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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-Q
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[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 001-16061
KEY3MEDIA GROUP, INC.
(Exact Name of registrant as specified in its charter)
DELAWARE 95-4799962
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
5700 WILSHIRE BOULEVARD, SUITE 325 90036
LOS ANGELES, CA (Zip Code)
(Address of Principal Executive Offices)
(323) 954-6000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
As of November 8, 2002, there were 68,531,919 shares of the
Registrant's voting common stock, par value $0.01 per share, outstanding.
KEY3MEDIA GROUP, INC.
TABLE OF CONTENTS
PAGE NO.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements........................................5
Condensed Consolidated Balance Sheets as of
December 31, 2001 and September 30, 2002 (Unaudited)...5
Condensed Consolidated Statements Of Operations for the
Three and Nine Months Ended September 30, 2001
and 2002 (Unaudited)....................................6
Condensed Consolidated Statements Of Cash Flows for the
Nine Months Ended September 30, 2001 and 2002
(Unaudited).............................................7
Condensed Consolidated Statement Of Changes In
Shareholders' Equity (Deficit) And Comprehensive
Loss for the Nine Months Ended September 30, 2002
(Unaudited).............................................8
Notes To Condensed Consolidated Financial Statements
(Unaudited).............................................9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................34
Item 3. Quantitative and Qualitative Disclosures about
Market Risk............................................48
Item 4. Controls and Procedures....................................48
PART II OTHER INFORMATION
Item 1. Legal Proceedings..........................................49
Item 6. Exhibits and Reports on Form 8-K...........................52
2
CAUTIONARY LEGEND REGARDING FORWARD LOOKING STATEMENTS
Some of the information in this Form 10-Q may constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both as
amended. These forward-looking statements are subject to various risks and
uncertainties. The forward-looking statements include, without limitations,
statements regarding our future business plans and strategies and our future
financial position or results of operations, as well as other statements that
are not historical. You can find many of these statements by looking for words
like "will", "may", "believes", "expects", "anticipates", "plans" and
"estimates" and for similar expressions.
Because forward-looking statements involve risks and uncertainties,
there are many factors that could cause the actual results to differ materially
from those expressed or implied. These include, but are not limited to,
economic conditions generally and in the information technology industry in
particular; the timing of Key3Media's events and their popularity with
exhibitors, sponsors and attendees; technological changes and developments;
intellectual property rights; competition; capital expenditures; and factors
impacting Key3Media's international operations. In addition, the IT industry
has experienced a significant downturn since the spring of 2001 and terrorist
attacks on September 11, 2001 have adversely affected the economy generally and
decreased air travel in particular. These developments have and will continue
to adversely affect participation and attendance at Key3Media's events, although
we are not able to quantify or reliably estimate the future impact that these
matters may have on its businesses, results of operations or financial
condition. As described in more detail in Item 2 of Part I of this Quarterly
Report, Key3Media has undertaken a strategic review of its operations and cost
structure and its board of directors has concluded that it cannot continue to
operate its businesses in the near term under its current capital structure and
that it would be in the best long-term interests of the holders of Key3Media's
shares and debt obligations to explore a possible restructuring (with or without
additional capital), sale, business combination and/or other reorganization
transaction which, if consummated could result in a change of control of
Key3Media. Therefore, Key3Media intends to commence a structured process to
explore these alternatives. As part of, or after, this process, Key3Media might
make a filing under Chapter 11 of the U.S. Bankruptcy Code. In addition, the
sections entitled "Item 1. Business - Certain Factors That May Affect our
Businesses" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Annual Report of Form 10-K for the
year ended December 31, 2001 filed by Key3Media with the SEC contain important
cautionary statements and a discussion of many of the factors that could
materially affect the accuracy of Key3Media's forward-looking statements and,
such statements and discussions, as well as others in any of Key3Media's other
SEC filings, are incorporated herein by reference.
Any subsequent written or oral forward-looking statements made by us or
any person acting on our behalf are qualified in their entirety by the
cautionary statements and factors contained or referred to in this section. We
do not intend or undertake any obligation to update any forward-looking
statements to reflect events or circumstances
3
after the date of this document or the date on which any subsequent
forward-looking statement is made or to reflect the occurrence of unanticipated
events.
4
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KEY3MEDIA GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
2001 2002
------------ -------------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 41,384 $ 18,550
Accounts receivable, net ................................. 47,032 28,349
Prepaid event expenses ................................... 4,540 7,969
Deferred income taxes .................................... 1,402 --
Prepaid insurance ........................................ 494 5,324
Other current assets ..................................... 2,723 4,018
----------- -----------
Total current assets ................................. 97,575 64,210
Property and equipment, net ................................... 18,812 12,210
Goodwill, net ................................................. 454,719 14,453
Other intangibles, net ........................................ 473,630 166,974
Deferred financing costs and other assets ..................... 11,973 10,222
----------- -----------
Total assets ......................................... $ 1,056,709 $ 268,069
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ......................................... $ 22,338 $ 17,764
Accrued expenses ......................................... 27,469 28,945
Deferred revenue ......................................... 62,982 49,353
Other current liabilities ................................ 1,660 1,812
----------- -----------
Total current liabilities ............................ 114,449 97,874
Deferred income taxes ......................................... 87,557 --
Long-term obligations (net of current maturities) ............. 370,000 370,000
Commitments and contingencies
Shareholders' equity (deficit):
Preferred stock .......................................... 30 29
Common stock ............................................. 681 685
Additional paid-in capital ............................... 476,474 476,285
Retained earnings (deficit) .............................. 17,414 (668,953)
Accumulated comprehensive loss ........................... (4,085) (4,356)
Deferred compensation .................................... (5,811) (3,495)
----------- -----------
Total shareholders' equity (deficit) ................. 484,703 (199,805)
----------- -----------
Total liabilities and shareholders' equity (deficit).. $ 1,056,709 $ 268,069
=========== ===========
See accompanying notes.
5
KEY3MEDIA GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
2001 2002 2001 2002
--------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net revenues:
Services ...................................................... $ 51,483 $ 36,820 $ 175,156 $ 110,002
Proceeds from insurance claim ................................. -- 1,562 -- 1,562
--------- --------- --------- ---------
51,483 38,382 175,156 111,564
Operating expenses:
Cost of production ............................................ 17,842 14,385 58,418 41,821
Selling, general and administrative ........................... 26,131 21,786 78,797 66,096
Staff reduction severance charges ............................. 308 744 308 1,584
Reduction of goodwill and other intangibles ................... -- 300,000 -- 300,000
Stock based compensation ...................................... (7,040) 553 (1,816) 1,278
Depreciation and amortization ................................. 10,406 4,468 29,172 16,398
--------- --------- --------- ---------
47,647 341,936 164,879 427,177
--------- --------- --------- ---------
Income (loss) from operations ...................................... 3,836 (303,554) 10,277 (315,613)
--------- --------- --------- ---------
Other income (expenses):
Interest expense .............................................. (9,780) (10,075) (35,118) (29,851)
Interest income ............................................... 257 28 2,736 342
Other income (expense), net ................................... (96) (205) 6,542 (380)
--------- --------- --------- ---------
(9,619) (10,252) (25,840) (29,889)
--------- --------- --------- ---------
Loss before income taxes, extraordinary item and cumulative
effect of accounting change ................................... (5,783) (313,806) (15,563) (345,502)
Income tax provision (benefit) ..................................... (2,132) 1,858 (4,645) (3,912)
--------- --------- --------- ---------
Loss before extraordinary item and cumulative effect of
accounting change ............................................. (3,651) (315,664) (10,918) (341,590)
Extraordinary loss on retirement of debt
(net of tax benefit of $3,220) ................................ -- -- (9,309) --
Cumulative effect of accounting change, net of tax - Note 7 ........ -- -- -- (344,615)
--------- --------- --------- ---------
Net loss .................................................. $ (3,651) $(315,664) $ (20,227) $(686,205)
========= ========= ========= =========
Net loss attributable to common shareholders:
Net loss ........................................................... $ (3,651) $(315,664) $ (20,227) $(686,205)
Accretion on convertible preferred stock ........................... -- (1,042) -- (3,123)
--------- --------- --------- ---------
Net loss attributable to common shareholders .................. $ (3,651) $(316,706) $ (20,227) $(689,328)
========= ========= ========= =========
Net loss per common share - Basic and Diluted:
Before extraordinary item and cumulative effect of
accounting change (after accretion on preferred stock) .... $ (0.05) $ (4.62) $ (0.16) $ (5.04)
Extraordinary loss on retirement of debt ...................... -- -- (0.14) --
Cumulative effect of accounting change ........................ -- -- -- (5.04)
--------- --------- --------- ---------
Net loss per common share ................................. $ (0.05) $ (4.62) $ (0.30) $ (10.08)
========= ========= ========= =========
Shares used in computing basic and diluted net loss per common
share ......................................................... 68,054 68,529 66,375 68,358
See accompanying notes.
6
KEY3MEDIA GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------
2001 2002
--------- ---------
(UNAUDITED)
(IN THOUSANDS)
Cash flows from operating activities:
Net loss ................................................................. $ (20,227) $(686,205)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Extraordinary loss on retirement of debt, net ........................ 12,529 --
Cumulative effect of accounting change ............................... -- 344,615
Reduction of goodwill and other intangibles .......................... -- 300,000
Depreciation and amortization ........................................ 29,172 16,398
Stock based compensation ............................................. (1,816) 1,278
Non-cash interest expense ............................................ 11,848 1,692
Loss on disposal of property and equipment ........................... -- 20
Foreign exchange loss ................................................ 191 32
Deferred income taxes ................................................ 1,593 (5,770)
Changes in operating assets and liabilities, net of effect from acquired
businesses:
Accounts receivable .................................................. 44,775 19,379
Prepaid event expenses ............................................... (901) (2,601)
Other current assets ................................................. 265 (5,603)
Other assets ......................................................... 6 59
Accounts payable ..................................................... 4,326 (4,576)
Accrued expenses ..................................................... (16,502) 1,192
Deferred revenue ..................................................... (25,533) (16,519)
Other liabilities .................................................... (16,922) (617)
--------- ---------
Total adjustments ................................................. 43,031 648,979
--------- ---------
Net cash provided by (used in) operating activities ............... 22,804 (37,226)
--------- ---------
Cash flows from investing activities:
Return of purchase price from acquired businesses ........................ -- 17,432
Acquisition of businesses, net of cash acquired .......................... (106,242) (1,865)
Purchase of property and equipment ....................................... (12,108) (546)
--------- ---------
Net cash provided by (used in) investing activities ............... (118,350) 15,021
--------- ---------
Cash flows from financing activities:
Proceeds from the exercise of options to purchase common stock ........... 693 --
Repayment of long-term obligations under credit facility ................. (300,000) --
Retirement of zero coupon senior debentures and accreted interest ........ (83,576) --
Proceeds from issuance of senior subordinated notes ...................... 300,000 --
Borrowings under revolving credit facility ............................... 110,000 --
Payments of costs associated with the issuance of long-term obligations .. (12,975) --
Payments associated with the issuance of preferred stock ................. -- (150)
--------- ---------
Net cash provided by (used in) financing activities ............... 14,142 (150)
--------- ---------
Effects of exchange rate changes on cash ..................................... (522) (479)
--------- ---------
Net decrease in cash and cash equivalents .................................... (81,926) (22,834)
Cash and cash equivalents at beginning of period ............................. 109,914 41,384
--------- ---------
Cash and cash equivalents at end of period ................................... $ 27,988 $ 18,550
========= =========
Supplemental cash flow disclosures:
Interest paid ............................................................ $ 22,618 $ 19,350
Income taxes paid ........................................................ $ 763 $ 149
Non-cash financing activities:
Additional paid-in capital resulting from stock issuance in connection
with a business acquired ............................................. $ 397 $ --
Conversion of preferred stock to common stock ............................ $ -- $ 163
See accompanying notes.
7
KEY3MEDIA GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
ADDITIONAL RETAINED ACCUMULATED TOTAL
PREFERRED COMMON PAID-IN EARNINGS COMPREHENSIVE COMPREHENSIVE DEFERRED
STOCK STOCK CAPITAL (DEFICIT) INCOME (LOSS) INCOME (LOSS) COMPENSATION TOTAL
--------- ------ ---------- --------- ------------- ------------- ------------ ---------
(UNAUDITED)
(IN THOUSANDS)
Balance at December 31, 2001 ..... $ 30 $681 $ 476,474 $ 17,414 $(4,085) $ (5,811) $ 484,703
Offering costs related to
preferred stock issuance in
December 2001 ................. -- -- (150) -- -- -- (150)
Conversion of preferred stock to
common stock .................. (1) 2 161 (162) -- -- --
Forfeiture of stock options ...... -- -- (349) -- -- 349 --
Adjustment in fair value of
options requiring variable
accounting .................... -- -- (689) -- -- 689 --
Amortization of deferred
compensation .................. -- -- -- -- -- 1,278 1,278
Issuance of common stock to
acquire a business ............ -- 2 838 -- -- -- 840
Foreign currency translation
adjustment .................... -- -- -- -- (271) $ (271) -- (271)
Net loss ......................... -- -- -- (686,205) -- (686,205) -- (686,205)
---- ---- --------- --------- ------- --------- --------- ---------
Balance at September 30, 2002 .... $ 29 $685 $ 476,285 $(668,953) $(4,356) $(686,476) $ (3,495) $(199,805)
==== ==== ========= ========= ======= ========= ========= =========
See accompanying notes.
8
KEY3MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
These unaudited condensed consolidated financial statements have been
prepared by the management of Key3Media Group, Inc. (the "Company") in
accordance with generally accepted accounting principles for interim financial
information and the applicable rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all information and
footnotes required by generally accepted accounting principles for complete
financial statements. However, in the opinion of management, the interim
financial statements reflect all adjustments necessary for a fair presentation
of the results for the periods presented. The results of operations for the
interim periods are not necessarily indicative of the results of operations to
be expected for the full year.
These unaudited condensed consolidated financial statements should be
read together with the Company's Annual Report on Form 10-K for the year ended
December 31, 2001 and the audited consolidated financial statements contained
therein.
The Company is a leading producer of business-to-business events for
the information technology industry, principally trade shows, conferences, and
customized marketing and education programs with operations in the United
States, Canada, Europe and Japan.
Certain reclassifications have been made to prior period amounts to
conform to current period presentation.
The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might occur as a result of the
process described in Note 5.
2. RECENT ACCOUNTING PRONOUNCEMENT
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No.142 "Goodwill and Other
Intangible Assets," which establishes financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No.17,
"Intangible Assets." The Company adopted SFAS No.142 beginning with the first
quarter of 2002. See Note 7 for further discussion on the Company's adoption of
SFAS No.142.
In October 2001, FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of," however it retains the fundamental provisions of SFAS
No. 121 related to the recognition and measurement of the impairment of
long-lived assets to be "held and used." In addition, SFAS No. 144
9
KEY3MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
provides, among other things, more guidance on estimating cash flows when
performing a recoverability test and establishes more restrictive criteria to
classify an asset as "held for sale." The Company's adoption of the provisions
of SFAS No. 144 on January 1, 2002 did not effect its financial position or
results of operations.
In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical
Corrections." For most companies, SFAS No.145 will require, among other things,
gains and losses on extinguishments of debt to be classified as income or loss
from continuing operations rather than as extraordinary items as previously
required under SFAS No. 4. The Company will adopt the provisions of SFAS No. 145
related to the rescission of SFAS No. 4 on January 1, 2003. At such time, the
Company will reclassify the extraordinary loss on extinguishments of debt to
continuing operations for prior periods. With regards to the other provisions of
SFAS No. 145, the Company has adopted them and such adoption did not effect its
financial position or results of operations.
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses financial and
reporting for costs associated with exit or disposal activities and 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)". The principal difference
between SFAS No. 146 and EITF No. 94-3 relates to the requirements for
recognition of a liability for a cost associated with an exit or disposal
activity. SFAS No. 146 requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred while
EITF No. 94-3 requires that the liability be recognized at the date of an
entity's commitment to an exit plan. The provisions of SFAS No. 146 are
effective for exit or disposal activities that are initiated after December 15,
2002, with early application encouraged. The Company adopted SFAS No. 146 in the
second quarter of 2002.
3. COMPUTATION OF NET INCOME (LOSS) PER SHARE
Basic earnings per share are calculated using the weighted average of
the number of common shares outstanding.
Diluted earnings per share are calculated using the weighted average of
the number of common shares outstanding plus the dilutive effect of stock
options, warrants and preferred stock, calculated using the treasury method.
These dilutive securities were excluded from the calculation of diluted net
income (loss) per share as the effect of their inclusion would have been
anti-dilutive.
10
KEY3MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
A summary of the shares used to compute earnings per common share is as
follows:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- -------------------------
2001 2002 2001 2002
--------- --------- --------- ---------
Net loss ............................................. $ (3,651) $(315,664) $ (20,227) $(686,205)
Accretion on convertible preferred stock ............. -- (1,042) -- (3,123)
--------- --------- --------- ---------
Net loss attributable to common shareholders ......... $ (3,651) $(316,706) $ (20,227) $(689,328)
--------- --------- --------- ---------
Weighted average common shares ....................... 68,054 68,529 66,375 68,358
--------- --------- --------- ---------
Denominator for basic calculation .................... 68,054 68,529 66,375 68,358
--------- --------- --------- ---------
Net loss per common share - basic .................... $ (0.05) $ (4.62) $ (0.30) $ (10.08)
========= ========= ========= =========
Weighted average effect of anti-dilutive securities:
Warrants .......................................... -- -- -- --
Stock options ..................................... -- -- -- --
Preferred stock ................................... -- -- -- --
--------- --------- --------- ---------
Total weighted average effect of anti-dilutive
securities ........................................ -- -- -- --
--------- --------- --------- ---------
Denominator for diluted calculation .................. 68,054 68,529 66,375 68,358
--------- --------- --------- ---------
Net loss per common share - diluted .................. $ (0.05) $ (4.62) $ (0.30) $ (10.08)
========= ========= ========= =========
4. COMPREHENSIVE LOSS
The components of comprehensive loss were as follows:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- -------------------------
2001 2002 2001 2002
--------- --------- --------- ---------
Net loss ................................ $ (3,651) $(315,664) $ (20,227) $(686,205)
Other comprehensive adjustment:
Foreign currency translation adjustment . (166) 82 (296) (271)
--------- --------- --------- ---------
Total comprehensive loss ................ $ (3,817) $(315,582) $ (20,523) $(686,476)
========= ========= ========= =========
11
KEY3MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
DECEMBER 31, SEPTEMBER 30,
2001 2002
------------ -------------
Borrowings under revolving credit facility ..... $ 80,000 $ 80,000
11.25%, senior subordinated notes .............. 290,000 290,000
-------- --------
370,000 370,000
Less current maturities ........................ -- --
-------- --------
Total .......................................... $370,000 $370,000
======== ========
On June 26, 2001, the Company issued $300,000 of unsecured senior
subordinated notes (the "Notes") that mature on June 15, 2011. The Notes bear
interest at a rate of 11.25% per annum, payable semi-annually on June 15 and
December 15 of each year. The net proceeds from the offering of the Notes were
approximately $292,000, after deducting the underwriting discount and other sale
expenses. These net proceeds and cash on hand were used by the Company to repay
its existing term loan bank borrowings and to repurchase and retire zero coupon
debentures issued in August 2000 in connection with the spin-off from Ziff-Davis
Inc. ("ZDI").
The Notes may be redeemed beginning on June 15, 2006 at an initial
redemption price of 105.625% of the principal amount, plus accrued and unpaid
interest. The redemption price declines ratably each year after 2006 to 100% of
their principal amount, plus accrued and unpaid interest to the redemption date,
beginning on June 15, 2009. In addition, the Company may redeem a portion of the
Notes in one or more redemptions prior to June 15, 2004 using certain equity
proceeds as long as the aggregate principal amount of the Notes outstanding
after each redemption is at least $195,000. The Notes are guaranteed by the
Company's wholly owned subsidiaries, Key3Media Events, Inc. ("Key3Media
Events"), Key3Media Von Events Inc. and Key3Media BCR Events, Inc., as to
principal, premium, if any, and interest. In addition, the Notes are
subordinated to all of the Company's senior indebtedness (as defined) and will
be structurally subordinated to all liabilities of the subsidiaries that do not
guarantee the Notes. If the Company acquires new subsidiaries, in most cases
they will be required to guarantee the Notes. The Notes contain various
financial covenants including, amongst other things, (i) limitations on
dividends and other restricted payments, (ii) limitations on the incurrence of
indebtedness, and (iii) limitations on the sale or exchange of assets.
Concurrent with the issuance of the Notes and repayment of existing
term loan bank borrowings, the Company amended and restated its bank credit
facility previously entered into on August 3, 2000 to eliminate the term loan
facility and increase the revolving credit facility under which its syndicate of
banks committed to lend up to $150,000 for general corporate purposes, which
could include acquisitions (the "Amended and Restated Credit Facility"). The
12
KEY3MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Company may borrow, repay and re-borrow under the increased revolving loan
facility until June 26, 2004, at which time it must repay any outstanding
amounts. Loans under the Amended and Restated Credit Facility are guaranteed by
the Company's wholly owned subsidiaries (other than foreign and unrestricted
subsidiaries, as defined) and are secured by substantially all of their assets.
Subject to certain conditions, our revolving credit facility does not
prohibit us from borrowing on a term loan basis an aggregate principal amount of
up to $200,000. These borrowings can be senior and can share in the collateral
securing the revolving credit facility. In addition, we may be required to
prepay any term loans under this part of the credit facility from the net cash
proceeds of assets sales outside the ordinary course of our business, the net
cash proceeds of additional debt and a portion of our excess cash flow (as
defined in our amended and restated credit agreement). No lender has committed
to lend us money under this provision.
At the Company's election, loans under the Amended and Restated Credit
Facility will bear interest at a margin over either (1) a base rate equal to the
higher of the federal funds rate plus 1/2% and Citibank, N.A.'s base rate or (2)
the Eurodollar rate (as defined). The margin that the Company must pay will vary
between 1.00% and 3.25% depending on which rate the Company chooses as its base
rate and the ratio of its total debt to EBITDA (earnings before interest, taxes,
depreciation and amortization) as defined in the Amended and Restated Credit
Facility. The Amended and Restated Credit Facility contains various financial
covenants including, amongst other things, (i) limitations on dividends, (ii)
limitations on the incurrence of indebtedness, (iii) limitations on the sale or
exchange of assets and (iv) maintenance of minimum leverage and interest
coverage ratio.
On November 27, 2001, the Company raised $52,000 through the private
placement of 1,000 shares of Series A 5.5% Convertible Redeemable Preferred
Stock and 1,080 shares of Series B 5.5% Convertible Redeemable Preferred Stock,
in each case for $25.00 per share. Concurrent with the issuance of this
convertible preferred stock, the Company repaid $30,000 of the borrowings under
the Amended and Restated Credit Facility and further amended that facility to
replace its existing financial covenants to maintain a minimum interest coverage
ratio and maximum senior debt and total debt to pro forma EBITDA ratios with new
covenants that require it to maintain a ratio of pro forma EDITDA to fixed
charges (which will include interest, domestic taxes and annual capital
expenditures of up to $5,000) of at least 1.1 to 1 and to limit total senior
debt to $120,000; total debt to $410,000 and annual capital expenditures to
$15,000. The revised covenants will remain in effect until there have been two
consecutive quarters in which the Company's pro forma EDITDA for the previous
twelve months is equal to or greater than $85,000, after which time the
preexisting covenants will be reinstated.
On June 26, 2002, the Company further amended its Amended and Restated
Credit Facility. This amendment modifies the existing financial covenants until
April 1, 2003, including replacing the fixed charge coverage ratio with minimum
quarterly EBITDA requirements through March 31, 2003, and limits total senior
debt to $100,000 and total debt to
13
KEY3MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
$390,000. In addition, the margin percentage that the Company must pay on its
loans under the Amended and Restated Credit Facility changed to a range of 1.00%
to 4.00% from the prior range of 1.00% to 3.25%, depending on which rate the
Company chooses as its base ratio and the ratio of its total debt to EBITDA, as
defined.
The Company was in compliance with the financial covenants included in
its Amended and Restated Credit Facility as of September 30, 2002; primarily
due to the inclusion in operating income of insurance proceeds for claims
arising from losses incurred as a result of the events of September 11, 2001,
the reversal of $1,755 of accruals recorded in 2001 for production costs at the
COMDEX/Fall 2001 tradeshow which were in excess of the production costs actually
incurred at that tradeshow and, to a lesser extent, continuing benefits from the
cost reduction and expense control programs initiated during the second half of
2001. However, because of the continuing difficulties being experienced in the
industries the Company serves, it is likely the Company will not be in
compliance with these financial covenants for the quarter ended December 31,
2002. The Company is currently negotiating with its lenders to obtain waivers
of certain non-financial technical covenant defaults that currently exist and
other modifications to the Amended and Restated Credit Facility. In addition,
there is substantial risk that the Company will be unable to pay the interest
payment on its Notes due on December 16, 2002, and it is in the early stages of
discussing this development with some of the larger holders of the Notes.
If the Company becomes noncompliant with its financial covenants in its
Amended and Restated Credit Facility and is unable to successfully modify and
amend those financial covenants or is unsuccessful in obtaining waivers with
respect to its noncompliance, the Company's lenders have the option to require
the Company to immediately repay all of its borrowings under the Amended and
Restated Credit Facility. The Company does not currently have sufficient funds
to make such a repayment. In addition, any acceleration of the borrowings under
the Company's Amended and Restated Credit Facility or failure to pay any
scheduled interest payments on its Notes would be an event of default in respect
of its Notes and could result in the acceleration of the maturity of those Notes
(although the subordination provisions of the Notes would require the prior
payment of the bank borrowings). The Company does not currently have sufficient
funds to repay its Notes in full.
At September 30, 2002, the Company had $18,231 of unused borrowings
under its Amended and Restated Credit Facility, after considering a $1,769
letter of credit issued in connection with a facility lease agreement.
6. BUSINESS COMBINATIONS
On January 7, 2002, the Company completed its acquisition of ExpoNova
Events & Exhibitions (ExpoNova) previously announced on November 20, 2001. The
Company paid an
14
KEY3MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
estimated initial purchase price of $3,360 in cash and issued 178 shares of its
common stock with a fair value approximating $840 for a total purchase price of
$4,200. Additionally, in connection with this acquisition, ExpoNova retained and
subsequently exercised a right to require the Company to purchase another
tradeshow and conference business subject to certain conditions. This exercise
of this put resulted in no additional payments as consideration by the Company
when it completed this purchase transaction on April 9, 2002. The initial
purchase price was determined by applying a multiple to the average EBITDA (as
defined in the purchase agreement) for the years 2000, 2001, and 2002. For the
purpose of the closing, an estimate of 2001 and 2002 EBITDA was used to
calculate the estimated initial purchase price with ten percent of the total
cash and securities given as consideration placed into escrow. Upon the final
determination of the purchase price, the escrow amount and additional amounts,
if any, due to each party were or will be distributed as required by the
purchase agreement.
On September 10, 2001, the Company, in three separate transactions,
acquired: (i) the Next Generation Networks and Next Generation Ventures
tradeshows and conferences (the "NGN Assets"), (ii) the Opticon and VoiceCon
tradeshows and conferences and the Business Communications Review magazine (the
"BCR Assets"); and (iii) the Voice on the Net Conferences and Session Initiation
Protocol Summits (collectively, the "Pulver Assets"). Each of the BCR Assets and
the NGN Assets relate to events that target the networking industry while the
Pulver Assets relate to events that target the networking and Internet Protocol
communications industries. The Company acquired these assets to strengthen its
presence in the networking trade show and event business.
In connection with each of these acquisitions, the initial purchase
price was determined by applying a multiple to the average EBITDA (as defined in
the purchase agreements) for the years 2000 and 2001 attributable to each group
of assets acquired. For purposes of each acquisition closing, an estimate of
2001 EBITDA was used to calculate the estimated initial purchase price with a
portion of this estimated initial purchase price placed into an escrow account
pending final determination of the initial purchase price based upon audited
financial results for 2001. Upon the final determination of the initial purchase
price, the escrow amounts and additional amounts, if any, due each party will be
distributed as required by the purchase agreements. The following data shows the
estimated initial purchase price for each acquisition described above and the
respective changes for each purchase price from the date of acquisition to
September 30, 2002:
PULVER BCR NGN EXPONOVA TOTAL
--------- --------- --------- --------- ---------
Cash and cash equivalents ................................ $ -- $ -- $ -- $ 1,706 $ 1,706
Accounts receivable and prepaid expenses ................. 654 1,314 1,036 2,046 5,050
Fixed assets, net ........................................ -- -- -- 163 163
Identifiable intangible assets ........................... 7,245 -- 3,386 -- 10,631
Goodwill ................................................. 33,965 12,339 41,195 4,954 92,453
Accounts payable and accrued expenses .................... -- (565) (13) (1,780) (2,358)
Deferred revenue ......................................... (2,772) (1,452) (3,044) (2,889) (10,157)
Common stock issued ...................................... -- -- -- (840) (840)
--------- --------- --------- --------- ---------
Total cash paid .......................................... 39,092 11,636 42,560 3,360 96,648
15
KEY3MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PULVER BCR NGN EXPONOVA TOTAL
--------- --------- --------- --------- ---------
Working capital adjustment included in purchase price .... 2,410 702 2,022 -- 5,134
Common stock issued ...................................... -- -- -- 840 840
--------- --------- --------- --------- ---------
Purchase price at September 30, 2002 ..................... $ 41,502 $ 12,338 $ 44,582 $ 4,200 $ 102,622
========= ========= ========= ========= =========
Estimated initial purchase price time of acquisition ..... $ 59,957 $ 13,765 $ 44,582 $ 4,200 $ 122,504
Net return of purchase price charged to Goodwill in
fiscal year 2001 ................................. (2,450) -- -- -- (2,450)
Net return of purchase price charged to Goodwill in
fiscal year 2002 ................................. (16,005) (1,427) -- -- (17,432)
--------- --------- --------- --------- ---------
Purchase price at September 30, 2002 ..................... $ 41,502 $ 12,338 $ 44,582 $ 4,200 $ 102,622
========= ========= ========= ========= =========
The following table shows the portion of the estimated initial purchase
price currently held in escrow for each acquisition described above as of
September 30, 2002:
PULVER BCR NGN EXPONOVA TOTAL
-------- -------- -------- -------- --------
Balance as of December 31, 2001 ......................... $ 20,250 $ 1,377 $ 4,458 $ 420 $ 26,505
Return of purchase price to Company ..................... (16,005) (1,427) -- -- (17,432)
Payment of escrow proceeds to Seller .................... (4,245) -- -- -- (4,245)
Additional escrow funding by Seller ..................... -- 50 4,373 -- 4,423
Reduction in fair value of common stock held ............ -- -- -- (82) (82)
-------- -------- -------- -------- --------
Balance as of September 30, 2002 ........................ $ -- $ -- $ 8,831 $ 338 $ 9,169
======== ======== ======== ======== ========
The estimated initial purchase price was preliminarily allocated based
on the estimated fair values of the assets acquired at their date of purchase
subject to final determination of the initial purchase price. This preliminary
allocation resulted in total acquired identifiable intangible assets related
primarily to exhibitor lists of $10,631, which are being amortized on a
straight-line basis over 3 years. The resulting total goodwill of $92,453 has
not been amortized but has been subjected to impairment testing in accordance
with SFAS No. 142. See note 7.
The Pulver asset purchase agreement includes provisions for purchase
price adjustments in each of 2002, 2003 and 2004. In each instance, EBITDA for
the year will be compared to the average EBITDA attributable to the Pulver
Assets for 2000 and 2001 (the "Base EBITDA"). If the EBITDA for any such year
exceeds the Base EBITDA, then the purchase price will increase by an amount
equal to 50% of such excess multiplied by 8.75; conversely, if the EBITDA for
any such year is less than the Base EBITDA, then the purchase price will
decrease by an amount equal to 50% of the shortfall multiplied by 8.75.
Notwithstanding the foregoing, the maximum increase or decrease in purchase
price for any year is $6,000 provided however, if the price increases as a
result of the EBITDA for 2002, then the maximum increase or decrease will be
$5,000 for each subsequent year. During the third quarter ended September 30,
2002, the Company and the sellers of the Pulver assets agreed to eliminate the
provisions related to purchase price adjustments for 2002, 2003 and 2004 and set
a final purchase price of $41,502; accordingly, the balance of funds held in
escrow were distributed.
16
KEY3MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In each of the NGN and BCR purchase agreements there is an incentive
provision to increase the purchase price of the assets acquired. To the extent
that (i) revenues for the year 2003 are greater than the average revenue for
2000 and 2001, and provided that (ii) the percentage that EBITDA bears to
revenue for 2003 is not less than the comparable percentage of EBITDA to average
revenue for 2000 and 2001, then additional purchase consideration will be due
each seller. For the portion of revenue increase up to $3,000, the additional
consideration will be the amount of the increase; for that portion of the
revenue increase from $3,001 to $6,000 the additional consideration will be 1.25
times the amount of the increase; and for that portion of the increase from the
above $6,000 the additional increase will be 1.5 times the amount of the
increase.
As of September 30, 2002, the purchase prices for BCR and NGN were
determined resulting in a final determination of purchase price for BCR; however
in connection with the final determination of purchase price for NGN, the
Company and the sellers of NGN agreed to a preliminary final purchase price
based upon applying a multiple to the average EBITDA for years 2000 and 2001
which did not include any proceeds from a pending insurance claim for event
interruption and cancellation submitted by NGN's sellers for one of its events
which they believed was impacted by the events that occurred on September 11,
2001. The determination of this preliminary final purchase price required NGN's
sellers to deposit $4,373, into the escrow as a potential return of purchase
price pending resolution of the insurance claim previously noted. On September
20, 2002, a proof of loss was accepted by the insurance company and proceeds
from the claim were subsequently received by the Company totaling $1,562. Final
distribution of the amounts held in escrow will occur upon execution of an
agreement and release between the Company's wholly owned subsidiary, Key3Media
Events, and the sellers of NGN and receipt by the escrow agent of distribution
instructions from the Company and the sellers of NGN.
These acquisitions have been recorded using the purchase method of
accounting. Accordingly, the accompanying consolidated statements of operations
do not include any revenues and expenses related to these acquisitions prior to
the respective closing dates.
On June 1, 2001, the Company's wholly owned subsidiary, Key3Media
Events, acquired and received from SOFTBANK America Inc. ("SB America") all the
outstanding equity shares of SOFTBANK Forums Inc. ("SB Forums") for a purchase
price equal to (i) ten times the EBITDA of SB Forums for 2001 minus (ii) $450.
The Company paid the purchase price in shares of its common stock, which were
valued at $10 per share for this purpose. The Company initially issued 2,955
shares of its common stock to SB America, which was based on an estimate that SB
Forums' EBITDA for 2001 will be $3,000. Based on SB Forums' EBITDA for 2001, the
Company was not required to issue any additional shares in connection with this
acquisition.
Because SB America owned in excess of 50% of the voting common shares
of the Company at the June 1, 2001 closing of this transaction and continued to
be a majority shareholder through the record date for voting on the transaction,
the Company recorded the acquisition as of this closing date. Accordingly, the
results of SB Forums are included in the
17
KEY3MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Company's statement of operations beginning on June 1, 2001. Furthermore, as
this transaction is between companies under common control, this business
combination has been recorded using the historical cost basis of the assets and
liabilities acquired; consequently, the fair value of common shares issued of
approximately $29,800 was reduced by $29,403 to equal the historical cost of the
net assets acquired of $397. This reduction in value was accomplished by
adjusting additional paid-in capital.
Following are the Company's unaudited pro forma results for the nine
months ended September 30, 2001 and 2002, respectively, assuming the
acquisitions described above occurred on January 1, 2001:
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
------------------------
2001 2002
--------- ---------
Net revenue ........................................... $ 197,950 $ 111,564
Loss before extraordinary item and cumulative effect .. (11,858) (341,590)
Net loss .............................................. (21,167) (686,205)
Loss before extraordinary item and cumulative effect
per common share - diluted .................... (0.17) (5.04)
Net loss per common share - diluted ................... (0.31) (10.08)
These pro forma results of operations have been prepared for
comparative purposes only and are not necessarily indicative of the results of
operations which actually would have resulted had the acquisitions occurred on
January 1, 2001.
7. GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF STATEMENT NO. 142
In July 2001, FASB issued SFAS No. 142 "Goodwill and Other Intangible
Assets," which establishes financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion No. 17,
"Intangible Assets". The Company adopted SFAS No. 142 beginning with the first
quarter of 2002. SFAS No. 142 requires that goodwill and intangible assets that
have indefinite useful lives not be amortized but, instead, tested at least
annually for impairment while intangible assets that have finite useful lives
continue to be amortized over their respective useful lives. Accordingly, the
Company ceased amortization of all goodwill, which is its only intangible asset
with an indefinite useful life, on January 1, 2002, and will continue to
amortize its intangible assets with finite useful lives, consisting primarily of
trade names and advertiser and exhibitor lists, over their respective useful
lives.
SFAS No. 142 requires that goodwill and other intangibles be tested for
impairment using a two-step process. The first step is to determine the fair
value of the reporting unit, which may be calculated using a discounted cash
flow methodology, and compare this value to its carrying value. If the fair
value exceeds the carrying value, no further work is required and no impairment
loss would be recognized. The second step is an allocation of the fair value of
18
KEY3MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
the reporting unit to all of the reporting unit's assets and liabilities under a
hypothetical purchase price allocation. Based on the evaluation performed to
adopt SFAS No. 142, the Company recorded a non-cash charge of $344,615, net of
tax benefit of $80,385, to reduce the carrying value of goodwill and other
intangibles related to the COMDEX reporting unit to their estimated fair value.
This charge is nonoperational in nature and is reported as a cumulative effect
of an accounting change in the accompanying Consolidated Statement of
Operations. The Company utilized a combination of discounted cash flow
methodology and relative market measures to determine fair value.
As a result of the strategic review of its operations undertaken during
the third quarter ending September 30, 2002, which lead to the announced
reduction and consolidation of its event schedule for 2003 and closing of its
regional office in Needham, Massachusetts, the Company conducted a review of its
goodwill and intangible assets and recorded an additional non-cash charge of
$300,000 to reduce the value of goodwill and other intangibles related to its
portfolio of reporting units to their estimated fair value. The strategic review
and resulting charge recognizes the sustained economic downturns experienced in
the information technology and networking industries serviced by the Company as
shown by the significant decline in the results of operations of the Company. A
combination of discounted cash flow methodology and relative market measures was
used by the Company to determine fair value.
In the event that the economic downturn continues for a prolonged
period of time, or conditions change as a result of the process currently
contemplated as discussed in Note 5, the value of goodwill and intangible assets
may vary from current estimates; accordingly, additional impairment charges may
be recorded in future periods.
The following table reflects the Company's comparative net loss before
the cumulative effect of accounting change and goodwill amortization under SFAS
No. 142:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- ---------------------------
2001 2002 2001 2002
--------- ----------- ---------- -----------
Reported loss before cumulative effect of accounting
change .......................................... $ (3,651) $ (315,664) $ (20,227) $ (341,590)
Add back: Goodwill amortization, net of taxes ........ 2,025 -- 6,760 --
--------- ----------- ---------- -----------
Adjusted loss before cumulative effective of
accounting change ............................... (1,626) (315,664) (13,467) (341,590)
Cumulative effect of accounting change ............... -- -- -- (344,615)
--------- ----------- ---------- -----------
Adjusted net loss .................................... $ (1,626) $ (315,664) $ (13,467) $ (686,205)
========= =========== ========== ===========
Basic and diluted earnings per common share:
Reported loss before cumulative effect of accounting
change (after accretion on preferred stock) ..... $ (0.05) $ (4.62) $ (0.30) $ (5.04)
Goodwill amortization, net of taxes .................. 0.03 -- 0.10 --
--------- ----------- ---------- -----------
19
KEY3MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- ---------------------------
2001 2002 2001 2002
--------- ----------- ---------- -----------
Adjusted loss before cumulative effect of accounting
change .......................................... (0.02) (4.62) (0.20) (5.04)
Cumulative effect of accounting change ............... -- -- -- (5.04)
--------- ----------- ---------- -----------
Adjusted net loss .................................... $ (0.02) $ (4.62) $ (0.20) $ (10.08)
========= =========== ========== ===========
The following table displays the intangible assets that continue to be
subject to amortization and aggregate amortization expense and intangible assets
not subject to amortization:
AS OF SEPTEMBER 30, 2002
------------------------------------------
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION NET
-------------- ------------ --------
Intangible assets subject to amortization:
Trade names ................................ $418,000 $259,408 $158,592
Advertiser and exhibitor lists ............. 10,631 3,835 6,796
Other ...................................... 3,172 1,586 1,586
-------- -------- --------
431,803 264,829 166,974
Intangible assets not subject to amortization:
Goodwill ................................... 14,453 -- 14,453
-------- -------- --------
Total ........................................... $446,256 $264,829 $181,427
======== ======== ========
Estimated amortization expense:
For the year ended 12/31/02 ................ $ 11,604
For the year ended 12/31/03 ................ $ 8,618
For the year ended 12/31/04 ................ $ 7,243
For the year ended 12/31/05 ................ $ 4,880
For the year ended 12/31/06 ................ $ 4,880
The following table displays the changes in the gross carrying amounts
of goodwill by brand for the nine months ended September 30, 2002:
COMDEX FORUMS PULVER NGN OTHER TOTAL
--------- --------- --------- --------- --------- ---------
Balance as of December 31, 2001 ...... $ 277,642 $ 160,424 $ 49,970 $ 41,195 $ 13,766 $ 542,997
Goodwill acquired during the year .... -- -- -- -- 4,954 4,954
Adjustment to purchase price ......... -- -- (16,005) -- (1,427) (17,432)
Impairment losses .................... (277,642) -- -- -- -- (277,642)
Reduction of goodwill ................ -- (158,820) (27,000) (41,195) (9,805) (236,820)
Write off of fully amortized balance . -- (1,604) -- -- -- (1,604)
--------- --------- --------- --------- --------- ---------
Balance as of September 30, 2002 ..... $ -- $ -- $ 6,965 $ -- $ 7,488 $ 14,453
========= ========= ========= ========= ========= =========
8. STAFF REDUCTION SEVERANCE CHARGES
In the second half of 2001, the Company initiated several cost
reduction and expense containment programs that reduced its temporary employment
costs, travel and entertainment
20
KEY3MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
expenses and most significantly, its total employment costs through staff
reductions. The Company has continued these cost reductions efforts in 2002
through reviewing its organizational structure and consolidating certain
operations.
On July 26, 2002, the Company announced that it was undertaking a
strategic review of its operations in response to the sustained economic
downturns being experienced in the information technology, networking and trade
show industries. On September 18, 2002, the Company announced the completion of
the initial phase of its strategic business review which includes a
consolidation of the 2003 event schedule and the closing of its regional office
in Needham, Massachusetts. As a result of these actions and previously untaken
cost reduction efforts in the first half of 2002, the Company recorded charges
of $744 and $1,584 for the three and nine month periods ending September 30,
2002, respectively. These charges are classified in the Consolidated Statement
of Operations as "Staff Reduction Severance Charges" and related to termination
and benefit costs incurred as a result of staff reductions.
The following table displays a rollforward of the accrual balance
related to the Staff Reduction Severance Charges:
AMOUNT
-------
Balance as of December 31, 2001 .... $ 1,100
Accruals / Charges ............ 1,584
Payments / Utilization ........ (1,837)
-------
Balance as of September 30, 2002 ... $ 847
=======
In connection with the announced closure of the regional office in
Needham, Massachusetts, the Company anticipates that it will incur additional
staff reduction severance and other charges during the fourth quarter ended
December 31, 2002.
9. COMMITMENTS AND CONTINGENCIES
On August 31, 2001, Key3Media Events provided notice of termination of
its then existing leased office space in Needham, Massachusetts to the landlord
of the existing space. The annual rental payments (net of operating expenses)
for the prior space were approximately $1,400. The Company entered into a lease
for new office space in Needham and relocated to its new offices on October 1,
2001. The Company estimates that its total annual occupancy costs under the new
lease will be approximately $1,700 greater than those under the prior lease. The
landlord of the prior office space has taken the position that Key3Media Events
is in breach of the lease agreement and that it did not have the right to
terminate the lease. On or about November 6, 2001, Interface Group -
Massachusetts, LLC, the landlord under the prior lease, sued Key3Media Events in
the Superior Court, County of Norfolk, Commonwealth of Massachusetts for breach
of contract, breach of the implied covenant of good faith and fair dealing and
violations of Mass. Gen L. c. 93A (unfair and deceptive acts and practices). The
21
KEY3MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
landlord has requested payment of rent for the remainder of the term of the
lease in an amount in excess of $6,500, treble damages, attorneys' fees, costs
and expenses, pre-judgment interest and costs of suit. In December 2001,
Key3Media Events filed an answer and counterclaim to the Interface complaint and
a motion to dismiss the Mass. Gen L. c. 93A claim. The counterclaim included
causes of action for (i) breach of contract, (ii) breach of implied covenant of
good faith and fair dealing, (iii) tortious interference with business
relationship, (iv) trespass, (v) breach of the covenant of quiet enjoyment and
constructive eviction, (vi) violation of Mass. Gen L. c. 93A, (vii) a request
for declaratory relief, (viii) civil conspiracy and (ix) fraud. In February
2002, Interface filed an opposition to motion to dismiss and an amended
complaint alleging breach of contract, breach of implied covenant of good faith
and fair dealing and violations of Mass. Gen L. c. 93A. Also in February 2002,
Key3Media Events filed an answer and counterclaim to the amended complaint and a
motion to dismiss the Mass. Gen L. c. 93A claim and Interface filed a motion to
dismiss counts (iii), (v), (vi), (viii) and (ix) of the counterclaim. In March
2002, Interface filed a second amended complaint adding a claim for trustee
process and to add Fleet Bank of Massachusetts and Citizens Bank of
Massachusetts as trustee defendants. Interface also filed a motion for Ex Parte
Approval of Trustee Process Attachment. The court denied the ex parte motion,
however the court subsequently held a hearing at which it found that Interface
had established a reasonable likelihood of prevailing on its claims and it
awarded a trustee attachment in the amount of $711 representing rent for the
period of October 2001 through May 2002. On September 26, 2002 Interface was
awarded an attachment on certain of Key3Media Events' assets in the amount of
$711 located in Massachusetts and on or before October 15, 2002, Interface
attached these assets. The value of these assets is currently in dispute. On
August 21, 2002, Interface filed a parallel action against Key3Media Events in
the Superior Court, County of Los Angeles, State of California. Key3Media Events
moved to have the California action dismissed or stayed. On October 2, 2002,
with the exception of any attachment proceedings in California, the California
action was stayed. Thereafter, Interface applied for and received a right to
attach up to $711 of Key3Media Events' assets in California. Based upon the
dispute as to the value of the assets attached in Massachusetts, on November 5,
2002, the California court stayed Interface's right to execute the attachment of
Key3Media Events' assets in California. On October 12, 2002, Interface filed a
motion with the court in Massachusetts to increase the attachment amount to the
full amount of rent claimed by Interface.
Key3Media Events is the plaintiff and counter-defendant in a case filed
October 18, 2000, in the Eighth Judicial District Court, Clark County, Nevada.
The suit arises out of a dispute between Key3Media Events, Inc. on the one hand,
and the Venetian Casino Resort, LLC, and Interface Group-Nevada, Inc., on the
other hand, concerning COMDEX/Fall. Key3Media Events initiated the action,
seeking damages and injunctive relief against defendants for their alleged
actual and threatened breaches of lease, meeting space, and credit extension
agreements in connection with the COMDEX/Fall 2000 show. The Venetian and
Interface Group-Nevada counter sued for compensatory damages "in excess of
$10,000" based on an asserted breach of an alleged oral agreement to host
keynote speeches at The Venetian, asserted breach of an alleged agreement not to
sublease certain facilities, intentional misrepresentation, and breach of the
implied covenant of good faith and fair dealing. The counterclaims include a
prayer for punitive damages. On October 19, 2001, the counter-defendants
specified their alleged damages
22
KEY3MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
in their supplemental response to plaintiff's third request for production of
documents. The response alleged damages of over $3,000 arising from breaches
related to COMDEX/Fall 2000 and over $2,000 arising from breaches related to
COMDEX/Fall 2001. On July 22, 2002, Key3Media Events sought and was granted
leave to amend its complaint. On July 23, 2002, Key3Media Events filed its first
amended complaint. The amended complaint included causes of action for
declaratory relief, injunctive relief, breach of contract, tortuous
interference, civil conspiracy, intentional misrepresentation/fraud, predatory
price fixing and restraint of trade. The amended complaint seeks injunctive and
declaratory relief, compensatory damages, punitive damages, treble damages,
interest and attorneys' fees. On July 29, 2002, the Venetian and Interface
Group-Nevada, Inc. filed a motion to dismiss the intentional misrepresentation/
fraud, predatory price fixing and restraint of trade causes of action.
On September 19, 2002, the Venetian and Interface Group-Nevada, Inc.,
filed their answer to the first amended complaint and counterclaim for breach of
contract, unjust enrichment, breach of implied covenant of good faith and fair
dealing, negligent and intentional misrepresentation, accounting, abuse of
process, intentional interference with contract and declaratory relief and
seeking compensatory damages in excess of $10 and punitive damages in excess of
$10 and declaratory relief. A jury trial was scheduled for October 22, 2002,
however, at the joint request of the parties the trial was postponed until
January 21, 2003. Discovery is ongoing.
On or about December 27, 2001, Key3Media Events filed a complaint
against Krause International, Inc., E.J. Krause & Associates (Argentina), Inc.,
and E.J. Krause & Associates, Inc. (collectively, "Krause"), with respect to
Krause's management of COMDEX Argentina 2001. The complaint includes causes of
action for breach of contract, misrepresentation and fraud, fraudulent
misrepresentation, negligent misrepresentation, and tortious interference with
business relations and seeks actual damages, punitive damages, interest,
attorneys' fees and costs. On or about February 8, 2002, Krause answered the
complaint, and filed a counter-claim alleging breach of contract, unjust
enrichment, and an additional claim for breach of contract. The counter-claim
seeks damages in the amount of $452 plus interest, and reasonable attorneys'
fees and costs. The parties have subsequently filed various responsive documents
including a reply to the counterclaim by Key3Media Events and a motion to
dismiss by Krause. On or about March 27, 2002, counsel for Krause requested
permission to amend its counter-claim to add E.J. Krause y Asociados Argentina
S.R.L., an Argentine corporation owned in part by Reed Elsevier Overseas BV, as
a third party, to add additional counter-claims and to request compensatory
damages of not less than $10,451 and punitive damages of $10,000. On or about
April 12, 2002, Krause and E.J. Krause Asociados Argentina S.R.L. filed their
answer and first amended counterclaim alleging breach of contract, unjust
enrichment, fraudulent inducement to contract, breach of implied covenant of
good faith and fair dealing, intentional misrepresentation, constructive fraud,
negligent misrepresentation, breach of fiduciary duty, torts arising from breach
of contract and tortuous interference with prospective advantage. The amended
counterclaim seeks compensatory damages of not less than $10,451 and punitive
damages of $10,000. On or about August 30, 2002, E.J. Krause & Associates, Inc.
filed a similar answer and counterclaim.
23
KEY3MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
On or about February 4, 2002, Key3Media Events filed a complaint
against Krause International, Inc., E.J. Krause and Associates, Inc. and E.J.
Krause de Mexico SA de CV (collectively, "Krause"), with respect to Krause's
management of COMDEX Mexico for the years 2001 and 2002. The complaint alleges
breach of oral contract, breach of written contract, declaratory relief, breach
of covenant of good faith and fair dealing, breach of fiduciary duty, fraud,
negligent misrepresentation, and violation of California Business and
Professions Code Section 17200 and seeks actual damages, punitive and exemplary
damages in an amount of at least $10,000, attorneys' fees and costs,
disgorgement and interest. On or about March 12, 2002, Krause filed a motion to
dismiss the complaint on the grounds of improper venue or, alternately, to
change venue to the United States District Court for the District of Maryland. A
hearing was held on this issue on April 29, 2002 and on May 9, 2002, the court
granted the portion of the motion for transfer of venue. Key3Media Events'
subsequent motion for reconsideration was denied. On or about July 26, 2002
Krause filed an answer and counterclaim for breach of contract, unjust
enrichment, fraudulent indictment to contract, breach of implied covenant of
good faith and fair dealing, intentional misrepresentation, constructive fraud,
negligent misrepresentation, torts arising from breach of contract and tortious
interference with prospective advantage. The amended counterclaim seeks
compensatory damages of not less than $10,700 and punitive damages of $10,000
On July 1, 2002, Commerce and Industry Insurance Company ("CIC") sued
the Company for declaratory relief in the Supreme Court of the State of New
York. The complaint arises out of the Company's event cancellation policy with
CIC covering its 2001 COMDEX/Fall event. On July 31, 2002, the Company sued CIC
in the Superior Court of the State of California, County of Los Angeles, for
breach of contract, tortious breach of implied covenant of good faith and fair
dealing and declaratory relief arising out of the Company's event cancellation
policy with CIC covering its 2001 Networld + Interop/Atlanta and 2001
COMDEX/Fall events. The complaint seeks compensatory damages of $9,147 and
$52,423 with respect to the 2001 Networld + Interop/Atlanta and 2001 COMDEX/Fall
events, respectively, punitive damages, interest and reasonable attorneys' fees.
The dispute arises out of CIC's response to the Company's insurance claim for
losses incurred in connection with these two events as a result of the tragedies
of September 11, 2001. Each of the Company and CIC have moved to dismiss or stay
the other party's suit in New York and California, respectively. On November 5,
2002, the California court rejected CIC's motion to dismiss or stay the
California action. The New York court has not yet rendered a decision on the
Company's pending motion to dismiss or stay the New York action.
In connection with its spin-off from ZDI, the Company and its
subsidiaries have received an indemnification from ZDI against all liabilities
not related to its businesses, including the class actions and derivative
litigation filed against ZDI discussed in the Company's Registration Statement
on Form S-1 (No.333-36828).
The Company and its subsidiaries are subject to various other claims
and legal proceedings arising in the normal course of business. Management
believes that the ultimate
24
KEY3MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
liability, if any, in the aggregate will not be material to the Company's
financial position, results of operations or cash flows.
10. SEGMENT INFORMATION
The Company operates in one business segment, the production and
management of trade shows, conferences, and customized marketing and education
programs. The Company holds events either directly or through international
contract events.
Financial information by geographic areas is as follows:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ ------------------------
2001 2002 2001 2002
--------- --------- --------- ---------
Net revenues:
North America ............ $ 39,721 $ 22,170 $ 149,929 $ 87,669
Europe ................... 11,054 403 11,974 5,327
Far East ................. 708 15,809 13,253 18,568
--------- --------- --------- ---------
Total .................... $ 51,483 $ 38,382 $ 175,156 $ 111,564
========= ========= ========= =========
Other income (expenses):
North America ............ $ (9,642) $(10,118) $ (25,875) $ (29,634)
Europe ................... 60 (133) 78 (187)
Far East ................. (37) (1) (43) (68)
--------- --------- --------- ---------
Total .................... $ (9,619) $ (10,252) $ (25,840) $ (29,889)
========= ========= ========= =========
AS OF SEPTEMBER 30,
-------------------------
2001 2002
---------- ----------
Total assets:
North America .......... $1,042,238 $ 246,130
Europe ................. 6,656 13,863
Far East ............... 4,548 8,076
---------- ----------
Total .................. $1,053,442 $ 268,069
========== ==========
11. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND SUBSIDIARY
NON-GUARANTORS
In connection with the Company's $290,000 Notes, the Company's
U.S.-based subsidiaries, Key3Media Events, Key3Media Von Events, Inc. and
Key3Media BCR Events, Inc., guaranteed the payment of principal, premium and
interest on the Notes. Presented below is condensed consolidating financial
information for the parent company (Key3Media Group, Inc.) only, the subsidiary
guarantors only and the subsidiary non-guarantors as a group as of December 31,
2001 and September 30, 2002 and for the nine and three months ended September
30, 2001 and 2002.
25
KEY3MEDIA GROUP, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001
ELIMINATIONS
PARENT AND
COMPANY SUBSIDIARY SUBSIDIARY CONSOLIDATING
ONLY GUARANTORS NON-GUARANTORS ENTRIES CONSOLIDATED
----------- ----------- -------------- ------------- ------------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents ............. $ 24,953 $ 13,682 $ 2,749 $ -- $ 41,384
Accounts receivable, net .............. -- 38,510 8,522 -- 47,032
Prepaid event expenses ................ -- 4,183 357 -- 4,540
Deferred income taxes ................. -- 1,402 -- -- 1,402
Other current assets .................. 15,293 1,193 2,062 (15,331) 3,217
----------- ----------- ----------- ----------- -----------
Total current assets .............. 40,246 58,970 13,690 (15,331) 97,575
Intercompany receivable ............... 409,183 5,493 7,864 (422,540) --
Property and equipment, net ........... -- 18,347 465 -- 18,812
Goodwill, net ......................... -- 454,719 -- -- 454,719
Other intangibles, net ................ -- 472,340 1,290 -- 473,630
Investment in subsidiaries ............ 513,088 111,117 -- (624,205) --
Deferred financing costs and other
assets ............................ 11,839 148 (14) -- 11,973
----------- ----------- ----------- ----------- -----------
Total assets ...................... $ 974,356 $ 1,121,134 $ 23,295 $(1,062,076) $ 1,056,709
=========== =========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ...................... $ -- $ 17,321 $ 5,017 $ -- $ 22,338
Accrued expenses ...................... 2,701 21,128 3,640 -- 27,469
Deferred revenue ...................... -- 56,643 6,339 -- 62,982
Other current liabilities ............. -- 712 948 -- 1,660
----------- ----------- ----------- ----------- -----------
Total current liabilities ......... 2,701 95,804 15,944 -- 114,449
Intercompany payable .................. -- 417,045 5,498 (422,543) --
Deferred income taxes ................. 1,750 101,135 -- (15,328) 87,557
Long-term obligations (net of current
maturities) ....................... 370,000 -- -- -- 370,000
Shareholders' equity:
Preferred stock ....................... 30 -- -- -- 30
Common stock .......................... 681 -- -- -- 681
Additional paid-in capital ............ 587,591 408,541 7,985 (527,643) 476,474
Retained earnings (deficit) ........... 17,414 98,609 (2,047) (96,562) 17,414
Accumulated comprehensive loss ........ -- -- (4,085) -- (4,085)
Deferred compensation ................. (5,811) -- -- -- (5,811)
----------- ----------- ----------- ----------- -----------
Total shareholders' equity ........ 599,905 507,150 1,853 (624,205) 484,703
----------- ----------- ----------- ----------- -----------
Total liabilities and
shareholders' equity ........... $ 974,356 $ 1,121,134 $ 23,295 $(1,062,076) $ 1,056,709
=========== =========== =========== =========== ===========
26
KEY3MEDIA GROUP, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2002
ELIMINATIONS
PARENT SUBSIDIARY AND
COMPANY SUBSIDIARY NON- CONSOLIDATING
ONLY GUARANTORS GUARANTORS ENTRIES CONSOLIDATED
--------- ---------- ---------- ------------- ------------
(Unaudited)
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents ............... $ 80 $ 13,860 $ 4,610 $ -- $ 18,550
Accounts receivable, net ................ -- 22,310 6,039 -- 28,349
Prepaid event expenses .................. -- 5,254 2,715 -- 7,969
Deferred income taxes ................... -- 1,402 -- (1,402) --
Prepaid insurance ....................... 5,324 -- -- -- 5,324
Other current assets .................... 10,899 14,922 2,304 (24,107) 4,018
--------- --------- --------- --------- ---------
Total current assets ................ 16,303 57,748 15,668 (25,509) 64,210
Intercompany receivable ............... 413,611 6,142 8,073 (427,826) --
Property and equipment, net ........... -- 11,711 499 -- 12,210
Goodwill, net ......................... -- 9,499 4,954 -- 14,453
Other intangibles, net ................ -- 165,683 1,291 -- 166,974
Investment in subsidiaries ............ (157,220) 97,886 -- 59,334 --
Deferred financing costs and other
assets .............................. 10,147 204 (129) -- 10,222
--------- --------- --------- --------- ---------
Total assets ........................ $ 282,841 $ 348,873 $ 30,356 $(394,001) $ 268,069
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
Current Liabilities:
Accounts payable ........................ $ -- $ 14,040 $ 3,724 $ -- $ 17,764
Accrued expenses ........................ 10,404 12,540 6,001 -- 28,945
Deferred revenue ........................ -- 41,135 8,218 -- 49,353
Other current liabilities ............... -- (51) 1,863 -- 1,812
--------- --------- --------- --------- ---------
Total current liabilities ........... 10,404 67,664 19,806 -- 97,874
Intercompany payable .................... -- 421,684 6,142 (427,826) --
Deferred income taxes ................... -- 25,509 -- (25,509) --
Long-term obligations (net of current
maturities) ........................ 370,000 -- -- -- 370,000
Shareholders' equity (deficit):
Preferred stock ......................... 29 -- -- -- 29
Common stock ............................ 685 -- -- -- 685
Additional paid-in capital .............. 574,171 391,110 12,185 (501,181) 476,285
Retained earnings (deficit) ............. (668,953) (557,094) (3,421) 560,515 (668,953)
Accumulated comprehensive loss .......... -- -- (4,356) -- (4,356)
Deferred compensation ................... (3,495) -- -- -- (3,495)
--------- --------- --------- --------- ---------
Total shareholders' equity
(deficit) ....................... (97,563) (165,984) 4,408 59,334 (199,805)
--------- --------- --------- --------- ---------
Total liabilities and
shareholders' equity (deficit) ... $ 282,841 $ 348,873 $ 30,356 $(394,001) $ 268,069
========= ========= ========= ========= =========
27
KEY3MEDIA GROUP, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
ELIMINATIONS
PARENT AND
COMPANY SUBSIDIARY SUBSIDIARY CONSOLIDATING
ONLY GUARANTORS NON-GUARANTORS ENTRIES CONSOLIDATED
--------- ---------- -------------- ------------- ------------
(Unaudited)
(In thousands)
Net revenues .................................. $ -- $ 152,167 $ 26,423 $ (3,434) $ 175,156
Operating expenses:
Cost of production ....................... -- 46,266 12,152 -- 58,418
Selling, general and administrative ...... 181 74,171 4,445 -- 78,797
Staff reduction severance charges ........ -- 308 -- -- 308
Stock based compensation ................. (1,816) -- -- -- (1,816)
Depreciation and amortization ............ -- 28,504 668 -- 29,172
--------- --------- --------- --------- ---------
(1,635) 149,249 17,265 -- 164,879
--------- --------- --------- --------- ---------
Income (loss) from operations ................. 1,635 2,918 9,158 (3,434) 10,277
Other income (expenses):
Interest expense ......................... (20,689) (14,424) (5) -- (35,118)
Interest income .......................... 203 2,462 71 -- 2,736
Intercompany activity .................... -- -- (3,434) 3,434 --
Other income (expense), net .............. -- 6,691 (149) -- 6,542
--------- --------- --------- --------- ---------
(20,486) (5,271) (3,517) 3,434 (25,840)
--------- --------- --------- --------- ---------
Income loss before income taxes and
extraordinary item ....................... (18,851) (2,353) 5,641 -- (15,563)
Income tax provision (benefit) ................ (5,410) (1,310) 2,075 -- (4,645)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item ....... (13,441) (1,043) 3,566 -- (10,918)
Extraordinary loss on retirement of debt, net . (4,268) (5,041) -- -- (9,309)
Equity in earnings (loss) in subsidiaries ..... (2,518) -- -- 2,518 --
--------- --------- --------- --------- ---------
Net income (loss) ..................... $ (20,227) $ (6,084) $ 3,566 $ 2,518 $ (20,227)
========= ========= ========= ========= =========
28
KEY3MEDIA GROUP, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
ELIMINATIONS
PARENT AND
COMPANY SUBSIDIARY SUBSIDIARY CONSOLIDATING
ONLY GUARANTORS NON-GUARANTORS ENTRIES CONSOLIDATED
--------- ---------- -------------- ------------- ------------
(Unaudited)
(In thousands)
Net revenues:
Services ................................. $ -- $ 89,015 $ 24,036 $ (3,049) $ 110,002
Proceeds from insurance claim ............ -- 1,562 -- -- 1,562
--------- --------- --------- --------- ---------
-- 90,577 24,036 (3,049) 111,564
Operating expenses:
Cost of production ....................... -- 28,347 13,474 -- 41,821
Selling, general and administrative ...... 880 58,908 6,449 (141) 66,096
Staff reduction severance charges ........ -- 1,426 158 -- 1,584
Reduction of goodwill and other
intangibles .............................. -- 300,000 -- -- 300,000
Stock based compensation ................. 1,278 -- -- -- 1,278
Depreciation and amortization ............ -- 16,005 393 -- 16,398
--------- --------- --------- --------- ---------
2,158 404,686 20,474 (141) 427,177
--------- --------- --------- --------- ---------
Income (loss) from operations ................. (2,158) (314,109) 3,562 (2,908) (315,613)
Other income (expenses):
Interest expense ......................... (29,752) (107) (95) 103 (29,851)
Interest income .......................... 102 231 112 (103) 342
Intercompany activity .................... -- -- (2,908) 2,908 --
Other income (expense), net .............. -- 17 (397) -- (380)
--------- --------- --------- --------- ---------
(29,650) 141 (3,288) 2,908 (29,889)
--------- --------- --------- --------- ---------
Income (loss) before income taxes and
cumulative effect of accounting change ... (31,808) (313,968) 274 -- (345,502)
Income tax provision (benefit) ................ (2,680) (2,880) 1,648 -- (3,912)
--------- --------- --------- --------- ---------
Loss before cumulative effect of
accounting change ........................ (29,128) (311,088) (1,374) -- (341,590)
Cumulative effect of accounting change ........ -- (344,615) -- -- (344,615)
Equity in earnings (loss) in subsidiaries ..... (357,077) -- -- 357,077 --
--------- --------- --------- --------- ---------
Net income (loss) ..................... $(386,205) $(655,703) $ (1,374) $ 357,077 $(686,205)
========= ========= ========= ========= =========
29
KEY3MEDIA GROUP, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
ELIMINATIONS
PARENT AND
COMPANY SUBSIDIARY SUBSIDIARY CONSOLIDATING
ONLY GUARANTORS NON-GUARANTORS ENTRIES CONSOLIDATED
--------- ---------- -------------- ------------- ------------
(Unaudited)
(In thousands)
Net revenues .............................. $ -- $ 39,913 $ 12,219 $ (649) $ 51,483
Operating expenses:
Cost of production ................... -- 13,534 4,308 -- 17,842
Selling, general and administrative .. 41 24,260 1,830 -- 26,131
Staff reduction severance charges .... -- 308 -- -- 308
Stock based compensation ............. (7,040) -- -- -- (7,040)
Depreciation and amortization ........ -- 10,027 379 -- 10,406
-------- -------- -------- -------- --------
(6,999) 48,129 6,517 -- 47,647
-------- -------- -------- -------- --------
Income (loss) from operations ............. 6,999 (8,216) 5,702 (649) 3,836
Other income (expenses):
Interest expense ..................... (9,782) (1) 3 -- (9,780)
Interest income ...................... 46 147 64 -- 257
Intercompany activity ................ -- -- (649) 649 --
Other income (expense), net .......... -- -- (96) -- (96)