<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 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, NY 11030
(Address of Principal Executive Offices) (Zip Code)
(516) 562-5000
(Registrant's Telephone Number, Including Area Code)
Securities to be registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
- ------------------- -------------------
None None
Securities to be registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Based on the closing sales price on March 16, 1999, the aggregate market
value of voting stock of the Registrant held by non-affiliates of the Registrant
was approximately $174,835,800 as of such date.
As of March 16, 1999, the Registrant had outstanding 7,038,875 shares of
Class A Common Stock, and 16,043,004 shares of Class B Common Stock.
---------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement to be filed with the Securities
and Exchange Commission relative to the Registrant's 1999 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Report on Form
10-K.
Certain exhibits filed with the Registrant's Registration Statement on
Form S-1 (File No. 333-26741) are incorporated by reference as Exhibits to this
Report on Form 10-K in Part IV, Item 14.
================================================================================
<PAGE> 2
CMP MEDIA INC.
TABLE OF CONTENTS
FORM 10-K
<TABLE>
<CAPTION>
Page
----
Part I
<S> <C> <C>
Item 1. Business..................................................... 3
Item 2. Properties................................................... 11
Item 3. Legal Proceedings............................................ 11
Item 4. Submission of Matters to a Vote of Security Holders.......... 11
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters.................................. 12
Item 6. Selected Financial Data...................................... 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 14
Item 7A. Quantitative and Qualitative Disclosures about Market Risk... 21
Item 8. Financial Statements and Supplementary Data.................. 21
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure....................... 42
Part III
Item 10. Directors and Executive Officers of the Registrant........... 42
Item 11. Executive Compensation....................................... 42
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................... 42
Item 13. Certain Relationships and Related Transactions............... 42
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K..................................................... 43
Signatures............................................................... 47
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
CMP Media Inc. ("CMP" or the "Company") is a leading technology media company
that provides information products and services to the builders, sellers and
users of technology worldwide. The Company has published magazines and
newspapers about technology for more than 27 years. In terms of total print
advertising pages, it is now the largest technology publisher in the U.S.
according to Inquiry Management Systems ("IMS"), an independent ad-tracking
firm. In recent years, the Company has expanded its publishing activities into
foreign countries as well as onto the World Wide Web.
Of the three largest U.S. technology publishers, CMP is the only one which
serves the broad spectrum of builders, sellers and users of technology. The
Company believes that publishing for audiences across the spectrum of builders,
sellers and users enables it to offer advertisers a one-stop purchasing
opportunity which capitalizes on their need to reach audiences in multiple
markets. The "builders" of technology include manufacturers, engineers,
designers and purchasers of electronic systems and components, including
computers, telecommunications equipment, semiconductors, software, peripherals
and related products. The "sellers" include distributors, value-added resellers
("VARs"), retailers, systems integrators, dealers, consultants, computer
superstores, mass merchandisers, warehouse clubs, consumer electronics retailers
and mail-order sellers. The "users" include the end-users of information
systems, telecommunications systems, computer systems, personal computers,
software, the Internet and related products and services, including information
systems executives, network communications and departmental applications
managers, and Internet and intranet managers. The technology sector of the U.S.
publishing industry has experienced substantial growth as technology has become
increasingly integrated into business and consumer products and the demand for
technology information and analysis has increased.
On February 10, 1999, CMP announced that it had retained the investment banking
firm of Lazard Freres & Co. LLC to explore strategic alternatives for the
Company, including, but not limited to, a sale or merger. The Company has not
made a decision as of the date hereof to pursue any particular alternative and
has indicated that there are no assurances that a transaction will result from
the exploration process.
CMP's principal executive offices are located at 600 Community Drive, Manhasset,
New York, and its telephone number is 516/562-5000.
U.S. Publications
Each of CMP's print publications is designed for a distinct audience among the
builders, sellers and users of technology. The Company serves the builders of
technology through its original equipment manufacturer ("OEM") publications; it
serves the sellers of technology through its "channel" publications; and it
serves the users of technology through its "business technology" publications.
Most of CMP's magazines and newspapers are controlled-circulation,
business-to-business trade publications.
A controlled-circulation publication is one which is distributed without charge
to qualified subscribers and which generates revenue predominantly from the
sale of advertising space. Circulation is limited to a pre-determined number of
subscribers who have certified to the publisher in writing that their job
functions include purchasing authority in the particular market served by the
publication. The publisher selects subscribers based on defined qualifying
characteristics, thereby enabling advertisers to reach those individuals most
likely to be interested in purchasing the products advertised in the
publication. Once CMP accepts an applicant as a qualified subscriber for a
controlled-circulation magazine or newspaper, that person normally receives the
particular publication for one year. The subscriber must requalify each year
thereafter to continue receiving the publication. Because the Company is able to
offer its advertisers access to this highly targeted and valuable subscriber
base, it is able to sell advertising space in its controlled-circulation
publications at rates that are higher than the average rates charged by
publications aimed at more general audiences.
Builders
CMP publishes three controlled-circulation newspapers that address distinct
audiences within the OEM sector of the technology industry.
Electronic Buyers' News (launched May 1971) was CMP's first publication.
It is a weekly newspaper primarily serving purchasers of electronic systems and
components as well as corporate management at OEMs. It provides information
about pricing trends, new products, supplier reports and industry developments.
In terms of advertising pages, Electronic Buyers' News is the second largest
3
<PAGE> 4
publication in the U.S. OEM publishing sector according to IMS.
Electronic Engineering Times (launched September 1972) is a weekly
newspaper targeting electronic engineers and technical/corporate management at
OEMs in the computer and electronics industries. It provides business,
technology and product news, market information and industry trends reports for
this audience. In terms of advertising pages, Electronic Engineering Times is
the largest publication in the U.S. OEM electronic engineering publishing sector
according to IMS.
Semiconductor Business News (launched July 1997) is a bi-weekly newspaper
primarily serving semiconductor industry executives and managers at OEMs. It
provides news and analysis about the worldwide semiconductor industry.
Sellers
CMP publishes three controlled-circulation publications that address distinct
audiences within the channel sector of the technology industry.
Computer Reseller News (launched June 1982) is a weekly newspaper that
provides the value-added reseller channel (including VARs, systems integrators,
dealers, consultants and distributors) with news, analysis and research about
computer-related technology and product marketing trends. In terms of
advertising pages, Computer Reseller News is the largest trade publication in
the U.S. technology industry, according to IMS.
VARBusiness (launched November 1987) is a bi-weekly magazine for the
value-added reseller channel, offering product coverage, analysis of technology
trends and practical insight on managing a reseller business. The magazine
provides overviews of the state of the computer market, with annual features
such as the VARBusiness 500, a ranking by revenue of the most successful VARs
and systems integrators in North America.
Computer Retail Week (launched September 1992) was a bi-weekly newspaper
delivering news and analysis concerning product technology and merchandising
trends to management and store-level sales personnel in the retail channel at
computer superstores, mass merchandisers, warehouse clubs and electronics
retailers selling directly to consumers. After its March 22 issue, Computer
Retail Week became primarily an online service. Publication of print issues will
continue in conjunction with the Company's Retail XChange Conferences and other
retail-oriented computer industry events. In addition, the newspaper's Computer
Products University feature will be enhanced and expanded on ChannelWeb, CMP's
portal for the channel community.
Users
CMP publishes five controlled-circulation publications and one paid-circulation
magazine that address distinct audiences focused on business applications of
technology.
InformationWeek (launched October 1979; re-launched January 1985) is a
weekly magazine that provides technology news and analysis from a business
solutions perspective. InformationWeek has the largest controlled-circulation
base of U.S. information systems managers and technology-related business
managers among all enterprise computing publications. It was originally
published under the title Information Systems News and was re-launched as
InformationWeek in 1985.
InternetWeek (launched January 1984; re-launched September 1997) is a
weekly newspaper that provides news, reviews, case studies and business analysis
to information technology buyers focused on the Internet, corporate networks,
intranets and extranets. The newspaper was originally published under the title
CommunicationsWeek and was re-launched as InternetWeek in 1997.
Network Computing (launched October 1990) is a bi-weekly magazine that
provides network managers with technical, lab-based news and information about
network technologies, from local area networks to large corporate intranet
networks.
DataCommunications (launched June 1974; acquired by CMP June 1998) is a
monthly magazine written for network managers and architects who design, build
and operate multi-site, mission-critical networks.
tele.com (launched April 1996; acquired by CMP June 1998) is a bi-weekly
magazine delivering comprehensive global coverage
4
<PAGE> 5
of the business and technology issues facing next-generation public network
service providers.
WINDOWS Magazine (launched February 1992) is a monthly paid-circulation
magazine for purchasers of Windows-related computing products ranging from
hand-held units through desktop PCs and workstations to enterprise-wide systems.
International
Over the past few years, CMP has expanded its business internationally. As a
print publisher, a licensor and an advertising sales representative, the Company
now offers advertisers access to a global network of technology publications
serving the builders, sellers and users of technology worldwide.
Publications
The Company publishes a number of technology magazines and newspapers in Europe.
The circulation of each of the publications is primarily controlled, although a
portion of the circulation is paid.
The Company publishes three channel publications in Europe.
Computer Reseller News (Germany; launched March 1995) is a
German-language weekly newspaper published in Munich by a joint venture between
CMP and WEKA Firmengruppe GmbH & Co. KG ("WEKA"). It provides news, analysis and
product information for resellers, VARs and OEMs in Germany, Austria and
Switzerland.
Computer Reseller News (France; launched October 1997) is a wholly-owned
French-language bi-weekly magazine targeting channel resellers, integrators,
dealers, consultants and distributors in France, Belgium and Switzerland.
Computer Reseller News (United Kingdom; launched November 1998) is a
wholly-owned weekly newspaper that serves the channel sector in the United
Kingdom.
The Company publishes six business technology publications in Europe.
InformationWeek (Germany; launched June 1997) is a bi-weekly magazine
published in Munich by a joint venture between CMP and WEKA. It targets
information technology decision-makers, and its editorial content covers all
technology areas.
Network Computing (Germany; launched February 1998) is a monthly newspaper
published in Munich by a joint venture between CMP and WEKA. A re-launch of a
magazine formerly known as PC-Netze, it provides news, trends and analysis to
information technology buyers in networked environments.
Datacom (Germany; launched November 1984) is a monthly magazine published
in Munich by a joint venture between CMP and WEKA. CMP acquired its interest in
the magazine in 1997. It covers the spectrum of in-house data exchange,
including WANs, telecommunications and related services, for data communications
and telecommunications professionals.
Informatiques Magazine (France; launched October 1994) is a wholly-owned,
French-language weekly magazine published in Paris. It provides information on
product developments, strategies and trends for information system managers and
technology-related business managers at companies in France, Belgium and
Switzerland.
InformationWeek (United Kingdom; launched March 1997) is a wholly-owned
weekly magazine published in London. It targets information technology
decision-makers whose purchasing responsibilities extend across the enterprise.
Editorial content covers all technology areas, with in-depth product reviews.
Network Week (United Kingdom; launched June 1995) is a wholly-owned weekly
newspaper which the Company acquired on December 31, 1997. It covers technology
and product issues for purchasers and managers of enterprise networks.
5
<PAGE> 6
Licensing
To achieve further international extension of its publication brands, the
Company licenses the editorial content, and in some cases the titles and
designs, of its U.S. publications to publishers outside the U.S. CMP material is
currently licensed to approximately 40 non-U.S. publishers and is distributed in
more than 20 countries around the world.
Advertising Sales Representation
In addition to selling advertising space in its own publications to non-U.S.
advertisers, CMP acts as the exclusive advertising sales representative in the
U.S. and Canada for non-CMP technology publications published outside the U.S.
This global network of technology publications enables the Company to offer its
advertisers a single source for the placement, billing and market-specific
translation and customization of advertisements around the world.
Internet Services
CMP has expanded its business onto the Internet in recent years. With the launch
of TechWeb in 1994, the Company became the first major U.S. technology publisher
to establish a Web site specifically for technology audiences. While TechWeb
originally operated as an independent business, CMP has integrated its Internet
activities with its core print businesses, thereby developing Internet expertise
across its publishing organization. In July 1997, CMP moved all its internet
sites under the umbrella brand of CMPnet. CMPnet (http://cmpnet.com) is the
World Wide Web site which now serves as a single point of access for all of the
Company's Internet services. It provides access not only to the Web sites
maintained by each of CMP's U.S. print publications but also to a number of
other Internet services, including the following:
Electronics Design & Technology News (EDTN) Network is an interactive
Internet service through which CMP is developing an online community in the OEM
area through an innovative partnership model that brings together content,
database technology and distribution.
ChannelWeb is an Internet service which provides a suite of content and
communications services focused on enabling computer resellers to custom-tailor
product configurations and accelerate their sales cycle.
Planet IT is an online community for corporate information technology
executives.
TechWeb is a news service and the successor to the original Web brand
launched in 1994. It is being more closely integrated with a number of CMP's
"user" publications to bring together a variety of perspectives on key IT user
issues.
CMP's Internet services derive their revenue primarily from the sale of
advertising space on their sites.
Other Services
CMP generates additional revenue through a variety of other services.
Hardware and Software Testing. CMP offers hardware and software testing
services through NSTL, Inc., an independent technology and consulting firm,
which CMP acquired in June 1998. NSTL tests software packages, hardware systems
and peripherals for hardware and software manufacturers, other corporations and
government agencies.
Events and Business Forums. CMP hosts various industry forums, roundtables
and conferences, including the InformationWeek Conference, where top
technology executives explore innovative uses of technology to tackle business
challenges, and the Xchange Conferences, which provide technology vendors with
the opportunity to meet with and demonstrate their new products to resellers and
retailers. In 1998, the Company established a separate Business Forums Group to
produce innovative and high-quality events that target specific, high-level
audiences and offer solutions to key business challenges within the IT industry.
The Business Forums Group has announced the launch of e-Business Expo, a series
of regional conferences and expositions that will bring together those charged
with deploying e-business solutions for their companies and those who can
provide them with the necessary products and services.
6
<PAGE> 7
Research. In 1998, the Company formed Reality Research, Inc. to provide
technology vendors and users with customized research and consulting services
that will assist them in assessing and capitalizing on the growing global market
for technology products and services. The Company also provides research
services relevant to the channel industry through its Channel Information
Services Unit.
List Rentals. CMP uses information from its subscription lists and other
available databases to compile detailed mailing lists for rental by advertisers.
The Company has the ability to customize its mailing list databases in order to
screen for specific business or demographic criteria selected by a list renter
and to match advertiser customer files against CMP's subscriber databases in
order to compile additional data regarding such customers, including job
function, purchase involvement, company size and other useful information. The
Company believes that, because its mailing lists provide such highly targeted
data, they are particularly attractive to its mailing list renters.
Reprints. CMP licenses to advertisers and marketing customers the right to
distribute both print and online reprints of articles that have appeared in CMP
publications.
Other. CMP provides a number of other marketing services, such as daily
e-mail news services for subscribers and the Channel Advocate Program which is
designed to help vendors enhance their channel relationships and sales results.
Editorial
CMP believes that its print and Internet content has established a reputation
among readers and within the technology industry for authoritative and reliable
journalism.
Each CMP publication has its own dedicated editorial staff, including editors,
researchers, designers and production personnel. To preserve the editorial
integrity of each publication's news reporting and analysis, the Company seeks
to maintain strict separation between the editorial and sales staffs of each
publication. The Company believes that its reputation for objective, fair and
credible editorial content contributes significantly to its success.
CMP's editorial staffs meet frequently with readers of their particular
publications to understand better the information needs and interests of those
readers and thereby serve them more effectively. The Company devotes
considerable resources to the study of trends in its readership communities and
strives to make its publications the best-read and most widely used among its
target audiences. The Company also uses high-quality design graphics,
illustrations, photography and other artistic elements to make its publications
visually attractive and accessible to readers. CMP's publications have won
numerous editorial and design awards from publishing and computer press
societies.
Many of the Company's editors, designers, programmers and contributors are
recognized as experts in their field and are regularly contacted by the press to
comment on developments and trends in technology areas.
Advertising Sales
CMP markets advertising space in each of its controlled-circulation publications
by assuring advertisers that they will be able to reach a valuable, qualified
audience of technology professionals and managers who are likely to have an
interest in purchasing products or services in the sector of the technology
industry to which the particular publication relates. Because CMP offers its
advertisers access to a highly targeted and valuable subscriber base, it is able
to sell advertising space in its controlled-circulation publications at rates
that are higher than the average rates charged by publications aimed at more
general audiences.
The Company believes it has built one of the most knowledgeable sales teams in
the technology publishing sector. In 1998, the Company implemented the Customer
First sales program, providing customers a single point of access through
account directors to the Company's products across multiple brands and media.
Because CMP is positioned as a single source for advertisers to reach a broad
spectrum of the technology market, CMP enables advertisers to consolidate their
advertising expenditures in a cost-effective manner.
Circulation
CMP's subscriber information for each of its U.S. controlled-circulation
publications is audited each year by BPA International ("BPA"), a
7
<PAGE> 8
nationally recognized auditor of periodical subscription lists specializing in
controlled-circulation publications. BPA's audits verify that CMP's subscription
information accurately identifies the number and job characteristics of
qualified recipients and that the qualified recipients are in fact eligible to
subscribe to the relevant publication under CMP's standards established for that
publication.
The Audit Bureau of Circulation, another nationally recognized auditor of
periodical subscription lists, audits WINDOWS Magazine, a paid-circulation
magazine. Subscriptions for WINDOWS Magazine are generated through a mix of
direct mail marketing, online promotion, insert cards in the Company's magazines
and advertising.
Production and Distribution
CMP's publications and other printed materials are printed and bound by
independent printers. The Company believes that outside printing services are
readily available at competitive prices, and its publications are printed by
several different printers.
The principal raw material used in the Company's print publications is paper.
CMP is party to a number of long-term paper supply contracts under which it
purchases the bulk of the paper used by its printers to produce the Company's
publications. The Company believes that the existing arrangements providing for
the supply of paper are adequate and that, in any event, alternative sources are
available. Paper costs represent a significant expense for the Company. All of
the Company's paper supply contracts provide for price adjustments (upwards or
downwards) on a quarterly basis to reflect then-prevailing market prices. Paper
prices are affected by a variety of factors, including demand, capacity, pulp
supply and general economic conditions. Paper prices have been volatile over the
past several years. The Company's costs for paper, relative to revenue, can
vary from year-to-year due to increased paper demands associated with the launch
of new publications.
The Company uses third-party distributors to distribute the United States and
international editions of certain of its publications.Many of the Company's
publications are delivered to the United States Postal Service directly by the
printer. Postage costs also represent a significant expense for the Company. In
an attempt to contain postal costs, the Company takes advantage of various
postal discounts as well as alternative delivery services.
Promotion and Marketing
The Company uses advertising, publicity, trade show presentations, promotions
and alliances to increase brand awareness for its publications and services and
to position its brands, as well as to generate subscriptions and increase online
traffic.
Growth Strategy
The Company continually monitors developments and trends in technology markets,
and it expects to continue extending the reach and scope of its existing
businesses by serving the changing needs of the builders, sellers and users of
technology worldwide. CMP's objective is to continue to grow in revenue,
profitability and market share. The Company believes that its ability to achieve
its objective will be enhanced by its strong relationships with advertisers, the
broad market coverage of its publications and services, its reputation for
high-quality editorial content and its experienced management team. To implement
this objective, CMP has adopted the following strategies, which it may pursue
through internal growth, selective acquisitions, joint ventures, licensing
arrangements, and other strategic alternatives. As noted above, the Company has
retained an investment banking firm to assist in exploring strategic
alternatives for the Company, including but not limited to a sale or merger.
Build Upon Strength Of Existing Publications and Introduce New Publications. CMP
will seek to increase its overall market share of advertising pages by
continuing to improve the editorial and circulation quality of its print
publications, thereby providing advertisers with increasingly effective access
to their target audiences. The Company will also continue monitoring new
developments and trends in technology markets to identify emerging audiences for
technology-related information and, when it perceives appropriate opportunities,
it intends to launch publications with innovative positions attractive to both
advertisers and readers.
Expand Internationally. CMP believes that the strength of its existing
publications and its network of non-U.S. publications for which it provides
advertising sales representation enable it to take advantage of the growth of
technology markets internationally. The Company plans to expand its
international business primarily by launching local versions of its strongest
publications, either independently or in joint ventures with local publishers,
in those countries that have the largest or fastest-growing technology markets.
CMP also intends to expand its program of licensing its titles, designs and
editorial content to local publishers.
8
<PAGE> 9
Expand Internet Services. CMP intends to continue using the Internet to
complement and extend the reach of its existing print publications and to
develop new online audiences for its advertisers. It also intends to develop new
services for users of technology and to further develop its e-commerce
capabilities.
Expand into Additional Media. CMP plans to expand its presence in media beyond
print and the Internet in order to capitalize on advertisers' increasing need to
reach their audiences through integrated marketing programs. The Company
currently sponsors several industry forums and expects to initiate additional
face-to-face events in the coming years. In addition, the Company is expanding
its research services through the formation of Reality Research, Inc.
Competition
The Company faces significant competition with respect to its print publications
from a number of technology publishers, some of which have substantially greater
financial resources that may give them a competitive advantage. In addition, the
Company faces broad competition for audiences and advertising revenue from other
media companies that produce magazines, newspapers and online content. Overall
competitive factors include product positioning, editorial quality, circulation,
price and customer service. Competition for advertising dollars is primarily
based on advertising rates, the nature and scope of readership, reader response
to advertisers' products and services, and effectiveness of sales teams.
There are several other technology publishing companies which compete intensely
with the Company in certain sectors of the technology publishing market targeted
by the Company's publications. The Company estimates that there are more than
350 technology magazines in the United States, most of which are published by
smaller publishers. Although in terms of advertising pages the Company's
publications are market share leaders in the OEM and channel sectors of the
technology publishing market, other publishers are the market share leaders in
the business technology sector of the market. An increasing number of companies,
some with significantly greater resources than the Company, are developing
content and services for delivery on the World Wide Web, and competing for
audiences and the advertising dollars that are currently being devoted to the
Internet.
Trademarks and Intellectual Property Rights
The Company regards its copyrights, trademarks, trade secrets and similar
intellectual property as critical to its success and relies upon copyright,
trademark and trade secrets laws, as well as confidentiality agreements with its
employees and others, to protect its rights. The Company pursues the
registration of its material trademarks in the United States and, depending upon
use, in certain other countries. Effective copyright, trademark and trade secret
protection may not be available in every country in which the Company's
publications and services are available.
From time to time, the Company may be subject to legal proceedings and claims in
the ordinary course of its business, including claims of alleged infringement by
the Company and its licensees of trademarks and other intellectual property
rights of third parties. The Company does not believe there are any legal
proceedings or claims that will have, individually or in the aggregate, a
material adverse effect on the Company's business, financial condition or
results of operations.
Employees
As of December 31, 1998, the Company had a total of 1,822 employees. None of the
Company's employees is represented by a labor union.
Executive Officers of the Company
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Michael S. Leeds 46 President, Chief Executive Officer and a
Director
Kenneth D. Cron 42 Executive Vice President, President of
Publishing and a Director
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
<S> <C> <C>
Daniel H. Leeds 43 Executive Vice President, President of
International and a Director
Joseph E. Sichler 58 Executive Vice President and Chief Financial
Officer
Robert D. Marafioti 51 Executive Vice President, Secretary and
General Counsel
Barbara Kerbel 52 Vice President of Corporate Communications
Mary Jones-Herbert 54 Vice President of Human Resources
Debra Robinson 46 Vice President/Chief Information Officer
Jeffrey L. Strief 43 Executive Vice President, Technology Buyers
John Russell 39 Senior Vice President, Channel
Steven Weitzner 48 Vice President, OEM
Gretchen Teichgraeber 45 Vice President, Marketing and Information Services
</TABLE>
All executive officers of the Company are elected by the Board of
Directors annually.
Michael S. Leeds has been the President and Chief Executive Officer of the
Company since 1988. He joined the Company in 1984 and was elected a director in
1987. Mr. Leeds is the brother of Daniel H. Leeds, the President of
International, and the son of Gerard and Lilo Leeds, founders of the Company and
Co-Chairpersons of the Board of Directors.
Kenneth D. Cron is an Executive Vice President of the Company and has been
the President of Publishing of the Company since 1994. He joined the Company in
1978 and held various sales, publishing and group publishing positions prior to
assuming his present responsibilities. He was elected a director in 1997.
Daniel H. Leeds is an Executive Vice President of the Company and has been
the President of International since 1992. He joined the Company in 1985 and was
elected a director in 1987. He is the brother of Michael S. Leeds, the President
and Chief Executive Officer of the Company, and the son of Gerard and Lilo
Leeds, founders of the Company and Co-Chairpersons of the Board of Directors.
Joseph E. Sichler joined the Company as Chief Financial Officer in 1992.
He was elected a Vice President in 1996 and an Executive Vice President of the
Company in 1999.
Robert D. Marafioti joined the Company as General Counsel in 1988. He was
elected a Vice President in 1993, Secretary of the Company in 1997 and an
Executive Vice President of the Company in 1999.
Barbara Kerbel has been the Vice President of Corporate Communications of
the Company since 1995. She first joined the Company in 1981 and held various
editorial, marketing and communications positions prior to assuming her present
responsibilities.
Mary Jones-Herbert joined the Company as Vice President of Human Resources
in October 1997. From 1995 to 1997, she served as Director of Human Resources,
Finance, of Allied Signal Inc., which she joined in 1993.
Debra Robinson joined the Company as Vice President/Chief Information
Officer in October 1997. From 1995 to 1997, she served as Vice President,
Information Technologies, of Delaware North Companies.
10
<PAGE> 11
Jeffrey L. Strief joined the Company in 1985 and held various sales,
publishing and group publishing positions prior to his election as a Senior Vice
President of the Company since 1994. He assumed his present responsibilities as
the group publisher of the Company's technology buyers publications in 1997 and
was elected an Executive Vice President in 1999.
John Russell joined the Company in 1983 and held various editorial and
publishing positions prior to being elected a Vice President and assuming his
present responsibilities as the group publisher of the Company's channel
publications in 1994. He was elected a Senior Vice President of the Company in
1999.
Steven Weitzner joined the Company in 1984 and held various editorial and
publishing positions prior to assuming his present responsibilities as the group
publisher of the Company's OEM publications. He was elected a Vice President in
1999.
Gretchen Teichgraeber joined the Company as General Manager, Publishing
in 1997. She was promoted to Vice President, Marketing and Information Services
in 1999. Prior to joining the Company, she served as Director, Marketing
Planning and Product Management at The New York Times newspaper.
ITEM 2. PROPERTIES
CMP's world headquarters are located in Manhasset, New York, and the Company has
editorial, production and sales offices in many other cities in the United
States and around the world, including: Atlanta; Austin; Chicago; Conshohocken,
Pennsylvania; Dallas; Irvine, California; Jericho, New York; Los Angeles; New
York City; San Francisco; San Mateo, California; Waltham, Massachusetts;
Washington, D.C.; Cologne; Hong Kong; London; Munich; Paris; Taipei; and Tokyo.
The Company owns no material real estate and leases all of its offices from
third parties. The Company believes that its properties, taken as a whole, are
in good operating condition and are suitable and adequate for the Company's
current business operations, and that suitable additional or alternative space,
including space available under lease options, will be available at commercially
reasonable terms for future expansion.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings to which the Company is a party, other than
ordinary routine litigation incidental to the business of the Company which is
not otherwise material to the business or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the
fourth quarter of its fiscal year ended December 31, 1998.
11
<PAGE> 12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company has two classes of common stock, Class A Common Stock and Class B
Common Stock (collectively, the "Common Stock"). The Company's Class A Common
Stock was listed on the Nasdaq National Market ("Nasdaq") under the symbol
"CMPX" on July 25, 1997. The following table sets forth by quarter the high and
low bid prices of the Company's Class A Common Stock as reported by Nasdaq.
<TABLE>
<CAPTION>
Price Per Share ($)
----------------------------------------
1998 1997
----------------- ------------------
High Low High Low
------ ------ ------ ------
<S> <C> <C> <C> <C>
First Quarter .................... $28.25 $15.88 $ -- $ --
Second Quarter ................... 27.00 11.50 -- --
Third Quarter .................... 20.50 7.38 29.00* 23.50*
Fourth Quarter ................... 18.25 7.75 26.63 13.38
</TABLE>
* Third quarter 1997 includes July 25, 1997 through September 30, 1997
As of March 16, 1999, there were approximately 4,788 holders of record of the
Company's Class A Common Stock and 13 holders of record of the Company's Class
B Common Stock.
Prior to the Company's initial public offering in July 1997 (the "Offering"),
the Company was an S corporation and made distributions to its stockholders
primarily to fund taxes owed by them on the Company's income attributable to
them as stockholders of an S corporation and to distribute earnings of the
Company on which such stockholders had previously paid income tax. In connection
with the termination of the Company's S corporation election upon consummation
of the Offering, the Company made to its then-stockholders a final distribution,
which was declared prior to the Offering but paid subsequently. For more
information about the Offering, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Initial Public Offering."
Since the Offering, the Company has not declared any dividends on its Common
Stock. The Company does not anticipate that any cash dividends will be declared
in the foreseeable future. The Company currently intend to retain all available
funds for use in the operation and expansion of its business.
12
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenue ........................................ $477,561 $473,851 $418,059 $382,360 $316,800
Income from operations .......................... 16,036 34,887 28,805 19,615 16,182
Net income(1) ................................... 10,005 30,287 26,859 16,635 27,739
Net income per share - basic .................... 0.43
Net income per share - diluted .................. 0.42
Pro forma net income(1)(2) ...................... 17,336 16,056 9,536 16,326
Pro forma net income per share - basic(1)(2) .... 0.77 0.72 0.43 0.73
Pro forma net income per share - diluted(1)(2) .. 0.75 0.72 0.43 0.73
As of December 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands)
Balance Sheet Data:
Working capital ................................. $ 37,300 $ 50,922 $ 11,865 $ 23,887 $ 2,416
Total assets .................................... 202,262 197,709 123,935 113,326 93,668
Total long-term debt ............................ -- -- 25,000 12,000 --
Stockholders' equity ............................ 107,507 96,596 16,713 27,827 19,345
</TABLE>
- ----------
(1) 1994 results include a gain from the sale of the Company's travel-related
publications. This gain increased 1994 historical net income, pro forma
net income and pro forma net income per share --basic and --diluted by
$13,070, $7,693 and $0.34, respectively.
(2) During 1997, the Company completed the Offering and elected to change its
tax status from an S corporation to a C corporation. Pro forma net income
and pro forma net income per share data are presented as if the Company
had changed its tax status to a C corporation prior to January 1, 1994.
See Notes 2m., 9 and 11 of the consolidated financial statements presented
elsewhere herein.
13
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
CMP provides information about technology and the Internet, domestically and
internationally through magazines, newspapers, conferences, exhibitions,
research, hardware/software testing services and the Internet. In addition, the
Company licenses the titles, editorial content and designs of many of its
publications to publishers outside the United States and represents foreign
technology publishers in their sale of advertising space to U.S. technology
advertisers. A substantial portion of the Company's revenue is derived from the
sale of advertising space in its controlled-circulation, business-to-business
trade publications and paid-circulation magazine.
The Company's revenue and profitability are influenced by a number of external
factors, the most significant of which include sales-growth rates among
technology companies; the pace at which new technology products are introduced;
the extent to which companies selling such products elect to advertise using
print or online media rather than other advertising media; trends in paper
prices and postal rates which, in certain years, have increased at levels in
excess of the rate increases which could reasonably be passed along to
customers; and the level of competition in various market sectors among the
major technology publishers.
Recent Developments
On February 10, 1999, CMP announced that it had retained the investment banking
firm of Lazard Freres & Co. LLC to explore strategic alternatives for the
Company, including, but not limited to, a sale or merger. The Company has not
made a decision as of the date hereof to pursue any particular alternative and
has indicated that there are no assurances that a transaction will result from
the exploration process.
Initial Public Offering
On July 30, 1997, the Company completed 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. The Company did not receive any of the proceeds from the
shares sold by the selling stockholders. Net proceeds to the Company after
issuance costs of the Offering were approximately $84.7 million. See "-Liquidity
and Capital Resources."
New Products and Services
The Company invests in new products and services aimed at the builders, sellers
and users of technology. New products generally incur significant operating
losses and require several years to achieve profitability. CMP has funded the
launches of new products and services with cash flow from operations and, to a
lesser extent, with borrowings under its revolving credit agreement. The Company
does not capitalize development costs or start-up expenses for new products and
services. Costs related to the development of new products and services are
expensed as incurred. If the Company concludes that a new product or service
will not achieve certain benchmarks with regard to revenue, profitability and
cash flow within a reasonable period of time, management will modify or
reposition the product or service, incorporate it into another product or
service, sell it or discontinue it.
14
<PAGE> 15
Results of Operations
The following table sets forth, for the periods indicated, items within the
Company's consolidated statements of income. This table and the subsequent
discussion should be read in conjunction with the consolidated financial
statements and the notes thereto contained elsewhere herein.
<TABLE>
<CAPTION>
For the year ended December 31,
------------------------------------
1998 1997 1996
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Revenue .......................................... $ 477,561 $ 473,851 $ 418,059
Operating costs and expenses:
Cost of revenue ................................ 209,883 188,965 172,475
Selling and promotion .......................... 164,902 160,579 138,319
General and administrative ..................... 86,740 84,971 78,460
Non-recurring compensation charge .............. -- 4,449 --
--------- --------- ---------
Income from operations ........................... 16,036 34,887 28,805
Gain on sales .................................... 1,320 4,011 1,434
Other income (expense), net ...................... 228 (8,161) (2,476)
--------- --------- ---------
Income before provision for income taxes ......... 17,584 30,737 27,763
Provision for income taxes ....................... 7,579 450 904
--------- --------- ---------
Net income ....................................... $ 10,005 $ 30,287 $ 26,859
========= ========= =========
Pro Forma Data:
Historical income before provision for income
taxes ........................................ 30,737 27,763
Pro forma provision for income taxes (1) ....... 13,401 11,707
--------- ---------
Pro forma net income (1) ....................... $ 17,336 $ 16,056
========= =========
</TABLE>
- ----------
(1) Pro forma provision for income taxes is presented as if the Company had
changed its tax status from an S corporation to a C corporation prior to
January 1, 1996.
1998 Compared with 1997
Revenue. Revenue for 1998 increased $3.7 million, or 0.8%, to $477.6 million
compared with $473.9 million for 1997. The improvement was primarily
attributable to the second quarter 1998 acquisition of four publications and
NSTL from The McGraw-Hill Companies, Inc. ("McGraw-Hill"), increased revenue 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 revenue from Internet services and the Company's
conferences. These revenue increases were largely offset by the sale of HomePC
in April 1998 and the discontinuance of NetGuide Magazine in July 1997, as well
as decreases in advertising yield (advertising revenue per page) 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 5.7% to 37,845 pages,
primarily due to advertising page decreases for Computer Reseller News,
InternetWeek, Windows Magazine, Electronic Engineering Times, the sale of HomePC
and the discontinuance of NetGuide Magazine, partially offset by advertising
page increases for InformationWeek and the inclusion of advertising pages of the
publications acquired from McGraw-Hill.
Operating Costs and Expenses. Cost of revenue for 1998 increased $20.9 million,
or 11.1%, to $209.9 million compared with $189.0 million for 1997. This increase
was primarily attributable to approximately $15.1 million in costs associated
with businesses acquired from McGraw-Hill, approximately $11.7 million of
International costs associated with the launch of Computer Reseller News France
and the publications acquired in the U.K., and increased costs attributable to
new conferences, partially offset by decreased costs of approximately $14.9
million as a result of the sale of HomePC and the discontinuance of NetGuide
Magazine. Cost of revenue as a percentage of revenue increased to 43.9% in 1998
from 39.9% 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
15
<PAGE> 16
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 most
of the Company's other print publications. Cost of revenue includes production,
paper, editorial, distribution and fulfillment costs.
Selling and promotion expenses for 1998 increased $4.3 million, or 2.7%, to
$164.9 million compared with $160.6 million for 1997. The increase was primarily
attributable to increased costs of approximately $11.9 million associated with
the businesses acquired from McGraw-Hill as well as costs associated with the
Company's new International publications, partially offset by decreased costs
due to the sale of HomePC and the discontinuance of NetGuide Magazine. Selling
and promotion expenses as a percentage of revenue increased to 34.5% in 1998
from 33.9% in 1997.
General and administrative expenses for 1998 increased $1.8 million, or 2.1%, to
$86.7 million compared with $85.0 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 increased to 18.2% in 1998 from 17.9% in
1997.
Gain on Sales. The gain on sales of $1.3 million in 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 sales of
$4.0 million in 1997 was primarily attributable to a gain of approximately $3.0
million resulting from the sale of the subscriber list of NetGuide Magazine and
a gain of approximately $0.8 million resulting from the sale of the Company's
50% interest in one of its joint ventures engaged in Internet-related services.
Other Income (Expense), Net. Other income, net for 1998 increased $8.4 million
to $0.2 million compared with $8.2 million of other expense, net for 1997,
primarily as a result of a significant decrease in losses from the Company's
Internet-related investments, as well as net interest income earned on
short-term and long-term investments in 1998 as compared to net interest expense
on borrowings incurred in 1997.
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 year ended December 31, 1998 was 43.1%. If the Company and
certain affiliates had been C corporations for the year ended December 31, 1997,
the effective income tax rate would have been 43.6%.
1997 Compared with 1996
Revenue. Revenue for 1997 increased $55.8 million, or 13.3%, to $473.9 million
compared with $418.1 million for 1996. The improvement was primarily
attributable to increases in advertising yield and in the number of advertising
pages in the Company's print publications, as well as increased revenue from the
Company's Internet services and growth in International operations. Total
advertising pages for the Company's domestic print publications increased 3.2%
to 40,384 pages, primarily due to advertising page increases for
InformationWeek, Computer Reseller News and VARBusiness, partially offset by
advertising page decreases for InternetWeek (CommunicationsWeek was re-launched
as InternetWeek in September 1997) and HomePC. In addition, the Company ceased
publishing NetGuide Magazine in July 1997.
Operating Costs and Expenses. Cost of revenue for 1997 increased $16.5 million,
or 9.6%, to $189.0 million compared with $172.5 million for 1996, primarily as a
result of increased editorial, production, distribution and fulfillment costs
for the Company's print publications, and increased costs attributable to the
Company's Internet services, partially offset by decreased paper costs for the
Company's print publications. However, cost of revenue as a percentage of
revenue decreased to 39.9% in 1997 as compared to 41.2% in 1996, primarily as a
result of higher revenue resulting from increased advertising yield and
advertising pages without a corresponding increase in cost of revenue for
certain of the Company's print publications and the discontinuance of NetGuide
Magazine in July 1997, which had a higher expense ratio than the Company's other
print publications, partially offset by costs associated with the Company's
Internet services, which had higher expense ratios than the Company's print
publications.
Selling and promotion expenses for 1997 increased $22.3 million, or 16.1%, to
$160.6 million compared with $138.3 million for 1996. The increase was primarily
attributable to higher commission and sales force costs associated with
increased revenues in 1997
16
<PAGE> 17
as compared to 1996, increased circulation and promotion efforts in 1997
relating to the re-launch of CommunicationsWeek as InternetWeek and the launch
of Computer Reseller News in France, as well as increased promotion efforts
related to the Company's Internet services. Selling and promotion expenses also
increased to support sales force expansion in several of the Company's print
publications to better meet the needs of customers. Selling and promotion
expenses as a percentage of revenue increased to 33.9% in 1997 from 33.1% in
1996. This was principally due to higher costs associated with the Company's
Internet services which had higher expense ratios than the Company's print
publications.
General and administrative expenses for 1997 increased $6.5 million, or 8.3%, to
$85.0 million compared with $78.5 million for 1996, primarily due to costs of
approximately $2.4 million related to a reduction in the Company's work force,
mainly at the corporate level but also in WINDOWS Magazine, HomePC, NetGuide
Magazine and NetGuide (the on-line service), as well as higher depreciation
expense in 1997 as compared to 1996. General and administrative expenses as a
percentage of revenue decreased to 17.9% in 1997 from 18.8% in 1996.
Non-recurring Compensation Charge. Upon the consummation of the Offering in July
1997, 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.
Gain on Sales. The gain on sales of $4.0 million in 1997 was primarily
attributable to a gain of approximately $3.0 million resulting from the sale of
the subscriber list of NetGuide Magazine in July 1997 and a gain of
approximately $0.8 million resulting from the sale of the Company's 50% interest
in one of its joint ventures engaged in Internet-related services in December
1997. The gain on sales of $1.4 million in 1996 was realized primarily from the
sale of the Company's CommunicationsWeek International publication in February
1996.
Other Income (Expense), Net. Other expense, net for 1997 increased $5.7 million
to $8.2 million as compared with $2.5 million for 1996, primarily as a result of
increased losses from the Company's equity investments of approximately $7.0
million, partially offset by lower interest expense and foreign exchange gains
in 1997 as compared to foreign exchange losses in 1996. Losses from the
Company's equity investments in 1997 included impairment charges of $3.2 million
to reduce the carrying value of certain investments in companies developing
Internet-related technologies.
Provision for Income Taxes. If the Company and certain affiliates had been
C corporations for the years ended December 31, 1997 and 1996, the effective
income tax rate would have been 43.6% and 42.2%, respectively.
Liquidity and Capital Resources
Working capital was $37.3 million, $50.9 million and $11.9 million at December
31, 1998, 1997 and 1996, respectively. The decrease in working capital for the
year ended December 31, 1998 was primarily attributable to the $28.6 million
acquisition of four publications and NSTL from McGraw-Hill and $13.4 million in
capital expenditures, 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, $9.1 million in proceeds from the sale of investments in
marketable securities and earnings for the year ended December 31, 1998. The
increase in working capital at December 31, 1997 as compared to December 31,
1996 was primarily attributable to the net proceeds of the Offering and earnings
for 1997, partially offset by net repayments of borrowings, distributions to S
corporation stockholders for taxes and other, purchase of long-term investments
and capital expenditures. Accounts receivable, net were $76.3, $76.7 million and
$65.1 million at December 31, 1998, 1997 and 1996, respectively. Days sales
outstanding ("DSO") was 58.0, 56.7 and 54.0 at December 31, 1998, 1997 and 1996,
respectively. DSO has increased primarily due to the growth in International
operations which currently have higher DSO than the Company's other businesses.
Paper inventories were $4.3 million, $7.6 million and $6.1 million at December
31, 1998, 1997 and 1996, respectively.
Cash provided by operating activities was $23.7 million, $34.2 million and $48.4
million for the years ended December 31, 1998, 1997 and 1996, respectively. The
decrease in 1998 as compared to 1997 was primarily due to decreased operating
income partially offset by changes in working capital items, the most
significant of which were accounts receivable and inventories. The decrease in
1997 as compared to 1996 was primarily due to changes in working capital items,
the most significant of which were accounts receivable and inventories,
partially offset by increased operating income.
Investing activities used $34.1 million in 1998, which consisted primarily of
$30.0 million in purchases of businesses (including four
17
<PAGE> 18
publications and NSTL from McGraw-Hill for $28.6 million) and $13.4 million in
capital expenditures, partially offset by $9.1 million in proceeds from the sale
of marketable securities. Investing activities used $39.2 million in 1997, which
consisted primarily of $19.3 million for the purchase of short-term and
long-term investments, $12.6 million in capital expenditures and $5.6 million in
investments in and advances to entities in which the Company has equity
investments. Investing activities used $22.4 million in 1996, which consisted
primarily of $12.7 million in capital expenditures, $10.0 million in investments
in and advances to entities in which the Company has equity investments and $2.0
million for the purchase of M&T International, partially offset by proceeds of
$2.2 million from the sale of CommunicationsWeek International.
Financing activities used $14.5 million in 1998, consisting primarily of $13.3
million in cash distributions to the individuals who were the Company's
stockholders of record prior to 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 provided $29.7 million in 1997, consisting primarily of
$84.7 million in net proceeds from the Offering, $29.5 million of borrowings
under the Company's revolving credit agreement, partially offset by $54.5
million for repayment of borrowings and $29.7 million for cash distributions to
the Company's stockholders of record prior to the Offering, a significant
portion of which was used to pay taxes such stockholders owed on the Company's
income attributable to them as stockholders of an S corporation. Financing
activities used $25.3 million in 1996, consisting primarily of $38.3 million for
distributions to stockholders and $30.1 million for repayment of borrowings,
partially offset by $43.1 million of borrowings under the Company's revolving
credit agreement.
The Company's revolving credit agreement, as amended, with two financial
institutions provides for borrowings of up to $75.0 million, substantially all
of which was available at December 31, 1998. 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 weighted average interest rate for borrowings during 1998
was 5.98%. The agreement, contains certain negative covenants regarding, among
other items, minimum levels of net worth, fixed coverage and limitations on
indebtedness. The agreement expires November 14, 2001.
In April 1997, the Company guaranteed a loan of $3.0 million to one of its
senior executives to pay taxes in connection with the purchase of Class A Common
Stock from principal stockholders of the Company. The loan is from one of the
financial institutions with which the Company has its revolving credit
agreement. As of December 31, 1998, the balance of the loan and related
guarantee was $1.2 million. This loan will be payable in November 2001 and is
guaranteed through such date. The Company is obligated to extend the guarantee
through December 31, 2005 at the request of the senior executive.
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. The Company has used a portion of the net proceeds
of the Offering to repay debt of $21.8 million 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.
The Company's working capital requirements and costs associated with new product
development have been met by cash flow from operations and short-term 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.
Fourth-quarter revenue and income from operations of the Company have typically
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
18
<PAGE> 19
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 the Volatility of Paper Prices
The Company continually reviews the impact of inflation and the volatility of
paper prices. The U.S. Postal Service increased the postage rate 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 trim
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 or declined in 1998. 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 in 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 with respect to the Company's
non-U.S. systems and applications were completed as of December 31, 1998.
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.
19
<PAGE> 20
The Company currently estimates that the Project will be substantially
completed by May 31, 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.
Contingency planning is under way in all of the Company's businesses. In
addition to supplier-related activities, high-level plans are being developed
for facilities and equipment, telecommunications infrastructure and internal
administrative processes. The Company expects to have detailed contingency plans
in place to address the most likely remaining effects on the Company from
external risks. As more information emerges about companies upon which the
Company is critically reliant, these plans will be adjusted accordingly.
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 December 31, 1998,
costs incurred in the inventory and assessment phases of the Project were
approximately $0.3 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 have 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.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). This statement establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
recognition of all derivatives as either assets or liabilities on the balance
sheet and measurement of those instruments at fair value. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The Company currently has no activities involving derivative instruments or
hedging and therefore expects that this statement will have no impact on the
Company's financial condition, results of operations or cash flows.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." Among other provisions, SOP
98-1 requires that entities capitalize certain internal-use software costs once
certain criteria are met. Under SOP 98-1, overhead, general and administrative,
and training costs are not to be capitalized. SOP 98-1 is effective for
financial statements for fiscal years beginning after December 15, 1998. The
effect of SOP 98-1 is not expected to be material.
20
<PAGE> 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants ......................................... 22
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996 .................................................... 23
Consolidated Balance Sheets as of December 31, 1998 and 1997 .............. 24
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996 ........................................ 25
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996 ..................................................... 26
Notes to Consolidated Financial Statements ................................ 27
</TABLE>
21
<PAGE> 22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of CMP Media Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of CMP Media Inc. and
its subsidiaries (the "Company") at December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 10, 1999, except for note 15, as
to which the date is March 30, 1999
22
<PAGE> 23
CMP Media Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the years
ended December 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenue $ 477,561 $ 473,851 $ 418,059
Operating costs and expenses:
Cost of revenue 209,883 188,965 172,475
Selling and promotion 164,902 160,579 138,319
General and administrative 86,740 84,971 78,460
Non-recurring compensation charge -- 4,449 --
--------- --------- ---------
Income from operations 16,036 34,887 28,805
--------- --------- ---------
Gain on sales 1,320 4,011 1,434
Other income (expense), net 228 (8,161) (2,476)
--------- --------- ---------
Income before provision for income taxes $ 17,584 $ 30,737 $ 27,763
Provision for income taxes 7,579 450 904
--------- --------- ---------
Net income $ 10,005 $ 30,287 $ 26,859
========= ========= =========
Net income per share - basic $ 0.43
=========
Net income per share - diluted $ 0.42
=========
Pro Forma Data:
Historical income before provision for
income taxes $ 30,737 $ 27,763
Pro forma provision for income taxes 13,401 11,707
--------- ---------
Pro forma net income $ 17,336 $ 16,056
========= =========
Pro forma net income per share - basic $ 0.77 $ 0.72
========= =========
Pro forma net income per share - diluted $ 0.75 $ 0.72
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
23
<PAGE> 24
CMP Media Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 6,658 $ 31,495
Accounts receivable, less allowance for doubtful accounts of $4,111 and
$3,631 as of December 31, 1998 and 1997, respectively 76,321 76,667
Short-term investments 13,211 6,610
Inventories 4,253 7,587
Deferred income taxes 7,471 5,695
Prepaid expenses and other current assets 13,135 10,073
--------- ---------
Total current assets 121,049 138,127
--------- ---------
Property and equipment, net 30,003 27,831
Long-term investments 1,702 12,862
Investments in and advances to unconsolidated affiliates 3,637 4,687
Intangible assets 38,289 6,460
Deferred income taxes 4,138 5,312
Other assets 3,444 2,430
--------- ---------
$ 202,262 $ 197,709
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 29,320 $ 26,389
Accrued expenses and other current liabilities 43,152 38,150
S corporation distribution payable -- 12,000
Deferred revenue 11,277 10,666
--------- ---------
Total current liabilities 83,749 87,205
--------- ---------
Deferred compensation 5,528 8,506
Other liabilities 5,478 5,402
--------- ---------
Total liabilities 94,755 101,113
--------- ---------
Commitments and contingencies
Stockholders' equity:
Class A Common Stock, par value $.01 per share, 50,000,000 shares authorized,
7,092,362 shares and 7,060,312 shares issued
at December 31, 1998 and December 31, 1997, respectively 71 71
Class B Common Stock, par value $.01 per share, 20,000,000 shares
authorized, 16,043,004 shares and 16,050,074 shares issued
at December 31, 1998 and December 31, 1997, respectively 160 160
Additional paid-in capital 85,556 86,305
Retained earnings 33,587 23,582
Unamortized restricted stock compensation (10,850) (13,270)
Accumulated other comprehensive income 494 (252)
Treasury stock, at cost, 81,672 shares at December 31, 1998 (1,511) --
--------- ---------
Total stockholders' equity 107,507 96,596
--------- ---------
$ 202,262 $ 197,709
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
24
<PAGE> 25
CMP Media Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Accumulated
Total Other
Stockholders' Comprehensive Retained Comprehensive Common
Equity Income Earnings Income Stock
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance as of January 1, 1996 $ 27,827 $ 25,723 $ (451) $ 189
Comprehensive income
Net income 26,859 26,859 26,859
Other comprehensive income, net of tax
Minimum pension liability adjustment (17) (17)
---------
Other comprehensive income (17) (17)
---------
Comprehensive income 26,842
=========
Sale of restricted stock --
Distributions to S corporation stockholders for
taxes and other (38,259) (38,259)
Amortization of restricted stock compensation 240
Contributed capital 63
--------- --------- --------- ---------
Balance as of December 31, 1996 16,713 14,323 (468) 189
========= ========= ========= =========
Comprehensive income
Net income 30,287 30,287 30,287
Other comprehensive income, net of tax
Unrealized gains on securities 109 109
Minimum pension liability adjustment 107 107
---------
Other comprehensive income 216 216
---------
Comprehensive income 30,503
=========
Proceeds from issuance of Class A
Common Stock in initial public offering at $22
per share, net of issuance costs of $1,937 84,711 42
Gift of Class A Common Stock to employees 4,449
Issuance of Class A Common Stock --
Distributions to S corporation stockholders
for taxes and other (41,721) (21,028)
Amortization of restricted stock compensation 1,924
Contributed capital 17
--------- --------- --------- ---------
Balance as of December 31, 1997 96,596 23,582 (252) 231
========= ========= ========= =========
Comprehensive income
Net income 10,005 10,005 10,005
Other comprehensive income, net of tax
Unrealized gains on securities 569 569
Foreign currency translation adjustments 51 51
Minimum pension liability adjustment 126 126
---------
Other comprehensive income 746 746
---------
Comprehensive income $ 10,751
=========
Adjustment to final S corporation distribution (1,269)
Amortization of restricted stock compensation 2,420
Treasury stock acquired (1,511)
Common stock issued under Employee Stock
Purchase Plan 366
Other 154
--------- --------- --------- ---------
Balance as of December 31, 1998 $ 107,507 $ 33,587 $ 494 $ 231
========= ========= ========= =========
</TABLE>
<PAGE> 26
<TABLE>
<CAPTION>
Unamortized
Additional Restricted Treasury
Paid-In Stock Stock
Capital Compensation At Cost
--------- --------- ---------
<S> <C> <C> <C>
Balance as of January 1, 1996 $ 2,366 $ -- $ --
Comprehensive income
Net income
Other comprehensive income, net of tax
Minimum pension liability adjustment
Other comprehensive income
Comprehensive income
Sale of restricted stock 15,414 (15,414)
Distributions to S corporation stockholders for
taxes and other
Amortization of restricted stock compensation 240
Contributed capital 63
--------- --------- ---------
Balance as of December 31, 1996 17,843 (15,174) --
========= ========= =========
Comprehensive income
Net income
Other comprehensive income, net of tax
Unrealized gains on securities
Minimum pension liability adjustment
Other comprehensive income
Comprehensive income
Proceeds from issuance of Class A
Common Stock in initial public offering at $22
per share, net of issuance costs of $1,937 84,669
Gift of Class A Common Stock to employees 4,449
Issuance of Class A Common Stock 20 (20)
Distributions to S corporation stockholders
for taxes and other (20,693)
Amortization of restricted stock compensation 1,924
Contributed capital 17
--------- --------- ---------
Balance as of December 31, 1997 86,305 (13,270) --
========= ========= =========
Comprehensive income
Net income
Other comprehensive income, net of tax
Unrealized gains on securities
Foreign currency translation adjustments
Minimum pension liability adjustment
Other comprehensive income
Comprehensive income
Adjustment to final S corporation distribution (1,269)
Amortization of restricted stock compensation 2,420
Treasury stock acquired (1,511)
Common stock issued under Employee Stock
Purchase Plan 366
Other 154
--------- --------- ---------
Balance as of December 31, 1998 $ 85,556 $ (10,850) $ (1,511)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
25
<PAGE> 27
CMP Media Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 10,005 $ 30,287 $ 26,859
Reconciliation of net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment 10,721 8,356 6,952
Amortization of intangible assets 2,376 415 369
Write-off of property and equipment 549 2,993 872
Write-off of intangible assets -- 390 --
Provision for doubtful accounts 3,074 3,100 2,216
Compensation expense under incentive plans 1,791 4,410 2,192
Gain on sales (1,320) (4,011) (1,434)
Non-recurring compensation charge -- 4,449 --
Losses from unconsolidated affiliates 1,262 8,374 1,330
Deferred income taxes (602) (10,622) 207
Changes in operating assets and liabilities, net of the effects of
businesses acquired and sold:
Increase in accounts receivable (3,030) (13,939) (2,807)
Decrease (increase) in inventories 4,573 (1,496) 6,153
(Increase) decrease in prepaid expenses and other assets (5,361) (2,676) 551
(Decrease) increase in accounts payable, accrued expenses
and other current liabilities (1,613) 927 5,398
Increase (decrease) in deferred revenue and other liabilities 1,319 3,260 (501)
-------- -------- --------
Net cash provided by operating activities 23,744 34,217 48,357
-------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment (13,442) (12,587) (12,728)
Investments in and advances to unconsolidated affiliates (212) (5,559) (9,950)
Purchase of businesses (29,962) (3,698) (2,000)
Purchase of investments (2,681) (19,346) --
Proceeds from sale of investments 9,115 -- --
Proceeds from sales of assets 4,613 2,001 2,489
Other investing activities (1,500) -- (219)
-------- -------- --------
Net cash used in investing activities (34,069) (39,189) (22,408)
-------- -------- --------
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 43,050
Repayment of borrowings (28,600) (54,475) (30,050)
Distributions to S corporation stockholders for taxes and other (13,269) (29,721) (38,259)
Purchase of treasury stock (1,511) -- --
Other financing activities (252) (244) (60)
-------- -------- --------
Net cash (used in) provided by financing activities (14,512) 29,746 (25,319)
-------- -------- --------
Net change in cash and cash equivalents (24,837) 24,774 630
Cash and cash equivalents at beginning of period 31,495 6,721 6,091
-------- -------- --------
Cash and cash equivalents at end of period $ 6,658 $ 31,495 $ 6,721
======== ======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 671 $ 1,076 $ 724
======== ======== ========
Income taxes paid $ 16,360 $ 6,102 $ 781
======== ======== ========
Supplemental disclosure of businesses acquired:
Fair value of assets acquired $ 36,693 $ 4,232 $ 2,275
Liabilities assumed (6,731) (534) (275)
-------- -------- --------
Cash paid $ 29,962 $ 3,698 $ 2,000
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
26
<PAGE> 28
CMP Media Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
1. NATURE OF BUSINESS:
CMP Media Inc. and subsidiaries (the "Company") provides information about
technology and the Internet, domestically and internationally through magazines,
newspapers, conferences, exhibitions, research, hardware/software testing
services and the Internet. The Company serves builders, sellers and users of
technology by providing information and services to the manufacturers,
engineers, designers and purchasers of electronic systems and components,
including computers, telecommunications equipment and related products,
distributors, resellers and retailers of those products and the end-users, in
business and at home, of information systems, computer systems, personal
computers, software, the Internet and related products and services. In
addition, the Company licenses the titles, editorial content and designs of many
of its publications to publishers outside the United States and represents
foreign technology publishers in their sale of advertising space to U.S.
technology advertisers.
On February 10, 1999, CMP announced that it had retained the investment
banking firm of Lazard Freres & Co. LLC to explore strategic alternatives for
the Company, including, but not limited to, a sale or merger. The Company has
not made a decision as of the date hereof to pursue any particular alternative
and has indicated that there are no assurances that a transaction will result
from the exploration process.
As more fully discussed in Note 9, on July 30, 1997, the Company completed
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. Basis of Presentation and Principles of Consolidation
The accompanying financial statements include the accounts of CMP Media
Inc. ("Media"), CMP International Corporation ("International"), CMP
Communications Corporation ("Communications"), CMP Media Partnership (the
"Partnership"), CMP France S.N.C. ("S.N.C."), and CMP Japan K.K. ("K.K."), which
are all related through common ownership. Through a series of transactions which
occurred from October 21, 1996 through February 3, 1997, Media became the parent
company of International and S.N.C., K.K. was liquidated, Media and
Communications merged, the outstanding shares in Communications were
subsequently canceled and the Partnership (which owned S.N.C.) ceased to exist.
As all of the entities were under common control, the most meaningful
presentation of the financial statements is the retroactive consolidation of
Media and its subsidiaries for all periods presented. All significant
intercompany accounts and transactions between Media and its subsidiaries have
been eliminated in consolidation.
As discussed in Note 9, 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 changed the par value of all classes of
its common stock from $0.10 per share to $0.01 per share. These transactions
have been given retroactive treatment in the consolidated financial statements
for all periods presented.
b. Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
Company's most significant estimates are related to provisions for estimated
returns, rebates, discounts and adjustments and allowances for doubtful
accounts.
c. Investments in Unconsolidated Affiliates
Investments in companies in which ownership interests range from 20 to 50
percent and the Company has the ability to exercise significant influence over
the operating and financial policies of such companies are accounted for under
the equity method. Other investments are accounted for under the cost method.
27
<PAGE> 29
CMP Media Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- Continued
(in thousands, except share and per share amounts)
d. Revenue Recognition
Advertising revenue from the Company's controlled-circulation trade
newspapers and magazines is recognized based on the publications' cover dates
net of provisions for estimated rebates, adjustments and discounts. Advertising
revenue from the Company's paid-subscription and newsstand-circulation consumer
magazine is recognized at the on-sale date net of provisions for estimated
rebates, adjustments and discounts. Revenue from newsstand sales is recognized
at the on-sale date of the publication, net of provisions for estimated returns.
Revenue from subscription sales is recognized over the terms of the subscription
on a straight-line basis.
e. Operating Costs and Expenses
Cost of revenue includes editorial, production, paper, distribution and
fulfillment costs. Selling and promotion costs include subscription acquisition
costs. Such costs are expensed as incurred.
f. Marketable Securities
The Company's investments in marketable securities are categorized as
available-for-sale, as defined by Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities".
Securities are carried at fair value, with net unrealized holding gains and
losses reflected as a component of stockholders' equity until realized. For the
purpose of computing realized gains and losses, cost is calculated on a specific
identification basis.
As of December 31, 1998, the Company's investments consisted of securities
issued by various municipalities. The majority of the investments have
contractual maturities of two years or less. Gross unrealized gains for the year
ended December 31, 1998 were approximately $1,000.
g. Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
h. Concentration of Credit Risk
The Company places its investments with high credit quality financial
institutions and municipalities. At times, such investments may be in excess of
federally insured limits. The Company has not experienced losses in such
accounts.
The Company's customers represent a variety of technology companies in the
United States and other countries. The Company extends credit to its customers
and historically has not experienced significant losses relating to receivables
from individual customers or groups of customers.
i. Inventories
Inventories, which consist of paper used in the production of the
Company's publications, are stated at the lower of cost or market. Cost is
determined on a first-in, first-out basis.
j. Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed
principally using the straight-line method over estimated useful lives which
range primarily from three to seven years. Maintenance and repairs are charged
to expense as incurred; renewals and improvements which extend the life of the
asset are capitalized. Gains or losses on the disposition of property and
equipment are reflected in results of operations. Leasehold improvements are
amortized over the shorter of the lease term or the remaining useful life of the
related assets.
28
<PAGE> 30
CMP Media Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- Continued
(in thousands, except share and per share amounts)
k. Intangible Assets
Intangible assets consist of goodwill, trademarks, customer and subscriber
lists and covenants not to compete. Intangible assets are amortized on a
straight-line basis over periods ranging from three to twenty years.
l. Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of" ("SFAS No. 121"), the Company periodically evaluates the carrying
value of long-lived assets to be held and used, including goodwill and other
intangible assets, to assess whether there has been an impairment in the value
of such assets. If the carrying value of the assets exceeds the estimated
undiscounted future cash flows from operating activities of the related
businesses, an impairment is deemed to have occurred. In this event, the assets
are written down to fair value. Adoption of SFAS No. 121 on January 1, 1996 had
no impact on the Company's financial position, results of operations or cash
flows.
m. Income Taxes
Prior to the Offering, the Company and certain affiliates elected to be
treated as S corporations for U.S. federal income tax purposes, which requires
that the income or loss for federal and certain state and local tax
jurisdictions be recognized by the stockholders. The other affiliates were
partnerships where income or loss was included in a partner's tax return based
upon its respective ownership percentage.
In connection with the Offering, the Company terminated its S corporation
election. As a result of converting to a C corporation, 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 are presented as if the Company had
terminated its S corporation election prior to January 1, 1996.
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end on the basis of enacted laws and
statutory tax rates applicable to the period in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
n. Net Income Per Share and Weighted Average Common Shares Outstanding
In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings per Share" ("SFAS No. 128"), which simplifies existing
computational guidelines, revises disclosure requirements and increases the
comparability of earnings-per-share-data on an international basis.
Net income per share-basic and pro forma net income per share-basic
(unaudited) are calculated using weighted average common shares outstanding and
net income per share-diluted and pro forma net income per share-diluted
(unaudited) are calculated using weighted average common shares outstanding
including the effect of dilutive securities calculated using the Treasury Stock
Method.
For the year ended December 31, 1998, for the purpose of calculating net
income per share-basic, the weighted average number of common shares outstanding
was 23,088,903 and for the purpose of calculating net income per share-diluted,
the weighted average number of common shares outstanding and dilutive securities
was 23,907,604 which includes 818,701 shares representing the impact of common
stock options calculated using the Treasury Stock Method. For the year ended
December 31, 1997, for the purpose of calculating pro forma net income per
share-basic, the weighted average number of common shares outstanding was
22,565,848 and for the purpose of calculating pro forma net income per
share-diluted, the weighted average number of common shares outstanding and
dilutive securities was 23,206,073 which includes 640,225 shares representing
the impact of common stock options calculated using the Treasury Stock Method.
29
<PAGE> 31
CMP Media Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- Continued
(in thousands, except share and per share amounts)
o. Fair Value of Financial Instruments
Cash and cash equivalents, marketable securities, short-term receivables
and trade payables and accrued expenses are carried at amounts approximating
fair value.
p. Reclassifications
Certain prior year amounts have been reclassified to conform with the 1998
presentation.
3. ACQUISITIONS, INVESTMENTS AND DISPOSITIONS:
a. Acquisitions
On May 29, 1998, the Company acquired four publications, as well as NSTL,
a hardware/software testing lab, from The McGraw-Hill Companies, Inc. This
acquisition has been accounted for by the purchase method of accounting. The
results of operations of the businesses acquired have been included in the
Company's Consolidated Statements of Income from the dates of acquisition. The
purchase price for this acquisition was $28,600 in cash plus the assumption of
certain liabilities. In connection with this acquisition, the Company recorded
intangible assets of $33,808 which are being amortized over periods ranging from
six to twenty years.
The following table summarizes pro forma results of operations of the
Company as if the acquisitions had occurred on January 1, 1997:
<TABLE>
<CAPTION>
For the year
ended December 31,
----------------------
1998 1997
-------- --------
(unaudited)
<S> <C> <C>
Revenues $499,043 $525,446
======== ========
Income before taxes $ 16,234 $ 30,366
======== ========
Net income $ 9,237 $ 30,078
======== ========
Net income per share - diluted $ 0.39
========
Pro forma net income as if a C corporation prior
to January 1, 1997 (See Note 9) $ 17,126
========
Pro forma net income per share - diluted $ 0.74
========
</TABLE>
In December 1997, the Company acquired two technology publications in the
U.K., as well as the 50% interest of the Company's partner in the joint venture
which published InformationWeek in the U.K., for $4,232 in cash and assumed
liabilities (net of cash acquired). In May 1996, the Company acquired M&T
International (now called CMP Worldwide Media Networks), a business which
represents non-U.S. technology publishers in the sale of advertising space to
U.S. technology advertisers, for $2,275 in cash and assumed liabilities. These
acquisitions have been accounted for by the purchase method of accounting. In
connection with these acquisitions, the Company recorded intangible assets of
$3,843 and $2,175 in 1997 and 1996, respectively, which are being amortized over
periods of up to fifteen years. Pro forma data have been omitted as the impact
is not material to the Company's results of operations for 1997 and 1996.
30
<PAGE> 32
CMP Media Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- Continued
(in thousands, except share and per share amounts)
b. Investments
In 1997, the Company made equity investments totaling $3,391 in
international publishing joint ventures and an Internet services joint venture,
as well as an investment accounted for under the cost method of $275 in a
company engaged in Internet-related services. In addition, during 1998 and 1997,
the Company made advances of $74 and $1,893 to its publishing joint ventures.
Losses from unconsolidated affiliates were $1,262, $8,374 and $1,330 for
1998, 1997 and 1996, respectively, and have been included in other expense, net,
in the Company's Consolidated Statements of Income. Losses for the year ended
December 31, 1997 included $3,200 for other than temporary impairments in
carrying value.
The excess of the Company's investments over equity in net assets acquired
amounted to $2,075 and $2,203 at December 31, 1998 and 1997, respectively, net
of accumulated amortization. Amortization is calculated on a straight-line basis
over fifteen years.
c. Dispositions
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 December 1997, the Company sold its 50% interest in one
of its joint ventures engaged in Internet-related services for $2,000. The sale
resulted in a gain of $836. In August 1997, the Company sold the subscriber list
of NetGuide Magazine for approximately $3,042 in cash and assumed liabilities.
The sale resulted in a gain of $3,042. In February 1996, the Company sold its
publication CommunicationsWeek International for $2,198. The sale resulted in a
gain of $1,216.
4. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Office equipment ................................ $42,431 $34,760
Leasehold improvements .......................... 14,474 11,938
Furniture and fixtures .......................... 3,856 2,724
------- -------
60,761 49,422
Less: accumulated depreciation and amortization . 30,758 21,591
------- -------
Property and equipment, net ................... $30,003 $27,831
======= =======
</TABLE>
5. INTANGIBLE ASSETS:
Intangible assets at December 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Goodwill ............................. $21,054 $ 6,516
Trademark ............................ 16,400 390
Customer list ........................ 3,340 --
Other ................................ 200 300
------- -------
40,994 7,206
Less: accumulated amortization ....... 2,705 746
------- -------
Intangible assets, net ............. $38,289 $ 6,460
======= =======
</TABLE>
31
<PAGE> 33
CMP Media Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- Continued
(in thousands, except share and per share amounts)
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities at December 31, 1998 and
1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Salaries, commissions, vacation and employee benefits . $15,474 $12,844
Profit sharing and 401(k) matching contributions ...... 6,331 6,070
Volume discounts ...................................... 6,525 4,758
Other ................................................. 14,822 14,478
------- -------
$43,152 $38,150
======= =======
</TABLE>
7. REVOLVING CREDIT AGREEMENT:
The Company has a revolving credit agreement with two financial
institutions which provides for borrowings of up to $75,000, substantially all
of which was available at December 31, 1998 (see Note 14). Borrowings bear
interest at either LIBOR plus .35% to .825%, depending on outstanding loan
balances and the Company's earnings levels, or the prime rate, at the Company's
option. The agreement contains certain negative covenants regarding, among other
items, minimum levels of net worth, fixed coverage and limitations on
indebtedness. There were no outstanding borrowings under the agreement at
December 31, 1998 and 1997. The agreement expires November 14, 2001. The
weighted average interest rates for borrowings under the agreement were 5.98%,
6.07% and 6.11% for the years ended December 31, 1998, 1997 and 1996,
respectively. Interest expense was approximately $671, $1,009 and $667 for the
years ended December 31, 1998, 1997 and 1996, respectively, and is included in
other income (expense), net, in the Company's Consolidated Statements of Income.
8. COMPREHENSIVE INCOME:
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"), which establishes standards for reporting and display
of comprehensive income and its components in the financial statements.
Comprehensive income consists of net income, foreign currency translation
adjustments, minimum pension liability adjustments and unrealized gains and
losses on certain investments in debt and equity securities and is presented in
the Consolidated Statements of Stockholders' Equity. The adoption of SFAS No.
130 had no impact on the Company's consolidated results of operations, financial
position or cash flows. Prior years' financial statements have been reclassified
to conform to the SFAS No. 130 reporting requirements.
The following table summarizes the components of accumulated other
comprehensive income as of December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Unrealized gains on securities ......... $ 678 $ 109 $ --
Foreign currency translation adjustments 51 -- --
Minimum pension liability adjustments... (235) (361) (468)
Total accumulated other comprehensive ------ ------ ------
income................................. $ 494 $ (252) $ (468)
====== ====== ======
</TABLE>
9. STOCKHOLDERS' EQUITY:
The Company has the authority to issue 70 million shares of common stock,
par value $.01 per share, of which 50 million shares are designated Class A
Common Stock and 20 million shares are designated Class B Common Stock. The
number of shares issued, held as treasury and outstanding were as follows:
32
<PAGE> 34
CMP Media Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- Continued
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Common Stock Issued
----------------------------- Treasury
Class A Class B Stock Outstanding
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance as of January 1, 1996 18,874,570 -- -- 18,874,570
Conversion of Class A Common
Stock to Class B Common Stock (18,874,570) 18,874,570 -- --
Conversion of Class B Common
Stock to Class A Common Stock 1,321,320 (1,321,320) -- --
----------- ----------- ----------- -----------
Balance as of December 31, 1996 1,321,320 17,553,250 -- 18,874,570
Conversion of Class B Common
Stock to Class A Common Stock 1,300,990 (1,300,990) -- --
Issuance of Class A Common Stock
in initial public offering 4,235,000 -- -- 4,235,000
Gift of Class A Common Stock
to employees 202,186 (202,186) -- --
Issuance of Class A Common Stock 816 -- -- 816
----------- ----------- ----------- -----------
Balance as of December 31, 1997 7,060,312 16,050,074 -- 23,110,386
Conversion of Class B Common
Stock to Class A Common Stock 7,070 (7,070) -- --
Treasury stock acquired -- -- (81,672) (81,672)
Common stock issued under
Employee Stock Purchase Plan 24,980 -- -- 24,980
----------- ----------- ----------- -----------
Balance as of December 31, 1998 7,092,362 16,043,004 (81,672) 23,053,694
=========== =========== =========== ===========
</TABLE>
Holders of Class A Common Stock and Class B Common Stock vote together as
a single class as follows: holders of Class A Common Stock are entitled to one
vote for each share of such stock held and holders of Class B Common Stock are
entitled to ten votes for each share of such stock held. Dividends may be paid
out of legally available funds if declared by the Board of Directors and are
payable equally to each class of common stock. Each share of Class B Common
Stock is convertible, at the option of the holder, into Class A Common Stock, on
a share-for-share basis.
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 the change in par value have
been given retroactive treatment in the consolidated financial statements for
all periods presented.
On July 30, 1997, the Company completed 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 issuance costs of
$1,937, were $84,711. The Company used a portion of the net proceeds of the
Offering to repay outstanding debt of $21,750 under its revolving credit
agreement and a portion to pay a final S corporation distribution of $39,300 to
its S corporation stockholders in connection with the Company's change in tax
status from an S corporation to a C corporation.
Upon the consummation of the Offering, 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. As
required by generally accepted accounting principles, the Company recorded, at
the date of the gift, a one-time, non-cash compensation charge of $4,449.
33
<PAGE> 35
CMP Media Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- Continued
(in thousands, except share and per share amounts)
10. INCENTIVE PLANS:
a. Stock Options
Executive Stock Option Agreements
On November 27, 1996, the Company granted three senior executives stock
options to purchase 2,642,640 shares of Class A Common Stock pursuant to certain
stock option agreements between these executives and the Company. The option
price per share of Class A Common Stock of $12.72 was equal to the market value
per share on the date of grant. Subject to acceleration based on certain
performance criteria, options with respect to 755,040 shares and 1,887,600
shares of Class A Common Stock vest on December 31, 2003 and 2005, respectively.
Options expire five years after the date they vest but in no event later than
December 31, 2010.
Employee Stock Incentive Plan
In December 1996, the Company adopted the CMP Media Inc. Stock Incentive
Plan (the "Stock Incentive Plan"). The Stock Incentive Plan provides for the
issuance of non-qualified and incentive stock options to key employees of the
Company for the purchase of up to 1,132,560 shares of the Company's Class A
Common Stock. The Stock Incentive Plan also permits the award of stock
appreciation rights, stock bonuses, restricted stock awards, performance units
and phantom stock. The expiration date for options granted under the Stock
Incentive Plan is the tenth anniversary of the date of grant. The exercise price
of options granted is equal to the market value per share on the dates of grant.
Options granted during 1998 vest over periods ranging from three to five years.
On February 9, 1999, the Compensation Committee of the Board of Directors of the
Company authorized the immediate vesting of all options held by employees under
the Stock Incentive Plan in the event of a sale or merger which results in a
change of control of the Company.
On October 20, 1998, the Company repriced the outstanding options held by
all employees other than members of senior management and options held by the
Company's Board of Directors. 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 market price of the Company's Class A Common Stock at the date of the
repricing was $10.25.
Information regarding the Executive Stock Option Agreements and the Stock
Incentive Plan is summarized below:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
---------- ----------
<S> <C> <C>
Outstanding at January 1, 1996 ................ -- --
Granted ..................................... 2,642,640 $ 12.72
---------- ----------
Outstanding at December 31, 1996 .............. 2,642,640 $ 12.72
Granted ..................................... 814,655 17.25
Terminated and cancelled .................... (5,750) 22.00
---------- ----------
Outstanding at December 31, 1997 .............. 3,451,545 $ 13.77
Granted ..................................... 240,600 20.70
Terminated and cancelled .................... (112,717) 19.90
---------- ----------
Outstanding at December 31, 1998 .............. 3,579,428 $ 12.80
========== ==========
</TABLE>
The range of exercise prices for options outstanding that were held by
employees at December 31, 1998 was: 3,549,121 options at $12.72 per share and
30,307 options at prices ranging from $10.75 to $26.25 per share. The weighted
average exercise price of options outstanding at December 31, 1998 of $12.80
reflects the October 20, 1998 repricing of options as described above. The
number of options which were exercisable as of December 31, 1998 and 1997 were
123,831 and 58,730, respectively.
Directors' Stock Compensation Plan
Under the CMP Media Inc. Directors' Stock Compensation Plan (the
"Directors' Plan") the Company may grant stock options to
34
<PAGE> 36
CMP Media Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- Continued
(in thousands, except share and per share amounts)
members of the Company's Board of Directors as part of the Directors' annual
compensation. The Company has reserved 35,000 shares of Class A Common Stock for
issuance under the Directors' Plan. As of December 31, 1998, approximately 8,400
options were granted to Directors. These options were granted at exercise prices
equal to the market value per share on the date of grant. The options vest over
three years and expire on the tenth anniversary of the date of the grant. On
February 9, 1999, the Board of Directors of the Company authorized the
immediate vesting of all options held by directors under the Directors' Plan in
the event of a sale or merger which results in a change of control of the
Company.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"), and related
interpretations in accounting for its incentive plans. Accordingly, since all
options granted to date have been granted at exercise prices equal to market
value on date of grant, no compensation expense has been recognized by the
Company in connection with stock options for the years ended December 31, 1998,
1997 and 1996. The weighted-average grant-date fair value of the options granted
during 1998 was estimated as approximately $2,630 using the Black-Scholes
option-pricing model. In calculating fair value, the following assumptions were
used for options granted during 1998: dividend yield of 0%, volatility of 50%,
risk-free interest rate of 5.4% and an expected life of 4 years. For 1997 and
1996, the following assumptions were used for options granted prior to the
Offering: dividend yield of 5%, volatility of 0%, risk-free interest rate of
6.5% and an expected life of six years. For 1997 options granted at the date of
the Offering and subsequent to the Offering, the following assumptions were used
in calculating fair value: dividend yield of 0%, volatility of 40%, risk-free
interest rate of 6% and an expected life of four years. Had compensation cost
for the Company's stock option awards been determined based upon the fair value
at the grant date consistent with the methodology prescribed under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123") the Company's unaudited pro forma net income,
unaudited pro forma net income per share-basic and unaudited pro forma net
income per share-diluted for the years ended December 31, 1998, 1997 and 1996
would have been $9,094, $0.39, and $0.38, $16,931, $0.75 and $0.73 and $16,036,
$0.72 and $0.72, respectively.
b. Executive Stock Purchase Agreements
On November 27, 1996, three senior executives acquired 1,321,320 shares of
the Company's outstanding Class A Common Stock from principal stockholders of
the Company for $1,386 in cash. At the date of purchase, the aggregate market
value of the shares was $16,800. The Company is recording $15,414 in non-cash
compensation expense pro rata over the vesting periods ranging from seven to
nine years. Compensation expense for 1998, 1997 and 1996 was $2,420, $1,924 and
$240, respectively. Under the terms of the purchase, in the event of a merger or
sale which results in a change of control of the Company, vesting will
accelerate with respect to the same percentage of such shares as the percentage
of shares of the principal stockholders of the Company sold in such merger or
sale.
c. Equity Appreciation Plan
In 1988, the Company established an equity appreciation plan (the "Equity
Appreciation Plan") for certain key employees and directors which provides for
incentive deferred compensation in the form of Share Appreciation Rights
("SARs") pursuant to formulas contained in the Equity Appreciation Plan. All
SARs are granted at the discretion of the Company's Board of Directors. The SARs
normally are subject to a nine-year redemption schedule beginning, at the
election of the participant, as early as June 30, 1993, and ending on June 30,
2002, unless the Board of Directors provides an extension. Under the redemption
schedule, a participant must have redeemed at least 20% of his or her SARs as of
June 30, 1998, 40% as of June 30, 1999, 60% as of June 30, 2000, 80% as of June
30, 2001 and 100% as of June 30, 2002; provided, however, that no more than 20%
of a participant's SARs may be redeemed in any one year. The Board of Directors
has the discretion to accelerate the payment of any or all redemptions and
payments. Pursuant to the Equity Appreciation Plan, approximately $(1,771),
$2,486 and $1,952 were (credited) charged to operations in 1998, 1997 and 1996,
respectively. As of December 31, 1998 and 1997, $7,099 and $10,632 respectively,
has been accrued for payment under the Equity Appreciation Plan.
d. Employee Stock Purchase Plan
During 1997, the Company adopted the CMP Media Inc. Employee Stock
Purchase Plan (the "Purchase Plan") which grants options to eligible employees
to purchase shares of the Company's Class A Common Stock. Under the Purchase
Plan, substantially all employees may purchase shares of Class A Common Stock,
subject to certain limitations. The purchase price will be the lower of 85% of
the fair market value of the Class A Common Stock on the grant date or 85% of
the fair market value of the Class A Common Stock on the exercise date. Options
granted under the Purchase Plan will be exercised six months after the grant
date. Purchases are limited to 10% of an employee's eligible compensation,
subject to the maximum amount permitted by the Purchase Plan. An aggregate of
1,500,000 shares of Class A Common Stock of the Company has been reserved for
issuance under the Purchase Plan. Of this amount, 24,980 shares were issued
under the Purchase Plan during the year ended December 31, 1998. The Company
applies APB No. 25 and related interpretations in accounting for its incentive
plans. Had compensation cost for the Purchase Plan been determined based upon
the fair value consistent with the methodology prescribed under SFAS No. 123,
the Company's unaudited pro forma net income, unaudited pro forma net income per
share-basic and unaudited pro forma net income per share-diluted would have
been $9,849, $0.43 and $0.41, respectively for the year ended December 31, 1998.
In calculating fair value, the following assumptions were used: dividend yield
of 0%, volatility of 50%, risk-free interest rate of 5.3% and an expected life
of six months.
35
<PAGE> 37
CMP Media Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- Continued
(in thousands, except share and per share amounts)
11. INCOME TAXES:
Income before provision for income taxes for the years ended December 31,
1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Domestic .............. $ 32,504 $ 35,217 $ 32,388
Foreign ............... (14,920) (4,480) (4,625)
-------- -------- --------
$ 17,584 $ 30,737 $ 27,763
======== ======== ========
</TABLE>
The provision (benefit) for income taxes for the years ended December 31,
1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
U.S. Federal income taxes:
Current ........................ $ 8,336 $ 8,274 $ --
Deferred ....................... (106) (8,803) --
State and local income taxes:
Current ........................ 2,203 2,345 446
Deferred ....................... (297) (1,819) 207
Foreign income taxes, net .......... (2,557) 453 251
------- ------- -------
$ 7,579 $ 450 $ 904
======= ======= =======
</TABLE>
In connection with the Offering (see Note 2m.), the Company converted from
an S corporation to a C corporation and recorded a cumulative deferred tax
benefit of approximately $7,600. A reconciliation of the U.S. federal statutory
rate to the historical effective income tax rates of the Company for the years
ended December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
U.S. federal statutory rate ...................... 35.0% 35.0% 35.0%
Benefit of S corporation status .................. -- (16.0) (35.0)
State and local income taxes ..................... 5.9 4.8 2.4
Foreign income taxes ............................. 3.3 1.5 0.9
Operating expenses disallowed for tax purposes ... 2.4 0.9 --
Tax exempt interest .............................. (3.3) (0.3) --
One-time cumulative deferred tax benefit ......... -- (24.4) --
Other miscellaneous .............................. (0.2) -- --
------ ------ ------
43.1% 1.5% 3.3%
====== ====== ======
</TABLE>
The components of the net deferred income tax asset as of December 31,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Accounts receivable .............................. $ 1,546 $ 1,150
Accruals for operating expenses .................. 6,462 4,546
Property, equipment and leasehold improvements ... 816 535
Deferred compensation ............................ 179 2,505
Investments in unconsolidated affiliates ......... 3,048 2,713
Valuation allowance .............................. (442) (442)
-------- --------
$ 11,609 $ 11,007
======== ========
</TABLE>
36
<PAGE> 38
CMP Media Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- Continued
(in thousands, except share and per share amounts)
11. INCOME TAXES: -- Continued
The pro forma provision for income taxes (unaudited) for the years ended
December 31, 1997 and 1996 as if the Company had terminated its S
corporation election prior to January 1, 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
U.S. federal income taxes:
Current ............................... $ 15,719 $ 6,853
Deferred .............................. (4,318) 2,223
State and local income taxes:
Current ............................... 3,594 1,796
Deferred .............................. (1,066) 584
Foreign income taxes, net ................. (528) 251
-------- --------
$ 13,401 $ 11,707
======== ========
</TABLE>
A reconciliation of the U.S. federal statutory rate to the pro forma
effective income tax rates (unaudited) of the Company for the years ended
December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
U.S. federal statutory rate ............................ 35.0% 35.0%
State and local income taxes ........................... 5.4 5.4
Foreign income taxes ................................... 1.5 0.9
Operating expenses disallowed for tax purposes ......... 2.0 1.2
Operating income with no income tax expense ............ -- (1.9)
Other .................................................. (0.3) (0.1)
Valuation allowance .................................... -- 1.7
------ ------
43.6% 42.2%
====== ======
</TABLE>
12. SEGMENT INFORMATION:
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"), which establishes standards for reporting information about
operating segments. SFAS No. 131 introduced the management approach for segment
reporting which designates the internal organization that is used by management
for making operating decisions and assessing performance as the source of the
Company's reportable segments. The adoption of SFAS No. 131 had no impact on the
Company's consolidated results of operations, financial position or cash flows.
The Company is organized on the basis of products and services. The
Company's business units are strategic groups that offer different products and
services. These business units have been aggregated into three segments:
publishing, conferences and computer hardware/software testing. The publishing
segment is a reportable segment. For purposes of reporting under SFAS No. 131,
the conference and computer hardware/software testing segments have been
combined in an "all other" category.
Publishing: the publishing segment consists of the Company's business
units that provide information and services about information technology to the
builders, sellers and users of technology worldwide. This segment is comprised
of the Company's domestic and international publications (both in print and
online), Internet products and services, research services, reprints, list
rental, licensing and advertising sales representation.
Conferences: This segment consists of various conferences and exhibitions
sponsored by the Company within the information technology industry.
Computer Hardware/Software Testing: This business consists of a lab which
provides hardware/software testing services to hardware/software manufacturers,
corporations and government agencies.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. There are no intersegment
revenues. Segment data includes a charge allocating corporate-headquarters
costs. Management evaluates the performance of its segments and allocates
resources to them based on income or loss before income taxes.
The table below presents information about reportable segments for the
years ended December 31, 1998, 1997 and 1996. Asset information by reportable
segment is not reported, since the Company does not produce such information
internally.
<PAGE> 39
<TABLE>
<CAPTION>
1998
-------------------------------------------------
Reconciling
Publishing All Other Items(1) Total
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues..................... $463,378 $ 14,183 $ -- $477,561
Income (loss) before taxes... 22,089 (1,657) (2,848) 17,584
Specified items included in segment income (loss) before taxes:
Depreciation and amortization
expense................... 11,833 753 511 13,097
Loss from equity investments. 1,269 -- -- 1,269
(1) Reconciling items primarily include unallocated corporate expenses and
interest income, net.
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------------------
Reconciling
Publishing All Other Items(1) Total
---------- --------- ----------- --------
<S> <C> <C> <C> <C>
Revenues..................... $470,128 $ 3,723 $ -- $473,851
Income (loss) before taxes... 43,957 517 (13,737) 30,737
Specified items included in segment income (loss) before taxes:
Depreciation and amortization
expense................... 7,791 18 962 8,771
Loss from equity investments. 8,374 -- -- 8,374
(1) Reconciling items primarily include unallocated corporate expenses.
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------------------
Reconciling
Publishing All Other Items(1) Total
---------- --------- ----------- --------
<S> <C> <C> <C> <C>
Revenues..................... $414,208 $ 3,851 $ -- $418,059
Income (loss) before taxes... 38,709 610 (11,556) 27,763
Specified items included in segment income (loss) before taxes:
Depreciation and amortization
expense................... 6,360 85 876 7,321
Loss from equity investments. 1,332 -- -- 1,332
(1) Reconciling items primarily include unallocated corporate expenses.
</TABLE>
The following table provides revenue and long-lived asset information by
geographic area for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
REVENUE LONG-LIVED ASSETS
----------------------- -----------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
United States..... $450,041 $458,739 $407,609 $27,422 $27,335 $25,971
Foreign........... 27,520 15,112 10,450 2,581 496 490
Foreign revenue is based on the country in which the legal subsidiary/
branch is domiciled. Revenue from no single foreign country was material to the
consolidated revenue of the Company in each year.
</TABLE>
13. EMPLOYEE BENEFIT PLANS:
a. Defined Benefit Pension Plan
As of December 31, 1992, substantially all employees of the Company were
covered under a noncontributory defined benefit pension plan (the "Pension
Plan"). As of January 1, 1993, the Pension Plan was amended and frozen so that
employees have earned no further benefits for subsequent services. Subsequent
services have continued to be the basis for vesting of benefits not yet vested
at December 31, 1992 and the Pension Plan will continue to hold assets and pay
benefits. This amendment was treated as a curtailment for the year ended
December 31, 1992. The Company has funded the Pension Plan in accordance with
the Employee Retirement Income Security Act of 1974.
37
<PAGE> 40
CMP Media Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- Continued
(in thousands, except share and per share amounts)
13. EMPLOYEE BENEFIT PLANS: -- Continued
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" ("SFAS No. 132"), which standardizes disclosures and eliminates those
that are no longer considered useful. SFAS No. 132 does not change the
measurement or recognition of costs for pension plans. The Company continues to
report pension expense in accordance with Statement of Financial Accounting
Standards No. 87, "Employers' Accounting for Pensions" ("SFAS No. 87"), and
Statement of Financial Accounting Standards No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits".
The following tables provide a reconciliation of the changes in the
Pension Plan's benefit obligation and fair value of assets for the years
ended December 31, 1998 and 1997, and a statement of the funded status as of
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Reconciliation of benefit obligation:
Obligation at January 1 $ 1,915 $ 2,117
Interest cost 133 148
Actuarial (gain) loss 186 (81)
Settlements (633) (269)
------- -------
Obligation at December 31 1,601 1,915
------- -------
Reconciliation of fair value of plan assets:
Fair value of plan assets at January 1 1,613 1,787
Actual return on plan assets 76 95
Employer contributions 94 --
Settlements (633) (269)
------- -------
Fair value of plan assets at December 31 1,150 1,613
------- -------
Funded status:
Funded status at December 31 (451) (302)
Unrecognized transition asset (244) (418)
Unrecognized loss 660 779
------- -------
Net amount recognized $ (35) $ 59
======= =======
</TABLE>
The following table provides the amounts recognized in the consolidated balance
sheets as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Accrued benefit liability $ (451) $ (302)
Minimum pension liability 416 361
------- -------
Net amount recognized $ (35) $ 59
======= =======
Other comprehensive income attributable to change
in additional minimum liability recognition $ 55 $ (107)
======= =======
</TABLE>
38
<PAGE> 41
CMP Media Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- Continued
(in thousands, except share and per share amounts)
13. EMPLOYEE BENEFIT PLANS: -- Continued
The following table provides the components of net periodic benefit cost for the
Pension Plan for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Interest cost $ 133 $ 148 $ 143
Expected return on plan assets (80) (89) (85)
Amortization of transition asset (74) (85) (85)
Amortization of net loss 39 52 56
------ ------ ------
Net periodic benefit cost 18 26 29
Settlement loss 170 53 --
------ ------ ------
Net periodic benefit cost after
curtailments and settlements $ 188 $ 79 $ 29
====== ====== ======
</TABLE>
The assumptions used in the measurement of the Company's benefit obligation are
shown in the following table:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Weighted average assumptions as of December 31:
Discount rate 6.50% 7.00% 7.00%
Expected return on plan assets 5.00% 5.00% 5.00%
Rate of compensation increase N/A N/A N/A
</TABLE>
b. Profit Sharing Plan
Substantially all employees of the Company are covered by a
defined-contribution plan (the "Profit Sharing Plan"). The Profit Sharing Plan
provides that employees may make annual pre-tax contributions of up to 15% of
their eligible compensation pursuant to Section 401(k) of the Internal Revenue
Code. Through December 31, 1996, the Company contributed an amount equal to 25%
of each employee's contribution up to 1.5% of the employee's eligible
compensation. As of January 1, 1997, the Company contributes an amount equal to
50% of each employee's contribution up to 3% of the employee's eligible
compensation. In addition, under the profit sharing component of the Profit
Sharing Plan, the Company contributes a minimum annual amount per eligible
participant and at its discretion, the Company has also made additional annual
contributions as defined in the Profit Sharing Plan. The provision for both the
matching and discretionary contributions amounted to $6,371, $6,150 and $5,165
in 1998, 1997 and 1996, respectively.
14. RELATED PARTY TRANSACTIONS:
During 1997 and 1996, certain stockholders of the Company held a 15%
ownership interest in the facility which the Company leases as its principal
offices. This ownership interest was sold effective January 1, 1998. The
existing lease expires in November 2014. Total rental expense with respect to
this lease was approximately $4,600 and $4,500 for the years ended December 31,
1997 and 1996, respectively (see Note 15). The Company has a note receivable
from one of its executive officers, the unpaid principal amount of which was
$750 and $760 as of December 31, 1998 and 1997, respectively. This note, which
bears interest at a rate which approximates LIBOR, provides for quarterly
interest payments and annual principal payments of $10 per year through 2003,
$20 per year through 2013 and $50 per year through 2023. In addition, in April
1997, the Company guaranteed a loan of $3,000 to one of its senior executives.
As of December 31, 1998, the balance of the loan and related guarantee was
$1,200. The loan is from one of the financial institutions with which the
Company has its revolving credit agreement. The amount available to the Company
for borrowings under its revolving credit agreement (see Note 7) is reduced by
the amount of this guarantee. This loan will be payable in November 2001 and is
guaranteed through such date. The Company is obligated to extend the guarantee
through December 31, 2005 at the request of the senior executive. The Company
incurred expenses of approximately $605, $623 and $544 for the years ended
December 31, 1998, 1997 and 1996, respectively, on behalf of a not-for-profit
organization managed by the Co-Chairpersons of the Company.
39
<PAGE> 42
CMP Media Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- Continued
(in thousands, except share and per share amounts)
15. COMMITMENTS AND CONTINGENCIES:
The Company leases its office facilities and certain office equipment
under non-cancelable operating leases expiring in various years through 2014.
Future minimum lease payments as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1999 15,990
2000 15,524
2001 15,193
2002 14,048
2003 13,350
Thereafter 119,685
---------
$ 193,790
=========
</TABLE>
Future minimum lease payments have not been reduced for future minimum
sublease rental receipts aggregating approximately $4,000. In addition, certain
of the above leases are subject to escalation clauses for taxes and other
expenses. Rent expense amounted to $12,195, $10,739 and $9,851 in 1998, 1997 and
1996, respectively.
The Company has employment agreements with three senior executives. The
agreements provide minimum terms for base compensation and fringe benefits. The
agreements also contain confidentiality and non-competition clauses ranging from
three to five years as well as termination provisions. The Company is accruing
the probable amount of expected termination costs over the expected service
period. The maximum contingent liability under such agreements at December 31,
1998 was approximately $17,000.
In March 1999, the Company entered into written agreements with certain
key employees which provide for the payment of bonuses if such employees do not
resign from employment with the Company for periods ranging from 60 to 90 days
after consummation of a merger or sale resulting in a change of control of the
Company (a "Transaction") (see Note 1). The minimum amount contingently payable
under these agreements is estimated to be approximately $13.7 million. The
amount ultimately payable under certain of these agreements is dependent on the
purchase price paid in connection with such Transaction.
Also in March 1999, the Company entered into agreements with certain key
employees which provide for severance payments if their employment is terminated
after a Transaction resulting in a change of control of the Company, or if their
employment is terminated without cause prior to such Transaction by reason of a
workforce-reduction or job-elimination. Many of such agreements include
non-competition covenants, the violation of which by a subject employee would
relieve the Company of the obligation to make further payments to such employee.
The amount contingently payable under these agreements is estimated to be
approximately $12.8 million.
In the normal course of business, the Company is sometimes named as a
defendant in litigation. In the opinion of management, based upon the advice of
counsel, any uninsured liability which may result from the resolution of any
present litigation or asserted claim will not have a material effect on the
Company's financial position, results of operations or cash flows.
16. QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<CAPTION>
1998 March 31, June 30, September 30, December 31, Total
- ---- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 109,185 $ 126,055 $ 117,470 $ 124,851 $ 477,561
Operating costs and expenses 108,534 120,603 115,702 116,686 461,525
------------ ------------ ------------ ------------ ------------
Income from operations 651 5,452 1,768 8,165 16,036
Gain on sales(1) 828 492 -- -- 1,320
Other income (expense), net 593 (62) (462) 159 228
------------ ------------ ------------ ------------ ------------
Income before provision
for income taxes 2,072 5,882 1,306 8,324 17,584
Provision for income taxes (2) 893 2,535 563 3,588 7,579
------------ ------------ ------------ ------------ ------------
Net income $ 1,179 $ 3,347 $ 743 $ 4,736 $ 10,005
============ ============ ============ ============ ============
Net income per share-- basic $ 0.05 $ 0.14 $ 0.03 $ 0.21 $ 0.43
============ ============ ============ ============ ============
Weighted average shares
outstanding-- basic 23,110,386 23,110,386 23,081,118 23,053,722 23,088,903
------------ ------------ ------------ ------------ ------------
Net income per share-- diluted $ 0.05 $ 0.14 $ 0.03 $ 0.20 $ 0.42
============ ============ ============ ============ ============
Weighted average shares
outstanding-- diluted 24,389,551 24,262,312 23,566,214 23,412,337 23,907,604
============ ============ ============ ============ ============
</TABLE>
40
<PAGE> 43
CMP Media Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- Continued
(in thousands, except share and per share amounts)
16. QUARTERLY FINANCIAL DATA (UNAUDITED): -- Continued
<TABLE>
<CAPTION>
1997 March 31, June 30, September 30, December 31, Total
- ---- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 101,914 $ 125,004 $ 114,179 $ 132,754 $ 473,851
Operating costs and expenses 102,858 111,421 107,374 117,312 438,964
------------ ------------ ------------ ------------ ------------
Income (loss) from operations (944) 13,583 6,805 15,442 34,887
Gain on sales(1) -- -- 3,042 969 4,011
Other income (expense), net (3,047) (2,076) (3,171) 133 (8,161)
------------ ------------ ------------ ------------ ------------
Income (loss) before provision
(benefit) for income taxes (3,991) 11,507 6,676 16,544 30,737
Provision (benefit) for income
taxes (133) 383 (2,939) 3,139 450
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (3,858) $ 11,124 $ 9,615 $ 13,405 $ 30,287
============ ============ ============ ============ ============
Historical income (loss) before
provision (benefit) for income
taxes $ (3,991) $ 11,507 $ 6,676 $ 16,544 $ 30,737
Pro forma provision (benefit) for
income taxes(2) (1,740) 5,017 2,911 7,213 13,401
------------ ------------ ------------ ------------ ------------
Pro forma net income (loss) $ (2,251) $ 6,490 $ 3,765 $ 9,331 $ 17,336
============ ============ ============ ============ ============
Pro forma net income (loss) per
share-- basic(3) $ (0.10) $ 0.29 $ 0.17 $ 0.40 $ 0.77
============ ============ ============ ============ ============
Pro forma weighted average shares
outstanding-- basic(3) 22,361,777 22,361,777 22,429,722 23,110,114 22,565,848
------------ ------------ ------------ ------------ ------------
Pro forma net income (loss) per
share-- diluted(3) $ (0.10) $ 0.29 $ 0.16 $ 0.39 $ 0.75
============ ============ ============ ============ ============
Pro forma weighted average shares
outstanding-- diluted(3) 22,361,777 22,361,777 24,072,904 24,033,162 23,206,073
============ ============ ============ ============ ============
</TABLE>
- ----------
(1) See Note 3c -- Acquisitions, Investments and Dispositions
(2) See Note 11 -- Income Taxes
(3) See Note 2n-- Net Income Per Share and Weighted Average Common
Shares Outstanding
41
<PAGE> 44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to Directors of the Company is incorporated herein by
reference to the Proxy Statement for the 1999 Annual Meeting of Stockholders
(the "1999 Proxy Statement"), and information with respect to Executive Officers
of the Company is set forth in Part I, Item 1 of this Report under the heading
"Executive Officers of the Company".
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is incorporated herein by
reference to the 1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners and
management is incorporated herein by reference to the 1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions is
incorporated herein by reference to the 1999 Proxy Statement.
42
<PAGE> 45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Consolidated Financial Statements of CMP Media Inc. and Subsidiaries
included in Item 8 herein.
2. Financial Statement Schedule of CMP Media Inc. and Subsidiaries for
three years ended December 31, 1998:
Valuation and Qualifying Accounts and Reserves
3. The following are included as part of this Report:
*3.3 Restated Certificate of Incorporation of CMP Media Inc.
*3.4 Amended and Restated Bylaws 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 Leeds Family Stockholders' Agreement
*10.1 Employment Agreement dated November 27, 1996 between CMP
Media Inc. and Michael S. Leeds
*10.2 Share Purchase Agreement, dated November 27, 1996, among
Gerard G. Leeds, Lilo J. Leeds, CMP Media Inc. and
Michael S. Leeds
*10.3 Stockholders' Agreement, dated November 27, 1996, among
CMP Media Inc., Gerard G. Leeds, Lilo J. Leeds and
Michael S. Leeds
*10.4 Option Agreement, dated November 27, 1996, between CMP
Media Inc. and Michael S. Leeds
*10.5 Employment Agreement dated November 27, 1996 between CMP
Media Inc. and Daniel H. Leeds
*10.6 Share Purchase Agreement, dated November 27, 1996, among
Gerard G. Leeds, Lilo J. Leeds, CMP Media Inc. and
Daniel H. Leeds
*10.7 Stockholders' Agreement, dated November 27, 1996, among
CMP Media Inc., Gerard G. Leeds, Lilo J. Leeds and
Daniel H. Leeds
*10.8 Option Agreement, dated November 27, 1996, between CMP
Media Inc. and Daniel H. Leeds
*10.9 Employment Agreement dated November 27, 1996 between CMP
Media Inc. and Kenneth D. Cron
*10.10 Share Purchase Agreement, dated November 27, 1996, among
Gerard G. Leeds, Lilo J. Leeds, CMP Media Inc. and
Kenneth D. Cron
*10.11 Stockholders' Agreement, dated November 27, 1996, among
CMP Media Inc., Gerard G. Leeds, Lilo J. Leeds and
Kenneth D. Cron
*10.12 Option Agreement, dated November 27, 1996, between CMP
Media Inc. and Kenneth D. Cron
*10.13 CMP Media Inc. 1996 Stock Option Plan
*10.14 CMP Media Inc. Pension Plan
*10.15 CMP Media Inc. Profit Sharing and Retirement Savings
Plan and Trust
*10.16 CMP Publications, Inc. 1988 Equity Appreciation Plan
*10.17 CMP Media Inc. Employee Stock Purchase Plan
*10.18 Credit Agreement by and among CMP Publications, Inc.,
Shawmut Bank Connecticut and The Chase Manhattan Bank,,
dated July 15, 1993
*10.19 Fifth Amendment to the Credit Agreement by and among CMP
Media Inc., Fleet National Bank and The Chase Manhattan
Bank, dated November 14, 1996
*10.20 Sixth Amendment to the Credit Agreement by and among CMP
Media Inc., Fleet National Bank and The Chase Manhattan
Bank, dated April 15, 1997
*10.21 CMP Media Inc. Directors' Stock Compensation Plan
*10.22 CMP Media Inc. Stock Incentive Plan
43
<PAGE> 46
*10.23 Seventh Amendment to the Credit Agreement by and among
CMP Media Inc., Fleet National Bank and The Chase
Manhattan Bank
10.24 Eighth Amendment to the Credit Agreement by and among
CMP Media Inc., Fleet National Bank and The Chase
Manhattan Bank
*16 Letter from Miller, Ellin & Company
21 Subsidiaries of CMP Media Inc.
23.1 Consent of PricewaterhouseCoopers L.L.P.
27 Financial Data Schedule for the year ended December 31,
1998
- ----------
* Incorporated by reference to the corresponding exhibit of the
Registrant's Registration Statement on Form S-1 (File No.
333-26741).
(b) The following reports on Form 8-K were filed during the Registrant's
quarter ended December 31, 1998:
An Item 5 report on Form 8-K, dated November 12, 1998, was filed reporting
Registrant's financial results for the nine months and fiscal quarter
ended September 30, 1998.
44
<PAGE> 47
Report Of Independent Accountants on
Financial Statement Schedule
To the Board of Directors and Stockholders
OF CMP MEDIA INC.:
Our audits of the consolidated financial statements referred to in our
report dated February 10, 1999, except for note 15, as to which the date is
March 30, 1999, appearing on page 22 of this Form 10-K also included an audit of
the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In
our opinion, the financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PricewaterhouseCoopers LLP
New York, New York
February 10, 1999,
except for note 15 as to which
the date is March 30, 1999
45
<PAGE> 48
CMP Media Inc. and Subsidiaries
Valuation and Qualifying Accounts and Reserves
as of December 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to
Beginning of Costs and Write- Balance at
Description Period Expenses offs End of Period
- ----------- ------ -------- ---- -------------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts at
December 31, 1998 ........... $3,631 3,074 (2,594) $4,111
====== ====== ====== ======
Allowance for Doubtful Accounts at
December 31, 1997 ........... $3,189 3,100 (2,658) $3,631
====== ====== ====== ======
Allowance for Doubtful Accounts at
December 31, 1996 ........... $2,945 2,216 (1,972) $3,189
====== ====== ====== ======
</TABLE>
46
<PAGE> 49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized.
CMP MEDIA INC.
(Registrant)
By: /s/ MICHAEL S. LEEDS
-------------------------------------
Michael S. Leeds
President and Chief Executive Officer
Date: March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ MICHAEL S. LEEDS President, Chief Executive March 30, 1999
- --------------------------------- Officer and a Director
Michael S. Leeds (Principal Executive Officer)
/s/ KENNETH D. CRON Executive Vice President, March 30, 1999
- --------------------------------- President of Publishing and a
Kenneth D. Cron Director
/s/ DANIEL H. LEEDS Executive Vice President, March 30, 1999
- --------------------------------- President of International and
Daniel H. Leeds a Director
/s/ JOSEPH E. SICHLER Executive Vice President and March 30, 1999
- --------------------------------- Chief Financial Officer (Principal
Joseph E. Sichler Financial Officer and Principal
Accounting Officer)
/s/ GERARD G. LEEDS Director, Co-Chairperson of March 30, 1999
- --------------------------------- Board of Directors
Gerard G. Leeds
/s/ LILO J. LEEDS Director, Co-Chairperson of March 30, 1999
- --------------------------------- Board of Directors
Lilo J. Leeds
/s/ RICHARD W. ANDERSON Director March 30, 1999
- ---------------------------------
Richard W. Anderson
/s/ RICHARD A. LEEDS Director March 30, 1999
- ---------------------------------
Richard A. Leeds
/s/ SHARON LEE PATRICK Director March 30, 1999
- ---------------------------------
Sharon Lee Patrick
</TABLE>
47
<PAGE> 1
EXHIBIT 10.24
EIGHTH AMENDMENT AGREEMENT
This EIGHTH AMENDMENT AGREEMENT (this "Agreement" or the "Eighth
Amendment") made as of May 21, 1998, by and among CMP MEDIA INC. (the
"Borrower"), a Delaware corporation and the successor by merger to CMP
Publications, Inc., a New York corporation ("CMP Publications"), FLEET NATIONAL
BANK ("Fleet"), formerly known as Fleet National Bank of Connecticut and prior
to that Shawmut Bank Connecticut, N.A., and the successor by merger to Fleet
Bank N.A. ("Fleet N.A."), THE CHASE MANHATTAN BANK ("Chase"), the successor by
merger to The Chase Manhattan Bank, N.A., (Fleet and Chase and any of their
respective successors or permitted assigns, the "Banks") and Fleet as agent for
the Banks (in its capacity as such, the "Agent").
WITNESSETH:
WHEREAS, CMP Publications, Fleet, Chase and the Agent have executed and
delivered a Credit Agreement dated as of July 15, 1993 (the "Original Credit
Agreement"), which Original Credit Agreement was amended by an Amendment and
Waiver Agreement among CMP Publications, Fleet, Chase and the Agent dated
February 28, 1994 (the "First Amendment"), by a Second Amendment and Waiver
Agreement among CMP Publications, Fleet, Chase and the Agent dated as of
February 27, 1995 (the "Second Amendment"), by a Third Amendment Agreement among
CMP Publications, Fleet, Chase and the Agent dated as of May 30, 1995 (the
"Third Amendment"), and by a Fourth Amendment Agreement, dated as of August 9,
1995, between CMP Publications, Fleet, Chase, Fleet N.A. and the Agent (the
"Fourth Amendment") (such First, Second, Third and Fourth Amendments are
collectively referred to below as the "Prior Four Amendments"); and
WHEREAS, CMP Publications, Fleet, Chase and the Agent also executed and
delivered (i) a Third Waiver Agreement, dated April 24, 1995 (the "Third
Waiver") and (ii) a Fourth Waiver Agreement, dated June 5, 1995 (the "Fourth
Waiver"), both relating to the Original Agreement, as amended; and
WHEREAS, CMP Publications, Fleet, Fleet N.A., Chase and the Agent also
executed and delivered a Fifth Waiver Agreement, dated February 28, 1996 (the
"Fifth Waiver") also relating to the Original Credit Agreement, as amended; and
WHEREAS, the Original Credit Agreement was subsequently amended by a Fifth
Amendment and Consolidation of Prior Amendments (Together with Sixth Waiver)
Agreement, dated as of November 14, 1996 (the "Fifth Amendment"), which Fifth
Amendment, among other things, (i) set forth certain new amendments to the
Original Credit Agreement, and (ii) consolidated those amendments (to the
Original Credit Agreement) which were contained in the Prior Four Amendments and
were still effective;
WHEREAS, the Original Credit Agreement was subsequently amended by a Sixth
Amendment, dated as of April 15, 1997 and by a Seventh Amendment Agreement,
dated as of July 18, 1997 (the Original Credit Agreement as amended by the Fifth
Amendment (including both such new amendments and consolidated amendments), such
Sixth Amendment and such Seventh Amendment is referred to below as the
"Agreement"); and
WHEREAS, the Borrower, the Banks and the Agent entered into a Seventh
Waiver Agreement, dated as of June 13, 1997 with respect to the Agreement; and
WHEREAS, the Borrower and the Banks desire to enter into this Agreement in
order to set forth certain other amendments to the Agreement.
NOW THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto hereby agree as follows:
48
<PAGE> 2
Part A. General Matters.
1. Capitalized Terms; Section References. Capitalized terms used herein
without definition and defined in the Agreement shall have the same respective
meanings given those terms in the Agreement, unless the context otherwise
requires. All Section references used herein shall, unless otherwise specified
herein, be deemed to refer to Sections in the Agreement.
Part B. Amendments to the Agreement.
1. Amendment to Definition. The definition of the terms "Guarantor" or
Guarantors" contained in Section 1.01 is hereby amended and restated to read in
its entirety as follows:
"Guarantor" or "Guarantors" (i) shall mean CMP International Corp., a
Delaware corporation and formerly known as CMP Publications International Corp.,
and any other Affiliate of the Borrower hereafter guarantying the Notes pursuant
to Section 5.09 below, and (ii) shall also include, for purposes hereof
(including Section 5.08, Article 6 (and the definitions related thereto), and
Article 7), unless the context otherwise requires, CMP France S.N.C., a general
partnership formed under the laws of France, CMP Media Limited, CMP Media (U.K.)
Limited and CMP Media GmbH, a German corporation, notwithstanding the fact that
some or all of such entities may not have executed such a guaranty (the Borrower
hereby acknowledging and agreeing that the Required Banks shall have the right,
at any time, to require the Borrower to cause such entities to so execute and
deliver such guaranties for the benefit of the Banks and the Agent (with such
changes, in the case of a foreign entity as the Banks may request as a result of
any foreign law requirements).
2. New Definitions. The following new definitions are hereby added to
Section 1.01 to be inserted in their proper alphabetical order:
"CMP Media Limited": means CMP Media Limited, a United Kingdom
corporation.
"CMP Media (U.K.) Limited": means CMP Media (U.K.) Limited, a United
Kingdom corporation.
"U.K. Lease": means the lease (including any related Agreement for Lease
and License for Alterations) to be entered into between CMP Media Limited and
CMP Media (U.K.) Limited and Bantry Limited with respect to the premises at 8-14
Vine Hill, Holborn London, England, which lease agreement shall provide for a
maximum term of approximately fifteen years, with an option (the "Termination
Option") to terminate after approximately the first ten years, such lease to
commence approximately May 21, 1998; the U.K Lease to contain such basic
monetary (including rental) terms as the Borrower has presented to the Banks on
or prior to May 20, 1998.
3. New Section 1.03. A new Section 1.03 is hereby added to the Agreement
to read in its entirety as follows:
1.03. Guarantied Indebtedness.
In determining the amount of principal of indebtedness guarantied by
the Borrower pursuant to Section 6.02(e) below: (i) any indebtedness in a
currency other than United States Dollars shall be deemed converted to
United States Dollars using a spot exchange rate reasonably selected by
the Agent at the applicable time, (ii) with respect to indebtedness
consisting of operating leases, the principal of indebtedness shall be
deemed to be the aggregate rental payable thereunder (but not, in the case
of a real property lease, the operating expenses and real property taxes)
as in good faith determined by the Agent, and (iii) until such time as the
Termination Option (as defined in the definition of U.K. Lease) may no
longer be legally and properly exercised by CMP Media Limited and CMP
Media (U.K.) Limited, the rental obligations to be paid only in the last
five years of the fifteen year lease term under the U.K. Lease shall not
be considered indebtedness.
4. Amendment of Section 6.02. Section 6.02 is hereby amended by amending
and restating clauses (e) - (g), inclusive thereof to read in their entirety as
follows: "(e) a guaranty or guaranties by the Borrower of (i) indebtedness (plus
interest thereon) for borrowed money incurred by one or more members of senior
management of the Borrower or (ii) indebtedness (including lease obligations
(including without limitation the U.K. Lease)) of Guarantors, to the extent such
indebtedness is otherwise permitted hereunder, provided, that the aggregate
principal amount of indebtedness guaranteed by the Borrower under this clause
(e) shall not exceed $15 million, (f) in addition to the guaranties permitted by
the preceding clause (e), guaranties made in the ordinary course of business for
the
49
<PAGE> 3
benefit of employees of the Borrower or any Guarantor, provided, that, the
maximum amount of obligations so guaranteed by the Borrower or any Guarantor
under this clause (f) shall not exceed $250,000 in the case of an individual
employee and $1,000,000 in the aggregate at any time outstanding, and (g)
guaranties not otherwise permitted by this Section 6.02, not to exceed $100,000
in the aggregate principal amount outstanding at any time."
5. Amendment of Section 6.04. Section 6.04 is hereby amended by (i)
deleting the word "and" immediately prior to clause (d), and (ii) adding a new
clause (e) to read as follows: "and (e) the U.K. Lease and any non-monetary
modifications and non-material monetary modifications thereto."
Part C. Miscellaneous; and Payment of Fees and Expenses.
1. The Borrower, the Agent and the Banks hereby ratify and confirm all
terms and provisions of the Agreement, and of any other documents, instruments
or agreements executed in connection therewith, and agree that, except as
expressly modified herein, all of such terms and provisions remain in full force
and effect.
2. Each Bank acknowledges and agrees with each other Bank and the Agent
that (i) it has independently evaluated any projections and other materials and
information with respect to the Borrower and/or any Guarantor and has made its
own independent decision to enter into this Amendment and is not relying on any
representation or other statement of such other Bank or the Agent in doing so
and (ii) pursuant to Section 8.04 of the Agreement, it shall make its own credit
decisions in taking or not taking any action (including without limitation
making or not making any Loan) under the Agreement and the Notes. Borrower
acknowledges that the obligations of the Banks are several and no Bank shall be
responsible for the failure (if any) of any other Bank to make any Loan required
to be made by such other Bank.
3. In order to induce the Banks to enter into this Agreement and to make
any further Loans, the Borrower hereby represents and warrants that:
(a) the representations and warranties contained in Article 4 of the
Agreement, as hereby amended, are true and correct in all material
respects on the date hereof (or were true and correct as of the specific
point in time to which they relate) with the same effect as though such
representations and warranties had been made on the date hereof,
(b) the Borrower is in compliance with all of the terms and provisions set
forth in the Agreement, as hereby amended, on its part to be observed and
performed,
(c) no Event of Default or Default under the Agreement, as hereby amended,
now exists,
(d) the Agreement, as hereby amended, and the Notes are the legal, valid
and binding obligations of the Borrower, enforceable against the Borrower
in accordance with their respective terms, and
(e) the Borrower has no claims, counterclaims, defenses, or rights of
set-off or recoupment against the Banks or the Agent.
4. This Eighth Amendment may be signed in any number of counterparts, all
of which shall be considered originals but all of which together shall be deemed
one instrument.
5. This Eighth Amendment (i) shall be governed by and construed in
accordance with the internal laws of the State of Connecticut, (ii) is limited
specifically to the matters set forth herein, (iii) does not constitute directly
or by implication a waiver or modification of any other provision of the
Agreement and (iv) shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns.
6. The Borrower hereby agrees to pay the legal fees and disbursements of
Finn Dixon & Herling LLP incurred in connection with the drafting and
negotiation of this Eighth Amendment and related matters.
50
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto each have executed this Eighth
Amendment as of the date first hereinbefore written.
CMP MEDIA INC.
By:___________________________
Name: Joseph E. Sichler
Title: Vice President/CFO
FLEET NATIONAL BANK
By:___________________________
Name: G. Steven Kalin
Title: Vice President
THE CHASE MANHATTAN BANK
By:___________________________
Name: Emelia K. Teige
Title: Vice President
FLEET NATIONAL BANK,
as Agent
By:___________________________
Name: G. Steven Kalin
Title: Vice President
51
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF CMP MEDIA INC.
CMP International Corp.
CMP Media Limited
CMP France S.N.C.
CMP Media (U.K.) Limited
CMP Media GmbH
CMP Media (Singapore) Pte. Ltd.
Reality Research, Inc.
NSTL, Inc.
NSTL (Canada) Inc.
52
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File Nos. 333-39261, 333-39263, and 333-70113) of CMP
Media Inc. of our report dated February 10, 1999, except for note 15, as to
which the date is March 30, 1999, relating to the financial statements and
financial statement schedule, which appears in this Form 10-K.
PricewaterhouseCoopers LLP
New York, New York
March 30, 1999
53
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,658
<SECURITIES> 13,211
<RECEIVABLES> 80,432
<ALLOWANCES> 4,111
<INVENTORY> 4,253
<CURRENT-ASSETS> 121,049
<PP&E> 60,761
<DEPRECIATION> 30,758
<TOTAL-ASSETS> 202,262
<CURRENT-LIABILITIES> 83,749
<BONDS> 0
0
0
<COMMON> 231
<OTHER-SE> 107,276
<TOTAL-LIABILITY-AND-EQUITY> 202,262
<SALES> 477,561
<TOTAL-REVENUES> 477,561
<CGS> 209,883
<TOTAL-COSTS> 461,525
<OTHER-EXPENSES> (1,548)
<LOSS-PROVISION> 3,074
<INTEREST-EXPENSE> (1,187)
<INCOME-PRETAX> 17,584
<INCOME-TAX> 7,579
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,005
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.42
</TABLE>
