An occasional sampling of reader electron-mail, or "keep those waves and particles pouring in, folks!"

The ever-reliable Paul Wagner of Carter & Burgess writes:
> "I was awash in a great feeling of contentment after reading the InformationWeek article you refer to in Issue No. 10 "Top-Level Take-Away: Behind The Curve". That research showed "more productivity out of systems in years four through six than in one through three, and even more in years seven through nine than in the middle years" [which] lends great legitimacy to our CAD development/management team's effort to put in place a standard "workspace" for two different CAD platforms and multiple CAD standards. We have a sizable investment... over the last two years and now have a viable system in place that we can enterprise to other offices and still maintain distinct office and/or client standards, etc... I now have research to point to that bodes well for our system over the next couple of years as we implement the system office wide and eventually division and corporate wide."

That's great news, Paul! A strong case can be made for the exponential benefit of technological leadership as a major component of sustainable competitive advantage—the further out front you are, the further out front you get.

Sydney De Cruz, a project accountant with Hill International in Abu Dhabi, asks:
> "May I take the opportunity to hyperlink your site in my site for info, I think it would interest some of the employees?"

> Yes, of course—and thanks for asking permission; it is the polite as well as the ethical thing to do. We're pleased by your interest, Sydney, on two counts:
> first, the addition of Abu Dhabi, in the .ae or United Arab Emirates internet domain, marks the 80th country in which our humble scrivenings are read—or at least viewed, according to our subscriber database and Webalizer statistics; and
> second, your link confirms that after only a dozen issues the
LaiserinLetter has become a "must-read" resource—from global design giants such as Hill, to major client organizations such as the US Army Corps of Engineers Construction Engineering Research Laboratory (CERL), and leading universities such as Georgia Tech's College of Architecture, where we are told the LLetter is required reading for all graduate students.
OK, I'll stop now before I dislocate my shoulder patting myself on the back.

On a less cheerful note, an AEC bizdev manager friend of ours, whose anonymity I'll preserve, writes:
> "You didn't miss much at CFC [Computers for Construction, a/k/a AEC Systems Fall]. The place was a ghost town. Every one I go to gets less people than the previous. We did not exhibit, I just went to look around. I'm sure Puerto Rico [the Fall meeting of the American Council of Engineering Companies (ACEC)—where I spoke on "Knowledge Management for Design Professionals"—JL] was a better choice."

> The sad decline of the AEC Systems trade shows in the USA since they were acquired by Penton Media is a tragedy for the entire AEC technology community. I don't mean to imply that the 70%+ shrinkage in audience turnout and exhibitor participation from the late 1990s to today is the fault of Penton's management of these events; Penton has been the victim of larger market forces beyond its control: recession; softness in advertising and marketing expenditures, especially tradeshows; after-effects of September 11 on business travel; the energy absorbing "black hole" left behind by the Internet/dot-com implosion. Yet, AEC Systems' numbers seemed already in decline even as the dot-com balloon inflated (it actually could be argued that the stampede of AEC project and procurement dot-com exhibitors to the June 1999 and 2000 shows masked the underlying decline). Furthermore, the shows' decline appeared to be accelerating by the June 2001 show, which of course was well before terrorist-induced fear of flying. Penton's most recent financial results (third-quarter 2002), as released on BusinessWire, tell an interesting tale:

Although headlining an improvement in EBITDA (earnings before interest, taxes, depreciation and amortization) "for first time since Q1 2001," the details are not nearly so pretty. The company took a total of US$243-million "non-cash goodwill impairment charges" in accordance with "SFAS No. 142, Goodwill and Other Intangible Assets." This is one of those brain-numbingly complex accounting issues that should be more widely understood because of its significant impact on corporate performance.

Accounting rules for public companies in the USA are set by an outfit called the Financial Accounting Standards Board (FASB), which issues "Statements on Financial Accounting Standards" (SFAS). SFAS 142 deals with intangible assets generally (non-physical stuff like patents or licenses) and "goodwill" in particular.

When one company buys another, the difference between the purchase price paid and the measurable value of all assets as recorded on the selling company's books gets recorded on the buying company's books as "goodwill"—presumably consisting of unmeasurable stuff like customer loyalty and brand-name recognition. SFAS 142, a relatively new rule, requires companies to periodically review the current actual value of each separately identifiable line of business to determine whether it's still worth as much as the company paid to acquire it. If the company, in effect, paid more in the past than what the business is worth today, then a "goodwill impairment charge" must be taken. The actual SFAS 142 review process is a bit more complicated, but is nicely explained on the US Security and Exchange Commision's (SEC) EDGAR Online website.

Now, Penton took "goodwill impairment" of more than $240-million in 2002, out of $493-million of goodwill on its books at the end of 2001. Thus, roughly 50% of Penton's goodwill—what the company paid to buy other businesses in excess of their "book" values—turned out to be "impaired." Because these impairment reviews are conducted on a business unit by business unit basis but reported in the aggregate, it's not easy to infer a direct correlation between specific lines of business (such as tradeshows) and the reported impairment. Nevertheless, Penton's own "product revenue" reports offer some tantalizing clues.

Publishing, which has the lion's share of Penton's revenue (but typically generates less EBITDA than trade shows), did slip a bit for the nine months ended September 30, 2002 (down nearly 25% from the same period in 2001), but seemed to level off in the third quarter (down only 14%). Online media revenues, although small at only 5% of total company revenue, held steady for the year to date and actually increased slightly year-over-year for the third quarter. This leaves trade show and conference revenues, which showed drastic 60%+ collapses for both the third quarter and the first nine months of 2002.

Penton acquired a number of tradeshow businesses, such as Internet World, in addition to AEC Systems. The financial results hint that few, if any, of these acquisitions have been generating revenue levels that may have justified their original valuations and resulting goodwill. Such impairment could be a consequence of overpaying or of underperforming, but either way it puts Penton in a touchy situation.

Although a "non-cash" adjustment, the $240-million+ writeoff of goodwill helped push shareholders' equity to a negative $75-million, with $328-million in bond debt and $16-million in other long-term liabilities not quite matched by $312-million in non-current assets (with only $26-million of those assets in physical stuff—plant, property and equipment—and the $286-million balance consisting of the remaining goodwill and other intangibles). Fortunately, the company was able to replace all its former term loans with long-term debt and preferred stock before taking the most recent goodwill impairment adjustments. Although the company reports $20-million cash on hand, its excess of all current assets over current liabilities is only $1.7 million. The company "expects to meet all interest payment obligations on its bonds," and management notes that an undrawn line of credit has a "current borrowing base [of] approximately $23 million."

I think a "strange" second cousin of mine, twice or thrice-removed, might have taken cash advances on his credit cards to pay the mortgage interest, but that's a story for another time. Back to Penton, which hints at the possibility of "strategic alternatives for a few small, non-core assets, which could generate cash through the combination of sale proceeds and/or tax benefits." Hard to judge whether AEC Systems fits Penton's definition of "small and non-core." Architects, who bitterly recall Penton's summary execution of the late and lamented Progressive Architecture magazine, could easily make the case for the AEC industry as a non-core interest of Penton's. Because the company "cannot be assured of its ability to execute asset sales in the existing merger and acquisition environment for business-to-business media properties," that leaves "tax benefits" as a controllable source for generating cash. In other words, pull the plug on the under-performers in order to book losses for tax purposes that can be turned into refunds (the company already is hoping for a $20-million refund in Q1 2003 "as a result of its updated estimate for its net operating loss for 2002").

The stock market hasn't been kind to Penton either. From a mid-2000 high in excess of $36 per share, the stock has lately been in the $0.33-$0.51 range. Although this is roughly a 99% decline, it could have been worse. With 32-million shares outstanding, Penton's entire market capitalization is hovering at or below $15-million, which (along with the sub-$1 share price) triggered a warning of possible delisting by the New York Stock Exchange. "If Penton's shares cease to be traded on the NYSE, the company will pursue having its shares included on the OTC Bulletin Board to facilitate future trading." The 2002 balance sheet shows a new line item on the shareholders' equity and liabilities side for more than $45-million worth of "Mandatorily redeemable convertible preferred stock," resulting from a May 2002 agreement between the company and its preferred shareholders to change both the redemption and conversion terms on this class of stock that had just been issued in March 2002 (these changes also counted as a $42-million "reduction of income available to common stockholders"). The accruing dividends on its preferred stock, plus interest on Penton's debt eat up roughly $8-million per quarter, almost exactly the same amount as the company's (improved) EBITDA in Q3 2002. This doesn't leave management a lot of wiggle room.

Overall, Penton's numerous fans and boosters in the AEC industry are keeping their fingers crossed for a favorable outcome.

DISCLOSURE: From 1995 through 1999 I was a regular and frequent presenter at the spring and fall AEC Systems conferences, and had been named a member of the conference advisory board (a ceremonial role). I both withdrew from speaking at the spring 2000 show and resigned from the conference advisory board in protest over Penton's selection of a speaker with whom I chose not to be associated. While Penton continues its association with that speaker at recent conferences, I draw no inferences regarding conference speaker selection and corresponding trade show attendance, exhibitor participation or financial performance.

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