<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
----------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended
SEPTEMBER 30, 2000
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 1-16061
KEY3MEDIA GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4799962
(State of Incorporation) (I.R.S. Employer Identification No.)
5700 Willshire Blvd., Suite 325 90036
Los Angeles, CA (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (323) 954-6000
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, and (2) has been subject to such filing
requirements for the past 90 days.
YES [_] NO [X]
As of November 10, 2000 there were 65 million shares of the Registrant's
voting common stock, par value $0.01 per share, issued and outstanding. No
shares of any other class of the capital stock of the Registrant are currently
issued or outstanding.
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<PAGE>
KEY3MEDIA GROUP, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 2000
(Unaudited) and December 31, 1999............................... 3
Condensed Consolidated Statements of Operations (Unaudited) for
the Three and Nine months Ended September 30, 2000 and 1999..... 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for
Nine Months Ended September 30, 2000 and 1999................... 5
Condensed Consolidated Statement of Changes in Shareholders'
Equity (Unaudited) for the Nine months Ended September 30,
2000............................................................ 6
Notes to Unaudited Condensed Consolidated Financial Statements... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 17
Part II. Other Information
Item 1. Legal Proceedings............................................ 18
Item 6. Exhibits and Reports on Form 8-K............................. 18
</TABLE>
1
<PAGE>
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.
These forward-looking statements include, without limitation, 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 our events and their popularity with exhibitors,
advertisers and attendees, technological changes and developments,
intellectual property rights, competition, capital expenditures and factors
impacting our international operations. In addition, the Registration
Statement on Form S-1 (File No. 333- 36828) that we filed with the SEC
contains important cautionary statements and discusses many of the factors
that could materially affect the accuracy of our forward-looking statements
and/or adversely affect our business, results of operations and financial
position under the captions "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations", which statements
and discussions are incorporated herein by reference.
If there are any subsequent written or oral forward-looking statements made
by us or any person acting on our behalf, they are qualified in their entirety
by the cautionary statements and factors contained or referred to in this
section. We do not undertake any obligation to release publicly any revisions
to the forward-looking statements to reflect events or circumstances 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.
2
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
KEY3MEDIA GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------ -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents......................... $ 5,570 $ 123,539
Accounts receivable, net.......................... 69,383 65,620
Prepaid event expenses............................ 4,584 12,328
Deferred income taxes............................. 4,443 2,634
Other current assets.............................. 1,952 2,520
-------- ----------
Total current assets............................ 85,932 206,641
Property and equipment, net......................... 10,028 10,590
Intangible assets, net.............................. 875,526 851,761
Deferred financing costs and other assets........... 78 8,345
-------- ----------
Total assets.................................... $971,564 $1,077,337
======== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Current maturities of long-term obligations....... $ 12,527
Accounts payable.................................. $ 8,777 4,903
Bank overdraft.................................... 2,351
Accrued expenses.................................. 23,178 39,428
Deferred revenue.................................. 85,799 135,487
Other current liabilities......................... 3,131 9,122
-------- ----------
Total current liabilities....................... 123,236 201,467
Deferred income taxes............................... 61,553 85,416
Long-term obligations (net of current maturities)... 382,002 367,728
Other long-term liabilities......................... 8,381 7,412
Commitments and contingencies
Shareholders' equity:
Division capital.................................. 328,022
Common Stock--$0.01 par value; authorized
200,000,000 shares; issued and outstanding,
65,000,000 shares................................ 650
Additional paid-in-capital........................ 416,517
Retained earnings................................. 73,246 29,538
Deferred compensation............................. (982) (27,133)
Other comprehensive loss.......................... (3,894) (4,258)
-------- ----------
Total shareholders' equity...................... 396,392 415,314
-------- ----------
Total liabilities and shareholders' equity...... $971,564 $1,077,337
======== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
KEY3MEDIA GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the three For the nine
months ended months ended
September 30, September 30,
----------------- ------------------
1999 2000 1999 2000
------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues........................... $62,127 $ 60,531 $155,161 $175,594
Operating expenses:
Cost of production................... 19,159 16,666 48,530 50,562
Selling, general and administrative.. 21,474 25,694 59,701 73,214
Stock based compensation (Note 4).... 130 2,776 392 3,444
Depreciation and amortization........ 8,837 9,009 28,248 27,464
------- -------- -------- --------
49,600 54,145 136,871 154,684
------- -------- -------- --------
Income from operations................. 12,527 6,386 18,290 20,910
------- -------- -------- --------
Other income (expenses):
Interest expense..................... (5,803) (10,849) (17,430) (23,518)
Interest income...................... 100 1,072 321 1,454
Equity in earnings from joint
venture............................. 338 1,649
Gain on sale of joint venture
interest............................ 13,746 13,746
Other expense, net................... (15) (90) (5) (25)
------- -------- -------- --------
8,366 (9,867) (1,719) (22,089)
------- -------- -------- --------
Income (loss) before income taxes...... 20,893 (3,481) 16,571 (1,179)
Income tax provision (benefit)......... 8,286 (1,382) 6,572 (469)
------- -------- -------- --------
Net income (loss).................. $12,607 $ (2,099) $ 9,999 $ (710)
======= ======== ======== ========
Basic net income (loss) per common
share................................. $ 0.24 $ (0.04) $ 0.19 $ (0.01)
Diluted net income (loss) per common
share................................. $ 0.24 $ (0.04) $ 0.19 $ (0.01)
Shares used in computing basic net
income (loss) per common share........ 53,358 58,731 53,358 55,149
Shares used in computing diluted net
income (loss) per common share........ 53,358 60,815 53,358 55,844
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
KEY3MEDIA GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
For the nine
months ended
September 30,
-------------------
1999 2000
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $ 9,999 $ (710)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 28,248 27,619
Amortization of deferred financing costs................ 574
Stock-based compensation................................ 392 3,492
Loss on disposal of fixed assets........................ 61
Foreign exchange gain................................... 5 35
Deferred income taxes................................... 3,406 (6,355)
Provision for uncollectible accounts receivable......... 1,202 73
Changes in operating assets and liabilities:
Accounts receivable.................................... (14,071) 3,690
Prepaid event expenses................................. (2,281) (7,744)
Other current assets................................... (3,814) (568)
Other assets........................................... 8,699 (78)
Accounts payable....................................... 7,769 (3,874)
Accrued expenses....................................... (194) 16,250
Accreted interest...................................... 2,024
Deferred revenue....................................... 36,837 49,455
Other liabilities...................................... (729) 5,022
-------- ---------
Total adjustments..................................... 65,469 89,676
-------- ---------
Net cash provided by operating activities............. 75,468 88,966
-------- ---------
Cash flows from investing activities:
Purchase of property and equipment....................... (1,620) (4,477)
Purchase of intangible assets............................ (2,019)
-------- ---------
Net cash used in investing activities................. (3,639) (4,477)
-------- ---------
Cash flows from financing activities:
Net transactions with Softbank, ZDI and affiliates
excluding noncash transactions with affiliates.......... (69,571) 7,170
Borrowings under new credit facility..................... 330,000
Proceeds from the issuance of zero coupon senior
debentures with detachable warrants..................... 72,938
Proceeds from the sale of common stock................... 69,851
Payment of costs associated with the issuance of long-
term obligations and the sale of stock.................. (8,962)
Payment of long-term obligations to ZDI and bank
borrowings retained by ZDI.............................. (382,002)
Payment of long-term obligations under the new credit
facility................................................ (10,000)
Payment of dividend to ZDI............................... (42,998)
Decrease in bank overdraft............................... (469) (2,351)
-------- ---------
Net cash provided by (used in) financing activities... (70,040) 33,646
-------- ---------
Effects of exchange rate changes on cash.................. (552) (166)
-------- ---------
Net increase in cash and cash equivalents................. 1,237 117,969
Cash and cash equivalents at beginning of period.......... 10,385 5,570
-------- ---------
Cash and cash equivalents at end of period................ $ 11,622 $ 123,539
======== =========
Supplemental cash flow disclosures:
Noncash financing activity:
Capital contribution through payment of stock issuance
costs by ZDI.......................................... $ 2,681
Adjustment to deferred income taxes.................... 32,027
Issuance of common stock to ZDI........................ 305,846
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
KEY3MEDIA GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
For the Nine months Ended September 30, 2000
<TABLE>
<CAPTION>
Accumulated
Additional Other
Divisional Common Paid-In Retained Comprehensive Deferred
Capital Stock Capital Earnings Income (Loss) Compensation Total
---------- ------ ---------- -------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1999................... $ 328,022 $ 73,246 $(3,894) $ (982) $396,392
Net transactions with
affiliates to August
18, 2000............... 9,851 9,851
Transactions related to
spin off from ZDI:
Adjustment of deferred
income taxes......... (32,027) (32,027)
Issuance of common
stock to ZDI......... (305,846) $534 $305,312
Dividend.............. (42,998) (42,998)
Sale of common stock,
net of issuance costs.. 116 66,562 66,678
Issuance of warrants to
purchase common stock.. 15,000 15,000
Issuance of options to
purchase stock......... 29,570 (29,570)
Amortization of deferred
compensation........... 378 3,066 3,444
Forfeiture of options to
purchase stock......... (305) 305
Foreign currency
adjustment............. (364) 48 (316)
Net loss................ (710) (710)
--------- ---- -------- -------- ------- -------- --------
Balance at September 30,
2000 (unaudited)....... $ $650 $416,517 $ 29,538 $(4,258) $(27,133) $415,314
========= ==== ======== ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE>
KEY3MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(in thousands, except per share amounts)
(1) Basis of Presentation, Organization and Nature of Operations
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 interim condensed consolidated financial statements should
be read together with the Company's Registration Statement on Form S-1 (No.
333- 36828) and the audited combined financial statements contained therein.
On August 18, 2000, Ziff Davis Inc. ("ZDI") completed a spin-off of the
Company, a new company formed to hold ZDI's trade show and conference
business, to the holders of ZDI common stock. In addition to the 53,358,050
shares of its common stock issued to holders of ZDI common stock in the spin-
off, the Company raised approximately $75 million through the issuance of zero
coupon senior debentures with detachable warrants and sold 11,641,950 common
shares of its common stock for $6 per share. Concurrently, the Company's
wholly owned subsidiary Key3Media Events, Inc. ("Key3Media Events") borrowed
$330 million from a syndicate of banks. The proceeds of these transactions
were used to repay Key3Media Events' $382 million of existing indebtedness and
to fund a $42,998 cash dividend to ZDI, and the balance was retained for
working capital and general corporate purposes.
Prior to June 1, 2000, ZDI provided to the Company certain centralized
administrative services including but not limited to, legal, tax and financial
accounting, management information, telecommunications and human resources.
Since June 1, 2000 the Company has provided these services for itself. Charges
for the services provided by ZDI were generally based upon utilization;
however, where measuring utilization was impractical, ZDI used percentages
based upon headcount or revenue in determining charges for these services.
Management of the Company believes the allocated cost of the centralized
administrative services approximated the cost it would have incurred if it had
obtained the same administrative services from unaffiliated third parties.
A portion of the cost of administrative services charged to the Company by
ZDI included amounts for certain cash management and treasury activities.
These activities included the investment of surplus cash and the issuance,
repayment and repurchase of short-term and long-term debt. The Company
generally remitted its cash receipts (other than receipts of foreign
operations or operations that were not wholly owned) to ZDI, and ZDI generally
funded the Company's cash disbursements (other than disbursements of foreign
operations or operations that were not wholly owned), on a periodic basis. The
cash funding described was accounted for within Division Capital and upon the
April 13, 2000 signing of a loan agreement with two banks (Note 5) the Company
assumed responsibility for its cash management and treasury activities.
The Company recorded $2,490 and $8,045 for centralized administrative
charges from ZDI for the nine months ended September 30, 2000 and 1999,
respectively.
Certain reclassifications were made to the prior year condensed combined
financial statements to conform to the September 30, 2000 presentation.
7
<PAGE>
KEY3MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--(Continued)
(in thousands, except per share amounts)
(2) Net Income (Loss) Per Share
Basic net income (loss) per share was calculated based on the weighted
average shares of common stock outstanding during the period, and diluted
earnings per share was calculated based on the weighted average of common
stock outstanding, plus the dilutive effect of stock options and other
dilutive securities, calculated using the treasury stock method. These
dilutive securities were excluded from the calculation of diluted net loss
per share as the effect of their inclusion would have been antidilutive.
(3) Comprehensive Income (Loss)
The components of comprehensive income (loss) were as follows:
<TABLE>
<CAPTION>
Three months Nine months
ended September ended
30, September 30,
--------------- ---------------
1999 2000 1999 2000
------- ------- ------ -------
<S> <C> <C> <C> <C>
Net income (loss)......................... $12,607 $(2,099) $9,999 $ (710)
Other comprehensive income:
Foreign currency translation
adjustment............................. 91 (32) (279) (364)
------- ------- ------ -------
Total comprehensive income (loss)......... $12,698 $(2,131) $9,720 $(1,074)
======= ======= ====== =======
</TABLE>
(4) Stock Compensation
On August 21, 2000, the Company granted options to purchase shares of its
common stock as listed below. Certain options granted to employees who
previously held options to purchase stock of ZDI, ZDNet, and Softbank Corp.
are subject to the accounting treatment described in Financial Accounting
Standards Board Interpretation No. 44 "Accounting for Certain Transactions
involving Stock Compensation--an interpretation of APB Opinion No. 25" which
requires recording the fair value of these options at the close of each
accounting period and recognizing the change in fair value from period to
period as an increase or decrease in stock based compensation.
<TABLE>
<S> <C>
Granted at an option price of
$5.00: 12,914,567
Granted at an option price of
$11.00: 8,211,666
----------
Total options granted 21,126,233
==========
</TABLE>
As a result of the issuance of these options to purchase common stock, the
Company recorded as of September 30, 2000, deferred stock compensation of
$28,433 and incurred noncash stock based compensation of $2,121, for the three
and nine month periods ended September 30, 2000, respectively.
Certain employees of the Company who continue to hold options to purchase
stock of Softbank Corp. were granted accelerated vesting rights that resulted
in additional deferred stock compensation at September 30, 2000 of $1,137 and
noncash stock based compensation expense of $635 in the three months ended
September 30, 2000. The remaining $20 of noncash stock based compensation in
the three months ended September 30, 2000 results from the amortization of
deferred compensation previously recorded.
Noncash stock based compensation has been presented as a separate operating
expense. If presented on a functional basis, this expense would be included in
Selling, general, and administrative expenses.
8
<PAGE>
KEY3MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--(Continued)
(in thousands, except per share amounts)
(5) Long-term Obligations
Debt consisted of the following:
<TABLE>
<CAPTION>
September 30,
-----------------
1999 2000
-------- --------
<S> <C> <C>
Note payable to Ziff-Davis Inc.--a related party........... $382,002
Senior credit facility..................................... $320,000
Zero coupon debentures including accreted interest, net of
discount.................................................. 60,255
-------- --------
382,002 380,255
Less current maturities.................................... (12,527)
-------- --------
Total.................................................... $382,002 $367,728
======== ========
</TABLE>
In May 1998, Key3Media Events entered into a Loan Agreement with ZDI for
$382,002 (the "Loan"). The Loan stated that interest payments were due on a
quarterly basis beginning June 1998 at a rate of 6% per annum. The Loan was
payable on March 31, 2008 and contained no financial covenants. On April 13,
2000, Key3Media Events entered into a Revolving Credit Agreement ("the
Agreement") with two banks and borrowed $150 million which represented the
maximum amount available under the Agreement. The proceeds of this borrowing
were used to repay a portion of the Loan. Under the terms of the Agreement,
Key3Media Events was required to maintain certain financial and operating
covenants, which included maximum leverage and minimum interest coverage
ratios and limits on capitalized leases and capital expenditures. The
borrowing bore interest at a base rate or eurodollar rate, at the option of
Key3Media Events. The base rate was equal to the higher of the lender's
commercial lending rate or 1/2 of 1% per annum above the federal funds rate.
The eurodollar rate was equal to the London Interbank Offered Rate divided by
a percentage equal to 100% minus the eurodollar rate reserve percentage, as
defined in the Agreement. The Loan and the Agreement were repaid on August 18,
2000 with borrowings from a credit facility noted below.
On August 3, 2000, the Company's wholly owned subsidiary, Key3Media Events,
entered into a credit facility with a syndicate of banks which consists of two
term loan facilities and a revolving credit facility. The initial principal
amount of the first term loan was $75 million which will mature on August 3,
2005. The first term loan requires repayment quarterly in annual amounts equal
to 10% of the original principal amount of the loan in the first year, 15% in
the second year, 20% in the third year, 25% in the fourth year and the
remaining 30% in the fifth and final year. The initial principal amount of the
second term loan was $255 million which will mature on August 3, 2006. The
second term loan requires repayment in equal quarterly amounts during the
final year of its term, subject to amortization of approximately 1% per year
prior to the final year. Key3Media Events borrowed $330 million under the term
loan facilities on August 18, 2000. On September 29, 2000, Key3Media Events
made a $10 million principal repayment on these two term loan facilities.
Interest expense on borrowings under the term loan facilities was $4,299 for
the three and nine months ended September 30, 2000, respectively.
The revolving credit facility commits the banks to lend up to $50 million to
Key3Media Events for general corporate purposes. Key3Media Events may borrow,
repay and re-borrow under the revolving loan facility until August 3, 2005, at
which time Key3Media Events must repay any amounts outstanding under the
revolving credit facility. As of September 30, 2000, Key3Media Events has no
amounts outstanding under the revolving credit facility.
At Key3Media Events' election, loans under the credit facility will bear
interest at a margin over, (1) the higher of the federal funds rate plus 1/2%
and Citibank, N.A.'s base rate or (2) the London interbank offered rate,
9
<PAGE>
KEY3MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--(Continued)
(in thousands, except per share amounts)
or LIBOR. The margin Key3Media Events pays will vary between 0.75% and 4.00%
depending on (a) what Key3Media Events chooses as its base rate and (b) the
ratio of its total debt to EBITDA as defined in the credit facility agreement.
On September 22, 2000, Key3Media Events entered in to a Rate Cap Transaction
Agreement with a bank which eliminates its exposure to interest rate increases
in LIBOR above 9.375% on $165 million of borrowings under the credit facility.
This agreement terminates on October 2, 2001.
On August 18, 2000, the Company issued zero coupon senior debentures with an
initial principal amount of $75 million. The purchasers paid $72,937,500 for
the debentures and the warrants described below. The principal amount of the
debentures will accrete at a rate of 12% per year, compounded quarterly, for
the first five years and 15% per year, compounded quarterly, after that. If
our consolidated ratio of debt to EBITDA as defined in the debenture agreement
in the previous four quarters is higher than 4.50:1.00, the accretion rate
will increase by 1.25% until the ratio falls below 4.50:1.00 for the previous
four quarters. The debentures will mature in seven years and nine months.
Accreted interest calculated on an average annualized basis on the debentures
was $2,024 for the three and nine months ended September 30, 2000. In
connection with the warrants, the Company recorded a discount on the
debentures and an increase to paid-in-capital of $15 million. The discount on
the debentures will be amortized as interest using the effective interest rate
method over the life of the debentures.
The Company can redeem the debentures at any time before the first
anniversary of the issuance of the debentures at 112% of the initial principal
amount. On or after the first but before the fifth anniversary of the
issuance, we can redeem the debentures at 100% of their accreted principal
amount. On or after the fifth anniversary, we cannot redeem the debentures.
The purchasers of our debentures received warrants to purchase 6.8 million
shares of our common stock at $6.00 per share, subject to adjustment as
described below and to customary anti-dilution rights. Cashless exercise is
permitted and the warrants will expire seven years after they are issued,
except that if the number of shares that may be purchased upon exercise of the
warrants increases on any anniversary of the issue date, then the warrants
will expire as to those additional shares seven years after that anniversary.
If the debentures are redeemed within 22 months after they are issued, the
number of shares that must be issued upon exercise of the warrants will
decrease by 523,000. If the debentures are still outstanding on the following
anniversaries, the number of shares that must be issued upon exercise of the
warrants will increase by 1.5 million on the second and third anniversaries of
the issuance of the debentures and by 1.75 million on the fourth and fifth
anniversaries.
The $15 million value assigned to the warrants at their issuance date has
been determined using a Black-Scholes Pricing Model which includes assumptions
as to risk free interest rates, dividend yield, volatility, expected life of
the warrants and liquidity.
(6) Commitments and Contingencies
On March 17, 2000, Key3Media Events sued GES Exposition Services, Inc. for
breach of contract in the United States District Court for the District of
Massachusetts. The Company believes that GES is withholding commissions that
it is required to pay to Key3Media Events under contract. The Company believes
that GES owed Key3Media Events approximately $10 million as of September 30,
2000, and that this balance is increasing. On June 19, 2000 GES filed an
answer, counterclaim and jury demand. Its counterclaim alleges that
10
<PAGE>
KEY3MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--(Continued)
(in thousands, except per share amounts)
Key3Media Events breached the contract, violated its fiduciary duty toward GES
and converted GES property to the benefit and use of Key3Media Events. GES has
asked the court to award unspecified damages as well as declaratory and
injunctive relief. The Company has received subsequent pleadings filed by GES
alleging damages of approximately $33 million on a variety of different legal
theories plus additional damages for lost future profits of $20 million.
Management and counsel believe that these claims are excessive and lack merit
and intends to vigorously defend against them. In management's opinion, this
litigation is not likely to have a material adverse effect on the Company's
financial position, results of operations or cash flows. On August 18, 2000,
the agreement with GES was terminated by Key3Media Events pursuant to a 60 day
notice of termination delivered by Key3Media Events to GES on June 19, 2000.
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 claims and legal
proceedings arising in the normal course of business. Management believes that
the ultimate liability, if any, in the aggregate will not be material to the
Company's financial position, results of operations or cash flows.
(7) Segment Information
<TABLE>
<CAPTION>
Three months
ending Nine months ending
September 30, September 30,
---------------- ----------------------
1999 2000 1999 2000
------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues:
North America.................... $50,746 $60,188 $ 139,258 $ 172,662
Latin America.................... 23 1,987 1,403
Europe........................... 10,897 78 11,918 944
Far East......................... 461 265 1,998 585
------- ------- ---------- ----------
$62,127 $60,531 $ 155,161 $ 175,594
======= ======= ========== ==========
Other income (expense):
North America.................... $ 2 $ (1)
Latin America.................... $ (28) (28)
Europe........................... (1) (1) 64
Far East......................... $ (15) (61) (6) (60)
------- ------- ---------- ----------
$ (15) $ (90) $ (5) $ (25)
======= ======= ========== ==========
Total assets:
North America.................................... $ 982,616 $1,063,348
Latin America.................................... 5,252 241
Europe........................................... 11,522 12,904
Far East......................................... 2,661 844
---------- ----------
$1,002,051 $1,077,337
========== ==========
</TABLE>
Transactions between geographic areas are not significant.
(8) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133
establishes accounting and reporting standards requiring that
11
<PAGE>
KEY3MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--(Continued)
(in thousands, except per share amounts)
every derivative instrument be recorded in the balance sheet as either an
asset or liability measured at its fair value. This statement also requires
that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. SFAS 133 will be
effective for our fiscal year ending December 31, 2001. We believe the
adoption of SFAS 133 will not have a material effect on our financial position
or results of operations.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 ("SAB 101"), which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with SEC for the quarter ended June 30, 2000. However, Staff Accounting
Bulletin No. 101B, "Second Amendment: Revenue Recognition in Financial
Statements" was subsequently issued delaying adoption of SAB 101 to the
quarter ending December 31, 2000. We believe the adoption of SAB 101 will not
result in a material change in our financial position or results of
operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB No. 25 and among other issues clarifies the
following: The definition of an employee for purposes of applying APB No. 25;
the criteria for determining whether a plan qualifies as a noncompensating
plan; the accounting consequences of various modifications to the terms of
previously fixed stock options or awards; and the accounting for an exchange
of stock compensation awards in a business combination. FIN 44 is effective
July 1, 2000, but certain conclusions in FIN 44 cover specific events that
occurred after either December 15, 1998 or January 12, 2000. The Company has
adopted FIN 44 as of July 1, 2000. See Note 4.
(9) Subsequent Event
On October 31, 2000, Key3Media Events paid an additional $9 million of the
principal balance outstanding under its term loan credit facilities.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The discussion below should be read in conjunction with our historical
condensed combined financial statements and the notes thereto. Historical
results and percentage relationships set forth in the condensed combined
financial statements, including trends which might appear, should not be taken
as indicative of future operations. The Company considers portions of this
information to be 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, with respect to the Company's expectations for
future periods. Although the Company believes that the expectations reflected
in such forward-looking statements are based upon reasonable assumptions, it
can give no assurance that its expectations will be achieved. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, words like "will", "may", "believes", "expects", "anticipates",
"plans" and "estimates" and similar expressions are intended to identify
forward-looking statements. 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 our events and their
popularity with exhibitors, advertisers and attendees, technological changes
and developments, intellectual property rights, competition, capital
expenditures and factors impacting our international operations. In addition,
the Registration Statement on Form S-1 (File No. 333-3682) that we filed with
the SEC contains important cautionary statements and discusses many of the
factors that could materially affect the accuracy of our forward-looking
statements and/or adversely affect our business, results of operations and
financial position under the captions "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
which statements and discussions are incorporated herein by reference.
Results of Operations
Three Months Ended September 30, 2000 Versus Three Months Ended September 30,
1999
Our total revenue decreased $1.6 million, or 2.6%, to $60.5 million in the
third quarter of 2000 from $62.1 million in the comparable period of 1999.
Exhibitor services revenue decreased $5.7 million or 11.7% to $43.0 million in
the third quarter of 2000 from $48.7 million in the comparable period in 1999.
This decrease can be attributed in large part to the timing of our N+I Paris
event, which was held in the third quarter of 1999 but will not be held until
the fourth quarter of 2000. Adjusting the results of operations for the three
months ended September 30, 1999 to exclude the results for the N+I Paris
event, exhibitor services revenue increased $4.2 million or 10.8% to $43.0
million in the three months ended September 30, 2000 from an adjusted
exhibitor service revenue of $38.8 million in the comparable period in 1999.
This increase was attributable to a 7.8% increase in the average rental rate
per square foot paid by exhibitors in the third quarter of 2000 to $52.60 from
$48.79 in the comparable period in 1999 partially offset by a 3.8% decrease in
net square feet of exhibit space rented at our events to 576,593 in the third
quarter of 2000 from 599,593 in the comparable period of 1999 along with a
$3.1 million increase in exhibitor revenue activity for management fee and
other exhibitor service fee income at our trade shows and conferences in 2000
compared with 1999.
Conference fees increased $1.9 million, or 26.9%, to $9.1 million in the
third quarter of 2000 from $7.2 million in the comparable period in 1999. This
increase was attributable to a 12.6% increase in the number of participants at
the conferences that we offered at our events to 8,433 from 7,493. This
increase also resulted from a 12.8% increase in the average revenue per
conference attendee in the third quarter of 2000 to $1,080 compared with $958
in the comparable period in 1999. The increase in conference attendees for the
three months ended September 30, 2000 was due to more specific customization
and a greater number of programs offered at our Seybold San Francisco and N+I
Atlanta events. Excluding the results of the N+I Paris event, conference fees
increased $2.2 million, or 31.8%.
Advertising and sponsorship revenues increased $2.2 million, or 34.9%, to
$8.4 million in the third quarter of 2000 from $6.2 million in the comparable
period in 1999. This increase is attributable to the increased advertising and
sponsorship opportunities at Seybold San Francisco and N+I Atlanta. Excluding
the results of the N+I Paris event, advertising and sponsorship revenues
increased $2.7 million, or 47.0%.
13
<PAGE>
Cost of production decreased $2.5 million, or 13.0%, to $16.7 million in the
third quarter of 2000 from $19.2 million in the comparable period in 1999. As
a percentage of revenues, these costs for the three months ended September 30,
represented 27.5% in 2000 compared to 30.8% in 1999. The decrease can be
attributed to the absence of the N+I Paris event in the third quarter of 2000.
Adjusting the results of operations for the three months ended September 30,
1999 to exclude the results for the N+I Paris event, cost of production
increased $1.8 million or 12.2% in the three months ended September 30, 2000
from an adjusted cost of production of $14.9 million in the comparable period
in 1999. Adjusted cost of production represented 28.9% of revenues for the
three months ended September 30, 1999.
Selling, general and administrative ("SG&A") expenses, including noncash
stock based compensation expenses, increased $6.9 million, or 31.8%, to $28.5
million in the third quarter of 2000 from $21.6 million in the comparable
period in 1999. As a percentage of revenue, SG&A represented 47.0% in the
third quarter of 2000 compared to 34.8% in the comparable period in 1999. The
increase in SG&A as a percentage of revenue is primarily attributed to the
increase in noncash stock based compensation and increased levels of
employment at our business locations in Massachusetts and California and the
addition of certain senior managers in March 2000. The noncash stock based
compensation for the three months ended September 30, 2000 was $2.8 million
versus $0.1 in the comparable period in 1999. Excluding the results of the N+I
Paris event and noncash stock based compensation, SG&A represented 42.5% and
41.6% of revenues for the three months ended September 30, 2000 and 1999,
respectively.
As a result of the foregoing, EBITDA decreased by $6.4, or 29.4%, to $15.3
million in the third quarter of 2000 from $21.7 million in the comparable
period in 1999. Adjusting the results of operations for the three months ended
September 30, 1999 to exclude the results for the N+I Paris event, and
excluding noncash stock based compensation for both quarterly periods,
adjusted EBITDA increased $2.6 million or 16.6% to 18.1 million in the three
months ended September 30, 2000 from an adjusted $15.5 million in the
comparable period in 1999.
Depreciation and amortization increased $172,000 or 2.0%, to $9.0 million in
the third quarter of 2000 from $8.8 million in the comparable period in 1999.
The increase is due primarily to additions of property and equipment.
Interest expense, net, increased by $4.1 million or 71.4%, to $9.8 million
in the third quarter of 2000 from $5.7 million in the comparable period in
1999. The increase is due primarily to increased interest rates on current
borrowings compared to previous borrowing arrangements. If our initial
borrowings under our new credit facility and our zero coupon senior debentures
had been outstanding from the beginning of the quarter, net interest expense
would have been $12.9 million or $3.1 million greater that the $9.8 million
reported.
Income tax expense (benefit) decreased by $9.7 million to $(1.4) million in
the third quarter of 2000 from $8.3 million in the comparable period in 1999.
The decrease can be attributed to higher income before taxes in the third
quarter of 1999 which, in addition to the items mentioned above, also included
the gain from the sale of our interest in the Expocomm partnership of $13.7
million.
As a result of the foregoing, our net loss for the three months ended
September 30, 2000 was $2.1 million compared to net income of $12.6 million in
the comparable period in 1999, which included the $13.7 million gain from the
sale of our interest in the Expocomm partnership.
Basic and Diluted net income (loss) per common share was $(0.04) and $0.24
for the three months ended September 30, 2000 and 1999, respectively. On a pro
forma basis giving effect from the first day of the quarter to the
transactions related to the spin off from ZDI, basic and diluted net income
(loss) per common share would have been $(0.08) and $0.08 for the three months
ended September 30, 2000 and 1999, respectively.
14
<PAGE>
Nine Months Ended September 30, 2000 Versus Nine Months Ended September 30,
1999
Our total revenue increased $20.4 million, or 13.2%, to $175.6 million in
the nine months ended September 30, 2000 from $155.2 million in the comparable
period in 1999. Exhibitor services revenues increased by $1.7 million, or
1.6%, to $111.1 million in the nine months ended September 30, 2000 from
$109.4 million in the comparable period in 1999. Adjusting the results of
operations for the nine months ended September 30, 1999 to exclude the results
for the N+I Paris event, which was held in the third quarter of 1999 but will
not be held until the fourth quarter of 2000, adjusted exhibitor services
revenue increased $11.6 million or 11.7% in the nine months ended September
30, 2000 from an adjusted $99.5 million in the comparable period in 1999. The
increase is due to a 4.6% increase in the average rental rate per square foot
paid by exhibitors to $52.64 from $50.34 in 1999 and a 0.8% increase in net
square feet of exhibit space rented at our events to 1,447,366 for the nine
months ended September 30, 2000 from 1,436,549 in the comparable period in
1999 along with a $7.7 million increase in exhibitor revenue activity which
includes $2.5 million for Java One and $5.2 million of other exhibitor service
fee income at our domestic and international tradeshows and conferences in
2000 compared with 1999.
Conference fees increased $12.4 million, or 38.7%, to $44.6 million in the
nine month period ended September 30, 2000 from $32.2 million in the
comparable period in 1999. The increase was attributable to a 19.0% increase
in the number of conference participants at our events to 33,907 from 28,500
and a 16.5% increase in the average revenue per conference attendee in the
nine months ended September 30, 2000 to $1,315 compared with $1,128 in the
comparable period in 1999. The increase in conference attendees for the nine
months ended September 30, 2000 was due to more specific customization and a
greater number of programs offered at our Java One, N+I Las Vegas, N+I
Atlanta, Seybold Seminars Boston, Seybold Seminars San Francisco and COMDEX
Spring events. Excluding the results of the N+I Paris event, conference fees
increased $12.7 million, or 39.8%, while the average revenue per conference
attendee increased by $181, or 16.0%.
Advertising and sponsorship revenues increased $6.3 million, or 46.2%, to
$19.9 million in the nine months ended September 30, 2000 from $13.6 million
in the comparable period in 1999. This increase is attributable to the
additional advertising and sponsorship opportunities at our N+I Las Vegas, N+I
Atlanta, Seybold Seminars Boston, Seybold Seminars San Francisco and COMDEX
Spring events. Excluding the results of the N+I Paris event, advertising and
sponsorship revenue increased by $6.8 million, 51.9%.
Cost of production increased $2.0 million, or 4.2%, to $50.6 million in the
nine months ended September 30, 2000 from $48.5 million in the comparable
period in 1999. As a percentage of revenues, these costs for the nine months
ended September 30, represented 28.8% in 2000 compared to 31.3% in 1999.
Adjusting the results of operations for the nine months ended September 30,
1999, to exclude the results for the N+I Paris event, cost of production
increased $6.3 million or 14.3% in the nine months ended September 30, 2000
from an adjusted cost of production of $44.2 million in the comparable period
in 1999. Adjusted costs of production represented 30.6% of revenues for the
nine months ended September 30, 1999.
SG&A expenses, including noncash stock based compensation, increased $16.6
million, or 27.6%, to $76.7 million in the nine months ended September 30,
2000 from $60.1 million in the comparable period in 1999. As a percentage of
revenue, SG&A represented 43.7% in the nine months ended September 30, 2000
compared to 38.7% in the comparable period in 1999. The increase in SG&A as a
percentage of revenue is primarily attributed to the increase in noncash stock
based compensation and increased levels of employment at our business
locations in Massachusetts and California. The noncash stock based
compensation was $3.4 million for the nine months ended September 30, 2000
compared to $0.4 million in the comparable period in 1999. Excluding the
results of the N+I Paris event and noncash stock based compensation for both
periods, SG&A expenses represent 41.7% and 41.3% of revenues for the nine
months ended September 30, 2000 and 1999, respectively.
15
<PAGE>
As a result of the foregoing, EBITDA increased by $0.2 million, or 0.4%, to
$48.4 million in the nine months ended September 30, 2000 from $48.2 million
in the comparable period in 1999. Adjusting the results of operations for the
nine months ended September 30, 1999, to exclude the results for the N+I Paris
event and excluding noncash stock based compensation for both nine month
periods, adjusted EBITDA increased $9.5 million, or 22.5% to $51.8 million in
the nine months ended September 30, 2000 from an adjusted $42.3 million in the
comparable period in 1999.
Depreciation and Amortization decreased by $784,000, or 2.8%, to $27.5
million in the nine months ended September 30, 2000 from $28.2 million in the
comparable period in 1999. This decrease is primarily due to certain property
and equipment and intangible assets becoming fully depreciated or amortized in
2000.
Interest expense, net, increased by $5.0 million or 29.0%, to 22.1 million
in the nine months ended September 30, 2000 from $17.1 million in the
comparable period in 1999. The increase is due primarily to increased interest
rates on current borrowings compared to previous borrowing arrangements. If
our initial borrowings under our new credit facility and our zero coupon
senior debentures had been outstanding from the first day of the year net
interest expense would have been $40.5 million or $18.4 million greater that
the $22.1 million reported.
Income tax expense (benefit) decreased $7.0 million, to $(0.5) million in
the nine months ended September 30, 2000 from $6.6 million in the comparable
period in 1999. The decrease can be attributed to lower income before taxes in
2000 as presented in the foregoing. The decrease in income can be attributed
to the $13.7 million gain from the sale of the Expocomm partnership in the
third quarter of 1999.
As a result of the foregoing, our net loss for the nine months ended
September 30, 2000 was $0.7 million compared to net income of $10.0 million
for the comparable period in 1999.
Basic and Diluted net income (loss) per common share was $(0.01) and $0.19
for the nine months ended September 30, 2000 and 1999, respectively. On a pro
forma basis giving effect from the first day of the year to the transactions
related to this spin off from ZDI, basic and diluted net (loss) per common
share would have been $(0.21) and $(0.12) for the nine months ended September
30, 2000 and 1999, respectively.
Liquidity and Capital Resources
Historically, the cash we generated from operating activities has exceeded
the cash we used in investing activities by significant amounts. We have used
cash in investing activities primarily to fund investments in property and
equipment and intangibles. For the nine months ended September 30, 2000, we
generated net cash from operations of $89.0 million and used $4.5 million of
net cash in investing activities and for the nine months ended September 30,
1999, we had $75.5 million net cash provided by our operations and used $3.6
million of net cash in investing activities. Prior to April 13, 2000, we, as a
wholly-owned subsidiary of ZDI, relied on ZDI's cash management and treasury
functions and remitted most of the cash we did not use in our business to ZDI,
which used it to fund its other businesses. As a result of these practices, we
historically had a working capital deficit and low cash balances. Since April
13, 2000, we assumed responsibility for our cash management and treasury
activities as if we were an independent company. At September 30, 2000, we had
working capital of $5.2 million and cash and cash equivalents of $123.5
million. Unless we decide to prepay our borrowings, we do not expect to have
material working capital deficits in the future.
Our cash flows are not as volatile as our revenues, because we receive
payments for events during the year but recognize them as revenue only when
the corresponding event occurs.
Capital expenditures for the nine months ended September 30, 2000 were $4.5
million. We anticipate our capital expenditures for the balance of 2000 to
total approximately $10 million, including $2 million for tenant upgrades in
our newly leased corporate headquarters in Los Angeles and existing facilities
located in Needham,
16
<PAGE>
Massachusetts and Foster City, California, $2 million for replacements and
upgrades of property and equipment, $1 million for expanded data center
capacity to replace administrative services that were previously provided by
ZDI and $5 million for our new Internet initiatives.
On August 18, 2000 ZDI completed the previously announced spin-off of the
Company, a new company formed to hold ZDI's trade show and conference
business, to the holders of ZDI common stock. In connection with the spin-off,
we raised approximately $75 million through the issuance of zero coupon senior
debentures with detachable warrants and sold 11,641,950 common shares of our
common stock for $6 per share. Additionally our subsidiary Key3Media Events
borrowed $330 million from a syndicate of banks. The proceeds of these
transactions were used to repay and refinance Key3Media Events' existing
indebtedness of $382 million and to fund a cash dividend to ZDI of $43
million, and the balances were retained for working capital and general
corporate purposes.
Based upon current and anticipated levels of operations, management believes
that our cash on hand and cash flow from operations combined with borrowings
available under our credit facilities will be sufficient to enable us to meet
our cash operating requirements including venue rental payments, scheduled
interest and principal payments on debt and capital expenditures. We will,
however, be subject to general economic conditions and to financial, business
and other factors, including factors beyond our control.
Seasonality
Our revenue is seasonal, even though our customers pay us for an event
during the 12 months preceding the event, we do not recognize the payments we
receive as revenue until the event occurs. Historically, our largest events
occur in the second quarter (N+I, Las Vegas) and the fourth quarter
(COMDEX/Fall). As a result, the majority of our revenue is recorded in these
quarters. We may also experience seasonal fluctuations as events held in one
quarter in the current or prior year may be held in a different quarter in
future years.
Inflation
The impact of inflation on our results of operations has not been
significant in recent years.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various market risks, which includes the potential loss
arising from adverse changes in market rates and prices such as foreign
currency exchange and interest rates. We do not enter into derivatives or
other financial instruments for trading or speculative purposes. We do not
hedge our foreign currency rate risk; however, as noted below, we have entered
into an interest rate cap agreement to manage and reduce the impact of changes
in interest rates.
Currencies. We maintain operations, cash and other assets in Europe, Canada,
Asia and Latin America. The results of operations and financial position of
our foreign operations are principally measured in their respective currency
and translated into U.S. dollars. As a result, exposure to foreign currency
gains and losses exists.
Interest. We rely significantly on long-term floating rate debt in our
capital structure. Our new credit facility with a syndicate of banks requires
that not less than $165.0 million of the facility be covered by interest rate
cap agreements which eliminate our exposure to interest rate increases in
LIBOR above 9.375%. Notwithstanding the preceding, a one percentage point
increase in interest rates would result in a reduction of pretax earnings and
cash flows equal to $1.9 million.
17
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceeding
Legal proceedings are discussed in footnote 6 (Commitments and
Contingencies) contained in Part 1, Item 1--Notes to Condensed Combined
Financial Statements and such discussion is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibit numbers in the following list correspond to the number
assigned to such exhibits in the Exhibit Table of Item 601 of
Regulation S-K:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
27 Financial Data Schedule for the nine months ended September 30,
2000, filed herewith.
</TABLE>
(b) Reports on Form 8-K
No report on Form 8-K was filed by the Company during the three
months ended September 30, 2000.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ Peter B. Knepper
-------------------------------------
Peter B. Knepper
Executive Vice President
Chief Financial and
Accounting Officer
November 13, 2000
19
