses, including electronic newsletters. Our products serve 12 industry
sectors, which we group into four segments:
INDUSTRY MEDIA TECHNOLOGY MEDIA
Manufacturing Internet/Broadband
Design/Engineering Information Technology
Mechanical Systems/Construction Electronics
Supply Chain RETAIL MEDIA
Government/Compliance Food/Retail
Aviation Leisure/Hospitality
LIFESTYLE MEDIA
Natural Products
We believe we have leading media products in each of the industry sectors
we serve. We are structured along segment and industry lines rather than by
product lines. This enables us to promote our related groups of products,
including publications, trade shows and conferences, and online media products
to our customers.
The business-to-business media industry experienced severe declines in 2002
as companies reduced their overall marketing expenditures in response to the
global economic slowdown and the resulting pressure on their businesses.
Business-to-business magazines serving the industry sectors analyzed in the
Business Information Network experienced a year-over-year decline in advertising
pages of 15.0%. Advertising pages in
25
technology trade magazines declined by 21.5%, according to Technology
Advertising & Branding Report. In addition, trade shows and conferences
experienced significant declines in exhibition space and attendance. According
to Tradeshow Week, net square footage of trade shows held during 2002 declined
5.3%, while attendance fell 2.2% for the year. Technology trade shows
experienced the steepest declines, with net square footage down 15.6%, the
number of exhibiting firms down almost 10.0%, and attendance off by 17.0%
compared with 2001.
RECENT DEVELOPMENTS
Dispositions
Discontinued Operations. In December 2002, the Company completed the sale
of the assets of PM Australia, which was part of our Technology Media segment,
to AJB Publishing Pty Limited for total consideration of approximately $0.1
million. Approximately $0.01 million was paid in cash upon closing, with the
remaining consideration due in 12 equal monthly installments starting in July
2003. The cash received from the sale was used to pay down the Company's
outstanding credit facility. The related loss on the sale approximates $0.6
million and is included as a component of discontinued operations in the
accompanying consolidated statements of operations.
In January 2003, the Company completed the sale of the assets of its PTS
group, which was part of our Industry Media segment, to Cygnus Business Media,
Inc. for total consideration of approximately $3.8 million, including a
potential earnout of $0.6 million based on reaching certain performance
objectives. The cash received from the sale was used to pay down the Company's
outstanding credit facility. The Company recognized a gain of approximately $1.0
million on the sale, which was recorded in the first quarter of 2003. The
results of PTS are included as a component of discontinued operations in the
accompanying consolidated statements of operations.
Other Dispositions. In December 2002, the Company disposed of four other
properties. Three of these properties, Streaming Media, Boardwatch and ISPCON,
were part of our Technology Media segment. The other property, A/E/C, was part
of our Industry Media segment. The aggregate consideration for these properties
was approximately $0.9 million. The cash received from the sales was used to pay
down the Company's outstanding credit facility. The sale of the properties
resulted in a loss of approximately $0.9 million (which is in addition to the
impairment charges already recorded for these properties), and is included in
operations as loss on sale of properties in the accompanying consolidated
statements of operations, as these properties did not qualify for discontinued
operations treatment.
Valuation Allowance
For 2002, the Company recorded a $36.0 million charge to establish a full
valuation allowance for its net deferred tax assets and net operating loss
carryforwards. The valuation allowance was calculated in accordance with the
provisions of SFAS 109. The Company intends to maintain a full valuation
allowance for its net deferred tax assets and net operating loss carryforwards
until sufficient positive evidence exists to support the reversal of the
remaining reserve. Until such time, except for minor foreign tax provisions, the
Company will have no reported tax provision, net of valuation allowance
adjustments. In the event the Company was to determine, based on the existence
of sufficient positive evidence, that it would be able to realize its deferred
tax assets in the future in excess of its net recorded amount, an adjustment to
the valuation allowance would increase income in the period such determination
was made. See Note 10 -- Income Taxes in the Notes to Consolidated Financial
Statements of the Company for additional information regarding income taxes.
Amended Credit Facility
In January 2003, the Company amended its senior credit facility. The
amended agreement permits the Company to sell certain properties in excess of
the $5.0 million aggregate limit required by the original amended agreement. In
return, the revolving commitment was reduced from $40.0 million to $32.0
million, and at such time as the aggregate sum of the cash and cash equivalents
of Penton equals or exceeds $40.0 million, an additional one-time reduction of
$10.0 million would be required. In addition, upon the sale
26
of the certain properties as noted above, the revolving commitment would be
further reduced by 50% of the aggregate gross proceeds from those sales, up to a
maximum of $6.0 million. For all other asset dispositions, the revolver would be
reduced by 50% of the aggregate gross proceeds. At December 31, 2002 and January
31, 2003, the revolver commitments under our credit facility were $40.0 million
and $20.1 million, respectively. Availability under the commitments, which is
subject to the Company's eligible accounts receivable, was $13.5 million (net of
$4.5 million outstanding) and $15.0 million, respectively, at December 31, 2002
and January 31, 2003.
The amended facility permits additional asset sales, transfers, leases, and
other dispositions and the issuance of equity interests by our subsidiaries up
to a maximum of approximately $3.6 million. The amended facility also increased
the maximum commitment fee from 0.50% to 0.75%.
New York Stock Exchange Notification
While the Company began cutting operating costs aggressively in 2001 and
has continued to lower costs throughout 2002, the severity and suddenness of the
Company's revenue decline against the backdrop of a severe downturn for the
business-to-business media industry have made it difficult to effect a
meaningful positive impact on operating income. At mid-year, it became apparent
that a widely anticipated recovery for technology markets would not materialize
and that a pickup in manufacturing markets had stalled. Penton's business
visibility became dramatically impaired as our customers reduced marketing
spending, along with capital expenditure and other discretionary spending. The
Company's equity trading volume and stock price were negatively impacted by
revised guidance and disappointing results as the year progressed.
On August 15, 2002, we were notified by the New York Stock Exchange (NYSE)
that our common stock was "below criteria" for continued listing because the
average closing price of our common stock for a consecutive 30-day period prior
to notification was below $1.00. On September 9, 2002, the NYSE also notified us
that the Company had fallen below the NYSE's standard requiring the average
total market capitalization of not less than $15 million over a 30-day trading
day period, and requested that the Company provide a business plan demonstrating
how it intended to achieve and sustain compliance within 18 months of receipt of
the notification.
On October 24, 2002, the Company submitted its plan to the NYSE outlining
how it intended to comply with the listing criteria. On December 5, 2002, the
NYSE accepted the Company's proposed business plan, subject to quarterly
monitoring for progress against the Company's goals as outlined in the plan.
Failure to achieve the plan's financial and operational goals will result in the
Company being subject to NYSE trading suspension and delisting.
In February 2003, Penton's Board of Directors approved a proposal to effect
a reverse stock split to be submitted for shareholder approval at the Company's
annual meeting, set for June 12, 2003. This corrective share action is part of
the plan submitted by Penton to the NYSE to meet the NYSE $1.00 stock price
listing requirement.
Preferred Stock Leverage Ratio Event of Non-Compliance
As of December 31, 2002, the Company's leverage ratio, as previously
defined, was 27x, which will result in an event of non-compliance if not cured
by March 31, 2003. Under our Series B Convertible Preferred Stock Agreement (the
"preferred stock") we are required to maintain a leverage ratio below 7.5 to
1.0. If an event of non-compliance occurs, the holders of a majority of the
preferred stock may nominate two additional members to our board of directors.
If the event of non-compliance is not cured by the end of the next succeeding
quarter, the holders of a majority of the preferred stock then outstanding may
elect one less than a minimum majority of our board of directors. The Company is
not expected to be able to correct the event of non-compliance within the 90-day
cure period. In addition, upon the occurrence of an event of non-compliance, the
5% dividend rate on the preferred stock increases by one percentage point each
quarter, up to a maximum rate of 10%, and the conversion price on the preferred
stock decreases by $0.76 per quarter up to a maximum reduction of $3.80. The
conversion price will adjust to what it would have been absent such event (to
the extent of any shares of preferred stock are still outstanding) once the
leverage ratio is less than
27
7.5 to 1.0. The dividend rate will adjust back to 5% as of the date on which the
leverage ratio is less than 7.5 to 1.0. Under the preferred stock agreement, if
the leverage ratio exceeds 7.5 to 1.0 for four consecutive quarters, the
preferred stock holders will have the right to cause the Company to seek a buyer
for all of the assets or issued and outstanding capital stock of the Company.
The leverage ratio event of non-compliance does not represent an event of
default or violation under any of the Company's outstanding notes or credit
facility. As such, there will not be an acceleration of any outstanding
indebtedness as a result of this event. In addition, this event of
non-compliance and the resulting consequences do not result in any cash outflow
from the Company.
Tax Refund
In January 2003, the Company received a tax refund of $52.7 million. A
portion of the proceeds was used to pay down the $4.5 million outstanding on the
Company's credit facility.
2002 REFINANCING EXECUTED TO IMPROVE LIQUIDITY
The Company's declining cash flows presented liquidity concerns for the
Company in late 2001. To address its liquidity risk, the Company executed a
three-part refinancing that was completed in March 2002. The refinancing
involved the following steps and outcomes:
- The Company completed a $50.0 million preferred stock placement. See
additional details below.
- The Company secured an amendment of its credit facility. The Company
paid down $48.0 million in term debt in exchange for covenant relief
and gained unrestricted access to a revolver upon the repayment of
the remaining balance on our term loans.
- The Company completed a $157.5 million senior secured notes offering
in March 2002 and used the proceeds to repay the remaining credit
facility term loans. The paydown triggered the effectiveness of a
$40.0 million asset-based revolver that has no financial covenants.
Penton also used the proceeds to repurchase $10.0 million of its
Senior Subordinated Notes for 83.75% of par.
On March 19, 2002, the Company issued 40,000 shares of its Series B
Convertible Preferred Stock, par value $0.01 per share (the "preferred stock"),
and warrants (the "warrants") to purchase 1,280,000 shares of Penton's common
stock, par value $0.01 per share, for $40.0 million in a private placement to
institutional investors and their affiliated entities. On March 28, 2002, the
Company issued an additional 10,000 shares of preferred stock, par value $0.01
per share, and warrants to purchase an additional 320,000 shares of Penton's
common stock, par value $0.01 per share, for $10.0 million to the same group of
investors. The net proceeds from the sale of the preferred stock and warrants
were used to repay a portion of the term loan indebtedness under our senior
credit facility (see Note 6 -- Debt).
Copies of the amended and restated Series B Convertible Preferred Stock and
Warrant Purchase Agreement and the Certificate of Designations (as amended on
June 4, 2002 on Form S-3/A) and Form of Warrants Agreement were filed with the
Securities and Exchange Commission on March 19, 2002 as exhibits to a Current
Report on Form 8-K. The following is a description of the material terms of the
preferred stock and warrants, and is qualified in its entirety by reference to
that Current Report on Form 8-K and the applicable agreements. Significant terms
of the preferred stock are as follows:
- Holders of the preferred shares will have a liquidation preference
over holders of common stock.
- The initial liquidation value per share will be $1,000. If the
preferred stock is not converted or redeemed prior to the sixth
anniversary of the date of issuance, the liquidation value will
increase to $4,570 per share.
- Dividends accrue at an annual rate of 5% per annum. After the sixth
anniversary, dividends accrue at an annual rate of 15%. Upon certain
triggering events, the dividend rate may increase by one percentage
point per quarter up to a maximum increase of five percentage points.
28
- The dividends are payable semiannually in cash only if declared by our
board of directors and approved by holders of no less than 75% of the
convertible preferred stock then outstanding. The provisions of our
debt instruments limit our ability to pay dividends in cash. Currently
we have no intention to pay dividends in cash.
- Shares of preferred stock can be convertible at any time, at each
investor's option, into a number of shares of our common stock equal
to the liquidation value plus accrued but unpaid dividends, divided by
the conversion price. The conversion price will initially be $7.61,
and is subject to certain antidilution and other adjustments. Subject
to certain restrictions, we have the option to convert the preferred
stock at any time.
- If we fail to comply with specific covenants contained in the
preferred stock purchase agreement, the conversion price will be
reduced by $0.76 (adjusted for stock splits and similar transactions).
Until such failure is no longer in existence, every 90 days the
conversion price shall be reduced by an additional $0.76 up to a
maximum reduction of $3.80 (adjusted for stock splits and similar
transactions). The conversion price will adjust to what it would have
been, absent such breach, once the breach is cured.
- We may redeem the preferred stock at any time, in whole or in part,
provided that the redemption price is equivalent to the amount the
holders would receive on an as-converted basis using a trailing 30-day
period and subject to certain minimum share prices based on the year
redeemed.
- The preferred stock initially entitles the holders to three seats on
our board of directors. Upon the occurrence of certain triggering
events, the holders may appoint up to one less than a minimum majority
of our board of directors or a minimum majority upon the occurrence of
certain events of bankruptcy or insolvency. See the further discussion
of these triggering events in "Risk Factors."
- The holders of the convertible preferred stock are entitled to vote on
all matters submitted to a vote of our common stockholders.
- We have registered the common stock issuable upon conversion of the
convertible preferred stock and exercise of the warrants.
- The terms of the convertible preferred stock subject us to various
covenants, which, among other things, limit our ability to sell
assets, make any restricted payments or restricted investments, enter
into various agreements and grant certain options.
- Warrants were issued to purchase an aggregate of 1.6 million shares of
our common stock at an initial exercise price of $7.61 per share,
subject to certain antidilution and other adjustments that mirror
those applicable to the convertible preferred stock. The warrants are
immediately exercisable and expire 10 years after issuance.
In March 2002, Penton issued $157.5 million of 11 7/8% senior secured notes
(the "Secured Notes") due 2007. Interest is payable on the Secured Notes
semiannually on April 1 and October 1. The Secured Notes are fully and
unconditionally, jointly and severally, guaranteed on a senior basis by all of
our domestic subsidiaries, which are 100% owned by the Company. We may redeem
the Secured Notes, in whole or in part, during the periods October 1, 2005
through October 1, 2006 and thereafter at redemption prices of 105.9375% and
100.0000% of the principal amount, respectively, together with accrued and
unpaid interest. In addition, at any time prior to October 1, 2005, up to 35% of
the aggregate principal amount of the Secured Notes may be redeemed at our
option, within 90 days of certain public equity offerings of our common stock,
at a redemption price equal to 111.875% of the principal amount, together with
accrued and unpaid interest.
The Secured Notes were offered at a discount of $0.8 million, which is
being amortized using the interest method over the term of the Secured Notes.
Net proceeds of $150.1 million were used to pay down $83.6 million of our term
loan A facility and $49.0 million of our term loan B facility, and to repurchase
$10.0 million of our 10 3/8% senior subordinated notes for $8.3 million
(excluding interest). The remaining net proceeds of $9.2 million were used for
general corporate purposes. The Secured Notes rank senior in right to all of our
subordinated indebtedness, including our 10 3/8% senior subordinated notes due
in 2011, and equal in
29
right of payment with all of our other senior indebtedness, which is
approximately $0.4 million at December 31, 2002. The Secured Notes contain
covenants that, among other things, limit the Company's ability to pay
dividends, incur additional debt, sell assets and enter into mergers or
consolidations. Our ability to obtain dividends from our subsidiaries is only
restricted if we are in default under our debt arrangements or if we have
exceeded our limitation of additional indebtedness, as specified in such
agreement.
In March 2002, Penton amended and restated its senior credit facility and
repaid in full our term loan A and term loan B facilities from the proceeds
received from the sale of preferred shares (see Note 7 -- Mandatorily Redeemable
Convertible Preferred Stock), proceeds received from the sale of Jupitermedia
Corporation common stock (see Note 5 -- Investments), cash on hand from a tax
refund of approximately $12.2 million, and the issuance of $157.5 million in
Secured Notes as mentioned above. The amended and restated credit facility
provides for a revolving credit facility of up to a maximum amount of $40.0
million. Availability under the revolving credit facility is subject to a
borrowing base limited to 80% of eligible receivables. In order to access the
revolver, Penton must not have more than $7.5 million of cash and cash
equivalents available, must be in compliance with the loan documents and must
submit a borrowing base certificate immediately prior to each extension of
credit showing compliance with the provisions of the borrowing base. Penton is
required to prepay the revolver in the event that it has loans outstanding in
excess of the borrowing base, or it has more than $7.5 million in cash and cash
equivalents at the end of any month. The amended and restated credit facility
has no financial covenants. In connection with the amendment and restatement of
the credit facility, the interest rate on the revolving credit facility were
increased. In addition, further restrictions were placed on Penton's ability to
make certain restricted payments, to make capital expenditures in excess of
certain amounts, to incur additional debt and contingent obligations, to make
acquisitions and investments, and to sell assets. As noted previously, the
senior credit facility was amended in January 2003. See Note 22 -- Subsequent
Events.
NON-GAAP FINANCIAL MEASURE
The Company believes that, although not prescribed under generally accepted
accounting principles ("GAAP"), adjusted EBITDA provides stockholders and
potential investors with a valuable measure in evaluating our operating
performance. The most directly comparable GAAP measure, operating income (loss),
includes depreciation and amortization, non-cash compensation, restructuring
charges, loss on sale of properties and impairment charges. Adjusted EBITDA
excludes these items because they do not directly influence the ongoing
operations of the business. In addition, one of our key financial ratios under
our preferred stock agreement is based, in part, on our adjusted EBITDA. It is
important to note, however, that not all companies calculate adjusted EBITDA in
the same manner, and adjusted EBITDA as presented may not be comparable to
similarly titled measures by other companies.
A reconciliation of our operating income (loss) to our adjusted EBITDA for
2002, 2001 and 2000 is as follows (in thousands):
2002 2001 2000
--------- --------- -------
Operating income (loss)................................ $(247,553) $ (81,622) 55,273
Restructuring charges.................................. 15,436 18,700 --
Impairment of assets................................... 223,424 59,794 1,051
Impairment of Internet assets.......................... -- -- 2,095
Non cash compensation.................................. 2,979 652 2,164
Loss on sale of properties............................. 888 -- --
Depreciation and amortization.......................... 19,329 44,048 32,811
--------- --------- -------
Adjusted EBITDA................................... $ 14,503 $ 41,572 $93,394
========= ========= =======
30
RESULTS OF OPERATIONS
The following table sets forth our consolidated statement of operations
data expressed as a percentage of revenues for the periods indicated:
YEAR ENDED DECEMBER 31,
--------------------------
2002 2001 2000
------ ----- -----
Revenues.................................................... 100.0% 100.0% 100.0%
------ ----- -----
Operating expenses:
Editorial, production and circulation..................... 44.2% 41.3% 36.4%
Selling, general and administrative....................... 50.9% 47.2% 40.7%
Impairment of Internet assets............................. -- -- 0.5%
Impairment of other assets................................ 95.0% 16.7% 0.3%
Restructuring charges..................................... 6.6% 5.2% --
Loss on sale of properties................................ 0.4% -- --
Depreciation and amortization............................. 8.2% 12.3% 8.3%
------ ----- -----
205.3% 122.7% 86.2%
------ ----- -----
Operating income (loss)..................................... (105.3)% (22.7)% 13.8%
------ ----- -----
Other income (expense):
Interest expense.......................................... (16.2)% (8.5)% (4.9)%
Interest income........................................... 0.3% 0.5% 1.3%
Gain on sale of investments............................... 0.6% -- 27.6%
Writedown of Internet investments......................... -- 0.2% (2.3)%
Miscellaneous, net........................................ (0.2)% (0.7)% --
------ ----- -----
(15.5)% (8.5)% 21.7%
------ ----- -----
Income (loss) from continuing operations before income
taxes, extraordinary items and cumulative effect of
accounting change......................................... (120.8)% (31.2)% 35.5%
Benefit (provision) for income taxes........................ 17.2% 4.5% (15.5)%
------ ----- -----
Income from continuing operations before extraordinary items
and cumulative effect of accounting change................ (103.6)% (26.7)% 20.0%
Discontinued operations..................................... (1.4)% (2.3)% (0.1)%
------ ----- -----
Income before extraordinary items and cumulative effect of
accounting change......................................... (105.0)% (29.0)% 19.9%
Extraordinary items, net of taxes........................... 0.1% -- --
Cumulative effect of accounting change, net of taxes........ (16.9)% -- --
------ ----- -----
Net income (loss)........................................... (121.8)% (29.0)% 19.9%
====== ===== =====
31
COMPARISON OF 2002 AND 2001
CONSOLIDATED RESULTS
The following table summarizes our results of operations for 2002 and 2001.
2002 2001 VARIANCE
--------- --------- ---------
Revenues...................................... $ 235,106 $ 358,871 $(123,765)
========= ========= =========
Operating expenses............................ $ 482,659 $ 440,493 $ 42,166
========= ========= =========
Loss from continuing operations, before
extraordinary items and cumulative effect of
accounting change........................... $(243,649) $ (95,944) $(147,705)
Discontinued operations....................... (3,252) (8,163) 4,911
Extraordinary items........................... 277 -- 277
Cumulative effect of an accounting change..... (39,700) -- (39,700)
--------- --------- ---------
Net loss...................................... $(286,324) $(104,107) $(182,217)
========= ========= =========
Net loss applicable to common stockholders.... $(332,498) $(104,107) $(228,391)
========= ========= =========
Net loss per diluted share applicable to
common stockholders......................... $ (10.27) $ (3.26) $ (7.01)
========= ========= =========
Adjusted EBITDA.......................... $ 14,503 $ 41,572 $ (27,069)
========= ========= =========
Adjusted EBITDA margin................... 6.2% 11.6% (5.4)%
========= ========= =========
REVENUES
Total revenues decreased $123.8 million, or 34.5%, from $358.9 million in
2001 to $235.1 million in 2002. The decrease was due primarily to a decrease in
trade show and conference revenues of $81.2 million, or 58.9%, from $137.9
million in 2001 to $56.7 million in 2002 and a decrease in publishing revenues
of $43.1 million, or 20.7%, from $208.8 million in 2001 to $165.7 million in
2002. Online Media revenues increased $0.6 million, or 4.9%, from $12.1 million
in 2001 to $12.7 million in 2002. The significant decrease in our trade show
revenues was primarily due to weak performance in our global portfolio of
Internet/broadband trade shows held during the year. Our Internet/broadband
trade shows sector represented $77.9 million, or 63.0%, of our total revenue
decline. In addition, significant declines were also experienced in our
electronics, information technology and manufacturing markets, which accounted
for an additional $29.3 million, or 23.6% of the total revenue decline. Included
in total revenues for 2002 and 2001 were revenues of $7.6 million and $27.2
million, respectively, associated with properties sold in December 2002, which
were not classified as discontinued operations.
OPERATING EXPENSE
Operating expenses increased $42.2 million, or 9.6%, from $440.5 million in
2001 to $482.7 million in 2002. Excluding restructuring charges of $15.4 million
and $18.7 million for 2002 and 2001, respectively; impairment of assets of
$223.4 million and $59.8 million for 2002 and 2001 respectively; loss on sale of
properties of $0.9 million for 2002 and depreciation and amortization charges of
$19.3 million and $44.0 million for 2002 and 2001, respectively; operating costs
decreased $96.7 million, or 30.5%, from $317.3 million in 2001 to $220.6 million
in 2002, although operating expenses as a percentage of revenues increased from
88.4% in 2001 to 93.8% in 2002. The increase in operating expenses as a
percentage of revenues was due primarily to the $123.8 million decline in
revenues, which was attributable to the impact of the economic downturn on our
business, partially offset by the effects from cost reduction initiatives and
restructuring activities throughout 2002 and 2001.
32
Editorial, Production and Circulation
Editorial, production and circulation expenses decreased to $103.9 million
in 2002, compared to $148.4 million in 2001, representing a decrease of $44.5
million, or 30.0%. The decrease was due to the effects of our expense reduction
initiatives, including eliminating unprofitable properties, reducing production
costs through process improvements and selective reduction in frequency and
circulation levels, outsourcing various functions in the organization, and the
effects of staff reductions made in the second half of 2001 and in 2002.
As a percentage of revenues, editorial, production and circulation expenses
increased from 41.3% in 2001 to 44.2% in 2002. The increase was due to the
general decrease in revenues across all of our products, particularly our
Internet/broadband trade shows.
Selling, General and Administrative
Selling, general and administrative expenses declined $49.9 million, or
29.4%, from $169.6 million in 2001 to $119.7 million in 2002. The decrease was
due primarily to cost savings associated with office closings and staff
reductions realized from the restructuring actions taken in the second half of
2001 and in 2002.
As a percentage of revenues, selling, general and administrative expenses
increased from 47.3% in 2001 to 50.9% in 2002. The increase was due primarily to
lower revenues realized from publications and trade shows, and in particular,
our Internet/broadband trade shows.
Depreciation and Amortization
Depreciation and amortization declined $24.7 million, or 56.1%, from $44.0
million in 2001 to $19.3 million in 2002 due to lower amortization of goodwill
resulting from the adoption of SFAS 142 on January 1, 2002.
OTHER INCOME (EXPENSE)
Interest expense increased $7.7 million from $30.5 million in 2001 to $38.2
million in 2002. The increase reflects the change in our debt structure from a
mix of bank and bond debt to primarily bond debt. As a result, the
weighted-average interest rates on our debt increased from approximately 8.0% in
2001 to 11.0% in 2002.
In January 2002, Penton sold its remaining 11.8% ownership interest in
Jupitermedia Corporation (formerly known as INT Media Group, Inc.) for $5.8
million and recognized a $1.5 million gain from its sale.
EFFECTIVE TAX RATES
The effective tax rates for 2002 and 2001 were 14.3% and 14.5%,
respectively. The effective tax rates for both years were different from the
statutory income tax rate as a result of non-deductible amortization, impaired
asset write-downs and disposition of assets.
Discontinued Operations
Loss from discontinued operations decreased $4.9 million from a loss of
$8.2 million in 2001 to a loss of $3.3 million in 2002. Revenues from
discontinued operations decreased from $12.7 million in 2001 to $8.7 million in
2002. The revenue decrease was due primarily to the significant economic
slowdown, which started in 2001, was further exacerbated by the events of
September 11, 2001, and continued through all of 2002. Also, 2001 results
include revenues from PM Australia only from the date of its acquisition in May.
Included in the loss from discontinued operations for 2002 was $1.0 million
related to restructuring charges. The 2001 loss included restructuring charges
of $0.09 million and goodwill impairment charges of $9.8 million.
Extraordinary Item, net
The extraordinary gain of $0.3 million in 2002 consisted of two separate
items. In March 2002, we purchased $10.0 million face value of our 10 3/8%
senior subordinated notes at prevailing market prices, resulting in a gain of
$1.4 million. This gain was offset by the write-off of unamortized deferred
finance costs of
33
approximately $1.1 million associated with the payoff of our term loan A and
term loan B facilities, which also occurred in March 2002.
Net Loss
We reported a net loss in 2002 of $286.3 million compared with a net loss
of $104.1 million for the same period in 2001. The 2002 results reflect: (i) the
elimination of goodwill amortization of approximately $15.3 million, net of
taxes, pursuant to our adoption of SFAS 142 on January 1, 2002; (ii) a non-cash
transitional goodwill impairment charge of $39.7 million, net of taxes, which is
recorded as a cumulative effect of accounting change on the consolidated
statements of operations; (iii) a non-cash impairment charge of $203.3 million
related to an additional goodwill impairment review as of September 30, 2002;
(iv) a non-cash impairment charge related to other intangible assets of
approximately $20.0 million; and (v) a restructuring charge of $16.4 million
($1.0 million of which was reclassified to discontinued operations) related to
staff reductions and office closings. Unusual 2001 items include: (i) a non-cash
impairment charge of $69.6 ($9.8 million of which was reclassified to
discontinued operations) for goodwill writedowns and asset impairments; and (ii)
a restructuring charge of $18.8 million ($0.09 million of which was reclassified
to discontinued operations) related to the discontinuation of certain media
properties, staff reductions and facility closings.
Net Loss Applicable to Common Stockholders
The net loss applicable to common stockholders of $332.5 million, or $10.27
per diluted share, for 2002 includes $1.5 million in accrued dividends as well
as a $42.1 million, one-time, non-cash charge related to the immediate
amortization of the beneficial conversion feature, which was the result of
stockholder approval on May 31, 2002 to remove the 10-year mandatory redemption
date on the preferred stock and $2.5 million of accretion from the date of
issuance to the date of stockholder approval. Subsequent to this approval, the
Company ceased accretion on the preferred stock and was required to recognize
the unamortized beneficial conversion feature of the stock immediately as a
charge to capital in excess of par value.
Adjusted EBITDA
Total adjusted EBITDA decreased $27.1 million, or 65.1%, from $41.6 million
in 2001 to $14.5 million in 2002. Adjusted EBITDA margin decreased from 11.6% in
2001 to 6.2% in 2002. The decrease in both our adjusted EBITDA and adjusted
EBITDA margin was due primarily to the decrease in our trade show and conference
operations of $44.4 million, or 84.8%, from $52.3 million in 2001 to $7.9
million in 2002. Adjusted EBITDA margin for trade shows and conferences
decreased from 37.9% in 2001 to 14.0% in 2002. Weak performance in our global
portfolio of Internet/broadband trade shows in 2002 represented 172.5% of the
total decrease in adjusted EBITDA. These decreases were somewhat offset by a
reduction in general and administrative costs of $10.7 million, or 30.9%, from
$34.6 million in 2001 to $23.9 million in 2002 as well as an improvement in
Online media adjusted EBITDA of $6.4 million from a loss of $3.1 million in 2001
to income of $3.3 million in 2002.
SEGMENTS
We manage our business based on four operating segments: Industry Media,
Technology Media, Lifestyle Media and Retail Media (previously called Other
Media). All four segments derive their revenues from publications, trade shows
and conferences, and online media products. See Note 17 -- Segment Information,
for the definition of adjusted segment EBITDA and a reconciliation of total
adjusted segment EBITDA to consolidated income (loss) from continuing operations
before income taxes, extraordinary items and cumulative effect of accounting
change.
34
Financial information by segment for 2002 and 2001, adjusted for
discontinued operations, is summarized in the following table (in thousands):
ADJUSTED
SEGMENT
ADJUSTED EBITDA
REVENUES SEGMENT EBITDA MARGIN
------------------- ----------------- -----------
2002 2001 2002 2001 2002 2001
-------- -------- ------- ------- ---- ----
Industry Media.......................... $ 92,380 $113,419 $15,447 $18,761 16.7% 16.5%
Technology Media........................ 90,267 195,159 246 33,847 0.3% 17.3%
Lifestyle Media......................... 30,839 29,893 11,144 9,787 36.1% 32.7%
Retail Media............................ 21,620 20,400 5,826 4,775 26.9% 23.4%
-------- -------- ------- -------
Total................................... $235,106 $358,871 $32,663 $67,170
======== ======== ======= =======
Industry Media
Our Industry Media segment, which represented 39.3% of total Company
revenues for 2002, serves customers in the manufacturing, design/engineering,
mechanical systems/construction, government/compliance, supply chain and
aviation industries. Revenues for this segment decreased $21.0 million, or
18.5%, from $113.4 million in 2001 to $92.4 million in 2002. The decrease was
due primarily to lower revenues from publications of $18.5 million and lower
revenues from trade shows and conferences of $2.1 million when comparing 2001 to
2002. The decrease in publication revenues was due primarily to revenue declines
in products serving the design/engineering, supply chain, aviation and
manufacturing sectors, which were impacted by the downturn in the U.S. economy.
These sectors accounted for approximately $18.8 million of the decrease. The
remaining decrease in publication revenues was due to declines in a number of
our other sectors. Of the decrease in trade show and conference revenues,
approximately $2.2 million was due to revenue declines in products serving our
manufacturing and construction sectors.
Adjusted segment EBITDA for Industry Media decreased $3.4 million, or
17.7%, from $18.8 million in 2001 to $15.4 million in 2002. Industry Media
publications decreased $6.3 million, while trade shows and conferences decreased
$1.3 million. These decreases were partially offset by an increase of $0.6
million in the segment's online media portfolio, as well as a decrease in
general and administrative and facility costs of $3.7 million as a result of
staff reductions and office closures. Adjusted segment EBITDA margin increased
to 16.7% in 2002 from 16.5% in 2001. The improvement in adjusted segment EBITDA
margin was due primarily to the decline in general and administrative costs and
facility-related costs.
Technology Media
Our Technology Media segment, which represented 38.4% of total Company
revenues in 2002, serves customers in the electronics, information technology
and Internet/broadband markets. Revenues for this segment decreased $104.9
million, or 53.7%, from $195.2 million in 2001 to $90.3 million in 2002. The
decrease was due primarily to lower revenues from publications of $25.6 million
and lower revenues from trade shows and conferences of $80.2 million.
Publications in our information technology, and electronics sectors were the
most significantly impacted and accounted for 78.2% of the decrease. Our
Internet/broadband sector accounted for $77.9 million of the total decrease in
trade show revenues. Online revenues increased $1.0 million from $9.5 million in
2001 to $10.5 million in 2002.
Adjusted segment EBITDA for Technology Media decreased $33.6 million, or
99.3%, from $33.8 million in 2001 to $0.2 million in 2002. Trade shows and
conferences accounted for $46.6 million of the decrease. The decrease was
partially offset by an increase in the segment's online media portfolio of $4.1
million, an increase in publications of $0.1 million and lower general and
administrative and facility costs of $8.8 million, as a result of staff
reductions and office closings. The significant adjusted segment EBITDA decline
for trade shows and conferences was due primarily to the trade shows revenue
declines noted above.
35
Lifestyle Media
Our Lifestyle Media segment, which represented 13.1% of total Company
revenues in 2002, serves customers in our natural products industry sector.
Revenues for this segment increased $0.9 million in 2002 when compared with
2001.
Adjusted segment EBITDA for the Lifestyle Media segment increased $1.4
million to $11.1 million in 2002. Trade shows and conferences for this segment
were flat when compared with 2001. Publications increased $0.5 million, from
$1.7 million in 2001 to $2.2 million in 2002. Online media increased $0.8
million from a loss of $0.9 million in 2001 to a loss of $0.1 million in 2002.
Adjusted segment EBITDA margins improved from 32.7% in 2001 to 36.1% in 2002,
due primarily to stable revenues and cost reduction measure taken.
Retail Media
Our Retail Media segment, which represented 9.2% of total Company revenues
for 2002, serves customers in the food/retail and leisure/hospitality sectors.
Revenues for this segment of $21.6 million increased $1.2 million in 2002 when
compared with 2001.
Adjusted segment EBITDA for Retail Media increased $1.0 million, or 22.0%,
from $4.8 million in 2001 to $5.8 million in 2002, due primarily to cost
reduction efforts. Cost reduction efforts also improved adjusted segment EBITDA
margins from 23.4% in 2001 to 26.9% in 2002.
PRODUCTS
We publish specialized trade magazines, produce trade shows and
conferences, and maintain a variety of online media products, including Web
businesses and electronic newsletters. Adjusted product EBITDA is calculated
similarly to adjusted EBITDA which is previously defined, except that adjusted
product EBITDA also excludes general and administrative costs. General and
administrative costs include corporate-level costs, as defined previously under
Segments, and other general and administrative costs related to product
offerings, which cannot be reasonably allocated to each product. Financial
information by product for 2002 and 2001 is as follows (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001
---------- ----------
Publishing.................................................. $ 27,145 $ 26,933
Trade shows and conferences................................. 7,940 52,301
Online media................................................ 3,317 (3,071)
-------- --------
Adjusted product EBITDA................................... 38,402 76,163
General and administrative.................................. (23,899) (34,591)
-------- --------
Adjusted EBITDA(1).......................................... $ 14,503 $ 41,572
======== ========
---------------
(1) See non-GAAP financial measures for a reconciliation of adjusted EBITDA to
operating income (loss).
In 2002, adjusted product EBITDA for the Company's publishing operations
increased $0.2 million, or 0.8%, when compared with 2001. Adjusted product
EBITDA for publications was primarily affected by: (i) a year-over-year increase
of approximately $3.3 million related to improvements from our Internet World
magazine; (ii) the discontinuation of our Streaming Media and Internet World
Asia magazines, which both reported a loss in 2001 for a total of $1.1 million;
and (iii) year-over-year improvements of approximately $3.0 million from SQL
Server, Netronics, Supply Chain Technology News, Business Finance, Restaurant
Hospitality, Food Management and Medical Design News magazines. These increases
were partially offset by approximately $7.3 million from magazines such as
Windows & .NET, Machine Design, American Machinist, Electronic Design and EE
Product News.
36
In 2002, adjusted product EBITDA for the Company's trade show and
conference operations decreased $44.4 million, or 84.8%, when compared with the
same prior-year period. The decline was due primarily to the significant drop in
revenues in our Internet/broadband events, with the Internet World Spring,
Internet World Fall, Service Networks Spring, Service Networks Fall, Internet
World UK, and Internet World Berlin shows accounting for approximately $39.4
million of the decrease.
Adjusted product EBITDA for the Company's online media operations increased
from a loss of $3.1 million for 2001 to income of $3.3 million in 2002. The
improvement was due primarily to the elimination of unprofitable online media
properties in 2001, organic product development within the Technology Media
segment, and year-on-year revenue growth of ongoing products.
In 2002, general and administrative costs decreased $10.7 million when
compared with 2001. The decrease was due primarily to staff reductions and other
cost-cutting efforts implemented in the second half of 2001 and in 2002.
COMPARISON OF 2001 AND 2000
CONSOLIDATED RESULTS
The following table summarizes our results for 2001 and 2000. As previously
noted, these 2001 and 2000 results reflect PTS and PM Australia as discontinued
operations.
2001 2000 CHANGE
--------- -------- ---------
Revenues........................................... $ 358,871 $399,717 $ (40,846)
========= ======== =========
Operating expenses................................. $ 440,493 $344,444 $ 96,049
========= ======== =========
Income (loss) from continuing operations, before
extraordinary items and cumulative effect of
accounting change................................ $ (95,944) $ 80,025 $(175,969)
Discontinued operations............................ (8,163) (435) (7,728)
--------- -------- ---------
Net income (loss).................................. $(104,107) $ 79,590 $(183,697)
========= ======== =========
Adjusted EBITDA.................................... $ 41,572 $ 93,394 $ (51,822)
========= ======== =========
Adjusted EBITDA margins............................ 11.6% 23.4% (11.8)%
========= ======== =========
Operating results for the year ended December 31, 2001 were severely
impacted by the downturn in the U.S. economy, and, to a lesser extent, by the
slowing of economies throughout Europe and Asia. In particular, results for the
fourth quarter of 2001, during which four of our largest trade shows took place,
were also adversely impacted by reductions in customers' travel and marketing
spending following the terrorist attacks of September 11, 2001. Our technology
and manufacturing media portfolios, particularly trade shows and publishing
properties serving the Internet/broadband sector, experienced the deepest
business decline throughout 2001, particularly in the second half of the year.
Our revenues decreased $40.8 million, or 10.2%, from $399.7 million in 2000
to $358.9 million in 2001. The decrease was due primarily to a decrease in
publishing revenues of $21.3 million, or 9.3%, from $230.1 million in 2000 to
$208.8 million in 2001, as well as a decrease in trade show and conference
revenues of $25.7 million, or 15.7%, from $163.6 million in 2000 to $137.9
million in 2001. These decreases were offset in part by an increase in online
media revenue of $6.1 million, from $6.0 million in 2000 to $12.1 million in
2001. Included in total revenues for 2001 and 2000 were revenues of $27.2
million and $33.4 million, respectively, associated with properties sold in
December 2002, which were not classified as discontinued operations.
Loss from discontinued operations increased $7.8 million from a loss of
$0.4 million in 2000 to a loss of $8.2 million in 2001. Revenues from
discontinued operations increased from $4.9 million in 2000 to $12.7 million in
2001. The 2000 revenues include revenues from PTS only from the date of its
acquisition in
37
September. No amounts were included in 2000 for PM Australia, as it was acquired
in May 2001. Included in the loss from discontinued operations for 2001 was $.09
million related to restructuring charges and $9.8 million related to goodwill
impairment.
We reported a net loss for 2001 of $104.1 million, or $(3.26) per diluted
share, compared with income of $79.6 million, or $2.49 per diluted share, in
2000. Excluding unusual items, our net loss was $7.1 million, or $(0.22) per
diluted share, in 2001, compared with income of $21.2 million, or $0.66 per
diluted share, in 2000. Unusual items in 2001 included restructuring charges of
$18.7 million related to the shutdown of certain unprofitable media properties,
staff reductions and facility closings, and non-cash charges of $59.8 million
related primarily to goodwill writedowns. Discontinued operations of $9.8
million related to PTS and PM Australia were also included in 2001. Unusual
items in 2000 included a pre-tax gain of $110.2 million on our sale of
Jupitermedia Corporation common stock and investment writedowns and asset
impairments of $12.6 million.
Adjusted EBITDA decreased $51.8 million, or 54.5%, from $93.4 million in
2000 to $41.6 million in 2001. Adjusted EBITDA margins decreased from 23.4% in
2000 to 11.6% in 2001. The decrease in both our adjusted EBITDA and adjusted
EBITDA margins was due primarily to a decrease in the adjusted EBITDA for our
publishing operations of $24.4 million, or 47.5%, from $51.3 million in 2000 to
$26.9 million in 2001; a decrease in the adjusted EBITDA for our trade show and
conference operations of $26.5 million, or 33.6%, from $78.8 million in 2000 to
$52.3 million in 2001; and an increase in our general and administrative costs
of $2.6 million, from $32.0 million in 2000 to $34.6 million in 2001. The
decreases in our adjusted EBITDA were somewhat offset by an increase in our
adjusted EBITDA for our Online media operations of $3.7 million, from a loss of
$6.8 million in 2000 to a loss of $3.1 million in 2001.
OPERATING EXPENSES
Editorial, Production and Circulation
Editorial, production and circulation expenses grew to $148.4 million in
2001 compared with $145.7 million in 2000, representing an increase of $2.7
million, or 1.9%. The increase was due primarily to a full year of operations
for the acquisitions completed in 2000, including Streaming Media, Duke and PM
Germany, as well as the acquisitions completed in 2001, including Hillgate.
These increases were somewhat offset by the shutdown of our Healthwell.com
exchange in February 2002, and our decision not to hold the Internet World
Summer and Internet World Canada shows in 2001.
Editorial, production and circulation expenses increased as a percentage of
revenues from 36.4% in 2000 to 41.3% in 2001. The increase was due largely to
lower revenues for both magazines and trade shows.
Selling, General and Administrative
Selling, general and administrative expenses grew $6.8 million, or 4.1%,
from $162.8 million in 2000 to $169.6 million in 2001, due primarily to higher
selling costs. During the first half of 2001, our spending on marketing and
selling increased at a higher rate for trade shows than in the previous year.
General and administrative costs increased due to the impact of Duke and
Streaming Media acquisitions in September 2000 and higher health benefit costs.
Selling, general and administrative expenses increased as a percentage of
revenues from 40.7% in 2000 to 47.3% in 2001. The increase was due largely to
lower revenues for both magazines and trade shows.
Depreciation and Amortization
Depreciation and amortization increased $11.2 million, or 34.2%, from $32.8
million in 2000 to $44.0 million in 2001. The higher expense was primarily the
result of a full year of amortization of goodwill and other intangibles
associated with Duke and Streaming Media, which were both acquired in September
2000, as well as increased depreciation associated with capital expenditures
related to the corporate headquarters relocation in the fourth quarter of 2000.
38
OTHER INCOME (EXPENSE)
Interest expense increased $11.0 million to $30.5 million due to a higher
average debt balance outstanding in 2001 compared with 2000. Interest income
decreased $3.5 million to $1.9 million due to a decrease in the interest earned
on available cash in 2001 compared with 2000. The overall increase in net
interest expense was somewhat offset by lower overall interest rates in 2001
compared with 2000.
In February 2000, Penton sold 2.0 million shares of Jupitermedia
Corporation common 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. In July 1999, Penton sold approximately 0.5
million shares of Jupitermedia Corporation common stock and recognized a pre-tax
gain of approximately $5.9 million.
In 2000, the Company invested $6.3 million in Cayenta Inc., a provider of
e-commerce systems, and $3.4 million in Leisurehub.com, an online
business-to-business trading community for the global leisure industry. During
2000, the Company determined that its investments in these Internet-related
companies had suffered declines in value that were other than temporary. As a
result, the Company recognized losses totaling $9.5 million, reducing its
investment in Cayenta Inc. and Leisurehub.com to zero.
Miscellaneous net expense increased to $2.8 million in 2001, due primarily
to minority equity interests and various professional fees related to
unsuccessful potential acquisitions that were written off during the year.
EFFECTIVE TAX RATES
The effective tax rates from continuing operations were a benefit of 14.5%
and provision of 43.6% for 2001 and 2000, respectively. The decrease in our
effective tax rate was due primarily to our writedown of non-deductible goodwill
in 2001.
SEGMENTS
Financial information by segment for 2001 and 2000, adjusted for
discontinued operations, is summarized in the following table (in thousands):
ADJUSTED
SEGMENT
ADJUSTED SEGMENT EBITDA
REVENUE EBITDA MARGINS
------------------- ------------------ -----------
2001 2000 2001 2000 2001 2000
-------- -------- ------- -------- ---- ----
Industry Media................. $113,419 $137,391 $18,761 $ 28,682 16.5% 20.9%
Technology Media............... 195,159 205,380 33,847 69,652 17.3% 33.9%
Lifestyle Media................ 29,893 30,121 9,787 7,495 32.7% 24.9%
Retail Media................... 20,400 26,825 4,775 7,526 23.4% 28.1%
-------- -------- ------- --------
Total........................ $358,871 $399,717 $67,170 $113,355
======== ======== ======= ========
Industry Media
Our Industry Media segment serves customers in the manufacturing,
design/engineering, mechanical systems/construction, government/compliance,
supply chain and aviation industries. Revenues for the Industry Media segment
decreased $24.0 million, or 17.4%, from $137.4 million in 2000 to $113.4 million
in 2001. The decrease was due primarily to year-over-year declines across much
of the segment's portfolio, which was primarily affected by the slowing economy,
with IndustryWeek, Machine Design, American Machinist, New Equipment Digest,
Contracting Business and Material Handling Management magazines accounting for
$12.5 million of the revenue decrease, and to declines in the Computers in
Manufacturing trade show, which accounted for an additional $2.0 million of the
decrease. These declines were somewhat offset by: (i) revenue of $0.8 million
generated by Medical Design News magazine, which we launched during the year;
(ii) added
39
revenues of approximately $1.4 million from Contractor magazine, which we
acquired in the second quarter of the year, and (iii) year-on-year revenue
growth of $0.1 million in the segment's online media business.
Adjusted segment EBITDA for Industry Media decreased $9.9 million, or
34.6%, from $28.7 million in 2000 to $18.8 million in 2001. Adjusted segment
EBITDA margins decreased from 20.9% in 2000 to 16.5% in 2001. The decrease was
due primarily to declines in the aforementioned magazines, which accounted for
$6.7 million of the decrease, and to declines in the Computers in Manufacturing
trade show, which accounted for an additional $1.4 million of the decrease. The
Industry Media segment's online media portfolio experienced a modest decline in
2001 compared with 2000.
Technology Media
Our Technology Media segment serves customers in the electronics,
information technology and Internet/broadband industry sectors. Revenues for
Technology Media decreased $10.2 million, or 5.0%, from $205.4 million in 2000
to $195.2 million in 2001. The decrease was due primarily to declines in our
Internet World Spring, Service Network Spring, Streaming Media West and Internet
World Fall trade shows, which accounted for $27.6 million of the decrease, and
to declines in the Internet World magazine of $12.6 million. The declines were
caused by the slowdown in the U.S. economy and the events of September 11, 2001.
Revenue declines were offset in part by: (i) added results of the Streaming
Media and PM Germany trade show properties of $5.3 million, which were acquired
in 2000; (ii) added results of Duke publications and online media products of
$23.8 million, which were acquired in 2000; (iii) several events launched in the
year and (iv) added results of the Wireless Developer Conference of $0.5
million, which was acquired in 2001.
Adjusted segment EBITDA for Technology Media decreased $35.9 million, or
51.4%, from $69.7 million in 2000 to $33.8 million in 2001. Adjusted segment
EBITDA margins decreased from 33.9% in 2000 to 17.3% in 2001. Declines mirrored
revenue trends for Technology Media publishing, trade shows and conferences and
online media products. Overall, 2001 results were severely impacted by the
decline in the technology market and the events of September 11, 2001. The
Internet World Fall show, originally scheduled for early October at the Jacob K.
Javits Convention Center in New York City, had to be rescheduled to December,
which impacted attendance. Other fourth-quarter shows were impacted by the
slowdown in travel and fear of additional attacks.
Lifestyle Media
Our Lifestyle Media segment serves customers in the natural products
industry sector. Revenues for Lifestyle Media decreased $0.2 million, or 0.8%,
from $30.1 million in 2000 to $29.9 million in 2001. Lifestyle Media incurred
revenue declines in its publishing and online media products, which were offset
in part by increases from trade show events and added properties. Revenues from
The Natural Foods Merchandiser and Nutrition Science News declined $1.2 million
year-over-year. These declines were offset in part by the added results of $0.9
million from Nutrition Business Journal, which we acquired in February 2001.
Trade show and conference revenues grew compared with 2000 by approximately $1.0
million; however, revenues for Natural Products Expo East, held in early October
in Washington, D.C., were impacted by travel slowdowns and fear of additional
attacks after the events of September 11, 2001.
Adjusted segment EBITDA for Lifestyle Media increased $2.3 million, or
30.6%, from $7.5 million in 2000 to $9.8 million in 2001. Adjusted segment
EBITDA margins increased to 32.7% in 2001 from 24.9% in 2000. The increase was
due primarily to the shutdown in 2001 of the Healthwell.com industry exchange
Web site.
Retail Media
Our Retail Media segment serves customers in the food/retail and
leisure/hospitality industry sectors. Revenues for Retail Media decreased $6.4
million, or 24.0%, from $26.8 million in 2000 to $20.4 million in 2001. The
decrease was due primarily to year-over-year declines of $2.0 million for
Convenience Store Decisions, Restaurant Hospitality and Lodging Hospitality
magazines, and to declines in the International Leisure Industry Week trade show
of $1.9, million caused primarily by the slowdown in the global economy.
40
Adjusted segment EBITDA for Retail Media decreased $2.7 million, or 36.6%,
from $7.5 million in 2000 to $4.8 million in 2001. Declines followed revenue
declines for the publications noted. Results of the International Leisure
Industry Week show held in October 2001 were impacted by the economic slowdown
in European markets and travel concerns following the September 11, 2001
terrorist attacks.
Products
We published 65 specialized trade magazines, produced 135 trade shows and
conferences, and provided Web sites, electronic newsletters and other online
media products, which serve each of the industries in our four business
segments. Adjusted product EBITDA is calculated similarly to adjusted EBITDA,
which is previously defined, except that adjusted product EBITDA also excludes
general and administrative costs. General and administrative costs include
corporate-level costs (as defined above) and other general and administrative
costs related to product offerings, which cannot be reasonably allocated to each
product. Our calculation of adjusted EBITDA by product, restated for
discontinued operations, is as follows (in thousands):
YEAR ENDED
DECEMBER 31,
-----------------
2001 2000
------- -------
Publishing.................................................. $26,933 $51,269
Trade shows and conferences................................. 52,301 78,756
Online media................................................ (3,071) (6,791)
------- -------
Adjusted product EBITDA................................ 76,163 123,234
General and administrative.................................. (34,591) (29,840)
------- -------
Adjusted EBITDA(1).......................................... $41,572 $93,394
======= =======
---------------
(1) See non-GAAP financial measures for a reconciliation of adjusted EBITDA to
operating income (loss).
Adjusted product EBITDA for our publishing operations decreased $24.4
million, or 47.5%, from $51.3 million in 2000 to $26.9 million in 2001.
Decreases for our publishing operations were due primarily to the general
slowdown in the U.S. economy, which most heavily impacted magazines in our
technology and electronics sectors, which accounted for $9.3 million of the
decrease. The largest decrease was in our Internet World magazine, which was
down $8.2 million. Declines were offset partially by $4.7 million of additional
adjusted EBITDA from our Windows 2000 Magazine, iSeries NEWS magazine and other
Duke Communications International ("Duke") titles, which were part of our
acquisition of Duke in September 2000.
Adjusted product EBITDA for our trade show and conference operations
decreased $26.5 million, or 33.6%, from $78.8 million in 2000 to $52.3 million
in 2001. The decrease was due primarily to the decline in our technology sector
in 2001 and the events of September 11, 2001, which exacerbated an already
difficult business environment. Our Internet World Fall show, which has
historically been our biggest show of the year, was originally scheduled to be
held at the Jacob K. Javits Convention Center in New York City in early October,
but had to be rescheduled to December because of the events of September 11,
2001. Other shows held during the fourth quarter of 2001 were also impacted by
the slowdown in travel and fear of additional attacks. These declines were
partially offset by: (i) added results from acquired properties, including
Streaming Media West; (ii) successful launches, including Internet World
Wireless East, ASPCON London, ASPCON Spring, Streaming Media events in Berlin
and Europe, Internet World Berlin, and m-Commerce World, which generated $8.4
million of adjusted EBITDA; and (iii) year-on-year growth of approximately $2.6
million from other events, including Internet World UK, ISPCON London, Natural
Products Expo West, and Natural Products Expo Europe.
Adjusted product EBITDA for our online media operations increased $3.7
million, from a loss of $6.8 million in 2000 to a loss of $3.1 million in 2001.
Approximately $1.3 million of the improvement was due to the addition of the
online media business of Duke, which was acquired in September 2000.
41
Our general and administrative costs increased $4.8 million, from $29.8
million in 2000 to $34.6 million in 2001. The increases were due primarily to
higher compensation expense, a significant increase in health care costs and
acquisitions completed during 2000 and 2001.
LIQUIDITY AND CAPITAL RESOURCES
Analysis of Cash Flows
Penton's total cash and cash equivalents was $6.8 million at December 31,
2002. Cash used for operating activities was $16.7 million in 2002, which
reflects a net loss of $286.3 million and a net working capital decrease of
approximately $48.9 million, offset by non-cash charges (primarily asset
impairments, cumulative effect of accounting change, depreciation and
amortization, and non-cash restructuring charges) of approximately $318.5
million. Cash used by operating activities was $20.3 million for the year ended
December 31, 2001. Operating cash flows for 2001 reflect our net loss of $104.1
million and a net working capital decrease of approximately $36.6 million,
offset by non-cash charges (primarily depreciation and amortization, non-cash
restructuring charges, writedowns of investments and asset impairments) of
approximately $120.4 million.
The decrease in cash used in operating activities in 2002 compared to 2001
was due primarily to decreases in working capital items. The most significant
working capital changes in 2002 were attributable to income taxes receivable,
accounts payable and accrued expenses, and unearned income. The change in the
receivable for income taxes reflects the anticipated receipt of an income tax
refund of $52.7 million in January 2003 compared with a refund of $12.2 million
in February 2002. The decrease in accounts payable and accrued expenses was due
primarily to the timing of vendor and other payments, which can fluctuate based
on when particular trade shows are held. The decrease in unearned income was due
primarily to the decrease in the volume of trade show business and the timing of
exhibitor deposit payments, which were being made closer to their respective
show dates. The decrease in operating cash flows in 2001 compared with 2000 was
due primarily to the decrease in operating income of $9.5 million, after
excluding non-cash charges. The most significant working capital changes in 2001
were attributable to accounts receivable, income taxes receivable, accounts
payable, accrued expenses, and unearned income. The accounts receivable decrease
reflects lower fourth-quarter sales in 2001 compared with 2000 and the timing of
payments received. The receivable for income taxes reflects the losses incurred
in 2001 and our ability to carry these losses back to previous years to obtain a
refund. The decrease in accounts payable and accrued expenses was due primarily
to the timing of vendor and other payments, which can fluctuate based on when
particular shows are held, and the decrease in unearned income is due primarily
to the timing of vendor payments and related shows, and the decrease in the
volume of expected business in 2002.
Investing activities used $2.6 million of cash in 2002. Capital
expenditures of approximately $3.9 million and earnout payments of approximately
$5.5 million were offset by proceeds of $5.8 million from the sale of
approximately 3.0 million shares of Jupitermedia Corporation common stock as
well as proceeds received from the sale of properties in December 2002.
Investing activities used $27.5 million of cash in 2001, primarily for capital
expenditures, several small acquisitions completed during the first half of the
year and earnout payments.
Financing activities provided $6.0 million of cash in 2002, due to the
issuance of our 11 7/8% senior secured notes, the sale of 50,000 shares of
Series B mandatorily redeemable convertible preferred stock, amounts drawn under
our revolving credit facility, and proceeds received from the repayment of
executive loans. These proceeds were primarily offset by the paydown of our
senior secured credit facility; the purchase of $10.0 million face value of our
10 3/8% senior subordinated notes at prevailing market prices; the payment of
financing fees associated with the amendment to our senior credit facility and
the issuance of our senior secured notes, and the payment of the short-term
portion of our note payable. Financing activities provided $56.3 million in
2001, primarily from the issuance of our 10 3/8% senior subordinated notes and
amounts drawn under our revolving credit facility. These proceeds were partially
offset by required quarterly principal payments under our term loans, the
paydown of our revolver balance, an additional $20.0 million paydown on our term
loans, and the payment of finance fees and dividends in the first half of the
year.
42
Debt Financing Activities
On September 1, 1999, we entered into a $340.0 million credit agreement
with several banks. The agreement provided for a revolving credit facility of up
to $125.0 million, a term loan A of $140.0 million and a term loan B of $75.0
million. In October 2000, we amended our credit facility to give us the ability
to increase our term loan A facility, term loan B facility and/or revolving
credit facility up to an aggregate of $100.0 million prior to September 30,
2001. At that time, we increased the commitment under the revolving credit
facility by $60.0 million to $185.0 million. The remaining $40.0 million could
not be requested on more than three separate occasions, and any increase had to
take place by September 30, 2001. We did not exercise this option. As described
in the following paragraphs, we amended our credit facility and paid off our
term A and term B loans in the first quarter of 2002.
In June 2001, we issued $185.0 million of 10 3/8% senior subordinated notes
(the "Subordinated Notes") due June 2011. Interest on the notes is payable
semiannually, on June 15 and December 15. The Subordinated Notes are fully and
unconditionally, jointly and severally guaranteed, on a senior subordinated
basis, by the assets of our domestic subsidiaries, which are 100% owned by the
Company, and may be redeemed, in whole or in part, on or after June 15, 2006. In
addition, we may redeem up to 35% of the aggregate principal amount of the
Subordinated Notes before June 15, 2004 with the proceeds of certain equity
offerings. The Subordinated Notes were offered at a discount of $4.2 million.
This discount is being amortized using the interest method, over the term of the
Subordinated Notes. Costs representing underwriting fees and other professional
fees of approximately $1.7 million are being amortized over the term of the
Subordinated Notes. The net proceeds of $180.2 million were used to pay down the
$136.0 million outstanding balance of the revolving credit facility, $12.8
million of the term loan A facility and $7.2 million of the term loan B
facility. The remaining proceeds were used for general corporate purposes. The
Subordinated Notes are our unsecured senior subordinated obligations,
subordinated in right of payment to all existing and future senior indebtedness,
including the senior secured credit facility and the 11 7/8% senior secured
notes discussed below.
The Subordinated Notes are jointly and severally irrevocably and
unconditionally guaranteed on a senior subordinated basis by each of our present
and future domestic subsidiaries. The indenture governing the Subordinated Notes
contains covenants that, among other things, restrict our and our subsidiaries'
ability to borrow money; pay dividends on or repurchase capital stock; make
certain investments; enter into agreements that restrict our subsidiaries from
paying dividends or other distributions, making loans or otherwise transferring
assets to us or to any other subsidiaries; create liens on assets; engage in
transactions with affiliates; sell assets, including capital stock of our
subsidiaries; and merge, consolidate or sell all or substantially all or our
assets and the assets of our subsidiaries. Our ability to obtain dividends from
our subsidiaries is restricted only if we are in default under our debt
arrangement or if we have exceeded our limitation of additional indebtedness, as
specified in such agreement.
In January 2002, we received $5.8 million in net proceeds from the sale of
our remaining investment in Jupitermedia Corporation common stock.
In March 2002, we entered into an agreement with a group of investors to
sell 50,000 shares of Series B Convertible Preferred Stock and warrants to
purchase 1.6 million shares of our common stock for $50.0 million. We received
gross proceeds of $40.0 million from the sale of 40,000 shares of preferred
stock and warrants to purchase 1,280,000 shares of our common stock on March 19,
2002 and gross proceeds of $10.0 million from the sale of 10,000 shares of
preferred stock and warrants to purchase 320,000 shares of our common stock on
March 28, 2002 (see Note 7 -- Mandatorily Redeemable Convertible Preferred
Stock). Net proceeds from the sale of the preferred stock, along with the net
proceeds from our recent sale of our Jupitermedia Corporation common stock, and
cash on hand from our tax refund were used to repay $48.0 million of amounts
outstanding under our term loans.
In March 2002, Penton issued $157.5 million of 11 7/8% senior secured notes
(the "Secured Notes") due in 2007. Interest is payable on the Secured Notes
semiannually on April 1 and October 1. The Secured Notes are fully and
unconditionally, jointly and severally guaranteed, on a senior basis, by all of
our domestic subsidiaries, which are 100% owned by the Company, and also the
stock of certain subsidiaries. We may redeem the Secured Notes, in whole or in
part, during the periods October 1, 2005 through October 1, 2006
43
and thereafter at redemption prices of 105.9375% and 100.0000% of the principal
amount, respectively, together with accrued and unpaid interest to the date of
redemption. In addition, at any time prior to October 1, 2005, upon certain
public equity offerings of our common stock, up to 35% of the aggregate
principal amount of the Secured Notes may be redeemed at our option, within 90
days of such public equity offering, with cash proceeds from the offering at a
redemption price equal to 111.875% of the principal amount, together with
accrued and unpaid interest to the date of redemption.
The Secured Notes were offered at a discount of $0.8 million, which is
being amortized, using the interest method, over the term of the Secured Notes.
Costs representing underwriting fees and other professional fees of $6.6 million
are being amortized over the term of the Secured Notes. Net proceeds of $150.1
million were used to pay down $83.6 million of term loan A and $49.0 million of
term loan B, and net proceeds of $8.3 million were used to repurchase $10.0
million of our Subordinated Notes. The remaining net proceeds of $9.2 million
were used for general corporate purposes. The Secured Notes rank senior in right
to all of our senior subordinated indebtedness, including our Subordinated
Notes, and equal in right of payment with all of our other senior indebtedness,
which is approximately $0.4 million at December 31, 2002. The guarantees are
senior secured obligations of each of our subsidiary guarantors and rank senior
in right of payment to all subordinated indebtedness of the subsidiary
guarantors, including the guarantees of our 10 3/8% Subordinated Notes, and
equal in right of payment with all of our senior indebtedness. The notes and
guarantees are secured by a lien on substantially all of our assets and those of
our subsidiary guarantors, other than specified excluded assets.
Excluded assets consist of, among other things, the capital stock of Duke
Communications International, Inc. and Internet World Media, Inc.; the capital
stock of our foreign subsidiaries directly owned by us or the subsidiary
guarantors which exceed 65% of the outstanding capital stock or equity interest
of such foreign subsidiaries; and all of the capital stock of our other foreign
subsidiaries. The indenture governing the Secured Notes contain covenants that,
among other things, restrict our and our subsidiaries' ability to borrow money;
pay dividends on or repurchase capital stock; make certain investments; enter
into agreements that restrict our subsidiaries from paying dividends or other
distributions, making loans or otherwise transferring assets to us or to any
other subsidiaries; create liens on assets; engage in transactions with
affiliates; sell assets, including capital stock of our subsidiaries; and merge,
consolidate or sell all or substantially all of our assets and the assets of our
subsidiaries. Our ability to obtain dividends from our subsidiaries is
restricted only if we are in default under our debt arrangement or if we have
exceeded our limitation of additional indebtedness, as specified in such
agreement.
In March 2002, we amended and restated our senior credit facility and
repaid our term loan A facility and our term loan B facility under our senior
credit facility from the proceeds received from the sale of preferred shares and
the issuance of the $157.5 million in Secured Notes, as noted above. The amended
and restated facility provided for a revolving credit facility of up to a
maximum amount of $40.0 million. Availability under the revolving credit
facility is subject to a borrowing base limited to 80% of eligible receivables.
In order to access the revolver, Penton must not have more than $7.5 million of
cash and cash equivalents available, must be in compliance with the loan
documents and must submit a borrowing base certificate immediately prior to each
extension of credit showing compliance with the provisions of the borrowing
base. Penton is required to prepay the revolver in the event that it has loans
outstanding in excess of the borrowing base, or it has more than $7.5 million in
cash and cash equivalents available at the end of any month. The commitment
under the amended and restated credit facility decreases by 15% in 2003, 30% in
2004, 35% in 2005, and 20% in 2006. The amended and restated credit facility has
no financial covenants. In connection with the amendment and restatement of the
credit facility, the interest rate on the revolving credit facility was
increased. In addition, further restrictions were placed on Penton's ability to
make certain restricted payments, to make capital expenditures in excess of
certain amounts, to incur additional debt and contingent obligations, to make
acquisitions and investments, and to sell assets. At December 31, 2002, $18.0
million was available under the revolving credit facility and $4.5 million was
outstanding. As noted below, the credit facility was further amended in January
2003.
The repayment of the term loans in March 2002 resulted in a non-cash
extraordinary charge of $1.1 million, which had no tax effect, relating to the
write-off of unamortized deferred finance costs.
44
A change in the rating of our debt instruments by the outside rating
agencies would not negatively impact our ability to use our revolver. In
September 2002, Moody's Investors Service took the following ratings actions
regarding Penton: (i) confirmed of the B3 rating on the Company's $157.5 million
11 7/8% Secured Notes, (ii) downgraded the Company's $171.3 million 10 3/8%
Subordinated Notes due 2011 from Caa2 to Ca, (iii) downgraded the Company's
senior implied rating from B3 to Caa3, and (iv) downgraded the Company's senior
unsecured issuer rating from Caa1 to Ca.
In December 2002, the Company sold four properties for approximately $0.9
million. The cash was used to pay down borrowings under our revolving credit
facility.
In January 2003, the Company amended its senior credit facility. The
amended agreement permits the Company to sell certain properties in excess of
the $5.0 million aggregate limit required by the original amended agreement. In
return, the revolving commitment was reduced from $40.0 million to $32.0 million
and, at such time as the aggregate sum of our cash and cash equivalents equals
or exceeds $40.0 million, an additional one-time reduction of $10.0 million
would be required. In addition, upon the sale of the certain properties noted
above, the revolving commitment would be further reduced by fifty percent of the
aggregate gross proceeds from those sales, up to a maximum of $6.0 million. For
all other asset dispositions, the revolver would be reduced by 50% of the
aggregate gross proceeds. At December 31, 2002 and January 31, 2003, the
revolver commitments under our credit facility were $40.0 million and $20.1
million, respectively. Availability under the commitments, which is subject to
the Company's eligible accounts receivable, was $13.5 million (net of $4.5
million outstanding) and $15.0 million at December 31, 2002 and January 31,
2003, respectively.
The amended facility allows for additional asset sales, transfers, leases
and other dispositions and the issuance of equity interests by our subsidiaries
up to a maximum of approximately $3.6 million. The amended facility also
increased the maximum commitment fee from 0.50% to 0.75%.
The Company has no special purpose entities or off-balance sheet debt,
other than operating leases in the ordinary course of business, which are fully
disclosed in the footnotes to the consolidated financial statements included
elsewhere in this Form 10-K.
Current Liquidity
In January 2003, the Company received a tax refund of $52.7 million. A
portion of the proceeds was used to pay down the outstanding credit facility.
In January 2003, the Company completed the sale of the assets of its
Professional Trade Show group for approximately $3.8 million, including an
earnout of $0.6 million. The cash received from the sale was used to pay down
the Company's outstanding credit facility.
Our primary future cash needs will be to fund working capital, debt
service, capital expenditures, and our business restructuring charges and
related expenses. We expect capital expenditures in 2003 to remain at or near
2002 levels of approximately $3.0 million to $4.0 million, as we continue to
restrain our spending as a result of continued economic and business
uncertainties. We expect to make cash payments in 2003 related to our business
restructuring initiatives of approximately $7.6 million, which is expected to be
composed of $4.5 million for employee separation costs, $2.3 million for lease
obligations and $0.7 million for other contractual obligations.
The Company has and continues to implement various cost-cutting programs
and cash conservation plans, which involve the limitation of capital
expenditures and the control of working capital. We expect these plans to
mitigate any future cash flow shortfalls.
We anticipate adequate liquidity from operations and have available cash on
hand to meet all interest payments on our bonds and our other obligations for
2003. We have no principal repayment requirements until maturity of our Senior
Secured notes in October 2007. In addition, we have no bank debt (as of January
31, 2003) and no maintenance covenants on our existing bond debt. As noted
above, Penton does have access to an asset-based, maintenance-free revolver of
up to $20.1 million under its amended credit facility. The
45
revolver had a balance of $4.5 million at December 31, 2002, which was repaid
with the proceeds of our tax refund and proceeds from the sale of assets in
January 2003.
Our ability to meet cash operating requirements depends upon our future
performance, which is subject to general economic conditions and to financial,
competitive, business and other factors, including factors beyond our control.
If we are unable to meet our debt obligations or fund our other liquidity needs,
we may be required to raise additional capital through additional financing
arrangements or the issuance of private or public debt or equity securities. We
cannot assure you that such additional financing will be available at acceptable
terms. In addition, the terms of our convertible preferred stock and warrants
issued, including the conversion price, dividend and liquidation adjustment
provisions that could result in substantial dilution to stockholders, the
redemption price premiums and board representation rights, could negatively
impact our ability to access the equity markets in the future.
We may from time to time seek to retire our outstanding debt through cash
purchases on the open market, privately negotiated transactions or otherwise.
Such repurchases, if any, will depend on the prevailing market conditions, our
liquidity requirements, contractual restrictions and other factors. The amounts
involved may be material.
The following are summaries of our contractual obligations and other
commercial commitments as of December 31, 2002 (in thousands):
LESS THAN 1 - 3 4 - 5 AFTER 5
TOTAL 1 YEAR YEARS YEARS YEARS
-------- --------- ------- -------- --------
Senior subordinated notes................. $175,000 $ -- $ -- $ -- $175,000
Senior secured notes...................... 157,500 -- -- 157,500 --
Revolving credit facility................. 4,500 4,500 -- -- --
Letter of credit.......................... 150 150 -- -- --
Note payable.............................. 417 -- 417 -- --
Capital lease obligation.................. 47 32 15 -- --
Operating leases.......................... 44,008 8,180 18,441 9,232 8,155
Unconditional purchase obligations (1).... 29,760 7,905 21,855 -- --
-------- ------- ------- -------- --------
Total..................................... $411,382 $20,767 $40,728 $166,732 $183,155
======== ======= ======= ======== ========
---------------
(1) Relates to our printing contract with R.R. Donnelly & Sons Company.
Penton did not make any cash contributions to its defined benefit pension
plan in 2001 or 2002. Based on the current value of the assets in our benefit
plans, we do not expect to be required to make any cash contributions in 2003.
However, the Company could be required to contribute between $10.0 million and
$20.0 million to its defined benefit pension plan by the end of 2007. Future
funding requirements are dependent upon factors such as interest rate levels,
changes to pension plan benefits, funded status, regulatory requirements for
funding purposes, and the level and timing of asset returns as compared with the
level and timing of expected benefit disbursements. Due to the presence of
significant variables, actual future contributions may differ materially.
Our sale of common stock under the 401(k) Plan in excess of the number of
shares registered by the Company on Form S-8 with the Securities and Exchange
Commission under the Securities Act of 1933 (the "unregistered sales") could
have a material adverse impact on our financial condition. The unregistered
sales do not cause an event of default under the indentures governing our
10 3/8% senior subordinated notes or 11 7/8% senior secured notes or our credit
agreement. However, an event of default could occur as an indirect result of the
unregistered sales.
For example, an event of default would occur under (a) the indentures if
the unregistered sales were to result in (i) unsatisfied judgements not covered
by insurance aggregating in excess of $5 million being rendered against the
Company and not stayed, bonded or discharged within 60 days after such judgment
46
became final and nonappealable or (ii) the Company's failure to observe the
covenant limiting the Company's ability to make restricted payments (as defined
in the indentures) if, for example, the Company made a rescission offer and as a
result repurchased shares, which could be considered the payment on account of
the purchase, redemption or other acquisition or retirement for value of equity
interest (as defined in the indentures) or (b) the credit agreement if the
unregistered sales were to result in (i) the Company's failure to observe the
covenant limiting the Company's ability to make a restricted payment (as defined
in the credit agreement) if, for example, the Company made a rescission offer
and as a result repurchased shares, which could be considered the payment by the
Company with respect to its equity interests (as defined in the credit
agreement), (ii) the Company's inability to file its Form 10-K for the fiscal
year ended December 31, 2002, by its due date of March 31, 2003 (which could be
cured by filing such Form 10-K within 30 days of the due date), or (iii) a
material adverse change in the business, assets, operations, prospects or
condition, financial or otherwise, of the Company taken as a whole. The
foregoing is not, and no inference should be drawn that the foregoing is, an
exclusive list of circumstances that could result in an event of default under
the indentures or the credit agreement as a consequence of the unregistered
sales. If an event of default occurs, all our indebtedness would be immediately
due and payable, and we cannot assure you that our business will generate
sufficient cash flow to enable us to service our debt obligations. In addition,
we cannot assure you that the Company will be able to obtain alternative sources
of funding (See Risk Factors "Our sale of unregistered shares of the Company's
common stock under the Company's 401(k) Retirement Savings Plan could have a
material adverse effect on our financial condition.")
We have accounted for approximately 1.1 million shares of our common stock
as redeemable common stock as a result of rescission rights that certain of our
common stockholders may have as a result of the fact that we may have violated
securities laws in connection with the unregistered sales from May 2001 through
March 2003 noted above. In such situations, a number of remedies may be
available to regulatory authorities and the employees who purchased the common
stock, including, without limitation, a right of rescission and other damages
that could be imposed by regulatory authorities. Pursuant to the recission
rights, employees may be entitled to return their shares to the Company and
receive back from us the full price they paid, plus interest. The rescission
rights lapse on various dates as prescribed in the securities laws. Although the
payments under the rescissionary rights are not anticipated to have a material
adverse impact on our financial condition, we have no control over any civil or
other damages that regulatory authorities could impose on the Company, the
result of which could have a material adverse effect on our financial condition.
Please also refer to Note 13 -- Common Stock and Common Stock Award Programs of
the consolidated financial statements for further details.
RESTRUCTURING CHARGES
During 2002, due to the continued effects of an economic slowdown, we
continued our implementation of a number of expense reduction and restructuring
initiatives to more closely align our cost structure with the current business
environment. The cost reduction initiatives have included workforce reductions,
elimination of unprofitable properties, and the shutdown or consolidation of
certain facilities. In 2002, operating costs were reduced by $96.7 million, or
30.5%, compared with the same period in 2001. Specific actions taken follow:
- We reduced staffing levels in 2002 by nearly 489 positions through
terminations and attrition.
- We imposed a companywide hiring freeze, as well as a salary freeze for
higher-paid employees.
- We shut down or consolidated more than 30 facilities worldwide.
- We reduced benefit costs by increasing employee contributions for
health care and temporarily suspending the Company match for our
defined contribution plan.
- We eliminated unprofitable properties.
- We restructured various under-performing events by either eliminating
these events or by co-locating them with other events and realigning
management structures.
- We sold non-core and non-strategic properties.
47
- We reduced the production cost of various under-performing magazines
through process improvements, automation of pre-press work, new
printing contracts and selective reduction in frequency and
circulation levels.
- We commenced a plan to centralize all information technology and
accounting services.
- We effectively outsourced various corporate and divisional functions.
During 2002, we recorded restructuring charges of $16.4 million ($1.0
million of which is classified as discontinued operations), which consisted of
approximately $10.4 million related to employee termination benefits, $4.7
million related to non-cancelable obligations under continuing contracts, and
the remaining $1.3 million related to other contractual obligations. The
following sets forth additional detail concerning the principal components of
the charge:
- Personnel costs of $10.4 million are associated with the elimination
of over 316 positions, of which 304 positions and payments of $7.6
million were completed at year-end. Approximately 93% of the positions
eliminated were in the United States, with most of the remaining
positions from the United Kingdom. Personnel costs include payments
for severance, outplacement services and a provision for continued
health benefits.
- Office closure costs of $4.7 million related to the closure in 2002 of
an additional nine Penton offices primarily in the United States and
include costs associated with existing office spaces under lease.
These amounts were offset in part by the reversal of approximately
$1.7 million related to lease reserves of $3.4 million recorded in the
second half of 2001. At that time no assumptions for subleases were
made due to the inherent limitations in estimating the future trends
of the real estate market place and the prevailing economy conditions.
However, due to continuing efforts by the Company, two subleases were
obtained in the first half of 2002, related to the charge in 2001. The
Company is actively attempting to sublease all other vacant premises
and subleased several additional properties in 2002.
- Other exit costs include contractual obligations associated with
cancellation of trade show venues, hotel contracts and service
agreements.
During 2001, we recorded restructuring charges of $18.8 million ($0.09
million of which is classified as discontinued operations) principally for
employee separation and lease obligations. In February 2001, Penton announced a
restructuring program with the intent of discontinuing certain Internet
operations that had not demonstrated revenue growth, customer acceptance and
near-term opportunity for profit. In the second half of 2001, the Company
implemented a number of expense reduction and restructuring initiatives to more
closely align its cost structure with the business environment at the time.
Management made a strategic decision 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.
The following table summarizes the restructuring charges (net of subleases
recorded of $1.7 million in 2002 and reversals of $1.0 million in 2001), the
cash payments and the ending accrual balances for the year ended December 31,
2002 (in thousands):
12/31/2001 12/31/2002
ACCRUAL 2002 CASH ACCRUAL
DESCRIPTION BALANCE CHARGES PAYMENTS BALANCE
----------- ---------- ------- -------- ----------
Severance, outplacement and other personnel
costs..................................... $ 2,283 $10,409 $ 7,569 $ 5,123
Facility closing costs...................... 8,402 4,667 2,283 10,786
Other exit costs............................ 947 1,285 1,217 1,015
------- ------- ------- -------
Total....................................... $11,632 $16,361 $11,069 $16,924
======= ======= ======= =======
48
In 2002 and 2001, restructuring charges of $1.0 million and $0.09 million
were classified as part of discontinued operations as these costs related to
discontinued properties. The remaining charges are presented as restructuring
charges on the accompanying consolidated statement of operations.
The majority of the severance costs of approximately $3.7 million is
expected to be paid by the end of June 2003. The balance of facility costs,
which include long-term leases, is expected to be paid through the end of the
respective lease terms.
Within approximately a one-year period the Company expects to realize
sufficient savings from its restructuring efforts to recover the employee
termination costs. Savings from terminations of contracts and lease costs will
be realized over the estimated life of the contracts or leases.
As a result of the current uncertainty in the economy, the potential for
terrorist attacks and the outcome of the war with Iraq, we continue to assess
the necessity of additional restructuring charges.
The liabilities representing the provision for severance, closures and
restructuring costs are included in accrued expenses and other long-term
liabilities on the consolidated balance sheets.
IMPAIRMENT OF ASSETS AND OTHER UNUSUAL ITEMS
2002
During the third quarter of 2002, Penton completed its transitional
goodwill impairment test for January 1, 2002 and recorded a non-cash charge of
$39.7 million to reduce the carrying value of goodwill for two of our seven
identified reporting units. Penton utilized a third-party valuation company to
determine the fair value of its reporting units. Both of these reporting units
are part of the Company's Technology Media segment. The charge is reflected as a
cumulative effect of accounting change in the accompanying consolidated
statements of operations.
During the third quarter, a number of events occurred which indicated that
a possible impairment of goodwill might exist. These events included
lower-than-expected revenues and EBITDA results for the year; a letter from the
New York Stock Exchange indicating that the Company had fallen below minimum
listing standards; a significant decline in the Company's stock price; and the
decision by management to potentially sell or dispose of certain non-core
assets. As a result of these triggering events and circumstances, the Company
completed an additional Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142") impairment review at
September 30, 2002. This review resulted in a non-cash charge of approximately
$203.3 million, further reducing the carrying value of goodwill for these two
reporting units in our Technology Media segment. This charge is reflected as
Impairment of Assets in the accompanying consolidated statements of operations.
The fair value of the reporting units for the initial and interim impairment
test was determined using the income approach, which is similar to the
discounted cash flows approach.
Because of the events noted above, Penton also completed an assessment in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), and recorded a non-cash charge of $20.0
million. This charge is also reflected as Impairment of Assets in the
accompanying consolidated statements of operations and primarily relates to the
write-off of mailing/exhibitor lists and sponsor relationships for properties in
our Technology Media segment. The fair value of the asset groups was determined
using the income approach, which is similar to the discounted cash flows
approach.
2001
In 2001, in connection with an ongoing review of our portfolio of
businesses triggered by the continued decline in the economy, deterioration of
the technology markets which we serve, and the negative impact of the September
11, 2001 on our trade show business, we recorded asset and goodwill impairment
charges of $69.6 million (of which $9.8 million was reclassified to discontinued
operations in the 2001 consolidated statements of operations presented herein)
in the second half of 2001. In addition to goodwill writedowns of
49
$66.4 million, the remaining charge primarily represented the write-off of
assets of $1.7 million related to various Web sites that were shut down and $0.9
million related to abandoned circulation software costs.
2000
In December 2000, we wrote off $2.1 million of impaired assets related to
certain internally funded Internet media initiatives. The impaired assets
related to certain abandoned projects. In addition, we recorded a non-cash
charge of approximately $1.0 million in 2000 to write down the carrying value of
certain leasehold improvements, furniture and fixtures, and computer equipment
to fair value.
FOREIGN CURRENCY
The functional currency of our foreign operations is their local currency.
Accordingly, assets and liabilities of foreign operations are translated to U.S.
dollars at the rates of exchange on the balance sheet date; income and expense
are translated at the average rates of exchange prevailing during the year.
There were no significant foreign currency transaction gains or losses for the
periods presented.
SEASONALITY
We may experience seasonal fluctuations as trade shows and conferences held
in one period in the current year may be held in a different period in future
years.
INFLATION
The impact of inflation on our results of operations has not been
significant in recent years.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142. SFAS 142 addresses financial accounting and reporting for intangible
assets acquired individually or with a group of other assets at acquisition.
SFAS 142 presumes that goodwill and certain intangible assets have indefinite
useful lives. Accordingly, goodwill and certain intangibles will not be
amortized, but rather will be tested at least annually for impairment. SFAS 142
also addresses accounting and reporting for goodwill and other intangible assets
subsequent to their acquisition. SFAS 142 is effective for fiscal years
beginning after December 15, 2001. We adopted this statement effective January
1, 2002. See Note 4 -- Goodwill and Other Intangibles.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). This Statement, which
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" ("SFAS 121"), provides a single
accounting model for long-lived assets to be disposed of. Although retaining
many of the fundamental recognition and measurement provisions of SFAS 121,
there are a number of changes including the removal of goodwill from its scope.
The Statement also retains the basic provision of APB Opinion No. 30, "Reporting
the Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB 30"). However, for long-lived assets held for sale, this
Statement introduces the components of an entity (rather than a "segment of a
business") approach to determining discontinued operations. A component of an
entity has clearly distinguishable operating and financial reporting practices.
We adopted this statement effective January 1, 2002. See Note 4 -- Goodwill and
Other Intangibles.
In May 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44,
and 64, Amendment of SFAS 13, and Technical Corrections as of April 2002" ("SFAS
145"). The provisions of this Statement related to the rescission of SFAS 4 are
effective for fiscal years beginning after May 15, 2002, while provisions
related to SFAS 13 are effective for transactions occurring after May 15, 2002,
and all remaining provisions of this Statement shall be effective for financial
statements issued on or after May 15, 2002. This Statement eliminates SFAS 4,
and as a result, gains and losses from extinguishment of debt should be
classified as extraordinary items if they meet the criteria of APB 30. This
Statement also rescinded SFAS 64, which was
50
an amendment to SFAS 4. Lastly, this Statement amends SFAS 13, requiring lease
modifications that have economic effects similar to sale-leaseback transactions
to be accounted for in the same manner as sale-leaseback transactions. The
adoption of the applicable provisions of SFAS 145 did not have an effect on our
financial statements, however, it will lead to the reclassification in 2003 of
extraordinary items related to the extinguishment of debt recorded in 2002.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). This statement
addresses financial accounting and reporting for costs associated with exit or
disposal activities. This statement nullifies Emerging Issues Task Force
("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring)." This Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred as opposed to recognizing the liability at the date of an entity's
commitment to an exit plan. This Statement is to be applied prospectively to
exit or disposal activities initiated after December 31, 2002. We do not expect
that SFAS 146 will have a material effect on our consolidated financial
condition or results of operations, but it will impact the timing of charges,
which could impact comparability of results among reporting periods.
In November 2002, the FASB issued Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires certain
guarantees to be recorded at fair value. The initial recognition and measurement
provisions of FIN 45 are applicable, on a prospective basis, to guarantees
issued or modified after December 31, 2002. FIN 45 also requires a guarantor to
make new disclosures regarding guarantees. The disclosure requirements are
effective for financial statements ending after December 15, 2002. No
significant changes were required to the Company's disclosures as a result of
the issuance of this Interpretation. The Company has a number of indemnification
and other clauses in vendor contracts, leases, operating leases, and credit
agreements, which are considered to be guarantees under the provision of FIN 45.
The clauses primarily relate to contingent payments related to third party
claims, taxes, and past performance of the Company. The Company does not
consider these guarantees to be probable and the minimum exposure cannot be
estimated by the Company.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosures" ("SFAS 148"), which amends FASB
Statement 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 148
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
more prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation. The transition guidance and annual
disclosure provisions of SFAS 148 are effective for fiscal years ending after
December 15, 2002 and are included in the Company's financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 addresses consolidation by
business enterprises of variable interest entities that possess certain
characteristics. The interpretation requires that if a business enterprise has a
controlling financial interest in a variable interest entity, the assets,
liabilities and results of activities of the variable interest entity must be
included in the consolidated financial statements of the business enterprise.
This interpretation applies immediately to variable interest entities created
after January 31, 2003 and to variable interest entities in which an enterprise
obtains an interest after that date. For variable interest entities created
prior to January 31, 2003, this interpretation is effective for the first year
or interim period beginning after June 15, 2003. At December 31, 2002, the
Company is evaluating the classification of certain investments under FIN 46.
However, the Company believes any exposures to be immaterial.
In April 2001, the EITF Issued No. 00-25, "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products"
("EITF 00-25"), which addresses whether consideration from a vendor to a
reseller of the vendor's products is an adjustment to the selling price or the
cost of the product. This issue was further addressed by EITF No. 01-9,
"Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products)" ("EITF 01-9") issued in September
51
2001. The Company adopted EITF 00-25 and EITF 01-9 effective January 1, 2002.
The adoption of EITF 00-25 and EITF 01-9 did not result in a material
reclassification between revenues and operating expenses.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates, including those
related to bad debts, intangible assets, income taxes, restructuring, pension
benefits, and contingencies and litigation. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Collectibility of Accounts Receivable
In order to record our accounts receivable at their net realizable value,
we must assess their collectibility. A considerable amount of judgment is
required in order to make this assessment, including an analysis of historical
bad debts, a review of the aging of our receivables and the current
creditworthiness of our customers. We have recorded allowances for receivables
that we feel are uncollectible, including amounts for the resolution of
potential credit and other collection issues or discrepancies. However,
depending on how such potential issues are resolved, or if the financial
condition of any of our customers was to deteriorate and their ability to make
required payments became impaired, increases in these allowances may be
required.
In 2002, our provision for doubtful accounts charged to expense reflects
the continued effects of the economic slowdown that started in 2001. As in 2001,
this was particularly true for our Internet/broadband, information technology,
telecommunication and electronic market customers, who continue to face
difficult market conditions.
In 2001, our provision for doubtful accounts charged to expense increased
significantly over 2000 because of the impact of the global economic slowdown in
2001 on our customers. This was particularly true for our Internet/broadband,
information technology and electronic market customers, many of whom signed
contracts and submitted deposits in 2000 for our 2001 trade shows, but either
declared bankruptcy or, following the events of September 11, 2001, decided not
only to cancel their attendance but also refused to fulfill their obligations
under the terms of the contract. We attempt to pursue these customers via legal
means; however, because many of these companies went out of business or filed
for bankruptcy and have little or no assets to liquidate, the collection efforts
have not been fully successful.
Impairment of Long-Lived Assets
We evaluate our long-lived assets for impairment whenever circumstances
indicate that an impairment may exist pursuant to the provisions of SFAS 144.
Factors indicating that an impairment may exist includes permanent declines in
cash flows, continued decreases in utilization of a long-lived asset, or a
change in business strategy. The process involves management determining if the
cash flows expected to be generated from the use of a long-lived asset (group)
and its eventual disposition (undiscounted and without interest charges) are
less than the carrying amount of the asset (group). If the criteria is met, the
fair value is determined using appropriate assumptions. The determination and
calculation of impairment requires management's judgment and estimates,
including among other items, establishing asset groupings and determining
discount rates.
52
During the third quarter of 2002, Penton completed its initial impairment
test under SFAS 142 for January 1, 2002 and recorded a non-cash charge of $39.7
million to reduce the carrying value of goodwill for two of our seven identified
reporting units. In addition, a number of events occurred during the third
quarter which indicated that an additional impairment of goodwill might exist.
As a result of these triggering events and circumstances, the Company completed
an additional SFAS 142 impairment review at September 30, 2002. This review
resulted in a non-cash impairment charge of approximately $203.3 million to
further reduce the carrying value of goodwill for the two reporting units, which
are part of our Technology Media segment.
The Company's SFAS 142 evaluations were performed by an independent
valuation firm, utilizing assumptions and projections we believe to be
reasonable and supportable, and that reflect management's best estimate of
projected future cash flows. Considerable judgment was required in selecting
discount rates, developing cash flow projections and developing balance sheets
for each reporting unit. Slight changes in any of these assumptions could create
a material impact on the impairment charge recorded by the Company.
Deferred Tax Asset Valuation
For 2002, the Company recorded a $36.2 million charge to establish a full
valuation allowance for its net deferred tax assets and net operating loss
carryforwards. The valuation allowance was calculated in accordance with the
provisions of SFAS 109, which places primary importance on the Company's
operating results in the most recent three-year period when assessing the need
for a valuation allowance. Although we believe that our results for the last
three years were heavily affected by impairments and planned restructuring
activities, which were undertaken to right-size our cost structure, the
cumulative losses represented sufficient negative evidence to require a
valuation allowance under the provisions of SFAS 109. We intend to maintain a
valuation allowance until sufficient positive evidence exists to support its
reversal. Until such time, except for minor foreign tax provisions, the Company
will have no reported tax provision, net of valuation allowance adjustments. See
Note 10 -- Income Taxes in the Notes to Consolidated Financial Statements of the
Company for additional information regarding this charge.
Restructuring Reserve
Restructuring reserves include estimated costs for severance benefits,
lease termination expenses and other costs. If the future payments of these
costs were to differ from our estimates, we may need to increase or decrease our
reserves. Specifically, for leased premises that the Company no longer occupies,
management makes certain assumptions as to when or if these premises will be
subleased and at what price. Assumptions include the number of years of any
sublease, square footage, market trends, property locations, and the price per
square foot. These assumptions involve significant judgments and estimations. We
have based our assumptions on discussions with brokers and/or parties that have
shown interest in the lease.
Divestitures
Pursuant to SFAS 142, reporting unit level goodwill should be allocated to
individual properties that are sold, if these properties qualify as a "business"
under EITF Issue No. 98-3, "Determining Whether a Nonmonetary Transaction
Involves Receipt of Productive Assets or of a Business" ("EITF 98-3"). We
undertook a detailed analysis of each property sold to determine if it qualified
as a business. Considerable judgment is required to determine if a transferred
set of activities possesses all of the criteria for a business under EITF 98-3.
In addition, further judgment is required to determine if missing elements (for
a business) are major or minor items.
The allocation of reporting unit goodwill to the individual properties is
further affected by whether a business is considered to be integrated. SFAS 142
states that if a business is not integrated, the initial goodwill that was
generated upon the acquisition of that business will be included in the
computation of the gain or loss on the disposition of that unit. Considerable
judgment is required to determine if a particular property has been integrated.
Factors such as length of time since acquisition, common management, knowledge
sharing, synergies between properties, and shared services such as legal and
accounting have to be considered carefully in determining whether a property is
integrated. The Company has concluded that all the properties classified
53
as discontinued operations have been integrated, and as such, the goodwill has
been allocated to each property sold based on its relative fair value. The
difference between the initial goodwill generated upon acquisition and the
amount allocated using relative fair value can be material.
In order for a property to be classified as discontinued operations, it
must meet the definition of a component under SFAS 144. A component is defined
as a reportable segment, a reporting unit, a subsidiary, an asset group or any
group of assets for which there is clearly distinguishable cash flows and such
cash flows will be eliminated upon the sale. This assessment requires
significant judgment.
Pension Plans
Assumptions used in determining the projected benefit obligation and the
fair value of plan assets for our pension plans are determined by us in
consultation with our outside actuary. Changes in assumptions are based upon our
historical data, such as the rate of compensation increase and the long-term
rate of return on plan assets. Assumptions, including the discount rate and the
long-term rate of return on plan assets, are evaluated and updated at least
annually. Based upon our evaluation, we have changed the discount rate from
7.25% at December 31, 2001 to 6.75% at December 31, 2002. We use a discount rate
1.0% lower for lump-sum distributions. The discount rate decrease reflects the
decrease in Moody's Aa corporate bond yields, which were 7.08% at December 31,
2001 and 6.52% at December 31, 2002. The expected long-term rate of return on
plan assets of 9.0% and the rate of compensation increase of 4.0% have remained
unchanged between 2001 and 2002. The salary increase rate is a long-term rate
based on current expectations of future pay increases. We believe that 4.0% is
reasonable. In addition, we believe that the long-term rate of return on plan
assets of 9.0% is still reasonable based on the plan's overall past performance.
In 2002 and 2001, Penton recognized pension income of $1.4 million and $0.1
million, respectively. No cash contributions were made in either year. Penton is
expected to recognize pension expense in 2003 of between $1.2 million and $1.7
million based on current expectations and assumptions. A decrease of 0.25% in
the discount rate would increase pension expense approximately $0.3 million,
while a decrease of 0.25% in the expected return on asset rate would increase
pension expense by approximately $0.1 million.
Commitments and Contingencies
We are subject to legal proceedings related to employment, intellectual
property, contract disputes and other matters. In order to determine the amount
of reserves required, we assess the likelihood of any adverse judgments or
outcomes to these matters as well as potential ranges of probable losses. A
determination of the amount of reserves required for these contingencies is made
after analysis of each individual issue and discussion with our legal counsel.
The required reserves may change in the future due to new developments in each
matter or changes in approach, such as a change in settlement strategy.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market
rates and prices, such as foreign currency exchange rates and interest rates. We
do not enter into financial instruments for trading or speculative purposes. As
of December 31, 2002, the Company was exposed to the following market risks:
INTEREST RATE RISK
Our cash and cash equivalents are not subject to significant interest rate
risk due to the short maturities of these instruments. As of December 31, 2002,
the carrying value of our cash and cash equivalents approximates fair value.
Our notes receivable earn interest at a variable rate and, thus, expose the
Company to interest rate risk. As of December 31, 2002, a hypothetical 10%
decrease of the interest rate would have resulted in an immaterial impact on our
financial results and cash flows.
54
The revolving credit facility bears interest at a variable rate (see Note
6 -- Debt) and, thus, exposes the Company to interest rate risk. As of December
31, 2002, a hypothetical 10% increase in the interest rate would have resulted
in an immaterial impact on our financial results and cash flows.
FAIR VALUE RISK
Our long-term debt consists of senior notes with interest at fixed rates.
Consequently, we do not have significant interest rate risk exposure related to
our long-term debt. However, the fair value of our senior notes fluctuates with
the market, as they are publicly traded.
The table below provides information about the expected cash flows
associated with our long-term debt obligations and their fair value at December
31, 2002 (in thousands):
EXPECTED MATURITY DATE
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
FAIR
2003 2004 2005 2006 2007 2011 TOTAL VALUE
------ ------ ------ ------ -------- -------- -------- --------
Long-Term Debt:
Senior Subordinated Notes..... -- -- -- -- -- $175,000 $175,000 $ 75,460
Interest rate............... 10 3/8% 10 3/8% 10 3/8% 10 3/8% 10 3/8% 10 3/8% 10 3/8%
Senior Secured Notes.......... -- -- -- -- $157,500 -- $157,500 $130,914
Interest rate............... 11 7/8% 11 7/8% 11 7/8% 11 7/8% 11 7/8% 11 7/8% 11 7/8%
The Company currently does not manage the fair value risk related to its
senior notes.
FOREIGN CURRENCY EXCHANGE RATE RISK
We maintain assets and operations in the United Kingdom and in various
other countries. As a result, we may be exposed to fluctuations in currency
rates relative to these markets. At December 31, 2002, a hypothetical 10%
strengthening or weakening of the U.S. dollar relative to the currencies of
foreign countries in which we operate would have resulted in an immaterial
impact on our financial results and cash flows.
2001 MARKET RISK
At December 31, 2001, the senior subordinated notes had a carrying amount
of $181.0 million and a fair value of $104.5 million.
At December 31, 2001, the Company was exposed to interest rate risk due to
the variable rate debt outstanding under the senior secured credit facility. The
Company managed fluctuations in the variable interest rate through interest rate
derivative agreements (see Note 9 -- Hedging Activities). At December 31, 2001,
the Company had a liability related to these derivatives of $3.4 million, which
represented the fair value of the derivatives. As the senior secured credit
facility was paid down in the first quarter 2002 (see Note 6 -- Debt), the
Company discontinued hedge accounting for the derivatives instruments. The
derivatives expired in the fourth quarter of 2002.
55
PENTON MEDIA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
FINANCIAL STATEMENTS:
Report of Independent Accountants........................... 57
Consolidated Balance Sheets at December 31, 2002 and 2001... 58
Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000.......................... 60
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000.......................... 61
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 2002, 2001 and 2000...... 62
Notes to Consolidated Financial Statements.................. 63
FINANCIAL STATEMENT SCHEDULE:
Consolidated Financial Statement Schedule II -- Valuation
and Qualifying Accounts................................... 110
All other schedules have been omitted because the required information is
not present, or is not present in amounts sufficient to require submission of
the schedule or because the information required is included in the consolidated
financial statements or notes thereto.
56
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Penton Media, Inc.:
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Penton Media, Inc. (the "Company") and its subsidiaries at December
31, 2002 and 2001, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and the financial
statement schedule based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for goodwill and other intangible
assets to comply with the provisions of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," and adopted Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," effective January 1, 2002, and adopted Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective January 1, 2001.
/s/ PricewaterhouseCoopers LLP
Cleveland, Ohio
February 28, 2003
57
PENTON MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------
2002 2001
--------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,771 $ 20,191
Restricted cash........................................... 677 --
Accounts receivable, less allowance for doubtful accounts
of $4,323 and $10,976 in 2002 and 2001, respectively... 34,842 54,357
Income taxes receivable................................... 53,547 14,750
Notes receivable.......................................... 2,124 2,095
Inventories............................................... 1,025 1,351
Deferred tax assets....................................... -- 6,645
Prepayments, deposits and other........................... 5,094 7,854
Current assets of discontinued operations................. 2,049 --
-------- --------
Total current assets.............................. 106,129 107,243
-------- --------
Property, plant and equipment:
Land, buildings and improvements.......................... 8,878 8,846
Machinery and equipment................................... 61,935 62,056
-------- --------
70,813 70,902
Less: accumulated depreciation............................ 46,896 40,726
-------- --------
23,917 30,176
-------- --------
Other assets:
Goodwill.................................................. 251,972 493,141
Other intangibles, less accumulated amortization of
$13,137 and $21,384 in 2002 and 2001, respectively..... 32,754 56,800
Deferred tax assets....................................... -- 7,468
Investments............................................... -- 5,649
-------- --------
284,726 563,058
-------- --------
$414,772 $700,477
======== ========
58
DECEMBER 31,
-----------------------
2002 2001
---------- ---------
(DOLLARS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Senior secured credit facility............................ $ 4,500 $ 16,489
Note payable.............................................. -- 2,804
Accounts payable.......................................... 9,464 12,094
Accrued earnouts.......................................... -- 6,572
Accrued compensation and benefits......................... 11,835 12,411
Other accrued expenses.................................... 24,355 21,707
Unearned income, principally trade show and conference
deposits............................................... 23,026 36,939
Current liabilities of discontinued operations............ 1,050 --
--------- --------
Total current liabilities......................... 74,230 109,016
--------- --------
Long-term liabilities and deferred credits:
Senior secured credit facility............................ -- 164,098
Senior secured notes, net of discount..................... 156,797 --
Senior subordinated notes, net of discount................ 171,423 180,957
Note payable.............................................. 417 417
Net deferred pension credits.............................. 13,762 15,140
Other..................................................... 13,052 10,319
--------- --------
355,451 370,931
--------- --------
Commitments and contingencies
Mandatorily redeemable convertible preferred stock, par
value $0.01 per share; 50,000 shares authorized, issued
and outstanding; redeemable at $1,000 per share........... 46,174 --
Redeemable common stock, par value $0.01 per share;
1,068,343 shares issued and outstanding................... 1,118 --
Stockholders' equity (deficit):
Preferred stock, par value $0.01 per share; 1,950,000
shares authorized; none issued or outstanding.......... -- --
Common stock, par value $0.01 per share, 155,000,000
shares authorized; 31,687,194 and 31,895,621 shares
issued and outstanding at December 31, 2002 and 2001,
respectively........................................... 317 319
Capital in excess of par value............................ 229,779 227,245
Retained earnings (deficit)............................... (279,600) 6,724
Notes receivable officers/directors....................... (9,720) (10,824)
Accumulated other comprehensive loss...................... (2,977) (2,934)
--------- --------
(62,201) 220,530
--------- --------
$ 414,772 $700,477
========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
59
PENTON MEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
2002 2001 2000
---------- ---------- ---------
(DOLLARS AND SHARES IN THOUSANDS,
EXCEPT PER SHARE DATA)
Revenues.................................................... $ 235,106 $ 358,871 $399,717
--------- --------- --------
Operating expenses:
Editorial, production and circulation..................... 103,894 148,369 145,655
Selling, general and administrative....................... 119,688 169,582 162,832
Impairment of Internet assets............................. -- -- 2,095
Impairment of other assets................................ 223,424 59,794 1,051
Restructuring charges..................................... 15,436 18,700 --
Loss on sale of properties................................ 888 -- --
Depreciation and amortization............................. 19,329 44,048 32,811
--------- --------- --------
482,659 440,493 344,444
--------- --------- --------
Operating income (loss)..................................... (247,553) (81,622) 55,273
Other income (expense):
Interest expense.......................................... (38,193) (30,487) (19,485)
Interest income........................................... 768 1,862 5,352
Gain on sale of investments............................... 1,491 -- 110,210
Writedown of Internet investments......................... (41) 824 (9,490)
Miscellaneous, net........................................ (635) (2,839) (45)
--------- --------- --------
(36,610) (30,640) 86,542
--------- --------- --------
Income (loss) from continuing operations before income
taxes, extraordinary items and cumulative effect of
accounting change......................................... (284,163) (112,262) 141,815
Provision (benefit) for income taxes........................ (40,514) (16,318) 61,790
--------- --------- --------
Income (loss) from continuing operations before
extraordinary items and cumulative effect of accounting
change.................................................... (243,649) (95,944) 80,025
Discontinued operations:
Loss from operations of discontinued components (including
loss on disposal of $0.6 million in 2002), net of
taxes................................................... (3,252) (8,163) (435)
--------- --------- --------
Income (loss) before extraordinary items and cumulative
effect of accounting change............................... (246,901) (104,107) 79,590
--------- --------- --------
Extraordinary items, net of taxes........................... 277 -- --
Cumulative effect of accounting change, net of taxes........ (39,700) -- --
--------- --------- --------
Net income (loss)........................................... (286,324) (104,107) 79,590
Amortization of deemed dividend and accretion of preferred
stock..................................................... (46,174) -- --
--------- --------- --------
Net income (loss) applicable to common stockholders......... $(332,498) $(104,107) $ 79,590
========= ========= ========
Earnings per common share -- basic:
Income (loss) from continuing operations applicable to
common stockholders..................................... $ (8.95) $ (3.00) $ 2.52
Discontinued operations, net of taxes..................... (0.10) (0.26) (0.01)
Extraordinary items, net of taxes......................... 0.01 -- --
Cumulative effect of accounting change, net of taxes...... (1.23) -- --
--------- --------- --------
Net income (loss) applicable to common stockholders....... $ (10.27) $ (3.26) $ 2.51
========= ========= ========
Earnings per common share -- diluted:
Income (loss) from continuing operations applicable to
common stockholders..................................... $ (8.95) $ (3.00) $ 2.50
Discontinued operations, net of taxes..................... (0.10) (0.26) (0.01)
Extraordinary items, net of taxes......................... 0.01 -- --
Cumulative effect of accounting change, net of taxes...... (1.23) -- --
--------- --------- --------
Net income (loss) applicable to common stockholders....... $ (10.27) $ (3.26) $ 2.49
========= ========= ========
Weighted-average number of shares outstanding:
Basic..................................................... 32,374 31,917 31,730
========= ========= ========
Diluted................................................... 32,374 31,917 32,010
========= ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
60
PENTON MEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
--------- --------- ---------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(286,324) $(104,107) $ 79,590
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................ 19,329 44,048 32,811
Gain on sale of investments.......................... (1,491) -- (110,210)
Loss from discontinued operations.................... 3,252 1,064 134
Extraordinary items.................................. (277) -- --
Loss on sale of properties........................... 888 -- --
Deferred income taxes................................ 14,651 (9,773) (4,379)
Retirement and deferred compensation plans........... (1,378) (102) (875)
Provision for losses on accounts receivable.......... 8,303 4,372 1,714
Non-cash restructuring charge........................ 10,901 11,632 --
Asset impairments and writedowns..................... 263,165 68,741 12,636
Other................................................ 1,178 380 571
Changes in assets and liabilities, excluding effects from
acquisitions and dispositions:
Accounts and notes receivable........................ 11,183 11,205 (22,817)
Income tax receivable................................ (38,797) (14,750) --
Inventories.......................................... 326 (567) 403
Prepayments and deposits............................. 2,510 2,762 1,295
Accounts payable and accrued expenses................ (11,003) (17,809) 7,531
Unearned income...................................... (12,863) (20,134) 12,894
Other changes, net................................... (237) 2,695 (2,058)
--------- --------- ---------
Net cash provided by (used for) operating
activities....................................... (16,684) (20,343) 9,240
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (3,855) (7,602) (27,272)
Acquisitions, including earnouts paid, net of cash
acquired................................................ (5,527) (19,853) (200,996)
Proceeds from sale of Jupitermedia Corporation stock...... 5,801 -- 113,100
Net proceeds from sale of properties...................... 951 -- 4,000
--------- --------- ---------
Net cash used for investing activities............. (2,630) (27,455) (111,168)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of mandatorily redeemable
convertible preferred stock............................. 46,123 -- --
Proceeds from senior secured notes........................ 156,717 -- --
Proceeds from senior subordinated notes................... -- 180,836 --
Repurchase of senior subordinated notes................... (8,375) -- --
Proceeds from senior secured credit facility.............. 6,000 45,000 91,000
Repayment of senior secured credit facility............... (182,087) (166,538) (3,875)
Payment of note payable................................... (2,804) (201) --
Payment of financing costs................................ (9,814) (1,657) (283)
Employee stock purchase plan payments..................... (434) (353) (209)
Proceeds from options exercised........................... -- 1,153 473
Proceeds from repayment of officers/directors loans....... 703 -- --
Dividends paid............................................ -- (1,914) (3,800)
--------- --------- ---------
Net cash provided by financing activities.......... 6,029 56,326 83,306
--------- --------- ---------
Effect of exchange rate changes on cash..................... (135) 58 (143)
--------- --------- ---------
Net increase (decrease) in cash and equivalents.... (13,420) 8,586 (18,765)
Cash and cash equivalents at beginning of period............ 20,191 11,605 30,370
--------- --------- ---------
Cash and cash equivalents at end of period.................. $ 6,771 $ 20,191 $ 11,605
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
61
PENTON MEDIA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
ACCUMULATED
CAPITAL IN NOTES OTHER
EXCESS OF RECEIVABLE COMPREHENSIVE
COMMON PAR RETAINED OFFICERS/ INCOME
STOCK VALUE EARNINGS DIRECTORS (LOSS) TOTAL
------ ---------- --------- ---------- ------------- ---------
(DOLLARS IN THOUSANDS)
Balance at December 31, 1999........... $313 $214,551 $ 36,970 $ -- $150,767 $ 402,601
---- -------- --------- -------- -------- ---------
Comprehensive income (loss):
Net income........................... -- -- 79,590 -- -- 79,590
Other comprehensive income (loss):
Unrealized loss on securities, at
fair value....................... -- -- -- -- (73,323) (73,323)
Reclassification adjustment for
gain realized on securities
sold............................. -- -- -- -- (70,272) (70,272)
Foreign currency translation
adjustment....................... -- -- -- -- 95 95
---------
Comprehensive loss................. (63,910)
---------
Dividends.............................. -- -- (3,815) -- -- (3,815)
Issuance of common stock:
Executive loan program............... 4 9,662 -- -- -- 9,666
Contingent shares.................... 1 1,428 -- -- -- 1,429
Exercise of stock options............ -- 1,014 -- -- -- 1,014
Employee stock purchase plan......... -- (209) -- -- -- (209)
Notes receivable officers/directors.... -- -- -- (10,207) -- (10,207)
---- -------- --------- -------- -------- ---------
Balance at December 31, 2000........... $318 $226,446 $ 112,745 $(10,207) $ 7,267 $ 336,569
---- -------- --------- -------- -------- ---------
Comprehensive income (loss):
Net loss............................. -- -- (104,107) -- -- (104,107)
Other comprehensive income (loss):
Unrealized loss on securities, at
fair value....................... -- -- -- -- (7,202) (7,202)
Net loss on cash flow hedges....... -- -- -- -- (1,439) (1,439)
Foreign currency translation
adjustment....................... -- -- -- -- (1,560) (1,560)
---------
Comprehensive loss................... (114,308)
---------
Dividends.............................. -- -- (1,914) -- -- (1,914)
Issuance of common stock:
Exercise of stock options............ 1 1,152 -- -- -- 1,153
Employee stock purchase plan......... -- (353) -- -- -- (353)
Notes receivable officers/directors.... -- -- -- (617) -- (617)
---- -------- --------- -------- -------- ---------
Balance at December 31, 2001........... $319 $227,245 $ 6,724 $(10,824) $ (2,934) $ 220,530
==== ======== ========= ======== ======== =========
Comprehensive income (loss):
Net loss............................. -- -- (286,324) -- -- (286,324)
Other comprehensive loss:
Reclassification adjustment for
realized gain on securities
sold............................. -- -- -- -- (808) (808)
Reclassification adjustment of net
loss on cash flow hedge
discontinuation.................. -- -- -- -- 1,439 1,439
Foreign currency translation
adjustment....................... -- -- -- -- (674) (674)
---------
Comprehensive loss................... (286,367)
---------
Issuance of common stock:
Exercise of deferred shares.......... 5 2,972 -- 31 -- 3,008
Employee stock purchase plan......... -- (434) -- -- -- (434)
Purchase of treasury stock........... (1) (386) -- 387 -- --
Contingent shares.................... 5 1,542 -- -- -- 1,547
Warrants issued with preferred stock... -- 4,015 -- -- -- 4,015
Amortization of deemed dividend and
accretion of preferred stock......... -- (4,068) -- -- -- (4,068)
Reclassification to redeemable common
stock................................ (11) (1,107) -- -- -- (1,118)
Notes receivable officers/directors.... -- -- -- 686 -- 686
---- -------- --------- -------- -------- ---------
Balance at December 31, 2002........... $317 $229,779 $(279,600) $ (9,720) $ (2,977) $ (62,201)
==== ======== ========= ======== ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
62
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS
Penton Media, Inc., ("Penton" or the "Company") is a leading diversified
business-to-business media company that produces market-focused magazines, Web
sites, trade shows and conferences. Penton's integrated media portfolio serves
the following segments comprising the following market sectors: Industry
Media -- design/engineering, government/compliance, manufacturing, mechanical
systems/construction, supply chain and aviation; Technology
Media -- Internet/broadband, information technology and electronics; Lifestyle
Media -- natural products; and Retail Media -- food/retail and
leisure/hospitality.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Penton and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated. All acquisitions have been accounted for under the purchase
method of accounting and are included in the consolidated financial statements
from their respective dates of acquisition. The consolidated financial
statements also include the accounts of all companies where the Company
exercises control.
Investments in companies in which Penton has significant influence, but
less than a controlling voting interest, are accounted for under the equity
method. Investments in companies in which Penton does not have a controlling
interest, or an ownership and voting interest so large as to exert significant
influence, are accounted for at market value if the investments are publicly
traded. Unrealized gain (loss) on investments accounted for at market value are
reported net of tax as a component of accumulated other comprehensive Income
(loss) until the investments are sold, at which time the realized gain (loss) is
included in earnings if the Company considers these investments to be available
for sale. If the investment is not publicly traded, then the investment is
accounted for at cost. At December 31, 2002, Penton does not have any equity
investments. Furthermore, our investments classified as available for sale were
sold in early 2002 (see Note 5 -- Investments).
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the reported amounts of revenues and
expenses during the reporting period. On an ongoing basis, management reviews
its estimates based upon currently available information. Actual results could
differ from these estimates.
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
Cash and cash equivalents include primarily cash on hand and short-term
investments. Short-term investments that have an original maturity of three
months or less are considered cash equivalents. At December 31, 2002, the
Company had $0.7 million of restricted cash balances, related primarily to cash
received for license fees for trade shows to be held in 2003.
BAD DEBT
The Company establishes its credit policies based on an ongoing evaluation
of its customers' credit worthiness and competitive market conditions, and
establishes its allowance for doubtful accounts based on an assessment of
exposures to credit losses at each balance sheet date. The Company believes its
allowance for doubtful accounts is sufficient based on the credit exposures
outstanding at December 31, 2002.
63
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORIES
Inventories, which consist primarily of paper stock, are stated at the
lower of cost or market, cost being determined on the basis of the last-in,
first-out ("LIFO") method. The difference between cost determined on a LIFO
basis and a first-in, first-out basis was insignificant at December 31, 2002 and
2001.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Penton records
depreciation using the straight-line method over the following estimated useful
lives:
Computer equipment and software........... 3-5 years
Furniture, fixtures and equipment......... 3-10 years
Leasehold improvements.................... Estimated useful lives or lease term, whichever
is shorter
Depreciation expense was $8.8 million, $9.6 million and $6.8 million for
the years ended December 31, 2002, 2001 and 2000, respectively.
Maintenance and repair expenditures are charged to appropriate expense
accounts in the period incurred; replacements, renewals and betterments are
capitalized. Upon sale or other disposition of property, the cost and
accumulated depreciation of such properties are eliminated from the accounts,
and the gains or losses thereon are reflected in operations.
GOODWILL, OTHER INTANGIBLE ASSETS AND LONG-LIVED ASSETS
The Company adopted Statement of Financial Accounting Standards ("SFAS"),
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), on January 1,
2002. Goodwill and certain other intangible assets having indefinite lives,
which were previously amortized on a straight-line basis over the periods
benefited, are no longer being amortized to earnings, but instead are subject to
periodic testing for impairment. Goodwill of a reporting unit is tested for
impairment on an annual basis or between annual tests if events occur or
circumstances change that could indicate a reduction in the fair value of a
reporting unit below its carrying amount.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived
Assets" ("SFAS 144"), requires long-lived assets to be grouped with other assets
and liabilities at the lowest level for which there are identifiable cash flows
that are largely independent of the cash flows of other groups of assets and
liabilities. An impairment exists only if the carrying amount of the long-lived
assets, or group, is not recoverable and exceeds its fair value. Intangible
assets determined to have definite lives are amortized over their remaining
useful lives. Intangible and other long-lived assets are reviewed for impairment
whenever events and circumstances indicate that the carrying amount may not be
recoverable pursuant to SFAS 144. In reviewing for impairment, the Company
compares the undiscounted cash flows generated by such assets to the carrying
value of such assets. If the total of cash flows is less than the carrying
amount, the Company compares the carrying value of such assets to the fair value
determined using the income approach, which is similar to the discounted cash
flows approach. Impairment is recognized equal to the difference between the
asset's fair value and its carrying amount.
DEFERRED FINANCING COSTS
Costs incurred in obtaining long-term financing are included in other
intangibles in the accompanying consolidated balance sheets, and are amortized
over the terms of the related indebtedness.
64
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivatives from time to time to manage the exposures to
changes in the interest rates on its floating-rate borrowings. The Company does
not enter into derivative financial instruments for speculative or trading
purposes.
In January 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires
that an entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative, and its designation as a hedge. Derivatives that are not hedges must
be adjusted to fair value through earnings. If a derivative qualifies as a hedge
under SFAS 133, the change in the fair value of the derivative either offsets
the change in fair value of the hedged assets, liabilities or firm commitments
through earnings, or is recognized in accumulated other comprehensive income
(loss) until the hedged item impacts earnings. The change in a derivative's fair
value related to the ineffective portion of a hedge, if any, is immediately
recognized in earnings.
When a designated hedged item matures, is sold or extinguished, or is
terminated, or a hedged anticipated transaction is no longer probable, any
amounts deferred in Accumulated Other Comprehensive Income (Loss) are
reclassified to earnings in the period the Company discontinues hedge
accounting.
REVENUE RECOGNITION
Advertising revenues from Penton's trade magazines are recognized in the
month the publications are mailed. Amounts received in advance of trade shows
and conferences are deferred and recognized in the month the events are held.
Web site revenues, which include primarily advertising revenues, are recognized
on a straight-line basis over the contract term as services are provided ratably
over the term of the contract. Licensing revenues are recognized as earned.
ADVERTISING AND PROMOTION EXPENSES
Advertising and promotion costs are expensed as incurred. These costs
amounted to $11.9 million, $24.5 million and $21.3 million in 2002, 2001 and
2000, respectively.
INCOME TAXES
Income taxes are accounted for using the asset and liability method
pursuant to the provisions of Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes" ("SFAS 109"). Deferred tax assets and
liabilities are recognized for the expected future tax consequences attributable
to temporary differences between the financial statement carrying amounts and
the tax basis of assets and liabilities. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
The Company assesses the recoverability of its deferred tax assets in
accordance with the provisions of SFAS 109. In accordance with that standard,
the Company recorded a valuation allowance for its net deferred tax assets and
net operating loss carryforwards of $36.2 million as of December 31, 2002. See
Note 10 -- Income Taxes for additional information regarding income taxes.
TRANSLATION OF FOREIGN CURRENCIES
The functional currency of Penton'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 at December 31, 2002
65
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and 2001; income and expense are translated at the average rates of exchange
prevailing during the applicable year. There were no significant foreign
currency transaction gains or losses in 2002, 2001 or 2000. The effects of
translation are included in accumulated other comprehensive income (loss) in
stockholders' equity (deficit).
STOCK OPTION PLANS
At December 31, 2002, the Company has various stock-based compensation
arrangements (see Note 13 -- Common Stock and Common Stock Award Programs). The
Company accounts for these plans under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), and related interpretations. For stock option
plans, no compensation is recognized, as all grants are issued at market value
of the Company's stock.
The following table illustrates the effect on net income (loss) and
earnings per share if the Company had applied the fair value recognition
provision of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), as amended by SFAS No. 148, "Accounting for Stock-Based Compensation
Transition and Disclosure" ("SFAS 148") (in thousands, except per share data):
2002 2001 2000
--------- --------- -------
Net income (loss) applicable to common stockholders:
As reported....................................... $(332,498) $(104,107) $79,590
Total stock-based compensation expense determined
under fair value based method for all awards,
net of related tax effects..................... (1,687) (3,354) (2,184)
--------- --------- -------
Pro forma......................................... $(334,185) $(107,461) $77,406
========= ========= =======
Basic earnings per share:
As reported....................................... $ (10.27) $ (3.26) $ 2.51
Pro forma......................................... $ (10.32) $ (3.37) $ 2.44
Diluted earnings per share:
As reported....................................... $ (10.27) $ (3.26) $ 2.49
Pro forma......................................... $ (10.32) $ (3.37) $ 2.42
EARNINGS PER SHARE
Basic earnings per share are based upon the weighted-average number of
common shares outstanding and the fully vested weighted-average contingently
issuable shares. Diluted earnings per share assume the exercise of all options
that are dilutive, whether exercisable or not.
The redeemable preferred stock is a participating security, such that in
the event a dividend is declared or paid on the common stock, the Company must
simultaneously declare and pay a dividend on the redeemable preferred stock as
if the redeemable preferred stock had been converted into common stock. Topic
D-95, "Effect of Participating Convertible Securities on the Computation of
Basic Earnings per Share," requires that the redeemable preferred stock be
included in the computation of basic earnings per share if the effect of
inclusion is dilutive. The Company's accounting policy requires the use of the
two-class method for its participating securities for earnings per share
calculations. To the extent not included in basic earnings per share, the
redeemable preferred stock is considered in the diluted earnings per share
calculation under the "if-converted" method.
66
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 addresses
financial accounting and reporting for intangible assets acquired individually
or with a group of other assets at acquisition. SFAS 142 presumes that goodwill
and certain intangible assets have indefinite useful lives. Accordingly,
goodwill and certain intangibles will not be amortized, but rather will be
tested at least annually for impairment. SFAS 142 also addresses accounting and
reporting for goodwill and other intangible assets subsequent to their
acquisition. SFAS 142 is effective for fiscal years beginning after December 15,
2001. We adopted this statement effective January 1, 2002 (see Note
4 -- Goodwill and Other Intangibles).
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets" ("SFAS 144"). This statement, which
supersedes SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and
for Long-lived Assets to be Disposed Of" ("SFAS 121"), provides a single
accounting model for long-lived assets to be disposed of. Although SFAS 144
retains many of the fundamental recognition and measurement provisions of SFAS
121, there are a number of changes, including the removal of goodwill from its
scope. The statement also retains the basic provision of APB Opinion No. 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("APB 30"). However, for long-lived assets held for
sale, this statement introduces the "components of an entity" (rather than a
"segment of a business") approach to determine discontinued operations. A
component of an entity has clearly distinguishable operating and financial
reporting practices. We adopted this statement effective January 1, 2002. See
Note 3 -- Acquisitions and Disposals and Note 4 -- Goodwill and Other
Intangibles.
In May 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44,
and 64, Amendment of SFAS 13, and Technical Corrections as of April 2002" ("SFAS
145"). The provisions of this statement related to the rescission of SFAS 4 are
effective for fiscal years beginning after May 15, 2002, while provisions
related to SFAS 13 are effective for transactions occurring after May 15, 2002,
and all remaining provisions of this statement shall be effective for financial
statements issued on or after May 15, 2002. This statement eliminates SFAS 4
and, as a result, gains and losses from extinguishment of debt should be
classified as extraordinary items if they meet the criteria of APB 30. This
statement also rescinds SFAS 64 , which was an amendment to SFAS 4. Lastly, this
statement amends SFAS 13, requiring lease modifications that have economic
effects similar to sale-leaseback transactions to be accounted for in the same
manner as sale-leaseback transactions. The adoption of the applicable provisions
of SFAS 145 did not have an effect on our financial statements, however, it will
lead to the reclassification in 2003 of extraordinary items related to the
extinguishment of debt recorded in 2002.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). This statement
addresses financial accounting and reporting for costs associated with exit or
disposal activities. This statement nullifies Emerging Issues Task Force
("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring)." This statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred as opposed to recognizing the liability at the date of an entity's
commitment to an exit plan. This statement is to be applied prospectively to
exit or disposal activities initiated after December 31, 2002. We do not expect
that SFAS 146 will have a material effect on our consolidated financial
condition or results of operations but it will impact the timing of charges,
which could impact comparability of results among reporting periods.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires certain
guarantees to be recorded at fair value. The initial recognition and measurement
provisions of FIN 45 are applicable, on a prospective basis, to guarantees
issued or modified after
67
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2002. FIN 45 also requires a guarantor to make new disclosures
regarding guarantees. The disclosure requirements are effective for financial
statements ending after December 15, 2002. No significant changes were required
to the Company's disclosure as a result of the issuance of the Interpretation.
The Company has a number of indemnification and other clauses in vendor
contracts, leases, operating leases, and credit agreements, which are considered
to be guarantees under the provision of FIN 45. The clauses primarily relate to
contingent payments related to third party claims, taxes, and past performance
of the Company. The Company does not consider these guarantees to be probable
and the minimum exposure cannot be estimated by the Company.
In December 2002, the FASB issued SFAS 148, which amends SFAS 123. SFAS 148
provides alternative methods of transition for a voluntary change to the fair
value-based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
more prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation. The transition guidance and annual
disclosure provisions of SFAS 148 are effective for fiscal years ending after
December 15, 2002, and were adopted by the Company in these financial
statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 addresses consolidation by
business enterprises of variable interest entities, which possess certain
characteristics. The interpretation requires that if a business enterprise has a
controlling financial interest in a variable interest entity, the assets,
liabilities and results of activities of the variable interest entity must be
included in the consolidated financial statements with those of the business
enterprise. This interpretation applies immediately to variable interest
entities created after January 31, 2003 and to variable interest entities in
which an enterprise obtains an interest after that date. For variable interest
entities created prior to January 31, 2003, this interpretation is effective for
the first year or interim period beginning after June 15, 2003. At December 31,
2002, the Company is evaluating the classification of certain investments under
FIN 46. However, the Company believes any exposure will be negligible.
In April 2001, the EITF issued No. 00-25, "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products"
("EITF 00-25"), which addresses whether consideration from a vendor to a
reseller of the vendor's products is an adjustment to the selling price or the
cost of the product. This issue was further addressed by EITF No. 01-9,
"Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products)" ("EITF 01-9"), issued in September 2001. The
Company adopted EITF 00-25 and EITF 01-9 effective January 1, 2002. The adoption
of EITF 00-25 and EITF 01-9 did not result in a material reclassification
between revenues and operating expenses.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2001 and 2000 financial
statements to conform to the 2002 presentation.
NOTE 3 -- ACQUISITIONS AND DISPOSALS
During 2001 and 2000, the Company completed 17 acquisitions that were
accounted for using the purchase method of accounting. There were no
acquisitions in 2002.
At December 31, 2002, Penton had no amounts accrued for contingent
consideration. During 2002, total cash payments of $5.5 million were made for
contingent consideration and the Company issued $1.5 million in shares of common
stock (527,951 shares). Contingent payments earned are recorded as additional
goodwill, pursuant to the provisions of EITF No. 95-8, "Accounting for
Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a
Purchase Business Combination," and tested for impairment under SFAS 142.
68
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2002, the remaining maximum potential liability for future
contingent consideration is approximately $16.1 million. Contingent
consideration is payable based on achieving specified performance goals, such as
reaching certain revenue or EBITDA levels. The earnout period for $0.4 million
of the total contingent consideration expired on January 31, 2003, and $15.7
million expires on December 31, 2003.
2001 ACQUISITIONS
In 2001, Penton acquired nine companies for an aggregate purchase price of
approximately $9.7 million in cash and $3.5 million in promissory notes, with
potential contingent consideration of up to $4.8 million based on the
achievement of specified business targets through 2003. The excess of the
aggregate purchase price over the fair market value of net assets acquired was
approximately $11.5 million.
2000 ACQUISITIONS
In September 2000, Penton acquired the stock of Duke Communications
International ("Duke") for $100.0 million in cash plus contingent consideration
of up to $50 million based on the achievement of specified business targets
through 2003. The excess of the aggregate purchase price over the fair market
value of net assets acquired was approximately $103.3 million. Duke is a leading
integrated media company serving the Windows 2000 and AS/400 operating systems
markets.
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 was approximately $16.1
million. PTS produces regional trade shows for the plant engineering and
maintenance, material handling, buildings and facilities maintenance, design
engineering, and machine tool industries. As noted below, PTS was sold in
January 2003.
In September 2000, Penton acquired the stock of Streaming Media, Inc. for
$65.0 million in cash plus contingent consideration of up to $35 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 was
approximately $62.9 million. Streaming Media is an integrated media company
serving the streaming media market. No amounts were paid in 2002 or 2001
pursuant to the contingent consideration provisions of the acquisition. As noted
below, Streaming Media was sold in December 2002.
In 2000, the Company also completed the acquisitions of five smaller
companies for an aggregate purchase price of approximately $3.8 million in cash,
with potential contingent consideration of up to $4.4 million based on the
achievement of specified business targets through 2003. The excess of the
aggregate purchase price over the fair market value of net assets acquired was
approximately $3.7 million.
DISPOSALS
As a part of management's plan to sell non-core, non-strategic properties
that were not demonstrating revenue growth or near-term opportunity for profit,
the Company disposed of six properties in fourth quarter 2002 and first quarter
2003.
In December 2002, the Company disposed of the net assets of Penton Media
Australia ("PM Australia") for approximately $0.01 million in cash upon closing
and $0.1 million due in 12 equal monthly installments starting in July 2003. The
sale resulted in a loss of approximately $0.6 million. PM Australia was part of
our Technology Media segment. The results of PM Australia are reported as
discontinued operations for all periods presented.
As of December 31, 2002, the net assets of our PTS group were classified as
held for sale. They were disposed of in January 2003 for approximately $3.8
million, including an earnout of $0.6 million based on reaching certain
performance objectives. The sale resulted in a gain of approximately $1.0
million, which was
69
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recorded in first quarter 2003. The PTS group was part of our Industry Media
segment. The results of PTS are reported as discontinued operations for all
periods presented.
In March 2000, the Company completed the sale of the net assets of its
Direct Mail operations for $4.0 million in cash. The sale resulted in a loss of
$1.1 million, which was recognized in 1999. Included in the operating results
for the discontinued components above is a loss of $0.09 million in 2000 related
to the Direct Mail operations.
Operating results for the discontinued components, which include PM
Australia, PTS and our Direct Mail segment for 2002, 2001 and 2000 are as
follows (in thousands):
YEARS ENDED DECEMBER 31,
---------------------------
2002 2001 2000
------- -------- ------
Revenues................................................ $ 8,719 $ 12,681 $4,854
======= ======== ======
Loss before income taxes................................ $(2,696) $(12,052) $ (581)
Benefit for income taxes................................ -- 3,889 231
Loss on sale of PM Australia............................ (556) -- --
Loss on sale of Direct Mail segment..................... -- -- (85)
------- -------- ------
Loss from discontinued operations....................... $(3,252) $ (8,163) $ (435)
======= ======== ======
In addition to the above components, the Company recognized a $0.9 million
loss included in operating expenses as loss on sale of properties related to the
sale of four properties in December 2002, including Streaming Media, Boardwatch
and ISPCON, which were part of our Technology Media segment, and AEC, which was
part of our Industry Media segment. The aggregate consideration for these
properties was approximately $0.9 million in cash.
At December 31, 2002, assets and liabilities related to PTS were classified
separately on the consolidated balance sheets as current assets of discontinued
operations and current liabilities of discontinued operations, respectively. The
carrying amounts of the major classes of assets and liabilities included in
these balances are as follows:
DECEMBER 31,
2002
------------
Goodwill.................................................... $ 959
Other intangibles, net...................................... 759
Other assets................................................ 331
------
Current assets of discontinued operations................... $2,049
======
Unearned revenue............................................ $1,050
------
Current liabilities of discontinued operations.............. $1,050
======
NOTE 4 -- GOODWILL AND OTHER INTANGIBLES
During the third quarter of 2002, Penton completed its initial impairment
test for January 1, 2002 and recorded a non-cash charge of $39.7 million to
reduce the carrying value of goodwill for two of our seven identified reporting
units. Penton utilized a third-party valuation company to determine the fair
value of the reporting units. Both of these reporting units are part of the
Company's Technology Media segment. The charge is reflected as a cumulative
effect of accounting change in the accompanying consolidated statements of
operations.
70
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the third quarter, a number of events occurred that indicated an
additional possible impairment of goodwill might exist. These events included
our determination in July of lower-than-expected revenues and adjusted EBITDA
results for the year; a letter from the New York Stock Exchange indicating that
the Company had fallen below minimum listing standards; a significant decline in
the Company's stock price; and the decision by management to potentially sell or
dispose of certain non-core assets. As a result of these triggering events and
circumstances, the Company completed an additional SFAS 142 impairment review at
September 30, 2002. This review resulted in a non-cash charge of approximately
$203.3 million to further reduce the carrying value of goodwill for these two
reporting units in our Technology Media segment. This charge is reflected as an
impairment of assets in the accompanying consolidated statements of operations.
The fair value of the reporting units for the initial and interim impairment
test was determined using the income approach, which is similar to the
discounted cash flows approach. The Company has selected September 30 of each
year to perform its annual impairment review.
A summary of changes in the Company's goodwill during 2002, by business
segment, is as follows (in thousands):
GOODWILL
-------------------------------------------------------------------------------------------
BALANCE CUMULATIVE EFFECT OF ACTIVITY AND BALANCE
DECEMBER 31, 2002 ACCOUNTING CHANGE EARNOUTS IMPAIRMENTS DECEMBER 31, 2001
----------------- -------------------- ------------ ----------- -----------------
Industry Media....... $ 37,237 $ -- $ (959)(1) $ -- $ 36,278
Technology Media..... 336,790 (39,700) 2,790(2) (203,300) 96,580
Lifestyle Media...... 84,924 -- -- -- 84,924
Retail Media......... 34,190 -- -- -- 34,190
-------- -------- ------ --------- --------
Total................ $493,141 $(39,700) $1,831 $(203,300) $251,972
======== ======== ====== ========= ========
---------------
(1) Represents goodwill related to the PTS group that was reclassified to
current assets of discontinued operations on the consolidated balance sheet.
(2) Consists of acquisition costs reclassified to goodwill and adjustments for
contingent consideration.
Because of the events just noted, Penton also completed an assessment in
accordance with SFAS 144, and recorded a non-cash charge of $20.0 million. This
charge is reflected as an impairment of assets in the accompanying consolidated
statements of operations, and relates primarily to the write-off of mailing/
exhibitor lists and sponsor relationship for properties in our Technology Media
segment. The fair value of the asset groups was determined using the income
approach, which is similar to the discounted cash flows approach.
Triggered by the continued decline in the economy and the negative impact
of the September 11, 2001 catastrophe, Penton recorded asset and goodwill
impairment charges of $69.6 million in the second half of 2001. In addition to
goodwill writedowns of $66.4 million, the remaining charges represent primarily
the write-off of assets of $1.7 million related to various Web sites that were
shut down and $0.9 million related to abandoned circulation software costs.
Asset impairment charges of $9.7 million in the third quarter included the
writedown of goodwill by $7.1 million on five small acquisitions, $1.7 million
for various Web sites that were shut down and $0.9 million of abandoned
circulation software costs. Asset impairment charges of $59.6 million in the
fourth quarter of 2001 included primarily the writedown of goodwill related to
eight acquisitions. In 2002, approximately $9.8 million of the 2001 impairment
charge was reclassified to discontinued operations.
In December 2000, the Company wrote off $2.1 million of impaired assets
related to certain internally funded Internet media initiatives. The impaired
assets related to certain abandoned projects. In addition, the
71
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company recorded approximately $1.0 million non-cash charge in 2000 to write
down the carrying value of certain leasehold improvements, furniture and
fixtures, and computer equipment to fair value.
A reconciliation of the reported net loss applicable to common stockholders
and net loss applicable to common stockholders per common share to the amounts
adjusted for the exclusion of amortization of goodwill as of December 31, 2002,
2001 and 2000, respectively, had the provisions of SFAS 142 been applied on
January 1, 2000 are as follows (in thousands, except per share data):
FOR THE YEARS
ENDED DECEMBER 31,
-------------------------------
2002 2001 2000
--------- --------- -------
Net income (loss)................................... $(286,324) $(104,107) $79,590
Goodwill amortization, net of taxes................. -- 16,425 13,046
--------- --------- -------
Adjusted net income (loss).......................... (286,324) (87,682) 92,636
Amortization of deemed dividend and accretion of
preferred stock................................... (46,174) -- --
--------- --------- -------
Adjusted net income (loss) applicable to common
stockholders...................................... $(332,498) $ (87,682) $92,636
========= ========= =======
Basic earnings per share:
Net income (loss) applicable to common
stockholders................................... $ (10.27) $ (3.26) $ 2.51
Goodwill amortization, net of taxes............... -- 0.51 0.41
--------- --------- -------
Adjusted net income (loss) applicable to common
stockholders................................... $ (10.27) $ (2.75) $ 2.92
========= ========= =======
Diluted earnings per share:
Net income (loss) applicable to common
stockholders................................... $ (10.27) $ (3.26) $ 2.49
Goodwill amortization, net of taxes............... -- 0.51 0.41
--------- --------- -------
Adjusted net income (loss) applicable to common
stockholders................................... $ (10.27) $ (2.75) $ 2.90
========= ========= =======
Weighted-average shares outstanding:
Basic............................................. 32,374 31,917 31,730
========= ========= =======
Diluted........................................... 32,374 31,917 32,010
========= ========= =======
Identifiable intangible assets, exclusive of goodwill, as of December 31,
2002, are recorded in other intangibles in the consolidated balance sheets and
comprise the following (in thousands):
GROSS NET
CARRYING ACCUMULATED BOOK
VALUE AMORTIZATION VALUE
-------- ------------ -------
Trade names........................................... $12,983 $ (2,977) $10,006
Mailing/exhibitor lists............................... 9,550 (4,342) 5,208
Advertiser relationships.............................. 8,309 (2,410) 5,899
Subscriber relationships.............................. 2,100 (563) 1,537
Non-compete agreements................................ 1,286 (1,071) 215
------- -------- -------
Balance at December 31, 2002..................... $34,228 $(11,363) $22,865
======= ======== =======
72
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Identifiable intangible assets, exclusive of goodwill, are being amortized
over three to 10 years. Total amortization expense for identifiable intangible
assets was $10.4 million and $8.0 million for the twelve months ended December
31, 2002 and 2001, respectively. Amortization expense estimated for the five
succeeding years for these intangibles are as follows (in thousands):
YEAR ENDED
DECEMBER 31, AMOUNT
------------------------------------------------------------ ------
2003................................................... $4,127
2004................................................... $3,922
2005................................................... $3,692
2006................................................... $2,875
2007................................................... $2,043
NOTE 5 -- INVESTMENTS
In February 2000, Penton sold 2.0 million shares of Jupitermedia
Corporation (formerly known as INT Media Group, Inc.) stock as part of a
3,750,000-share secondary offering. Penton received cash of $113.1 million and
recognized a pre-tax gain of approximately $110.2 million.
In March 2000, Penton entered into an agreement with Cayenta, Inc.
("Cayenta"), a subsidiary of the Titan Corporation. Cayenta provides end-to-end
e-commerce systems. As part of the agreement, Penton purchased 250,000 shares of
Cayenta stock for $6.3 million. Penton recorded its investment at cost.
In June 2000, Penton entered into an agreement with LeisureHub.com, an
online B2B trading community for the global leisure industry. Penton paid
approximately $3.4 million for a 19.9% stake in the company. As Penton had the
ability to exercise significant influence over LeisureHub.com, the Company
accounted for its investment using the equity method of accounting.
During the fourth quarter of 2000, the Company determined that its
investments in Cayenta and Leisurehub.com had suffered declines in value that
were other than temporary. The decision was based on current market conditions,
economic outlook and the future viability of these companies. As a result, the
Company recognized losses totaling $9.5 million and reduced the carrying value
of its investment in Cayenta and LeisureHub.com to zero. In 2001, LeisureHub.com
voluntarily liquidated and, in December 2001, Penton received partial
liquidation proceeds of approximately $0.8 million that was recorded in the
writedown of Internet investments in the consolidated statements of operations.
In January 2002, Penton sold its remaining 11.8% ownership interest, or
2,973,383 shares, in Jupitermedia Corporation for approximately $5.8 million in
cash, and recognized a gain of approximately $1.5 million.
NOTE 6 -- DEBT
SENIOR SECURED NOTES
In March 2002, Penton issued $157.5 million of 11 7/8% senior secured notes
(the "Secured Notes") due in 2007. Interest is payable on the Secured Notes
semiannually on April 1 and October 1. The Secured Notes are fully and
unconditionally, jointly and severally guaranteed on a senior basis by all of
the assets of Penton's domestic subsidiaries, which are 100% owned by the
Company, and also by the stock of certain subsidiaries. Condensed consolidating
financial information is presented in Note 20 -- Guarantor and Non-guarantor
Subsidiaries. Penton may redeem the Secured Notes, in whole or in part, during
the periods October 1, 2005 through October 1, 2006 and thereafter at redemption
prices of 105.9% and 100.0% of the principal amount, respectively, together with
accrued and unpaid interest. In addition, at any time prior to October 1, 2005,
up to 35% of the aggregate principal amount of the Secured Notes may be redeemed
at Penton's option, within
73
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
90 days of certain public equity offerings of its common stock, at a redemption
price equal to 111.875% of the principal amount, together with accrued and
unpaid interest.
The Secured Notes were offered at a discount of $0.8 million, which is
being amortized using the interest method, over the term of the Secured Notes.
Amortization of the discount was $0.08 million for the twelve months ended
December 31, 2002. Costs representing underwriting fees and other professional
fees of $6.6 million are being amortized, using the effective interest method,
over the term of the Secured Notes. Net proceeds of $150.1 million were used to
pay down $83.6 million of Penton's term loan A facility and $49.0 million of its
term loan B facility, and to repurchase $10.0 million of the Company's 10 3/8%
senior subordinated notes for $8.3 million (excluding interest). The remaining
net proceeds of $9.2 million were used for general corporate purposes. The
Secured Notes rank senior in right to all of Penton's subordinated indebtedness,
including the 10 3/8% senior subordinated notes due in 2011, and equal in right
of payment with all of the Company's other senior indebtedness, which is
approximately $0.4 million at December 31, 2002. The Secured Notes contain
covenants that will, among other things, limit the Company's ability to pay
dividends, incur additional debt, sell assets, and enter into mergers or
consolidations. The Company's ability to obtain dividends from its subsidiaries
is only restricted if Penton is in default under its debt arrangement or if the
Company has exceeded its limitation of additional indebtedness, as specified in
such agreement.
SENIOR SUBORDINATED NOTES
In June 2001, Penton issued $185.0 million of 10 3/8% senior subordinated
notes (the "Subordinated Notes") due in 2011. Interest is payable on the
Subordinated Notes semiannually on June 15 and December 15. The Subordinated
Notes are fully and unconditionally, jointly and severally guaranteed, on a
senior subordinated basis, by the assets of Penton's domestic subsidiaries,
which are 100% owned by the Company. Condensed consolidating financial
information is presented in Note 20 -- Guarantor and Non-guarantor Subsidiaries.
The notes may be redeemed in whole or in part on or after June 15, 2006. In
addition, the Company may redeem up to 35% of the aggregate principal amount of
the Subordinated Notes before June 15, 2004 with the proceeds of certain equity
offerings. The Subordinated Notes were offered at a discount of $4.2 million,
which is being amortized using the interest method, over the term of the
Subordinated Notes. Amortization of the discount was $0.4 million for the twelve
months ended December 31, 2002. Costs representing underwriting fees and other
professional fees of $1.7 million are being amortized over the term of the
Subordinated Notes. Net proceeds of $180.2 million were used to pay down $136.0
million under the revolving credit facility, $12.8 million of term loan A and
$7.2 million of term loan B. The remaining net proceeds of $24.2 million were
used for general corporate purposes. The Subordinated Notes are unsecured senior
subordinated obligations of the Company, subordinated in right of payment to all
existing and future senior indebtedness of the Company, including the credit
facility. The Subordinated Notes contain covenants that, among other things,
restrict the Company's ability to borrow money, pay dividends on or repurchase
capital stock, make investments, sell assets, and enter into mergers or
consolidations. The Company's ability to obtain dividends from its subsidiaries
is only restricted if Penton is in default under its debt arrangement or if the
Company has exceeded its limitation of additional indebtedness, as specified in
such agreement.
In March 2002, the Company repurchased $10.0 million of the Subordinated
Notes with $8.7 million of the proceeds from the Secured Note offering,
resulting in an extraordinary gain of $1.4 million, which had no tax effect.
SENIOR SECURED CREDIT FACILITY
In March 2002, Penton amended and restated its senior secured credit
facility and repaid in full its term loan A and term loan B facilities from the
proceeds received from the sale of preferred shares (see Note 7 -- Mandatorily
Redeemable Convertible Preferred Stock), proceeds received from the sale of
Jupitermedia Corporation common stock (see Note 5 -- Investments), cash on hand
from a tax refund of approximately
74
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$12.2 million, and the issuance of $157.5 million in Secured Notes as mentioned
previously. The amended and restated credit agreement provides for a revolving
credit facility of up to a maximum of $40.0 million. Availability under the
revolving credit facility is subject to a borrowing base limited to 80% of
eligible receivables. In order to access the revolver, Penton must not have more
than $7.5 million of cash and cash equivalents available, must be in compliance
with the loan documents and must submit a borrowing base certificate immediately
prior to each extension of credit showing compliance with the provisions of the
borrowing base. Penton is required to pay down the revolver in the event that it
has loans outstanding in excess of the borrowing base, or it has more than $7.5
million in cash and cash equivalents at the end of any month. The amended and
restated credit facility has no financial covenants. In connection with the
amendment and restatement of the credit facility, the interest rate on the
revolving credit facility was increased. In addition, further restrictions were
placed on Penton's ability to make certain restricted payments, to make capital
expenditures in excess of certain amounts, to incur additional debt and
contingent obligations, to make acquisitions and investments, and to sell
assets.
The revolving credit facility bears interest, at Penton's option, at either
The Bank of New York's prime rate or at LIBOR, plus, in each case, an additional
margin ranging from 2.75% to 4.25% based on Penton's consolidated leverage
ratio, defined as the ratio of total debt to total adjusted EBITDA. At December
31, 2002, $4.5 million was outstanding under the revolving credit facility and,
based upon the calculation of the borrowing base, an additional $13.5 million
was available. The commitment under the revolving credit facility decreases by
15% in 2003, 30% in 2004, 35% in 2005 and 20% in 2006. Penton has agreed to pay
a commitment fee ranging from 0.375% to 0.5%, based on Penton's consolidated
leverage ratio, on the average unused portion of the revolving credit facility
commitment.
The repayment of the term loans in March 2002 resulted in a non-cash
extraordinary charge of $1.1 million, which had no tax effect, relating to the
write-off of unamortized deferred finance costs.
Cash paid for interest for 2002, 2001 and 2000 was $29.9, $16.4 million and
$19.5 million, respectively.
In January 2003, the Company amended its senior secured credit facility
(see Note 22 -- Subsequent Events).
NOTE PAYABLE
The note payable at December 31, 2002 represents indebtedness resulting
from the acquisition of Hillgate Communications Ltd. in February 2001. In May
2002, Loan note A in the amount of $2.8 million was paid in full. Loan note B in
the amount of $0.4 million bears interest at 0.5% and matures in July 2004.
However, the holders of Loan note B have the option to demand payment any time
after April 30, 2004.
NOTE 7 -- MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
On March 19, 2002, the Company issued 40,000 shares of its Series B
Convertible Preferred Stock, par value $0.01 per share (the "preferred stock")
and warrants (the "warrants") to purchase 1,280,000 shares of Penton's common
stock, par value $0.01 per share, for $40.0 million in a private placement to
institutional investors and affiliated entities. On March 28, 2002, the Company
issued an additional 10,000 shares of preferred stock, par value $0.01 per
share, and warrants to purchase an additional 320,000 shares of Penton's common
stock, par value $0.01 per share, for $10.0 million to the same group of
investors. The net proceeds from the sale of the preferred stock and warrants
were used to repay the term loan indebtedness under Penton's senior credit
facility (see Note 6 -- Debt).
The net proceeds of $46.1 million from the issuance of the preferred stock
and warrants, net of issue costs of $3.8 million, were allocated to the
preferred stock and warrants based on the relative fair values of each security
as of the respective commitment dates noted above. Approximately $4.0 million of
the net proceeds
75
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
were allocated to the warrants and were recorded in additional paid in capital,
resulting in a discount to the preferred stock. The fair value of the warrants
was determined using the Black-Scholes pricing model.
The balance of the net proceeds, of approximately $42.1 million, was
allocated to the preferred stock, which because of the mandatory redemption date
and other redemption provisions, was classified outside of permanent equity.
Pursuant to the provisions of EITF 98-5, "Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios," and EITF 00-27, "Application of Issue 98-5 to Certain Convertible
Instruments," the entire amount of $42.1 million was initially recorded as a
beneficial conversion feature in capital in excess of par value, resulting in an
additional discount to the preferred stock. The amount of the beneficial
conversion feature was determined pursuant to Issue 2 of EITF 00-27. As such,
the most beneficial "accounting conversion price" at the issue date of the
preferred shares was compared with the closing market price of the stock on that
date, and the intrinsic spread was multiplied by the number of most beneficial
shares into which the preferred shares can be converted. This beneficial
conversion feature was being recognized, using the interest method, as a deemed
dividend to the preferred stockholders and an increase in the carrying value of
the preferred stock from the issuance date to the 10-year mandatory redemption
date.
The preferred stock was also initially being accreted to its maximum
redemption amount possible pursuant to Topic D-98, "Classification and
Measurement of Redeemable Securities," using the interest method from the
issuance date to the 10-year mandatory redemption date.
In April 2002, the Company reached an agreement with the preferred
stockholders to eliminate the scheduled 10-year redemption date of the preferred
stock and on May 31, 2002, the stockholders approved an amendment to remove the
scheduled redemption feature. In exchange for removing the scheduled redemption
date, the Company agreed to grant the holders of the preferred stock the right
to require Penton to seek a buyer for substantially all of its assets or issued
and outstanding capital stock beginning on March 19, 2008, if any preferred
stock remains outstanding. The Company sought the amendment to eliminate the
requirement to accrete the preferred stock to the maximum possible redemption
amount by such date. However, it did not seek to eliminate the preferred
stockholders' right to require the Company to redeem the security upon the
occurrence of certain contingent events, including a change in control or
liquidation, dissolution or winding up of Penton. To the extent that redemption
of the preferred stock becomes probable in the future pursuant to a contingent
redemption provision of the preferred stock, accretion to the maximum redemption
amount will be required at such time.
Prior to the stockholder approval to remove the scheduled redemption date,
the Company was required to accrete a portion of the maximum redemption amount.
Accordingly, approximately $2.5 million was accreted, using the interest method,
prior to May 31, 2002. In addition, certain features of the preferred stock had
to be accounted for as embedded derivatives, which required mark to market
accounting that could have potentially resulted in significant swings in net
income and earnings per share. The preferred shares agreement has a number of
conversion and redemption provisions that represented derivatives under SFAS 133
prior to the elimination of the mandatory redemption date. The Company
determined that certain of these derivatives do not qualify for scope exemption
and are not clearly and closely related to the host contract. As such, these
embedded derivatives were required to be bifurcated and recorded at fair value.
The fair values of these derivatives were calculated using the Black-Scholes
methodology.
As a result of stockholder approval on May 31, 2002, accretion is no longer
required and the $42.1 million of unamortized beneficial conversion feature was
recognized immediately as a charge to capital in excess of par and as a
reduction of income available to common stockholders in the consolidated
statements of operations. In addition, mark to market accounting for the
embedded derivatives is no longer required subsequent to May 31, 2002. Pursuant
to SFAS 133, the elimination of the mandatory redemption feature made the
preferred shares agreement more akin to an equity instrument than a debt
instrument. Consequently, the embedded derivatives noted above, which related to
the conversion or redemption options, either qualified
76
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for a scope exemption or did not constitute derivatives pursuant to SFAS 133.
Therefore, the elimination of the mandatory redemption feature also eliminated
the requirement to mark to market these derivatives.
The elimination of the mandatory redemption date does not alter the
mezzanine classification of the preferred shares in the balance sheet because of
the existence of other redemption provisions in the preferred shares agreement,
such as the optional redemption in the event of a change in control by the
holder of the preferred shares. Dividends on the preferred stock will continue
to be accrued and will be reflected as a reduction in earnings per share
available to common stockholders.
SUMMARY OF TERMS OF CONVERTIBLE PREFERRED STOCK
Below is a description of the material terms of the preferred stock and
warrants reflecting the effects of the stockholder approval of the transaction
and the elimination of the mandatory redemption date.
Liquidation Preference
The preferred stock has preferences over the common stock in the event of
liquidation or change in control, dissolution or winding up. Upon the occurrence
of any such event, the preferred stockholder will be entitled to be paid in
cash, subject to the satisfaction of Penton's obligations under the indentures
governing the Company's 10 3/8% Senior Subordinated Notes and 11 7/8% Senior
Secured Notes.
The initial liquidation value of the preferred stock is $1,000 per share.
If the preferred stock is not converted or redeemed prior to March 19, 2008, the
liquidation value will increase to $4,570 per share. The liquidation preference
is the liquidation value plus accrued and unpaid dividends.
Dividends
From the date of issuance until March 19, 2008, the dividends on the
preferred stock will accrue daily on the sum of the then-applicable liquidation
preference and the accrued dividends thereon at an annual rate of 5% per annum.
From and after March 19, 2008, the dividends will accrue solely from and
including such date at a rate of 15% per annum. Preferred dividends of $2.0
million were accrued at December 31, 2002.
Dividends are payable semiannually in cash only if declared by Penton's
Board of Directors and approved by holders of no less than 75% of the preferred
stock then outstanding. The provisions of Penton's debt instruments limit its
ability to pay dividends in cash, and the Company has no present intention to
either declare or pay cash dividends on the preferred stock.
Upon the occurrence of certain triggering events, the dividend rate
increases by one percentage point, with additional one-percentage-point
increases per quarter up to a maximum increase of five percentage points.
Conversion Provisions
Each share of preferred stock is convertible at the holder's option, and,
subject to certain restrictions, at Penton's option. Preferred stock is
convertible into Penton common stock by multiplying the number of shares of
preferred stock to be converted by the liquidation value, plus accrued and
unpaid dividends, divided by the conversion price. The conversion price for the
preferred stock initially will be $7.61 per share, subject to certain
anti-dilution adjustments. Among others, the restrictions on Penton's right to
force conversion include the market price of the common shares being equal to or
greater than the applicable share minimum noted below.
77
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's Redemption Provisions
The Company can redeem the preferred stock at any time, in whole or in
part, at a cash redemption price equal to the product of the number of shares of
common stock into which the preferred shares can be converted and the greater of
the volume weighted-average closing share price of Penton's common stock for the
preceding 30 trading days, or the applicable minimum share price derived from
the following schedule (as may be adjusted for stock splits and similar
transactions):
If being redeemed prior to the third anniversary............ $15.18
If being redeemed after the third, but before the fourth
anniversary............................................... $17.51
If being redeemed after the fourth, but before the fifth
anniversary............................................... $19.31
If being redeemed after the fifth, but before the sixth
anniversary............................................... $23.26
Holder's Redemption Provisions
The preferred stockholders have the right to require the Company to redeem
the security upon the occurrence of certain contingent events, including a
change in control or liquidation, dissolution or winding up of Penton.
Conversion Prices
The initial conversion price is $7.61 per share (subject to certain
anti-dilution adjustments) until the sixth anniversary of issuance, at which
time the price may be adjusted to the lesser of (a) the conversion price in
effect on the sixth anniversary or (b) the greater of 90% of the market price of
the Company's common stock on the conversion date or $4.50.
If Penton fails to comply with specific covenants contained in the purchase
agreement, the conversion price of the preferred stock will be reduced by $0.76
(adjusted for stock splits and similar transactions) until such failure is no
longer in existence, and every 90 days thereafter, the conversion price shall be
reduced by an additional $0.76 up to a maximum reduction of $3.80 (adjusted for
stock splits and similar transactions). The conversion price will adjust to what
it would have been absent such breach (to the extent of any shares of preferred
stock still outstanding) once the breach is cured. No such reduction to the
conversion price will be made at any time that representatives of the investors
constitute a majority of the board of directors. In addition, if Penton's
leverage ratio (defined as debt less cash balances in excess of $5.0 million
plus the liquidation value of the preferred stock and unpaid dividend, divided
by adjusted EBITDA) exceeds 7.5 to 1.0 for any quarterly period beginning on
December 31, 2002, and such leverage ratio remains in excess of 7.5 to 1.0 for a
period of 90 days, the conversion price of the preferred stock will be reduced
by $0.76 (adjusted for stock splits and similar transactions). Thereafter, until
the leverage ratio is less than 7.5 to 1.0, every 90 days the conversion price
will be reduced by another $0.76 (adjusted for stock splits and similar
transactions), subject to a maximum reduction not to exceed $3.80 (adjusted for
stock splits and similar transactions). The conversion price will adjust to what
it would have been absent such event (to the extent of any shares of preferred
stock still outstanding) once the leverage ratio is less than 7.5 to 1.0. No
such reduction to the conversion price will be made at any time that
representatives of the investors constitute a majority of the board of
directors.
Board Representation
The preferred stock entitles the holders thereof initially to three board
seats. However, at such time as the holders of preferred stock cease to hold
shares of preferred stock having an aggregate liquidation preference of at least
$25.0 million, they will lose the right to appoint the director for one of these
board seats. On March 19, 2008, the holders of a majority of the preferred stock
then outstanding, if any, will be entitled to appoint one less than a minimum
majority of the board of directors. In addition, upon the occurrence of certain
triggering
78
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
events, the holders of a majority of the preferred stock may appoint a minimum
majority of Penton's Board of Directors. At such time as the holders of
preferred stock cease to hold shares of preferred stock having an aggregate
liquidation preference of at least $10.0 million, and such holders' beneficial
ownership of Penton's preferred stock and common stock constitutes less than 5%
of the aggregate voting power of the Company's voting securities, the holders of
preferred stock will no longer have the right to appoint any directors to the
board of directors.
Penton has also granted the holders of the preferred stock the right to
have representatives attend meetings of the board of directors after such time
as they are no longer entitled to appoint any members to the board of directors
and until such time as they no longer own any preferred stock, warrants or
shares of common stock issued upon conversion of the preferred stock and
exercise of the warrants.
Voting Rights
The holders of the preferred stock are entitled to vote on all matters
submitted to a vote of Penton's stockholders, voting as a single class with the
common stockholders on an as-converted basis. In addition, Penton may not,
without the affirmative vote of the holders of not less than 75% of the
preferred stock then outstanding, declare and pay dividends, impact the existing
classes of capital stock or increase the size of the board, among other
conditions.
Covenants
The terms of the preferred stock have several financial and non-financial
covenants. As of December 31, 2002, Penton was in compliance with all such
covenants (see preferred stock leverage ratio event of non-compliance as
discussed below).
Sales Rights
The terms of the preferred stock require that Penton maintain a leverage
ratio, as previously defined, of 7.5 to 1.0 for the twelve month period ending
on the last day of December, March, June, and September of each year beginning
with the period ending on December 31, 2002. If Penton is not in compliance with
this covenant for four consecutive fiscal quarters, then the holders of a
majority of the preferred stock have the right to cause the Company to seek a
buyer for all of its assets or all of its issued and outstanding capital stock.
The holders of preferred stock will not have this right if their representatives
constitute a majority of the board of directors.
In exchange for removing the scheduled redemption date, the Company agreed
to grant the holders of the preferred stock the right to require the Company to
seek a buyer for substantially all of its assets or issued and outstanding
capital stock beginning on March 19, 2008. The holders of the preferred stock
will not have this right if less than 3,500 shares of preferred stock (as
adjusted for stock splits and similar transactions) are then outstanding.
Warrants
The initial exercise price of the warrants is $7.61 per share. The warrants
are subject to anti-dilution and other adjustments that mirror those applicable
to the preferred stock. The warrants are immediately exercisable and expire 10
years after issuance.
PREFERRED STOCK LEVERAGE RATIO EVENT OF NON-COMPLIANCE
As of December 31, 2002, the Company's leverage ratio as previously defined
was 27x, which will result in an event of non-compliance if not cured by March
31, 2003. Under our Series B Convertible Preferred Stock Agreement (the
"preferred stock") we are required to maintain a leverage ratio below 7.5 to
1.0. If an
79
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
event of non-compliance occurs, the holders of a majority of the preferred stock
may nominate two additional members to our board of directors. If the event of
non-compliance is not cured by the end of the next succeeding quarter, the
holders of a majority of the preferred stock then outstanding may elect one less
than a minimum majority of our board of directors. The Company is not expected
to be able to correct the event of non-compliance within the 90-day cure period.
In addition, upon the occurrence of an event of non-compliance, the 5% dividend
rate on the preferred stock increases by one percentage point each quarter, up
to a maximum rate of 10%, and the conversion price on the preferred stock
decreases by $0.76 per quarter up to a maximum reduction of $3.80. The
conversion price will adjust to what it would have been absent such event (to
the extent of any shares of preferred stock are still outstanding) once the
leverage ratio is less than 7.5 to 1.0. The dividend rate will adjust back to 5%
as of the date on which the leverage ratio is less than 7.5 to 1.0. Under the
preferred stock agreement, if the leverage ratio exceeds 7.5 to 1.0 for four
consecutive quarters, the preferred stock holders will have the right to cause
the Company to seek a buyer for all of the assets or issued and outstanding
capital stock of the Company. The leverage ratio event of non-compliance does
not represent an event of default or violation under any of the Company's
outstanding notes or credit facility. As such, there will not be an acceleration
of any outstanding indebtedness as a result of this event. In addition, this
event of non-compliance and the resulting consequences do not result in any cash
outflow from the Company.
NOTE 8 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating fair value disclosures of financial instruments as of December 31,
2002 and 2001:
CASH AND CASH EQUIVALENTS, RESTRICTED CASH, ACCOUNTS RECEIVABLE, NOTES
RECEIVABLE, ACCOUNTS PAYABLE, ACCRUED EXPENSES AND SENIOR SECURED CREDIT
FACILITY
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, accounts and notes receivable, accounts payable and
accrued expenses approximated fair value because of their short maturities. The
carrying amount of the senior secured credit facility approximates fair value,
as the effective rates are comparable to market rates at December 31, 2002 and
2001, respectively.
SENIOR SECURED NOTES AND SENIOR SUBORDINATED NOTES
The fair values of the 11 7/8% senior secured notes and 10 3/8% senior
subordinated notes are determined by reference to quoted market prices. At
December 31, 2002, the Company's senior secured notes had fair values of $130.9
million and carrying amounts of $156.8 million. At December 31, 2002 and 2001,
the Company's senior subordinated notes had fair values of $75.5 and $104.5
million, respectively, and carrying amounts of $171.4 million and $181.0
million, respectively.
INTEREST RATE DERIVATIVES
At December 31, 2001, the Company had interest rate derivatives related to
its variable-rate term loans. The carrying amount of the interest rate
derivatives approximated fair value of ($3.4) million. These derivatives expired
in 2002. See Note 9 -- Hedging Activities.
NOTE 9 -- HEDGING ACTIVITIES
RISK MANAGEMENT
In the ordinary course of business, the Company is exposed to fluctuations
in foreign currency rates. The Company maintains assets and operations in Europe
and Asia and, as a result, may be exposed to fluctuations in currency rates
relative to these markets. Penton, however, does not manage this risk using
derivative instruments.
80
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is also exposed to interest rate risk due to the variable
interest rate of its revolving credit facility. The Company enters into interest
rate swaps and cap agreements to mitigate the exposure related to fluctuating
interest rates.
CASH FLOW HEDGES
The Company entered into cash flow hedges to reduce the exposure to
interest rate fluctuations under the term loans of the senior secured credit
facility. The Company used interest rate swaps to convert a portion of its
variable-rate debt to fixed-rate debt. All components of interest rate swaps
were included in the assessment of hedge effectiveness. With respect to the
interest rate cap, the hedge effectiveness assessment excluded the time value
element.
At December 31, 2002, the Company had no interest rate swaps or caps
outstanding. At December 31, 2001, the Company 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............................. $17,916 5.95% 9/99-10/02
Interest rate cap.............................. $26,875 8.50% 10/99-10/02
At December 31, 2001, the interest rate instruments had a fair value of
($3.4) million, which was recorded as a liability in other accrued expenses in
the consolidated balance sheets.
In March 2002, the Company discontinued hedge accounting for its cash flow
hedges as the Company paid down the term loans of its senior secured credit
facility. The entire net deferred loss on cash flow hedges of $1.4 million
recorded in other comprehensive income was reclassified to earnings (reported as
interest expense in the consolidated statements of operations). Subsequently,
the Company recognized changes in the fair value in current period earnings
until the derivatives matured in October and November 2002, respectively. In
2002, the Company recognized a net loss of $0.1 million related to such
derivative instruments (reported as interest expense in the consolidated
statements of operations).
In 2001 and 2002, the Company had the following activity in other
comprehensive income related to hedging activities:
Total cumulative effect of adoption on other comprehensive
income at January 1, 2001................................. $ 1,351
Net change related to hedging transactions during the
year.................................................. 1,246
Net amount reclassified to earnings.................... (1,158)
-------
Net deferred loss on cash flow hedges at December 31,
2001...................................................... $ 1,439
-------
Amount reclassified to earnings due to discontinuance
of hedge accounting................................... (1,439)
-------
Net deferred loss on cash flow hedges at December 31,
2002...................................................... $ --
=======
In 2001, the Company reclassified $1.2 million from accumulated other
comprehensive income to current period earnings and recognized a net loss of
$0.9 million for the portion of the interest swaps required to be recognized in
results of operations.
81
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- INCOME TAXES
The source of income (loss) from continuing operations before income taxes,
extraordinary items and cumulative effect of accounting change for the years
ended December 31, 2002, 2001 and 2000, consists of (in thousands):
2002 2001 2000
--------- --------- --------
U.S. domestic...................................... $(259,240) $(111,870) $135,745
Foreign............................................ (24,923) (392) 6,070
--------- --------- --------
$(284,163) $(112,262) $141,815
========= ========= ========
The provision (benefit) for income taxes on continuing operations in the
consolidated statements of operations for the years ended December 31, 2002,
2001 and 2000, are as follows (in thousands):
2002 2001 2000
-------- -------- -------
Current:
Federal............................................. $(65,238) $ (8,092) $51,237
State and local..................................... -- -- 12,874
Foreign............................................. (354) 1,547 2,058
-------- -------- -------
(65,592) (6,545) 66,169
-------- -------- -------
Deferred:
Federal............................................. 2,458 (7,224) (3,814)
State and local..................................... (13,602) (4,328) (565)
Foreign............................................. -- -- --
-------- -------- -------
(11,144) (11,552) (4,379)
-------- -------- -------
Valuation allowance:
Federal............................................. 16,976 1,779 --
State and local..................................... 19,246 -- --
-------- -------- -------
36,222 1,779 --
-------- -------- -------
$(40,514) $(16,318) $61,790
======== ======== =======
The consolidated provision (benefit) for income taxes for the years ended
December 31, 2002, 2001 and 2000, are as follows (in thousands):
2002 2001 2000
-------- -------- -------
Provision (benefit) for income taxes from continuing
operations.......................................... $(40,514) $(16,318) $61,790
Provision (benefit) for income taxes from discontinued
operations.......................................... -- (3,889) (288)
-------- -------- -------
Consolidated tax provision (benefit).................. $(40,514) $(20,207) $61,502
======== ======== =======
82
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The difference between the actual income tax provision (benefit) on
continuing operations and the tax provision (benefit) computed by applying the
statutory federal income tax rate of 35% to income before income taxes for the
years ended December 31, 2002, 2001 and 2000, are as follows (in thousands):
2002 2001 2000
-------- -------- -------
Income tax provision (benefit) at statutory rate...... $(99,457) $(39,292) $49,635
Tax effect of:
Non-deductible goodwill impairment.................. 58,759 16,438 --
Loss on basis difference from asset disposition..... (23,878) -- --
State income benefit, net of federal provision...... (9,151) (3,100) 7,794
Non-deductible goodwill............................. 1,650 6,698 5,104
Foreign tax items................................... (1,204) 721 --
Non-deductible expenses............................. 305 305 259
Other items, net.................................... (215) 133 (1,002)
Valuation allowance................................. 32,677 1,779 --
-------- -------- -------
Actual income tax provision (benefit)................. $(40,514) $(16,318) $61,790
======== ======== =======
Effective income tax rate............................. 14.3% 14.5% 43.6%
======== ======== =======
The components of deferred tax assets and liabilities at December 31, 2002,
2001 and 2000 are as follows (in thousands):
2002 2001 2000
-------- -------- --------
Deferred tax assets:
Deferred pension credits........................... $ 5,644 $ 6,202 $ 6,100
Accrued vacation................................... 968 1,460 889
Bad debts.......................................... 1,053 3,594 1,963
Reserves recorded for financial reporting
purposes........................................ 1,159 2,253 3,420
Investment writedown............................... -- 2,565 3,821
Branch net operating losses........................ -- -- 1,133
Impairment of assets............................... 12,186 6,319 --
Restructuring charge............................... 5,660 4,083 --
Net operating loss carryforwards................... 21,527 2,096 --
Foreign tax credits................................ 249 1,779 --
Deferred compensation.............................. 2,194 883 --
Other.............................................. 36 148 283
-------- -------- --------
Total deferred tax assets....................... $ 50,676 $ 31,382 $ 17,609
======== ======== ========
83
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2002 2001 2000
-------- -------- --------
Deferred tax liabilities:
Mark-to-market adjustment for securities........... -- (584) (5,340)
Depreciation....................................... (2,113) (2,081) (896)
Amortization....................................... (12,341) (12,825) (10,265)
Trade show expenses................................ -- -- (954)
Other.............................................. -- -- (570)
-------- -------- --------
Total deferred tax liabilities.................. (14,454) (15,490) (18,025)
-------- -------- --------
Net deferred tax asset (liability)................... 36,222 15,892 (416)
-------- -------- --------
Valuation allowance............................. (36,222) (1,779) --
-------- -------- --------
Total net deferred tax asset (liability)........ $ -- $ 14,113 $ (416)
======== ======== ========
The Company has a $36.2 million valuation allowance for its net deferred
tax assets and net operating loss carryforwards at December 31, 2002. The
valuation allowance was calculated in accordance with the provisions of SFAS
109, which places primary importance on the Company's operating results in the
most recent three-year period when assessing the need for a valuation allowance.
The Company's cumulative loss in the most recent three-year period, including
the operating loss reported in the fourth quarter of 2002, represented negative
evidence sufficient to require a full valuation allowance under the provisions
of SFAS 109. The Company intends to maintain a full valuation allowance for its
net deferred tax assets and net operating loss carryforwards until sufficient
positive evidence exists to support reversal, in whole or in part, of the
valuation allowance.
At December 31, 2002, the Company had federal operating loss carryforwards
of $9.7 million for tax purposes, which can be carried forward up to 20 years. A
full valuation has been provided on the federal operating loss carryforward.
At December 31, 2002, the Company had state operating loss carryforwards of
$18.2 million for tax purposes, which can be carried forward from five to 20
years. A full valuation has been provided on the state operating loss
carryforwards.
At December 31, 2002, the Company had available foreign tax credit
carryforwards of approximately $0.2 million, which will expire between 2005 and
2006, if not utilized. A full valuation allowance has been provided on the
foreign tax credit carryforwards.
For 2002, the Company received net tax refunds of $17.6 million ($18.8
million of tax refunds for prior year less cash paid for taxes in 2002 of $1.2
million). For 2001 and 2000, cash paid for taxes was $3.0 million and $71.6
million, respectively.
NOTE 11 -- EMPLOYEE BENEFIT PLANS
RETIREMENT PLAN
Penton's non-contributory retirement plans cover substantially all current
and former domestic employees. Retirement benefits for employees in foreign
countries generally are provided by national statutory programs. Benefits for
domestic employees are based on years of service and annual compensation as
defined by each plan.
84
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the funded status of the plan and amounts
recognized in the consolidated balance sheets (in thousands):
2002 2001
-------- --------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, January 1............................. $ 42,199 $ 40,555
Service cost........................................... 2,268 2,213
Interest cost.......................................... 2,911 2,966
Benefits paid.......................................... (8,786) (3,541)
Actuarial loss......................................... 2,474 559
Plan amendments........................................ 149 --
Curtailments........................................... (1,117) (553)
-------- --------
Benefit obligation, December 31........................... $ 40,098 $ 42,199
======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets, January 1...................... $ 43,960 $ 45,772
Actual return on plan assets........................... (5,996) 1,729
Benefits paid.......................................... (8,786) (3,541)
-------- --------
Fair value of plan assets, December 31.................... $ 29,178 $ 43,960
======== ========
FUNDED STATUS OF THE PLAN
Projected benefit obligation (more than) less than fair
value of assets, December 31........................... $(10,921) $ 1,761
Unrecognized actuarial gain............................... (3,414) (17,589)
Unrecognized prior service cost........................... 573 688
-------- --------
Net deferred pension credits.............................. $(13,762) $(15,140)
======== ========
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS
Accrued benefit cost...................................... $(13,762) $(15,140)
Additional minimum liability.............................. -- --
Intangible assets......................................... -- --
-------- --------
Net amount recognized, December 31........................ $(13,762) $(15,140)
======== ========
ASSUMPTIONS AS OF DECEMBER 31
Discount rates:
Pre-retirement......................................... 6.75% 7.25%
Post-retirement........................................ 5.75% 6.25%
Expected return on plan assets............................ 9.00% 9.00%
Weighted-average salary increase rate..................... 4.00% 4.00%
85
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the components of pension expense for the
years ended December 31, 2002, 2001, and 2000 (in thousands, except for
percentages):
2002 2001 2000
---------- ------- -------
NET PERIODIC COST
Service cost................................. $ 2,269 $ 2,213 $ 1,831
Interest cost................................ 2,911 2,966 3,036
Expected return on assets.................... (3,452) (3,515) (3,737)
Amortization of:
Transition asset.......................... -- -- (840)
Prior service cost........................ 94 101 126
Actuarial gain............................ (1,133) (1,421) (1,444)
---------- ------- -------
Net pension expense (income)................... 689 344 (1,028)
---------- ------- -------
Curtailment gain............................. (946) (446) --
Settlement gain.............................. (1,121) -- --
---------- ------- -------
Total net periodic pension cost
(benefit)............................... $ (1,378) $ (102) $(1,028)
========== ======= =======
ASSUMPTIONS AS TO PERIODIC PENSION COST
Discount rate
Pre-retirement............................ 7.25%/6.75%* 7.50% 8.00%
Post-retirement........................... 6.25%/5.75%* 6.50% 7.00%
Expected return on plan assets............... 9.00% 9.00% 9.00%
Weighted-average salary increase rate........ 4.00% 5.00% 5.00%
---------------
* Pursuant to the revised valuation, as discussed below, a discount rate of
7.25% and 6.25% was used from January 1, 2002 to August 31, 2002 (the
valuation date) and a rate of 6.75% and 5.75% was used for the remainder of
the year.
The restructuring efforts in 2002 triggered a need for a revised valuation
of our defined benefit pension plan at August 31, 2002. Pursuant to this revised
valuation, the Company recorded a curtailment gain of $0.9 million and a
settlement gain of $1.1 million in the third quarter of 2002. Such amounts have
been recorded as part of selling, general and administrative expenses on the
consolidated statements of operations. Due to this revised valuation, the
Company also updated its assumptions and recorded pension expense of $0.7
million for 2002.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Penton's supplemental executive retirement plan ("SERP") was revalued at
August 31, 2002 as a result of the elimination of four plan participants.
Pursuant to this revised valuation, the Company recorded a curtailment charge of
$0.1 million and a settlement charge of $0.02 million in the third quarter of
2002. The projected benefit obligation and accumulated benefit obligation for
our SERP plan were $0.8 million and $0.6 million, respectively, as of December
31, 2002; $0.8 million and $0.6 million, respectively, as of December 31, 2001;
and $0.8 million and $0.5 million, respectively, at December 31, 2000. The SERP
plan is an unfunded, non-qualified plan, and hence has no plan assets.
401(k) PLAN
The Penton Media, Inc. Retirement Savings Plan (the "401(k) Plan") covers
substantially all domestic officers and employees of the Company. The 401(k)
Plan permits participants to defer up to a maximum of 15% of their compensation.
Penton matched 50% of the employee's contributions up to a maximum of 6% of
86
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the employee's annual compensation. The employee's contribution and Penton's
matching contribution vest immediately. Penton's contributions to the 401(k)
Plan for the years ended December 31, 2001 and 2000 were $2.2 million and $1.7
million, respectively. Effective January 1, 2002, the Company temporarily
suspended the 50% Company match.
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
LEASES
Penton leases certain office space and equipment under non-cancelable
operating leases. Some of the leases contain renewal options and/or rent
escalations, and certain equipment leases include options to purchase during or
at the end of the lease term. Following is a schedule of approximate annual
future minimum rental payments required under operating leases that have initial
or remaining non-cancelable lease terms in excess of one year as of December 31,
2002 (in thousands):
YEARS ENDING
DECEMBER 31,
------------------------------------------------------------
2003........................................................ $ 8,180
2004........................................................ 7,063
2005........................................................ 6,342
2006........................................................ 5,036
2007........................................................ 4,717
Thereafter.................................................. 12,670
-------
$44,008
=======
The Company does not have any significant capital leases.
For the years ended December 31, 2002, 2001 and 2000, the total rent
expense (including taxes, insurance and maintenance when included in the rent)
incurred by Penton was approximately $6.7 million, $9.4 million and $8.4
million, respectively.
LEGAL PROCEEDINGS
In connection with the acquisition of Mecklermedia Corporation on December
1, 1998, a lawsuit was brought against the Company by Ariff Alidina (the
"Plaintiff"), a former stockholder of Mecklermedia Corporation, in the United
States Federal District Court in the Southern District of New York for an
unspecified amount, as well as other relief. The Plaintiff has claimed that the
Company violated the federal securities laws by selling Mr. Meckler, a
beneficial owner of approximately 26% of the shares of Mecklermedia, an 80.1%
interest in Jupitermedia Corporation for what the Plaintiff alleges was a below-
market price, thereby giving to Mr. Meckler more consideration for his common
stock in Mecklermedia Corporation than was paid to other stockholders of
Mecklermedia Corporation. On May 16, 2001, the United States District Court for
the Southern District of New York granted the Plaintiff's motion for
certification of a class consisting of all former stockholders of Mecklermedia
who tendered their shares in the tender offer. On October 17, 2001, the District
Court denied the Company's motion for a summary judgment. On November 26, 2002,
the District Court denied a motion for judgment on the pleadings filed by the
Company. Expert discovery is proceeding and a pretrial conference is scheduled
for April 21, 2003. The Company intends to vigorously defend this suit.
In the normal course of business, Penton is subject to a number of lawsuits
and claims, both actual and potential in nature. While management believes that
resolution of existing claims and lawsuits will not have a
87
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
material adverse effect on Penton's financial statements, management is unable
to estimate the magnitude or financial impact of claims and lawsuits that may be
filed in the future.
OTHER COMMITMENTS
In December 1999, Penton entered into a print agreement with R.R. Donnelley
& Sons Company ("R.R. Donnelley"), which entitles R.R. Donnelley to the
exclusive right to print and produce certain magazines for a period of seven
years beginning December 1, 1999 through November 30, 2006. Under the agreement,
which is non-cancelable, Penton is obligated to pay certain minimum amounts.
These minimum amounts will be adjusted annually based on changes in the Consumer
Price Index.
The following schedule sets forth the minimum liability under the agreement
with R.R. Donnelley (in thousands):
YEARS ENDING
DECEMBER 31,
------------------------------------------------------------
2003................................................... $ 7,905
2004................................................... 7,440
2005................................................... 7,440
2006................................................... 6,975
-------
$29,760
=======
For the years ended December 31, 2002 and 2001, Penton paid $8.9 million
and $9.0 million, respectively, under the agreement with R.R. Donnelley.
In connection with the tax-free spinoff of our common stock by Pittway to
its stockholders in August 1998, we agreed not to take any action that would
cause the spinoff to be taxable to Pittway under Section 355 of the Internal
Revenue Code, and to indemnify Pittway for any liability suffered by it in that
event. The spinoff would be taxable to Pittway if, as part of a plan or series
of related transactions, as determined under a facts and circumstances test, one
or more persons, acting independently or in concert, have acquired 50.0% or more
of our common stock. Since August 1998, our common stock has been involved in a
number of transactions. Because of the open-ended nature of the facts and
circumstances test, we believe, but we cannot assure you, that the Internal
Revenue Service could not successfully assert that one or more transactions
involving our common stock were part of a plan or series of related transactions
that has caused the spinoff to be taxable to Pittway. If the spinoff were
taxable to Pittway, our payment to Pittway under our indemnity agreement could
have a material adverse effect on our financial condition.
NOTE 13 -- COMMON STOCK AND COMMON STOCK AWARD PROGRAMS
STOCK OFFERINGS
In May 2002, the stockholders approved an amendment to increase the number
of authorized shares from 60.0 million to 155.0 million.
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. Penton did not receive any proceeds from this
offering.
REDEEMABLE COMMON STOCK
Redeemable common stock relates to common stock that may be subject to
rescissionary rights. Sale of common stock to certain employees in the Company's
401k plan from May 2001 through March 2003 were
88
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not registered under the federal securities laws (the "unregistered sales"). The
purchase of the common stock was not made pursuant to an effective registration
statement. As a result, such purchasers of our common stock may have the right
to rescind their purchases for an amount equal to the purchase price paid for
the shares, plus interest from the date of purchase. Any rescissionary rights
will lapse on various dates under the applicable statute of limitations. The
Company may also be subject to civil and other penalties by regulatory
authorities. The unregistered sales do not cause an event of default under the
10- 3/8% Senior Subordinated Notes, the 11- 7/8% Senior Secured Notes or the
credit facility. However, an event of default could occur as an indirect result
of the unregistered sales, if for instance, such unregistered sales lead to
restricted payments under the indentures and/or the credit facility.
At December 31, 2002, the Company has classified 1.1 million shares related
to the potential rescissionary rights outside of stockholders' equity, because
the redemption features are not within the control of the Company. No
adjustments have been made to the net income available for common stockholders
as a result of these potential rescissionary rights as the amounts involved are
insignificant for both 2002 and 2001.
STOCKHOLDER RIGHTS AGREEMENT
The Company has a Stockholder Rights Agreement (the "Rights Agreement") to
protect stockholder rights in the event of a proposed takeover of the Company.
Under the plan, the rights will initially trade together with the Company's
common stock and will not be exercisable. In the absence of further board
action, the rights generally will become exercisable and will allow the holder
to acquire the Company's common stock at a discounted price if any person or
group acquires 20% or more of the outstanding shares of the Company's common
stock. Rights held by the persons who exceed the applicable threshold will be
void.
Under certain circumstances, the rights will entitle the holder to buy
shares in an acquiring entity at a discounted price. The plan also includes an
exchange option. In general, after the rights become exercisable, the Penton
Board of Directors 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 of Directors 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 on June 27, 2010, unless earlier redeemed, exchanged or
amended by the Penton Board of Directors.
In March 2002, the Rights Agreement was amended by the board of directors
to permit the sale of convertible preferred stock (see Note 7 -- Mandatorily
Redeemable Convertible Preferred Stock) and in July 2002, the Rights Agreement
was amended by the board of directors to change the expiration date of the
rights under the Rights Agreement to be effective at the close of business at
Penton's 2003 annual meeting of stockholders. The Rights Agreement has no impact
on the consolidated financial statements or earnings per share.
EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan, which allows employees the
opportunity to purchase shares of Penton at a discount. The plan allows
employees to purchase common stock at 85% of the lower of the market price at
the beginning or end of each quarter. This plan was deemed to be non-
compensatory pursuant to the appropriate sections of the Internal Revenue
Service Codes. In 2002 and 2001, 546,231 and 165,767 shares, respectively, were
purchased by employees under this plan.
MANAGEMENT STOCK PURCHASE PLAN
The Company has a Management Stock Purchase Plan for designated officers
and other key employees. Participants in the plan may elect to receive
restricted stock units ("RSUs") in lieu of a designated portion of
89
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
up to 100% of their annual incentive bonus. Each RSU represents the right to
receive one share of Penton common stock. RSUs are granted at a 20% discount
from fair market value on the date awarded. RSUs vest two years after the date
of grant and are settled in shares of common stock after a period of deferral
(of no less than two years) selected by the participant, or upon termination of
employment. The discount is recorded as compensation expense over the minimum
vesting period. In 2002, 2001 and 2000, approximately $0.1 million each year was
recognized as expense. In February 2002, 21,976 RSUs were granted at a fair
market value of $7.38 per share. At December 31, 2002, 56,079 RSUs were
outstanding. During 2002, 17,472 shares of the Company's common stock were
issued under this plan.
EXECUTIVE LOAN PROGRAM
The Company has an Executive Loan Program, which allowed Penton to issue
shares of Company common stock at fair market value to six key executives, in
exchange for full recourse notes. In December 2001, the loan notes were amended
to cease interest charges as well as to extend the maturity date from the fifth
anniversary of the first loan date to six months following the seventh
anniversary of the first loan date. No payments are required until maturity, at
which time all outstanding amounts are due.
At December 31, 2002, the outstanding loan balance under the Executive Loan
Program was approximately $9.7 million (including $1.0 million of accrued
interest). In 2002, executive loans of $1.1 million (including $0.1 million of
accrued interest) were repaid. The loan balance is classified in the
stockholders' equity (deficit) section of the consolidated balance sheets as
notes receivable officers/directors.
EQUITY AND PERFORMANCE INCENTIVE PLAN
In May 2001, the stockholders approved an amendment to increase the number
of shares of common stock reserved for issuance under the 1998 Equity and
Performance Incentive Plan from 2,500,000 shares to 5,500,000 shares.
Stock Options
The Company has stock option plans under which employees and directors may
be granted options to purchase shares of the Company's common stock. In May
2001, the stockholders approved an amendment to increase the number of shares of
common stock reserved for issuance under the 1998 Director Stock Option Plan
from 100,000 shares to 250,000 shares.
In July 2002, Penton filed a Tender Offer Statement ("Tender Offer")
related to the exchange by eligible employees of outstanding options to purchase
shares of Penton's common stock issued under the Penton Media, Inc. 1998 Equity
and Performance Incentive Plan (the "Option Plan") with exercise prices greater
than or equal to $16.225 per share for new options to purchase shares of common
stock to be issued under the Option Plan ("New Options"). New Options were
granted in 2003, (see Note 22 -- Subsequent Events). Each eligible employee will
receive a New Option to acquire one share of Penton's common stock for every two
shares of Penton's common stock subject to an eligible option. The offer to
exchange options under the Tender Offer expired on August 22, 2002, at which
time 860,100 options, out of a total of 917,600 eligible options, had been
cancelled.
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.
90
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents a summary of Penton's stock option activity
and related information for the years ended 2000, 2001 and 2002 (in thousands,
except per share amounts):
NUMBER OF OPTIONS
--------------------- WEIGHTED-AVERAGE
EMPLOYEES DIRECTORS EXERCISE PRICE
--------- --------- ----------------
Balance, December 31, 1999................ 961 69 $17.93
------ ---
Granted................................... 519 30 $22.72
Exercised................................. (37) (8) $17.63
Canceled.................................. (70) -- $20.51
------ ---
Balance, December 31, 2000................ 1,373 91 $19.80
------ ---
Granted................................... 1,565 52 $12.83
Exercised................................. (51) -- $16.94
Canceled.................................. (101) -- $20.92
------ ---
Balance, December 31, 2001................ 2,786 143 $15.98
------ ---
Granted................................... -- -- $ --
Exercised................................. -- -- $ --
Canceled.................................. (1,332) -- $19.42
------ ---
Balance, December 31, 2002................ 1,454 143 $13.05
====== ===
The following table summarizes information about stock options outstanding
at December 31, 2002 (in thousands, except number of years and per share
amounts):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- OPTIONS WEIGHTED-
NUMBER REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF OF CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES OPTIONS LIFE PRICE 2002 PRICE
--------------- ------- ------------ --------- -------------- ---------
$27.75-28.38 . 36 7.6 years $28.10 11 $27.75
$16.23-24.25 . 678 6.5 years $20.31 384 $17.75
$6.89-6.89 . 884 8.9 years $ 6.89 -- --
Deferred Shares
In April 2002, 462,130 deferred shares were granted. At December 31, 2002,
2001 and 2000, 470,826, 397,749, and 63,029 deferred shares, respectively, were
outstanding. Of the shares outstanding at December 31, 2002, 462,130 shares vest
one-fourth on each three-month anniversary following the date of grant, and
8,696 shares vest at the rate of 20% per year over a five-year period from date
of grant. During 2002, 340,775 fully vested deferred shares were issued for
Penton common stock and 48,278 non-vested deferred shared were cancelled.
Compensation expense is being recognized over the related vesting period
based on the fair value of the shares at the date of grant. During 2002, 2001
and 2000, approximately $4.3 million, $0.4 million and $0.4 million,
respectively, were charged to expense under this plan. The board of directors
may authorize the payment of dividend equivalents on such shares on a current,
deferred or contingent basis, either in cash or in additional shares of common
stock. At December 31, 2002, no such authorization had been made.
91
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Performance Shares
In February 2002, the board of directors approved a grant of 495,000
performance shares to certain key executives, subject to the attainment of
certain performance goals over a three-year period from January 1, 2002 through
December 31, 2004. Each grantee is eligible to receive between 50% and 150% of
the granted shares. In 2002, the vesting of 50,000 shares under this grant was
accelerated to immediate vesting for one executive and issued as common stock.
At December 31, 2002, 603,003 performance shares were outstanding.
Performance shares are generally not issuable until earned. Compensation expense
related to these shares is recorded over the performance period. For the years
ended December 31, 2002, 2001 and 2000, approximately $(1.4) million, $0.5
million and $1.4 million, respectively, were (credited) charged to expense for
these shares.
In February 2001, the board of directors approved a grant of 101,485
performance shares to certain key executives, subject to the attainment of
certain performance goals over a three-year period from January 1, 2001 through
December 31, 2003. Each grantee is eligible to receive between 50% and 150% of
the granted shares.
In October 2000, the board of directors approved a grant of 15,000
performance shares to a key executive, subject to the attainment of certain
performance goals over a three-year period from January 1, 2001 through December
31, 2003. The grantee is eligible to receive between 17% and 150% of the granted
shares.
In June 2000, the board of directors approved a grant of 20,000 performance
shares to two key executives, subject to the attainment of certain performance
goals over a three-year period from January 1, 2000 through December 31, 2002.
Each grantee is eligible to receive between 10% and 150% of the granted shares.
At December 31, 2002, none of these shares had been earned.
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. As of December 31, 2002, 30,516
performance shares had been earned.
TREASURY STOCK
In 2002, three executives returned a total of 115,712 shares to the Company
to pay down a portion of the executive loan balance and to cover taxes for
shares issued under the Performance Share Agreement. The treasury stock of $0.3
million was recorded as a net decrease in capital in excess of par value.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Pro forma information regarding net income (loss) and earnings per share is
required by SFAS 123, and has been determined as if Penton had accounted for its
employee stock options under SFAS 123. The weighted-average fair value of
options granted in 2001 and 2000 was $6.32 and $10.95, respectively. No options
were granted in 2002. The fair value of each option grant was estimated on the
date of grant using the Black-Scholes option-pricing model, under the following
assumptions for 2001 and 2000:
2001 2000
------- -------
Risk-free interest rate.................................... 4.03% 5.06%
Dividend yields............................................ 0.0% 0.40%
Expected volatility........................................ 59.4% 55.93%
Expected life.............................................. 4 years 4 years
92
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Had compensation cost for Penton's stock-based compensation plans been
determined based on the fair values of the options granted at the grant dates,
consistent with SFAS 123, Penton's net income (loss) and earnings per share for
2002, 2001 and 2000 would have been as follows (in thousands, except per share
data):
2002 2001 2000
--------- --------- -------
Net income (loss):
As reported......................................... $(332,498) $(104,107) $79,590
Total stock-based compensation expense determined
under fair value based method for all awards, net
of related tax effects............................ (1,687) (3,354) (2,184)
--------- --------- -------
Pro forma........................................... $(334,185) $(107,461) $77,406
========= ========= =======
Basic earnings per share:
As reported....................................... $ (10.27) $ (3.26) $ 2.51
Pro forma......................................... $ (10.32) $ (3.37) $ 2.44
Diluted earnings per share:
As reported....................................... $ (10.27) $ (3.26) $ 2.49
Pro forma......................................... $ (10.32) $ (3.37) $ 2.42
NOTE 14 -- EARNINGS PER SHARE
Earnings per share have been computed pursuant to the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
Computations of basic and diluted earnings per share for the years ended
December 31, 2002, 2001 and 2000 are as follows (in thousands, except per share
data):
YEARS ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
--------- --------- --------
Net income (loss).................................. $(286,324) $(104,107) $ 79,590
Amortization of deemed dividend and accretion of
preferred stock.................................. (46,174) -- --
--------- --------- --------
Net income (loss) applicable to common
stockholders..................................... $(332,498) $(104,107) $ 79,590
========= ========= ========
Number of shares:
Basic - weighted-average shares outstanding........ 32,374 31,917 31,730
Effect of dilutive securities:
Stock options.................................... -- -- 280
--------- --------- --------
Diluted - weighted-average shares outstanding...... 32,374 31,917 32,010
========= ========= ========
Per share:
Income (loss) applicable to common stockholders
Basic............................................ $ (10.27) $ (3.26) $ 2.51
Diluted.......................................... $ (10.27) $ (3.26) $ 2.49
The redeemable preferred stock is a participating security, such that in
the event a dividend is declared or paid on the common stock, the Company must
simultaneously declare and pay a dividend on the redeemable preferred stock as
if the redeemable preferred stock had been converted into common stock. Topic
D-95, "Effect of Participating Convertible Securities on the Computation of
Basic Earnings per Share," requires that the redeemable preferred stock be
included in the computation of basic earnings per share if the effect of
inclusion is dilutive. The Company's accounting policy requires the use of the
two-class method for its
93
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
participating securities for earnings per share calculations as the result was
not dilutive. At December 31, 2002, redeemable preferred stock was excluded from
the calculation of basic earnings per share. The redeemable preferred stock has
been considered in the diluted earnings per share calculation under the "if-
converted" method only if excluded from basic earnings per share.
Due to the net loss applicable to common stockholders in 2002, 1,597,355
stock options, 603,003 performance shares, 263,427 deferred shares, 47,677
restricted stock units, and 1,600,000 warrants were excluded from the
calculation of diluted earnings per share as the result would have been
anti-dilutive. Due to the net loss applicable to common stockholders in 2001,
2,929,355 stock options, 272,539 performance shares, 397,749 deferred shares,
and 56,968 restricted stock units were excluded from the calculation of diluted
earnings per share as the result would have been anti-dilutive. In 2000, 171,054
performance shares, 63,029 deferred shares and 25,507 restricted stock units
were excluded from the calculation of diluted earnings per share as the effect
would have been anti-dilutive.
NOTE 15 -- COMPREHENSIVE LOSS
Comprehensive income (loss), which is displayed in the consolidated
statements of stockholders' equity (deficit), represents net income (loss) plus
the results of certain stockholder equity changes not reflected in the
consolidated statements of operations.
The after-tax components of other comprehensive income (loss) as of
December 31, 2002, 2001 and 2000, respectively, are as follows (in thousands):
2002 2001 2000
--------- --------- --------
Net income (loss).................................. $(286,324) $(104,107) $ 79,590
Change in unrealized loss on securities reported at
fair value, net of taxes of $2.9 million and
$29.3 million in 2001 and 2000, respectively..... -- (7,202) (73,323)
Reclassification adjustment for gain on sale of
securities, net of taxes of $0.3 million and
$28.1 million in 2002 and 2000, respectively..... (808) -- (70,272)
Reclassification adjustment for cash flow hedges... 1,439 (1,439) --
Change in accumulated translation adjustments...... (674) (1,560) 95
--------- --------- --------
Comprehensive loss................................. $(286,367) $(114,308) $(63,910)
========= ========= ========
Accumulated other comprehensive loss as of December 31, 2002 and 2001 are
as follows (in thousands):
2002 2001
------- -------
Foreign currency translation adjustments.................... $(2,977) $(2,303)
Net unrealized gains on securities.......................... -- 808
Net loss on cash flow hedges................................ -- (1,439)
------- -------
Accumulated other comprehensive loss........................ $(2,977) $(2,934)
======= =======
NOTE 16 -- BUSINESS RESTRUCTURING CHARGES
2002 RESTRUCTURING CHARGES
Due to the continued effects of an economic slowdown in 2002, the Company
continued its implementation of a number of expense reduction and restructuring
initiatives to more closely align its cost structure with the current business
environment. As a result, we recorded restructuring charges of $16.4 million in
2002. The
94
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
charges consisted of approximately $10.4 million related to employee termination
benefits, $8.5 million related to non-cancelable lease obligations and $1.3
million related to other contractual obligations.
The charge related to non-cancelable lease obligations was offset by $3.8
million of subleases recorded in 2002. For leases that the Company no longer
occupies, management made assumptions including the number of years a property
will be subleased, square footage, market trends, property location, and the
price per square foot. These assumptions involve significant judgments and
estimations. Where possible, we have based our assumptions on discussions with
brokers and/or parties that have shown interest in the space. Under Penton's
sublease policy, subleases are recorded either when a sublease has been entered
into or when management believes it is more likely than not that a sublease will
be obtained for a particular location. Actual and estimated future sublease
payments are discounted using Penton's average borrowing rate at the time the
sublease is recorded.
The following sets forth additional detail concerning the principal
components of the charge:
- Personnel costs of $10.4 million are associated with the elimination
of nearly 316 positions, of which 304 positions were eliminated and
payments of $7.6 million were completed at 2002 year end.
Approximately 93% of the positions eliminated or to be eliminated are
in the United States, with most of the remaining positions from the
United Kingdom. Personnel costs include payments for severance,
outplacement services and a provision for continued health benefits.
- Office closure costs of $4.7 million relate to the closure, in 2002,
of an additional nine Penton offices worldwide and include costs
associated with existing office spaces under long-term leases expiring
through 2010. These amounts were offset in part by the reversal of
approximately $1.7 million related to lease reserves of $3.4 million
recorded in the second half of 2001 for our New York, NY, and
Burlingame, CA, offices for long-term leases that we were able to
sublease. At that time, no assumptions for subleases were made by the
Company due to the inherent limitations in estimating the future
trends of the real estate marketplace, the economic conditions present
in New York City at the time and the remote probability of a
successful sublease. However, in March 2002, due to continuing efforts
by the Company, we finalized a contract to sublease our New York
office space for the remainder of the lease term, or approximately 7.3
years. In addition, in April 2002, we subleased our Burlingame office
for the remainder of the lease term, or approximately 3.8 years.
Penton remains ultimately responsible for both of these leases. As of
December 31, 2002, in addition to the New York and Burlingame
subleases, Penton recorded subleases related to four locations of $0.1
million.
- Other contractual obligations of $1.3 million relate primarily to the
cancellation of trade show venues, hotel contracts and service
agreements.
2001 RESTRUCTURING CHARGES
In February 2001, Penton announced a restructuring program with the intent
of discontinuing certain Internet operations that had not demonstrated revenue
growth, customer acceptance and near-term opportunity for profit. The charge of
$5.6 million included the write-off of capitalized software development costs
associated with the discontinuance of the industry exchange component of New
Hope Natural Media's Healthwell.com; personnel costs, including the reduction of
approximately 60 employees at Healthwell.com as well as a reduction of workforce
related to a number of other Internet initiatives throughout Penton; and exit
costs associated with existing office spaces under lease and other contractual
obligations. In the third-quarter of 2001, the Company determined that some
first-quarter restructuring initiatives would not require the level of spending
that had been originally estimated. Based on the Company's third-quarter
estimates, approximately $1.0 million was reversed from the first-quarter charge
and the total amount of the charge was adjusted to $4.6 million. All costs
incurred in connection with the first-quarter restructuring plan have been paid.
95
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the second half of 2001, the Company implemented a number of expense
reduction and restructuring initiatives to more closely align its cost structure
with the business environment. Restructuring charges of $9.5 million, net of
$1.0 million reversal noted above, in the third quarter and $3.7 million in the
fourth quarter 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
charges, $4.7 million related to employee termination benefits for the
elimination of nearly 340 positions, of which 294 positions had been eliminated
and $2.7 million in payments had been completed by the end of 2001. The
remaining positions and outstanding payments were completed in 2002.
Approximately 84% of the positions eliminated were in the United States, with
the remaining positions predominantly in the United Kingdom and Germany. The
remaining $8.5 million of the restructuring charges related to the closure of
more than 20 Penton offices worldwide, and included costs associated with
existing office spaces under lease and other contractual obligations.
Other exit costs included primarily the write-off of computerized software
development costs associated with the discontinuance of our industry exchange
component of New Hope Natural Media's Healthwell.com as well as other
contractual obligations.
The following table summarizes the restructuring charges (net of subleases
recorded of $1.7 million in 2002 and reversals of $1.0 million in 2001, as
discussed above), the cash payments and the ending accrual balances for the
years ended December 31, 2002 and 2001 (in thousands):
2001 2002
---------------------------- ----------------------------
ENDING ENDING
TOTAL CASH ACCRUAL TOTAL CASH ACCRUAL
DESCRIPTION CHARGES PAYMENTS BALANCE CHARGES PAYMENTS BALANCE
----------- ------- -------- ------- ------- -------- -------
Severance, outplacement and
other personnel costs.... $ 6,751 $4,468 $ 2,283 $10,409 $ 7,569 $ 5,123
Facility closing costs..... 8,669 267 8,402 4,667 2,283 10,786
Other exit costs........... 3,370 2,423 947 1,285 1,217 1,015
------- ------ ------- ------- ------- -------
Total...................... $18,790 $7,158 $11,632 $16,361 $11,069 $16,924
======= ====== ======= ======= ======= =======
We expect to make cash payments in 2003 related to our business
restructuring initiatives of approximately $7.6 million which is expected to be
composed of $4.5 million for employee separation costs, $2.4 million for lease
obligations and $0.7 million for other contractual obligations. The balance of
severance and other exit costs will not require cash payments and the balance of
facility costs, which include primarily long-term leases, is expected to be paid
through the end of the respective lease terms.
In 2002 and 2001, restructuring charges of $1.0 million and $0.09 million,
respectively, were classified as part of discontinued operations as these costs
related to discontinued properties. The remaining charges are presented as
restructuring charges in the accompanying consolidated statements of operations.
NOTE 17 -- SEGMENT INFORMATION
We view and manage our business along four media segments: Industry,
Technology, Lifestyle and Retail, and we group our industry sectors within each
segment. A senior manager is in charge of each segment, and these senior
managers report directly to the Chief Executive Officer and to the President and
Chief Operating Officer.
Our four segments derive their revenues from trade shows and conferences,
publications and online media products, including Web sites serving customers in
12 distinct industry sectors. See Note 1 -- Description of
96
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Business. The accounting policies of the operating segments are the same as
those described in Note 2 -- Summary of Significant Accounting Policies.
The chief operating decision makers evaluate performance of the segments
based on revenues and adjusted segment EBITDA. As such in the analysis that
follows, we have used adjusted segment EBITDA, which we define as net income
(loss) before interest, taxes, depreciation and amortization, non-cash
compensation, corporate level costs, and unusual items, as the primary measure
of profitability in evaluating our operations. Corporate-level costs include
costs for centralized functions, such as finance, accounting and information
systems, which cannot reasonably be allocated to each segment. Assets are not
allocated to segments and as such have not been presented.
Summary information by segment for the years ended December 31, 2002, 2001
and 2000, adjusted for discontinued operations, is as follows (in thousands):
INDUSTRY TECHNOLOGY LIFESTYLE RETAIL
MEDIA MEDIA MEDIA MEDIA TOTAL
-------- ---------- --------- ------- --------
2002
Revenues........................ $ 92,380 $ 90,267 $30,839 $21,620 $235,106
Adjusted segment EBITDA......... $ 15,447 $ 246 $11,144 $ 5,826 $ 32,663
2001
Revenues........................ $113,419 $195,159 $29,893 $20,400 $358,871
Adjusted segment EBITDA......... $ 18,761 $ 33,847 $ 9,787 $ 4,775 $ 67,170
2000
Revenues........................ $137,391 $205,380 $30,121 $26,825 $399,717
Adjusted segment EBITDA......... $ 28,682 $ 69,652 $ 7,495 $ 7,526 $113,355
Segment revenues, all of which are realized from external customers, equal
Penton's consolidated revenues. Following is a reconciliation of Penton's total
adjusted segment EBITDA to consolidated income (loss) from continuing operations
before income taxes, extraordinary items and cumulative effect of accounting
change (in thousands):
YEARS ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
--------- --------- --------
Total adjusted segment EBITDA...................... $ 32,663 $ 67,170 $113,355
Depreciation and amortization...................... (19,329) (44,048) (32,811)
Restructuring charge............................... (15,436) (18,700) --
Loss on sale of properties......................... (888) -- --
Asset writedowns and impairments................... (223,424) (59,794) (3,146)
Non-cash compensation.............................. (2,979) (652) --
Gain on sale of investments........................ 1,491 -- 110,210
Interest expense................................... (38,193) (30,487) (19,485)
Interest income.................................... 768 1,862 5,352
Writedown of Internet investments.................. (41) 824 (9,490)
Miscellaneous, net................................. (635) (2,839) (45)
Corporate costs.................................... (18,160) (25,598) (22,125)
--------- --------- --------
Consolidated income (loss) from continuing
operations before income taxes, extraordinary
items and cumulative effect of accounting
change........................................... $(284,163) $(112,262) $141,815
========= ========= ========
97
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ENTERPRISE-WIDE DISCLOSURES
Revenues by product offering are as follows for the years ended December
31, 2002, 2001 and 2000 (in thousands):
2002 2001 2000
-------- -------- --------
Publishing........................................... $165,686 $208,825 $230,120
Trade shows and conferences.......................... 56,707 137,931 163,582
Online media......................................... 12,713 12,115 6,015
-------- -------- --------
$235,106 $358,871 $399,717
======== ======== ========
Domestic revenues of our products and services comprised $209.4 million,
$311.6 million and $359.5 million of total revenues for the years ended December
31, 2002, 2001 and 2000, respectively. Foreign revenues totaled $25.7 million,
$47.3 million and $40.2 million of our revenues for the years ended December 31,
2002, 2001 and 2000, respectively, of which $19.2 million, $32.5 million and
$24.7 million, respectively, were from the United Kingdom. No single customer
accounted for 10% or more of sales during 2002, 2001 and 2000.
Long-lived assets at December 31, 2002, 2001 and 2000 included $10.2
million, $42.2 million and $36.4 million, respectively, identified with foreign
operations, substantially all of which were intangible assets, with the
remaining assets identified with domestic operations. Long-lived assets
identified with the United Kingdom comprised $6.8 million, $33.1 million and
$29.8 million, respectively, of these foreign assets.
NOTE 18 -- SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
The following transactions do not provide or use cash and, accordingly, are
not reflected in the consolidated statements of cash flows.
INVESTING ACTIVITIES
Penton issued 527,951 and 52,920 shares for contingent consideration in
2002 and 2000, respectively; 17,472 and 361 shares under the Management Stock
Purchase Plan in 2002 and 2001, respectively; 340,775 and 6,780 deferred shares
in 2002 and 2001, respectively; 50,000 shares under the Performance Share Plan
in 2002; 52,164 and 39,296 stock options in 2001 and 2000, respectively; and
400,000 shares under the Executive Loan Program in 2000.
During 2002, three executives returned a total of 115,712 shares to the
Company to pay down a portion of the executive loan balance and to cover taxes
for shares issued under the Performance Share Plan. The Company also recorded
amortization of deemed dividend and accretion on preferred stock of $46.2
million.
In December 2002, Penton sold PM Australia for approximately $0.1 million,
of which $0.01 million was received in cash and the remainder is payable in 12
equal monthly installments starting in July 2003.
In 2001 and 2000, Penton marked to market its investment in Jupitermedia
Corporation stock by approximately $1.3 million and $13.4 million, respectively.
See Note 5 -- Investments for further discussion.
In addition, Penton acquired Hillgate Communications Ltd. in 2001 for
approximately $4.1 million, of which $3.5 million was in the form of notes
payable.
Penton assumed liabilities of approximately $9.9 million and $21.0 million
in connection with acquisitions completed in 2001 and 2000.
98
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 19 -- QUARTERLY RESULTS (UNAUDITED)
Quarterly results of operations for the years ended December 31, 2002 and
2001 are shown below (in thousands, except per share amounts):
2002 QUARTERS
---------------------- TOTAL
FIRST SECOND THIRD FOURTH FOR YEAR
-------- -------- --------- ------- ---------
Revenues............................ $ 61,128 $ 62,947 $ 47,194 $63,837 $ 235,106
Operating income (loss)............. $ 890 $ (9,417)(a) $(233,054)(b) $(5,972)(c) $(247,553)
Income (loss) from continuing
operations before extraordinary
items and cumulative effect of
accounting change................. $ (3,992) $(11,837) $(242,351) $14,531 $(243,649)
Discontinued operations............. $ (407) $ (221) $ (813) $(1,811) $ (3,252)
Extraordinary items................. $ 166 $ -- $ -- $ 111 $ 277
Cumulative effect of accounting
change............................ $(39,700)(d) $ -- $ -- $ -- $ (39,700)
Net income (loss)................... $(43,933) $(12,058) $(243,164) $12,831 $(286,324)
Amortization of deemed dividend and
accretion of preferred stock...... $ (363) $(44,498)(e) $ (652) $ (661) $ (46,174)
Net income (loss) applicable to
common stockholders............... $(44,296) $(56,556) $(243,816) $12,170 $(332,498)
Earnings per share (basic and
diluted):
Net income (loss)................. $ (1.37) $ (0.38) $ (7.47) $ 0.39 $ (8.84)
Net income (loss) applicable to
common stockholders............. $ (1.39) $ (1.77) $ (7.49) $ 0.31 $ (10.27)
2001 QUARTERS
--------------------- TOTAL
FIRST SECOND THIRD FOURTH FOR YEAR
-------- -------- -------- -------- ---------
Revenues............................ $110,630 $101,994 $ 59,506 $ 86,741 $ 358,871
Operating income (loss)............. $ 3,019(f) $ 4,452 $(37,378)(g) $(51,715)(h) $ (81,622)
Loss from continuing operations
before extraordinary items and
cumulative effect of accounting
change............................ $ (1,104) $ (5,705) $(28,652) $(60,483) $ (95,944)
Discontinued operations............. $ (174) $ 222 $ (843) $ (7,368) $ (8,163)
Net loss............................ $ (1,278) $ (5,483) $(29,495) $(67,851) $(104,107)
Earnings per share (basic and
diluted):
Net loss.......................... $ (0.04) $ (0.17) $ (0.92) $ (2.12) $ (3.26)
Earnings per share calculations for each of the quarters are based on the
weighted-average number of shares outstanding for each quarter, and the sum of
the quarters may not necessarily be equal to the full-year earnings per share
amount.
---------------
(a) Includes $7.7 million restructuring charge.
(b) Includes $3.3 million restructuring charge and $223.3 million related to
impairment of assets.
(c) Includes $4.7 million restructuring charge and $0.9 million loss on sale of
properties.
(d) Relates to the initial goodwill impairment test, which resulted in a
non-cash charge of $39.7 million, to reduce the carrying value of goodwill
for two of our seven identified reporting units.
(e) Relates to a one-time, non-cash charge of $44.5 million to remove the
10-year mandatory redemption date on the preferred stock.
(f) Includes $5.6 million restructuring charge.
(g) Includes $9.7 million related to impairment of assets and $9.5 million
related to restructuring charges.
(h) Includes $50.1 million related to impairment of assets and $3.7 million
related to restructuring charges.
99
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 20 -- GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
The following schedules set forth condensed consolidating balance sheets as
of December 31, 2002 and 2001 and condensed consolidating statements of
operations and condensed consolidating statements of cash flows for the years
ended December 31, 2002, 2001 and 2000. In the following schedules, "Parent"
refers to Penton Media, Inc., "Guarantor Subsidiaries" refers to Penton's wholly
owned domestic subsidiaries and "Non-guarantor Subsidiaries" refers to Penton's
foreign subsidiaries. "Eliminations" represent the adjustments necessary to (a)
eliminate intercompany transactions and (b) eliminate the investments in our
subsidiaries.
100
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF DECEMBER 31, 2002
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents............. $ 5,165 $ 460 $ 1,146 $ -- $ 6,771
Restricted cash....................... 241 -- 436 -- 677
Accounts receivable, net.............. 21,120 8,784 4,938 -- 34,842
Notes receivable...................... -- -- 2,124 -- 2,124
Income taxes receivable............... 33,470 19,895 182 -- 53,547
Inventories........................... 757 262 6 -- 1,025
Prepayments, deposits and other....... 2,299 821 1,974 -- 5,094
Current assets of discontinued
operations.......................... 2,049 -- -- -- 2,049
--------- --------- -------- --------- ---------
65,101 30,222 10,806 -- 106,129
--------- --------- -------- --------- ---------
Property, plant and equipment, net.... 18,717 3,116 2,084 -- 23,917
Goodwill.............................. 122,651 124,891 4,430 -- 251,972
Other intangibles, net................ 15,742 13,339 3,673 -- 32,754
Investment in subsidiaries(1)......... (98,098) -- -- 98,098 --
--------- --------- -------- --------- ---------
59,012 141,346 10,187 98,098 308,643
--------- --------- -------- --------- ---------
$ 124,113 $ 171,568 $ 20,993 $ 98,098 $ 414,772
========= ========= ======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Senior secured credit facility........ $ 4,500 $ -- $ -- $ -- $ 4,500
Accounts payable and accrued
expenses............................ 25,504 5,388 2,927 -- 33,819
Accrued compensation and benefits..... 10,713 1,031 91 -- 11,835
Unearned income....................... 13,619 5,296 4,111 -- 23,026
Current liabilities of discontinued
operations.......................... 1,050 -- -- -- 1,050
--------- --------- -------- --------- ---------
55,386 11,715 7,129 -- 74,230
--------- --------- -------- --------- ---------
Long-term liabilities and deferred
credits:
Senior secured notes, net of
discount............................ 79,966 76,831 -- -- 156,797
Senior subordinated notes, net of
discount............................ 87,426 83,997 -- -- 171,423
Note payable.......................... -- -- 417 -- 417
Net deferred pension credits.......... 13,762 -- -- -- 13,762
Intercompany advances................. (102,694) 65,062 31,545 6,087 --
Other................................. 5,176 2,934 4,942 -- 13,052
--------- --------- -------- --------- ---------
83,636 228,824 36,904 6,087 355,451
--------- --------- -------- --------- ---------
Mandatorily redeemable convertible
preferred stock....................... 46,174 -- -- -- 46,174
Redeemable common stock................. 1,118 -- -- -- 1,118
Stockholders' equity (deficit):
Common stock and capital in excess of
par value........................... 230,096 209,653 16,614 (226,267) 230,096
Retained earnings (deficit)........... (279,600) (278,624) (36,677) 315,301 (279,600)
Notes receivable officers/directors... (9,720) -- -- -- (9,720)
Accumulated other comprehensive
loss................................ (2,977) -- (2,977) 2,977 (2,977)
--------- --------- -------- --------- ---------
(62,201) (68,971) (23,040) 92,011 (62,201)
--------- --------- -------- --------- ---------
$ 124,113 $ 171,568 $ 20,993 $ 98,098 $ 414,772
========= ========= ======== ========= =========
---------------
(1) Reflects investments in subsidiaries utilizing the equity method.
101
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF DECEMBER 31, 2001
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES(2) SUBSIDIARIES(2) ELIMINATIONS CONSOLIDATED
--------- --------------- --------------- ------------ ------------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents.......... $ 14,518 $ 1,993 $ 3,680 $ -- $ 20,191
Accounts receivable, net........... 32,973 11,247 10,137 -- 54,357
Income tax receivable.............. 14,750 -- -- -- 14,750
Notes receivable................... -- -- 2,095 -- 2,095
Inventories........................ 1,090 248 13 -- 1,351
Deferred tax assets................ 4,683 1,962 -- -- 6,645
Prepayments, deposits and other.... 3,893 3,961 -- -- 7,854
--------- -------- ------- --------- --------
71,907 19,411 15,925 -- 107,243
--------- -------- ------- --------- --------
Property, plant and equipment,
net.............................. 22,563 4,694 2,919 -- 30,176
Goodwill........................... 124,828 331,570 36,743 -- 493,141
Other intangibles, net............. 13,624 40,684 2,492 -- 56,800
Deferred tax assets................ 16,462 (8,994) -- -- 7,468
Investment in subsidiaries(1)...... 193,473 -- -- (193,473) --
Investments........................ -- 5,649 -- -- 5,649
--------- -------- ------- --------- --------
370,950 373,603 42,154 (193,473) 593,234
--------- -------- ------- --------- --------
$ 442,857 $393,014 $58,079 $(193,473) $700,477
========= ======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Senior secured credit facility..... $ 16,489 $ -- $ -- $ -- $ 16,489
Note payable....................... -- -- 2,804 -- 2,804
Accounts payable and accrued
expenses......................... 31,758 1,305 7,310 -- 40,373
Accrued compensation and
benefits......................... 10,562 1,226 623 -- 12,411
Unearned income.................... 15,339 16,723 4,877 -- 36,939
--------- -------- ------- --------- --------
74,148 19,254 15,614 -- 109,016
--------- -------- ------- --------- --------
Long-term liabilities and deferred
credits:
Senior secured credit facility..... 164,098 -- -- -- 164,098
Senior subordinated notes, net of
discount......................... 180,957 -- -- -- 180,957
Note payable....................... -- -- 417 -- 417
Net deferred pension credits....... 15,140 -- -- -- 15,140
Intercompany advances.............. (214,585) 177,975 28,910 7,700 --
Other.............................. 2,569 4,238 3,512 -- 10,319
--------- -------- ------- --------- --------
148,179 182,213 32,839 7,700 370,931
--------- -------- ------- --------- --------
Stockholders' equity:
Common stock and capital in excess
of par value..................... 227,564 209,653 16,614 (226,267) 227,564
Retained earnings (deficit)........ 6,724 (18,914) (4,816) 23,730 6,724
Notes receivable
officers/directors............... (10,824) -- -- -- (10,824)
Accumulated other comprehensive
income (loss).................... (2,934) 808 (2,172) 1,364 (2,934)
--------- -------- ------- --------- --------
220,530 191,547 9,626 (201,173) 220,530
--------- -------- ------- --------- --------
$ 442,857 $393,014 $58,079 $(193,473) $700,477
========= ======== ======= ========= ========
---------------
(1) Reflects investments in subsidiaries utilizing the equity method.
(2) Certain amounts have been reclassified to conform to the current year
presentation.
102
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2002
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
REVENUES......................... $ 149,916 $ 60,791 $ 24,399 $ -- $ 235,106
--------- --------- -------- -------- ---------
OPERATING EXPENSES:
Editorial, production and
circulation................. 67,636 26,621 9,637 -- 103,894
Selling, general and
administrative.............. 53,933 50,923 14,832 -- 119,688
Impairment of other assets..... 136 197,346 25,942 -- 223,424
Restructuring charges.......... 11,100 2,882 1,454 -- 15,436
Loss on sale of properties..... 114 774 -- -- 888
Depreciation and
amortization................ 8,837 8,737 1,755 -- 19,329
--------- --------- -------- -------- ---------
141,756 287,283 53,620 -- 482,659
--------- --------- -------- -------- ---------
OPERATING INCOME (LOSS).......... 8,160 (226,492) (29,221) -- (247,553)
--------- --------- -------- -------- ---------
OTHER INCOME (EXPENSE):
Interest expense, net of income
earned...................... (19,185) (17,844) (396) -- (37,425)
Gain on sale of investments.... -- 1,491 -- -- 1,491
Writedown of Internet
investments................. (25) 22 (38) -- (41)
Equity in losses of
subsidiaries................ (291,571) -- -- 291,571 --
Miscellaneous, net............. (3,562) (197) 3,124 -- (635)
--------- --------- -------- -------- ---------
(314,343) (16,528) 2,690 291,571 (36,610)
--------- --------- -------- -------- ---------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES,
EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE......................... (306,183) (243,020) (26,531) 291,571 (284,163)
Provision (benefit) for income
taxes.......................... (22,278) (17,882) (354) -- (40,514)
--------- --------- -------- -------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE EXTRAORDINARY
ITEMS AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE.............. (283,905) (225,138) (26,177) 291,571 (243,649)
--------- --------- -------- -------- ---------
Loss from operations of
discontinued components, net of
taxes.......................... (2,696) -- (556) -- (3,252)
--------- --------- -------- -------- ---------
Extraordinary items, net of
taxes.......................... 277 -- -- -- 277
Cumulative effect of accounting
change, net of taxes........... -- (34,572) (5,128) -- (39,700)
--------- --------- -------- -------- ---------
NET LOSS......................... $(286,324) $(259,710) $(31,861) $291,571 $(286,324)
========= ========= ======== ======== =========
103
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2001
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
REVENUES......................... $ 184,214 $130,454 $44,203 $ -- $ 358,871
--------- -------- ------- ------- ---------
OPERATING EXPENSES:
Editorial, production and
circulation................. 88,233 45,663 14,473 -- 148,369
Selling, general and
administrative.............. 90,343 57,521 21,718 -- 169,582
Impairment of other assets..... 4,393 53,259 2,142 -- 59,794
Restructuring charges.......... 6,007 10,169 2,524 -- 18,700
Depreciation and
amortization................ 14,469 26,899 2,680 -- 44,048
--------- -------- ------- ------- ---------
203,445 193,511 43,537 -- 440,493
--------- -------- ------- ------- ---------
OPERATING INCOME (LOSS).......... (19,231) (63,057) 666 -- (81,622)
--------- -------- ------- ------- ---------
OTHER INCOME (EXPENSE):
Interest expense, net of income
earned...................... (32,794) 4,530 (361) -- (28,625)
Writedown of Internet
investments................. -- -- 824 -- 824
Equity in losses of
subsidiaries................ (53,866) -- -- 53,866 --
Miscellaneous, net............. (1,285) -- (1,554) -- (2,839)
--------- -------- ------- ------- ---------
(87,945) 4,530 (1,091) 53,866 (30,640)
--------- -------- ------- ------- ---------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES............ (107,176) (58,527) (425) 53,866 (112,262)
Provision (benefit) for income
taxes.......................... (10,306) (6,976) 964 -- (16,318)
--------- -------- ------- ------- ---------
LOSS FROM CONTINUING
OPERATIONS..................... (96,870) (51,551) (1,389) 53,866 (95,944)
Loss from operations of
discontinued components, net of
taxes.......................... (7,237) -- (926) -- (8,163)
--------- -------- ------- ------- ---------
NET LOSS......................... $(104,107) $(51,551) $(2,315) $53,866 $(104,107)
========= ======== ======= ======= =========
104
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2000
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
REVENUES.......................... $215,079 $156,240 $28,398 $ -- $399,717
-------- -------- ------- -------- --------
OPERATING EXPENSES:
Editorial, production and
circulation.................. 93,373 43,176 9,106 -- 145,655
Selling, general and
administrative............... 97,955 51,935 12,942 -- 162,832
Impairment of other assets...... -- 1,051 -- -- 1,051
Impairment of Internet assets... 2,095 -- -- -- 2,095
Depreciation and amortization... 11,880 18,795 2,136 -- 32,811
-------- -------- ------- -------- --------
205,303 114,957 24,184 -- 344,444
-------- -------- ------- -------- --------
OPERATING INCOME.................. 9,776 41,283 4,214 -- 55,273
-------- -------- ------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense, net of income
earned....................... (16,016) 2,340 (457) -- (14,133)
Writedown of Internet
investments.................. (9,490) -- -- -- (9,490)
Gain on sale of investments..... 110,210 -- -- -- 110,210
Equity in losses of
subsidiaries................. 17,203 -- -- (17,203) --
Miscellaneous, net.............. (931) 377 509 -- (45)
-------- -------- ------- -------- --------
100,976 2,717 52 (17,203) 86,542
-------- -------- ------- -------- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES............. 110,752 44,000 4,266 (17,203) 141,815
Provision for income taxes........ 30,727 28,238 2,825 -- 61,790
-------- -------- ------- -------- --------
INCOME FROM CONTINUING
OPERATIONS...................... 80,025 15,762 1,441 (17,203) 80,025
Loss from operations of
discontinued components, net of
taxes........................... (435) -- -- -- (435)
-------- -------- ------- -------- --------
NET INCOME........................ $ 79,590 $ 15,762 $ 1,441 $(17,203) $ 79,590
======== ======== ======= ======== ========
105
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2002
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
CASH FLOWS PROVIDED BY (USED FOR)
OPERATING ACTIVITIES........... $ 57,725 $(80,004) $ 5,595 $-- $ (16,684)
--------- -------- ------- -- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures........... (3,163) (157) (535) -- (3,855)
Acquisitions, including
earnouts paid, net of cash
acquired.................... (687) (48) (4,792) -- (5,527)
Proceeds from sale of
Jupitermedia Corporation
stock....................... -- 5,801 -- -- 5,801
Net proceeds from sale of
properties.................. 751 188 12 -- 951
--------- -------- ------- -- ---------
Net cash provided by (used for)
investing activities........ (3,099) 5,784 (5,315) -- (2,630)
--------- -------- ------- -- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of
mandatorily redeemable
convertible preferred
stock....................... 46,123 -- -- -- 46,123
Proceeds from senior secured
notes....................... 79,926 76,791 -- -- 156,717
Repurchase of senior
subordinated notes.......... (4,271) (4,104) -- -- (8,375)
Proceeds from senior secured
credit facility............. 6,000 -- -- -- 6,000
Repayment of senior secured
credit facility............. (182,087) -- -- -- (182,087)
Payment of note payable........ -- -- (2,804) -- (2,804)
Employee stock purchase plan
payments.................... (424) -- (10) -- (434)
Payment of financing costs..... (9,814) -- -- -- (9,814)
Proceeds from repayment of
officers/directors loans.... 703 -- -- -- 703
--------- -------- ------- -- ---------
Net cash provided by (used
for) financing
activities............. (63,844) 72,687 (2,814) -- 6,029
--------- -------- ------- -- ---------
Effect of exchange rate changes
on cash........................ (135) -- -- -- (135)
--------- -------- ------- -- ---------
Net decrease in cash and
equivalents............ (9,353) (1,533) (2,534) -- (13,420)
Cash and cash equivalents at
beginning of period............ 14,518 1,993 3,680 -- 20,191
--------- -------- ------- -- ---------
Cash and cash equivalents at end
of period...................... $ 5,165 $ 460 $ 1,146 $-- $ 6,771
========= ======== ======= == =========
106
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2001
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
CASH FLOWS PROVIDED BY (USED FOR)
OPERATING ACTIVITIES........... $ (25,529) $ (699) $ 4,842 $ 1,043 $ (20,343)
--------- ------- ------- ------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures........... (3,735) (2,153) (1,714) -- (7,602)
Acquisitions, including
earnouts paid, net of cash
acquired.................... (12,806) (3,833) (3,214) -- (19,853)
--------- ------- ------- ------- ---------
Net cash used for investing
activities................ (16,541) (5,986) (4,928) -- (27,455)
--------- ------- ------- ------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from senior
subordinated notes.......... 180,836 -- -- -- 180,836
Proceeds from senior secured
credit facility............. 45,000 -- -- -- 45,000
Repayment of senior secured
credit facility............. (166,538) -- -- -- (166,538)
Payment of note payable........ -- -- (201) -- (201)
Employee stock purchase plan
payments.................... (350) -- (3) -- (353)
Proceeds from deferred shares
and options exercised....... 1,153 -- -- -- 1,153
Payment of financing costs..... (1,657) -- -- -- (1,657)
Dividends paid................. (1,914) -- -- -- (1,914)
--------- ------- ------- ------- ---------
Net cash provided by (used
for) financing
activities................ 56,530 -- (204) -- 56,326
--------- ------- ------- ------- ---------
Effect of exchange rate changes
on cash........................ 58 -- -- -- 58
--------- ------- ------- ------- ---------
Net increase (decrease) in
cash and equivalents...... 14,518 (6,685) (290) 1,043 8,586
Cash and cash equivalents at
beginning of period............ -- 8,678 3,970 (1,043) 11,605
--------- ------- ------- ------- ---------
Cash and cash equivalents at end
of period...................... $ 14,518 $ 1,993 $ 3,680 $ -- $ 20,191
========= ======= ======= ======= =========
107
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENTON MEDIA, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2000
GUARANTOR NON-GUARANTOR PENTON
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
CASH FLOWS PROVIDED BY (USED FOR)
OPERATING ACTIVITIES........... $ (13,600) $ 15,809 $ 8,074 $(1,043) $ 9,240
--------- -------- ------- ------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures........... (19,208) (7,416) (648) -- (27,272)
Acquisitions, including
earnouts paid, net of cash
acquired.................... (192,119) (2,633) (6,244) -- (200,996)
Proceeds from sale of
Jupitermedia Corporation
stock....................... 113,100 -- -- -- 113,100
Net proceeds from sale of
discontinued operations..... 4,000 -- -- -- 4,000
--------- -------- ------- ------- ---------
Net cash used for investing
activities................ (94,227) (10,049) (6,892) -- (111,168)
--------- -------- ------- ------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from senior secured
credit facility............. 91,000 -- -- -- 91,000
Repayment of senior secured
credit facility............. (3,875) -- -- -- (3,875)
Employee stock purchase plan
payments.................... (209) -- -- -- (209)
Payment of financing costs..... (283) -- -- -- (283)
Proceeds from options
exercised................... 473 -- -- -- 473
Dividends paid................. (3,800) -- -- -- (3,800)
--------- -------- ------- ------- ---------
Net cash provided by
financing activities...... 83,306 -- -- -- 83,306
--------- -------- ------- ------- ---------
Effect of exchange rate changes
on cash........................ (143) -- -- -- (143)
Net increase (decrease) in cash
and equivalents............. (24,664) 5,760 1,182 (1,043) (18,765)
Cash and cash equivalents at
beginning of period............ 24,664 2,918 2,788 -- 30,370
--------- -------- ------- ------- ---------
Cash and cash equivalents at end
of period...................... $ -- $ 8,678 $ 3,970 $(1,043) $ 11,605
========= ======== ======= ======= =========
NOTE 21 -- RELATED PARTY TRANSACTIONS
In January 2003, the Company sold its PTS group assets to Cygnus
Expositions, a division of Cygnus Business Media, Inc., a Delaware corporation,
for $3.8 million, including a potential earnout of $0.6 million based on
reaching certain performance objectives. Cygnus Business Media, Inc. is owned by
ABRY Mezzanine Partners L.P., which holds a significant portion of our preferred
stock and has two members on the Company's Board of Directors.
108
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2002 and 2001, Neue Medien Ulm Holdings GmbH ("Neue
Medien") owes Penton Media Germany (formally known as ComMunic GmbH
Kongresse-Messen-Seminare), a consolidated subsidiary, $2.1 million and $2.1
million, respectively. These amounts are classified on the consolidated balance
sheets as notes receivable. Neue Median and Penton jointly own PM Germany. The
notes are due on demand and bear interest at the German Federal rate plus 3%,
which was 5.47% at December 31, 2002.
On August 1, 2002, the Company issued 527,951 shares of common stock to R.
Douglas Greene, a director of the Company, as part of the final contingent
payment required for the acquisition of New Hope Communications, Inc. in 1999.
NOTE 22 -- SUBSEQUENT EVENTS
Amended Credit Facility
In January 2003, the Company amended its senior credit facility. The
amended agreement permits the Company to sell certain properties in excess of
the $5.0 million aggregate limit required by the original amended agreement. In
return, the revolving commitment was reduced from $40.0 million to $32.0
million, and at such time as the aggregate sum of the cash and cash equivalents
of Penton equals or exceeds $40.0 million, an additional one-time reduction of
$10.0 million would be required. In addition, upon the sale of the certain
properties noted above, the revolving commitment would be further reduced by 50%
of the aggregate gross proceeds from those sales, up to a maximum of $6.0
million. For all other asset dispositions, the revolver would be reduced by 50%
of the aggregate gross proceeds. At December 31, 2002 and January 31, 2003, the
revolver commitments under our credit facility were $40.0 million and $20.1
million, respectively. Availability under the commitments, which is subject to
the Company's eligible accounts receivable, was $13.5 million (net of $4.5
million outstanding) and $15.0 million at December 31, 2002 and January 31,
2003, respectively.
The amended facility allows for additional asset sales, transfers, leases,
and other dispositions and the issuance of equity interests by our subsidiaries
up to a maximum of approximately $3.6 million. The amended facility also
increased the maximum commitment fee from 0.50% to 0.75%.
Sale of PTS
In January 2003, the Company completed the sale of the assets of its PTS
group, which was part of our Industry Media segment, to Cygnus Business Media,
Inc. for total consideration of approximately $3.8 million, including an earnout
of $0.6 million based on reaching certain performance objectives. The cash
received from the sale was used to pay down the Company's outstanding credit
facility. A gain on the sale of approximately $1.0 million will be recorded in
2003 and will be included as a component of discontinued operations.
Tax Refund
In January 2003, the Company received a tax refund of $52.7 million. A
portion of the proceeds was used to pay down the outstanding credit facility.
Equity and Performance Shares
In February 2003, the Company issued 30,516 shares earned under the
performance share plan and 19,050 shares earned under the management stock
purchase plan. In addition, the Company granted 598,850 shares under our stock
option plan, of which 334,850 shares were issued in connection with the Tender
Offer. The exercise price of the New Options shall be the fair value of our
common stock on the grant date. The Company also granted 391,360 deferred shares
to certain key executives.
109
PENTON MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 2003, Penton's Board of Directors approved a proposal to effect
a reverse stock split to be submitted for shareholder approval at the Company's
annual meeting, set for June 12, 2003. This corrective share action is part of
the plan submitted by Penton to the NYSE to meet the NYSE $1.00 stock price
listing requirement.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
BALANCE AT BALANCE AT
BEGINNING CHARGE TO END
OF YEAR EXPENSES DEDUCTIONS OF YEAR
---------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
Allowance for Doubtful Accounts:
2002 - Allowance for doubtful accounts.............. $10,976 $ 8,303 $(14,956) $ 4,323
2001 - Allowance for doubtful accounts.............. $ 3,863 $14,971 $ (7,858) $10,976
2000 - Allowance for doubtful accounts.............. $ 3,958 $ 1,714 $ (1,809) $ 3,863
Future Income Tax Benefits -- Valuation Allowance:
2002 - Valuation allowance.......................... $ 1,779 $35,973 $ (1,530) $36,222
2001 - Valuation allowance.......................... $ -- $ 1,779 $ -- $ 1,779
2000 - Valuation allowance.......................... $ -- $ -- $ -- $ --
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
110
PART III
Information required to be furnished in this part of the Form 10-K has been
omitted because the Registrant will file with the Securities and Exchange
Commission a definitive proxy statement pursuant to Regulation 14A under the
Securities Exchange Act of 1934 not later than April 30, 2003 containing such
information.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the headings "Election of Directors,"
"Board of Directors," "Executive Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Registrant's Proxy Statement for the
annual meeting of stockholders to be held on June 12, 2003 is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the headings "Compensation," "Compensation
Committee Interlocks and Insider Participation," "Compensation Committee Report
on Executive Compensation," and "Performance Graph" in the Registrant's Proxy
Statement for the annual meeting of stockholders to be held on June 12, 2003 is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the heading "Security Ownership of Certain
Beneficial Owners and Management" and "Securities Authorized for Issuance under
Equity Compensation Plans" in the Registrant's Proxy Statement for the annual
meeting of stockholders to be held on June 12, 2003 is incorporated herein by
reference.
The Company currently maintains the Penton Media, Inc. 1998 Equity and
Performance Incentive Plan (As Amended and Restated Effective as of March 15,
2001) (the "Incentive Plan"), the Penton Media, Inc. 1998 Director Stock Option
Plan (As Amended and Restated Effective as of March 15, 2001) (the "Director
Plan"), the Penton Media, Inc. Management Stock Purchase Plan (As Amended and
Restated Effective as of January 1, 2000) (the "Management Stock Purchase Plan")
and the Penton Media, Inc. Employee Stock Purchase Plan (the "Employee Stock
Purchase Plan"), pursuant to which it has made equity available to eligible
persons.
111
The following table summarizes information about these plans as of December
31, 2002. All outstanding awards relate to our common stock.
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER EQUITY
ISSUED UPON EXERCISE OF EXERCISE PRICE OF OUTSTANDING COMPENSATION PLANS
OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND (EXCLUDING SECURITIES
WARRANTS AND RIGHTS RIGHTS REFLECTED IN COLUMN (A))
PLAN CATEGORY (A) (B) (C)
------------- -------------------------- ----------------------------- ----------------------------
Equity compensation plans
approved by security
holders................ 1,597,355(1) $13.05 2,796,066(2)
Equity compensation plans
not approved by
security holders....... -- -- --
--------- ------ ---------
Total.................. 1,597,355 $13.05 2,796,066
---------------
(1) Includes 1,454,355 and 143,000 shares to be issued upon the exercise of
outstanding options under the Incentive Plan and Director Plan,
respectively.
(2) Includes 2,520,978 shares available for issuance under the Incentive Plan,
99,000 shares available for issuance under the Director Plan, no shares
available for issuance under the Employee Stock Purchase Plan and 176,088
shares available for issuance under the Management Stock Purchase Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the headings "Certain Transactions" in the
Registrant's Proxy Statement for the annual meeting of shareholders to be held
on June 12, 2003 is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES.
Based on their evaluation, as of a date within 90 days of the filing date
of this Form 10-K, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures (as defined in Rule
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended)
are effective. There have been no significant changes in internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses, except as follows: the Company
has sold common stock under the Company's 401(k) Retirement Savings Plan (the
"Plan") in excess of the number of shares registered by the Company on Form S-8
with the Securities and Exchange Commission under the Securities Act of 1933
(the "unregistered sales") from May 2001 through March 2003. The Company has
taken corrective actions immediately upon discovery, and intends to file a
post-effective amendment to the Form S-8 to register additional shares. For
further details, see:
- Risk Factors "Our sale of unregistered shares of the Company's common
stock under the Company's 401(k) Retirement Savings Plan could have a
material adverse effect on our financial condition."
- Liquidity and Capital Resources section of the Management's Discussion
and Analysis of Financial Condition and Results of Operations.
- Note 13 -- Common Stock and Common Stock Award Programs of the
consolidated financial statements.
112
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report.
1. Financial statements: The following documents are filed as part of this
Report.
Report of Independent Accountants.
Consolidated Balance Sheets as of December 31, 2002 and 2001.
Consolidated Statements of Operations for the years ended December 31,
2002, 2001 and 2000.
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 2002, 2001 and 2000.
Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedule: The following financial statement schedule
of Penton Media, Inc. is filed as part of this Report and should be read
in conjunction with the Consolidated Financial Statements of Penton
Media, Inc.
Schedule II Valuation and Qualifying Accounts.
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set
forth therein is included in the Consolidated Financial Statements or
Notes thereto.
(b) Reports on Form 8-K
DATE OF REPORT ITEMS REPORTED
-------------- --------------
October 24, 2002............... Item 5. Other Events
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits
December 5, 2002............... Item 5. Other Events
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits
(c) Exhibits: The Exhibits listed in the accompanying Index to Exhibits
immediately following the financial statement schedules are filed as
part of, or incorporated by reference into, this Report.
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
2.1 Asset Purchase Agreement, dated as of May 18, 1999, by and
among Penton Media, Inc., New Hope Communications, Inc. and
R. Douglas Greene (filed as Exhibit 2.0 to the Company's
Form 8-K/A on August 10, 1999, and incorporated herein by
reference). The Registrant agrees to furnish supplementally
a copy of any omitted schedule to the Commission upon
request.
2.2 Combination Agreement, dated May 21, 1998, by and among
Penton Media, Inc., D-M Acquisition Corp., Pittway
Corporation, Donohue Meehan Publishing Company, William C.
Donohue and John J. Meehan (filed as Exhibit 2.1 to the
Company's Registration Statement No. 33-56877 and
incorporated herein by reference). The Registrant agrees to
furnish supplementally a copy of any omitted schedule to the
Commission upon request.
3.1 Restated Certificate of Incorporation of the Registrant
(filed as Exhibit 3.1 to the Company's Form 10-Q on August
14, 2002, and incorporated herein by reference).
3.2 Certificate of Designation of Series A Junior Participating
Preferred Stock of Penton Media, Inc. (filed as Exhibit 4.1
to the Company's Form 8-K on June 12, 2000, and incorporated
herein by reference).
113
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
3.3 Amended Certificate of Designations, Preferences and Rights
of the Series B Convertible Preferred Stock of Registrant
(filed as Exhibit 3.1 to the Company's Form S-3/A on June 4,
2002, and incorporated herein by reference).
3.4 Amended and Restated Bylaws of the Registrant (filed as
Exhibit 3.3 to the Company's Form 10-Q on August 14, 2002,
and incorporated herein by reference).
4.1 Indenture, dated as of March 28, 2002, by and among Penton
Media, Inc., the Subsidiary Guarantors named therein and
U.S. Bank National Association, as Trustee (filed as Exhibit
4.1 to the Company's Form S-4 on June 26, 2002, and
incorporated herein by reference).
4.2 Pledge and Security Agreement, dated as of March 28, 2002,
by and among Penton Media, Inc., the Subsidiary Guarantors
named therein and U.S. Bank National Association, as Trustee
(filed as Exhibit 4.3 to the Company's Form S-4 on June 26,
2002, and incorporated herein by reference).
4.3 Intercreditor Agreement, dated as of March 28, 2002, by and
between U.S. Bank National Association and The Bank of New
York (filed as Exhibit 4.4 to the Company's Form S-4 on June
26, 2002, and incorporated herein by reference).
4.4 Form of Warrants to purchase common stock of Penton Media,
Inc. (filed as Exhibit 4.1 to the Company's Form 8-K on
March 19, 2002, and incorporated herein by reference).
4.5 Rights Agreement, dated as of June 9, 2000, between Penton
Media, Inc. and Harris Trust and Savings Bank, as Rights
Agent, including a Form of Certificate of Designation of
Series A Junior Participating Preferred Stock as Exhibit A
thereto, a Form of Right Certificate as Exhibit B thereto
and a Summary of Rights to Purchase Preferred Stock as
Exhibit C thereto (filed as Exhibit 4.1 to the Company's
Form 8-K on June 12, 2000, and incorporated herein by
reference).
4.6 Amendment No. 1, dated as of March 18, 2002, to the Rights
Agreement, by and between Penton and National City Bank, as
successor Rights Agent (filed as Exhibit 4.2 to the
Company's Form 8-K on March 19, 2002, and incorporated
herein by reference).
4.7 Amendment No. 2, dated as of July 31, 2002, to the Rights
Agreement, by and between Registrant and National City Bank,
as successor rights agent (filed as Exhibit 4.1 to the
Company's Form 8-A/A on August 1, 2002, and incorporated
herein by reference).
4.8 Indenture, dated as of June 28, 2001, between Penton Media,
Inc., as issuer, the Subsidiary Guarantors named herein, and
The Bank of New York, as Trustee, including the form of the
Company's 10.375% Senior Subordinated Notes due June 15,
2011 attached as Exhibit A thereto (filed as Exhibit 4.1 to
the Company's Form 10-Q on August 14, 2001, and incorporated
herein by reference).
10.1 Amended and Restated Series B Convertible Preferred Stock
and Warrant Purchase Agreement, dated as of March 18, 2002,
among Penton Media, Inc. and the investors listed on
Schedule 1 attached thereto (the "Investors"), (filed as
Exhibit 10.1 to the Company's Form 8-K on March 19, 2002,
and incorporated herein by reference).
10.2 Amendment No. 1 to the Amended and Restated Series B
Convertible Preferred Stock and Warrant Purchase Agreement
(filed as Exhibit 10.3 to the Company's Form S-3/A on June
4, 2002, and incorporated herein by reference).
10.3 Registration Rights Agreement (filed as Exhibit 10.2 to the
Company's Form 8-K on March 19, 2002, and incorporated
herein by reference).
10.4 Amended and Restated Credit Agreement, dated March 8, 2002,
between Penton Media, Inc., as borrower, the Lenders Party
hereto, as lenders, Banc of America Securities, LLC, as
syndication agent, Bank One and Fleet National Bank, as
co-documentation agents and The Bank of New York, as
administrative agent, (filed as Exhibit 10.3 to the
Company's Form 10-K on March 21, 2002, and incorporated
herein by reference).
10.5 First Amendment to the Amended and Restated Credit
Agreement, dated January 17, 2003, between Penton Media,
Inc., as borrower, the Lenders Party hereto, as lenders,
Banc of America Securities, LLC, as syndication agent, Bank
One and Fleet National Bank, as co-documentation agents and
The Bank of New York, as administrative agent, filed
herewith.
114
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
MANAGEMENT CONTRACTS AND COMPENSATORY PLANS
10.6 Penton Media, Inc. Retirement Savings Plan (filed as Exhibit
4.3 to the Company's Form S-8 on August 27, 1998, and
incorporated herein by reference).
10.7 Penton Media, Inc. Management Stock Purchase Plan (filed as
Exhibit 4.3 to the Company's Form S-8 on March 21, 2000, and
incorporated herein by reference).
10.8 Penton Media, Inc. Employee Stock Purchase Plan (filed as
Exhibit 4.3 to the Company's Form S-8 on November 17, 1999,
and incorporated herein by reference).
10.9 Penton Media, Inc. Amended and Restated 1998 Director Stock
Option Plan (filed as Exhibit 10.4 to the Company's Form
10-Q on August 14, 2001, and incorporated herein by
reference).
10.10 Penton Media, Inc. Amended and Restated 1998 Equity and
Performance Incentive Plan (filed as Exhibit 10.5 to the
Company's Form 10-Q on August 14, 2001, and incorporated
herein by reference).
10.11 Penton Media, Inc. Retirement Plan (filed as Exhibit 10.9 to
the Company's Registration Statement No. 333-56877, and
incorporated herein by reference).
10.12 Penton Media, Inc. Senior Executive Bonus Plan (filed as
Exhibit 10.8 to the Company's Form 10-K on March 30, 2000,
and incorporated herein by reference).
10.13 Penton Media, Inc. Supplemental Executive Retirement Plan
(as Amended and Restated Effective as of January 1, 2000
(filed as Exhibit 10.9 to the Company's Form 10-K on March
30, 2000, and incorporated herein by reference).
10.14 Amendment to the Employment Agreement, dated December 11,
2001, between Penton Media, Inc. and David Nussbaum, (filed
as Exhibit 10.12 to the Company's Form 10-K on March 21,
2002, and incorporated herein by reference).
10.15 Amendment to the Restated Employment Agreement, dated
December 11, 2001, between Penton Media, Inc. and Thomas
Kemp, (filed as Exhibit 10.13 to the Company's Form 10-K on
March 21, 2002, and incorporated herein by reference).
10.16 Amendment to the Restated Employment Agreement, dated
December 11, 2001, between Penton Media, Inc. and Daniel J.
Ramella, (filed as Exhibit 10.14 to the Company's Form 10-K
on March 21, 2002, and incorporated herein by reference).
10.17 Amendment to the Amended and Restated Employment Agreement,
dated December 11, 2001, between Penton Media, Inc. and
James W. Zaremba, (filed as Exhibit 10.15 to the Company's
Form 10-K on March 21, 2002, and incorporated herein by
reference).
10.18 Amendment to the Employment Agreement, dated December 11,
2001, between Penton Media, Inc. and Preston L. Vice, (filed
as Exhibit 10.17 to the Company's Form 10-K on March 21,
2002, and incorporated herein by reference).
10.19 Amendment to the Employment Agreement, dated December 11,
2001, between Penton Media, Inc. and Darrell Denny, (filed
as Exhibit 10.18 to the Company's Form 10-K on March 21,
2002, and incorporated herein by reference).
21. Subsidiaries of Penton Media, Inc.
23. Consent of the Independent Accountants.
24. Powers of Attorneys.
99.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, filed herewith.
99.2 Certification of CFO Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, filed herewith.
115
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES AND
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.
By: /s/ PRESTON L. VICE
------------------------------------
Name: Preston L. Vice
Title: Chief Financial Officer
Dated: March 31, 2003
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON MARCH 31, 2003.
SIGNATURE TITLE
--------- -----
/s/ Thomas L. Kemp Chairman of the Board, Chief Executive Officer and
------------------------------------------------ Director (Principal Executive Officer)
Thomas L. Kemp
/s/ PRESTON L. VICE Chief Financial Officer and Secretary
------------------------------------------------ (Principal Financial Officer)
Preston L. Vice
/s/ JOCELYN A. BRADFORD Vice President and Controller
------------------------------------------------ (Principal Accounting Officer)
Jocelyn A. Bradford
/s/ * Director
------------------------------------------------
Paul W. Brown
/s/ * Director
------------------------------------------------
Daniel C. Budde
/s/ * Director
------------------------------------------------
Peni Garber
/s/ * Director
------------------------------------------------
R. Douglas Greene
/s/ * Director
------------------------------------------------
King Harris
/s/ * Director
------------------------------------------------
John J. Meehan
/s/ * Director
------------------------------------------------
David B. Nussbaum
/s/ * Director
------------------------------------------------
Daniel J. Ramella
/s/ * Director
------------------------------------------------
Edward J. Schwartz
116
SIGNATURE TITLE
--------- -----
/s/ * Director
------------------------------------------------
Hannah C. Craven
/s/ * Director
------------------------------------------------
William B. Summers
---------------
* The undersigned, by signing his name hereto, does sign and execute this Annual
Report on Form 10-K pursuant to a Power of Attorney executed on behalf of the
above named officers and directors of Penton Media, Inc. and files herewith as
Exhibit 24 on behalf of Penton Media, Inc. and each such person.
March 31, 2003
By: /s/ PRESTON L. VICE
----------------------------------
Preston L. Vice
Attorney-in-Fact
117
CERTIFICATIONS
I, Thomas L. Kemp, certify that:
1. I have reviewed this annual report on Form 10-K of Penton Media
Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
By: /s/ THOMAS L. KEMP
------------------------------------
Thomas L. Kemp
Chairman and Chief Executive
Officer and Director (Principal
Executive Officer)
Date: March 31, 2003
118
CERTIFICATIONS
I, Preston L. Vice, certify that:
1. I have reviewed this annual report on Form 10-K of Penton Media
Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
By: /s/ PRESTON L. VICE
------------------------------------
Preston L. Vice
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
Date: March 31, 2003
119
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
2.1 Asset Purchase Agreement, dated as of May 18, 1999, by and
among Penton Media, Inc., New Hope Communications, Inc. and
R. Douglas Greene (filed as Exhibit 2.0 to the Company's
Form 8-K/A on August 10, 1999, and incorporated herein by
reference). The Registrant agrees to furnish supplementally
a copy of any omitted schedule to the Commission upon
request.
2.2 Combination Agreement, dated May 21, 1998, by and among
Penton Media, Inc., D-M Acquisition Corp., Pittway
Corporation, Donohue Meehan Publishing Company, William C.
Donohue and John J. Meehan (filed as Exhibit 2.1 to the
Company's Registration Statement No. 33-56877 and
incorporated herein by reference). The Registrant agrees to
furnish supplementally a copy of any omitted schedule to the
Commission upon request.
3.1 Restated Certificate of Incorporation of the Registrant
(filed as Exhibit 3.1 to the Company's Form 10-Q on August
14, 2002, and incorporated herein by reference).
3.2 Certificate of Designation of Series A Junior Participating
Preferred Stock of Penton Media, Inc. (filed as Exhibit 4.1
to the Company's Form 8-K on June 12, 2000, and incorporated
herein by reference).
3.3 Amended Certificate of Designations, Preferences and Rights
of the Series B Convertible Preferred Stock of Registrant
(filed as Exhibit 3.1 to the Company's Form S-3/A on June 4,
2002, and incorporated herein by reference).
3.4 Amended and Restated Bylaws of the Registrant (filed as
Exhibit 3.3 to the Company's Form 10-Q on August 14, 2002,
and incorporated herein by reference).
4.1 Indenture, dated as of March 28, 2002, by and among Penton
Media, Inc., the Subsidiary Guarantors named therein and
U.S. Bank National Association, as Trustee (filed as Exhibit
4.1 to the Company's Form S-4 on June 26, 2002, and
incorporated herein by reference).
4.2 Pledge and Security Agreement, dated as of March 28, 2002,
by and among Penton Media, Inc., the Subsidiary Guarantors
named therein and U.S. Bank National Association, as Trustee
(filed as Exhibit 4.3 to the Company's Form S-4 on June 26,
2002, and incorporated herein by reference).
4.3 Intercreditor Agreement, dated as of March 28, 2002, by and
between U.S. Bank National Association and The Bank of New
York (filed as Exhibit 4.4 to the Company's Form S-4 on June
26, 2002, and incorporated herein by reference).
4.4 Form of Warrants to purchase common stock of Penton Media,
Inc. (filed as Exhibit 4.1 to the Company's Form 8-K on
March 19, 2002, and incorporated herein by reference).
4.5 Rights Agreement, dated as of June 9, 2000, between Penton
Media, Inc. and Harris Trust and Savings Bank, as Rights
Agent, including a Form of Certificate of Designation of
Series A Junior Participating Preferred Stock as Exhibit A
thereto, a Form of Right Certificate as Exhibit B thereto
and a Summary of Rights to Purchase Preferred Stock as
Exhibit C thereto (filed as Exhibit 4.1 to the Company's
Form 8-K on June 12, 2000, and incorporated herein by
reference).
4.6 Amendment No. 1, dated as of March 18, 2002, to the Rights
Agreement, by and between Penton and National City Bank, as
successor Rights Agent (filed as Exhibit 4.2 to the
Company's Form 8-K on March 19, 2002, and incorporated
herein by reference).
4.7 Amendment No. 2, dated as of July 31, 2002, to the Rights
Agreement, by and between Registrant and
National City Bank, as successor rights agent (filed as
Exhibit 4.1 to the Company's Form 8-A/A on August 1, 2002,
and incorporated herein by reference).
4.8 Indenture, dated as of June 28, 2001, between Penton Media,
Inc., as issuer, the Subsidiary Guarantors named herein, and
The Bank of New York, as Trustee, including the form of the
Company's 10.375% Senior Subordinated Notes due June 15,
2011 attached as Exhibit A thereto (filed as Exhibit 4.1 to
the Company's Form 10-Q on August 14, 2001, and incorporated
herein by reference).
120
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
10.1 Amended and Restated Series B Convertible Preferred Stock
and Warrant Purchase Agreement, dated as of March 18, 2002,
among Penton Media, Inc. and the investors listed on
Schedule 1 attached thereto (the "Investors"), (filed as
Exhibit 10.1 to the Company's Form 8-K on March 19, 2002,
and incorporated herein by reference).
10.2 Amendment No. 1 to the Amended and Restated Series B
Convertible Preferred Stock and Warrant Purchase Agreement
(filed as Exhibit 10.3 to the Company's Form S-3/A on June
4, 2002, and incorporated herein by reference).
10.3 Registration Rights Agreement (filed as Exhibit 10.2 to the
Company's Form 8-K on March 19, 2002, and incorporated
herein by reference).
10.4 Amended and Restated Credit Agreement, dated March 8, 2002,
between Penton Media, Inc., as borrower, the Lenders Party
hereto, as lenders, Banc of America Securities, LLC, as
syndication agent, Bank One and Fleet National Bank, as
co-documentation agents and The Bank of New York, as
administrative agent, (filed as Exhibit 10.3 to the
Company's Form 10-K on March 21, 2002, and incorporated
herein by reference).
10.5 First Amendment to the Amended and Restated Credit
Agreement, dated January 17, 2003, between Penton Media,
Inc., as borrower, the Lenders Party hereto, as lenders,
Banc of America Securities, LLC, as syndication agent, Bank
One and Fleet National Bank, as co-documentation agents and
The Bank of New York, as administrative agent, filed
herewith.
MANAGEMENT CONTRACTS AND COMPENSATORY PLANS
10.6 Penton Media, Inc. Retirement Savings Plan (filed as Exhibit
4.3 to the Company's Form S-8 on August 27, 1998, and
incorporated herein by reference).
10.7 Penton Media, Inc. Management Stock Purchase Plan (filed as
Exhibit 4.3 to the Company's Form S-8 on March 21, 2000, and
incorporated herein by reference).
10.8 Penton Media, Inc. Employee Stock Purchase Plan (filed as
Exhibit 4.3 to the Company's Form S-8 on November 17, 1999,
and incorporated herein by reference).
10.9 Penton Media, Inc. Amended and Restated 1998 Director Stock
Option Plan (filed as Exhibit 10.4 to the Company's Form
10-Q on August 14, 2001, and incorporated herein by
reference).
10.10 Penton Media, Inc. Amended and Restated 1998 Equity and
Performance Incentive Plan (filed as Exhibit 10.5 to the
Company's Form 10-Q on August 14, 2001, and incorporated
herein by reference).
10.11 Penton Media, Inc. Retirement Plan (filed as Exhibit 10.9 to
the Company's Registration Statement No. 333-56877, and
incorporated herein by reference).
10.12 Penton Media, Inc. Senior Executive Bonus Plan (filed as
Exhibit 10.8 to the Company's Form 10-K on March 30, 2000,
and incorporated herein by reference).
10.13 Penton Media, Inc. Supplemental Executive Retirement Plan
(as Amended and Restated Effective as of January 1, 2000
(filed as Exhibit 10.9 to the Company's Form 10-K on March
30, 2000, and incorporated herein by reference).
10.14 Amendment to the Employment Agreement, dated December 11,
2001, between Penton Media, Inc. and David Nussbaum, (filed
as Exhibit 10.12 to the Company's Form 10-K on March 21,
2002, and incorporated herein by reference).
10.15 Amendment to the Restated Employment Agreement, dated
December 11, 2001, between Penton Media, Inc. and Thomas
Kemp, (filed as Exhibit 10.13 to the Company's Form 10-K on
March 21, 2002, and incorporated herein by reference).
10.16 Amendment to the Restated Employment Agreement, dated
December 11, 2001, between Penton Media, Inc. and Daniel J.
Ramella, (filed as Exhibit 10.14 to the Company's Form 10-K
on March 21, 2002, and incorporated herein by reference).
10.17 Amendment to the Amended and Restated Employment Agreement,
dated December 11, 2001, between Penton Media, Inc. and
James W. Zaremba, (filed as Exhibit 10.15 to the Company's
Form 10-K on March 21, 2002, and incorporated herein by
reference).
10.18 Amendment to the Employment Agreement, dated December 11,
2001, between Penton Media, Inc. and Preston L. Vice, (filed
as Exhibit 10.17 to the Company's Form 10-K on March 21,
2002, and incorporated herein by reference).
121
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
10.19 Amendment to the Employment Agreement, dated December 11,
2001, between Penton Media, Inc. and Darrell Denny, (filed
as Exhibit 10.18 to the Company's Form 10-K on March 21,
2002, and incorporated herein by reference).
21. Subsidiaries of Penton Media, Inc.
23. Consent of the Independent Accountants.
24. Powers of Attorneys.
99.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, filed herewith.
99.2 Certification of CFO Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, filed herewith.
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