<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 1-10263
THE OFFICIAL INFORMATION COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 73-1341805
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
250 West 57th Street, Suite 2421, New York, New York 10019
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 247-5160
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OR 12(G) OF THE ACT: NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
As of May 10, 1999, 112,367 shares of common stock were outstanding, of
which 72,367 were owned by VS&A T/SF, L.L.C. 34,541, 3,831 and 1,628 were owned
by Fir Tree Value Fund LP., Fir Tree Institutional Value Fund L.P. and Fir Tree
Value Partners L.D.C., respectively.
<PAGE>
PART I
Item 1. Financial Information
<PAGE>
THE OFFICIAL INFORMATION COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS MARCH 31, DECEMBER 31,
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,124 3,878
Accounts receivable, less reserve for doubtful accounts 18,570 17,555
Inventories 235 231
Deferred tax assets 230 260
Notes receivable and other current assets 2,588 1,726
-------- ------
Total current assets 25,747 23,650
-------- ------
Notes receivable and investments 287 411
-------- ------
Property, plant and equipment, at cost: 22,568 21,609
Less accumulated depreciation 13,539 12,584
-------- ------
Property, plant and equipment, net 9,029 9,025
-------- ------
Deferred tax assets 1,185 1,185
Intangibles and other assets, net 40,770 40,263
-------- ------
$ 77,018 74,534
======== ======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
THE OFFICIAL INFORMATION COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) MARCH 31, DECEMBER 31,
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
Current liabilities:
Accounts payable $ 2,736 2,967
Accrued liabilities 12,604 9,984
Deferred revenue 7,091 6,680
Current portion of long-term debt 1,309 1,367
--------- --------
Total current liabilities 23,740 20,998
--------- --------
Long-term debt 98,820 99,385
Other liabilities 1,318 1,353
Minority interest 7,553 6,991
Stockholders' equity (deficit):
Common stock, $.10 par value, 150,000 shares authorized at
March 31, 1999 and December 31, 1998, respectively 42 42
Additional paid-in capital 48,197 48,197
Retained earnings 11,824 12,044
--------- --------
60,063 60,283
Treasury stock (114,476) (114,476)
--------- --------
Total stockholders' equity (deficit) (54,413) (54,193)
--------- --------
$ 77,018 74,534
========= ========
</TABLE>
4
<PAGE>
THE OFFICIAL INFORMATION COMPANY
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net Revenues
Operating revenues $ 23,182 19,063
Interest and other income 5 112
Gain on sale of assets, net - 48
-------- ------
Total revenues 23,187 19,223
-------- ------
Costs and expenses:
Operating costs 10,578 9,383
General and administrative 7,669 6,165
Interest 2,653 2,692
Depreciation and amortization 1,825 1,313
-------- ------
22,725 19,553
-------- ------
Income (loss) before minority interest and income taxes 462 (330)
Minority interest in earnings of consolidated entity (562) (146)
Income tax (expense) benefit (120) 22
-------- ------
Net loss $ (220) (454)
======== ======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
THE OFFICIAL INFORMATION COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (220) (454)
Adjustments to reconcile loss to net cash provided by
operating activities:
Depreciation and amortization 1,825 1,313
Gain on sale of assets - (48)
Minority interest in earnings of consolidated
entity 562 146
Deferred income taxes 30 64
Changes in assets and liabilities 527 221
------- ------
Total adjustments 2,944 1,696
------- ------
Net cash provided by operating activities 2,724 1,242
------- ------
Cash flows from investing activities:
Collections on contract and notes receivable 9 14
Capital expenditures (1,167) (1,245)
Proceeds from the sale of assets - 303
Payments for acquisition, net of cash acquired (668) -
Payments on deferred contract liabilities (42) (103)
------- ------
Net cash used in investing
Activities (1,868) (1,031)
------- ------
Cash flows from financing activities:
Principal payments of long-term debt (611) (326)
Minority interest - 4,500
Repurchase of common stock - (3,500)
------- ------
Net cash (used in) provided by financing activities (611) 674
------- ------
Net increase in cash and cash equivalents 245 885
Cash and cash equivalents at beginning of period 3,878 10,564
------- ------
Cash and cash equivalents at end of period $ 4,124 11,449
======= ======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
6
<PAGE>
THE OFFICIAL INFORMATION COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated condensed financial statements of
The Official Information Company ("TOIC" or the "Company"), include the
accounts of TOIC, its wholly-owned subsidiaries, TOIC Holdings, LLC
("Holdings LLC") and the limited liability companies wholly owned by
Holdings LLC (the "Subsidiary LLCs"). Through its priority interest in
Holdings LLC, TOIC has voting, operational and management control of
Holdings LLC and the Subsidiary LLCs and, accordingly, the financial
statements of these entities are consolidated herein. Income allocated to
TOIC from Holdings LLC is the lesser of net earnings or the preferred
return, such amount being defined as an 11% cumulative annual compounded
return on TOIC's undistributed capital in each, respectively. Losses are
allocated first to the common members of Holdings LLC. TOIC and Holdings LLC
share common management, resources and control. Prior to the drop down
restructuring (see Note B) in February 1998, the operations of Holdings LLC
and the Subsidiary LLCs were wholly-owned by TOIC.
INTERIM REPORTING. The accompanying interim consolidated condensed financial
statements reflect all adjustment which, in the opinion of management are
considered necessary for a fair presentation of the interim periods
presented. All such adjustments are of a normal recurring nature. Due to the
seasonal nature of the business, the results of operations for the three
months ended March 31, 1999 are not necessarily indicative of the results to
be expected for the year ending December 31, 1999. For further information,
refer to the consolidated financial statements and related notes thereto
included in TOIC's annual report on Form 10-K for the year ended December
31, 1998.
RECLASSIFICATIONS
Certain 1998 account balances have been reclassified to conform to the 1999
consolidated financial statement presentation.
B. RECAPITALIZATION
During 1997, the Company adopted a two phased leveraged recapitalization
plan of the Company's ownership and capital structure. Phase I included a
tender offer for substantially all of TOIC's outstanding common stock;
selling newly-issued common stock to a new investor, VS&A-T/SF, L.L.C. and
repurchasing substantially all of the outstanding stock options. Phase II
was completed on February 27, 1998 and included a reverse stock split to
eliminate all shares of the Company's common stock other than those owned by
the Equity Investors (as defined below) and a restructuring of the Company
and its subsidiaries. As of March 31, 1999, VS&A-T/SF and entities
controlled by Fir Tree Partners (together referred to as the Equity
Investors) own approximately 64% and 36% of TOIC's common stock,
respectively.
7
<PAGE>
The reverse stock split provided that each then outstanding share of common
stock other than treasury stock and stock owned by the Equity Investors was
converted into the right to receive $40.25 for each pre-split share.
In the drop down restructuring, TOIC and certain of its wholly owned
subsidiaries contributed substantially all of the assets and liabilities of
TOIC's Business to Business Communication Segment into Holdings LLC in
exchange for a $45 million priority equity interest which carries an 11%
annual distribution. Simultaneous with this event, Holdings LLC contributed
the assets received to the Subsidiary LLCs in exchange for a 99% interest.
TOIC also purchased a priority interest in another limited liability company
("Operating LLC"), which held the remaining 1% interest in the Subsidiary
LLCs. The Equity Investors purchased common equity interests in Holdings LLC
and Operating LLC for approximately $4.5 million in the same proportion as
their ownership of TOIC. Effective as of December 31, 1998, Operating LLC
merged with and into Holdings LLC, with Holdings LLC being the surviving
entity. TOIC has voting, operational and management control of Holdings LLC.
C. DEBT GUARANTORS
Atwood Publishing LLC, Galaxy Information Services LLC, GEM Communications
LLC, Holdings LLC (collectively the "LLC Guarantors"), TISI and Corsearch,
(collectively, the "Subsidiary Guarantors" and, together with the LLC
Guarantors, the "Guarantors") are included in the consolidated results of
the Company. Because the Company, directly or indirectly, owns all of the
voting interests in the LLC Guarantors, the LLC Guarantors are considered
wholly owned subsidiaries of the Company as defined by Regulation S-X. The
Company indirectly owns all of the voting shares of the Subsidiary
Guarantors.
Each of the Guarantors jointly and severally guarantee all of the Company's
debt, on a full and unconditional basis. For accounting purposes, all
Guarantors are consolidated. Separate financial statements and other
disclosures concerning the Guarantors are not presented because the
Company's management has determined that they are not material to investors.
The Senior Credit Facility contains covenants, among others, restricting the
ability of the Company and the Guarantors to: (i) declare dividends or
redeem or purchase capital stock; (ii) prepay, redeem or purchase debt;
(iii) incur liens and engage in sale-leaseback transactions; (iv) make loans
and investments; (v) issue more debt; (vi) amend or otherwise alter debt and
other material agreements; (vii) make capital expenditures; (viii) engage in
mergers, acquisitions and asset sales; (ix) transact with affiliates and (x)
alter its lines of business. The net assets of the Guarantors approximated
$58,412,000 as of March 31, 1999.
Included in the 1999 financial results of the LLC Guarantors are the three
months activity of Atwood Publishing LLC, Galaxy Information Services LLC,
GEM Communications LLC and Holdings LLC. Included in the 1998 financial
results of the Subsidiary Guarantors are the two months of operations of
Atwood Publishing, Inc., Galaxy Information Services, Inc., GEM
Communications, Inc. and the three months results of TISI and Corsearch.
8
<PAGE>
The following are condensed consolidating financial statements of The
Official Information Company and the Guarantors for each period presented:
<TABLE>
MARCH 31,1999
BALANCE SHEET
(UNAUDITED)
<CAPTION>
ASSETS
TOIC LLC SUBSIDIARY SUBTOTAL TOIC
CORPORATE GUARANTORS GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Current assets $ 3,241 $ 10,417 $ 12,089 $ 22,506 $ -- $ 25,747
Notes receivable and
investments 214 73 -- 73 -- 287
Investment in subsidiaries
& affil 51,316 -- 7,096 7,096 (58,412) --
PPE-Net 215 4,545 4,269 8,814 -- 9,029
Deferred tax assets 1,185 -- -- -- -- 1,185
Intangibles and other
assets-net 3,320 16,410 21,040 37,450 -- 40,770
---------------------------------------------------------------------------------------
Total assets $ 59,491 $ 31,445 $ 44,494 $ 75,939 $(58,412) $ 77,018
======== ======== ======== ======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities $ 6,928 $ 10,744 $ 6,068 $ 16,812 $ -- $ 23,740
Long term debt 98,583 -- 237 237 -- 98,820
Other liabilities 840 104 374 478 -- 1,318
Minority interest 7,553 -- -- -- -- 7,553
Total shareholders' equity
(deficit) (54,413) 20,599 37,815 58,412 (58,412) (54,413)
---------------------------------------------------------------------------------------
Total liabilities and
Shareholders' equity $ 59,491 $ 31,445 $ 44,494 $ 75,939 $(58,412) $ 77,018
======== ======== ======== ======== ======== ========
<CAPTION>
THREE MONTHS ENDED MARCH 31,1999
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
TOIC LLC SUBSIDIARY SUBTOTAL TOIC
CORPORATE GUARANTORS GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Total revenue $ 5 $ 13,226 $ 9,956 $ 23,182 $ -- $ 23,187
Costs and expenses:
Operating costs -- 7,166 3,412 10,578 -- 10,578
General &admin 890 3,437 3,341 6,778 -- 7,669
Interest 2,632 3 18 21 -- 2,653
Deprec.& amort 126 823 876 1,699 -- 1,825
---------------------------------------------------------------------------------------
Total costs 3,648 11,430 7,647 19,077 -- 22,725
Income (loss) before income
taxes (3,642) 1,796 2,309 4,105 -- 462
Minority interest -- -- -- -- (562) (562)
Income tax expense (120) -- -- -- -- (120)
Earnings (losses) of
subsidiaries 1,233 -- -- -- (1,233) --
---------------------------------------------------------------------------------------
Net Income (loss) $ (2,530) $ 1,796 $ 2,309 $ 4,105 $(1,795) $ (220)
======== ======== ======== ======== ======= ========
</TABLE>
9
<PAGE>
<TABLE>
THREE MONTHS ENDED MARCH 31,1999
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<CAPTION>
TOIC LLC SUBSIDIARY SUBTOTAL TOIC
CORPORATE GUARANTORS GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $(2,530) $ 1,796 $ 2,309 $ 4,105 $(1,795) $ (220)
Adjustments to reconcile
net income (loss) to net
cash provided by operating
activities, net 159 820 875 1,696 562 2,417
Changes in assets and
liabilities, net 3,400 (1,584) (2,522) (4,105) 1,233 527
--------------------------------------------------------------------------------------
Net cash provided by
operating activity 1,029 1,032 663 1,695 -- 2,724
Cash flows from investing
activities:
Collections on
Contract & notes
Receivable 9 -- -- -- -- 9
Capital expenditures (37) (631) (499) (1,130) -- (1,167)
Proceed from the
Sale of assets -- -- -- -- -- --
Payments for
Acquisitions, net of
Cash acquired -- (668) -- (668) -- (668)
Payments on
Deferred contract
Liabilities (42) -- -- -- -- (42)
--------------------------------------------------------------------------------------
Net cash used in by
investing activity (70) (1,299) (499) (1,798) -- (1,868)
Cash flows from financing
activities:
Principal payments
of long-term debt (452) -- (159) (159) -- (611)
Debt financing cost -- -- -- -- -- --
Retirement of bonds -- -- -- -- -- --
Minority interest -- --
Repurchase of -- -- -- -- --
Common stock --
--------------------------------------------------------------------------------------
Net cash used in by
financing activities (452) -- (159) (159) -- (611)
--------------------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents 507 (267) 5 (262) -- 245
Cash equivalents at
beginning of period 1,078 2,339 461 2,800 -- 3,878
--------------------------------------------------------------------------------------
Cash equivalents at end of
period $ 1,585 $ 2,072 $ 467 $ 2,539 $ -- $ 4,124
======= ======= ======= ======= ======= =======
</TABLE>
10
<PAGE>
DECEMBER 31, 1998
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
TOIC LLC SUBSIDIARY SUBTOTAL TOIC
CORPORATE GUARANTORS GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Current assets $ 9,973 $ 4,337 $ 9,340 $ 13,677 $ -- $ 23,650
Notes receivable and
investments (4,727) 5,138 -- 5,138 -- 411
Investment in subsidiaries
& affil 46,694 517 7,096 7,613 (54,307) --
PPE-Net 193 4,462 4,370 8,832 -- 9,025
Deferred tax assets 1,185 -- -- -- -- 1,185
Intangibles and other
assets-net 3,417 15,646 21,200 36,846 -- 40,263
-------- -------- -------- -------- -------- --------
Total assets $ 56,735 $ 30,100 $ 42,006 $ 72,106 $(54,307) $ 74,534
======== ======== ======== ======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities $ 4,529 $ 10,673 $ 5,796 $ 16,469 $ -- $ 20,998
Long term debt 99,043 -- 342 342 -- 99,385
Other liabilities 882 107 364 471 -- 1,353
Minority interest 6,474 517 -- 517 -- 6,991
Total shareholders' equity
(deficit) (54,193) 18,803 35,504 54,307 (54,307) (54,193)
-------- -------- -------- -------- -------- --------
Total liabilities and
Shareholders' equity $ 56,735 $ 30,100 $ 42,006 $ 72,106 $(54,307) $ 74,534
======== ======== ======== ======== ======== ========
</TABLE>
11
<PAGE>
<TABLE>
THREE MONTHS ENDED MARCH 31,1998
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<CAPTION>
TOIC LLC SUBSIDIARY SUBTOTAL TOIC
CORPORATE GUARANTORS GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Total revenue $ 292 $ 4,537 $ 14,442 $ 18,979 $ (48) $ 19,223
Costs and expenses:
Operating costs -- 2,975 6,408 9,383 -- 9,383
General &admin 402 934 4,829 5,763 -- 6,165
Interest 2,666 -- 26 26 -- 2,692
Deprec.& amort 109 149 1,055 1,204 -- 1,313
-------- -------- -------- -------- -------- --------
Total costs 3,177 4,058 12,318 16,376 -- 19,553
Income (loss) before income
taxes (2,885) 479 2,124 2,603 (48) (330)
Minority interest -- (6) -- (6) (140) (146)
Income tax (expense) benefit -- -- (14) (14) 36 22
Earnings (losses) of
subsidiaries -- 6 -- 6 (6) --
-------- -------- -------- -------- -------- --------
Net Income (loss) $ (2,885) $ 479 $ 2,110 $ 2,589 $ (158) $ (454)
======== ======== ======== ======== ======== ========
</TABLE>
12
<PAGE>
<TABLE>
THREE MONTHS ENDED MARCH 31,1998
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<CAPTION>
TOIC LLC SUBSIDIARY SUBTOTAL TOIC
CORPORATE GUARANTORS GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $ (2,885) $ 479 $ 2,110 $ 2,589 $ (158) $ (454)
Adjustments to reconcile
net income (loss) to net
cash provided by operating
activities, net 41 239 1,054 1,294 140 1,475
Changes in assets and
liabilities, net 3,453 (487) (1,788) (2,275) (958) 221
-------- -------- -------- -------- -------- --------
Net cash (used in) provided
by operating activity 610 231 1,378 1,609 (976) 1,242
Cash flows from investing
activities:
Collections on
Contract & notes
Receivable 14 -- -- -- -- 14
Capital expenditures (34) (744) (467) (1,211) -- (1,245)
Proceed from the
Sale of assets 303 -- -- -- -- 303
Payments for
Acquisitions, net of
Cash acquired -- -- -- -- -- --
Payments on
Deferred contract
Liabilities (103) -- -- -- -- (103)
-------- -------- -------- -------- -------- --------
Net cash provided by (used
in) by investing activity 180 (744) (467) (1,211) -- (1,031)
Cash flows from financing
activities:
Principal payments
of long-term debt (326) -- -- -- -- (326)
Debt financing cost -- -- -- -- -- --
Retirement of bonds -- -- -- -- --
Minority interest 4,500 -- 4,500
Repurchase of
Common stock (3,500) -- -- -- -- (3,500)
-------- -------- -------- -------- -------- --------
Net cash provided by
financing activities 674 -- -- -- -- 674
-------- -------- -------- -------- -------- --------
Net increase (decrease) in
cash and cash equivalents 1,463 (513) 911 398 (976) 885
Cash equivalents at
beginning of period 7,541 2,169 854 3,023 -- 10,564
-------- -------- -------- -------- -------- --------
Cash equivalents at end of
period $ 9,004 $ 1,656 $ 1,765 $ 3,421 $ (976) $ 11,449
======== ======== ======== ======== ======== ========
</TABLE>
13
<PAGE>
D. BUSINESS SEGMENT INFORMATION
The FASB issued Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information (SFAS
No. 131) in June 1997. SFAS 131 supersedes FASB Statement No. 14, Financial
Reporting for Segments of a Business Enterprise, but retains the requirement
to report information about major customers. SFAS 131 replaces the "industry
segment" concept of Statement 14 with a "management approach" concept as the
basis for identifying reportable segments. The management approach is based
on the way that management organizes the segments within the enterprise for
making operating decisions and assessing performance. Consequently, the
segments are evident from the structure of the enterprise's internal
organization. It focuses on financial information that an enterprise's
decision makers use to make decisions about the enterprise's operating
matters. The Company adopted SFAS 131 in 1998.
Operations of the Company are conducted primarily through two business
segments primarily within the continental United States. These segments and
the primary operations of each are as follows:
BUSINESS TO BUSINESS COMMUNICATIONS
Publisher (Atwood) of various convention/trade show publications and a trade
journal, provider (Galaxy) of registration services, exhibitor marketing and
information services all to the exposition industry and owner (GEM) of the
World Gaming Congress, a trade show catering to the legalized gaming
industry, and the publisher of several trade magazines and newsletters.
INFORMATION SERVICES
Provider (TISI) of pre-employment screening information including motor
vehicle reports, truck driver employment information, worker's compensation
information, credit reports, criminal record reports and other
pre-employment screening information and services to the trucking and other
industries and motor vehicle reports to the insurance industry. Provider
(Corsearch) of trademark research and information services, using both
proprietary and public databases.
Corporate revenues consist principally of revenues from interest,
covenants-not-to-compete and miscellaneous non-operating income. Operating
profit is net revenues less applicable operating expenses and segment
general and administrative expenses. Corporate general and administrative
expenses are generally not allocated to each segment.
Identifiable assets by segment are those assets that are used in the
operations of each segment. Corporate assets consist principally of cash and
cash equivalents, notes receivable, prepaid expenses and corporate
furniture, fixtures and equipment. Capital expenditures include additions to
property, plant and equipment, goodwill and truck driver employment
information files.
During the first quarter of 1999 and 1998, no customer represented ten
percent or more of the Company's revenue or operating profit.
14
<PAGE>
Summarized financial information by industry segment is as follows:
<TABLE>
<CAPTION>
For the three months
ended March 31,
1999 1998
---- ----
(In thousands)
<S> <C> <C>
NET REVENUES FROM SALES TO UNAFFILIATED CUSTOMERS:
Business to Business Communications $ 13,226 10,237
Information Services 9,956 8,826
Corporate and other 5 160
-------- --------
$ 23,187 19,223
======== ========
OPERATING INCOME (LOSS):
Business to Business Communications $ 1,798 653
Information Services 2,328 2,060
-------- --------
Operating profit from segments 4,126 2,713
Corporate expenses, net (1,011) (351)
Interest expense (2,653) (2,692)
-------- --------
Income (loss) before income taxes $ 462 (330)
======== ========
IDENTIFIABLE ASSETS AT MARCH 31 AND DECEMBER 31:
Business to Business Communications $ 31,445 34,206
Information Services 37,398 33,804
Corporate 8,175 6,524
-------- --------
$ 77,018 74,534
======== --------
DEPRECIATION AND AMORTIZATION:
Business to Business Communications $ 823 481
Information Services 876 723
Corporate 126 109
-------- --------
$ 1,825 1,313
======== ========
CAPITAL EXPENDITURES:
Business to Business Communications $ 499 744
Information Services 631 467
Corporate 37 34
-------- --------
$ 1,167 1,245
======== ========
</TABLE>
E. SUBSEQUENT EVENT
During the first quarter of 1999, the Company executed an asset purchase
agreement to acquire, through a subsidiary, substantially all of the assets
and liabilities of International Travel Service, Inc., for approximately
$22.7 million. This transaction was consumated as of April 30, 1999. This
transaction will be accounted for as a purchase.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
OVERVIEW
The Company is a diversified business media company which principally
operates two lines of business: (i) business and professional information
services and (ii) business to business communications, publishing and related
service.
Information Services provides specialized information and database
management services to selected market segments. Total Information Services,
Inc. ("TISI") is a leading supplier of pre-employment screening information to
the trucking industry and a provider of risk assessment and underwriting
information to agents, underwriters and others in the insurance industry.
CORSEARCH, Inc. acquired by the Company in 1996, is the second largest supplier
in the United States of trademark and trade name searches and information
research.
The Company's Business to Business Communications operations are conducted
through several individual businesses, each of which is characterized by leading
competitive positions within specialized market niches. Business to Business
Communications includes: (i) Atwood Publishing, LLC and its affiliates
(collectively, "Atwood"), the largest domestic independent publisher of
exposition and association related publications and directories; (ii) Galaxy
Information Services, LLC ("Galaxy"), the largest independent provider of trade
show and convention registration, exhibitor information and "lead" management
services in the United States and (iii) GEM Communications, LLC and its
affiliates (collectively, "GEM"), the owner and operator of the World Gaming
Congress, the world's largest trade show catering to the legalized gaming
industry and the publisher of trade magazines directed to the legalized gaming
industry, principally IGWB, the leading gaming industry magazine, and Casino
Executive, the major magazine for casino management.
Effective January 31, 1998, the Company acquired the remaining interests in
Casino Publishing Company. In June, 1998, GEM acquired all the assets and rights
to the International Gaming Business Exposition, a conference and trade show
serving the casino gaming industry. On September 1, 1998, GEM acquired all the
stock of UK based InterGame Limited, the publisher of the leading series of
publications for the international coin-operated amusement and gaming machines
and amusement park businesses. During 1998, GEM had a 49% interest in Gaming for
Africa Expo, a gaming trade show and conference held in South Africa, and Gaming
for Africa, the leading trade magazine for gaming in Sub-Saharan Africa.
Effective as of January 1, 1999, GEM acquired, in a series of transactions, the
business of Gaming for Africa Expo and Gaming for Africa for approximately
$668,000. The investment had previously been accounted for under the equity
method.
RESULTS OF OPERATION
Revenues. Revenues for the three months ended March 31, 1999 totaled $23.2
million, an increase of $4.0 million (21%) over the first quarter of 1998. The
Business to Business Communications segment Revenue totaled $13.2 million for
the three months ended March 31, 1999, an increase of $3.0 million (29%) over
the first quarter 1998. At Galaxy, increased registration and exhibitor volume
and the growth of new lead management and interactive services contributed $1.4
million to the revenue growth. At Atwood, growth in new directories business, a
strong increase in new digital products and expansion of proprietary publishing
led to a 11% increase in revenue in the first quarter of 1999 compared with the
first quarter
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of 1998. The inclusion of InterGame ($863,000) and Gaming for Africa ($49,000)
which were not included in consolidated 1998 results until September 1, 1998 and
January 1, 1999, respectively, contributed to a 78% increase in revenue at GEM.
The Information Services segment produced first quarter 1999 revenue of
$10.0 million, an increase of $1.1 million or 13% over the first quarter of
1998. TISI's first quarter 1999 revenue increased 17% over the first quarter of
1998, due principally to increased criminal record volume and employment history
searches, as compared to the prior year and launch of World Gaming Network
(WGN). WGN provides pre-employment screening services to the casino gaming
industry based on the successful DAC model. TISI's Crimesearch affiliate,
acquired in 1996, experienced a 90% increase in first quarter revenue reflecting
growing demand for criminal records. Corsearch revenue remained flat with an
improved mix of searches and price increases offset by lower search volume.
Operating Costs. Operating Costs increased $1.2 million (13%) during the
first quarter of 1999 compared with the same period in 1998. Business to
Business Communications first quarter 1999 Operating Costs increased $893,000
(14%) on 39% higher revenue compared with first quarter 1998. Growth was
attributable principally to increased volume at Atwood and Galaxy and the
inclusion of InterGame and Gaming for Africa, which were not included in
consolidated 1998 GEM results until September 1, 1998 and January 1, 1999
respectively.
Information Services Operating Costs increased 10% during the first quarter
of 1999 compared with the first quarter of 1998. The increase was attributable
principally to the expansion of research capacity at Corsearch and higher
criminal record and pre-employment screening volume at TISI.
General and Administrative Expenses. General and Administrative Expenses
increased $1.5 million (24%) during the first quarter of 1999 compared with the
first quarter of 1998. Higher general and administrative expense was primarily
due to the inclusion of InterGame and Gaming for Africa, increased staff to
support volume growth and new product development at TISI and corporate business
development costs.
Depreciation and Amortization. Depreciation and Amortization increased
$512,000 (39%) during the first quarter of 1999 compared with the same period in
1998. The increase resulted principally from 1998 capital expenditure to acquire
data, expand exposition and trade show capacity and upgrade information
technology.
Interest Expense. Interest Expense totaled $2.7 million for the three months
ended March 31, 1999 and 1998, respectively. Interest expense results primarily
from debt incurred in connection with the Recapitalization.
EBITDA. EBITDA totaled $4.9 million during the first quarter of 1999
compared with $3.7 million during the same 1998 period, an increase of $1.3
million (34%). The increase resulted from higher EBITDA in the Business to
Business Communications segment (up $1.5 million - 131%) and the Information
Services segment (up $420,000 - 15%), offset partially by higher corporate
business development expenses and lower other income.
EBITDA, as presented, represents operating income plus depreciation and
amortization. EBITDA is included because management understands that such
information is considered by certain investors to be an additional basis on
which to evaluate the Company's ability to pay interest expense, repay debt and
make capital expenditures. Excluded from EBITDA are interest expenses, income
taxes, depreciation and amortization, unusual gains, minority interest in
consolidated subsidiaries, discontinued operations, net and
17
<PAGE>
extraordinary loss, net of tax, each of which can significantly affect the
Company's results of operations and liquidity and should be considered in
evaluating the Company's financial performance. EBITDA is not intended to
represent and should not be considered more meaningful than, or an alternative
to, measures of operating performance as determined in accordance with generally
accepted accounting principles.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the Recapitalization, the Company: (i) borrowed $13
million under a $25.0 million revolving senior credit facility (the "Senior
Credit Facility") with First Union National Bank ("FUNB"); (ii) issued $80.0
million aggregate principal amount of notes pursuant to a facility (the "Bridge
Financing Facility") provided by First Union Corporation; and (iii) received
$40.0 million of equity contributions (the "Equity Contributions") from
VS&A-T/SF and Fir Tree. On October 29, 1997, the Company completed the private
sale to First Union Capital Markets Corp. (the "Initial Purchaser") of $100.0
million principal amount of Senior Subordinated Notes due 2007 (the "Old Notes")
at a price of 97% of the principal amount thereof. The Initial Purchaser resold
the Old Notes to a limited number of qualified institutional buyers at an
initial price to investors of 100% of the principal amount thereof, with net
proceeds to the Company of $97.0 million (the "Offering"). The Offering was a
private placement transaction exempt from the registration requirements of the
Securities Act pursuant to Rule 144A and Section 4 thereof. The net proceeds of
the Notes sold pursuant to the Offering were applied to repay indebtedness
incurred in connection with the Recapitalization under the Senior Credit
Facility and the Bridge Financing Facility. On February 10, 1998, the Company
offered to exchange up to $100,000,000 aggregate principal amount of Old Notes
for up to an equal aggregate principal amount of new notes (the "New Notes" and,
together with the Old Notes, the "Notes")). The New Notes are obligations of the
Company entitled to the benefits of the Indenture (the "Indenture") relating to
the Old Notes and the form and terms of the New Notes are identical in all
material respects to the form and terms of the Old Notes except that the New
Notes have been registered under the Securities Act and do not contain terms
with respect to transfer restrictions. On September 1, 1998 the Company
purchased $1.5 million of the New Notes at a price below par.
The Company's principal sources of funds are anticipated to be cash flows
from operating activities and borrowings under the Senior Credit Facility. Based
upon the successful implementation of management's business and operating
strategy, the Company believes that these funds will provide the Company with
sufficient liquidity and capital resources for the Company to meet its current
and future financial obligations, including the payment of principal and
interest on the Notes, as well as to provide funds for the Company's working
capital, capital expenditures and other needs. No assurance can be given,
however, that this will be the case. As of March 31, 1999, the Company had $24.8
million of availability under the Senior Credit Facility. The Company's future
operating performance and ability to service or refinance the Notes and to
repay, extend or refinance the Senior Credit Facility will be subject to future
economic conditions and to financial, business and other factors, many of which
are beyond the Company's control. In addition, any future acquisitions by the
Company would likely require additional financing.
In the event of a Change of Control (as defined in the Indenture), the
Company will be required to make an offer for cash to repurchase the Notes at
101% of the principal amount thereof, plus accrued and unpaid interest and
Additional Interest (as defined in the Indenture), if any, thereon to the
repurchase date. Certain events involving a Change of Control would result in an
event of default under the Senior Credit Facility or other indebtedness of the
Company that may be incurred in the future. Moreover, the exercise by the
holders of the Notes of their right to require the Company to repurchase the
Notes may cause an event of default under the Senior Credit Facility or such
other indebtedness, even if the Change of Control does not. Finally, there can
be no assurance that the Company will have the financial resources necessary to
repurchase the Notes upon a Change of Control.
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<PAGE>
Capital Expenditures. Management anticipates that capital expenditures in
1999 will be approximately $7.0 million. The primary capital expenditures will
be for computer equipment and software, "reader boxes" at Galaxy and database
acquisitions at TISI and Corsearch. TISI continues to offer its customers in the
trucking industry credits for providing employment information to be utilized in
its database, which credits can be used against charges for future services from
such division. All of the credits earned are considered capital expenditures for
the acquisition of such data. Management anticipates positive cash flow from
operations in 1999, even after the anticipated capital expenditures for 1999.
Thus, with the Company's available cash reserves and cash flow, management does
not anticipate a need for additional capital during 1999 except for possible
future acquisitions.
INFLATION
Management anticipates the effect of inflation on the Company's operations
during 1999 will be primarily limited to the effects which general inflation
will have on costs in most areas in which the Company operates.
YEAR 2000 COMPLIANCE
GENERAL
TOIC's company-wide Year 2000 Project is proceeding on schedule. The project
was begun in earnest during the second quarter of 1998 and is addressing the
issue of information systems being unable to distinguish between the year 1900
and the year 2000. The general project phases common to all business units are:
(1) inventorying Year 2000 items; (2) assigning priorities to identified items;
(3) assessing the Year 2000 readiness of items determined to be material to the
Company; (4) repairing or replacing material items that are determined not to be
ready for the Year 2000; (5) testing repaired or replaced items; and (6)
designing and implementing contingency and business continuation plans for all
material items. At December 31, 1998, the inventory and priority assessment
phases for each business unit had been completed and detailed remediation plans
have been developed by business units considered to have material Year 2000
issues. Based on the inventory, only TISI was determined to have material Year
2000 issues.
PROJECT
A dedicated TISI project team has been working on remediating core
processing applications as well as assessing the readiness of the infrastructure
portion of the systems. The project is on schedule overall and is 75% complete,
with different phases of the schedule being between 40% and 95% complete. The
portions of the project that are behind schedule are the portions that will
require the least amount of time to complete. The most time consuming portions
are on or ahead of schedule. The second half of 1999 is being reserved for final
testing.
TISI's project is broken down by line of business and by steps in the value
chain - customer interaction, order processing/delivery, information
production/retrieval, billing, customer service, monitoring/management,
infrastructure and extended enterprise. For packaged software and hardware
components, TISI is evaluating vendors' statements about their products'
readiness and developing test plans where the components are material and
testing is possible. Several items have been identified as unready for the Year
2000 and plans are being made for remediation. All remediation in these areas is
scheduled to be complete by the second quarter of 1999.
19
<PAGE>
For applications that have been developed in-house, active inventorying and
remediation has been underway since early in 1998. To date, all PC-based
applications have been found to be ready for the Year 2000 or have required only
minor changes, which have been completed. TISI has completed a general inventory
of its primary VMS-based processing applications and 95% of the detailed
inventory. Remediation of these systems has been divided into two phases and
TISI has completed nearly 85% of the first phase and nearly 40% of the second
phase. All non-critical systems (defined as cosmetically impacted or
internal-use reporting only) will be deferred until all critical systems have
been remediated, tested and put back into production. System level and
comprehensive testing is being performed throughout the remediation process.
TISI expects that all critical application remediation will be completed by the
end of the third quarter of 1999.
TISI and the Company's other business units are in the process of contacting
significant external entities, assessing their Year 2000 readiness and
developing action plans. The company expects to complete this survey by the end
of second quarter 1999 and, if necessary, will develop contingency plans based
on the survey results.
COSTS
The total cost associated with required modifications to become Year 2000
compliant is not expected to be material to the Company's financial position.
The estimated total cost of the Year 2000 Project is approximately $1.4 million.
The total amount expended on the Project through March 31, 1999, was
approximately $650,000 nearly all of which related to the cost to repair or
replace software and related hardware problems. The estimated future cost of
completing the Year 2000 Project is estimated to be approximately $750,000.
Funds for the Project are included in existing operating budgets.
RISKS
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. The primary business
risk associated with Year 2000 is TISI's ability to provide employment screening
information to customers without interruption. Due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000 readiness of third-party suppliers and customers, the Company is
unable to determine at this time whether the consequences of Year 2000 failures
will have a material impact on the Company's results of operations, liquidity or
financial condition. The Year 2000 Project is expected to reduce significantly
the Company's level of uncertainty about the Year 2000 problem and, in
particular, about the Year 2000 compliance and readiness of material external
entities. The Company believes that, with the implementation of new business
systems and completion of the Project as scheduled, the possibility of
significant interruptions of normal operations should be reduced. The Company
expects to develop contingency plans if it is determined that the Company or its
external entities will not be materially Year 2000 compliant. Readers are
cautioned that forward-looking statements contained in the Year 2000 Update
should be read in conjunction with the Company's disclosures under the heading
"Forward-Looking Statements".
NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Company adopted AICPA Statement of Position ("SOP") No.98-1,
"Accounting for the Cost of Computer Software Developed or Obtained for Internal
Use." SOP No.98-1 requires certain cost in connection with the developing or
obtaining internally used software to be capitalized that
20
<PAGE>
previously would have been expensed as incurred. The adoption of SOP No. 98-1
resulted in the capitalization of approximately $300,000 related to software
development cost.
The FASB also recently issued Statement of Financial Accounting Standards
No. 132, Employers' Disclosures about Pensions and Other Post-retirement
Benefits (SFAS 132) and Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS
132 revises employer's disclosures about pension and other post-retirement
benefit plans. It does not change the measurement or recognition of those plans.
SFAS 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. These Statements are not expected to have a
material impact on the Company's financial reporting as the Company does not
currently sponsor pension or other post-retirement benefit plans and does not
engage in the use of derivative instruments.
FORWARD-LOOKING STATEMENTS
This Quarterly Report for the quarter ended March 31, 1999 as well as other
public documents of the Company contains forward-looking statements which
involve risks and uncertainties. The Private Securities Litigation Reform Act of
1995 provides a "safe harbor" for certain forward-looking statements. When used
in this Quarterly Report, the words "estimate," "project," "anticipate,"
"expect," "intend," "believe," "seek," "plan," as well as variations of such
words and similar expressions, are intended to identify forward-looking
statements. While management believes these statements are reasonable, actual
results could differ materially from those projected by such forward-looking
statements. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
SUBSEQUENT EVENT
During the first quarter of 1999, the Company executed an asset purchase
agreement to acquire, through a subsidiary, substantially all of the assets and
liabilities of International Travel Service, Inc., for approximately $22.7
million. This transaction was consumated as of April 30, 1999. This transaction
will be accounted for as a purchase.
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) List of Exhibits:
Financial Data Schedule (Exhibit 27)
(b) Reports on Form 8-K
The Registrant filed no reports on Form 8-K during the quarter ended
March 31, 1999.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: May 11, 1999
THE OFFICIAL INFORMATION COMPANY
By /s/ Ian L.M. Thomas
------------------------------------
IAN L. M. THOMAS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
By /s/ Steven J. Hunt
------------------------------------
STEVEN J. HUNT
CHIEF FINANCIAL OFFICER
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