<PAGE> 1
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, 1998
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: 0-22789
CMP MEDIA INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-2240940
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 COMMUNITY DRIVE
MANHASSET, NEW YORK 11030
(Address of principal executive offices) (Zip code)
(516) 562-5000
(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 10, 1998, there were 23,053,756 shares of the registrant's
voting common stock issued and outstanding, of which 7,010,752 shares were Class
A Common Stock and 16,043,004 shares were Class B Common Stock.
<PAGE> 2
CMP MEDIA INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Condensed Consolidated Statements of Income (Unaudited)
for the three and nine months ended September 30, 1998 and 1997... 1
Condensed Consolidated Balance Sheets (Unaudited)
as of September 30, 1998 and December 31, 1997.................... 2
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the nine months ended September 30, 1998 and 1997............. 3
Notes to Unaudited Condensed Consolidated Financial Statements.... 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................... 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
PART II - OTHER INFORMATION.................................................. 14
SIGNATURES................................................................... 15
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CMP Media Inc. and Subsidiaries
Condensed Consolidated Statements of Income
in thousands, except per share amounts
(unaudited)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 117,470 $ 114,179 $ 352,710 $ 341,097
Operating costs and expenses:
Cost of revenues 52,617 45,117 155,638 136,289
Selling and promotion 40,181 37,579 121,513 115,134
General and administrative 22,904 20,229 67,688 65,780
Non-recurring compensation charge -- 4,449 -- 4,449
--------- --------- --------- ---------
Income from operations 1,768 6,805 7,871 19,445
--------- --------- --------- ---------
Gain on sales -- 3,042 1,320 3,042
Other income (expense), net (462) (3,171) 69 (8,294)
--------- --------- --------- ---------
Income before provision (benefit) for
income taxes $ 1,306 $ 6,676 $ 9,260 $ 14,193
Provision (benefit) for income taxes 563 (2,939) 3,991 (2,689)
--------- --------- --------- ---------
Net income $ 743 $ 9,615 $ 5,269 $ 16,882
========= ========= ========= =========
Net income per share - basic $ 0.03 $ 0.23
========= =========
Net income per share - diluted $ 0.03 $ 0.22
========= =========
Pro Forma Data:
Historical income before provision
for income taxes $ 6,676 $ 14,193
Pro forma provision for income taxes 2,911 6,188
--------- ---------
Pro forma net income $ 3,765 $ 8,005
========= =========
Pro forma net income per share - basic $ 0.17 $ 0.37
========= =========
Pro forma net income per share - diluted $ 0.16 $ 0.35
========= =========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
1
<PAGE> 4
CMP Media Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
in thousands, except share and per share amounts
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 16,430 $ 31,495
Accounts receivable, net 77,201 76,667
Short-term investments 17,713 6,610
Inventories 7,207 7,587
Deferred income taxes 5,695 5,695
Deferred subscription acquisition costs 4,843 --
Prepaid expenses and other current assets 7,637 10,073
--------- ---------
Total current assets 136,726 138,127
--------- ---------
Property and equipment, net 30,031 27,831
Long-term investments 5,158 12,862
Investments in and advances to unconsolidated affiliates 3,818 4,687
Intangible and other assets 42,528 8,890
Deferred income taxes 5,312 5,312
--------- ---------
$ 223,573 $ 197,709
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 31,291 $ 26,389
Accrued expenses and other current liabilities 49,075 38,150
S corporation distribution payable -- 12,000
Deferred revenue 13,620 10,666
--------- ---------
Total current liabilities 93,986 87,205
--------- ---------
Long-term debt 14,000 --
Deferred compensation and other liabilities 13,273 13,908
--------- ---------
Total liabilities 121,259 101,113
--------- ---------
Commitments and contingencies
Stockholders' equity:
Class A Common Stock, par value $.01 per share, 50,000,000 shares
authorized, 7,092,361 shares and 7,060,312 shares issued
at September 30, 1998 and December 31, 1997, respectively 71 71
Class B Common Stock, par value $.01 per share, 20,000,000 shares
authorized, 16,043,005 shares and 16,050,074 shares issued
at September 30, 1998 and December 31, 1997, respectively 160 160
Additional paid-in capital 85,556 86,305
Retained earnings 28,851 23,582
Unamortized restricted stock compensation (11,312) (13,270)
Accumulated other comprehensive income 498 (252)
Treasury stock, at cost, 81,610 shares (1,510) --
--------- ---------
Total stockholders' equity 102,314 96,596
--------- ---------
$ 223,573 $ 197,709
========= =========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
2
<PAGE> 5
CMP Media Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
in thousands
(unaudited)
<TABLE>
<CAPTION>
For the nine months
ended September 30,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,269 $ 16,882
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization of property and equipment 7,700 6,070
Amortization of intangible assets 1,431 312
Write-off of property and equipment 508 2,601
Provision for doubtful accounts 2,565 1,787
Compensation expense under incentive plans 3,381 2,863
Gain on sales (1,320) (3,042)
Non-recurring compensation charge -- 4,449
Losses from unconsolidated affiliates 1,074 7,850
Deferred income taxes -- (5,100)
Changes in operating assets and liabilities, net of the
effects of businesses acquired and sold:
Increase in accounts receivable (3,391) (8,972)
Decrease (increase) in inventories 1,619 (583)
Increase in deferred subscription acquisition costs (6,243) (4,773)
Decrease in prepaid expenses and other assets 1,454 141
Increase (decrease) in accounts payable, accrued expenses
and other current liabilities 7,034 (360)
Increase in deferred revenue and other liabilities 1,983 1,183
-------- --------
Net cash provided by operating activities 23,064 21,308
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (10,408) (9,021)
Investments in and advances to unconsolidated affiliates (205) (4,172)
Purchase of businesses (29,962) --
Purchase of investments (2,627) --
Proceeds from sale of investments 1,060 --
Proceeds from sales of assets 4,483 1,868
-------- --------
Net cash used in investing activities (37,659) (11,325)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock net of issuance costs 520 84,711
Borrowings under revolving credit agreement 28,600 29,475
Repayment of borrowings (14,600) (54,475)
Distributions to S corporation stockholders for taxes and other (13,269) (29,721)
Purchase of treasury stock (1,510) --
Other financing activities (211) (177)
-------- --------
Net cash provided by (used in) financing activities (470) 29,813
-------- --------
Net change in cash and cash equivalents (15,065) 39,796
Cash and cash equivalents at beginning of period 31,495 6,721
-------- --------
Cash and cash equivalents at end of period $ 16,430 $ 46,517
======== ========
Supplemental disclosure of businesses acquired:
Fair value of assets acquired $ 38,228
Liabilities assumed (8,266)
--------
Cash paid $ 29,962
========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
3
<PAGE> 6
CMP MEDIA INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of CMP Media Inc. and
subsidiaries (the "Company") as of September 30, 1998 and for the three and nine
months ended September 30, 1998 and 1997 are unaudited but have been prepared in
accordance with generally accepted accounting principles for interim financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. The results of operations of any interim period are not necessarily
indicative of the results of operations for the full year.
The accompanying financial information should be read in conjunction with
the financial statements, including the notes thereto, for the year ended
December 31, 1997 included in the Company's 1997 Annual Report on Form 10-K. The
condensed consolidated balance sheet as of December 31, 1997 has been summarized
from the Company's audited consolidated balance sheet as of that date.
2. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company has adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130") which was effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in the financial
statements. The Company's total comprehensive income for the three and nine
months ended September 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1998 1997 1998 1997
------- -------- -------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net income .............................. $ 743 $ 9,615 $ 5,269 $16,882
Other comprehensive income, net of tax:
Unrealized gain (loss) on
securities available for sale ....... (73) -- 695 --
Foreign currency translation
adjustments ......................... 100 -- 55 --
------- --------- --------- -------
Total comprehensive income .............. $ 770 $ 9,615 $ 6,019 $16,882
======= ======== ======== =======
</TABLE>
3. RESULTS OF OPERATIONS
On May 29, 1998, the Company acquired four computer and communications
publications, as well as NSTL, a technology and software testing lab, from The
McGraw-Hill Companies, Inc. The purchase price for this acquisition was $28.6
million in cash plus the assumption of certain liabilities.
4
<PAGE> 7
CMP MEDIA INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following table summarizes pro forma results as if the acquisition had
occurred on January 1, 1997:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
1998 1997
-------- ------------
(UNAUDITED)
<S> <C> <C>
Revenues $383,277 $ 399,535
======== ============
Income before taxes $ 5,116 $ 11,376
======== ============
Net income $ 2,911 $ 15,293
======== ============
Net income per share - diluted $ 0.12 $ 0.67
======== ============
Pro forma net income as if a C
corporation prior to January
1, 1997 (See Note 4) $ 6,416
============
Pro forma net income per share -
diluted $ 0.28
============
</TABLE>
In April 1998, the Company sold substantially all of the assets of its
publication HomePC for cash and assumed liabilities totaling $4,087. In
connection with this transaction, the Company recorded a gain of approximately
$440.
In March 1998, in connection with the sale of its investment in a business
developing Internet-related technologies, the Company recorded a gain of
approximately $828.
In August 1997, the Company sold the subscriber list of NetGuide Magazine
for approximately $3,042 in cash and assumed liabilities. In connection with
this transaction, the Company recorded a gain of $3,042.
During the nine months ended September 30, 1997, the Company recorded
charges of $3,200 to reduce the carrying value of two of its investments in
companies developing Internet-related technologies due to impairment. These
charges are included in Other income (expense), net in the accompanying
condensed consolidated statement of income.
4. INITIAL PUBLIC OFFERING
On July 30, 1997, the Company closed an initial public offering (the
"Offering") of 5,485,000 shares of Class A Common Stock at an offering price of
$22.00 per share, of which 4,235,000 shares were sold by the Company and
1,250,000 shares were sold by selling stockholders. Net proceeds to the Company
after expenses of the Offering were $84,711.
5
<PAGE> 8
CMP MEDIA INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
In connection with the Offering, the Company terminated its S corporation
election and declared a final S corporation distribution of approximately
$39,300 to the individuals who were its stockholders of record prior to the
consummation of the Offering. The Company has used a portion of the net proceeds
of the Offering to repay debt of $21,750 outstanding at the time of the Offering
under its revolving credit agreement and a portion to pay the final S
corporation distribution. The remaining net proceeds are being used for general
corporate purposes including acquisitions.
Prior to the consummation of the Offering, the Company declared a
35.75-for-one stock split, in the form of a stock dividend, of all classes of
its common stock and restated its certificate of incorporation to, among other
things, change the par value of all classes of its common stock from $0.10 per
share to $0.01 per share. The stock dividend and change in par value have been
given retroactive treatment in the condensed consolidated financial statements
for all periods presented.
As a result of terminating its S corporation election and converting to a
C corporation in connection with the Offering, the Company is subject to U.S.
federal and all applicable state and local taxes. The unaudited pro forma
provision for income taxes, unaudited pro forma net income and unaudited pro
forma net income per share data for the three and nine months ended September
30, 1997 are presented as if the Company had terminated its S corporation
election prior to January 1, 1997.
5. NET INCOME PER SHARE AND WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Net income per share - basic is calculated using weighted average common
shares outstanding and net income per share - diluted is calculated using
weighted average common shares outstanding including the effect of dilutive
securities calculated using the Treasury Stock Method. In addition, the
calculations prior to the Offering include shares of common stock representing
the number of shares, based upon the Offering price of $22.00 per share, the
proceeds from which would be necessary to pay the final S corporation
distribution (see Note 4) and S corporation distributions of approximately
$10,300 made in the twelve months preceding May 31, 1997 which were in excess of
net income for such twelve-month period (the "Offering Shares").
For the three months ended September 30, 1998, for the purpose of
calculating net income per share - basic, the weighted average number of common
shares outstanding was 23,081,118 and for the purpose of calculating net income
per share - diluted, the weighted average number of common shares outstanding
including dilutive securities was 23,566,214 which includes 485,096 shares
representing the impact of common stock options calculated using the Treasury
Stock Method. For the three months ended September 30, 1997, for the purpose of
calculating pro forma net income per share - basic, the weighted average number
of common shares outstanding was 22,429,722 and for the purpose of calculating
net income per share - diluted, the weighted average number of common shares
outstanding including dilutive securities was 24,072,904 which includes
1,643,182 shares representing the impact of common stock options calculated
using the Treasury Stock Method.
For the nine months ended September 30, 1998, for the purpose of calculating
net income per share - basic, the weighted average number of common shares
outstanding was 23,100,630 and for the purpose of calculating net income per
share - diluted, the weighted average number of common shares outstanding
including dilutive securities was 24,072,693 which includes 972,063 shares
representing the impact of common stock options calculated using the Treasury
Stock Method. For the nine months ended September 30, 1997, for the purpose of
calculating pro forma net income per share - basic, weighted average common
shares outstanding including the Offering Shares was 22,384,425 and for the
purpose of calculating net
6
<PAGE> 9
CMP MEDIA INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
income per share - diluted, the weighted average number of common shares
outstanding including dilutive securities was 22,932,153 which includes 547,728
shares representing the weighted average impact of common stock options
calculated using the Treasury Stock Method.
6. SUBSEQUENT EVENTS
On October 20, 1998, the Compensation Committee of the CMP Board of
Directors approved the repricing of outstanding options held by employees other
than members of senior management. The repricing affected approximately 14% of
total options outstanding. The exercise price of the options was reduced to
$12.72 from prices ranging from $16.38 to $26.00, with the condition that the
repriced options cannot be exercised for one year after the date of repricing.
The new exercise price exceeded the market price of the Company's Class A Common
Stock at the date of the repricing. The repricing affects options covering
approximately 500,000 shares of CMP's Class A Common Stock. CMP has no plans to
reprice outstanding options held by any members of senior management.
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUES. Revenues for the three months ended September 30, 1998 increased
$3.3 million, or 2.9%, to $117.5 million compared with $114.2 million for the
same period in 1997. The improvement was primarily attributable to increased
revenues for the Company's International operations, driven primarily by the
launch of Computer Reseller News France and the acquisition of three
publications in the U.K. in the fourth quarter of 1997, as well as the
acquisition from The McGraw-Hill Companies, Inc. ("McGraw-Hill") in the second
quarter of 1998 of four publications (Byte, Data Communications, LAN Times and
tele.com) and NSTL, a technology and software testing lab. These revenue
increases were partially offset by decreased revenues due to the sale of HomePC
in April 1998 and the discontinuance of NetGuide Magazine in July 1997, as well
as decreases in advertising yield for certain of the Company's print
publications and a decrease in the number of advertising pages in the Company's
domestic print publications. Total advertising pages for the Company's domestic
print publications decreased 7.7% to 8,999 pages, primarily due to advertising
page decreases for InternetWeek, Computer Reseller News, Windows Magazine,
Electronic Engineering Times, and from the sale of HomePC and the discontinuance
of NetGuide Magazine, partially offset by the addition of advertising pages for
the publications acquired from McGraw-Hill.
OPERATING COSTS AND EXPENSES. Cost of revenues for the three months ended
September 30, 1998 increased $7.5 million, or 16.6%, to $52.6 million compared
with $45.1 million for the same period in 1997. This increase was primarily
attributable to approximately $6.0 million in costs associated with the
acquisition of the four publications and NSTL from McGraw-Hill, approximately
$2.5 million of International costs associated with the launch of Computer
Reseller News France and the acquisition of three publications in the U.K.,
increased costs attributable to conferences and increased editorial costs in the
Company's "channel" publications, partially offset by decreased costs due to the
sale of HomePC and the discontinuance of NetGuide Magazine. Cost of revenues as
a percentage of revenues increased to 44.8% in the third quarter of 1998 from
39.5% in the third quarter of 1997. This resulted primarily from the addition of
new International publications, which currently have higher expense ratios than
the Company's domestic print publications, partially offset by the sale of
HomePC and the discontinuance of NetGuide Magazine which had higher expense
ratios than the Company's other print publications. Cost of revenues includes
production, paper, editorial, distribution and fulfillment costs.
Selling and promotion expenses for the three months ended September 30,
1998 increased $2.6 million, or 6.9%, to $40.2 million compared with $37.6
million for the same period in 1997. The increase was primarily attributable to
approximately $3.9 million of sales force costs associated with the acquisition
of the publications and NSTL from McGraw-Hill and the new International
publications, partially offset by decreases of approximately $2.0 million due to
the sale of HomePC and the discontinuance of NetGuide Magazine. Selling and
promotion expenses as a percentage of revenues increased to 34.2% in the third
quarter of 1998 from 32.9% in the third quarter of 1997.
General and administrative expenses for the three months ended September
30, 1998 increased $2.7 million, or 13.2%, to $22.9 million compared with $20.2
million for the same period in 1997, primarily due to expansion in International
operations and the Company's Internet services. General and administrative
expenses as a percentage of revenues increased to 19.5% in the third quarter of
1998 from 17.7% in the third quarter of 1997.
NON-RECURRING COMPENSATION CHARGE. Upon the consummation of the Offering
in July 1997 (see "Liquidity and Capital Resources"), certain members of the
founding family of the Company made a gift from their personal holdings of
202,186 shares of Class A Common Stock to substantially all of the employees of
the Company. The Company recorded, at the date of the gift, a one-time, non-cash
compensation charge of $4.4 million which represented the fair market value of
the shares on such date.
8
<PAGE> 11
GAIN ON SALES. The gain on sale of approximately $3.0 million in the third
quarter of 1997 was attributable to the sale of the subscriber list of NetGuide
Magazine.
OTHER INCOME (EXPENSE), NET. Other expense, net for the three months ended
September 30, 1998 of $0.5 million compared favorably to $3.2 million for the
same period in 1997, primarily as a result of a significant decrease in losses
from the Company's Internet-related investments. The Company's equity
investments are primarily in International publications as well as an Internet
services company.
PROVISION FOR INCOME TAXES. Prior to changing its tax election from S
corporation to C corporation, the Company and certain affiliates had elected to
be treated as S corporations for U.S. federal income tax purposes, which
required that the income or loss for federal and certain state and local
jurisdictions be recognized by the stockholders. In connection with the Offering
(see "Liquidity and Capital Resources"), the Company terminated its S
corporation election and became a C corporation. The Company's effective income
tax rate for the three months ended September 30, 1998 was 43.1%. If the Company
and certain affiliates had been C corporations for the three months ended
September 30, 1997 the effective income tax rate would have been 43.6%.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUES. Revenues for the nine months ended September 30, 1998 increased
$11.6 million, or 3.4%, to $352.7 million compared with $341.1 million for the
same period in 1997. The improvement was primarily attributable to the second
quarter 1998 acquisition of four publications and NSTL from McGraw-Hill,
increased revenues for the Company's International operations due primarily to
the fourth quarter 1997 launch of Computer Reseller News France and acquisition
of publications in the U.K., as well as increased revenues from the Company's
conferences. These revenue increases were partially offset by the sale of HomePC
in April 1998 and the discontinuance of NetGuide Magazine in July 1997. Total
advertising pages for the Company's domestic print publications decreased 3.8%
to 27,511 pages, primarily due to advertising page decreases for Computer
Reseller News, InternetWeek, Windows Magazine, the sale of HomePC and the
discontinuance of NetGuide Magazine, partially offset by advertising page
increases for InformationWeek and the addition of advertising pages for the
publications acquired from McGraw-Hill.
OPERATING COSTS AND EXPENSES. Cost of revenues for the nine months ended
September 30, 1998 increased $19.3 million, or 14.2%, to $155.6 million compared
with $136.3 million for the same period in 1997. This increase was primarily
attributable to approximately $9.3 million in costs associated with the
acquisition of four publications and NSTL from McGraw-Hill, approximately $8.6
million of International costs associated with the launch of Computer Reseller
News France and the acquisition of three publications in the U.K., increased
costs attributable to conferences, and increased edit and paper costs for
certain of the Company's print publications, partially offset by decreased costs
of approximately $10.9 million as a result of the sale of HomePC and the
discontinuance of NetGuide Magazine. Cost of revenues as a percentage of
revenues increased to 44.1% for the nine months ended September 30, 1998 from
40.0% for the same period in 1997. This resulted primarily from the addition of
new International publications, which currently have higher expense ratios than
the Company's domestic print publications, and higher paper costs in two of the
Company's publications due to the conversion to coated stock, partially offset
by decreased costs due to the sale of HomePC and the discontinuance of NetGuide
Magazine, which had higher expense ratios than the Company's other print
publications.
Selling and promotion expenses for the nine months ended September 30,
1998 increased $6.4 million, or 5.5%, to $121.5 million compared with $115.1
million for the same period in 1997. The increase was primarily attributable to
increased sales efforts associated with certain of the Company's publications
and increased costs associated with the acquisition of the publications and NSTL
from McGraw-Hill as well as costs associated with the Company's new
International publications, partially offset by decreased selling and promotion
costs due to the sale of HomePC and the discontinuance of NetGuide Magazine.
Selling and promotion expenses as a percentage of revenues increased to 34.5% in
the nine months ended September 30, 1998 from 33.8% for the same period in 1997.
9
<PAGE> 12
General and administrative expenses for the nine months ended September
30, 1998 increased $1.9 million, or 2.9%, to $67.7 million compared with $65.8
million for the same period in 1997, primarily as a result of expansion in
International operations and the Company's Internet services, partially offset
by a decrease in costs of $2.4 million attributable to a charge taken in 1997
for workforce reduction. General and administrative expenses as a percentage of
revenues decreased to 19.2% for the nine months ended September 30, 1998 from
19.3% for the same period in 1997.
GAIN ON SALES. The gain on sales of $1.3 million in the nine months ended
September 30, 1998 was realized in connection with the sale of the Company's
investment in a business developing Internet-related technologies and from the
sale of HomePC. The gain on sale of approximately $3.0 million for the nine
months ended September 30, 1997 was attributable to the sale of the subscriber
list of NetGuide Magazine.
OTHER INCOME (EXPENSE), NET. Other income, net for the nine months ended
September 30, 1998 increased $8.4 million to $0.1 million compared with $8.3
million of other expense, net for the same period in 1997, primarily as a result
of a significant decrease in losses from the Company's Internet-related
investments, as well as interest income earned on short-term and long-term
investments during the nine months ended September 30, 1998 as compared to
interest expense on borrowings incurred during the same period in 1997.
PROVISION FOR INCOME TAXES. If the Company and certain affiliates had been
C corporations for the nine months ended September 30, 1997, the effective
income tax rate would have been 43.6%.
LIQUIDITY AND CAPITAL RESOURCES
The Company has traditionally required relatively low levels of working
capital to operate its business. Working capital was $42.7 million at September
30, 1998 and $50.9 million at December 31, 1997. The decrease in working capital
for the nine months ended September 30, 1998 was primarily attributable to the
repayment of $14.6 million of long-term debt incurred in connection with the
acquisition of four publications and NSTL from McGraw-Hill, partially offset by
the reclassification of investments from long-term to short-term as a result of
their maturities coming due within the operating cycle and earnings for the nine
months ended September 30, 1998. Accounts receivable, net were $77.2 million at
September 30, 1998 and $76.7 million at December 31, 1997. Days sales
outstanding was 58.0 at September 30, 1998 and 56.7 at December 31, 1997. Paper
inventories were $7.2 million at September 30, 1998 and $7.6 million at December
31, 1997.
Cash provided by operating activities was $23.1 million and $21.3 million
for the nine months ended September 30, 1998 and 1997, respectively. The
increase was primarily due to changes in working capital items, the most
significant of which were accounts receivable and accounts payable, accrued
expenses and other current liabilities, as well as the absence of a significant
change in deferred income taxes, partially offset by decreased earnings and
decreased losses from unconsolidated affiliates.
Investing activities during the nine months ended September 30, 1998 used
$37.7 million, consisting primarily of $30.0 million in purchases of businesses
(including four publications and NSTL from McGraw-Hill for $28.6 million) and
$10.4 million in capital expenditures, partially offset by $4.5 million in
proceeds from the sales of assets, primarily the Company's 50% interest in one
of its joint ventures engaged in Internet-related services as well as the sale
of HomePC. Investing activities during the nine months ended September 30, 1997
used $11.3 million, consisting of $9.0 million in capital expenditures and $4.2
million in investments in and advances to Internet services and other entities
in which the Company has investments, partially offset by proceeds from the sale
of the subscriber list of NetGuide Magazine. The Company expects total capital
expenditures for 1998 to continue at least at the pace of 1997 and to be
primarily for computer equipment for business unit and corporate use.
Financing activities during the nine months ended September 30, 1998 used
$0.5 million, consisting primarily of $28.6 million of borrowings (less $14.6
million of subsequent repayments) under the Company's revolving credit agreement
partially offset by $13.3 million of cash distributions to the individuals who
were the Company's stockholders of record prior to
10
<PAGE> 13
the Offering; a significant portion of these distributions were used by such
stockholders to pay taxes they owed on the Company's income attributable to them
as stockholders of an S corporation. Financing activities for the nine months
ended September 30, 1997 provided $29.8 million, consisting primarily of $84.7
million in net proceeds from the Offering and $29.5 million of borrowings under
the Company's revolving credit agreement, partially offset by $54.5 million for
the repayment of borrowings and $29.7 million of cash distributions to the
individuals who were the Company's stockholders of record prior to the Offering.
The Company's revolving credit agreement, as amended, with two financial
institutions provides for borrowings of up to $75 million. Borrowings are
unsecured and bear interest at either (i) LIBOR plus .35% to .825% depending on
outstanding loan balances and the Company's earnings levels, or (ii) the prime
rate, at the Company's option. The agreement, as amended, contains certain
negative covenants regarding, among other items, minimum levels of net worth,
fixed coverage and limitations on indebtedness. Outstanding borrowings at
September 30, 1998 amounted to $14.0 million and the interest rate was 5.8%.
These borrowings are due November 14, 2001. At September 30, 1998, the Company
had approximately $61.0 million of the available borrowing capacity under this
agreement. Management believes that the Company was in compliance with all the
covenants of the revolving credit agreement at September 30, 1998.
In April 1997, the Company guaranteed loans totaling $4.7 million to two
of its senior executives to pay taxes in connection with their purchase of Class
A Common Stock from principal stockholders of the Company. The loans are from
one of the financial institutions with which the Company has its revolving
credit agreement. These loans will be payable in November 2001 and are
guaranteed through such date. The Company is obligated to extend the guarantees
for $3.0 million and $1.7 million through December 31, 2005 and December 31,
2007, respectively, at the request of the senior executives.
On July 30, 1997, the Company closed the Offering of 5,485,000 shares of
Class A Common Stock at an offering price of $22.00 per share, of which
4,235,000 shares were sold by the Company and 1,250,000 shares were sold by
selling stockholders. Net proceeds to the Company after expenses of the Offering
were approximately $84.7 million.
In connection with the Offering, the Company terminated its S corporation
election and declared a final S corporation distribution of approximately $39.3
million to the individuals who were its stockholders of record prior to the
consummation of the Offering, a significant portion of which distribution was
used by such stockholders to pay taxes they owed on the Company's income
attributable to them as stockholders of an S corporation. The Company has used a
portion of the net proceeds of the Offering to pay the final S corporation
distribution and a portion to repay approximately $21.8 million outstanding
under its revolving credit agreement at the time of the Offering. The remaining
net proceeds are currently held in short-term and long-term investments. The
Company plans to use the remaining net proceeds of the Offering for general
corporate purposes including acquisitions.
The Company's working capital requirements and costs associated with new
product development have been met by cash flow from operations and borrowings
under its existing revolving credit facility. Management believes sufficient
cash resources will be available to support its long-term growth strategies
through internally generated funds, the proceeds of the Offering and existing
credit arrangements.
SEASONALITY
Although the Company earned a profit in the first quarter of 1998, it has
typically incurred operating losses in the first quarter of most years, but
generally has earned profits in each of the remaining quarters. First quarter
losses have been primarily due to lower than average advertising sales during
the quarter and relatively even distribution of certain costs throughout the
year. First-quarter losses have varied from year to year due to a variety of
factors, including the timing of new product launches and price increases from
suppliers.
11
<PAGE> 14
Fourth-quarter revenues and income from operations of the Company have
historically been more favorable than those of the preceding quarters as a
result of a tendency of technology advertisers to place more advertising in the
latter part of the year and the scheduling of major technology industry trade
shows in the fourth quarter. However, there can be no assurance that these
quarterly patterns will continue in the future.
INFLATION AND VOLATILITY OF PAPER PRICES
The Company continually reviews the impact of inflation and the volatility
of paper prices. The U.S. Postal Service has announced a postage rate increase
effective in early 1999. In an effort to minimize the impact of this increase,
the Company has implemented various cost saving initiatives, which include
using lighter paper stock, taking advantage of newly offered postal
discounts, reducing the trimmed sizes of the Company's publications to reduce
mailing cost and increasing the emphasis on list maintenance.
Paper prices rose significantly in 1995, dropped in 1996, increased
moderately in 1997 and have remained stable in recent months. The Company will
continue to monitor the impact of paper prices and will consider this in setting
its pricing policies. There can be no assurance that the Company can recoup
paper price increases by passing them through to its advertisers and readers. In
addition, the Company continually reviews its purchasing and manufacturing
processes for opportunities to reduce costs and mitigate the impact of increases
in paper prices (such as purchasing lighter-grade paper stock or, when paper
prices are at cyclical lows, increasing paper inventory or entering into longer
term contracts with suppliers). However, the Company has not entered, and does
not currently plan to enter, into forward contracts.
YEAR 2000
The Year 2000 ("Y2K") problem relates to computer systems and embedded
chips with programming codes in which calendar year data is abbreviated to only
two digits. As a result of this design, some systems could fail to operate or
fail to produce correct results in the year 2000 if "00" is interpreted to mean
the year 1900, rather than the year 2000. As a result, companies are at risk for
possible miscalculations or failures in either their own systems or the systems
of third parties which could cause disruption in business operations.
The Company has implemented a project (the "Project") to address the Y2K
issues that could affect the Company's business, results of operations or
financial condition. The Project addresses information technology ("IT") systems
and software applications as well as non-IT systems, including both those used
internally by the Company and those used by certain third parties with whom the
Company does business. The Project is organized into six phases: (1) inventory
of all systems and applications of the Company as well as those of certain
third-party suppliers and service providers to identify all potential Y2K
problems; (2) assessment of Y2K compliance for each system and application so
identified; (3) correction/remediation of those systems and applications
determined not to be Y2K compliant; (4) testing of corrected/remediated systems
and applications; (5) implementation of new and/or corrected systems and
applications; and (6) contingency planning. The Company expects all of its
internal systems and software applications to be Y2K compliant before January 1,
2000.
The inventory and assessment phases of the Project were completed as of
September 30, 1998 for all of the Company's internal systems and software
applications in the U.S. The Company has determined that certain of its U.S.
systems and applications are already Y2K compliant, and the Company has begun
the correction/remediation phase with respect to its other U.S. systems and
applications. The U.S. testing phase will be ongoing as hardware or system
software is remediated, upgraded or replaced. The inventory and assessment
phases are in progress with respect to the Company's non-U.S. systems and
applications, and they are expected to be completed by December 31, 1998.
12
<PAGE> 15
The Company is also in the process of identifying and contacting third
parties with whom the Company has material relationships in order to verify
their Y2K readiness. These third parties include printing plants, distributors
of its publications, and computer system and application vendors as well as
service providers such as financial institutions, companies which provide
payroll and other employee benefits services to the Company, and utilities and
telecommunications providers. The failure of such third parties to correct
material Y2K problems could result in an interruption in, or a failure of,
certain normal business activities or operations of the Company, and such
failures could materially and adversely affect the Company's results of
operations, liquidity and financial condition. The Company is developing a plan
to address what testing, if any, may need to be performed on the systems of
those vendors and suppliers whose failure to become Y2K compliant could have a
material effect on the Company's business, results of operations or financial
condition.
The Company currently estimates the entire Project will be completed by
April 30, 1999. In the event that unforeseen circumstances prevent the Company
from completing the Project by this date, the Project timetable allows
sufficient time for the Company to conclude the Project prior to January 1,
2000.
The total cost associated with the Project, including the replacement cost
of any non-Y2K compliant systems, software or hardware, is not expected to be
material to the Company's business, results of operations or financial
condition. The total cost of the Project is estimated to be in the range of $1.0
million to $1.3 million. This estimate is primarily for the cost of software,
hardware and outside consultants and does not include internal costs related to
the Project. Internal Project costs consist principally of payroll costs for the
Company's IT group which are not separately tracked. As of September 30, 1998,
costs incurred in the inventory and assessment phases of the Project were
approximately $0.2 million. Costs incurred in connection with the Project are
expensed as incurred, except for the cost of replacement systems or hardware
which will be capitalized and depreciated over their estimated useful lives.
Project costs are being funded through operating cash flows. None of the
Company's other information technology projects has been deferred due to the
Project.
Due to the general uncertainty inherent in the Y2K problem, resulting in
part from the uncertainty of the Y2K readiness of third-party suppliers and
service providers, the Company is unable to determine at this time whether the
consequences of Y2K failures will have a material impact on the Company's
results of operations, liquidity or financial condition. However, the Company
could be materially adversely affected by a temporary inability to conduct
business in the ordinary course for a period of time after January 1, 2000
through a failure to identify and remediate all its susceptible systems or if
third-party vendors and suppliers whose systems and operations impact the
Company did not become Y2K compliant in time. This could result in the
inability to produce publications or provide online services on schedule which
could cause a decrease in the Company's revenues. Completion of the assessment
phase of the Project -- in particular, the assessment of the Y2K readiness of
its critical vendors and service providers -- is expected to significantly
reduce the Company's level of uncertainty about the Y2K problem. To the extent
that third-party responses to the Company's Y2K compliance questionnaires or
the Company's testing of such responses are unsatisfactory, the Company will
create contingency plans which could include changing vendors or service
providers to those who have demonstrated Y2K readiness.
The Project is an ongoing process and the estimates of costs and
completion dates described above are subject to change.
Information and statements contained herein regarding the Company's Y2K
Project are "Year 2000 Readiness Disclosures" as defined by the Year 2000
Information and Readiness Disclosures Act of 1998, enacted on October 19, 1998.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements regarding matters that are
subject to risks and uncertainties. For such statements, the Company claims the
protection of the safe harbor for forward-looking statements contained in
Section 21E of the Securities Exchange Act of 1934, as amended. The Company's
results could differ materially from those discussed in each forward-looking
statement due to various factors which are outside the Company's control,
including a reduction in demand for advertising by technology advertisers,
competition from other media companies for audience and advertising revenue,
market acceptance and penetration of new products and services, material adverse
changes in general economic conditions, delays or impediments in completing the
Company's Y2K Project, the failure of third parties to be Y2K compliant and the
inability of the Company to secure alternative third-party service providers
which are Y2K compliant.
13
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES.
The Company's Registration Statement on Form S-1 (File No. 333-26741) was
declared effective by the Securities and Exchange Commission (the "Commission")
on July 24, 1997. On July 30, 1997, the Company closed the initial public
offering of its Class A Common Stock, par value $.01 per share (the "Offering").
After deducting expenses of the Offering, net proceeds received by the Company
were approximately $84.7 million. To date, the Company has used a portion of
such proceeds to pay the $39.3 million final S corporation distribution and
approximately $21.8 million to repay indebtedness outstanding under its
revolving credit agreement. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
*3.3 Restated Certificate of Incorporation of CMP Media Inc.
*3.4 Amended and Restated By-laws of CMP Media Inc.
*4.1 Reference is made to Exhibits 3.3 and 3.4
*4.2 Specimen Class A Common Stock certificate
*4.3 1997 Stockholders' Agreement
27 Financial Data Schedule
- ---------------------
* Incorporated by reference to the corresponding exhibit to the Registration
Statement on Form S-1 of CMP Media Inc., as amended (Commission File No.
333-26741).
(b) The following reports on Form 8-K were filed during the
Company's quarter ended September 30, 1998:
An Item 5 report on Form 8-K, dated July 7, 1998, was filed
reporting the Company's expected second quarter 1998 results.
An Item 5 report on Form 8-K, dated September 4, 1998, was
filed reporting the Company's expected third quarter 1998
results.
14
<PAGE> 17
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.
CMP MEDIA INC.
November 16, 1998 By: /s/ Joseph E. Sichler
------------------------------
Joseph E. Sichler
Vice President and Chief Financial Officer
(Authorized Executive Officer and
Principal Accounting Officer)
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