An announcement was made within Cygnus on New Year’s Eve regarding the restoration of some of the salary cuts made at the company for the fourth quarter of 2007. I will be attempting to speak with Cygnus CEO Carr Davis this week about the details. More in the upcoming issue of min’s b2b. And, Happy New Year, b2b-ers.

More on the salary cuts here, here, and here.

UPDATE:

The salary restoration will be paid out in the form of bonuses, which will represent 70% of what was taken away in the initial cuts. Though this is a nice holiday season gift for the employees, I wonder just exactly how these bonuses were delt out: Bonus money is taxed at 40-45%, as I understand it. After consulting with a source at Cygnus, I have been informed that the “bonuses” will be taxed at the employees’ normal rates, which varies for every employee.
UPDATE II:

I just received the actual memo that was sent out and signed by Davis and Tony O’Brien (the other CEO). Some highlights:

“We are pleased to announce that Cygnus has granted a special bonus payment- to our hourly and salaried associates who are not otherwise eligible to receive commission, bonus or incentive payments (those who do not have an incentive plan).”

“Amount: 1.25% of compensation. This averages out to roughly $560 per eligible associate, but the actual ammounts will vary depending on compensation. This amount constitutes a restoration of roughly 70% of the compensation reduction absorbed by these associates in October.”

I was sent a tip today that Ascend’s Physician’s Money Digest will be shuttering after the November issue, and that Family Practice Recertification and Internal Medicine World Report will fold at the end of the year.  I called Will Passano, division president, and Cam Bishop, CEO of the company, and left messages.  I also emailed Bishop.  No response so far. (If you have more news on this story, please email me at jgreenfield@accessintel.com.)

This is just more negative news coming out of a company that seemed to have so much promise when it was formed.   This year alone, Ascend has sold its top-performing division (Stagnito) to BNP Media, and lost a top executive in Ron Wall.  When I’ve spoken to top executives at Ascend about the state of the company this past year, they’ve said the right things, but didn’t sound to happy or confident.

Meanwhile, Wall goes to Apprise Media, and is now part of an organization that has increased revenues by 33% and profits by 55% in the two years it has existed, the company announced today: both through acquisition and organic growth.

Troubles that we’ve seen this year at Ascend, BNP/Stagnito, and Cygnus are unfortunate for those companies, the people that work there, and the industry as a whole, but these strong profit and revenue increases from Apprise go to show that the news isn’t always all bad, even in a print-challeneged 2007.

For the employees, this title really does not apply.  Let’s face it, if Cygnus does come out of this and has a blowout 2008, are the low-level employees going to really benefit all that much?  Probably not.  So let’s fly a little higher right now, and try to see the bright side of the across-the-board pay cuts.

When Cygnus made its budget for the year, the company projected a certain amount of growth for print, online, and events.  The bank covenants that were made were based on that growth.  Despite online’s overperformance (budgeted for about 50% growth, and will be growing about 60%), and events’ overperformance (budgeted for about 9% growth and realized about 11%), Cygnus wasn’t able to match its growth forecasts from the beginning of the year.  Print was set to grow 4-5%, and it remained flat.  Money was also slated to come in from big agency accounts cultivated by Carr Davis and other salespeople.  That money isn’t coming in as expected either.

So, what could be done to maintain bank covenants?  Layoffs, asset sales, reworking covenants, and pay cuts.  As we all know, the last option was chosen.  Here’s why it might be good for the company:

Next year, when the bank covenents have to be rewritten based on the new budgets, Cygnus is showing its creditors that it has done several things this year:

- The company will end up growing about 5%.  Though that is far below the projected 11%, and far below the required amount in the covenants, it still is growth in a very challenged market.

- When the company was unable to keep its covenent due to unforseen problems, what did it do?  Did it default?  Did it cut staff and therefore weaken its business?  Did it ask the banks for more money or concessions?  No.  The company just made it happen.  It did whatever it took to make sure that its financial house was in order, even if it did mean some painful sacrifices from the top on down.

You might fault Davis and Tony O’Brien for what they have decided to do (especially if you’re an affected party), but, you also have to admit that it was not a decision without merits.  I would also add to that that it was not an easy decision for anyone.  A lot of people look at moves that CEOs make and say that they may have done something differently; the situation always looks different from the balcony–it’s a lot hotter, and the lights are alot brighter on stage.

There is, you may have heard, a bit of unrest at Cygnus. I won’t go over it again. Here’s the latest that I know.

This was recently reported by top management to employees at offices around the country via teleconference:

Last year, the company, as a whole, grew 1.8%. EBITDA also grew (amount unspecified). This year, 8% growth was budgeted, but only 5.5% was achieved due to an acceleration of print losses. The pay cuts were made to ensure a higher rate of growth, because, according to the manager running the call, “The way to get out of this is to grow.”

The manager also compared the current situation to a college student with a credit card: “Did anyone have a credit card in college and go crazy with it? The answer isn’t more borrowing, it’s getting your house in order.”

Employees on the call asked questions about sharing in the company’s eventual profits when things were turned around (the converse of what is happening now), and mentioned a high level of disgruntlement, citing that lower level employees are feeling unmotivated to work harder knowing that their only real incentive is to keep their jobs.

Despite the implosion of the sub-prime housing loan market, the economy has been fairly resilient. Stocks are up, consumer confidence hasn’t nose-dived, and Americans are still spending.

That’s most of the good news. And now, some of the bad news:

- The dollar is at its weakest point since the 70s. One greenback is now roughly equal in value to one Loonie, the Canadian dollar.

- The Army Corps of Engineers recently assessed America’s infrastructure and gave it, overall, a D. (See the Minneapolis bridge collapse.) This is a problem that will affect commerce increasingly in the coming years.

- The EU has recently passed a chemical control act called REACH that, because of the size and economic power of the EU, will be the industry standard. The American Chemical industry is already reacting, and it will cost billions of dollars over the next 10 years–that’s on top of the hundreds of millions our government and industry has spend lobbying the EU, basically to keep carcinogens in American products. (Turns out, though, that in the end, this legislation will benefit the larger chemical companies, as they will have control over the information that the EU will demand on their products, and downriver chemical users will have to buy that information from Dow Chemicals, etc, to be able to verify the safety of the products they sell in Europe.) This is not the only instance in the world of America taking a back seat to forward-thinking policies that are stimulating foreign economies and hurting our own. This is entirely due to overly business-friendly, short-sighted, interest-group driven government policies.

- And, probably most disturbing, our national debt has reached a dizzying $9 trillion. This, compounded with the recent gashes the fed has made in the prime rate, should send inflation spiraling out of control soon. Why hasn’t this happened yet? Prices on foreign goods in this country have been kept artificially low by massive foreign firms who are looking to protect market share. (Do this: go to amazon.com and search for a Japanese product. Now go to amazon.de and search for the same product.) But how long will that last as long as the dollar weakens? And now on to Cygnus….

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I know very little about what is going on inside Cygnus right now: all I know I read in Folio and what was written to me in an email from someone within the company. I don’t know how much money this move will save them, or how close to the abyss (not making a payment to creditors) the company was or is. Nonetheless, I will offer my opinion.

- The article, by Tony Silber and Bill Mickey, Folio’s publisher/editor and one of its most senior correspondents, respectively, quoted an anonymous source from outside the company who said:

”While busting a bank covenant is never a good thing, it is not uncommon or traumatic for private companies,” the second source said. “Bank amendments occur all the time with lenders who cooperate with management to get through difficult times. It is hard to imagine that the CEOs and/or ABRY are willing to make the company go through this trauma in order to avoid the modest costs and pain of a bank amendment.”

I give ABRY and Carr/O’Brien (Cygnus’ co-CEOs) a bit more credit than that. They are not business neophytes. Theay know how borrowing goes, and ABRY has considerable experience living on the edge with Penton. This unusual move is not one that they would make without considering other options, including the initial steps towards bankruptcy.

- The one bit of information that my secret source within the company gave me that wasn’t in the Folio article was that the managers of the company had supposedly agreed to take a 25% “or more” pay cut. I’m not sure how this part of the deal is being structured, but I do not think that a 25% or even 35% pay cut by very senior management is comparable to a 7.5% cut for the rank and file.  Let’s engage in a thought experiment….

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I was having lunch today with a friend in the industry.  We had both been watching some of the B2B deals that have gone through in the past year or so.  While the mega-deal of the year involved the expansion of an already huge Penton Media into the second largest diversified B2B media company in the country, the other two that we discussed saw the formation of two very different kind of companies.

Bill Reilly’s Summit Business Media, although it has plans to get very large, is focused on the service industries–finance, accounting, insurance, etc–exclusively at this point.  And Paul Mackler’s HMP Communications is focused on health.  In fact, last week, Bill Colbert told me for min’s b2b that he, along with VSS, his PE backer, was going to focus on building a single-industry company.  And Ascend Media has recently gone from diversification with Stagnito (health and food) to focus.

Will the new generation of B2B startups aspire to the Reed/Penton/Cygnus model?  Or will they be more focused?