<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 4, 1998
REGISTRATION NO. 333-56665
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
INFORMATION HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 2731 06-1518007
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
23 OLD KINGS HIGHWAY SOUTH
DARIEN, CONNECTICUT 06820
(203) 662-4203
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------------
MASON P. SLAINE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
INFORMATION HOLDINGS INC.
23 OLD KINGS HIGHWAY SOUTH
DARIEN, CONNECTICUT 06820
(203) 662-4203
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
STEVEN J. GARTNER, ESQ. JONATHAN A. SCHAFFZIN, ESQ.
WILLKIE FARR & GALLAGHER CAHILL GORDON & REINDEL
787 SEVENTH AVENUE 80 PINE STREET
NEW YORK, NEW YORK 10019 NEW YORK, NEW YORK 10005
(212) 728-8000 (212) 701-3000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BY ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED AUGUST 4, 1998
4,250,000 SHARES
INFORMATION HOLDINGS INC.
[LOGO]
COMMON STOCK
--------------
All of the shares of Common Stock of Information Holdings Inc., a Delaware
corporation (the "Company"), offered hereby are being offered by the Company.
Prior to this Offering (the "Offering"), there has been no public market for the
Common Stock. It is currently anticipated that the initial public offering price
will be between $14.50 and $16.50 per share. See "Underwriting" for a discussion
of the factors to be considered in determining the initial public offering price
of the Common Stock.
Upon consummation of the Offering, Warburg Pincus (as defined herein) will
own 58.8% of the outstanding Common Stock, assuming an initial public offering
price of $15.50 per share.
The Common Stock has been approved for listing on the New York Stock
Exchange ("NYSE") under the symbol "IHI," subject to official notice of
issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS OF THE COMMON STOCK OFFERED
HEREBY.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(3)
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total(4)................................... $ $ $
</TABLE>
(1) Up to 72,841 shares (assuming an initial public offering price of $15.50 per
share) offered hereby are being offered by the Company on a non-underwritten
basis to certain directors of the Company at the Price to Public less the
Underwriting Discount.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $1,360,000.
(4) The Company has granted to the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase up to 637,500 additional
shares of Common Stock on the same terms as set forth above, solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively.
-------------------
The shares of Common Stock being offered by this Prospectus are offered by
the several Underwriters, subject to prior sale, when, as and if delivered to
and accepted by the Underwriters, and subject to approval of certain legal
matters by counsel for the Underwriters. The Underwriters reserve the right to
withdraw, cancel or modify such offer and to reject orders in whole or in part.
It is expected that delivery of the shares of Common Stock offered hereby will
be made in New York, New York on or about , 1998.
-------------------
MERRILL LYNCH & CO. BT ALEX. BROWN
------------
The date of this Prospectus is , 1998.
<PAGE>
[Graphic material, omitted in the electronic filing, depicts various logos of
CRC Press, as well as sample publishing products and related images in each of
the following areas: (i) Life Sciences; (ii) Engineering, Mathematics and
Physical Sciences; (iii) Journals and Newsletters; (iv) Environmental Sciences;
and (v) Business Publications.]
2
<PAGE>
INFORMATION IN THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH CAN
BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL,"
"SHOULD," "EXPECT," "INTEND," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVE THEREOF
OR COMPARABLE TERMINOLOGY. THE MATTERS SET FORTH UNDER THE CAPTION "RISK
FACTORS" IN THE PROSPECTUS CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING
IMPORTANT FACTORS WITH RESPECT TO SUCH FORWARD-LOOKING STATEMENTS, INCLUDING
CERTAIN RISKS AND UNCERTAINTIES, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE STABILIZATION, THE PURCHASE OF COMMON STOCK TO COVER
SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."
3
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
4
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND HISTORICAL AND PRO FORMA
FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT
OTHERWISE REQUIRES, REFERENCES HEREIN TO THE "COMPANY" OR "IH" INCLUDE
INFORMATION HOLDINGS INC. AND ITS SUBSIDIARIES, INCLUDING THE LLC (AS DEFINED
HEREIN), AND REFERENCES HEREIN TO "COMMON STOCK" REFER TO THE COMPANY'S COMMON
STOCK, PAR VALUE $.01 PER SHARE. UNLESS OTHERWISE INDICATED, ALL INFORMATION
PRESENTED IN THIS PROSPECTUS ASSUMES THAT (I) THE EXCHANGE (AS DEFINED HEREIN)
AND CERTAIN CONTEMPORANEOUS TRANSACTIONS HAVE BEEN CONSUMMATED AND (II) THE
UNDERWRITERS' OVER-ALLOTMENT OPTION HAS NOT BEEN EXERCISED.
THE COMPANY
OVERVIEW
The Company is an information publishing business focused on providing
essential information to professional and academic end-users in attractive niche
markets. The Company was formed to capitalize on management's experience in
acquiring information publishing businesses and then increasing profitability
through a combination of organic revenue growth and improved operating
efficiencies. To date, the Company has acquired information publishing
businesses in the following niche markets: scientific, technical and medical
("STM") and professional through CRC Press; and intellectual property through
MicroPatent. For the year ended December 31, 1997, the Company had revenues, net
loss and EBITDA of $34.9 million, ($4.9) million and $1.4 million, respectively.
These figures reflect the Adjustments (as defined on page 10), which reduced
revenues by $4.0 million and net income and EBITDA by $8.0 million.
CRC Press, acquired in January 1997 from The Times Mirror Company, is a
mid-sized STM and professional publisher with leading positions in several
attractive niche markets. CRC Press, with a 95-year history, has highly regarded
brand names and publishes some of the most recognizable STM titles in their
respective fields, including THE HANDBOOK OF CHEMISTRY AND PHYSICS (currently in
its 79th edition) and STANDARD MATHEMATICAL TABLES AND FORMULAE. In the first
half of 1997, two fold-in acquisitions were completed and combined with CRC
Press: St. Lucie Press, a publisher of professional titles; and Auerbach, a
provider of technology-oriented print and electronic subscription-based
products, which was acquired from The Thomson Corporation ("Thomson"). For the
three months ended March 31, 1998, CRC Press contributed approximately 83% of
the Company's revenues.
MicroPatent, acquired in July 1997, is a leading source of intellectual
property information products and services. Its high-quality patent and
trademark databases are used extensively by legal and research professionals and
corporations. The Internet, MicroPatent's fastest-growing distribution channel,
accounted for 34% of its total revenues in the first quarter of 1998, as
compared to 14% in the first quarter of 1997. The Company believes that its
profitable PATENTWEB-TM- service is among the most comprehensive intellectual
property information services on the Internet. For the three months ended March
31, 1998, MicroPatent contributed approximately 17% of the Company's revenues.
MANAGEMENT
The Company was formed in December 1996 by Mason P. Slaine and Warburg,
Pincus Ventures, L.P. ("Warburg Pincus"). Mr. Slaine, the Company's President
and Chief Executive Officer, has more than 15 years of experience in the
information publishing industry in both corporate and entrepreneurial
environments. From 1994 to 1996, he served as President of Thomson Financial
Services ("Thomson Financial"), a unit of Thomson which is a leading provider of
financial information, research, analysis and software products worldwide.
Vincent A. Chippari, the Company's Executive Vice President and Chief
Financial Officer, has extensive experience in information publishing, business
management, consulting and finance, including
5
<PAGE>
seven years in various senior level operating and financial capacities with
Thomson. Messrs. Slaine and Chippari are complemented by strong operating
management. Dennis Buda, President of CRC Press, and Steven Wolfson, President
of MicroPatent, each have more than 20 years of experience in the information
publishing industry. See "Management--Executive Officers and Directors." Upon
consummation of the Offering, the executive officers of the Company will own an
aggregate of approximately 15.4% of the outstanding Common Stock, assuming an
initial public offering price of $15.50 per share. See "Security Ownership of
Certain Beneficial Owners and Management."
GROWTH AND OPERATING STRATEGY
The principal elements of the Company's growth strategy are to (i) acquire
businesses in attractive niche markets, (ii) organically grow revenues and
profit, (iii) improve operating efficiencies and (iv) attract and retain
superior management.
ACQUIRE BUSINESSES IN ATTRACTIVE NICHE MARKETS. The Company actively seeks
to identify and acquire information publishing businesses with attractive
market, product and customer characteristics. The Company targets professional
and academic end-users who have a critical need to keep abreast of current
developments in their particular fields. While the Company continually develops
and introduces new products, the majority of the Company's revenues are
generated from recurring sources, such as subscriptions and sales of previously
released publications ("backlist"). The Company believes that markets in which
information is critical to success, such as the STM market served by the
Company, have supported consistent price increases over the past decade.
Examples of additional niche markets that the Company may target include
business information, healthcare information, regulatory information and
technology-related information. Upon the expiration of Mr. Slaine's non-compete
agreement with Thomson at the end of 1999, the Company may also pursue
opportunities in financial information publishing. See "Management--Slaine
Non-competition Agreement."
ORGANICALLY GROW REVENUES AND PROFIT. The Company seeks to acquire
information publishing businesses with significant short- and long-term growth
prospects. The Company's strategy is to acquire valuable content and leverage
such content across new distribution platforms and through expansion of product
lines. For example, the Company has launched new electronic versions of
successful print products, increased sales of core products based on new
distribution agreements, began Internet delivery of products and launched new
products targeting segments of its existing customer base.
IMPROVE OPERATING EFFICIENCIES. The Company seeks to improve operating
efficiencies by combining administrative functions, eliminating redundant
facilities, negotiating more favorable contract terms with suppliers,
implementing systems improvements and upgrading management. In addition, the
Company seeks to leverage its infrastructure by acquiring companies or product
lines which can be supported by its existing operations. To date, CRC Press has
acquired two such companies, St. Lucie Press and Auerbach, as well as a line of
engineering titles from Krause Communications and the McGee line of business
titles.
ATTRACT AND RETAIN SUPERIOR MANAGEMENT. The Company seeks to employ
professional management with substantial information publishing expertise, both
in entrepreneurial and corporate settings. The Company's philosophy is to
provide its operating units with significant decision-making authority, so that
key operating policies are made close to the Company's customers and operations.
This enables the Company to attract superior entrepreneurial talent who can grow
the business by capitalizing on market opportunities.
BACKGROUND
Information Ventures LLC, a Delaware limited liability company (the "LLC"),
was formed in December 1996 by Mason P. Slaine and Warburg Pincus (together, the
"Initial Stockholders"). In order to effect the Offering through a corporation
rather than a limited liability company, immediately prior to the
6
<PAGE>
consummation of the Offering, the members of the LLC will contribute all of
their direct or indirect equity interests therein to the Company, a newly formed
Delaware corporation, in exchange for an aggregate of 12,200,000 shares of
Common Stock (the "Exchange"). Following the Exchange, the Company will own,
directly or indirectly, all of the equity interests in the LLC and its
subsidiaries. Contemporaneously with the Exchange, the Company will make certain
incentive payments to Dennis Buda. See "Management-- Employment Agreements."
Warburg Pincus and its affiliates comprise a specialized financial services
organization that manages approximately $7.0 billion of investments in its
private equity investing activities. Upon consummation of the Offering, the
Initial Stockholders will own an aggregate of 73.9% of the outstanding Common
Stock. As a result, the Initial Stockholders will have the abilitiy to control
the Company, including the election of directors, and direct its affairs and
business. See "Risk Factors--Control by Principal Stockholders; Anti-takeover
Provisions."
The Company's principal executive office is located at 23 Old Kings Highway
South, Darien, Connecticut 06820, and its telephone number is (203) 662-4203.
7
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the
Company (1).................... 4,250,000 shares
Common Stock to be Outstanding
After the Offering (1)(2)...... 16,466,129 shares
Use of Proceeds.................. The net proceeds to be received by the Company from the
Offering, estimated to be approximately $59.9 million,
will be used for general corporate purposes, including
acquisitions. See "Use of Proceeds."
NYSE Symbol...................... "IHI"
</TABLE>
- ------------------------
(1) Does not include up to 637,500 shares subject to an over-allotment option
granted by the Company to the Underwriters.
(2) Does not include an aggregate of 409,617 shares of Common Stock (assuming an
initial public offering price of $15.50 per share) issuable at a price per
share equal to the initial public offering price upon the exercise of stock
options to be granted upon consummation of the Offering. See "Management--
1998 Stock Option Plan" and "Shares Eligible for Future Sale."
RISK FACTORS
See "Risk Factors" for a description of certain risks to be considered
before making an investment in the Common Stock.
8
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The summary historical financial data of the Company as of and for the year
ended December 31, 1997 and as of and for the three months ended March 31, 1998
were derived from its audited financial statements. The summary historical
financial data as of and for the three months ended March 31, 1997 has been
derived from unaudited financial statements, which in the opinion of management
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results for such period. The summary
unaudited pro forma financial data for the year ended December 31, 1997 includes
adjustments to reflect the results of operations as if each acquisition was
consummated as of January 1, 1997 and certain other adjustments as more fully
described on the financial pages of this Prospectus. The unaudited pro forma
data is not designed to represent and does not represent what the Company's
results of operations actually would have been had the transactions described
herein under "Unaudited Pro Forma Condensed Consolidated Statement of
Operations" been completed as of January 1, 1997 or to project the Company's
results of operations at any future date or for any future period. The Company
acquired Auerbach on June 5, 1997 and MicroPatent on July 2, 1997 in
transactions accounted for under the purchase method of accounting. The results
of operations of these businesses were included in the Company's results from
their respective dates of acquisition. Accordingly, the operating results for
the three months ended March 31, 1997 and the three months ended March 31, 1998
are not fully comparable. The summary historical financial data should be read
in conjunction with, and are qualified by reference to, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the financial
statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THE COMPANY (1)
--------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
---------------------- --------------------
<CAPTION>
1997 1997 1997 1998
ACTUAL PRO FORMA ACTUAL ACTUAL
--------- ----------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
OPERATING DATA:
Revenues (2).......................................................... $ 34,869 $ 39,483 $ 8,698 $ 10,728
Cost of sales......................................................... 11,492 13,315 2,668 2,858
Operating expenses.................................................... 28,040 33,771 5,864 7,250
--------- ----------- --------- ---------
Operating income (loss)............................................... (4,663) (7,603) 166 620
Interest (expense) income, net........................................ (130) (140) (127) 37
Other (expense) income................................................ (115) (126) -- --
--------- ----------- --------- ---------
Income (loss) before taxes............................................ (4,908) (7,869) 39 657
Net income (loss) (3)(4).............................................. (4,911) (7,872) 39 601
Pro forma earnings (loss) per share (5)............................... (.30) (.48) -- .04
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
-------------------------
ACTUAL AS ADJUSTED(6)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................................................. $ 9,803 $ 69,707
Total assets........................................................................... 47,592 107,496
Total debt............................................................................. 4,132 4,132
Total equity........................................................................... 29,157 89,061
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
YEAR ENDED ----------------------
DECEMBER 31, 1997 1998
1997 ACTUAL ACTUAL
--------------- ----------- ---------
<S> <C> <C> <C>
OTHER DATA:
Depreciation and amortization (7)........................ $ 6,222 $ 859 $ 1,841
Capital expenditures (7)................................. 2,817 398 342
Net cash provided by operating activities (8)............ 8,570 1,292 1,080
Net cash used by investing activities (8)................ (33,584) (15,578) (502)
Net cash provided (used) by financing activities (8)..... 35,294 19,174 (1,055)
EBITDA (9)............................................... 1,444 1,025 2,461
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
9
<PAGE>
(FOOTNOTES FOR PRECEDING PAGE)
- ------------------------
(1) In conjunction with the acquisition and reorganization of CRC Press and
other businesses and certain compensation issues, the Company recorded
significant adjustments in 1997 and early 1998, which are not expected to
continue in the future. These adjustments (the "Adjustments") reduced
revenues by $4,017 and increased expenses by $4,013, and therefore reduced
net income by $8,030, for the year ended December 31, 1997. The Adjustments
reduced revenues by $693 and $54 and increased expenses by $1,968 and $146,
and therefore reduced net income by $2,661 and $200, for the three-month
periods ended March 31, 1997 and March 31, 1998, respectively. The
Adjustments affecting revenues were required by purchase accounting in
connection with the acquisitions of CRC Press and MicroPatent and reflect
the revaluation of acquired deferred subscription revenues based on the cost
to fulfill subscriptions. This revaluation is a non-cash adjustment which
reduces revenues in the twelve months following acquisition. The Adjustments
affecting expenses relate to: severance and reorganization costs from the
consolidation of certain functions and reductions in workforce; special
bonuses granted to an officer; contingent compensation paid to an officer of
a subsidiary; and certain additional purchase accounting-related
adjustments. Historical operating loss and EBITDA of ($4,663) and $1,444,
respectively, for the year ended December 31, 1997 include the effect of the
Adjustments of $8,030.
(2) Revenues for the three months ended March 31, 1997 and the year ended
December 31, 1997 include an initial stocking order by a new international
distributor aggregating $3,307, which is not expected to continue in the
future.
(3) Historical income taxes of the Company are not significant. Prior to the
Exchange, the Company was a limited liability company and, accordingly, was
not subject to U.S. federal or certain state income taxes.
(4) The Company's results of operations for the fiscal quarter in which the
Offering is consummated will be adversely affected by the payment of
approximately $1.0 million in cash and shares of Common Stock as incentive
payments to Dennis Buda. See "Management--Employment Agreements."
(5) No historical earnings per share data are presented as the Company does not
consider such historical data meaningful. Pro forma basic earnings (loss)
per share were computed by using 16,466,129 shares of Common Stock
outstanding after giving effect to the Exchange, the Offering and shares
issuable under an employment agreement, as if such shares were outstanding
on January 1, 1997, assuming an initial public offering price of $15.50 per
share.
(6) As adjusted amounts give effect to the issuance and sale of 4,250,000 shares
of Common Stock in the Offering (assuming an initial public offering price
of $15.50 per share), after deducting underwriting discounts and estimated
offering expenses.
(7) Depreciation and amortization include balances related to property and
equipment, intangible assets and pre-publication costs incurred in book
publishing operations. Capital expenditures include property and equipment
and pre-publication costs.
(8) For details of operating, investing and financing activities, see the
Company's Consolidated Statements of Cash Flow for the year ended December
31, 1997 and for the three months ended March 31, 1998, included elsewhere
in this Prospectus.
(9) "EBITDA" is defined as income before interest expense/income, income taxes,
depreciation and amortization. EBITDA is not a measure of performance under
generally accepted accounting principles ("GAAP") and should not be
considered in isolation or as a substitute for net income, cash flow from
operations or other income or cash flow data prepared in accordance with
GAAP. Items excluded from the calculation of EBITDA are significant
components in understanding and evaluating the Company's financial
performance. While EBITDA should not be considered as a measure of
profitability or liquidity, the Company understands that EBITDA is
customarily used in evaluating the equity value of publishing companies. The
EBITDA measure presented herein may not be comparable to similarly titled
measures of other companies.
10
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD TAKE INTO ACCOUNT THE CONSIDERATIONS SET FORTH
BELOW AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS BEFORE
PURCHASING ANY OF THE SHARES OF COMMON STOCK OFFERED HEREBY.
LIMITED OPERATING HISTORY; OPERATING LOSSES
The Company has completed numerous acquisitions since it commenced
operations in January 1997. Consequently, the financial results of the Company
and its subsidiaries included in this Prospectus are not necessarily indicative
of their future financial condition or results of operations. As a result of
adjustments in the aggregate amount of $8.0 million recorded in conjunction with
the acquisition and reorganization of businesses and certain compensation
issues, the Company reported a pre-tax loss of $(4.9) million for the year ended
December 31, 1997. The predecessor to the Company also reported pre-tax losses
in 1993, 1995 and 1996 of ($3.9) million, ($14.1) million and ($11.1) million,
respectively. See "Selected Historical Financial Data." Although the Company
achieved profitability for the three months ended March 31, 1998, there can be
no assurance that the Company will sustain profitability in the future, In
addition, the Company's results of operations for the fiscal quarter in which
the Offering is consummated will be adversely affected by the payment of
approximately $1.0 million in cash and shares of Common Stock as incentive
payments to Dennis Buda. See "Management--Employment Agreements."
DEPENDENCE ON KEY PERSONNEL
The Company believes that its success depends principally upon the efforts
and abilities of Mason P. Slaine, its co-founder, President and Chief Executive
Officer. In addition, the Company believes that its success will depend to a
significant extent upon the efforts and abilities of Vincent A. Chippari, its
Executive Vice President and Chief Financial Officer. Neither individual has
served as chief executive officer or chief financial officer, respectively, of a
public company. The successful operations of the Company's subsidiaries will
also depend on the senior management teams of such subsidiaries who are
currently in the employ of the Company and those the Company will hire in
connection with future acquisitions. The inability to hire and retain qualified
employees in connection with future acquisitions or to replace the loss of the
services of one or more key employees could have a material adverse effect on
the Company's financial condition and results of operations. The Company does
not currently maintain key person life insurance with respect to any of its
employees.
RISKS ASSOCIATED WITH ACQUISITIONS
The Company's growth will depend in part on its ability to consummate
acquisitions, integrate such acquisitions into existing operations, manage
expansion, achieve operating efficiencies and control costs in its operations.
This strategy will entail reviewing and potentially reorganizing the
infrastructure, management and financial controls of acquired operations. The
Company's financial condition and results of operations could be adversely
affected by unforeseen expenses, difficulties, complications and delays
frequently encountered in connection with the acquisition and integration of new
businesses. Acquisition-related costs could include severance payments to
employees of acquired companies, restructuring charges, assumption of
liabilities and amortization of goodwill and other acquired intangible assets,
as well as non-recurring acquisition costs, including accounting, legal and
other advisory fees. In addition, acquisitions may place a strain upon the
management resources and systems of the Company, requiring that the Company hire
additional personnel, implement new systems or upgrade existing systems.
There can be no assurance that the Company will identify acquisition
candidates that result in successful business combinations or that acquisitions
will be consummated on acceptable terms. The Company competes for acquisition
targets with other companies, many of which are larger than the Company and have
greater financial resources. In addition, the Company seeks to acquire
businesses at what it considers to be attractive valuations, a policy which has
caused, and may in the future cause, the
11
<PAGE>
Company to be outbid for otherwise desirable businesses. In general, the
magnitude, timing and nature of future acquisitions will depend upon various
factors, including the availability of suitable acquisition candidates, the
negotiation of acceptable terms, the Company's financial capabilities at the
time of the acquisition bid, the availability of skilled employees to manage the
acquired businesses and general economic and business conditions. There can be
no assurance that the Company will continue to be successful in completing
attractive acquisitions, integrating acquired businesses and improving their
profitability.
The Company anticipates that it will finance future acquisitions through
cash on hand, borrowings and issuances of capital stock. The Company does not
currently have any commitments with respect to any acquisition financing, and
there can be no assurance that sufficient financing will be available, or, if
available, that it will be available on acceptable terms. In addition,
stockholders of the Company may experience dilution in the event that equity
securities are issued in connection with acquisitions. If adequate funds are not
available, the Company may be required to significantly curtail its acquisition
program.
COMPETITION
The Company faces significant competition with respect to its STM and
professional and intellectual property businesses. In addition to competing for
sales on the basis of editorial quality of its publications, the Company
competes for the signing of noted authors. Many of the Company's competitors are
substantially larger than the Company and have greater financial, technical,
editorial, personnel and marketing resources, longer operating histories and
greater name recognition than the Company's. If the Company is unable to compete
effectively under these conditions, its financial condition and results of
operations will be materially adversely affected. See "Business--Competition."
RISKS RELATED TO AVAILABILITY OF SOURCE DATA
Much of the source data for MicroPatent's information services is publicly
available in raw form at little or no cost. To the extent users of patent and
trademark data choose to extract the data they need from such public sources
rather than utilize MicroPatent's services, MicroPatent's financial condition
and results of operations could be adversely affected. See
"Business--Competition."
RISKS RELATED TO CHANGES IN TECHNOLOGY
To the extent that the Company's businesses utilize the Internet and other
electronic media, they are subject to rapid changes in technology. There can be
no assurance that the development of new or improved technologies and products
by competitors will not have a material adverse effect on the Company's
electronically-based businesses, nor can there be any assurance that the Company
can remain competitive once such technologies and products are introduced.
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
Approximately 24% of the Company's 1997 pro forma revenues, excluding the
Adjustments, were generated from sales outside North America (including an
initial stocking order by a new international distributor approximating 8% of
1997 pro forma revenues). The Company may increase its presence internationally
through internal growth and, possibly, through acquisitions. There are certain
risks inherent in doing business in international markets, such as the
uncertainty of product acceptance by different cultures, the risks of divergent
business expectations or difficulties in establishing joint ventures with
foreign partners, difficulties in staffing and managing multinational
operations, currency and interest rate fluctuations, reduced protection of
intellectual property rights, political instability, restrictions or limitations
on the repatriation of funds and potentially adverse tax consequences. There can
be no assurance that one or more of such factors will not have a material
adverse effect on the Company's future
12
<PAGE>
international operations and, consequently, on the Company's financial condition
and results of operations.
RISKS RELATED TO THE YEAR 2000
The year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognizes a date using "00" as the
year 1900 rather than the year 2000. This error could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. Although the Company expects that its
information technology will be ready for the year 2000, the Company cannot
effectively ensure against all potential year 2000 problems that might originate
with third parties. If the Company or any third party with whom the Company does
business were to have a year 2000 problem, the Company's business, especially
that of MicroPatent, could be seriously disrupted and the Company's financial
condition and results of operations could be materially adversely affected.
FLUCTUATIONS IN PAPER COSTS
While the Company does not make significant direct paper purchases, paper
costs constitute a significant component of its printing expenses, which
expenses accounted for 8% of the Company's total operating expenses in 1997.
Paper prices have been volatile over the past several years, and management
anticipates such volatility to continue in the future. Significant increases in
paper prices could adversely affect the Company's financial condition and
results of operations.
RISKS RELATED TO USE OF PROCEEDS
Substantially all of the net proceeds from the Offering will remain
uncommitted pending the intended application of such funds for general corporate
purposes, including acquisitions. Accordingly, management will have substantial
discretion in using the proceeds received by the Company until such time as
acquisitions are completed. In the interim, management intends to invest these
proceeds in short-term, investment grade securities, which will yield only that
rate of return earned by such securities and will be subject to the risks
inherent in investment in such securities. A delay in using such proceeds for
acquisitions may adversely affect the market price of the Common Stock.
The principal purposes of the Offering are to (i) fund the Company's growth
through acquisition, (ii) create a public market for the Common Stock, which
will enable the Company to issue equity securities as consideration for
acquisitions and incentive compensation to employees, and (iii) facilitate
future access by the Company of public capital markets.
CONTROL BY PRINCIPAL STOCKHOLDERS; ANTI-TAKEOVER PROVISIONS
Upon consummation of the Offering, the Initial Stockholders will own an
aggregate of 73.9% of the outstanding Common Stock. As a result, the Initial
Stockholders will have the ability to control the Company, including the
election of directors, and direct its affairs and business. Such concentration
of ownership, as well as certain provisions of the Company's Certificate of
Incorporation and the Delaware General Corporation Law (the "DGCL"), could have
the effect of delaying or preventing a change in control of the Company under
circumstances that could give holders of the Common Stock the opportunity to
realize a premium over the then prevailing market price of such stock. Such
provisions may also adversely affect the market price of the Common Stock. Such
provisions include the ability of the Board of Directors to issue preferred
stock without further action by stockholders (known as "blank check preferred
stock") and Section 203 of the DGCL, which, in general, imposes restrictions
upon certain acquirers of 15% or more of the Company's Common Stock. These
provisions could delay or frustrate the assumption of control by stockholders,
even if such assumption of control would be beneficial to stockholders, and also
13
<PAGE>
could discourage or make more difficult a merger, tender offer or proxy contest,
even if such events could be beneficial to the interests of stockholders. See
"Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have outstanding
16,466,129 shares of Common Stock. All of the 4,250,000 shares of Common Stock
to be sold in the Offering will be eligible for immediate sale in the public
market without restriction unless purchased by affiliates of the Company. All of
the remaining 12,216,129 outstanding shares of Common Stock (the "Restricted
Shares") are held by affiliates of the Company and are available for public
resale pursuant to Rule 144 under the Securities Act. All the Restricted Shares
are subject to the lock-up agreements described under "Underwriting." Further,
409,617 shares of Common Stock (assuming an initial public offering price of
$15.50 per share) are issuable at the initial public offering price per share
upon the exercise of stock options to be granted upon consummation of the
Offering. See "Management--1998 Stock Option Plan" and "Shares Eligible for
Future Sale." Sales of substantial amounts of Common Stock, or the perception
that such sales could occur, could adversely affect the market price of the
Common Stock. The Company may also determine to issue Common Stock to fund
acquisitions, which may have such an effect, as well as be financially dilutive
to stockholders.
NO PRIOR MARKET FOR THE COMMON STOCK
Prior to the Offering, there has been no public market for the Common Stock.
There can be no assurance that an active public market for the Common Stock will
develop or be sustained after the Offering. The initial public offering price of
the Common Stock will be determined by negotiation between the Company and the
representatives of the Underwriters based on the factors described under
"Underwriting." There can be no assurance that the price at which the Common
Stock will trade in the public market after the Offering will not fall below the
initial public offering price. See "Underwriting."
DILUTION TO NEW INVESTORS
Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution in the amount of $11.35 per share in net tangible book
value per share. See "Dilution."
DIVIDENDS
The Company has never declared or paid dividends on its Common Stock and
does not currently anticipate paying dividends in the future. There can be no
assurance that the Company will ever pay a dividend. See "Dividend Policy."
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $59.9 million (approximately $69.1 million if the Underwriters'
over-allotment option is exercised in full) after deducting underwriting
discounts and estimated offering expenses (and assuming an initial offering
price of $15.50 per share). Such net proceeds will be used for general corporate
purposes, including acquisitions. The Company does not have any agreements,
arrangements or understandings with respect to any prospective material
acquisitions. Pending such uses, the net proceeds will be invested in
short-term, investment grade securities.
The Company is in discussions to acquire two STM product lines located in
the United Kingdom. The proposed purchase price is approximately $4.0 million,
which will be paid with a portion of the proceeds of the Offering. No definitive
agreements have been signed, and there can be no assurance that such transaction
will be consummated.
The principal purposes of the Offering are to (i) fund the Company's growth
through acquisition, (ii) create a public market for the Common Stock, which
will enable the Company to issue equity securities as consideration for
acquisitions and incentive compensation to employees, and (iii) facilitate
future access by the Company of public capital markets.
DIVIDEND POLICY
The Company has never declared or paid dividends on the Common Stock. The
Company intends to retain future earnings, if any, to finance the development
and expansion of its business and, therefore, does not anticipate paying any
cash dividends on its Common Stock in the foreseeable future. The decision
whether to pay dividends will be made by the Board of Directors of the Company
in light of conditions then existing, including the Company's results of
operations, financial condition and requirements, business conditions and other
factors.
15
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of March 31, 1998 and as adjusted to give effect to the Exchange and
the Offering (assuming an initial public offering price of $15.50 per share).
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" and the financial
statements of the Company and notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
-----------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
---------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................................................ $ 9,803 $ 69,707
---------- -----------
---------- -----------
DEBT:
Short-term............................................................................. $ 1,000 $ 1,000
Current portion of capitalized lease obligations....................................... 243 243
---------- -----------
Total short-term debt................................................................ 1,243 1,243
Long-term portion of capitalized lease obligations..................................... 2,889 2,889
---------- -----------
Total debt........................................................................... 4,132 4,132
---------- -----------
STOCKHOLDERS' EQUITY:
Membership interests in the LLC........................................................ 33,467 --
Common stock, $.01 par value; 50,000 shares authorized; no shares issued and
outstanding, actual; 16,466 shares issued and outstanding, as adjusted(1)............ -- 165
Additional paid-in capital............................................................. -- 93,535
Retained deficit....................................................................... (4,310) (4,639)
---------- -----------
Total stockholders' equity........................................................... 29,157 89,061
---------- -----------
Total capitalization................................................................. $ 33,289 $ 93,193
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) Does not include an aggregate of 409,617 shares of Common Stock (assuming an
initial public offering price of $15.50 per share) issuable at a price per
share equal to the initial public offering price upon the exercise of stock
options to be granted upon consummation of the Offering. See "Management--
1998 Stock Option Plan" and "Shares Eligible for Future Sale."
16
<PAGE>
DILUTION
As of March 31, 1998, the pro forma net tangible book value of the Common
Stock, after giving effect to the Exchange, was approximately $8.5 million, or
approximately $0.69 per share. Net tangible book value per share represents the
amount of total tangible assets less total liabilities, divided by the number of
shares of Common Stock outstanding. After giving effect to the Offering
(assuming an initial public offering price of $15.50 per share and after
deducting estimated offering expenses), the pro forma net tangible book value of
the Company at March 31, 1998 would have been approximately $68.4 million, or
approximately $4.15 per share. This represents an immediate dilution of
approximately $11.35 per share to investors purchasing shares at the initial
public offering price. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share......................... $ 15.50
Pro forma net tangible book value per share at March 31, 1998, after
giving effect to the Exchange....................................... $ 0.69
Increase in pro forma net tangible book value per share attributable
to new investors in the Offering.................................... 3.46
---------
Pro forma net tangible book value per share as further adjusted for the
Offering 4.15
---------
Dilution per share to new investors in the Offering..................... $ 11.35
---------
---------
</TABLE>
The following table sets forth, on a pro forma basis as of March 31, 1998,
the difference between the existing holders of Common Stock (including the
shares of Common Stock issued pursuant to the Exchange) and the new investors in
the Offering with respect to the number of shares of Common Stock purchased
(assuming an initial public offering price of $15.50 per share), the total
consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED CONSIDERATION
-------------------------- --------------------------
NUMBER AMOUNT AVERAGE
(IN (IN PRICE
THOUSANDS) PERCENT THOUSANDS) PERCENT PER SHARE
------------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................... 12,216 74.2% $ 33,717 33.9% $ 2.76
New investors in the Offering....................... 4,250 25.8 65,875 66.1 15.50
------ ----- ------------- -----
Total............................................. 16,466 100.0% $ 99,592 100.0%
------ ----- ------------- -----
------ ----- ------------- -----
</TABLE>
17
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data of (i) CRC Press, Inc. (the
"Predecessor") as of and for the years ended December 31, 1995 and 1996 and (ii)
the Company as of and for the year ended December 31, 1997 and as of and for the
three months ended March 31, 1998 have been derived from their respective
audited financial statements. The selected historical financial data of the
Predecessor as of and for the years ended December 31, 1993 and 1994 is derived
from its accounting records and has not been audited. The selected historical
financial data as of and for the three months ended March 31, 1997 has been
derived from unaudited financial statements, which in the opinion of management
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results for the interim period. The
acquisition of the Predecessor and all other acquisitions by the Company were
accounted for using the purchase method of accounting. The Company acquired St.
Lucie Press on January 13, 1997, Auerbach on June 5, 1997 and MicroPatent on
July 2, 1997. The results of operations of these businesses are included in the
Company's results from their respective dates of acquisition and are not
included at all in the Predecessor's results. Accordingly, certain of the
historical financial data of the Predecessor are not comparable to those of the
Company. The selected historical financial data should be read in conjunction
with, and are qualified by reference to, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the financial statements
and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THE COMPANY(1)
THE PREDECESSOR ----------------------------------
---------------------------------------------
YEAR ENDED THREE MONTHS
YEAR ENDED DECEMBER 31, DECEMBER 31, ENDED MARCH 31,
--------------------------------------------- ------------ --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- ---------- ----------- ------------ --------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues (2)........................... $ 32,155 $ 32,328 $ 32,054 $ 28,852 $ 34,869 $ 8,698 $ 10,728
Cost of sales (3)...................... 11,145 11,591 11,371 9,262 11,492 2,668 2,858
Operating expenses (3)................. 23,541 18,289 33,452 29,667 28,040 5,864 7,250
--------- --------- ---------- ----------- ------------ --------- ---------
Operating income (loss)................ (2,531) 2,448 (12,769) (10,077) (4,663) 166 620
Interest (expense) income.............. (1,131) (1,237) (1,272) (1,036) (130) (127) 37
Other (expense) income................. (219) (95) (95) 47 (115) -- --
--------- --------- ---------- ----------- ------------ --------- ---------
Income (loss) before taxes............. (3,881) 1,116 (14,136) (11,066) (4,908) 39 657
Net income (loss) (4).................. (2,614) 1,556 (9,234) (11,236) (4,911) 39 601
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents.............. $ 103 $ 846 $ 664 $ 1,025 $ 10,280 $ 4,888 $ 9,803
Total assets........................... 51,655 49,897 45,753 35,533 50,219 34,701 47,592
Total debt............................. 17,066 12,026 13,756 15,705 5,188 5,720 4,132
Total equity........................... 27,250 26,251 17,017 5,818 28,556 16,756 29,157
</TABLE>
<TABLE>
<S> <C> <C> <C>
OTHER DATA:
Depreciation and amortization (5)............................... $ 6,222 $ 859 $ 1,841
Capital expenditures (5)........................................ 2,817 398 342
Net cash provided by operating
activities (6)................................................ 8,570 1,292 1,080
Net cash used by investing
activities (6)................................................ (33,584) (15,578) (502)
Net cash provided (used) by
financing activities (6)...................................... 35,294 19,174 (1,055)
EBITDA (7)...................................................... 1,444 1,025 2,461
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
18
<PAGE>
(FOOTNOTES FOR PRECEDING PAGE)
- ------------------------
(1) In conjunction with the acquisition and reorganization of CRC Press and
other businesses and certain compensation issues, the Company recorded
significant adjustments in 1997 and early 1998, which are not expected to
continue in the future. These adjustments (the "Adjustments") reduced
revenues by $4,017 and increased expenses by $4,013, and therefore reduced
net income by $8,030, for the year ended December 31, 1997. The Adjustments
reduced revenue by $693 and $54 and increased expenses by $1,968 and $146,
and therefore reduced net income by $2,661 and $200, for the three month
periods ended March 31, 1997 and March 31, 1998, respectively. The
Adjustments affecting revenues were required by purchase accounting in
connection with the acquisitions of CRC Press and MicroPatent and reflect
the revaluation of acquired deferred subscription revenues based on the cost
to fulfill subscriptions. This revaluation is a non-cash adjustment which
reduces revenues in the twelve months following acquisition. The Adjustments
affecting expenses relate to: severance and reorganization costs from the
consolidation of certain functions and reductions in workforce; special
bonuses granted to an officer; contingent compensation paid to an officer of
a subsidiary; and certain additional purchase accounting-related
adjustments. Historical operating loss and EBITDA for the year ended
December 31, 1997 of ($4,663) and $1,444, respectively, include the effect
of the Adjustments of $8,030.
(2) Revenues for the three months ended March 31, 1997 and the year ended
December 31, 1997 includes an initial stocking order by a new international
distributor aggregating $3,307, which is not expected to continue in the
future.
(3) Operating expenses for the year ended December 31, 1995 include $10,727 of
restructuring and one-time charges. Operating expenses for the year ended
December 31, 1996 include an impairment in the value of goodwill and other
intangible assets of $10,666. This charge represents the amount by which the
recorded value of the assets exceeded the proceeds from the sale of the
business.
(4) Income taxes of the Company are not significant. Prior to the Exchange, the
Company was a limited liability company and, accordingly, was not subject to
U.S. federal or certain state income taxes. Income tax (benefits) expenses
of the Predecessor were ($4,902) and $170, respectively, for the years ended
December 31, 1995 and 1996. No historical earnings per share or share data
are presented as the Company does not consider such historical data
meaningful.
(5) Depreciation and amortization include balances related to property and
equipment, intangible assets and pre-publication costs incurred in book
publishing operations. Capital expenditures include property and equipment
and pre-publication costs.
(6) For details of operating, investing and financing activities, see the
Company's Consolidated Statements of Cash Flow for the year ended December
31, 1997 and for the three months ended March 31, 1998, included elsewhere
in this Prospectus.
(7) "EBITDA" is defined as income before interest expense/income, income taxes,
depreciation and amortization. EBITDA is not a measure of performance under
GAAP and should not be considered in isolation or as a substitute for net
income, cash flow from operations or other income or cash flow data prepared
in accordance with GAAP. Items excluded from the calculation of EBITDA are
significant components in understanding and evaluating the Company's
financial performance. While EBITDA should not be considered as a measure of
profitability or liquidity, the Company understands that EBITDA is
customarily used in evaluating the equity value of publishing companies. The
EBITDA measure presented herein may not be comparable to similarly titled
measures of other companies.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND NOTES THERETO AND THE OTHER FINANCIAL INFORMATION
APPEARING ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
The Company is an information publisher that provides print and electronic
information to end-users in the STM and professional markets and electronic
access to intellectual property databases for end-users in the patent and
trademark markets. The Company currently sells over 3,000 individual book titles
and publishes approximately 300 new books each year. The Company also offers
multiple subscription products and services, including 20 journals, eight
newsletters, 16 annual handbooks and several comprehensive information guides
that are available in print and electronic formats. The Company offers its
intellectual property databases on CD-ROM and through the Internet.
The Company operates in attractive niche publishing markets where it
provides essential information to professional and academic end-users. These
markets have supported consistent price increases over the past decade due to
the critical nature of the content. The markets for STM and professional
publishing and intellectual property information are growing and provide a
foundation for organic revenue growth and attractive fold-in acquisition
opportunities. The Company may enter additional niche markets that have these
attractive characteristics, such as healthcare information, regulatory
information and technology-related information.
The Company's principal sources of revenues are book publishing sales,
subscription service sales and sales of patent and trademark information.
Through CRC Press (which includes St. Lucie Press and Auerbach), the Company
generates revenues from the sale of books and subscription products (72% and
28%, respectively, of total CRC Press revenues in the first quarter of 1998).
Revenues from books and related costs of sales are recognized when the product
is shipped to the customer. For products sold with a right of return, revenues
are recognized net of a provision for estimated returns. CRC Press's
subscription products target end-users with essential information and represent
a stable source of revenues. For example, aggregate renewal rates of the
Company's journals approximated 85% in 1997. The Company realizes significant
liquidity benefits from subscription revenues as cash is generally received in
advance of shipment. Revenues from subscription products are deferred and
recognized as revenues once the product is shipped. Further, the Company
believes that its book and subscription titles generate significant recurring
demand. For example, while the Company published approximately 285 frontlist
titles in 1997, it had a backlist of nearly 3,000 titles which accounted for
approximately 68% of the Company's total book publishing revenues in 1997.
Through MicroPatent, the Company generates revenues from CD-ROM subscriptions,
Internet-based services, and other products including database sales of
historical and customized patent information (35%, 34% and 31%, respectively, of
total MicroPatent revenues in the first quarter of 1998). The Company expects
that new publishing media, such as the Internet, will grow in significance in
the future. Of the Company's total revenues of $10.7 million for the first
quarter of 1998, 83% and 17% were derived from CRC Press and MicroPatent,
respectively.
The Company's cost of sales are comprised principally of printing and
binding costs, amortization of plant costs and royalties paid to authors.
Printing and binding costs, which represented 26% of revenues for the first
quarter of 1998, are paid to third parties that print or produce the Company's
book products on a contract basis and include the costs of paper purchased by
those third parties. Plant costs include design and other pre-publication costs.
These costs are capitalized and charged to expense over a four-year period
following the release of the applicable book using an accelerated amortization
method. The Company's payments to its authors and editors do not involve
substantial up-front expense. Royalty payments are variable costs directly
associated with book sales.
Operating expenses, which represented approximately 69% of the Company's
revenues for the first quarter of 1998, include selling, general and
administrative expense and related costs (39%), direct mail marketing costs
(19%) and amortization of intangible assets (13.4%). Selling, general and
administrative
20
<PAGE>
expense includes wages and related costs, rent, fulfillment and commissions.
Direct mail expense is driven by the cost to produce each page, the number of
pages produced and mailing expense. In 1997, the Company mailed in excess of
800,000 pieces of direct mail per month. The aggregate cash consideration paid
by the Company to acquire its businesses in 1997 of $30.8 million was allocated
primarily to intangible assets having a gross book value of $24.6 million. The
amortization of these assets, as well as amortization from future acquisitions,
will impact operating results.
IMPACT OF ACQUISITIONS AND OUTLOOK
The Company was organized in December 1996 and, since its inception, has
grown principally through acquisitions. The Company has sought acquisitions in
attractive niche markets where opportunities exist to organically grow the
acquired companies' revenues and profitability and to achieve operating
efficiencies. The Company continues to actively seek acquisitions that
management believes will further its growth and operating strategies. As the
Company acquires additional companies, its sales mix, market focus, cost
structure and operating leverage may change significantly. Consequently, the
Company's historical and future results of operations reflect and will reflect
the impact of acquisitions, and period-to-period comparisons may not be
meaningful in certain respects. For example, historical information for the
Predecessor and other acquired companies prior to their acquisitions reflect the
acquired companies' prior management and cost structure. In addition, as
described below, historical information for companies subsequent to their
acquisition may include integration and other costs that are not expected to
continue in the future.
In 1997 and early 1998, the Company recorded the Adjustments in conjunction
with the acquisition and reorganization of the Predecessor and other businesses,
as well as certain compensation matters. The Adjustments reduced revenues and
operating loss of $34.9 million and ($4.7) million for 1997 by approximately
$4.0 and $8.0 million, respectively. Management does not expect these items to
continue in the future, although other issues may arise from future
acquisitions. See "Selected Historical Financial Data."
The Company's results of operations for the fiscal quarter in which the
Offering is consummated will be adversely affected by the payment of
approximately $1.0 million in cash and shares of Common Stock as incentive
payments to Dennis Buda. See "Management--Employment Agreements."
The Company is in discussions to acquire two STM product lines located in
the United Kingdom for a price of approximately $4.0 million. No definitive
agreements have been signed, and there can be no assurance that such transaction
will be consummated.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
REVENUES. Revenues increased by $2.0 million, or 23.3%, from $8.7 million
to $10.7 million. Auerbach, acquired in June 1997, and MicroPatent, acquired in
July 1997, contributed $2.9 million to revenues in the first quarter of 1998.
Domestic book sales increased by $2.2 million and the Adjustments resulted in an
increase of $0.6 million. These increases were partially offset by lower
international book sales of $3.8 million, due primarily to the initial stocking
order received in the first quarter of 1997.
COST OF SALES. Cost of sales increased by $0.2 million, or 7.1%, from $2.7
million to $2.9 million. As a percentage of revenues, cost of sales declined
from 30.7% to 26.6%. Auerbach and MicroPatent contributed $0.7 million to cost
of sales in the first quarter of 1998. Excluding the impact of such
acquisitions, cost of sales declined by $0.5 million due to the reduction in
international revenues, while other costs remained relatively consistent.
OPERATING EXPENSES. Operating expenses increased by $1.4 million, or 23.6%,
from $5.9 million to $7.3 million due primarily to operating expenses at
Auerbach and MicroPatent of $1.5 million. Excluding the impact of the
acquisitions, operating expenses decreased by $0.1 million. Expenses associated
with the
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Adjustments decreased by $1.8 million, offset by increases in amortization of
intangible assets of $0.9 million and increases in other expenses of $0.8
million, including higher direct mail marketing costs.
NET INCOME. Net income increased by $0.6 million from less than $0.1
million to $0.6 million due to the factors described above.
EBITDA. EBITDA increased by $1.5 million, or 140.1%, from $1.0 million to
$2.5 million due to increased operating income of $0.5 million and the fact that
depreciation and amortization charged against operating income increased by $1.0
million for the three months ended March 31, 1998. The ratio of EBITDA as a
percentage of revenues increased from 11.8% to 22.9%.
COMPANY YEAR ENDED DECEMBER 31, 1997 COMPARED TO PREDECESSOR YEAR ENDED DECEMBER
31, 1996
REVENUES. Revenues increased by $6.0 million, or 20.9%, from $28.9 million
to $34.9 million. St. Lucie Press, acquired in January 1997, Auerbach and
MicroPatent (the "1997 Acquisitions") contributed $8.3 million of revenues in
1997. Additionally, international book sales increased by $3.6 million,
primarily due to the initial stocking order received in the first quarter of
1997. These increases were partially offset by reduced revenues of $4.0 million
related to the Adjustments and other decreases of $1.9 million related primarily
to lower domestic book sales.
COST OF SALES. Cost of sales increased by $2.2 million, or 24.1%, from $9.3
million to $11.5 million. The 1997 Acquisitions contributed $2.4 million to cost
of sales in 1997. The Adjustments caused an increase of $0.4 million and, as a
result, increased cost of sales as a percentage of revenues. These increases
were partially offset by reduced costs of $0.6 million, primarily due to a
decrease in book production costs. Excluding the Adjustments, cost of sales as a
percentage of revenues decreased from 32.1% to 28.5% due primarily to lower
amortization of plant costs, as well as reductions in printing and binding costs
as a percentage of revenues.
OPERATING EXPENSES. Operating expenses decreased by $1.6 million, or 5.5%,
from $29.6 million to $28.0 million due to the impairment of intangible assets
of $10.7 million recorded in 1996 and a reduction in selling, general and
administrative expenses of $2.1 million, primarily related to lower wages, rent
and fulfillment costs. These decreases were partially offset by expenses of $5.7
million from the 1997 Acquisitions, expenses of $3.6 million related to the
Adjustments and $1.9 million of charges, due to the amortization of intangible
assets.
OPERATING INCOME/LOSS. The operating loss decreased by $5.4 million, or
53.7%, from ($10.1) million to ($4.7) million due to operating income (excluding
the amortization of intangible assets) from the 1997 Acquisitions of $0.6
million, an improvement in operating income of $4.0 million and an increase of
$10.7 million due to the impairment of intangibles recorded in 1996. These
increases were offset in part by an $8.0 million decrease resulting from the
Adjustments and a decrease of $1.9 million from higher amortization of
intangible assets.
INTEREST EXPENSE. Interest expense decreased by $0.9 million, or 87.5%,
from $1.0 million to $0.1 million due to reduced long-term obligations of CRC
Press, which had previous borrowings from its parent, The Times Mirror Company.
NET LOSS. The net loss decreased by $6.3 million, or 56.3%, from ($11.2)
million to ($4.9) million due to the operating income changes described above,
decreased interest expense and a decrease in income tax expense of $0.2 million.
EBITDA. EBITDA increased by $6.7 million, or 127.5%, from ($5.3) million to
$1.4 million. Excluding the Adjustments, EBITDA would have been $9.5 million, or
24.4% of revenues. For the year ended December 31, 1996, excluding the
impairment in intangible assets, EBITDA would have been $5.4 million, or 18.7%
of revenue.
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PREDECESSOR YEAR ENDED DECEMBER 31, 1996 COMPARED TO PREDECESSOR YEAR ENDED
DECEMBER 31, 1995
REVENUES. Revenues decreased by $3.2 million, or 10.0%, from $32.1 million
to $28.9 million due primarily to a $2.6 million decrease in international book
sales, largely in Asia. Domestic book sales declined by $0.4 million due to a
decreased publishing schedule.
COST OF SALES. Cost of sales declined by $2.1 million, or 18.5%, from $11.4
million to $9.3 million. As a percentage of revenues, cost of sales declined
from 35.5% to 32.1% primarily due to lower book publishing revenues, which
resulted in lower printing and binding costs, and decreased amortization of
plant costs.
OPERATING EXPENSES. Operating expenses decreased by $3.8 million, or 11.3%,
from $33.5 million to $29.7 million due to restructuring costs of $10.7 million
recorded in 1996, reduced provisions for book returns and bad debts and
decreased employee related costs in editorial and administrative areas. These
decreases were partially offset by a $10.7 million impairment of intangible
assets recorded in 1997.
OPERATING LOSS. The operating loss decreased by $2.7 million, or 21.1%,
from ($12.8) to ($10.1) million due to lower operating expenses, partially
offset by lower gross profits resulting from the decline in revenues. The 1996
restructuring charges of $10.7 million were offset by the 1997 impairment of
intangible assets of $10.7 million.
INTEREST EXPENSE. Interest expense declined by $0.3 million, or 18.6%, from
$1.3 million to $1.0 million due to lower average intercompany borrowings.
NET LOSS. The net loss increased by $2.0 million, or 21.7%, from ($9.2)
million to ($11.2) million due primarily to increased income tax expenses of
$5.1 million. This increase was partially offset by the operating income
improvements discussed above.
EBITDA. EBITDA increased by $1.8 million, or 25.4%, from ($7.1) million to
($5.3) million due to higher operating income, partially offset by decreased
depreciation and amortization.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the financing requirements of the Company have been funded
through cash generated by operating activities and capital contributions from
the Initial Stockholders. The financing requirements of CRC Press prior to its
acquisition by the Company were funded primarily through intercompany loans and
advances from its parent, The Times Mirror Company.
Cash and cash equivalents totaled $9.8 million at March 31, 1998 and $10.3
million at December 31, 1997. Excluding cash, the Company had a working capital
deficit of $5.7 million at March 31, 1998 due primarily to the inclusion of $8.2
million of deferred subscription revenues, a non-cash obligation. Since the
Company receives subscription payments in advance, the Company's existing
operations are expected to maintain very low or negative working capital
balances, excluding cash.
Cash generated by operating activities was $1.1 million for the three months
ended March 31, 1998 derived from net income of $0.6 million plus non-cash
charges of $1.8 million less an increase in operating assets, net of liabilities
of $1.3 million. This increase in operating assets and liabilities was primarily
due to payments associated with the Adjustments. Cash generated by operating
activities for the year ended December 31, 1997 was $8.6 million derived from
the net loss of ($4.9) million plus non-cash charges of $7.2 million plus a
decrease in operating assets, net of liabilities of $6.3 million.
Cash used by investing activities was $0.5 million for the three months
ended March 31, 1998 due to capital expenditures, including pre-publication
costs, of $0.3 million and acquisition costs of $0.2 million. Cash used for
investing activities for the year ended December 31, 1997 was $33.6 million,
including acquisitions of businesses totaling $30.8 million and capital
expenditures, including plant costs, of $2.8 million. The Company's existing
operations are not capital intensive.
Cash used for financing activities was $1.1 million for the three months
ended March 31, 1998 representing payment on debt. Cash provided by financing
activities was $35.3 million for the year ended
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December 31, 1997, including $33.5 million of capital contributions from the
Initial Stockholders and a net increase in debt of $1.8 million.
The Company has financed all acquisitions to date through capital
contributions from the Initial Stockholders. The Company had $1.0 million of
debt at March 31, 1998 under a revolving credit facility, which was subsequently
repaid. The Company currently does not maintain a working capital facility but
believes that, if needed, one would be available at market rates.
The Company believes that net cash provided by operations, together with
cash on hand and other available sources of funds, will be sufficient to fund
the cash requirements of its existing operations. Excluding acquisition
activity, the Company does not expect to use the proceeds of the Offering to
fund operations. The Company currently has no commitments for material capital
expenditures. However, future operating requirements and capital needs will be
subject to economic conditions and other factors, many of which are beyond the
Company's control. See "Risk Factors."
The Company will use net proceeds from the Offering for general corporate
purposes, including acquisitions. The Company does not have any agreements,
arrangements or understandings with respect to any prospective material
acquisitions. Pending such uses, the net proceeds will be invested in
short-term, investment grade securities.
SEASONALITY
The Company's business is mildly seasonal, with revenues typically reaching
slightly higher levels during the third and fourth quarters of each calendar
year, based on historical publication schedules. In 1997, on a pro forma basis,
24% of the Company's revenues were generated during the fourth quarter, with the
first, second and third quarters accounting for 29%, 23% and 24% of revenues,
respectively. The first quarter of 1997 was uncharacteristically high due to an
initial stocking order from a new international distributor. Excluding this
order, first through fourth quarter revenues were 22%, 25%, 27% and 26%,
respectively. In addition, the Company may experience fluctuations in revenues
from period to period based on the timing of acquisitions and new product
launches.
EFFECTS OF INFLATION
The Company believes that inflation has not had a material impact on the
results of operations presented herein.
ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
129, DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE, and SFAS No. 130,
REPORTING COMPREHENSIVE INCOME. SFAS No. 129 contains no change in the Company's
disclosure requirements, and SFAS No. 130 has no impact on the Company's
financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. The Company adopted this statement and
determined that the new standard does not have any impact on the Company's
financial statements.
YEAR 2000 ISSUE
The year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognizes a date using "00" as the
1900 rather than the year 2000. This error could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
The Company has developed a plan to modify its information technology to be
ready for the year 2000 and has begun converting critical data processing
systems. The Company expects the projects to be completed by early 1999 at a
cost of less than $100,000. The estimate includes internal costs, but excludes
the costs to upgrade and replace systems in the normal course of business. The
Company does not expect these projects to have a significant effect on
operations. As of March 31, 1998, there have been no significant expenses
incurred. See "Risk Factors--Risks Related to the Year 2000."
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BUSINESS
OVERVIEW
The Company is an information publishing business focused on providing
essential information to professional and academic end-users in attractive niche
markets. The Company was formed to capitalize on management's experience in
acquiring information publishing businesses and then increasing profitability
through a combination of organic revenue growth and improved operating
efficiencies. To date, the Company has acquired information publishing
businesses in the following niche markets: STM and professional through CRC
Press; and intellectual property through MicroPatent. For the year ended
December 31, 1997, the Company had revenues, net loss and EBITDA of $34.9
million, ($4.9) million and $1.4 million, respectively. These figures reflect
the Adjustments, which reduced revenues by $4.0 million and net income and
EBITDA by $8.0 million.
CRC Press, acquired in January 1997 from The Times Mirror Company, is a
mid-sized STM and professional publisher with leading positions in several
attractive niche markets. CRC Press, with a 95-year history, has highly regarded
brand names and publishes some of the most recognizable STM titles in their
respective fields, including THE HANDBOOK OF CHEMISTRY AND PHYSICS (currently in
its 79th edition) and STANDARD MATHEMATICAL TABLES AND FORMULAE. In the first
half of 1997, two fold-in acquisitions were completed and combined with CRC
Press: St. Lucie Press, a publisher of professional titles; and Auerbach, a
provider of technology-oriented print and electronic subscription-based
products, which was acquired from Thomson. For the three months ended March 31,
1998, CRC Press contributed approximately 83% of the Company's revenues.
MicroPatent, acquired in July 1997, is a leading source of intellectual
property information products and services. Its high-quality patent and
trademark databases are used extensively by legal and research professionals and
corporations. The Internet, MicroPatent's fastest-growing distribution channel,
accounted for 34% of its total revenue in the first quarter of 1998, as compared
to 14% in the first quarter of 1997. The Company believes that its profitable
PATENTWEB service is among the most comprehensive intellectual property
information services on the Internet. For the three months ended March 31, 1998,
MicroPatent contributed approximately 17% of the Company's revenues.
MANAGEMENT
The Company was formed in December 1996 by Mason P. Slaine and Warburg
Pincus. Mr. Slaine, the Company's President and Chief Executive Officer, has
more than 15 years of experience in the information publishing industry in both
corporate and entrepreneurial environments. From 1994 to 1996, he served as
President of Thomson Financial, a unit of Thomson which is a leading provider of
financial information, research, analysis and software products worldwide.
Vincent A. Chippari, the Company's Executive Vice President and Chief
Financial Officer, has extensive experience in information publishing, business
management, consulting and finance, including seven years in various senior
level operating and financial capacities with Thomson. Messrs. Slaine and
Chippari are complemented by strong operating management. Dennis Buda, President
of CRC Press, and Steven Wolfson, President of MicroPatent, each have more than
20 years of experience in the information publishing industry. See "Executive
Officers and Directors." Upon consummation of the Offering, the executive
officers of the Company will own an aggregate of approximately 15.4%, of the
outstanding Common Stock, assuming an initial public offering price of $15.50
per share. See "Security Ownership of Certain Beneficial Owners and Management."
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GROWTH AND OPERATING STRATEGY
The principal elements of the Company's growth strategy are to (i) acquire
businesses in attractive niche markets, (ii) organically grow revenues and
profit, (iii) improve operating efficiencies and (iv) attract and retain
superior management.
ACQUIRE BUSINESSES IN ATTRACTIVE NICHE MARKETS. The Company actively seeks
to identify and acquire information publishing businesses with attractive
market, product and customer characteristics. The Company targets professional
and academic end-users who have a critical need to keep abreast of current
developments in their particular fields. While the Company continually develops
and introduces new products, the majority of the Company's revenues are
generated from recurring sources, such as subscriptions and backlist sales. The
Company believes that markets in which information is critical to success, such
as the STM market served by the Company, have supported consistent price
increases over the past decade. The Company's products and services are
generally not sensitive to pricing pressures or adverse economic conditions.
Examples of additional niche markets that the Company may target include
business information, healthcare information, regulatory information and
technology-related information. Upon the expiration of Mr. Slaine's non-compete
agreement with Thomson at the end of 1999, the Company may also pursue
opportunities in financial information publishing. See "Management--Slaine
Non-competition Agreement."
ORGANICALLY GROW REVENUES AND PROFIT. The Company seeks to acquire
information publishing businesses with significant short- and long-term growth
prospects. The Company's strategy is to acquire valuable content and leverage
such content across new distribution platforms and through expansion of product
lines. For example, the Company has launched new electronic versions of
successful print products, increased sales of core products based on new
distribution agreements, began Internet delivery of products and launched new
products targeting segments of its existing customer base.
IMPROVE OPERATING EFFICIENCIES. The Company seeks to improve operating
efficiencies by combining administrative functions, eliminating redundant
facilities, negotiating more favorable contract terms with suppliers,
implementing systems improvements, and upgrading management. In addition, the
Company seeks to leverage its infrastructure by acquiring companies or product
lines which can be supported by its existing operations. To date, CRC Press has
acquired two such companies, St. Lucie Press and Auerbach, as well as a line of
engineering titles from Krause Communications and the McGee line of business
titles.
ATTRACT AND RETAIN SUPERIOR MANAGEMENT. The Company seeks to employ
professional management with substantial information publishing expertise, both
in entrepreneurial and corporate settings. The Company's philosophy is to
provide operating units with significant decision-making authority, so that key
operating policies are made close to the Company's customers and operations.
This enables the Company to attract superior entrepreneurial talent who can grow
the business by capitalizing on market opportunities.
STRATEGY IMPLEMENTATION
Since the acquisitions of CRC Press and MicroPatent, the Company has
successfully executed its growth and operating strategy and significantly
improved the financial performance of these businesses. In 1996, prior to its
acquisition by the Company, CRC Press had an operating profit margin of
approximately 6%, excluding the impairment and amortization of intangibles. In
the first quarter of 1998, CRC Press increased its operating profit margin to
approximately 15%, excluding the amortization of intangibles. Similarly,
MicroPatent's operating profit margin was approximately 2%, excluding the
amortization of intangibles, in the year prior to acquisition. In the first
quarter of 1998, operating profit was increased to 32%, excluding the
amortization of intangibles.
ORGANIC GROWTH. At CRC Press, the list of new publications or new editions
of prior publications ("frontlist") of 285 titles in 1997 is expected to grow to
approximately 300 new titles in 1998 and
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approximately 350 titles in 1999. The Company has also taken steps to increase
its international sales by entering into a global distribution agreement
(excluding North America) with Springer-Verlag GmbH & Co. KG
("Springer-Verlag"), a significant Europe-based scientific and technical
publisher. In addition, the Company has leveraged well-established titles such
as THE HANDBOOK OF CHEMISTRY AND PHYSICS and STANDARD MATHEMATICAL TABLES AND
FORMULAE by publishing them in electronic format, which is expected to expand
their reach and application.
MicroPatent's revenue growth has also accelerated significantly since its
acquisition by the Company, with revenues increasing 23% in the nine months
following acquisition over the comparable period of the prior fiscal year. Such
growth has been driven largely by Internet product offerings. Revenues from
Internet-based patent information grew more than 150% from the second quarter of
1997 to the first quarter of 1998. In addition, in the first quarter of 1998,
revenues generated by all Internet products rose to 34% of MicroPatent's total
revenues, as compared to 14% in the first quarter of 1997.
OPERATING IMPROVEMENTS. The overall cost base of CRC Press has been reduced
through an improvement in operating procedures. For example, plant costs per
page, which include design and other pre-production costs for books published,
decreased by approximately 45% between 1996 and 1997 and have been further
reduced in 1998. Additionally, direct marketing costs per piece were reduced by
more than 30% from 1996 to 1997 without any revenue impairment.
At MicroPatent, significant investments were made in its website to expand
web-based content and to enhance existing technology. This investment has led to
increased Internet reliability and speed which has helped spur customer demand.
In addition, since the Company acquired MicroPatent, overall cost levels have
decreased. In particular, in the year prior to acquisition, operating expenses,
excluding the amortization of intangibles, approximated 62% of revenues. In the
first six months under the Company's ownership, these expenses were reduced to
52% of revenues.
FOLD-IN ACQUISITIONS. Since the acquisition of CRC Press, the Company has
successfully completed two fold-in acquisitions: (i) St. Lucie Press, a
publisher of professional titles; and (ii) Auerbach, a provider of
technology-oriented print and electronic subscription-based products. The
Company also acquired a line of engineering titles from Krause Communications
and the McGee line of business titles. These acquisitions expanded the Company's
product offerings and increased profitability by leveraging its existing
infrastructure.
MANAGEMENT. The Company installed a new senior management team at CRC Press
within three months after its acquisition, which substantially altered the
editorial, production and marketing processes at the Company. These executives
have an average of 16 years of publishing industry experience.
At MicroPatent, through internal promotion and recruitment, the Company
installed a new CEO, hired management to build a trademark database and hired
senior sales and marketing executives.
STM AND PROFESSIONAL PUBLISHING
MARKET
The Company provides information in selected niches of the broad STM and
professional market. The STM and professional market is global in nature and has
experienced consistently solid growth with total market revenues expanding from
$2.1 billion in 1986 to $4.0 billion in 1996. Management believes this market
will continue to expand as the need for information continues to increase based
on factors such as: constantly increasing complexity within STM and professional
research; globalization of the STM and professional market; and technological
advances which enable greater distribution of content.
The Company targets end-users, such as professionals and academics, with
high-end specialized reference information. The Company products are targeted
towards areas with a significant number of
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end-users including chemists, engineers, mathematicians, technology
practitioners and environmental scientists. These end-users are generally not
price sensitive due to the critical nature of the content.
PRODUCTS
CRC Press is a medium-sized publisher with strong market positions in
chemistry, mathematics, engineering, food science, environmental sciences and
key areas of technology. CRC Press's products are divided into two broad
categories: book publishing (which includes electronic versions and
distribution) and subscription services. In the first quarter of 1998, book
publishing and subscription services generated 72% and 28%, respectively, of CRC
Press's revenues.
BOOK PUBLISHING. CRC Press publishes some of the most recognizable science
titles in their respective fields, including THE HANDBOOK OF CHEMISTRY AND
PHYSICS (currently in its 79th edition) and STANDARD MATHEMATICAL TABLES AND
FORMULAE. CRC Press has an extensive backlist of nearly 3,000 titles, which
generates substantial recurring demand. In 1996 and 1997, the backlist
contributed 66% and 68% of total book publishing revenues, respectively. In
addition, CRC Press has a strong and active frontlist publishing program. In
1997, CRC Press published approximately 285 frontlist titles. Publishing levels
have increased since the Company acquired CRC Press with 300 titles scheduled
for publication in 1998 and approximately 350 scheduled for publication in 1999.
CRC Press's book publishing focuses on the following areas:
Life Sciences. CRC Press-Registered Trademark- is a well-recognized
brand in life sciences and publishes with a technical focus in areas
including neurology, biology, pathology, ecology, food technology, marine
science and forensics. CRC Press published 103 titles in life sciences in
1997 and has an active life sciences backlist of over 1,400 titles. In 1997,
total life sciences sales represented 34% of Company's book publishing
revenues. Some of CRC Press's leading titles in life sciences include CRC
HANDBOOK OF HUMAN TOXICOLOGY, PRACTICAL HOMICIDE INVESTIGATION and PAIN
MANAGEMENT.
Engineering, Mathematics and Physical Sciences. CRC Press has a strong
franchise in engineering, mathematics and physical sciences based on leading
titles, strong co-publishing relationships and a practitioner oriented
approach. CRC Press published 83 titles in engineering, mathematics and
physical sciences in 1997 and has a backlist of over 600 titles. In 1997,
total engineering, mathematics and physical sciences revenues represented
32% of Company's book publishing sales. CRC Press's strong titles include
THE HANDBOOK OF CHEMISTRY AND PHYSICS (79th edition) and STANDARD
MATHEMATICAL TABLES AND FORMULAE. In addition, the Company has a
co-publishing arrangement with the Institute of Electrical and Electronic
Engineers, a leading engineering society with over 120,000 members. This
relationship gives the Company wide distribution for engineering titles and
a competitive advantage in attracting engineering authors.
Environmental Sciences. The Company's Lewis Publishers-TM- imprint is
one of the top publishers of environmental science books with titles in all
areas including environmental chemistry, environment engineering, wetlands
development, ecology and remediation. The Company published 54 environmental
sciences titles in 1997 and has a backlist that includes over 600 titles. In
1997, total environmental sciences sales represented 22% of the Company's
book publishing revenues. Well-known environmental sciences titles include
Manahan's ENVIRONMENTAL CHEMISTRY, REMEDIATION ENGINEERING: A DESIGN
HANDBOOK, ENVIRONMENTAL ENGINEERING HANDBOOK and the United States Golf
Association's ("USGA") LANDSCAPE RESTORATION HANDBOOK (a joint publication
among CRC Press, the Audubon Society of New York State and the USGA).
Business Publications. The Company's St. Lucie Press-TM- imprint
publishes books focusing on all areas of business, including management,
human resources, manufacturing processes, finance and investment. St. Lucie
Press's publications are targeted at high-level management, technical and
analytic end-users through titles such as PRINCIPLES OF TOTAL QUALITY and
CHIEF EXECUTIVE OFFICER PAY AND SHAREHOLDER VALUE. Additionally, the Company
completed the complementary acquisition of the
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McGee line of titles, including TECHNICAL ANALYSIS OF STOCK TRENDS, which
was integrated into CRC Press. CRC Press published 34 business publications
in 1997 and has a backlist which includes approximately 100 titles. In 1997,
total business publications sales represented 7% of the Company's book
publishing revenues.
SUBSCRIPTION PRODUCTS. The Company's subscription products focus on the
following areas:
Technology Services. The Company provides high-level information
systems and information technology management products under its Auerbach
imprint. Auerbach offers three journals, two newsletters, sixteen annual
handbooks and eight information management guides available in print and
CD-ROM. Auerbach is a technology publisher with over 20,000 subscriptions
for its various products. Significant Auerbach titles include the JOURNAL OF
INFORMATION SYSTEMS MANAGEMENT, EDP AUDIT CONTROLS, BUSINESS RESUMPTION
PLANNING, HANDBOOK OF LOCAL AREA NETWORKS, HANDBOOK OF MIS MANAGEMENT and
the AUERBACH INFORMATION MANAGEMENT SERIES (AIMS). Auerbach recently
launched a successful newsletter, YEAR 2000 PRACTITIONER, and it has several
newsletters and handbooks in development. Auerbach contributed approximately
41% of CRC Press's pro forma 1997 subscription revenues, excluding the
Adjustments.
Newsletters. The Company's Food Chemical News ("FCN") division serves
the food and chemical industries with six newsletters and two comprehensive
food chemical science guides, available in print and CD-ROM. FCN products
command premium pricing and have aggregate renewal rates above 80%. Content
is also available in electronic format, and the Company is actively pursuing
site licensing and Internet opportunities. FCN's flagship product, FOOD
CHEMICAL NEWS-REGISTERED TRADEMARK-, is a weekly newsletter tracking food
policy and regulatory changes. It has been a leading source of information
to the food industry for over 36 years. Additional products offered by FCN
include PESTICIDE AND TOXIC CHEMICAL NEWS, WORLD FOOD NEWS and FOOD LABELING
AND NUTRITION NEWS. FCN contributed approximately 37% of CRC Press's pro
forma 1997 subscription revenues, excluding the Adjustments.
Journals. The Company currently publishes 17 subscription-based
journals. Journals include both primary journals, such as the JOURNAL OF
SOIL CONTAMINATION and OZONE SCIENCE AND ENGINEERING, which are vehicles for
the publication of original research; and secondary journals in the Critical
Review series. The journal program is concentrated in areas where the
Company has strong book publishing programs and provides synergy with
respect to marketing and editorial functions. In CRITICAL REVIEW journals,
including titles such as CRITICAL REVIEWS IN ANALYTICAL CHEMISTRY and
CRITICAL REVIEWS IN TOXICOLOGY, acknowledged experts summarize recent
professional literature in important areas of science and technology. The
Company recently launched a new primary journal, STRATEGIES IN ENVIRONMENTAL
MANAGEMENT, and is actively developing journal content for Internet
delivery. Aggregate renewal rates for the Company's journals approximated
85%. Journals contributed approximately 21% of CRC Press's pro forma 1997
subscription revenues, excluding the Adjustments.
SALES, MARKETING AND DISTRIBUTION
Direct response marketing is the primary method for selling the Company's
products. The Company has an in-house creative services and direct marketing
group which designs, manages, and produces cost-effective direct mail campaigns
and other promotional support programs. The Company utilizes its extensive
in-house lists of book buyers, supplemented by lists from professional societies
and list management companies. In 1997, the Company produced in excess of 1,000
promotional campaigns and mailed in excess of 800,000 direct mail pieces per
month on average. The cost per piece for direct mail has been reduced by over
30% since the Company acquired CRC Press. Direct mail, including textbook
adoptions, generated 31% of CRC Press's 1997 book revenues and the majority of
its subscription-based revenues.
The Company uses a small, well-experienced sales force for professional book
sales to the Company's academic and specialty bookstores, wholesalers,
catalogers and associations, as well as sales of site licenses
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to corporations and academic institutions. In the aggregate, these channels
provided 37% of the Company's 1997 book revenues. There is also an outbound
telesales group used primarily for new sales of Auerbach technology products.
The Company uses several well-respected distributors for sales outside of
North America. The primary distributor for books is Springer-Verlag, a
significant Europe-based scientific and technical publisher with extensive
international marketing capabilities. International sales contributed 30% of the
Company's 1997 book revenues, 12% attributable to a non-recurring initial
stocking order from Springer-Verlag in the first quarter of 1997. In 1997,
Springer-Verlag accounted for approximately 18.7% of the Company's revenues.
OPERATIONS
The Company operates its business in an entrepreneurial manner that serves
to increase employee responsibility and accountability. The Company has
leveraged its long-standing relationships with acknowledged experts in its
existing markets and developed close relationships with acclaimed industry
leaders in new markets. These relationships provide the Company with experienced
authors and editors who are given increased responsibility for product
development and profitability. Currently, CRC Press employs approximately 40
editors who are responsible for proposing new publications, contacting and
signing new authors, managing each publication on a return-on-investment basis,
and managing product line growth and quality enhancement. The compensation of
editors is partially linked to the success of their respective product lines.
Similarly, authors are typically signed to royalty-based contracts that
compensate them based on the revenues of the applicable publications.
The Company's strategy of increasing individual responsibility and
accountability has been applied to the in-house production process, as well.
Currently, CRC Press employs approximately 35 professionals to manage pre-press
production which includes copy-editing, type-setting, illustration, interior and
cover design, and the preparation of final output for the printer. Driven by
systems upgrades and several incentive-based bonus plans, CRC Press expects to
perform over 50% of pre-press production in-house in 1998, with external
production having negotiated rates comparable to its internal rate. In addition,
the production personnel oversee the printing and binding activities performed
by third-party printers. The Company conducts business with several different
printers and is not dependent on the services of any one printer in particular.
INTELLECTUAL PROPERTY INFORMATION SERVICES
MARKETS
The Company is a leading provider of intellectual property information
products and services. The Company estimates that the core components of the
intellectual property information markets, patents and trademarks, currently
exceed $500 million on a worldwide basis. These markets continue to grow as
usage of intellectual property information has expanded significantly in the
past decade fueled by factors such as: increased awareness of the value of
intellectual property as a corporate asset; greater enforcement of intellectual
property rights on a worldwide basis; more intellectual property filings, such
as European Community trademarks; and technological advances which enable
greater storage, searching and access to large databases. Management believes
these positive trends will continue.
PRODUCTS
The Company is a leader in selected niches of intellectual property markets,
specifically in the provision of patent information through the Internet,
corporate intranets and other electronic media, such as CD-ROM. The Company
collects primary source data from the world's major patent and trademark offices
and adds significant value through the development of vast integrated databases,
innovative product
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delivery and sophisticated software for data searching and access. In addition,
the Company has recently launched its trademark information business and is
currently a growing provider in this market.
The Internet is an important distribution mechanism for intellectual
property information and is MicroPatent's fastest growing channel. The Company
believes that its profitable PATENTWEB service is the most comprehensive
commercial intellectual property information service on the Internet. Internet
services range from individual payment for access to a single patent to
unlimited annual use plans for searching and downloading throughout a corporate
customer's site. Revenues from Internet-based patent information grew more than
150% from the second quarter of 1997 to the first quarter of 1998. In addition,
in the first quarter of 1998, revenues generated by all Internet products rose
to 34% of MicroPatent's total revenues.
MicroPatent was also among the first providers of patent information on
CD-ROM. It offers both text and image products covering U.S., European and
Japanese information. The Company believes that its
PATENTIMAGES-REGISTERED TRADEMARK- products remain leading CD-ROM products in
the North American market. Patent CD-ROM subscriptions generated 35% of
MicroPatent's revenues in the first quarter of 1998. In addition to
subscriptions to databases of worldwide patent information, MicroPatent offers
databases of historical ("backfile") and current patent information, in standard
and custom formats, in multiple media. Backfile and custom product sales
generated 23% of MicroPatent's revenues in the first quarter of 1998.
While the Company continues to expand both the content and functionality of
its patent products, it is also expanding rapidly into trademark information.
The Company launched a U.S. federal trademark database, MARKSEARCH PRO-TM-, and
now has trademark products available in CD-ROM and on the Internet through
TRADEMARKWEB-TM-. In the first quarter of 1998, trademark products, which are
included above in CD-ROM subscription and Internet revenues, generated 7% of
MicroPatent's revenues.
The Company continues to develop its content and recently launched its
worldwide patent search service and MARKSEARCH PRO. Later this year, the Company
plans to introduce full-text searching on U.S. patents and several new
international databases, including content from the World Intellectual Property
Organization and the European Community. The Company is also expanding into new
markets through development of value-added trademark information products,
including a state trademark database which will be available on the Internet.
SALES, MARKETING AND DISTRIBUTION
The majority of MicroPatent's sales are made through an in-house sales force
with offices in the United States and the United Kingdom. Prospects are
identified through referrals from existing customers, referrals from patent and
trademark offices, leads from trade shows and information requests from sources
such as the Internet. Additional international sales are made through a network
of distributors. Renewals are generally made by mail with telephone follow-up.
OPERATIONS
The Company employs 12 people to produce and fulfill its patent and
trademark CD-ROM and customized information products. Source data is received
weekly from the U.S. Patent and Trademark Office and certain foreign patent and
trademark offices. The Company receives the data in various formats and media
and, through internal procedures using both proprietary and third-party
software, produces a master CD-ROM for each subscription product. An outside
vendor is used for CD-ROM replication and shipments to customers.
Source data is continually added to the Company's numerous in-house
databases, which support its Internet-based products and services. These
databases, together with various support systems and product interfaces, are
maintained by a programming and research and development staff of four. These
software
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development professionals, together with several technical support staff, create
and maintain the Company's various Internet products.
Since its acquisition of MicroPatent, the Company has taken several
initiatives to improve operations. Significant investments made in MicroPatent's
website to expand web-based content and enhance existing technology have led to
increased reliability and speed. In addition, since the Company acquired
MicroPatent, overall cost levels have decreased. In particular, in the year
prior to acquisition, operating expenses (excluding amortization of intangibles)
approximated 62% of revenues. In the first six months under the Company's
ownership, these expenses were reduced to 52% of revenues.
COMPETITION
The Company competes with a broad range of companies for the products and
services it offers. Although it provides information in competitive markets and
such competition is unlikely to diminish, the Company believes it can compete
successfully based on its well-established positions in niche markets, the
quality of its products, the breadth and depth of its content, continued product
innovation and efficient operations.
STM information publishing is a large market with numerous competitors.
While there is competition for sales in a given area, products are generally
unique titles sold on an individual basis. The Company must also compete for the
signing of noted authors. The Company's primary STM competitors include John
Wiley, McGraw-Hill and Academic Press, a unit of Harcourt General. These
competitors are larger and have greater financial resources than the Company. In
addition there are numerous small publishers that compete with the Company.
The Company also competes with other sellers of intellectual property
information. Thomson owns Derwent and Thomson & Thomson, large competitors in
patents and trademarks, respectively. In addition to direct sales, these
companies offer content through on-line services such as Dialog, which combines
this information with other business information. Lastly, there are several
low-cost or free intellectual property services offered by large
technology-oriented companies, such as IBM and EDS, and certain national and
international patent and trademark offices. These services have not had a
significant negative impact on the Company to date, due to the Company's ability
to differentiate itself through adding value by making data easily accessible
and customizing products for specific client needs.
INTELLECTUAL PROPERTY
The Company regards its trademarks, copyrights, trade secrets and similar
intellectual property as valuable assets and relies upon trademark and copyright
laws, as well as confidentiality agreements with its employees and others, to
protect its rights. The Company pursues the registration of its material
trademarks and copyrights in the United States and, depending upon use, in
certain other countries. The Company believes it owns or licenses all
intellectual property rights necessary to conduct its business. To the best of
the Company's knowledge, there are no threatened or pending legal proceedings or
claims related to the Company's intellectual property that are likely to have,
individually or in the aggregate, a material adverse effect on the Company's
business, financial condition or results of operations.
FACILITIES
The Company leases office space in East Haven, Connecticut; Washington,
D.C.; Boca Raton, Florida; New York, New York; and London, England under leases
expiring in 2001; 2002; 1998 and 2006; 2002 and 2005; and quarterly,
respectively. The Company contracts with a third party for warehousing and
distribution services at a Lynn, Missouri facility. The Company does not own any
real property. 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
will be available at commercially reasonable terms for future expansion.
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EMPLOYEES AND LABOR RELATIONS
As of March 31, 1998, the Company had approximately 240 employees. No
employees are covered by collective bargaining agreements with labor unions. The
Company believes that relations with its employees are good. The Company's
policy is to motivate its key employees through grants of stock options and
other incentive-based compensation. See "Management--1998 Stock Option Plan."
LITIGATION
Mason P. Slaine, the Company's President and Chief Executive Officer, and
Michael E. Danziger, a director of the Company, are shareholders, officers and
directors of Rand Publishing Company Inc. ("Rand"), a private holding company
that has made investments in the publishing industry. Certain of the other
investors in Rand have alleged that Mr. Slaine breached his fiduciary duty to
them and usurped corporate opportunities available to Rand by investing in the
Company and by participating in the acquisition by the Company of various
businesses. These investors have threatened to sue Mr. Slaine, have asserted
claims for damages and have requested that a constructive trust be established
for their benefit consisting of Mr. Slaine's interest in the Company and other
relief. Mr. Slaine denies such allegations and has indicated to the Company
that, if commenced, he intends to vigorously contest any such action brought by
these investors.
In addition, the Company is involved in litigation that has arisen in the
ordinary course of business. None of these matters, either individually or in
the aggregate, is expected to have a material adverse effect on the Company's
financial condition or results of operations.
INSURANCE
The Company maintains general liability and property insurance and an
umbrella and excess liability policy in amounts it considers adequate and
customary for a business of its kind. However, there can be no assurance that
future claims will not exceed insurance coverage.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below are the names, ages and positions of the executive officers
and directors of the Company as of July 15, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------- --- ---------------------------------------------------------
<S> <C> <C>
Mason P. Slaine.............. 45 President, Chief Executive Officer and Director
Vincent A. Chippari.......... 38 Executive Vice President and Chief Financial Officer
Dennis Buda.................. 50 President, CRC Press LLC
Steven Wolfson............... 53 President, MicroPatent LLC
Michael E. Danziger.......... 39 Director
David R. Haas................ 57 Director
Sidney Lapidus............... 60 Director
David E. Libowitz............ 35 Director
</TABLE>
Set forth below are the present principal occupation and employment
background of each of the executive officers and directors of the Company.
MASON P. SLAINE has been President, Chief Executive Officer and a director
of the Company since December 1996. Since 1993, Mr. Slaine has been President of
Rand Publishing Company Inc. ("Rand"), a small holding company that has made
investments in the publishing industry. One such investment is Progressive
Grocer Associates LLC, a publisher of three magazines serving the retail
industry, of which Mr. Slaine has been Chairman since 1995. From 1994 to 1996,
Mr. Slaine served as President of Thomson Financial, a division of Thomson which
provides financial information, research, analysis and software products
worldwide. From 1993 to 1994, he served as President of Thomson Financial
Publishing, a division of Thomson Financial. See "Business--Litigation."
VINCENT A. CHIPPARI has been Executive Vice President and Chief Financial
Officer of the Company since January 1998. From 1990 to 1996, Mr. Chippari was
Chief Financial Officer of Thomson Business Information, which serves the global
scientific, medical, intellectual property, technical and general reference
markets. From 1996 to 1997, he was Executive Vice President, Operations, of
Thomson Intellectual Property/Automotive Group, as well as General Manager of
its Derwent Information North America unit, a patent and scientific information
business.
DENNIS BUDA has been President of CRC Press since January 1997. From 1992
until then, Mr. Buda was the owner and President of St. Lucie Press, Inc., a
publisher of managerial, technical and analytical business books.
STEVEN WOLFSON has been President of MicroPatent since July 1997. From 1996
to 1997, Mr. Wolfson was Vice President and Chief Financial Officer of
MicroPatent's predecessor. From 1994 to 1996, he was Vice President and Chief
Financial Officer of American Banker, a financial information publishing
company. From 1993 to 1994, Mr. Wolfson was an independent consultant in the
financial and administrative fields.
MICHAEL E. DANZIGER has been a director of the Company since July 1998.
Since 1991, Mr. Danziger has been Chairman of Thomson Financial's Database
Group, a division of Thomson which provides financial information. Since 1993,
he has also been an executive officer of Rand.
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DAVID R. HAAS has been a director of the Company since July 1998. Mr. Haas
has been a financial consultant in the entertainment and communications
industries since 1995. From 1990 until 1994, he was Senior Vice President and
Controller of Time Warner, a leading media and entertainment company. He is
currently a director of TODD-AO Corporation and GRB Entertainment, Inc.
SIDNEY LAPIDUS has been a director of the Company since December 1996. Mr.
Lapidus has been a General Partner of Warburg, Pincus & Co. ("WP") and a Member
and Managing Director of E.M. Warburg, Pincus & Co., LLC or its predecessors
("EMW LLC") since January 1982, where he has been employed since 1967. He is
currently a director of Caribiner International, Inc., Grubb and Ellis Company,
Journal Register Company, Knoll Inc., Lennar Corporation and several privately
held companies.
DAVID E. LIBOWITZ has been a director of the Company since December 1996.
Mr. Libowitz is a General Partner of WP and a Member and Managing Director of
EMW LLC, where he has been employed since July 1991. He is currently a director
of Caribiner International, Inc. and several privately held companies.
The Company has agreed to nominate and use its best efforts to elect and
cause to remain as directors (i) Mr. Slaine, for so long as he beneficially owns
(within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as
amended) at least 5% of the outstanding shares of Common Stock, unless his
employment is terminated by the Company for "Just Cause" (as defined in his
employment agreement), and (ii) at least one or two nominees of Warburg Pincus
for so long as Warburg Pincus beneficially owns at least 10% or 20%,
respectively, of the outstanding shares of Common Stock.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has established Compensation and Audit
Committees, each of which reports to the Board. The Compensation Committee
consists of Messrs. Lapidus and Libowitz and has the authority to determine all
matters relating to compensation of the Company's employees. The Audit Committee
consists of Messrs. Danziger and Haas and is responsible for meeting with the
Company's independent accountants regarding, among other issues, audits and
adequacy of the Company's accounting and control systems.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Securities and Exchange Commission (the "Commission") requires issuers
to disclose the existence of any other company in which both (i) an executive
officer of the Company serves on the board of directors and/or compensation
committee and (ii) a director of the Company serves as an executive officer.
There are no relationships that are required to be disclosed hereunder.
DIRECTOR COMPENSATION
Each director who is not an employee of the Company or its affiliates,
including Warburg Pincus (each, an "Independent Director"), will receive a fee
of $1,000 for each meeting of the Board of Directors attended in person and $500
for each telephonic meeting of the Board of Directors attended. The Chairman of
each committee of the Board will also receive an annual fee of $1,000. Effective
upon consummation of the Offering, each Independent Director will receive a
grant of options to purchase 1,500 shares of Common Stock at the initial public
offering price per share. Thereafter, each Independent Director will receive an
annual grant of a number of options equal to $15,000 divided by the fair market
value of one share of Common Stock on the date of grant, which options will be
exercisable at a price per share equal to the fair market value of the Common
Stock on such date. All options granted to Independent Directors will vest
immediately. Directors who are not Independent Directors will not receive fees
for serving on the Board of Directors or any committee thereof. In addition, all
directors will be reimbursed for reasonable out-of-pocket expenses incurred in
attending meetings of the Board of Directors and any committee thereof.
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SUMMARY COMPENSATION TABLE
The following Summary Compensation Table sets forth information concerning
the compensation for services paid to the officers named below (the "Named
Executive Officers") during fiscal year 1997.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------------------
<S> <C> <C> <C> <C>
NAME AND PRINCIPAL ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION
- ---------------------------------------------------------------- --------- ---------- ------------ -------------
Mason P. Slaine................................................. 1997 $ 300,000 -- $ 1,000,000(1)
President and Chief Executive Officer
Vincent A. Chippari(2).......................................... 1997 -- -- --
Executive Vice President
and Chief Financial Officer
Dennis Buda..................................................... 1997 $ 150,000 -- $ 660,000(3)
President, CRC Press LLC
Steven Wolfson(4)............................................... 1997 $ 62,500 $ 25,000 --
President, MicroPatent LLC
</TABLE>
- ------------------------
(1) Represents a one-time payment related to the formation of the Company and
its initial acquisitions.
(2) Mr. Chippari's employment commenced on January 19, 1998. His employment
agreement is described below under "Employment Agreements."
(3) Represents incentive payments made under Mr. Buda's initial employment
agreement entered into in connection with the Company's acquisition of St.
Lucie Press.
(4) Mr. Wolfson's compensation includes compensation from July 2, 1997, the date
of the Company's acquisition of MicroPatent.
EMPLOYMENT AGREEMENTS
MASON P. SLAINE
The Company has an employment agreement, dated as of December 31, 1996, with
Mason P. Slaine which provides that Mr. Slaine will serve as President and Chief
Executive Officer of the Company until June 30, 2000, subject to automatic
two-year renewals unless either party provides notice of non-renewal. Mr.
Slaine's employment agreement provides for a base salary of $300,000 per year,
subject to increases in the discretion of the Board of Directors. In addition,
Mr. Slaine is eligible to receive an annual cash bonus, as determined by the
Board of Directors. He is also entitled to participate in health, insurance,
pension, automobile and other benefits provided to other senior executives of
the Company.
In the event that Mr. Slaine resigns without "Good Reason" or his employment
terminates for "Just Cause" (as such terms are defined in the his employment
agreement), Mr. Slaine will be entitled to receive any accrued but unpaid base
salary, unused vacation or unreimbursed expenses. In the event that Mr. Slaine
terminates his employment for Good Reason, for a period of 12 months following
the date of such termination, in addition to the amounts specified in the
foregoing sentence, Mr. Slaine will continue to receive his base salary and
health and insurance benefits, offset by amounts paid to him in respect of other
employment or business activities during such period. Mr. Slaine's employment
agreement also contains a non-compete clause, which applies until the first
anniversary of the termination of Mr. Slaine's employment, and confidentiality
and non-solicitation provisions.
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VINCENT A. CHIPPARI
The Company has an employment agreement, dated as of January 19, 1998, with
Vincent A. Chippari, which provides that Mr. Chippari will serve as Executive
Vice President and Chief Financial Officer of the Company until January 19,
2001, subject to automatic one-year renewals unless either party provides notice
of non-renewal. Mr. Chippari's employment agreement provides for a base salary
of $200,000 per year, increased annually to the extent of any net increase in
the Consumer Price Index. In addition, Mr. Chippari is entitled to receive an
annual cash bonus in an amount up to 50% of his base salary based upon the
meeting of certain objectives approved by the Board of Directors, provided that
the bonus for his first year of employment must equal at least $50,000. Mr.
Chippari is also eligible to participate in health, insurance, pension and other
benefits provided to other senior executives of the Company.
In the event that Mr. Chippari resigns or his employment terminates for
"Cause" (as defined in his employment agreement), Mr. Chippari will be entitled
to receive any accrued but unpaid base salary, unused vacation or unreimbursed
expenses. In the event the Company terminates his employment without Cause, in
addition to the amounts specified in the foregoing sentence, Mr. Chippari will
continue to receive his base salary and health and insurance benefits for a
period of 12 months following the date of such termination. Mr. Chippari's
employment agreement also contains a non-compete clause, which applies until the
first anniversary of the termination of Mr. Chippari's employment, and
confidentiality and non-solicitation provisions.
In addition, Mr. Chippari holds an equity interest in the LLC. Assuming an
initial public offering price of $15.50 per share, Mr. Chippari will exchange
such interest for 32,123 shares of Common Stock in the Exchange.
DENNIS BUDA
The Company has an employment agreement, dated as of June 10, 1998, with
Dennis Buda, which provides that Mr. Buda will serve as President of CRC Press
until January 13, 2000. Mr. Buda's Employment Agreement provides for a base
salary of $175,000 per year through December 31, 1998 and $200,000 per year
beginning January 1, 1999, subject to increases in the discretion of the Board
of Directors. Upon consummation of the Offering, Mr. Buda is also entitled to
receive incentive payments of approximately $1.0 million, of which $250,000 will
be paid in shares of Common Stock based on the initial public offering price
(the "Incentive Payments"). In addition, Mr. Buda is entitled to receive a bonus
equal to 50% of his base salary if CRC Press meets its financial performance
objectives for the year ended December 31, 1999. Mr. Buda is also eligible to
participate in health, insurance and other benefits provided to other senior
executives of CRC Press.
Mr. Buda's employment agreement provides for a grant, upon consummation of
the Offering, of options to purchase the number of shares of Common Stock
obtained by dividing $3 million by the initial public offering price. Pursuant
to the employment agreement, Mr. Buda's options will be exercisable for a period
of five years from the date of grant at a price per share equal to the initial
public offering price. Approximately one-third of such options will be
immediately exercisable, one-third will vest and become exercisable on December
31, 1999 and the balance thereof will vest and become exercisable in equal
monthly installments through January 13, 2000.
In the event that Mr. Buda's employment terminates for any reason, Mr. Buda
will be entitled to receive any accrued but unpaid base salary, Incentive
Payments or unreimbursed expenses, provided that he will not be entitled to
receive the Incentive Payments if he is terminated for "Just Cause" (as defined
in his employment agreement) or if he resigns. In the event Mr. Buda's
employment is terminated without Just Cause prior to January 13, 1999, then
until such date, in addition to the amounts specified in the foregoing sentence,
Mr. Buda will continue to receive his base salary and health and insurance
benefits, offset by amounts paid to him in respect of other employment or
business activities during such period.
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Mr. Buda's employment agreement also contains a non-compete clause, which
applies until January 13, 2002, and confidentiality and non-solicitation
provisions.
SLAINE NON-COMPETITION AGREEMENT
Pursuant to an employment and restrictive covenants agreement, dated April
1, 1994, between Mr. Slaine and an affiliate of Thomson, Mr. Slaine is generally
restricted from owning, engaging in or providing services to any business that
competes with the businesses of Thomson Financial. Thomson Financial is a
provider of financial information, research, analysis and software products.
These restrictions expire on December 31, 1999.
1998 STOCK OPTION PLAN
The Company's 1998 Stock Option Plan (the "1998 Stock Option Plan") has been
adopted by the Board of Directors and the stockholders of the Company. The 1998
Stock Option Plan provides for the grant of non-qualified options ("NQOs") and
incentive stock options ("ISOs") as defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"). The 1998 Stock Option Plan will
be administered by the Board of Directors of the Company, or, if designated by
the Board, the Compensation Committee of the Board. The Board believes that the
1998 Stock Option Plan is important to provide an inducement to obtain and
retain the services of employees of the Company and its subsidiaries and to
increase their proprietary interest in the Company's success.
At present, all directors and full-time employees of the Company and its
subsidiaries, are eligible to participate in the 1998 Stock Option Plan. The
aggregate number of shares of Common Stock as to which stock options ("Options")
may be granted under the 1998 Stock Option Plan may not exceed 866,638 (assuming
an initial public offering price of $15.50 per share), subject to adjustment as
provided in the 1998 Stock Option Plan.
Recipients of Options under the 1998 Stock Option Plan ("Optionees") are
currently selected by the Board, which has sole authority (i) to determine the
number of Options to be granted to such recipient, (ii) to prescribe the form or
forms of the Option Agreements, (iii) to adopt, amend or rescind rules and
regulations for the administration of the 1998 Stock Option Plan, (iv) to
construe and interpret the 1998 Stock Option Plan, (v) to determine the exercise
price of shares subject to Options, (vi) to determine the dates on which Options
become exercisable, (vii) to determine the expiration date of each Option and
(viii) to cancel any Option held with the express written consent of the
affected Optionee. Options granted under the 1998 Stock Option Plan will be
evidenced by a written Option agreement between each Optionee and the Company.
The exercise price of the shares of Common Stock subject to Options are
currently fixed by the Board, in its discretion, at the time Options are
granted, provided that the per share exercise price of an ISO may not be less
than the fair market value of a share of Common Stock on the date of grant.
Options to purchase an aggregate of 409,617 shares under the 1998 Stock Option
Plan will be granted upon consummation of the Offering, assuming an initial
public offering price of $15.50 per share. Such Options are exercisable at a
price per share equal to the initial public offering price and vest in four
equal annual installments beginning on the first anniversary of the date of
grant, except that the Options to be granted to the Independent Directors and
certain executive officers have accelerated vesting schedules.
Optionees will have no voting, dividend, or other rights as stockholders
with respect to shares of Common Stock covered by Options prior to becoming the
holders of record of such shares. All Option grants will permit the exercise
price to be paid in cash or by certified check, bank draft or money order or by
"cashless" exercise. If the Company is sold, reorganized, consolidated, or
merged with another corporation, or if all or substantially all of the assets of
the Company are sold or exchanged (a "Corporate Event"), (i) the Optionee will,
at the time of such Corporate Event, be entitled to receive upon the exercise of
his Option the same number and kind of shares of Common Stock or the same amount
of property, cash
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<PAGE>
or other securities as he would have been entitled to receive upon the
occurrence of such Corporate Event as if he had been, immediately prior to, or
on the record date relating to, such event, the holder of the number of shares
covered by his Option, and (ii) if the Company is not the surviving corporation
in such Corporate Event, the Company will require the successor corporation or
parent thereof to assume such outstanding Options; provided, however, that the
Board may provide that all outstanding Options will terminate as of the
consummation of such Corporate Event and accelerate the exercisability of all
outstanding Options to any date prior to the date of such Corporate Event. In
the event of a "Change of Control" (as defined in the 1998 Stock Option Plan),
each outstanding Option will vest and become immediately exercisable in full as
of the date immediately preceding the date of such Change of Control.
The Board of Directors of the Company may at any time terminate the 1998
Stock Option Plan or from time to time make such modifications or amendments to
the 1998 Stock Option Plan as it may deem advisable, provided that the Board may
not, without the consent of the Optionee, take action which would have a
material adverse effect on outstanding Options or any unexercised rights under
outstanding Options.
The following is a brief discussion of the Federal income tax consequences
of transactions under the 1998 Stock Option Plan based on the Code. The 1998
Stock Option Plan is not qualified under Section 401(a) of the Code.
No taxable income is realized by an Optionee upon the grant or exercise of
an ISO. If Common Stock is issued to an Optionee pursuant to the exercise of an
ISO, and if no disqualifying disposition of such shares is made by such Optionee
within two years after the date of grant or within one year after the transfer
of such shares to such Optionee, then (i) upon sale of such shares, any amount
realized in excess of the Option price will be taxed to such Optionee as a
long-term capital gain and any loss sustained will be a long-term capital loss
and (ii) no deduction will be allowed to the Optionee's employer for Federal
income tax purposes.
If the Common Stock acquired upon the exercise of an ISO is disposed of
prior to the expiration of either holding period described above, generally (i)
the Optionee will realize ordinary income in the year of disposition in an
amount equal to the excess (if any) of the fair market value of such shares at
exercise (or, if less, the amount realized on the disposition of such shares)
over the Option price paid for such shares and (ii) the Company will be entitled
to deduct such amount for Federal income tax purposes if the amount represents
an ordinary and necessary business expense. Any further gain (or loss) realized
by the Optionee will be taxed as short-term or long-term capital gain (or loss),
as the case may be, and will not result in any deduction by the Company.
With respect to NQOs, (i) no income is realized by an Optionee at the time
the Option is granted, (ii) generally, at exercise, ordinary income is realized
by the Optionee in an amount equal to the difference between the Option price
paid for the shares and the fair market value of the shares, if unrestricted, on
the date of exercise, and the Company is generally entitled to a tax deduction
in the same amount subject to applicable tax withholding requirements and (iii)
at sale, appreciation (or depreciation) after the date of exercise is treated as
either short-term or long-term capital gain (or loss) depending on how long the
shares have been held. Deductions for compensation attributable to NQOs (or
disqualified ISOs) granted to the Company's named executive officers may be
subject to the deduction limits of Section 162(m) of the Code, unless such
compensation qualifies as "performance-based" (as defined therein).
39
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to an Exchange Agreement, dated as of June 10, 1998, immediately
prior to the consummation of the Offering, Warburg Pincus, Mr. Slaine and Mr.
Chippari will contribute to the Company all of their direct or indirect equity
interests in the LLC in exchange for an aggregate of 12,200,000 shares of Common
Stock. See "The Exchange." The exact number of shares to be issued to each of
them will be based on the initial public offering price of the Common Stock.
Assuming an initial public offering price of $15.50 per share, Warburg Pincus,
Mr. Slaine and Mr. Chippari will receive 9,682,380, 2,485,497 and 32,123 shares
of Common Stock, respectively.
In connection with the acquisition of CRC Press in January 1997, the Initial
Stockholders loaned an aggregate of $2.5 million to the Company. Such loans were
repaid without interest in April 1997.
The Company transacts business in the amount of approximately $250,000 per
year with a mail house owned by a brother-in-law of Dennis Buda, the President
of CRC Press. The rates charged by such mail house are at or below the rates
charged by other mail houses serving the Company.
The Initial Stockholders are entitled to certain registration rights with
respect to their respective shares of Common Stock. See "Shares Eligible for
Future Sale."
Until such time as the Company uses the net proceeds of the Offering for
acquisitions, the Company intends to invest them in short-term, investment grade
securities. In connection therewith, the Company may utilize the services of an
affiliate of Warburg Pincus, for which the Company will pay reasonable and
customary fees to such affiliate.
40
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The table below sets forth the beneficial ownership of Common Stock as of
July 1, 1998, after giving effect to the Exchange and the Offering (assuming an
initial public offering price of $15.50 per share), by (i) all persons who
beneficially own 5% or more of the Common Stock, (ii) each Named Executive
Officer, (iii) each director of the Company and (iv) all executive officers and
directors as a group.
<TABLE>
<CAPTION>
COMMON STOCK BENEFICIALLY OWNED
----------------------------------
<S> <C> <C>
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES PERCENTAGE(1)
- --------------------------------------------------------------------------------- ----------------- ---------------
Warburg, Pincus Ventures, L.P.(2)................................................ 9,682,380 58.8%
466 Lexington Avenue
New York, New York 10017
Mason P. Slaine(3)............................................................... 2,485,497 15.1
Vincent A. Chippari.............................................................. 32,123 *
Dennis Buda(4)................................................................... 84,229 *
Steven Wolfson................................................................... 0 *
Michael E. Danziger(5)........................................................... 70,872 *
David R. Haas(5)................................................................. 4,969 *
Sidney Lapidus(6)................................................................ 9,682,380 58.8
David E. Libowitz(6)............................................................. 9,682,380 58.8
All directors and executive officers as a group (eight persons).................. 12,360,070 75.07
</TABLE>
- ------------------------
* Less than 1%.
(1) Pursuant to the regulations of the Commission, shares are deemed to be
"beneficially owned" by a person if such person directly or indirectly has
or shares the power to vote or dispose of such shares, whether or not such
person has any pecuniary interest in such shares, or the right to acquire
the power to vote or dispose of such shares within 60 days, including any
right to acquire through the exercise of any option, warrant or right.
(2) The sole general partner of Warburg Pincus is Warburg, Pincus & Co., a New
York general partnership ("WP"). E.M. Warburg, Pincus & Co., LLC, a New York
limited liability company ("EMW LLC"), manages Warburg Pincus. The members
of EMW LLC are substantially the same as the partners of WP. Lionel I.
Pincus is the Managing Partner of WP and the Managing Member of EMW LLC. WP
has a 15% interest in the profits of Warburg Pincus as the general partner
and also owns approximately 1.2% of the limited partnership interests in
Warburg Pincus.
(3) Mr. Slaine has been threatened with a lawsuit relating to his interest in
the Company. See "Business-- Litigation."
(4) Includes 68,100 shares issuable upon exercise of options to be granted upon
consummation of the Offering that will be immediately vested and
exercisable.
(5) Includes 1,500 shares issuable upon exercise of options to be granted upon
consummation of the Offering that will be immediately vested and
exercisable.
(6) All shares indicated as owned by Mr. Lapidus or Mr. Libowitz are owned by
Warburg Pincus and are included because of their affiliation with Warburg
Pincus. Both of them are Members and Managing Directors of EMW LLC and
General Partners of WP. Messrs. Lapidus and Libowitz disclaim beneficial
ownership of the shares owned by Warburg Pincus.
41
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, par value $.01 per share, and 1,000,000 shares of Preferred Stock,
par value $.01 per share.
COMMON STOCK
Prior to the consummation of the Offering, after giving effect to the
Exchange, there will be 12,200,000 shares of Common Stock outstanding, owned of
record by three stockholders. Holders of Common Stock have no pre-emptive,
redemption, conversion or sinking fund rights. Holders of Common Stock are
entitled to one vote per share on all matters submitted to a vote of
stockholders and do not have any cumulative voting rights. In the event of a
liquidation, dissolution, or winding-up of the Company, the holders of Common
Stock are entitled to share equally and ratably in the assets of the Company, if
any, remaining after provision for the payment of creditors and after payment of
any liquidation preference to holders of Preferred Stock. Upon consummation of
the Offering, all outstanding shares of Common Stock will be validly issued,
fully paid and nonassessable. Holders of Common Stock will receive such
dividends, if any, as may be declared by the Board out of funds legally
available for such purposes. See "Dividend Policy."
PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares of Preferred
Stock. The Board of Directors will have the authority to issue this Preferred
Stock in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series, without further vote or action by the stockholders. The issuance
of Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders and
may adversely affect the voting and other rights of the holders of Common Stock,
including the loss of voting control to others.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
After consummation of the Offering, there will be 33,533,871 shares of
Common Stock and 1,000,000 shares of Preferred Stock available for future
issuance without stockholder approval. These additional shares may be utilized
for a variety of corporate purposes, including future public offerings to raise
additional capital or to facilitate corporate acquisitions. The company
currently does not have any plans to issue additional shares of Common Stock or
Preferred Stock.
One of the effects of the existence of unissued and unreserved Common Stock
and Preferred Stock of the Company may be to enable the Board of Directors to
issue shares to persons supportive of current management which could render more
difficult or discourage an attempt to obtain control of the Company by means of
a merger, tender offer, proxy contest or otherwise, and thereby protect the
continuity of the Company's management and possibly deprive the stockholders of
opportunities to sell their shares of Common Stock at prices higher than
prevailing market prices. Such additional shares also could be used to dilute
the stock ownership of persons seeking to obtain control of the Company pursuant
to the operation of a stockholders' rights plan or otherwise.
DELAWARE GENERAL CORPORATION LAW
Pursuant to Section 203 of the DGCL, with certain exceptions, a Delaware
corporation may not engage in any of a broad range of business combinations,
such as mergers, consolidations and sales of assets, with an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless (i) the transaction that results in the
person's becoming an interest stockholder, or the business combination, is
approved by the board of directors of the corporation before
42
<PAGE>
the person becomes an interested stockholder, (ii) the interested stockholder
acquires 85% or more of the outstanding voting stock of the corporation in the
same transaction that makes it an interested stockholder or (iii) on or after
the date the person becomes an interested stockholder, the business combination
is approved by the corporation's board of directors and by holders of at least
two-thirds of the corporation's outstanding voting stock, excluding shares owned
by the interested stockholder, at a meeting of the stockholders. Under Section
203, an "interested stockholder" is defined as any person that is (i) the owner
of 15% or more of the outstanding voting stock of the corporation or (ii) an
affiliate or associate of the corporation and the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder or (iii) an affiliate or
associate of such person. Pursuant to an exception within Section 203, no
stockholders of the Company existing prior to the Offering are subject to the
restrictions of Section 203.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an "interested stockholder" to effect various business
combinations with a corporation for a three-year period, although the
stockholders may elect to exclude a corporation from the restrictions imposed
thereunder. The Company's Certificate of Incorporation does not exclude the
Company from the restrictions imposed under Section 203. The provisions of
Section 203 may encourage companies interested in acquiring the Company to
negotiate in advance with the Board of Directors, since the stockholder approval
requirement would be avoided if a majority of the directors then in office
approve either the business combination or the transaction which results in the
stockholder becoming an interested stockholder. Such provisions also could delay
or frustrate the assumption of control by stockholders, even if such assumption
of control would be beneficial to stockholders, and also could discourage or
make more difficult a merger, tender offer or proxy contest, even if such events
could be beneficial to the interests of stockholders.
LIMITATION OF LIABILITY OF DIRECTORS
The Certificate of Incorporation provides that a director of the Company
will not be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law, which concerns unlawful payments of dividends,
stock purchases or redemptions, or (iv) for any transaction from which the
director derived an improper personal benefit.
While the Certificate of Incorporation provides directors with protection
from awards for monetary damages for breaches of their duty of care, it does not
eliminate such duty. Accordingly, the Certificate of Incorporation will have no
effect on the availability of equitable remedies such as an injunction or
rescission based on a director's breach of his duty of care. The provisions of
the Certificate of Incorporation described above apply to an officer of the
Company only if he is a director of the Company and is acting in his capacity as
director, and do not apply to officers of the Company who are not directors.
REGISTRATION RIGHTS
The Initial Stockholders are entitled to certain registration rights with
respect to their respective shares of Common Stock. See "Shares Eligible for
Future Sale."
TRANSFER AGENT
The transfer agent and registrar of the Common Stock is State Street Bank
and Trust Company.
43
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Of the 16,466,129 shares of Common Stock outstanding upon consummation of
the Offering, the 4,250,000 shares of Common Stock sold in the Offering will be
freely transferable without restriction under the Securities Act unless
purchased by "affiliates" of the Company (as that term is used under the
Securities Act and the regulations promulgated thereunder). The remaining
12,216,129 shares of Common Stock outstanding were sold by the Company in
reliance on exemptions from the registration requirements of the Securities Act
and are deemed "restricted" securities within the meaning of Rule 144 under the
Securities Act and may not be resold without registration under the Securities
Act or pursuant to an exemption from registration, including exemptions provided
by Rule 144 under the Securities Act. All such restricted shares are presently
held by affiliates of the Company, are subject to lock-up agreements (as
described under "Underwriting") and will become eligible for sale beginning 180
days after the date of this Prospectus upon expiration of such agreements and
subject to compliance with the Securities Act.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including an affiliate of the Company, who has
beneficially owned shares for at least a one-year period (as computed under Rule
144) is entitled to sell within any three-month period commencing 90 days after
this Offering such number of shares that does not exceed the greater of (i) 1%
of the then outstanding shares of Common Stock (approximately 164,661 shares
upon consummation of the Offering) and (ii) the average weekly trading volume in
the Common Stock during the four calendar weeks immediately preceding such sale.
Sales under Rule 144 are also subject to certain manner-of-sale provisions,
notice requirements and the availability of current public information about the
Company. A person who is not deemed to have been an affiliate of the company at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, is entitled to sell
such shares under Rule 144(k) without regard to the volume limitations or other
requirements described above. The foregoing summary of Rule 144 is not intended
to be a complete description of that rule.
Upon consummation of the Offering, 866,638 shares of Common Stock will be
authorized for issuance under the 1998 Stock Option Plan, of which options to
purchase 409,617 shares will be outstanding, assuming an initial public offering
price of $15.50 per share. When issued, such shares may only be resold by
complying with the one-year holding period under Rule 144 or pursuant to
registration under the Securities Act.
Prior to the Offering, there has been no public market for securities of the
Company. No predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts of
Common Stock, or the perception that such sales could occur, could adversely
affect the market price of the Common Stock.
The Company, the Company's directors and executive officers and Warburg
Pincus have agreed, subject to certain exceptions, not to offer, sell or
otherwise dispose of or transfer any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock for a period of
180 days after the date of this Prospectus. See "Underwriting."
Pursuant to a registration rights agreement, the Initial Stockholders have
the right to request two registrations of their shares of Common Stock, provided
that the anticipated aggregate public offering price equals $15 million or more,
and unlimited registrations on Form S-3, provided that the anticipated aggregate
offering price exceeds $5 million. In addition, the Initial Stockholders are
entitled to have their shares included in an unlimited number of registrations
initiated by the Company, subject to certain customary conditions. The rights of
the Initial Stockholders pursuant to the registration rights agreement are
subject to the lock-up agreements described under "Underwriting." In general,
all fees, costs and expenses of such registration (other than underwriting
discounts and selling commissions) will be borne by the Company. The Company has
agreed to indemnify the Initial Stockholders from any liability arising out of
or relating to any untrue statement of a material fact or any omission of a
material fact in any registration statement or prospectus filed by the Company
pursuant to the Registration Rights Agreement, subject to certain exceptions.
44
<PAGE>
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and BT
Alex. Brown Incorporated are acting as representatives (the "Representatives")
of each of the Underwriters named below (the "Underwriters"). Subject to the
terms and conditions set forth in a purchase agreement (the "Purchase
Agreement") among the Company and the Underwriters, the Company has agreed to
sell to the Underwriters, and each of the Underwriters severally and not jointly
has agreed to purchase from the Company, the number of shares of Common Stock
set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------------------------------------------------ -----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..............................................................
BT Alex. Brown Incorporated.........................................................
-----------
Total.....................................................................
-----------
-----------
</TABLE>
In the Purchase Agreement, the several Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the shares of Common
Stock being sold pursuant to such agreement if any of the shares of Common Stock
being sold pursuant to such agreement are purchased. Under certain
circumstances, under the Purchase Agreement, the commitments of non-defaulting
Underwriters may be increased.
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public at the initial
public offering price set forth on the cover page of this Prospectus, and to
certain dealers at such price less a concession not in excess of $ per share
of Common Stock. The Underwriters may allow, and such dealers may re-allow, a
discount not in excess of $ per share of Common Stock on sales to certain
other dealers. After the Offering, the public offering price, concession and
discount may be changed.
The Company has granted an option to the Underwriters, exercisable for 30
days after the date of this Prospectus, to purchase up to an aggregate of
637,500 additional shares of Common Stock at the initial public offering price
set forth on the cover page of this Prospectus, less the underwriting discount.
The Underwriters may exercise this option solely to cover over-allotments, if
any, made on the sale of the Common Stock offered hereby. To the extent that the
Underwriters exercise this option, each Underwriter will be obligated, subject
to certain conditions, to purchase a number of additional shares of Common Stock
proportionate to such Underwriter's initial amount reflected in the foregoing
table.
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to 212,500 of the shares offered hereby to
be sold to certain employees of the Company and certain other persons. The
number of shares of Common Stock available for sale to the general public will
be reduced to the extent such persons purchase such reserved shares. Any
reserved shares which are not orally confirmed for purchase within one day of
the pricing of the Offering will be offered by the Underwriters to the general
public on the same terms as the other shares offered hereby.
The Company, the Company's executive officers and directors and Warburg
Pincus have agreed not to directly or indirectly (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant for the sale of, or
otherwise dispose of or transfer any shares of Common Stock or any securities
convertible into or exchangeable or exercisable for Common Stock, or file any
registration statement under the Securities Act with respect to any of the
foregoing or (ii) enter into any swap or other agreement or any transaction that
transfers, in whole or in part, directly or indirectly, the economic consequence
of ownership of the Common Stock whether any such swap or transaction is to be
settled by delivery of Common Stock or other securities, in cash or otherwise,
without the prior written consent of Merrill Lynch on behalf of the Underwriters
for a period of 180 days after the date of this Prospectus other than (i) the
sale to the Underwriters of the shares of
45
<PAGE>
Common Stock in connection with the Offering, (ii) the issuance of options
pursuant to the 1998 Stock Option Plan, (iii) upon the exercise of such options,
(iv) in the Exchange, (v) pursuant to Dennis Buda's employment agreement or (vi)
the issuance of securities as consideration for a merger or acquisition,
provided that the recipients of securities referred to in clauses (v) and (vi)
immediately above agree to be bound by the foregoing restriction. See
"Management--1998 Stock Option Plan" and "Management-- Employment Agreements."
Prior to the Offering, there has been no public market for the Common Stock
of the Company. The initial public offering price has been determined through
negotiations between the Company and the Representatives. The factors considered
in determining the initial public offering price, in addition to prevailing
market conditions, are price-earnings ratios of publicly traded companies that
the Representatives believe to be comparable to the Company, certain financial
information of the Company, the history of, and the prospects for, the Company
and the industry in which it competes, and an assessment of the Company's
management, its past and present operations, the prospects for, and timing of,
future revenues of the Company, the present state of the Company's development,
and the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to the Company. There
can be no assurance that an active trading market will develop for the Common
Stock or that the Common Stock will trade in the public market subsequent to the
Offering at or above the initial public offering price.
The Common Stock has been approved for listing on the NYSE under the symbol
"IHI," subject to official notice of issuance. In order to meet the requirements
for listing of the Common Stock on the NYSE, the Underwriters have undertaken to
sell lots of 100 or more shares to a minimum of 2,000 beneficial owners.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including certain liabilities under the Securities Act, or to
contribute to payments the Underwriters may be required to make in respect
thereof.
Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Common Stock. As an exception to these
rules, the Representatives are permitted to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Representatives may
reduce that short position by purchasing Common Stock in the open market. The
Representatives may also elect to reduce any short position by exercising all or
part of the over-allotment option described above.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group members
who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of the Common Stock to the extent that it
discourages resales of the Common Stock.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation
46
<PAGE>
that the Representatives will engage in such transactions or that such
transactions, once commenced, will not be discontinued without notice.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Willkie Farr & Gallagher, New York, New York. Certain legal matters
in connection with this Offering will be passed upon for the Underwriters by
Cahill Gordon & Reindel (a partnership including a professional corporation),
New York, New York.
EXPERTS
The consolidated balance sheets of Information Ventures LLC as of December
31, 1997 and March 31, 1998 and the related consolidated statements of
operations, members' equity and cash flows for the year ended December 31, 1997
and for the three months ended March 31, 1998 appearing in this Prospectus and
the Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein, and
are included in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
The consolidated balance sheets of CRC Press, Inc. as of December 31, 1995
and 1996 and the related consolidated statements of operations, shareholder's
equity and cash flows for the years ended December 31, 1995 and 1996 appearing
in this Prospectus and the Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The balance sheets of MicroPatent as of June 30, 1996 and 1997 and the
related statements of operations, partners' capital and cash flows for the years
ended June 30, 1996 and 1997 appearing in this Prospectus and the Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The balance sheet of St. Lucie Press, Inc. as of December 31, 1996 and the
related statement of income and retained earnings and cash flows for the year
ended December 31, 1996 appearing in this Prospectus and the Registration
Statement have been audited by Robert A. Young, CPA, independent auditor, as set
forth in his report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as an expert in
accounting and auditing.
47
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (herein, together with all amendments thereto, called the "Registration
Statement") under the Securities Act with respect to the Common Stock offered by
the Company hereby. This Prospectus, which is part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits and financial schedules thereto, to which reference
is hereby made. Statements contained in this Prospectus as to the contents of
any contract or other document are summaries which are not necessarily complete
and in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such statement
herein being qualified in all respects by such reference. The Registration
Statement, including the exhibits thereto, may be inspected without charge at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Avenue, N.W., Washington, D.C. 20549, and at the Commission's regional
offices at Seven World Trade Center, 13th Floor, New York, New York 10048.
Copies of such materials can be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission also maintains a Website (http://www.sec.gov.) that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
The Company intends to furnish stockholders with annual reports containing
audited financial statements and an opinion thereon expressed by independent
certified public accountants.
48
<PAGE>
INDEX TO FINANCIAL STATEMENTS
INFORMATION VENTURES LLC
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Auditors............................................................................. F-2
Consolidated Balance Sheet as of March 31, 1998............................................................ F-3
Consolidated Statements of Operations for the three months ended March 31, 1997 (unaudited) and the three
months ended March 31, 1998.............................................................................. F-4
Consolidated Statement of Members' Equity for the three months ended March 31, 1998........................ F-5
Consolidated Statements of Cash Flows for the three months ended March 31, 1997 (unaudited) and the three
months ended March 31, 1998.............................................................................. F-6
Notes to Consolidated Financial Statements................................................................. F-7
Report of Independent Auditors............................................................................. F-14
Consolidated Balance Sheet as of December 31, 1997......................................................... F-15
Consolidated Statement of Operations for the year ended December 31, 1997.................................. F-16
Consolidated Statement of Members' Equity for the year ended December 31, 1997............................. F-17
Consolidated Statement of Cash Flows for the year ended December 31, 1997.................................. F-18
Notes to Consolidated Financial Statements................................................................. F-19
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1997.... F-27
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statement of Operations...................... F-29
CRC PRESS, INC.
Report of Independent Certified Public Accountants......................................................... F-30
Consolidated Balance Sheets as of December 31, 1995 and 1996............................................... F-31
Consolidated Statements of Operations for the years ended December 31, 1995 and 1996....................... F-32
Consolidated Statements of Shareholder's Equity for the years ended December 31, 1995 and 1996............. F-33
Consolidated Statements of Cash Flows for the years ended December 31, 1995 and 1996....................... F-34
Notes to Consolidated Financial Statements................................................................. F-35
MICROPATENT
Report of Independent Auditors............................................................................. F-44
Balance Sheets as of June 30, 1996 and 1997................................................................ F-45
Statements of Income for the years ended June 30, 1996 and 1997............................................ F-46
Statements of Partners' Capital for the years ended June 30, 1996 and 1997................................. F-46
Statements of Cash Flows for the years ended June 30, 1996 and 1997........................................ F-47
Notes to Financial Statements.............................................................................. F-48
ST. LUCIE PRESS, INC.
Report of Independent Public Accountant.................................................................... F-52
Balance Sheet as of December 31, 1996...................................................................... F-53
Statement of Income and Retained Earnings for the year ended December 31, 1996............................. F-54
Statement of Cash Flow for the year ended December 31, 1996................................................ F-55
Notes to Financial Statements.............................................................................. F-56
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Members of
Information Ventures LLC
We have audited the accompanying consolidated balance sheet of Information
Ventures LLC (the "Company") as of March 31, 1998, and the related consolidated
statements of operations, members' equity and cash flows for the three months
then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Information
Ventures LLC at March 31, 1998 and the consolidated results of their operations
and their cash flows for the three months then ended in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
June 8, 1998
F-2
<PAGE>
INFORMATION VENTURES LLC
CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(IN THOUSANDS OF DOLLARS)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 9,803
Accounts receivable, less allowance for doubtful accounts and returns of $776.... 3,497
Inventories...................................................................... 3,624
Prepaid expenses................................................................. 123
Other current assets............................................................. 1,911
---------
Total current assets............................................................... 18,958
Property and equipment, net........................................................ 3,906
Pre-publication costs, net......................................................... 2,935
Publishing rights and other intangible assets, net................................. 20,672
Other assets....................................................................... 1,094
Deferred tax assets................................................................ 27
---------
Total assets....................................................................... $ 47,592
---------
---------
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Current portion of capitalized lease obligations................................. $ 243
Accounts payable................................................................. 2,834
Accrued expenses................................................................. 752
Accrued compensation............................................................. 643
Royalties payable................................................................ 1,158
Deferred subscription revenue.................................................... 8,233
Short-term debt.................................................................. 1,000
---------
Total current liabilities.......................................................... 14,863
Capital leases..................................................................... 2,889
Other long-term liabilities........................................................ 683
---------
Total liabilities.................................................................. 18,435
---------
Members' equity:
Class A preferred................................................................ 31,804
Class B preferred................................................................ 1,663
Retained deficit................................................................. (4,310)
---------
Total members' equity.............................................................. 29,157
---------
Total liabilities and members' equity.............................................. $ 47,592
---------
---------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
INFORMATION VENTURES LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1997 THREE MONTHS ENDED
(UNAUDITED) MARCH 31, 1998
------------------- -------------------
<S> <C> <C>
Revenues............................................................... $ 8,698 $ 10,728
Costs and expenses:
Cost of sales........................................................ 2,668 2,858
Selling, general and administrative expenses......................... 5,605 5,972
Depreciation and amortization........................................ 259 1,278
------ -------
Total operating expenses............................................... 8,532 10,108
------ -------
Operating income....................................................... 166 620
Interest income........................................................ 27 140
Interest expense....................................................... (154) (103)
------ -------
Income before income taxes............................................. 39 657
Provision for income taxes............................................. -- 56
------ -------
Net income............................................................. $ 39 $ 601
------ -------
------ -------
Pro forma income data (unaudited):
Income before income taxes, as reported............................ $ 657
Pro forma income taxes............................................. 56
-------
Pro forma net income............................................... $ 601
-------
-------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
INFORMATION VENTURES LLC
CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
MARCH 31, 1998
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
CLASS A
PREFERRED CLASS B PREFERRED TOTAL
---------------- ----------------- ---------
<S> <C> <C> <C>
Balance at January 1, 1998........................................ $ 27,139 $ 1,417 $ 28,556
Net income........................................................ 571 30 601
------- ------ ---------
Balance at March 31, 1998......................................... $ 27,710 $ 1,447 $ 29,157
------- ------ ---------
------- ------ ---------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
INFORMATION VENTURES LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1997 THREE MONTHS ENDED
(UNAUDITED) MARCH 31, 1998
------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................. $ 39 $ 601
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization........................................ 259 1,278
Amortization of pre-publication costs................................ 600 563
Changes in assets and liabilities:
Accounts receivable.................................................. (2,687) 1,471
Inventories.......................................................... 747 179
Prepaid expenses and other current assets............................ (620) (568)
Accounts payable, accrued expenses and employee compensation......... 1,765 (2,232)
Royalties payable.................................................... (245) (591)
Deferred subscription revenue........................................ 784 651
Other................................................................ 650 (272)
-------- -------
Net cash provided by operating activities.............................. 1,292 1,080
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment..................................... (25) (133)
Pre-publication costs.................................................. (373) (209)
Acquisitions of businesses............................................. (15,180) --
Acquisition of titles.................................................. -- (160)
-------- -------
Net cash used in investing activity.................................... (15,578) (502)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings from Members................................................ 2,500 --
Repayments under line of credit........................................ -- (1,000)
Capital contributions.................................................. 16,717 --
Payments on capitalized lease obligations.............................. (43) (55)
-------- -------
Net cash provided by (used in) financing activities.................... 19,174 (1,055)
-------- -------
Net increase (decrease) in cash and cash equivalents................... 4,888 (477)
Cash and cash equivalents at beginning of period....................... -- 10,280
-------- -------
Cash and cash equivalents at end of period............................. $ 4,888 $ 9,803
-------- -------
-------- -------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
Information Ventures LLC
Notes to Consolidated Financial Statements
March 31, 1998
1. BUSINESS OPERATIONS
Information Ventures LLC ("IV") was formed on December 2, 1996 to create and
build an information and publishing business. IV functions as a holding company
and, through its subsidiaries (together, the "Company"), publishes information
in print and electronic media in the fields of science, technology, business,
environmental science, intellectual property, and certain related disciplines.
Products are distributed on a worldwide basis and the business has operating
offices in the United States and Europe. Prior to the Company's initial
acquisition, which occurred effective as of January 1, 1997, the Company had no
operations or assets.
In connection with a planned offering of securities, the members will
contribute all of their direct or indirect equity interests to Information
Holdings Inc. ("IH"), a newly formed Delaware corporation, in exchange for
Common Stock of IH, representing 100% of the outstanding equity interest.
Because IH will conduct no business operations prior to the exchange, the
balance sheet and statement of operations for Information Holdings Inc. are not
included herein.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts of
IV and subsidiaries, all which are wholly owned. All material intercompany
accounts and transactions have been eliminated in consolidation. All
acquisitions have been accounted for using the purchase method of accounting and
operating results have been included from the respective dates of acquisition.
REVENUE RECOGNITION
Revenues from books and the related cost of sales are recognized when the
product is shipped to the customer. For products sold with the right of return,
revenue is recognized net of a provision for estimated returns. Subscription
payments received are deferred and recognized as revenue in the period in which
the product is shipped.
INTERIM FINANCIAL INFORMATION
The financial information for the three months ended March 31, 1997 is
unaudited, but includes all adjustments (consisting only of normal recurring
adjustments) that the Company considers necessary for a fair presentation of the
operating results and cash flows for such period.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of all highly liquid investments with
maturities of three months or less. The cost of these investments is equal to
fair market value.
INVENTORIES
Inventories are valued at the lower of cost or market and are determined
under the first-in, first-out method. Inventories at March 31, 1998 consist
solely of finished goods. The vast majority of inventories are books, which are
reviewed periodically on a title-by-title basis for salability. The cost of
inventory determined to be impaired is charged to income in the period of
determination.
F-7
<PAGE>
INFORMATION VENTURES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DIRECT MAIL COSTS
Direct mail costs are expensed upon mailing. Direct mail expense was
$1,444,000 for the period ended March 31, 1998. Direct mail related costs of
$428,000 were included in other current assets at March 31, 1998.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Expenditures for repairs and
maintenance are expensed as incurred.
Depreciation is calculated on a straight-line basis over the estimated
useful lives of the assets as follows:
<TABLE>
<S> <C>
Buildings............................ 10 years
Furniture and equipment.............. 5 years
Computer equipment................... 3 years
Leasehold improvements............... Shorter of useful life or lease term
</TABLE>
PRE-PUBLICATION COSTS
Certain expenses related to books, primarily comprised of design and other
pre-production costs, are deferred and charged to expense over the estimated
product life. These costs are amortized over a four year period following
release of the applicable book, using an accelerated amortization method.
Accumulated amortization of pre-publication costs was approximately $2,876,000
at March 31, 1998.
PUBLISHING RIGHTS AND OTHER INTANGIBLES
Publishing rights consist primarily of publication agreements, subscriber
lists, trademarks and related assets and are amortized using the straight-line
method over their estimated useful lives ranging from 3-20 years. Amortization
expense of publishing rights in 1998 was approximately $981,000.
Noncompete agreements arising from acquisitions are amortized using the
straight-line basis over the contractual term, currently 3 years. Amortization
expense in 1998 related to noncompete agreements was $8,333.
Goodwill represents acquisition cost in excess of the fair market value of
the net tangible and identifiable intangible assets. Goodwill and related
amortization expense was insignificant in 1998.
The recoverability of publishing rights, other intangibles and other
long-lived assets is assessed periodically and whenever adverse events or
changes in circumstances or business climate indicate that previously
anticipated cash flows warrant a reassessment. When such reassessments indicate
the potential of impairment, all business factors are considered and, if such
assets are not likely to be recovered from future cash flows, they are written
down to recoverable value. The Company, based on current circumstances, does not
believe that any long-lived asset are impaired at March 31, 1998.
F-8
<PAGE>
INFORMATION VENTURES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company is a limited liability company ("LLC") and anticipates treatment
as a partnership for federal and most state income taxes. However, the Company
is still liable for income taxes in certain states and thus a provision for
those state income taxes is reflected on the statement of operations.
Deferred income tax assets and liabilities are determined based upon
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
ACCOUNTING ESTIMATES
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 revenue and expenses during the reported
period. Actual results could differ from these estimates.
CONCENTRATION OF BUSINESS RISK
The Company is not subject to significant credit risk from concentration of
accounts receivable or other assets in any particular customer group, industry
segment or geographic region. A subsidiary of IV has entered into an exclusive
distribution agreement with a third party for sale of its products in regions
outside of North America. Accounts receivable related to this distribution
agreement approximated $630,000 at March 31, 1998.
The Company performs ongoing credit evaluation of its customers and does not
require any collateral for the amounts owed.
The Company maintains its cash in demand deposit accounts which at times may
exceed the Federal Deposit Insurance Corporation ("FDIC") insurance limits. As
of March 31, 1998, the Company had approximately $552,000 of cash in excess of
FDIC insurance limits.
GEOGRAPHIC INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
REVENUES
------------
<S> <C>
United States....................................................................................... $ 8,914
Europe.............................................................................................. 1,045
Others.............................................................................................. 769
------------
Total............................................................................................... $ 10,728
------------
------------
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
129, DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE, and SFAS No. 130,
REPORTING COMPREHENSIVE INCOME. SFAS No. 129 contains no change in the Company's
disclosure requirements, and SFAS No. 130 has no impact on the Company's
financial position or results of operations.
F-9
<PAGE>
INFORMATION VENTURES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. The Company adopted this statement and
determined that the new standard does not have any impact on the Company's
financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment at March 31, 1998 consist of the following (in
thousands):
<TABLE>
<S> <C>
Building............................................................ $ 2,344
Furniture and equipment............................................. 2,298
Leasehold improvements.............................................. 370
---------
5,012
Accumulated depreciation............................................ (1,106)
---------
$ 3,906
---------
---------
</TABLE>
Depreciation expense for building under capital lease, furniture and
equipment and leasehold improvements for the period was approximately $270,000.
4. PUBLISHING RIGHTS AND OTHER INTANGIBLE ASSETS
Publishing rights and other intangible assets at March 31, 1998 consist of
the following (in thousands):
<TABLE>
<S> <C>
Publishing rights.................................................. $ 23,154
Goodwill........................................................... 148
Noncompete agreements.............................................. 100
Trademarks......................................................... 1,350
---------
24,752
Accumulated amortization........................................... (4,080)
---------
$ 20,672
---------
---------
</TABLE>
5. LEASES
As of March 31, 1998, assets recorded under capital leases aggregated
approximately $2,430,000 and had accumulated amortization of approximately
$327,000.
F-10
<PAGE>
INFORMATION VENTURES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LEASES (CONTINUED)
Rental expense under operating leases was $127,000 for the period ended
March 31, 1998. The future noncancelable minimum lease payments as of March 31,
1998, including estimated escalation amounts for the capital leases, are as
follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL
OPERATING LEASES LEASES
---------------- -------------
<S> <C> <C>
For the nine months ending December 31, 1998................ $ 335 $ 412
For the twelve months ending December 31,
1999........................................................ 333 525
2000........................................................ 318 517
2001........................................................ 288 519
2002........................................................ 118 535
Thereafter.................................................. 236 2,070
------- -------------
Total....................................................... $ 1,628 4,578
-------
-------
Less amount representing unamortized interest (1,446)
Less current portion........................................ (243)
-------------
Present value of minimum lease payment, excluding current
portion................................................... $ 2,889
-------------
-------------
</TABLE>
6. DEBT
A subsidiary of the Company maintains a revolving line of credit (the
"Credit Line") borrowing arrangement of $5,000,000 with State Street Bank.
Interest on the Credit Line is due quarterly in arrears at the London Interbank
Offering Rate (LIBOR) plus applicable margin ranging from 1.5% to 2.5%. In 1998,
interest rates under these agreements ranged from 7.22% to 7.38%. At March 31,
1998, the principal amount outstanding is $1,000,000 and the unused bank line of
credit amounted to $4,000,000. The Credit Line expires as follows: June 20,
2000--$1,250,000, June 30, 2001--$1,250,000, and June 30, 2002-- $2,500,000.
There are no compensating balance arrangements. The line is secured by the
tangible and intangible property of the subsidiary. The property securing this
obligation comprises a material portion of the net assets of the Company.
The terms of the Credit Line restrict the subsidiary from incurring
additional debts, repaying debts and declaring dividends and distributions to
affiliates or members over specified amounts. In addition, the Company is
required to maintain certain financial ratios and comply with certain
restrictive covenants. All other future indebtedness of the subsidiary is
subordinate to this Credit Line.
The outstanding balance of $1,000,000 at March 31, 1998 was repaid in full
in April 1998. The Company plans to terminate the Credit Line in 1998.
7. MEMBERSHIP INTEREST
The Company has two classes of preferred equity interests which have voting
rights and which share in profits and losses. The Class A Preferred holder
contributed 95% of total capital, is allocated 95% of profits and losses and is
entitled to elect three directors. The Class B Preferred holder contributed 5%
of total capital, is allocated 5% of profits and losses and is entitled to elect
one director. Voting rights are apportioned between the classes on a basis
equivalent to contributed capital.
F-11
<PAGE>
INFORMATION VENTURES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. MEMBERSHIP INTEREST (CONTINUED)
Both classes of such preferred equity interests convert to common equity
interests under certain events, including a public offering of the Company's
securities or the sale of the Company. In the event of a conversion to common
equity interests, the Class A and Class B Preferred holders receive common
equity interests under a pre-determined formula.
8. EMPLOYEE BENEFIT PLANS
The Company offers two defined contribution savings plan qualifying under
Section 401(k) of the Internal Revenue Code. The plans cover substantially all
full time U.S. employees, both requiring one year of service prior to
eligibility (see below). The Company, via the subsidiaries, matches 50% of such
contributions up to a maximum employee contribution of 6% of salary. The Company
contributed and incurred expenses of $55,000 during 1998 under these plans.
Effective January 1, 1998, one of the plans is being replaced with a new
plan. The new plan will cover all employees of a subsidiary of the Company as of
December 31, 1997 and new employees with more than one year of service (compared
to 90 days service in the prior plan). Other plan provisions are unchanged from
the prior plan.
9. INCOME TAXES
The components of the state income tax provision (benefit) for the period
ended March 31, 1998 are as follows:
<TABLE>
<S> <C>
Current.............................................................. $ 56
Deferred............................................................. --
---------
Total................................................................ $ 56
---------
---------
</TABLE>
10. PRO FORMA INCOME TAXES (UNAUDITED)
As discussed in Note 2, the Company is an LLC that anticipates treatment as
a partnership for Federal and certain state income taxes. In connection with the
initial public offering, the Company will become subject to Federal and
additional state income tax. The pro forma provision for income taxes represents
the income tax provisions that would have been reported had the Company been
subject to Federal and additional state income taxes.
The pro forma income tax provision consists of the following (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1998
---------------------
<S> <C>
Current income taxes:
Federal taxes.............................................................................. $ --
State and local taxes...................................................................... 56
-----
56
Deferred income taxes...................................................................... --
-----
$ 56
-----
-----
</TABLE>
F-12
<PAGE>
INFORMATION VENTURES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. PRO FORMA INCOME TAXES (UNAUDITED) (CONTINUED)
A reconciliation setting forth the differences between the pro forma
effective tax rate of the Company and U.S. Federal Statutory tax rate is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1998
-------------------
<S> <C>
Federal statutory rate....................................................................... 35.0%
State and local taxes net of Federal tax benefits............................................ 5.6
Valuation allowance.......................................................................... (32.9)
Other items, net, none of which individually exceeds 5% of Federal taxes at statutory
rates....................................................................................... 0.8
-------------------
Effective tax rate........................................................................... 8.5%
</TABLE>
Pro forma deferred income taxes will reflect the net tax effects of
temporary differences between the carrying amount of assets and liabilities for
pro forma financial reporting and the amounts used for income tax purposes.
Significant components of the Company's deferred tax asset as of March 31, 1998
are as follows (in thousands):
<TABLE>
<S> <C>
Current deferred tax assets:
Allowance for accounts receivable........................................ $ 338
Inventory................................................................ 377
Accruals and other....................................................... 239
-------
Total current deferred tax assets.......................................... 954
Long term deferred tax assets:
Amortization and depreciation............................................ 1,255
Net operating loss....................................................... --
-------
Total long term deferred tax asset......................................... 1,255
Valuation allowance...................................................... (1,744)
-------
Total deferred tax asset................................................... $ 465
-------
-------
</TABLE>
During the three months ended March 31, 1998, the Company reversed $216,000
of its valuation allowance, as the Company generated income during the three
months ended March 31, 1998.
F-13
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Members of
Information Ventures LLC
We have audited the accompanying consolidated balance sheet of Information
Ventures LLC (the "Company") as of December 31, 1997, and the related
consolidated statements of operations, members' equity and cash flows for the
year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Information
Ventures LLC at December 31, 1997 and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
New York, New York /s/ Ernst & Young LLP
April 20, 1998
F-14
<PAGE>
INFORMATION VENTURES LLC
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS OF DOLLARS)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 10,280
Accounts receivable, less allowance for doubtful accounts and returns of $803.... 4,968
Inventories...................................................................... 3,803
Prepaid expenses................................................................. 1,387
Other current assets............................................................. 79
---------
Total current assets............................................................... 20,517
Property and equipment, net........................................................ 4,041
Pre-publication costs.............................................................. 3,289
Other assets....................................................................... 826
Publishing rights and other intangible assets, net................................. 21,519
Deferred tax asset................................................................. 27
---------
Total assets....................................................................... $ 50,219
---------
---------
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Current portion of capitalized lease obligations................................. $ 233
Accounts payable................................................................. 2,950
Accrued compensation expense..................................................... 1,988
Accrued expenses................................................................. 1,523
Royalties payable................................................................ 1,749
Deferred subscription revenue.................................................... 7,582
---------
Total current liabilities.......................................................... 16,025
Capital leases..................................................................... 2,955
Long-term debt..................................................................... 2,000
Other long-term liabilities........................................................ 683
---------
Total liabilities.................................................................. 21,663
---------
Members' equity:
Class A preferred................................................................ 31,804
Class B preferred................................................................ 1,663
Retained deficit................................................................. (4,911)
---------
Total members' equity.............................................................. 28,556
---------
Total liabilities and members' equity.............................................. $ 50,219
---------
---------
</TABLE>
See notes to consolidated financial statements.
F-15
<PAGE>
INFORMATION VENTURES LLC
CONSOLIDATED STATEMENT OF OPERATIONS
DECEMBER 31, 1997
(IN THOUSANDS OF DOLLARS)
<TABLE>
<S> <C>
Revenues........................................................................... $ 34,869
Costs and expenses:
Cost of sales.................................................................... 11,492
Selling, general and administrative expenses..................................... 20,518
Severance and special bonuses.................................................... 3,213
Research and development expense................................................. 400
Depreciation and amortization.................................................... 3,909
---------
Total operating expenses........................................................... 39,532
---------
Operating loss..................................................................... (4,663)
Interest income.................................................................... 152
Interest expense................................................................... (282)
Other expense, net................................................................. 115
---------
Loss before income taxes........................................................... (4,908)
Provision for income taxes......................................................... 3
---------
Net loss........................................................................... $ (4,911)
---------
---------
</TABLE>
<TABLE>
<S> <C>
Pro forma income data (unaudited):
Loss before income taxes, as reported............................................ $ (4,908)
Pro forma income taxes........................................................... 3
---------
Pro forma net loss............................................................... $ (4,911)
---------
---------
</TABLE>
See notes to consolidated financial statements.
F-16
<PAGE>
INFORMATION VENTURES LLC
CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
DECEMBER 31, 1997
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
CLASS A CLASS B
PREFERRED PREFERRED TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
Balance at January 1, 1997................................... $ -- $ -- $ --
Capital contributions........................................ 31,804 1,663 33,467
Net loss..................................................... (4,665) (246) (4,911)
----------- ----------- ---------
Balance at December 31, 1997................................. $ 27,139 $ 1,417 $ 28,556
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
See notes to consolidated financial statements.
F-17
<PAGE>
INFORMATION VENTURES LLC
CONSOLIDATED STATEMENT OF CASH FLOW
DECEMBER 31, 1997
(IN THOUSANDS OF DOLLARS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................................................... $ (4,911)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization.................................................. 3,909
Amortization of pre-publication costs.......................................... 2,313
Provision for bad debt......................................................... 587
Other.......................................................................... 400
Deferred income taxes.......................................................... (27)
Changes in assets and liabilities:
Accounts receivable.............................................................. (1,495)
Inventories...................................................................... 785
Prepaid expenses and other current assets........................................ (807)
Other assets, net................................................................ 387
Accounts payable, accrued expenses and compensation expense...................... 2,779
Royalties payable................................................................ 843
Deferred subscription revenue.................................................... 3,807
---------
Net cash provided by operating activities.......................................... 8,570
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment................................................. (1,163)
Pre-publication costs.............................................................. (1,654)
Acquisitions of businesses......................................................... (30,778)
Proceeds from sale of equipment.................................................... 11
---------
Net cash used in investing activity................................................ (33,584)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit...................................... 3,000
Repayments under line of credit.................................................... (1,000)
Capital contributions.............................................................. 33,467
Payments on capitalized lease obligations.......................................... (173)
---------
Net cash provided by financing activities.......................................... 35,294
---------
Net increase in cash and cash equivalents.......................................... 10,280
Cash and cash equivalents at beginning of year..................................... --
---------
Cash and cash equivalents at end of year........................................... $ 10,280
---------
---------
</TABLE>
See notes to consolidated financial statements.
F-18
<PAGE>
INFORMATION VENTURES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. BUSINESS OPERATIONS
Information Ventures LLC ("IV") was formed on December 2, 1996 to create and
build an information and publishing business. IV functions as a holding company
and, through its subsidiaries (together, the "Company"), publishes information
in print and electronic media in the fields of science, technology, business,
environmental science, intellectual property, and certain related disciplines.
Products are distributed on a worldwide basis and the business has operating
offices in the United States and Europe. Prior to the Company's initial
acquisition (see Note 3), which occurred effective as of January 1, 1997, the
Company had no operations or assets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts of
IV and subsidiaries, all which are wholly owned. All material intercompany
accounts and transactions have been eliminated in consolidation. All
acquisitions have been accounted for using the purchase method of accounting and
operating results have been included from the respective dates of acquisition.
REVENUE RECOGNITION
Revenues from books and the related cost of sales are recognized when the
product is shipped to the customer. For products sold with the right of return,
revenue is recognized net of a provision for estimated returns. Subscription
payments received are deferred and recognized as revenue in the period in which
the product is shipped.
DEFERRED REVENUE
In connection with the acquisition of companies, it is the Company's policy
to record deferred revenue as the cost to fulfill rather than based on the
subscription payments received.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of all highly liquid investments with
maturities of three months or less. The cost of these investments is equal to
fair market value.
INVENTORIES
Inventories are valued at the lower of cost or market and are determined
under the first-in, first-out method. Inventories at December 31, 1997 consist
solely of finished goods. The vast majority of inventories are books, which are
reviewed periodically on a title-by-title basis for salability. The cost of
inventory determined to be impaired is charged to income in the period of
determination.
DIRECT MAIL COSTS
Direct mail costs are expensed upon mailing. Direct mail expense was
$6,119,000 for the period ended December 31, 1997. $418,000 of direct mail
related costs were included in other current assets at December 31, 1997.
F-19
<PAGE>
INFORMATION VENTURES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Expenditures for repairs and
maintenance are expensed as incurred.
Depreciation is calculated on a straight-line basis over the estimated
useful lives of the assets as follows:
<TABLE>
<S> <C>
Buildings............................ 10 years
Furniture and equipment.............. 5 to 7 years
Computer equipment................... 3 years
Leasehold improvements............... Lesser of useful life or lease term
</TABLE>
PRE-PUBLICATION COSTS
Certain expenses related to books, primarily comprised of design and other
pre-production costs, are deferred and charged to expense over the estimated
product life. These costs are amortized over a four year period following
release of the applicable book, using an accelerated amortization method.
Accumulated amortization of pre-publication costs was approximately $2,313,000
at December 31, 1997.
PUBLISHING RIGHTS AND OTHER INTANGIBLES
Publishing rights consist primarily of publication agreements, subscriber
lists, trademarks and related assets and are amortized using the straight-line
method over their estimated useful lives ranging from 3-20 years. Amortization
of publishing rights in 1997 was approximately $3,000,000.
Noncompete agreements arising from acquisitions are amortized using the
straight-line basis over the contractual term, currently 3 years. Amortization
in 1997 related to noncompete agreements was $19,000.
Goodwill represents acquisition cost in excess of the fair market value of
the net tangible and identifiable intangible assets. Goodwill and related
amortization were insignificant in 1997.
The recoverability of publishing rights, other intangibles and other
long-lived assets is assessed periodically and whenever adverse events or
changes in circumstances or business climate indicate that previously
anticipated cash flows warrant a reassessment. When such reassessments indicate
the potential of impairment, all business factors are considered and, if such
assets are not likely to be recovered from future cash flows, they are written
down to recoverable value. The Company, based on current circumstances, does not
believe that any long-lived assets are impaired at December 31, 1997.
INCOME TAXES
The Company is a limited liability company ("LLC") and anticipates treatment
as a partnership for federal and most state income taxes. However, the Company
is still liable for income taxes in certain states and thus a provision for
those state income taxes is reflected on the statement of operations.
Deferred income tax assets and liabilities are determined based upon
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
F-20
<PAGE>
INFORMATION VENTURES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING ESTIMATES
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 revenue and expenses during the reported
period. Actual results could differ from these estimates.
CONCENTRATION OF BUSINESS RISK
The Company is not subject to significant credit risk from concentration of
accounts receivable or other assets in any particular customer group, industry
segment or geographic region. A subsidiary of IV has entered into an exclusive
distribution agreement with a third party for sale of its products in regions
outside of North America. Accounts receivable related to this distribution
agreement approximated $1.4 million at December 31, 1997.
The Company performs ongoing credit evaluation of its customers and does not
require any collateral for the amounts owed.
The Company maintains its cash in demand deposit accounts which at times may
exceed the FDIC insurance limits. As of December 31, 1997, the company had
approximately $355,000 of cash in excess of FDIC insurance limits.
GEOGRAPHIC INFORMATION
<TABLE>
<CAPTION>
REVENUES
(IN
THOUSANDS)
-------------
<S> <C>
United States................................................................................. $ 24,570
Europe........................................................................................ 9,086
Other......................................................................................... 1,213
-------------
Total......................................................................................... $ 34,869
-------------
-------------
</TABLE>
MAJOR CUSTOMER
Revenues from one customer represent approximately 18.7% of the Company's
consolidated revenue.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1997, the FASB issued SFAS No. 129, DISCLOSURE OF INFORMATION ABOUT
CAPITAL STRUCTURE, and SFAS No. 130, REPORTING COMPREHENSIVE INCOME. SFAS No.
129 contains no change in the Company's disclosure requirements, and SFAS No.
130 has no impact on the Company's financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. The Company anticipates that the adoption of
this statement will not have any significant impact on the Company's financial
statements.
F-21
<PAGE>
INFORMATION VENTURES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
3. ACQUISITIONS
On January 10, 1997, effectively as of January 1, 1997, the Company acquired
the net assets of CRC Press for cash consideration of $13 million. CRC Press
publishes information in print and electronic media for the global scientific,
professional and technical communities. The purchase price was allocated to net
tangible assets of $5.8 million and publishing rights and other intangible
assets of $7.2 million. Intangible assets are being amortized on a straight-line
basis over 20 years.
On January 14, 1997, effectively as of January 1, 1997, the Company acquired
the net assets of St. Lucie Press for cash consideration of $2.6 million. St.
Lucie publishes business related books. The purchase price was allocated to net
tangible assets aggregating $.6 million and publishing rights and other
intangibles of $2.0 million. Intangible assets are being amortized on a
straight-line basis over 20 years.
On June 5, 1997, the Company acquired the net assets of Auerbach for cash
consideration of $8.0 million. Auerbach publishes information in print and
electronic media for the information technology market. The purchase price was
allocated to net liabilities assumed of $.3 million publishing rights and other
intangibles of $8.1 million, goodwill of $.1 million and noncompete agreements
of $.1 million. Intangible assets are being amortized on a straight-line basis
over 20 years.
On July 2, 1997, effectively as of July 1, 1997, the Company acquired the
net assets of MicroPatent for cash consideration of $7.4 million. MicroPatent
provides information products and services for intellectual property
professionals. The purchase price was allocated to in process research and
development costs of $.4 million which were expensed in 1997, tangible net
assets/(liabilities) aggregating ($.1 million) and publishing rights and other
intangibles of $7.1 million. Intangible assets are being amortized over a three
year life using an accelerated method.
In connection with the purchase of the above mentioned subsidiaries, the
Company has revalued the deferred subscription revenues based on cost to
fulfill. As a result, the deferred subscription revenues were reduced by $4
million. Had the Company not made such revaluation, revenues and gross profit
for the year ended December 31, 1997 would have been higher by $4 million.
The acquisitions were accounted for using the purchase method of accounting
and results of operations are included from the dates of acquisition.
The Pro forma unaudited condensed consolidated result of operations for the
year ended December 31, 1997, assuming the transactions were consummated as of
January 1, 1997, are as follows (in thousands):
<TABLE>
<S> <C>
Revenues........................................................... $ 39,483
---------
---------
Net loss........................................................... $ 7,872
---------
---------
</TABLE>
4. SEVERANCE AND SPECIAL BONUSES
During the year the Company incurred severance expenses related primarily to
the consolidation of certain functions and reductions in workforce aggregating
$1.6 million. The amount included in accrued expenses at December 31, 1997
relating to the termination expense was $160,000.
A subsidiary has an employment agreement with an officer which provides for
the contingent compensation arrangements based on the subsidiary's operating
performance. The agreement expires in
F-22
<PAGE>
INFORMATION VENTURES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
4. SEVERANCE AND SPECIAL BONUSES (CONTINUED)
January 2000. In addition, the Company granted an officer of the Company a
special bonus (payable in cash) related to the formation of the Company and its
initial acquisitions. As a result, the amount recognized by the Company for
compensation under the two arrangements was approximately $1.6 million for the
year ended December 31, 1997.
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 consist of the following (in
thousands):
<TABLE>
<S> <C>
Building............................................................ $ 2,344
Furniture and equipment............................................. 2,223
Leasehold improvements.............................................. 310
---------
4,877
Accumulated depreciation............................................ (836)
---------
$ 4,041
---------
---------
</TABLE>
Depreciation expense for building under capital lease, furniture and
equipment and leasehold improvements for the year was approximately $836,000.
6. PUBLISHING RIGHTS AND OTHER INTANGIBLE ASSETS
Publishing rights and other intangible assets at December 31, 1997 consist
of the following (in thousands):
<TABLE>
<S> <C>
Publishing rights.................................................. $ 22,994
Goodwill........................................................... 148
Noncompete agreements.............................................. 100
Trademarks......................................................... 1,350
---------
24,592
Accumulated amortization........................................... (3,073)
---------
$ 21,519
---------
---------
</TABLE>
7. LEASES
As of December 31, 1997, assets recorded under capital leases aggregated
approximately $2,430,000 and had accumulated amortization of approximately
$81,000.
F-23
<PAGE>
INFORMATION VENTURES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
7. LEASES (CONTINUED)
Rental expense under operating leases was $359,000 for the year ended
December 31, 1997. The future noncancelable minimum lease payments as of
December 31, 1997, including estimated escalation amounts for the capital
leases, are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL
OPERATING LEASES LEASES
----------------- -------------
<S> <C> <C>
1998........................................................ $ 441 $ 522
1999........................................................ 333 525
2000........................................................ 320 517
2001........................................................ 289 519
2002........................................................ 118 535
Thereafter.................................................. 236 2,070
------ -------------
Total....................................................... $ 1,737 4,688
------
------
Less amount representing unamortized interest............... (1,500)
Less current portion........................................ (233)
-------------
Present value of minimum lease payment, excluding current
portion................................................... $ 2,955
-------------
-------------
</TABLE>
8. DEBT
A subsidiary of the Company maintains a revolving line of credit (the
"Credit Line") borrowing arrangement of $5,000,000 with State Street Bank.
Interest on the Credit Line is due quarterly in arrears at the London Interbank
Offering Rate (LIBOR) plus applicable margin ranging from 1.5% to 2.5%. In 1997,
interest rates under these agreements ranged from 7.22% to 7.38%. At December
31, 1997, the principal amount outstanding is $2,000,000 and the unused bank
line of credit amounted to $3,000,000. No amount is currently due. The Credit
Line expires as follows: June 20, 2000--$1,250,000, June 30, 2001--$1,250,000,
and June 30, 2002--$2,500,000. There are no compensating balance arrangements.
The line is secured by the tangible and intangible property of the subsidiary.
The property securing this obligation comprises a material portion of the net
assets of the Company.
The terms of the Credit Line restrict the subsidiary from incurring
additional debts, repaying of debts, declaring of dividends and distributions to
affiliates or members over specified amounts. In addition, the Company is
required to maintain certain financial ratios and comply with certain
restrictive covenants. All other future indebtedness of the subsidiary is
subordinate to this Credit Line. At December 31, 1997, the subsidiary was in
compliance with all positive and negative covenants contained in the line of
credit agreement.
9. MEMBERSHIP INTEREST
The Company has two classes of preferred equity interests which have voting
rights and which share in profits and losses. The Class A Preferred holder
contributed 95% of total capital, is allocated 95% of profits and losses and is
entitled to elect three directors. The Class B Preferred holder contributed 5%
of total capital, is allocated 5% of profits and losses and is entitled to elect
one director. Voting rights are apportioned between the classes on a basis
equivalent to contributed capital.
F-24
<PAGE>
INFORMATION VENTURES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
9. MEMBERSHIP INTEREST (CONTINUED)
Both classes of such preferred equity interests convert to common equity
interests under certain events, including a public offering of the Company's
securities or the sale of the Company. In the event of a conversion to common
equity interests, the Class A and Class B Preferred holders receive common
equity interests under a predetermined formula.
10. EMPLOYEE BENEFIT PLANS
The Company offers two defined contribution savings plans qualifying under
Section 401(k) of the Internal Revenue Code. The plans cover substantially all
full time U.S. employees; one plan requiring 90 days of service prior to
eligibility and the other requiring one year of service prior to eligibility.
The Company, via the subsidiaries, matches 50% of such contributions up to a
maximum employee contribution of 6% of salary. The Company contributed and
incurred expenses of $86,000 during 1997 under these plans.
Effective January 1, 1998, one of the plans is being replaced with a new
plan. The new plan will cover all employees of a subsidiary of the Company as of
December 31, 1997 and new employees with more than one year of service (compared
to 90 days service in the prior plan). Other plan provisions are unchanged from
the prior plan.
11. INCOME TAXES
The components of the state income tax provision (benefit) for the year
ended December 31, 1997 are as follows:
<TABLE>
<S> <C>
Current........................................................... $ 30,000
Deferred.......................................................... (27,000)
---------
Total............................................................. $ 3,000
---------
---------
</TABLE>
12 SUBSEQUENT EVENT
In January 1998, a subsidiary of the Company acquired certain assets of the
Chicago Publishing and Media Company, Inc. for cash of approximately $175,000.
13. PRO FORMA INCOME TAXES (UNAUDITED)
As discussed in Note 2, the Company is a limited liability company that
anticipates treatment as a partnership for federal and certain state income
taxes. In connection with the offering made hereby, the Company will become
subject to Federal and additional state income tax. The pro forma provision for
income taxes represents the income tax provisions that would have been reported
had the Company been subject to Federal and additional state income taxes.
F-25
<PAGE>
INFORMATION VENTURES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
13. PRO FORMA INCOME TAXES (UNAUDITED) (CONTINUED)
The Pro forma income tax provision consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Current income taxes:
Federal taxes............................................................ $ --
State and local taxes.................................................... 3,000
------
Deferred income taxes.................................................... --
------
$ 3,000
------
------
</TABLE>
A reconciliation setting forth the differences between the pro forma
effective tax rate of the Company and U.S. Federal statutory tax rate is as
follows:
<TABLE>
<S> <C>
Federal Statutory Rate...................................... (35.0)%
State and local taxes, net of Federal tax benefits.......... (5.6)
Valuation allowance......................................... 41.7
Other items, net, none of which individually exceeds 5% of
Federal taxes at Statutory Rates.......................... (1.0)
------
Effective tax rate.......................................... 0.1%
------
------
</TABLE>
Pro forma deferred income taxes will reflect the net tax effects of
temporary differences between the carrying amount of assets and liabilities for
pro forma financial reporting and the amounts used for income tax purposes.
Significant components of the Company's deferred tax asset as of December 31,
1997 are as follows (in thousands):
<TABLE>
<S> <C>
Current deferred tax assets:
Allowance for accounts receivable $ 326
Inventory................................................. 82
Accruals and other........................................ 188
------
Total current deferred tax assets........................... 596
------
Long-term deferred tax assets:
Amortization and depreciation............................. 1,011
Net operating loss........................................ 353
------
Total long-term deferred tax asset.......................... 1,364
------
Valuation allowance....................................... (1,960)
------
Total deferred tax asset.................................... $ --
------
------
</TABLE>
F-26
<PAGE>
INFORMATION VENTURES LLC
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
The following unaudited pro forma condensed consolidated statement of
operations of Information Ventures LLC for the year ended December 31, 1997
gives effect to the following transactions as if they occurred as of January 1,
1997: (i) the acquisition of Auerbach on June 5, 1997; and (ii) the acquisition
of MicroPatent on July 2, 1997. The unaudited pro forma condensed financial
statement gives effect to the aforementioned acquisitions under the purchase
method of accounting and the assumptions in the accompanying notes to the pro
forma condensed financial statement.
The unaudited pro forma condensed consolidated financial statement has been
prepared by the Company's management. The unaudited pro forma statement of
operations is not designed to represent and does not represent what the
Company's results of operations actually would have been had the aforementioned
transactions been completed as of the date or the beginning of the period
indicated, or to project the Company's results of operations at any future date
or for any future period. The pro forma condensed financial statement of
operations should be read in conjunction with the consolidated financial
statements and notes of Information Ventures LLC and MicroPatent contained
elsewhere herein.
F-27
<PAGE>
INFORMATION VENTURES LLC
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
DECEMBER 31, 1997
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
INFORMATION PRO FORMA
VENTURES LLC MICROPATENT AUERBACH ADJUSTMENTS PRO FORMA
------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues........................................ $ 34,869 $ 2,841 $ 1,773 $ $ 39,483
Costs and expenses:
Cost of sales................................. 11,492 919 904 13,315
Selling, general and administrative........... 20,518 1,571 1,161 183(c) 23,433
Severance and special bonuses................. 3,213 -- -- 3,213
Research and development...................... 400 141 -- 541
Depreciation and amortization................. 3,909 356 -- 2,363(a) 6,584
186(b)
(230)(c)
------------- ----------- ----------- ----------- -----------
Total operating expenses........................ 39,532 2,987 2,065 2,502 47,086
------------- ----------- ----------- ----------- -----------
Operating loss.................................. (4,663) (146) (292) (2,502) (7,603)
------------- ----------- ----------- ----------- -----------
Other expenses:
Interest expense, net......................... 130 10 -- 140
Other expense, net............................ 115 -- -- 115
Loss on disposal of asset..................... -- 11 -- 11
------------- ----------- ----------- ----------- -----------
Total other expenses............................ 245 21 -- 266
------------- ----------- ----------- ----------- -----------
Net loss before provision for income taxes...... (4,908) (167) (292) (2,502) (7,869)
Provision for income taxes...................... 3 -- -- 3
------------- ----------- ----------- ----------- -----------
Net loss........................................ $ (4,911) $ (167) $ (292) $ (2,502) $ (7,872)
------------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- -----------
</TABLE>
F-28
<PAGE>
INFORMATION VENTURES LLC
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
For purposes of determining the pro forma effect of the transactions described
above on Information Ventures LLC Condensed Consolidated Statement of Operations
for the year ended December 31, 1997, the following adjustments have been made:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C> <C>
(a) Represents incremental amortization of acquired intangible assets of MicroPatent,
amortized over three years using an accelerated method. $ 2,363
(b) Represents incremental amortization on intangible assets of Auerbach. The non-compete
agreement is amortized over a term of three years. Goodwill, publishing rights and
trademarks are amortized over a term of 20 years. 186
(c) Represents the adjustment for amortization recorded relating to the capitalized
database costs of MicroPatent no longer being capitalized; represents the database
costs acquired that are currently expensed.
- Depreciation and amortization (230)
- Selling, general and administrative 183
</TABLE>
F-29
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholder
CRC Press, Inc.
We have audited the accompanying consolidated balance sheets of CRC Press,
Inc. (a wholly-owned subsidiary of The Times Mirror Company) as of December 31,
1995 and 1996, and the related consolidated statements of operations,
shareholder's equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the CRC
Press, Inc. at December 31, 1995 and 1996 and the results of its operations and
its cash flows for the years then ended, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
West Palm Beach, Florida
May 29, 1998
F-30
<PAGE>
CRC PRESS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1995 1996
--------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 664 $ 1,025
Accounts receivable, less allowances for doubtful accounts and
returns of $4,281 and $2,979, in 1995 and 1996, respectively............................ 1,368 3,247
Inventories............................................................................... 2,328 3,660
Deferred income taxes..................................................................... 8,841 7,314
Other current assets...................................................................... 924 519
--------- ---------
Total current assets........................................................................ 14,125 15,765
Building, equipment and leasehold improvements, net......................................... 2,698 2,543
Goodwill and other intangible assets, net................................................... 20,394 7,236
Pre-publication costs, net.................................................................. 7,235 7,812
Deferred income taxes....................................................................... 856 1,866
Other assets................................................................................ 445 311
--------- ---------
Total assets................................................................................ $ 45,753 $ 35,533
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................................................... $ 4,015 $ 4,564
Unearned income........................................................................... 3,663 4,114
Employees' compensation................................................................... 2,001 1,328
Restructuring liabilities................................................................. 1,699 --
Royalties payable......................................................................... 1,187 1,114
Advances due to Times Mirror.............................................................. 11,579 13,694
Other current liabilities................................................................. 262 482
--------- ---------
Total current liabilities................................................................... 24,406 25,296
Capital lease liability..................................................................... 2,177 2,011
Pension liability........................................................................... 1,421 1,665
Postretirement benefits liability........................................................... 732 743
--------- ---------
Total liabilities........................................................................... 28,736 29,715
Commitments
Shareholder's equity:
Common stock; $1.00 par value; 5,000 shares authorized;
3,950 shares issued and outstanding..................................................... 4 4
Additional paid-in capital................................................................ 29,069 29,106
Accumulated deficit....................................................................... (12,056) (23,292)
--------- ---------
Total shareholder's equity.................................................................. 17,017 5,818
--------- ---------
Total liabilities and shareholder's equity.................................................. $ 45,753 $ 35,533
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-31
<PAGE>
CRC PRESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
<S> <C> <C>
1995 1996
--------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Revenues................................................................................... $ 32,054 $ 28,852
Costs and expenses:
Cost of sales............................................................................ 11,371 9,262
Selling, general and administrative expenses............................................. 22,725 19,001
Restructuring and one-time charges....................................................... 10,727 --
Impairment of goodwill and other intangible assets....................................... -- 10,666
--------- ----------
Total Operating Expenses................................................................... 44,823 38,929
--------- ----------
Operating loss............................................................................. (12,769) (10,077)
Intercompany interest expense.............................................................. (1,063) (824)
Interest expense........................................................................... (209) (212)
Other, net................................................................................. (95) 47
--------- ----------
Loss before income taxes................................................................... (14,136) (11,066)
Income tax provision (benefit)............................................................. (4,902) 170
--------- ----------
Net loss................................................................................... $ (9,234) $ (11,236)
--------- ----------
--------- ----------
</TABLE>
See accompanying notes.
F-32
<PAGE>
CRC PRESS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
DECEMBER 31, 1996
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PAID-IN ACCUMULATED STOCKHOLDER'S
COMMON STOCK CAPITAL DEFICIT EQUITY
------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995.................................... $ 4 $ 29,069 $ (2,822) $ 26,251
Net loss...................................................... -- -- (9,234) (9,234)
--
----------- ------------ ------------
Balance at December 31, 1995.................................. 4 29,069 (12,056) 17,017
Capital contribution.......................................... -- 37 -- 37
Net loss...................................................... -- -- (11,236) (11,236)
--
----------- ------------ ------------
Balance at December 31, 1996.................................. $ 4 $ 29,106 $ (23,292) $ 5,818
--
--
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
See accompanying notes.
F-33
<PAGE>
CRC PRESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1995 1996
---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (9,234) $ (11,236)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization........................................................... 2,212 1,706
Restructuring:
Net change in liability............................................................... 1,541 (371)
Noncash charges....................................................................... 7,691 --
Amortization of product development costs............................................... 3,597 3,064
Provision for doubtful accounts......................................................... 615 207
Loss on impairment of goodwill and other intangible assets.............................. -- 10,666
Deferred income tax (benefit) provision................................................. (4,914) 170
Changes in assets and liabilities:
Decrease (increase) in trade accounts receivable...................................... 3,929 (2,086)
Increase in inventories............................................................... (618) (1,332)
(Decrease) increase in accounts payable............................................... (21) 549
Increase (decrease) in employees' compensation........................................ 1,195 (673)
Other, net............................................................................ (3,600) 1,584
---------- ----------
Net cash provided by operating activities................................................. 2,393 2,248
INVESTING ACTIVITIES
Capital expenditures...................................................................... (434) (387)
Additions to product development.......................................................... (3,472) (3,641)
Acquisition, net of cash acquired......................................................... (524) --
Covenant-not-to-compete payments.......................................................... (500) --
Other, net................................................................................ 37 --
---------- ----------
Net cash used in investing activities..................................................... (4,893) (4,028)
FINANCING ACTIVITIES
Change in advance from Times Mirror....................................................... 2,462 2,270
Capital contribution from Times Mirror.................................................... -- 37
Capital lease payments.................................................................... (144) (166)
---------- ----------
Net cash provided by financing activities................................................. 2,318 2,141
---------- ----------
Decrease (increase) in cash and cash equivalents.......................................... (182) 361
Cash and cash equivalents at beginning of year............................................ 846 664
---------- ----------
Cash and cash equivalents at end of year.................................................. $ 664 $ 1,025
---------- ----------
---------- ----------
Cash paid during the year for:
Interest................................................................................ $ 1,287 $ 1,035
---------- ----------
---------- ----------
Income taxes............................................................................ $ 1,185 $ 974
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-34
<PAGE>
CRC PRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
1. BUSINESS OPERATIONS
CRC (as defined below) publishes reference books and other information for
scientists and engineers in industry, government and academia. Revenues
typically increase in the third and fourth quarters more as a result of its
publication schedule than from any seasonality aspects of its customers.
CRC routinely assesses the financial strength of significant customers and
this assessment, combined with the large number and geographic diversity of its
customer base, limits its concentration of risk with respect to trade
receivables.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
As of December 31, 1995, the consolidated financial statements include the
accounts of CRC Press, Inc. and its wholly-owned subsidiary, Environmental
Education Enterprises (collectively "CRC" ). On March 20, 1996, Environmental
Education Enterprises was sold to an unrelated party. CRC is a wholly-owned
subsidiary of The Times Mirror Company ("Times Mirror"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
The historical consolidated financial statements do not necessarily reflect
the results of operations or financial position that would have existed had CRC
been an independent company. Times Mirror provides certain legal services, tax
compliance and planning reviews, risk management and various other corporate
services to CRC. The cost of these services is not believed to be material and
is not included in the financial statements of CRC.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of all highly liquid investments with
maturities of three months or less. The cost of these investments is equal to
fair market value.
INVENTORIES
Inventories are carried at the lower of cost or market and are determined
under the first-in, first-out method. Inventories consist of books and other
finished products. There were no raw materials or work-in-progress as of
December 31, 1995 and 1996.
BUILDING, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
The building is carried at the net present value of the capital lease
obligation. Leasehold improvements and equipment are carried on the basis of
cost. Maintenance and repairs are charged to expense as incurred. Additions,
improvements and replacements are capitalized.
Depreciation is calculated on a straight-line basis over the estimated
useful lives as follows:
<TABLE>
<S> <C>
Building............................. Lease term - 20 years
Furniture and equipment.............. 5 to 7 years
Leasehold improvements............... Lesser of useful life or lease term
</TABLE>
F-35
<PAGE>
CRC PRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill recognized in business combinations is amortized on a straight-line
basis over 40 years. Accumulated amortization was $4,745,000 and $17,367,000 at
December 31, 1995 and 1996, respectively. Amortization expense amounted to
$686,000 for 1995 and $629,000 for 1996. The cost of covenants-not-to-compete is
amortized on a straight-line basis over 2 to 5 years. Accumulated amortization
was $821,000 and $1,357,000 at December 31, 1995 and 1996, respectively.
Amortization expense amounted to $536,000 for 1995 and 1996.
CRC assesses on an ongoing basis the recoverability of goodwill and other
intangibles based on estimates of future undiscounted cash flows compared to net
book value. If the future undiscounted cash flows estimate was less than net
book value, net book value would then be reduced to fair value based on an
estimate of discounted cash flow. CRC also evaluates the amortization periods of
assets, including goodwill and other intangibles, to determine whether events or
circumstances warrant revised estimates of useful lives.
Based on the January 10, 1997 sale of CRC's net assets (see Note 11), CRC
determined that goodwill had been impaired and recorded an impairment charge of
approximately $10,666,000, which is net of approximately $1,300,000 representing
the recovery of certain restructuring liabilities that were accrued as of
December 31, 1995.
DIRECT MAIL COSTS
Direct mail costs are expensed upon mailing. Direct mail expense was
approximately $3,646,000 and $3,596,000 for the years ended December 31, 1995
and 1996, respectively. Other current assets as of December 31, 1995 and 1996
included approximately $307,000 and $19,000, respectively.
PRE-PUBLICATION COSTS
Certain expenses for books, primarily design and order pre-production costs,
are deferred and charged to expense over the estimated product life. These costs
are amortized over a 4 year period following the release of the applicable book,
using an accelerated amortization method. Accumulated amortization of
pre-publication costs was $7,587,000 and $10,086,000 at December 31, 1995 and
1996, respectively.
REVENUE RECOGNITION
Revenues from books sold with the right of return are recognized net of a
provision for estimated returns. Revenues from newsletter subscriptions are
deferred as unearned income at the time of the sale. A pro rata share of the
subscription price is included in revenue as the newsletter is delivered,
generally over one year.
F-36
<PAGE>
CRC PRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES AND OTHER UNCERTAINTIES
Financial statements prepared in accordance with generally accepted
accounting principles require management to make estimates and judgments that
affect amounts and disclosures reported in the financial statements. Actual
results could differ from those estimates although management does not believe
that any differences would materially affect its financial position or reported
results. CRC's future results could be adversely affected by a general economic
downturn resulting in decreased professional or corporate spending on
discretionary items such as information products.
3. RESTRUCTURING PROGRAM
During 1995, the Company recorded restructuring charges of $10,727,000,
consisting primarily of asset writeoffs, in connection with a comprehensive and
systematic review of its operations, cost structure, and balance sheet.
Additional charges of $1,032,000 were also included in 1995 results. These
charges do not meet the accounting criteria for inclusion in restructuring
charges, but were part of CRC's restructuring program.
Liabilities of $1,699,000 representing cash to be paid for restructuring
program actions, are included in the consolidated balance sheets at December 31,
1995.
4. OTHER INFORMATION
CRC participates in Time Mirror's cash management system, where the bank
sends daily notification of checks presented for payment. Times Mirror transfers
funds from other sources to cover the checks presented for payment. This program
generally results in a book overdraft as a result of checks outstanding. The
book overdraft of $514,000 and $588,000 on December 31, 1995 and 1996,
respectively, has been reclassified to accounts payable.
CRC is largely self-insured for workers compensation group health benefits
and certain other loss contingencies.
5. BUILDING, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Building, equipment and leasehold improvements consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1995 1996
--------- ---------
Building................................................................. $ 2,816 $ 2,816
Furniture and equipment.................................................. 2,259 2,749
Leasehold improvements................................................... 517 517
--------- ---------
5,592 6,082
Less accumulated depreciation............................................ (2,894) (3,539)
--------- ---------
$ 2,698 $ 2,543
--------- ---------
--------- ---------
</TABLE>
Depreciation expense for building, equipment and leasehold improvements was
approximately $576,000 and $574,000 for 1995 and 1996, respectively.
F-37
<PAGE>
CRC PRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
<S> <C> <C>
1995 1996
--------- ----------
Goodwill (See Note 2).................................................. $ 24,460 $ 12,494
Covenants-not-to-compete............................................... 1,500 1,500
--------- ----------
25,960 13,994
Less accumulated amortization.......................................... (5,566) (6,758)
--------- ----------
$ 20,394 $ 7,236
--------- ----------
--------- ----------
</TABLE>
Amortization expense was approximately $1,222,000 and $1,165,000 for 1995
and 1996, respectively.
7. INCOME TAXES
CRC is included in Times Mirror's consolidated Federal income tax return.
CRC files separate tax returns in Florida, Missouri and Washington, D.C. Under a
tax sharing arrangement with Times Mirror, CRC's deferred tax assets are
recoverable against the future taxable earnings of CRC or Times Mirror.
CRC accounts for income taxes under FASB Statement No. 109 "Accounting for
Income Taxes" (FASB 109). Deferred income tax assets and liabilities are
determined based upon differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
Income tax (benefit) expense for 1995 and 1996, which is computed as if CRC
filed a separate income tax return, consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1995 1996
--------- ---------
Current
Federal................................................................ $ (30) $ (313)
State.................................................................. 42 (33)
Deferred
Federal................................................................ (4,594) 468
State.................................................................. (320) 48
--------- ---------
$ (4,902) $ 170
--------- ---------
--------- ---------
</TABLE>
F-38
<PAGE>
CRC PRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The difference between the actual income tax benefit and the U.S. Federal
statutory income tax benefit for 1995 and 1996 is reconciled as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1995 1996
---------- ----------
Loss before income taxes.............................................. $ (14,136) $ (11,066)
Federal statutory income tax rate..................................... 35% 35%
Federal statutory income tax benefit.................................. (4,948) (3,873)
Increase (decrease) in income taxes resulting from:
State and local income tax benefit, net of Federal effect........... (181) (393)
Goodwill amortization not deductible for tax purposes............... 159 4,198
Non-deductible permanent items...................................... -- 26
Other................................................................. 68 (212)
---------- ----------
$ (4,902) $ 170
---------- ----------
---------- ----------
</TABLE>
The tax effect of temporary differences results in deferred income tax
assets (liabilities) and balance sheet classifications at December 31, 1995 and
1996 as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1995 1996
--------- ---------
TEMPORARY DIFFERENCES
Depreciation and other building and equipment differences.................. $ 516 $ 592
Postretirement benefits.................................................... 1,259 1,274
Valuation and other reserves............................................... 6,986 4,793
State and local income taxes............................................... (261) (366)
Restructuring charges...................................................... 804 1,044
Other deferred tax assets.................................................. 1,018 2,252
Other deferred tax liabilities............................................. (625) (409)
--------- ---------
$ 9,697 $ 9,180
--------- ---------
--------- ---------
BALANCE SHEET CLASSIFICATION
Current deferred tax asset................................................. $ 8,841 $ 7,314
Noncurrent deferred tax asset.............................................. 856 1,866
--------- ---------
$ 9,697 $ 9,180
--------- ---------
--------- ---------
</TABLE>
FASB 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of evidence, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Due to
CRC's tax sharing arrangements with Times Mirror, management has determined that
a valuation allowance is not required at December 31, 1995 and 1996.
8. RETIREMENT PLANS AND POSTRETIREMENT BENEFITS
CRC provides defined pension benefits to employees based on years of service
and the employee's compensation for the five highest consecutive years during
the last ten years of employment. These
F-39
<PAGE>
CRC PRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RETIREMENT PLANS AND POSTRETIREMENT BENEFITS (CONTINUED)
benefits are provided under The Times Mirror Pension Plan (the "Times Mirror
Plan"). The Times Mirror Plan is generally funded on a current basis in
accordance with the Employee Retirement Income Security Act of 1974.
Substantially all employees over age 21 with one year of service are
eligible to participate in the Times Mirror's Savings Plus Plan (the "Savings
Plus Plan"). Eligible employees may contribute from 1 percent to 13 percent of
their basic compensation. CRC makes matching contributions equal to 50 percent
of employee before-tax contributions from 1 percent to 6 percent. Employees may
choose among five investment options, including a Times Mirror common stock
fund, for investing their contributions and CRC's matching contribution.
Retirement plan expense for 1995 and 1996 consisted of defined contribution
plan expense for the Saving Plus Plan of $114,000 and $119,000, respectively and
net periodic pension expense for the Time Mirror Plan as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1995 1996
--------- ---------
Service cost--benefits earned during period............................... $ 266 $ 243
Interest cost on projected benefit obligation............................. 151 177
Return on plan assets..................................................... (142) (168)
Net amortization and deferral............................................. (16) (9)
--------- ---------
Periodic pension expense.................................................. $ 259 $ 243
--------- ---------
--------- ---------
</TABLE>
Assumptions used in the actuarial computations at December 31, 1995 and 1996
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1995 1996
--------- ---------
Discount rate............................................................. 7.5% 8.0%
Rate of increase in compensation levels................................... 5.0% 5.0%
Expected long-term rate of return on assets............................... 9.75% 9.75%
</TABLE>
F-40
<PAGE>
CRC PRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RETIREMENT PLANS AND POSTRETIREMENT BENEFITS (CONTINUED)
The following table sets forth the amount recognized in the consolidated
balance sheets at December 31, 1995 and 1996 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1995 1996
--------- ---------
Actuarial present value of benefit obligations:
Vested................................................................. $ 1,197 $ 1,380
Nonvested.............................................................. 61 104
--------- ---------
Accumulated benefit obligations.......................................... $ 1,258 $ 1,484
--------- ---------
--------- ---------
Projected benefit obligations............................................ 2,361 2,457
Plan assets at fair value................................................ 1,783 1,813
--------- ---------
Plan assets less than projected benefit obligations...................... (578) (644)
Unrecognized net loss from past experience different from that assumed... (879) (1,021)
Prior service cost not yet recognized.................................... 36 --
--------- ---------
Pension liability........................................................ $ (1,421) $ (1,665)
--------- ---------
--------- ---------
</TABLE>
Postretirement health care benefits provided by CRC are unfunded and cover
employees hired before January 1, 1993, or approximately half of CRC's current
employees.
Net periodic postretirement benefit expense for 1995 and 1996 is as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1995 1996
--------- ---------
Service cost--benefits earned during period.................................... $ 33 $ 30
Interest cost on accumulated projected benefit obligation...................... 26 25
Net amortization............................................................... (36) (37)
--- ---
Net periodic postretirement expense............................................ $ 23 $ 18
--- ---
--- ---
</TABLE>
Assumptions used in the actuarial computations as of December 31, 1995 and
1996 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1995 1996
--------- -----
Discount rate................................................................... 7.5% 8.0%
Health care cost trend rate..................................................... 10.0% 9.0%
</TABLE>
At December 31, 1995 and 1996, the health care cost trend rates of 10 and 9
percent respectively were assumed to ratably decline to 5.5 percent by 2008 as
December 31, 1998 and 2011 as December 31, 1995.
F-41
<PAGE>
CRC PRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RETIREMENT PLANS AND POSTRETIREMENT BENEFITS (CONTINUED)
The following table sets forth the plan's unfunded obligations and the
amount recognized in the consolidated balance sheets at December 31, 1995 and
1996 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1995 1996
--------- ---------
Actuarial present value of benefit obligations:
Retirees.................................................................... $ 49 $ 37
Other active participants................................................... 384 308
--------- ---------
Accumulated postretirement benefit obligations................................ 433 345
Unrecognized net decrease in prior service cost............................... 405 368
Unrecognized net gain (loss) from past experience different from that
assumed..................................................................... (106) 30
--------- ---------
Postretirement benefits liability............................................. $ 732 $ 743
--------- ---------
--------- ---------
</TABLE>
The assumed health care cost trend rate can significantly affect
postretirement expense and liabilities. An increase of 1 percent in the health
care cost trend rate would increase 1995 and 1996 net periodic postretirement
expense by $8,000 and $7,000, respectively and increase the accumulated
postretirement benefit obligations as of December 31, 1995 and 1996 by $16,000
and $33,000, respectively.
On January 10, 1997, CRC was sold by Times Mirror (see Note 11). In
accordance with the Asset Purchase Agreement, the Retirement Plans and
Postretirement Benefits Liabilities were not assumed by the purchaser and were
retained by Times Mirror.
9. LEASES
Rental expense under operating leases was $867,000 and $872,000 for the
years ended December 31, 1995 and 1996, respectively. The future noncancelable
minimum lease payments as of December 31, 1996, including estimated escalation
amounts for the capital lease, are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASE
----------- ---------
<S> <C> <C>
1997.................................................................... $ 339 $ 624
1998.................................................................... 234 640
1999.................................................................... 656
2000.................................................................... 672
2001.................................................................... 689
Later years............................................................. 3,386
----------- ---------
Total minimum payments.................................................. $ 573 6,667
-----------
-----------
Less: Executory costs................................................ (3,677)
Imputed portion................................................. (814)
Current portion................................................. (165)
---------
Present value of net minimum lease payments............................. $ 2,011
---------
---------
</TABLE>
The imputed interest for the capital lease was 7% in 1996.
F-42
<PAGE>
CRC PRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. RELATED PARTY TRANSACTIONS
AMOUNTS DUE TO TIMES MIRROR
The amounts due to Times Mirror are generally due on demand and the
aggregate amounts are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1995 1996
--------- ---------
Advances due to Times Mirror............................................ $ 11,885 $ 14,347
Receivables due from affiliated companies............................... (1,059) (259)
Income taxes payable (receivable) to (from) Times Mirror................ 753 (394)
--------- ---------
$ 11,579 $ 13,694
--------- ---------
--------- ---------
</TABLE>
Advances bear interest at Times Mirror's estimated ten-year financing rate.
These interest rates are established at the beginning of each quarter and were
9% in the first quarter of 1995, 8% through the first quarter of 1996 and 6% for
the remainder of 1996.
WAREHOUSING AND DISTRIBUTION
CRC receives warehousing and distribution services from another Times Mirror
subsidiary. The charges for these services during 1995 and 1996 were $500,000
and $454,000, respectively.
INTERNATIONAL SALES
Times Mirror International Publishers, Inc. ("TMIP"), a wholly-owned
subsidiary of Times Mirror, has an arrangement with other subsidiaries of Times
Mirror, including CRC, to manage all international sales, including sales of
U.S. copyrighted materials, foreign language adaptations of U.S. copyrighted
materials and foreign rights income. In connection with this arrangement, TMIP
markets, sells and distributes CRC's products in certain international markets.
Net sales to TMIP aggregated $6,093,000 and $3,975,000 in 1995 and 1996,
respectively. CRC incurred direct costs including paper, printing, binding,
international royalties and incremental plant, editorial and production
associated with foreign language adaptations of $2,595,000 and $1,837,000 in
1995 and 1996, respectively.
11. SUBSEQUENT EVENT
On January 10, 1997, Times Mirror, pursuant to an Asset Purchase Agreement
with Information Ventures LLC ("IV"), sold substantially all the assets of CRC
for $12,950,000. The transaction was accounted by IV as a purchase.
Subsequently, IV formed CRC Press LLC and transferred all assets purchased to
this new entity.
F-43
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners of
MicroPatent
We have audited the accompanying balance sheets of MicroPatent (the
"Company") as of June 30, 1996 and 1997, and the related statements of income
and partners' deficit and cash flows for the years then ended. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MicroPatent at June 30, 1996
and 1997 and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
June 8, 1998
F-44
<PAGE>
MICROPATENT
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
<S> <C> <C>
1996 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 269,607 $ 181,252
Accounts receivable, net of allowance for bad debts of $0 and $51,960,
respectively...................................................................... 457,719 458,553
Due from Neato LLC.................................................................. -- 421,410
Inventories......................................................................... 170,900 194,781
Prepaid subscriptions............................................................... 321,912 318,960
Prepaid commissions and royalties................................................... 118,872 108,768
Prepaid expenses, other............................................................. 60,787 66,722
------------ ------------
Total current assets............................................................ 1,399,797 1,750,446
Fixed assets, net..................................................................... 403,723 444,801
Capitalized database costs, net of accumulated amortization of $1,866,106 and
$2,306,111, respectively............................................................ 616,742 530,682
Intangible assets, net................................................................ 25,530 24,499
Deposits.............................................................................. 27,961 21,594
------------ ------------
Total assets.................................................................... $ 2,473,753 $ 2,772,022
------------ ------------
------------ ------------
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Accounts payable.................................................................... $ 314,919 $ 461,009
Accrued expenses.................................................................... 280,220 201,977
Royalties payable................................................................... 107,599 73,680
Commissions payable................................................................. 220,739 118,732
Deferred revenue.................................................................... 1,928,336 2,072,901
Other current liabilities........................................................... 27,636 64,463
Notes payable, bank................................................................. 150,000 300,000
Capital lease obligations, current portion.......................................... 27,475 38,046
------------ ------------
Total current liabilities....................................................... 3,056,924 3,330,808
Other long-term liabilities........................................................... 4,627 --
Capital lease obligations, less current portion....................................... 89,343 69,990
------------ ------------
Total liabilities............................................................... 3,150,894 3,400,798
Partners' deficit:
Partners' deficit................................................................... (677,141) (628,776)
------------ ------------
Total liabilities and partners' deficit............................................... $ 2,473,753 $ 2,772,022
------------ ------------
------------ ------------
</TABLE>
See notes to financial statements
F-45
<PAGE>
MICROPATENT
STATEMENTS OF INCOME AND PARTNERS' DEFICIT
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------
<S> <C> <C>
1996 1997
------------ ------------
Revenue............................................................................... $ 5,248,766 $ 5,829,693
Cost of sales......................................................................... 2,208,084 2,156,210
------------ ------------
Gross profit.................................................................... 3,040,682 3,673,483
Operating expenses:
Selling, general and administrative................................................. 2,257,576 2,783,285
New product development............................................................. 79,930 144,261
Depreciation and amortization....................................................... 616,096 664,580
Loss on disposition................................................................. -- 10,375
------------ ------------
Total operating expenses.............................................................. 2,953,602 3,602,501
------------ ------------
Income from operations................................................................ 87,080 70,982
Interest income....................................................................... 6,628 3,324
Interest expense...................................................................... (23,818) (25,941)
------------ ------------
Net income............................................................................ 69,890 48,365
Partners' deficit, beginning of year.................................................. (629,220) (677,141)
Partner distributions................................................................. (117,811) --
------------ ------------
Partners' deficit, end of year........................................................ $ (677,141) $ (628,776)
------------ ------------
------------ ------------
</TABLE>
See notes to financial statements
F-46
<PAGE>
MICROPATENT
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------
CASH FLOWS FROM OPERATING ACTIVITIES 1996 1997
---------- ----------
<S> <C> <C>
Net income................................................................................ $ 69,890 $ 48,365
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization........................................................... 616,096 664,580
Loss on disposal........................................................................ -- 10,375
Provision for bad debt.................................................................. -- 51,960
Changes in assets and liabilities:
Decrease (increase) in accounts receivable.............................................. 4,146 (52,794)
Increase in due from Neato LLC.......................................................... (421,410)
Decrease (increase) in inventories...................................................... 27,532 (23,881)
Decrease in prepaid subscription costs.................................................. 17,616 2,952
(Increase) decrease in prepaidcommissions and royalties................................. (67,552) 10,104
Decrease (increase) in prepaid expenses, other.......................................... (3,040) (5,935)
Increase in intangible assets........................................................... (14,254) (6,338)
(Increase) decrease in deposits......................................................... (10,559) 6,367
(Decrease) increase in accounts payable and accrued expenses............................ (536,312) 67,847
Increase (decrease) in royalties payable................................................ 67,099 (33,919)
Increase (decrease) in commissions payable.............................................. 168,632 (102,007)
Increase in deferred revenue............................................................ 333,843 144,565
Increase in other current liabilities................................................... 9,454 36,827
Decrease in other liabilities........................................................... (5,828) (4,627)
---------- ----------
Net cash provided by operating activities................................................. 676,763 393,031
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment and database costs........................................ (479,070) (612,051)
Proceeds from sale of assets.............................................................. -- 9,500
---------- ----------
Net cash used in investing activity....................................................... (479,070) (602,551)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITY
Proceeds from borrowings.................................................................. 150,000 150,000
Payments on capitalized lease obligations................................................. (21,392) (28,835)
Distributions to partners................................................................. (117,811) --
---------- ----------
Net cash provided by financing activities................................................. 10,797 121,165
---------- ----------
Net increase (decrease) in cash and cash equivalents...................................... 208,490 (88,355)
Cash and cash equivalents at beginning of year............................................ 61,117 269,607
---------- ----------
Cash and cash equivalents at end of year.................................................. $ 269,607 $ 181,252
---------- ----------
---------- ----------
SUPPLEMENTAL DATA
Interest Paid............................................................................. $ 22,599 $ 27,160
---------- ----------
---------- ----------
Capital lease obligations entered into during the year.................................... $ 138,909 $ 20,053
---------- ----------
---------- ----------
</TABLE>
See notes to financial statements
F-47
<PAGE>
MICROPATENT
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
1. BUSINESS OPERATIONS AND BASIS OF PRESENTATION
MicroPatent (the "Company") is a general partnership founded in 1989 that
publishes intellectual property databases for the patent and trademark markets,
all in electronic format. Its databases, which are provided on the Internet,
Intranet and on CD-ROM, are used by legal and research professionals and
corporations.
On January 1, 1997, the Neato division of the Company was transferred to
certain partners of the Company for net book value.
On July 2, 1997, net assets of the Company (which excluded the Neato assets)
were purchased by MicroPatent LLC, a newly-formed subsidiary of Information
Ventures LLC for $7,400,000. Accordingly, these financial statements have been
prepared representing the operations acquired by the subsidiary of Information
Ventures LLC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues include the sale of patent and trademark information on CD-ROM and
the Internet. Subscription sales and related cost of sales are recognized
ratably over the life of the subscription as the information is made available
or shipped to the customer. Subscription payments received are deferred and
recorded as revenue in the period in which the information is made available.
Nonsubscription sales and related cost of sales are recognized when information
is made available or shipped to the customer.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of all highly liquid investments with
maturities of three months or less, when purchased. The cost of these cash
equivalents is equal to fair market value.
INVENTORIES
Inventories are valued at lower of cost or market and are determined under
the first-in, first-out method. Inventories at June 30, 1996 and 1997 consist of
finished products and raw materials. There was no significant work-in-process as
of June 30, 1996 and 1997.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for repairs and
maintenance are expensed as incurred.
The Company provides for depreciation and amortization primarily using the
straight-line method over the estimated useful lives of the various assets as
follows:
<TABLE>
<S> <C>
Furniture and equipment............................................ 7 years
Computers and equipment............................................ 5 years
Leasehold improvements............................................. 5 years
Trademarks......................................................... 5 years
</TABLE>
F-48
<PAGE>
MICROPATENT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CAPITALIZED DATABASE COSTS
Capitalized database costs consist of masters, data and software purchased.
Amortization is computed by an accelerated method over a period of five years.
INCOME TAXES
The Company is organized as a partnership and accordingly all income and
expenses are passed through to the Partners. Therefore, the Company's financial
statements exclude a provision for income taxes.
ADVERTISING EXPENSE
Advertising costs are expensed as incurred and approximated $128,968 and
$201,249 as of June 30, 1996 and 1997, respectively.
ACCOUNTING ESTIMATES
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 these estimates.
3. INVENTORIES
Inventories consist of the following as of June 30, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Finished goods........................................................ $ 155,446 $ 185,418
Raw material.......................................................... 15,454 9,363
---------- ----------
$ 170,900 $ 194,781
---------- ----------
---------- ----------
</TABLE>
4. PROPERTY AND EQUIPMENT
Property, plant and equipment consist of the following as of June 30, 1996
and 1997:
<TABLE>
<CAPTION>
1996 1997
----------- ------------
<S> <C> <C>
Furniture and fixtures............................................. $ 16,422 $ 19,734
Equipment.......................................................... 805,827 1,038,424
Automobile......................................................... 25,632 --
Leasehold improvements............................................. 32,357 58,430
----------- ------------
880,238 1,116,588
Accumulated depreciation........................................... (476,515) (671,787)
----------- ------------
$ 403,723 $ 444,801
----------- ------------
----------- ------------
</TABLE>
F-49
<PAGE>
MICROPATENT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INTANGIBLE ASSETS
Intangible assets consist of trademarks and are amortized using the
straight-line method over five years. Accumulated amortization as of June 30,
1996 and 1997 is $21,428 and $28,797, respectively.
6. LEASES
As of June 30, 1996 and 1997, assets recorded under capital leases
aggregated approximately $138,909 and $158,962, respectively, and included
accumulated amortization of $27,782 and $76,244, respectively.
Rental expense under operating leases was $70,000 and $83,000 for the years
ended June 30, 1996 and 1997, respectively. The future noncancelable minimum
lease payments as of June 30, 1997, including estimated escalation amounts for
capital leases, are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- ----------
<S> <C> <C>
1998.................................................................. $ 46,587 $ 51,999
1999.................................................................. 44,787 51,999
2000.................................................................. 43,897 24,809
2001.................................................................. 42,116 3,100
2002.................................................................. 17,548 --
---------- ----------
Total................................................................. $ 194,935 $ 131,907
---------- ----------
---------- ----------
Less amount representing unamortized interest......................... 23,871
Less current portion.................................................. 38,046
----------
Present value of minimum lease payment, excluding current portion..... $ 69,990
----------
----------
</TABLE>
7. FOREIGN EXCHANGE
The Company incurred foreign exchange gains of $44,000 and $109,000 for the
years ended June 30, 1996 and 1997, respectively. Foreign exchange gains are
included in cost of sales.
8. EMPLOYEE BENEFIT PLAN
The Company offers an employee savings plan qualifying under Section 401(k)
of the Internal Revenue Code. The plan covers substantially all full time U.S.
employees with more than 90 days of service. Employees are encouraged to make
contributions to the Plan. The Company matches 50% of such contributions up to a
maximum employee contribution of 6% of salary. The Company contributed and
incurred expenses of $21,000 and $22,132 during the years ended June 30, 1996
and 1997, respectively.
9. NOTES PAYABLE
The notes payable consist of a revolving line of credit note for $150,000,
bearing interest at 1.5% above the bank prime lending rate (8.25% and 8.5% at
June 30, 1996 and 1997, respectively). The line of credit agreement, which
expires December 31, 1997, is secured by all of the Company's assets. At June
30, 1996 and 1997, the balance outstanding on the revolving line of credit is
$150,000.
F-50
<PAGE>
MICROPATENT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. NOTES PAYABLE (CONTINUED)
At June 30, 1997 the Company also has a demand note payable for $150,000
bearing interest at 1.75% above the bank prime lending rate (8.5%). The note is
secured by all the Company's assets and is due on demand.
Subsequent to the purchase of the Company by MicroPatent LLC, the
outstanding balances of the line of credit and the demand note were paid in
full.
F-51
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANT
To the Board of Directors of
St. Lucie Press Corporation, Inc.,
I have audited the accompanying balance sheet of St. Lucie Press Corporation,
Inc., (the "Company") as of December 31, 1996, and the related statements of
income, retained earnings and cash flows for the year ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
My responsibility is to express an opinion on these financial statements based
on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of St. Lucie Press Corporation, Inc.,
as of December 31, 1996, and the results of its operations ands its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
/s/ Robert A. Young, CPA
West Palm Beach, Florida
June 5, 1998
F-52
<PAGE>
ST. LUCIE PRESS CORPORATION, INC.
BALANCE SHEET,
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents....................................................... $ 47,618
Investments..................................................................... 53,952
Accounts receivable............................................................. 258,132
Inventories..................................................................... 231,359
Other current assets............................................................ 62,112
---------
Total current assets........................................................ 653,173
Property and equipment, net..................................................... 62,159
Other assets.................................................................... 97,784
---------
Total assets................................................................ $ 813,116
---------
---------
LIABILITIES
Current liabilities:
Accounts payable................................................................ 95,213
Accrued liabilities............................................................. 93,395
Accrued royalties............................................................... 134,400
Deferred revenue................................................................ 49,458
---------
Total current liabilities................................................... 372,466
---------
Total liabilities........................................................... 372,466
---------
STOCKHOLDERS' EQUITY
Common stock, $1 par value; 100,000 shares authorized; 10,000 shares issued and
outstanding................................................................... 10,000
Paid-in capital................................................................. 174,161
Retained earnings............................................................... 256,489
---------
Total stockholders' equity.................................................. 440,650
---------
Total liabilities and stockholders' equity...................................... $ 813,116
---------
---------
</TABLE>
See accompanying notes
F-53
<PAGE>
ST. LUCIE PRESS CORPORATION, INC.
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Revenue:
Sales......................................................................... $2,615,383
Interest and other............................................................ 2,861
---------
Total revenue............................................................. 2,618,244
Costs and expenses:
Cost of sales................................................................. 706,748
Selling, general and administrative........................................... 1,471,618
Interest...................................................................... 1,206
Depreciation and amortization................................................. 5,668
---------
Total costs and expenses.................................................. 2,185,240
---------
Net Income................................................................ 433,004
Distributions to shareholders............................................. (280,401)
Retained earnings, beginning............................................ 103,886
---------
Retained earnings, ending................................................. $ 256,489
---------
---------
Earnings per common share....................................................... $ 43.30
Average shares outstanding...................................................... 10,000
</TABLE>
See accompanying notes
F-54
<PAGE>
ST. LUCIE PRESS CORPORATION, INC.
STATEMENT OF CASH FLOWS,
FOR YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income........................................................................ $ 433,004
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................... 5,668
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable........................................................... 53,846
Investments................................................................... (1,337)
Inventories................................................................... (87,895)
Other current assets.......................................................... (62,112)
Other assets.................................................................. (53,528)
Increase (decrease) in:
Accounts payable.............................................................. (5,178)
Deferred revenue.............................................................. (52,465)
Accrued royalities............................................................ 46,183
Accrued liabilities........................................................... 75,544
---------
Net cash provided by operating activities......................................... 351,730
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............................................................ (2,607)
Dividends paid to shareholders.................................................. (280,401)
---------
Net cash used by investing activities............................................. (283,008)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings.............................................. 40,000
Repayments of long-term borrowings.............................................. (84,623)
---------
Net cash used by financing activities............................................. (44,623)
---------
NET INCREASE IN CASH.............................................................. 24,099
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD.............................. 23,519
---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................ $ 47,618
---------
---------
</TABLE>
See accompanying notes.
F-55
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
St. Lucie Press Corporation, Inc. (the "Company"), is a publisher of printed
and electronic media for the global education, scientific and professional
markets. Its products consist of books, videos and newsletters which are sold
both domestically and internationally.
The significant accounting policies followed by the Company are summarized
below:
ACCOUNTING ESTIMATES
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 reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
ACQUISITIONS
On August 1, 1995 the Company purchased certain operating assets and assumed
certain operating debts of Goose Run Press, Inc., d.b.a. GR Press in exchange
for ten percent of the outstanding shares of the Company. An excess purchase
price of approximately $56,000 has been determined, based upon the fair values
of assets acquired and liabilities assumed.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, demand deposits and highly
liquid investments. The Company considers all highly liquid investments
purchased with an original maturity date of three months or less to be cash
equivalents.
REVENUE RECOGNITION
Sales primarily consist of the publication of books and videos for which
sales and the related cost of sales are recognized when the book or video is
shipped to the customer. Revenues from books sold with the right of return are
recognized net of a provision for estimated return. Subscription payments
received are deferred and reported as income in the period in which the related
issue is shipped.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is principally
determined by first-in, first-out method. Inventories at December 31, 1996
consist of books and other finished products. There were no raw materials or
work-in-process as of December 31, 1996. Consideration is given to obsolescence
and other factors in evaluating the net realizable value.
LONG-LIVED ASSETS
The Company accounts for long-lived assets pursuant to Statement of
Financial Standards (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which requires impairment
losses to be recorded in long-lived assets used in operations when events or
changes in circumstances indicates that the carrying amount of an asset may not
be recoverable. Management reviews long-lived assets and the related intangible
assets for impairment whenever events or changes in
F-56
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
circumstances indicate the assets may be impaired. The Company, based on current
circumstances, does not believe that any long-lived assets are impaired at
December 31, 1996.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Improvements and replacements are
capitalized, while expenditures for maintenance and repairs are charged to
expense as incurred.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Accelerated depreciation methods are used for tax
purposes. The cost and accumulated depreciation of property sold or retired are
removed from the accounts and gains or losses, if any, are reflected in the
earnings for the period.
INTANGIBLE ASSETS
Intangible assets consist primarily of publication rights and trademarks
arising from acquisitions and goodwill. These assets are recorded at cost and
amortized using the straight-line method over their estimated useful lives
ranging from 7 to 20 years. The Company continually reviews the recoverability
of the carrying value of these assets using various factors, including the
methodology prescribed in SFAS No. 121.
ADVERTISING COSTS
Pursuant to Statement of Position (SOP) 93-7, REPORTING ON ADVERTISING
COSTS, the production costs of advertising are expensed in the period in which
the costs are incurred. Advertising expense was approximately $897,404 for the
year ended December 31, 1996. At December 31, 1996, approximately $62,112 of
advertising related costs were included in other current assets.
DEFERRED PRODUCT DEVELOPMENT COSTS
Certain expenses for books, primarily design and other pre-production costs,
are capitalized and charged to expense over the estimated product life as the
products are sold, which is typically three years.
INCOME TAXES
The Company has elected to be treated as a "S" Corporation for federal and
state income tax purposes.
Deferred income taxes are determined utilizing a liability method. This
method gives consideration to the future tax consequences associated with
differences between financial accounting and tax bases of assets and
liabilities. These differences relate to items such as depreciable properties.
This method gives immediate effect to changes in income tax laws upon enactment.
The income statement effect is derived from changes in deferred income taxes on
the balance sheet.
CONCENTRATION OF BUSINESS RISK
The Company is not subject to significant credit risk from concentration of
accounts receivable or other assets in any particular customer group, industry
segment or geographical region. The Company performs ongoing credit evaluation
of its customers and does not require any collateral for the amounts owed. The
customary payment term for most customers is 30 days. Occasionally, the Company
grants
F-57
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
extended terms to foreign or larger commercial customers with payment terms
ranging from 60 to 180 days.
The Company maintains its cash in demand deposit accounts which at times may
exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits. As of
December 31, 1996, the Company was not in excess of FDIC insurance limits.
2. INVENTORIES
Inventories at December 31, 1996 consists of finished goods of $100,559.
The Company regularly reviews its book inventories on a title-by-title basis
for salability. The costs of those books determined to have impaired or no sales
value are charged to income in the period of impairment.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1996:
<TABLE>
<S> <C>
Computer hardware and software............................. $ 57,289
Equipment.................................................. 5,489
Furniture and fixtures..................................... 7,831
---------
70,609
Less accumulated depreciation.............................. 8,450
---------
$ 62,159
---------
---------
</TABLE>
At December 31, 1996 depreciation expense charged to income was $3,450
4. OTHER ASSETS
At December 31, 1996 other assets consist of the following:
<TABLE>
<S> <C>
Note receivable, under capitalized lease................... $ 50,513
Note receivable............................................ 5,133
Goodwill................................................... 42,138
---------
$ 97,784
---------
---------
</TABLE>
Included as a charge to income at December 21, 1992 was amortization of
intangible assets of $2,218.
5. RELATED PARTY TRANSACTIONS
Because of related shareholders the Company and Perry Services, Inc., are
related parties. At December 31, 1996 the Company had advanced Perry Services,
Inc., $5,133 under an unsecured note receivable and $50,513 under a secured note
receivable.
The Company paid wages of $100,590 to shareholders.
6. SUBSEQUENT EVENT
On January 14, 1997, substantially all the assets of the Company as well as
publishing rights were purchased by Information Ventures LLC for cash
consideration of $2.6 million.
F-58
<PAGE>
[Graphic material, omitted in the electronic filing, depicts MicroPatent's
website.]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 5
Risk Factors.............................................................. 11
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Capitalization............................................................ 16
Dilution.................................................................. 17
Selected Historical Financial Data........................................ 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 20
Business.................................................................. 25
Management................................................................ 34
Certain Relationships and Related Transactions............................ 40
Security Ownership of Certain Beneficial Owners and Management............ 41
Description of Capital Stock.............................................. 42
Shares Eligible for Future Sale........................................... 44
Underwriting.............................................................. 45
Legal Matters............................................................. 47
Experts................................................................... 47
Additional Information.................................................... 48
Index to Financial Statements............................................. F-1
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
4,250,000 SHARES
[LOGO]
INFORMATION HOLDINGS INC.
COMMON STOCK
-------------------
P R O S P E C T U S
-------------------
MERRILL LYNCH & CO.
BT ALEX. BROWN
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered which will be paid
solely by the Company. All the amounts shown are estimates, except the
Commission registration fee and the NASD filing fee:
<TABLE>
<S> <C>
SEC Registration Fee............................................................ $ 23,790
NASD Fees....................................................................... 7,000
NYSE Listing Fee................................................................ 81,800
Transfer Agent and Registrar Fees and Expenses.................................. 2,500
Printing and Engraving Expenses................................................. 386,800
Legal Fees and Expenses......................................................... 350,000
Accounting Fees and Expenses.................................................... 500,000
Blue Sky Fees and Expenses...................................................... 5,000
Miscellaneous Expenses.......................................................... 3,110
---------
Total......................................................................... $1,360,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the DGCL empowers a Delaware corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of such corporation) by reason of the fact that such person is or was a
director, officer, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. A corporation may indemnify such person
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if he acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, has no
reasonable cause to believe his conduct was unlawful. A corporation may, in
advance of the final disposition of any civil, criminal, administrative or
investigative action, suit or proceeding, pay the expenses (including attorneys'
fees) incurred by any officer or director in defending such action, provided
that the director or officer undertake to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the
corporation.
A Delaware corporation may indemnify officers and directors in an action by
or in the right of the corporation to procure a judgment in its favor under the
same conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the corporation.
Where an officer or director is successful on the merits or otherwise in the
defense of any action referred to above, the corporation must indemnify him
against the expenses (including attorneys' fees) which he actually or reasonably
incurred in connection therewith. The indemnification provided is not deemed to
be exclusive of any other rights to which an officer or director may be entitled
under any corporation's bylaw, agreement, vote or otherwise.
The Company has adopted provisions in its Certificate of Incorporation and
Bylaws that provide that the Company shall indemnify its officers and directors
to the maximum extent permitted under the Act.
II-1
<PAGE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS (CONTINUED)
In addition, the Purchase Agreement filed as Exhibit 1.1 to the Registration
Statement provides for indemnification of the Company, its officers and its
directors by the Underwriters under certain circumstances.
The Company's officers and directors are also covered under the Company's
directors' and officers' insurance policy.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Pursuant to an Exchange Agreement, dated June 10, 1998, immediately prior to
the consummation of the Offering, Warburg Pincus, Mr. Slaine and Mr. Chippari
will contribute to the Company all of their direct or indirect equity interests
in the LLC in exchange for an aggregate of 12,200,000 shares of Common Stock.
See "Prospectus Summary--Background." The exact number of shares to be issued to
each of them will be based on the initial public offering price for the Common
Stock. Assuming an initial offering price of $15.50 per share, Warburg Pincus,
Mr. Slaine and Mr. Chippari will receive 9,682,380, 2,485,497 and 32,123 shares
of Common Stock, respectively.
Pursuant to Mr. Buda's employment agreement, upon consummation of the
Offering, the Company will issue to Mr. Buda the number of shares of Common
Stock obtained by dividing $250,000 by the initial public offering price per
share. See "Management--Employment Agreements."
In addition to any exemptions specified above, each of the foregoing
offerings was effected in reliance on Section 4(2) of the Securities Act as a
transaction not involving any public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NO. DESCRIPTION
- --------- ----------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Purchase Agreement*
3.1 Certificate of Incorporation*
3.2 Bylaws*
4.1 Specimen Common Stock certificate*
5.1 Opinion of Willkie Farr & Gallagher regarding the legality of Common Stock*
10.1 Employment Agreement, dated as of December 31, 1996, between Information Ventures LLC and Mason P. Slaine*
10.2 Employment Agreement, dated as of January 19, 1998, between Information Ventures LLC and Vincent A.
Chippari*
10.3 Employment Agreement, dated as of June 10, 1998, between CRC Press LLC and Dennis Buda*
10.4 Form of 1998 Stock Option Plan of the Company*
10.5 Form of Registration Rights Agreement among the Company, Warburg, Pincus Ventures, L.P., and Mason P.
Slaine*
</TABLE>
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
<TABLE>
<CAPTION>
NO. DESCRIPTION
- --------- ----------------------------------------------------------------------------------------------------------
<C> <S>
10.6 Asset Purchase Agreement, dated as of December 4, 1996, The Times Mirror Company, CRC Press, Inc. and
Information Ventures LLC*
10.7 Asset Purchase Agreement, dated as of January 8, 1997, among St. Lucie Press, Inc., St. Lucie Press (U.K.)
Ltd. and CRC Press LLC*
10.8 Asset Purchase Agreement, dated as of June 5, 1997, among Thomson Information Services Inc., Thomson
Licensing Corporation and CRC Press LLC*
10.9 Asset Purchase Agreement, dated as of July 2, 1997, among MicroPatent, Opus Publications, Inc., Dorinda
Developments, Inc., Susan Severtson, Robert Asleson and MicroPatent LLC*
10.10 Lease Agreement, dated December 1, 1980, between CRC Press, Inc. and Starkoff Associates*
10.11 Modification and Extension of Leases, dated January 1, 1994, between CRC Press, Inc. and Starkoff
Associates*
10.12 Lease Agreement, dated March 1, 1998, between R.P. Realty Company and MicroPatent LLC*
21.1 List of subsidiaries of the Company*
23.1 Consent of Ernst & Young LLP
23.2 Consent of Ernst & Young LLP
23.3 Consent of Ernst & Young LLP
23.4 Consent of Robert A. Young, CPA
23.5 Consent of Willkie Farr & Gallagher (included in Exhibit 5.1)*
24.1 Powers of Attorney (included in the signature pages of this registration statement)*
27.1 Financial Data Schedule*
</TABLE>
- ------------------------
* Previously filed.
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts, Information Ventures LLC
Schedule II--Valuation and Qualifying Accounts, CRC Press, Inc.
ITEM 17. UNDERTAKINGS
(1) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Purchase Agreement certificates for
the Common Stock in such denominations and registered in such names as required
by the Underwriters to permit prompt delivery to each purchaser.
(2) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to its Bylaws, the Purchase Agreement or otherwise, the
Registrant has been advised that, in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling
II-3
<PAGE>
ITEM 17. UNDERTAKINGS (CONTINUED)
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(3) The Registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to be signed on its behalf by the
undersigned, thereunto duly authorized, in New York, New York on August 4, 1998.
<TABLE>
<S> <C> <C>
INFORMATION HOLDINGS INC.
By: /s/ VINCENT A. CHIPPARI
------------------------------------------
Vincent A. Chippari
EXECUTIVE VICE PRESIDENT
AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------- ----------------------
<S> <C> <C>
* President, Chief Executive
- ------------------------------------------- Officer and Director (Principal August 4, 1998
Mason P. Slaine Executive Officer)
Executive Vice President and
/s/ VINCENT A. CHIPPARI Chief Financial Officer
- ------------------------------------------- (Principal Accounting Officer August 4, 1998
Vincent A. Chippari and Principal Financial
Officer)
*
- ------------------------------------------- Director August 4, 1998
Michael E. Danziger
*
- ------------------------------------------- Director August 4, 1998
David R. Haas
*
- ------------------------------------------- Director August 4, 1998
Sidney Lapidus
*
- ------------------------------------------- Director August 4, 1998
David E. Libowitz
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ VINCENT A. CHIPPARI
-------------------------
Attorney-in-fact
</TABLE>
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Auditors............................................................................. S-2
Schedule II Valuation and Qualifying Accounts, Information Ventures LLC.................................... S-3
Report of Certified Public Accountants..................................................................... S-4
Schedule II Valuation and Qualifying Accounts, CRC Press, Inc.............................................. S-5
</TABLE>
S-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Members of
Information Ventures LLC
We have audited the consolidated financial statements of Information
Ventures LLC as of December 31, 1997 and March 31, 1998 and have issued our
reports thereon dated April 20, 1998 and June 8, 1998, respectively, included
elsewhere in this Registration Statement. Our audits also included the financial
statement schedule listed in Item 16(b) of this Registration Statement. This
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits.
In our opinion the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
New York, New York
June 8, 1998
S-2
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
INFORMATION VENTURES LLC
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COST AND OTHER END OF
DESCRIPTION (IN THOUSANDS) OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR
- ---------------------------------------------------- ------------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts and returns......... $ 0 1,049 -- 246 $ 803
----- ----------- ----- ----- -----
----- ----------- ----- ----- -----
THREE MONTHS ENDED MARCH 31, 1998
Allowance for doubtful accounts and returns......... $ 803 69 -- 96 $ 776
----- ----------- ----- ----- -----
----- ----------- ----- ----- -----
</TABLE>
S-3
<PAGE>
REPORT OF CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholder
of CRC Press, Inc.
We have audited the financial statements of CRC Press, Inc. as of December
31, 1995 and 1996 and have issued our report thereon dated May 29, 1998,
included elsewhere in this Registration Statement. Our audits also included the
financial statement schedule listed in Item 16(b) of this Registration
Statement. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
West Palm Beach, Florida
May 29, 1998
S-4
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
CRC PRESS, INC.
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COST AND OTHER END OF
DESCRIPTION (IN THOUSANDS) OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR
- ---------------------------------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts and returns......... $ 1,444 3,203 -- 366 $ 4,281
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts and returns......... $ 4,281 207 -- 1,509 $ 2,979
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
S-5
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated June 8, 1998, with respect to the financial
statements of MicroPatent for the years ended June 30, 1996 and 1997, in
Amendment No. 2 to the Registration Statement (Form S-1 No. 333-56665) and
related Prospectus of Information Holdings Inc. for the registration of its
Common Stock.
/s/ Ernst & Young LLP
New York, New York
August 4, 1998
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated May 29, 1998, with respect to the consolidated
financial statements of CRC Press, Inc. for the years ended December 31, 1995
and 1996, in Amendment No. 2 to the Registration Statement (Form S-1 No.
333-56665) and related Prospectus of Information Holdings Inc. for the
registration of its Common Stock.
/s/ Ernst & Young LLP
West Palm Beach, Florida
August 3, 1998
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated April 20, 1998 and June 8, 1998, with respect to
the consolidated financial statements of Information Ventures LLC, in Amendment
No. 2 to the Registration Statement (Form S-1 No. 333-56665) and related
Prospectus of Information Holdings Inc. for the registration of its Common
Stock.
/s/ Ernst & Young LLP
New York, New York
August 4, 1998
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
I consent to the use of my report dated June 5, 1998, related to the financial
statements of St. Lucie Press Corporation, Inc., as of December 31, 1996 and for
the year then ended, included in Amendment No. 2 to the Registration Statement
(Form S-1, No. 333-56665) to be filed by Information Holdings Inc. on or about
August 4, 1998, and to the reference to my firm under the heading "Experts" in
the prospectus.
/s/ Robert A. Young, CPA
West Palm Beach, Florida
August 4, 1998
