ITEM 1. BUSINESS
UNLESS THE CONTEXT OTHERWISE REQUIRES: (I) THE "COMPANY" REFERS TO AMERICAN LAWYER MEDIA, INC. AND ITS SUBSIDIARIES; AND (II) "HOLDINGS" REFERS TO AMERICAN LAWYER MEDIA HOLDINGS, INC., WHICH IS THE PARENT COMPANY OF THE COMPANY, AND TO HOLDINGS' PREDECESSOR, CRANBERRY PARTNERS, LLC. REFERENCES HEREIN TO THE COMPANY'S ESTIMATED CIRCULATION INCLUDE TOTAL PAID AND FREE CIRCULATION FOR ALL OF THE COMPANY'S PERIODICALS. REFERENCES HEREIN TO READERSHIP INCLUDE ESTIMATED CIRCULATION PLUS COMBINED PASS-ALONG READERSHIP UNADJUSTED FOR ANY OVERLAP THAT EXISTS AMONG READERS OF THE COMPANY'S VARIOUS PUBLICATIONS.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE BASED UPON THE BELIEFS AND ASSUMPTIONS OF, AND ON INFORMATION AVAILABLE TO, THE MANAGEMENT OF THE COMPANY AT THE TIME SUCH STATEMENTS ARE MADE. THE FOLLOWING ARE OR MAY CONSTITUTE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: (I) STATEMENTS PRECEDED BY OR FOLLOWED BY OR THAT INCLUDE THE WORDS "MAY," "WILL," "COULD," "SHOULD," "BELIEVE," "EXPECT," "FUTURE," "POTENTIAL," "ANTICIPATE," "INTEND," "PLAN," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF AND (II) STATEMENTS REGARDING MATTERS THAT ARE NOT HISTORICAL FACTS. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING WITHOUT LIMITATION, (I) GENERAL ECONOMIC CONDITIONS AND DEVELOPMENTS IN THE LEGAL SERVICES INDUSTRY OR THE PUBLISHING INDUSTRY, (II) PRODUCT DEMAND AND PRICING, (III) THE SUCCESS OF NEW INITIATIVES, (IV) INCREASED COMPETITION WITH RESPECT TO SERVICES IT PROVIDES AND FOR ADVERTISING AND SUBSCRIPTION REVENUE, AND (V) SUFFICIENCY OF CASH FLOW TO FUND ITS OPERATIONS.
COMPANY OVERVIEW
The Company publishes 22 periodicals serving legal and business professionals, including several leading national periodicals and regional publications serving four of the five largest state legal markets. The Company's nationally-recognized periodicals include THE AMERICAN LAWYER, a monthly magazine containing articles and features targeted to attorneys practicing in large law firms, and THE NATIONAL LAW JOURNAL, the nation's largest selling legal newspaper, which covers the law, lawyers and the business of the legal profession. The Company's regional publications are led by the NEW YORK LAW JOURNAL, which has the largest paid circulation of any regional legal newspaper in the United States. In addition to the NEW YORK LAW JOURNAL, the Company publishes seven other daily newspapers serving Atlanta, Philadelphia, Northern California, Miami, Fort Lauderdale and Palm Beach, as well as eight weekly newspapers serving New Jersey, Delaware, Texas, Washington, D.C., Connecticut, California, Georgia and Pennsylvania. In September 1999, the Company launched THE DAILY DEAL, a daily publication and Web site that focuses on international deals and the deal-making community of bankers, accountants, lawyers, venture capitalists and business professionals, which the Company sold in March 2000. See RECENT DEVELOPMENTS.
In addition to the periodicals referred to above, the Company publishes CORPORATE COUNSEL, a leading magazine for corporate in-house attorneys, LAW TECHNOLOGY NEWS and AMLAW TECH, two leading legal technology magazines, as well as IP WORLDWIDE, a leading specialty magazine focusing on intellectual property.
The Company also creates and packages information for attorneys and business professionals through its Professional Information division. This business includes a portfolio of publications covering a variety of specialized legal interests and practice areas, including 37 newsletters and 111 books on topics of national and regional interest. The Company also publishes various directories used by legal professionals.
The Company, under its LegalTech trademark, is a leading producer of trade shows and conferences relating to law practice technology. In addition, the Company organizes and sponsors numerous professional seminars and conferences that cover issues of current legal interest.
The Company derives its revenues principally from advertising and subscriptions, with additional revenues generated by its Professional Information division and its LegalTech and seminars divisions. For
the twelve months ended December 31, 1999, approximately 57% of the Company's revenues were from advertising, 18% were from subscriptions, 24% were from ancillary products and services and 1% were from Internet services.
At the beginning of 1999, the Company's Internet business consisted of various web sites that offered a myriad of legal resources to serve lawyers, legal professionals, law students, business people and consumers. Its Law News Network site (www.lawnewsnetwork.com), launched in December 1998, provided updated legal news and information from the Company's publications as well as original content, online advertising and specialized legal subscription services. The Company's Internet business also included Law Journal Information Systems, a division which included MA/3000, a case tracking and docketing software package that allows litigators to track court activity published in the NEW YORK LAW JOURNAL, and QDS, which offers subscribers faxed copies on request of both published and unpublished state and federal court opinions for New York.
In May 1999, the Company reorganized its Internet business under a wholly-owned subsidiary, Professional On-Line, Inc. In July 1999, the Company completed the sale of its Internet business to Law.com, Inc. ("Law.com"), the holding company for a leading Internet destination for legal information, e-commerce and e-services, for $1.0 million in cash and the Company retained a preferred stock interest with a face amount of $3.75 million. The sale consisted of various national and regional web sites of Law News Network, the uniform resource locators for these web sites and substantially all of the Law Journal Information Systems division. In December 1999, Law.com redeemed all of the preferred stock for $3.75 million plus accrued dividends.
As part of the sale, the Company entered into a license agreement with Law.com, which provides for an exclusive license to Law.com of digital and electronic distribution rights to all of the Company's content through 2004.
PRODUCT LINES
PERIODICALS. The Company's newspaper and magazine business publishes 22 national, regional and local periodicals that serve legal and business professionals. The Company's periodicals have a combined circulation of approximately 300,000. The subscription renewal rate for the Company's periodicals has historically averaged approximately 80%.
NEWSPAPERS. The Company's newspapers provide news, features, analysis and commentary about the world of law and advocacy. Feature articles and stories covering the local, state and federal courts and law firms are supplemented by reports and analyses of cutting-edge legal issues. The Company is committed to providing high quality and balanced coverage of its local markets. Most of the Company's newspapers serve as the newspaper of record for their respective legal markets. Lawyers look to the newspapers for reports on local court rulings and opinions, as well as information regarding local court dockets.
As of December 31, 1999, the Company published sixteen daily and weekly newspapers including THE NATIONAL LAW JOURNAL, the leading national legal newspaper in the United States, and the NEW YORK LAW JOURNAL, which has the largest circulation of any regional legal newspaper. In the aggregate, the Company's newspapers serve nine state markets, including New York, New Jersey, Pennsylvania, Georgia, Florida, Texas, California, Connecticut and Delaware, and the District of Columbia, which cover approximately 45% of all active attorneys in the United States. Each of the Company's regional newspapers has a significant presence in its respective market.
The following table sets forth information regarding the Company's newspapers:
NEWSPAPERS
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(1) References in the table above to the Company's total circulation include total paid and free circulation.
(2) References in the table above to the Company's estimated total readership include total circulation plus combined pass-along readership unadjusted for any overlap that exists among readers of the Company's various publications.
(3) CALIFORNIA LAW WEEK ceased publishing in December 1999.
(4) For these recently launched publications, insufficient information is currently available.
(5) In March 2000, the Company sold THE DAILY DEAL. See RECENT DEVELOPMENTS.
MAGAZINES. THE AMERICAN LAWYER anchors the Company's magazine portfolio. Founded in 1979, THE AMERICAN LAWYER is a glossy magazine that features stories on the strategies, successes, failures and personalities of the most important figures in the legal world. The target audience for the publication is attorneys practicing in large law firms and corporate legal departments across the United States. THE AMERICAN LAWYER has been the winner of National Magazine awards granted by the American Society of Magazine Editors four times, and has been nominated for 22 such awards since its founding.
The Company's other magazines focus on specific practice areas or segments within the legal profession and certain topics applicable to the business of law. The Company's specialty legal magazines include CORPORATE COUNSEL, one of the nation's largest magazines focused on issues of importance to in-house lawyers at large and mid-size corporations, and IP WORLDWIDE, which covers developments in intellectual property law. The Company also publishes two leading technology magazines targeted to the legal community, AMLAW TECH and LAW TECHNOLOGY NEWS, which focus on information technology and its applications to the practice of law. AMLAW TECH is targeted toward persons at law firms with purchase-
making authority and is distributed to all readers of THE AMERICAN LAWYER, while LAW TECHNOLOGY NEWS is targeted toward attorneys and information services departments in law offices. At the end of 1999, the Company introduced L magazine, a law and lifestyle quarterly publication for law students.
The Company publishes the following six magazines:
MAGAZINES
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(1) References in the table above to the Company's total circulation include total paid and free circulation.
(2) References in the table above to the Company's estimated total readership include total circulation plus combined pass-along readership unadjusted for any overlap that exists among readers of the Company's various publications.
(3) AMLAW TECH is distributed for free to subscribers of THE AMERICAN LAWYER.
(4) These magazines are distributed primarily free of charge. For these publications, the Company assumes only two readers per copy.
(5) L was only distributed once in 1999, as it was founded in December.
NEWSLETTERS. The Company's newsletter division publishes 37 newsletters that cover specialized legal practice areas. Circulation for the Company's newsletters ranges from approximately 250 to 2,000, with an average circulation of over 700. The total number of paid subscribers for all newsletters was approximately 18,200 as of December 31, 1999. In February 2000, the Company discontinued publication of four of its weekly newsletters. See RECENT DEVELOPMENTS. The following table sets forth a list of the Company's newsletters as of December 31, 1999:
NEWSLETTERS
Accounting for Law Firms
The Bankruptcy Strategist
Broadcast Law Report
Business Crimes Bulletin
Commercial Leasing Law & Strategy
Corporate Control Alert
Corporate Law Weekly
The Corporate Counsellor
Criminal Justice Weekly
Employment Law Strategist
Employment Law Weekly
Entertainment Law & Finance
Environmental Compliance and Litigation Strategy
Equipment Leasing
E-Commerce Law Weekly
E-Commerce Law & Strategy
e Securities
Fen Phen Litigation Strategist
Healthcare Fraud and Abuse
The Intellectual Property Law Strategist
The Internet Newsletter: Legal & Business Aspects
IP Law Weekly
Law Firm Partnership & Benefits Report
Leader's Franchising Business & Law Alert
Legal Tech
Managed Care Law Strategist
Marketing for Lawyers
The Matrimonial Strategist
Medical Malpractice Law & Strategy
Medical/Legal Aspects of Breast Implants
New York Employment Law & Practice
New York Family Law Monthly
New York Real Estate Law Reporter
Personal Injury Reporter
Product Liability Law & Strategy
Securities Law Weekly
Shopping Center Law Report
BOOKS. The Company currently publishes 111 books on a broad array of legal topics. These books generally focus on practical legal subjects that arise in the daily professional lives of lawyers. Most of the Company's books are updated once or twice per year with inserts to keep the material current. The Company focuses on publishing books that cover particularly dynamic areas of law that lend themselves to frequent supplementation.
The Company most often develops the concept for a new book and then solicits an author to write the text. However, in certain cases, the Company has received unsolicited manuscripts which it has ultimately published. Authors who have written books for the Company include prominent attorneys and judges such as Martin Lipton, Judge Jed Rakoff, James Freund and James Goodale. The following tables set forth the Company's current offering of books:
BOOKS
STATE AND LOCAL SUBJECTS
Encyclopedia of New Jersey Causes of Action Georgia Bench Book 1999 Harris County Bench Book Supplement (Texas) Texas Auto Insurance Policy Annotated Marketing and Maintaining a Family Law Mediation Practice Mediation: A Texas Practice Guide New Jersey Brownfields Law New Jersey Employment Law New Jersey Federal Civil Procedure New Jersey Insurance Law New Jersey Product Liability Law New York County Bench Book 2000 Pennsylvania Tax Handbook Pennsylvania District and County Reports Pennsylvania Court Rules Pennsylvania: The Legal Directory Pleadings and Pretrial Practice (Connecticut) Representing Clients in Mediation 1999 Tarrant County Bench Book (Texas) 1999-2000 Texas Criminal Codes and Rules, Annotated 2000 Assigned Judges Bench Book
NATIONAL SUBJECTS
A Practical Guide to Equal Employment Opportunity A Practical Guide to the Occupational Safety and Health Act Acquisitions Under the Hart-Scott-Rodino Antitrust Improvements Act All About Cable Alternative Dispute Resolution in the Work Place Anatomy of a Merger: Strategies and Techniques for Negotiating Corporate Acquisitions Antitrust Basics Antitrust: An Economic Approach Changing the Situs of a Trust Class Actions: The Law of 50 States Communications Law and Practice Computer Law: Drafting and Negotiating Forms and Agreements Corporate Internal Investigations
Corporate Privileges and Confidential Information Corporate Sentencing Guidelines: Compliance and Mitigation Divorce, Separation and the Distribution of Property Doing Business on the Internet: Forms and Analysis Due Diligence in Business Transactions Employee Benefits Law: ERISA and Beyond Encyclopedia of Matrimonial Clauses Environmental Enforcement: Civil and Criminal Environmental Law Lexicon Environmental Regulation of Real Property Estate Planning Executive Compensation Executive Stock Options and Stock Appreciation Rights Federal Bank Holding Company Law Federal Rules of Civil Procedure Federal Taxation of Intellectual Property Transfers Federal Taxation of Real Estate Federal Taxation of S Corporations Federal Trade Commission: Law, Practice and Procedure Ferrara on Insider Trading and The Wall Franchising: Realities and Remedies Franchising: Realities and Remedies Forms Volume Going Private Grand Jury Practice Ground Leases and Land Acquisition Contracts Health Care Fraud: Enforcement and Compliance Hospital Liability "I'd Rather Do It Myself": How to Set Up Your Own Law Firm Insurance Coverage Disputes Intellectual Property Law: Commercial, Creative and Industrial Property Intellectual Property Licensing Forms and Analysis Internet and Online Law Law Firm Accounting and Financial Management Law Firm Partnership Agreements Lawyering: A Realistic Approach to Legal Practice Legal Research and Law Library Management Lender Liability and Banking Litigation Licensing of Intellectual Property Limited Liability Companies and Limited Liability Partnerships Marketing the Law Firm: Business Development Techniques Maximizing Law Firm Profitability: Hiring, Training and Developing Productive Lawyers Merit Systems Protection Board: Rights and Remedies Model Terms of Engagement Modern Visual Evidence Multimedia Law: Forms and Analysis Negotiated Acquisitions of Companies, Subsidiaries and Divisions Negotiating and Drafting Office Leases Negotiation: Strategies for Law and Business Partnership and Joint Venture Agreements Private Equity Funds: Business Structure & Operations Private Real Estate Syndications
Product Liability Product Liability: Winning Strategies and Techniques Products Liability: Recreation and Sports Equipment Real Estate, A Guide for the Profession Real Estate Financing Reorganizations under Chapter 11 of the Bankruptcy Code Representing High-Tech Companies RICO: Civil and Criminal, Law and Strategy Savings Institutions: Mergers, Acquisitions and Conversions Securities Practice and Electronic Technology Securities Regulation: Liabilities and Remedies Sex Discrimination and Sexual Harassment in the Workplace Shareholder Derivative Litigation: Besieging the Board Shopping Center and Store Leases Start-Up and Emerging Companies: Planning, Financing and Operating the Successful Business State Antitrust Law Structured Settlements and Periodic Payment Judgments Takeovers and Freezeouts Tax Aspects of Divorce and Separation The Law and Practice of Secured Transactions: Working with Article 9 The Preparation and Trial of Medical Malpractice Cases Trade Secrets Travel Law Use of Statistics in Equal Employment Opportunity Litigation White Collar Crime: Business and Regulatory Offenses Winning Attorney's Fees from the U.S. Government
CONFERENCES AND SEMINARS. Under its LegalTech tradename, the Company produces conferences and exhibitions relating to law practice technology in New York, Los Angeles, Chicago, Miami, Atlanta and Houston. In 2000, the Company plans to produce Legal Tech shows in New York, Los Angeles, Chicago, Miami, Atlanta, Dallas, Toronto, Canada and London, England. The conferences are generally three-day events that include vendor exhibits, a seminar program and a variety of workshops and focus sessions. Attendees typically include attorneys in private practice, corporate counsel, law firm administrators and information technology personnel, while exhibitors include a variety of software, hardware, publishing and other technology product related companies. The Company conducts a number of seminars for lawyers and other professionals in related fields. The Company's seminars complement its other products and services both by serving as powerful marketing vehicles for the Company's existing books and newsletters and by generating ideas for new seminars, books and newsletters. Seminars also introduce the Company to lawyers who may subsequently write articles or books for the Company. The following table sets forth the seminars and conferences held in 1999:
SEMINARS
Civil Litigation Practice Year 2000 Litigation Acquisitions Of Subsidiaries, Divisions and Private Companies Distribution and Dealer Termination Failure to Diagnose Breast Cancer Computer Law General Counsel Conference Negotiating Joint Ventures and Strategic Alliances Failure to Diagnose Fetal Distress
Counseling Start-up and Emerging Companies Negotiating the Modern Lease Law Firm Marketing Beyond the New Millennium Negotiating Contracts in the Entertainment Industry Trial of Obstetrical Malpractice Case Negotiating Corporate Acquisitions Internet Security Summit International Money Laundering China Update Avoiding Ethical Pitfalls Facing Experienced Practitioners Ethics in the 21(st) Century Ethics for Corporate Lawyers and Business Litigators Internet and Electronic Commerce
CONFERENCES
LegalTech New York (January) LegalTech Miami LegalTech Los Angeles LegalTech New York (September) LegalTech Chicago LegalTech Houston LegalTech Atlanta
PRINTING AND DISTRIBUTION
Layouts for the Company's publications are prepared in-house, while the large majority of the Company's printing activities, and all of its distribution activities, are outsourced.
COMPETITION
The Company competes for advertising and subscription revenues with publishers of special-interest legal newspapers and magazines with similar editorial content. However, in most of the Company's markets, its newspaper is the only newspaper focused on serving the legal community. The Company also competes for advertising revenues with other national legal publications, as well as general-interest magazines and other forms of media, including broadcast and cable television, radio, direct marketing and electronic media. Factors that may affect competition for advertisers include effective costs of such advertising compared to other forms of media, and the size and characteristics of the readership of the Company's publications. The Company also faces significant competition from other legal publishers and legal service providers in all media.
INTELLECTUAL PROPERTY
The Company owns a number of registered and unregistered trademarks for use in connection with its business, including trademarks in the titles of its major periodicals such as THE AMERICAN LAWYER, CORPORATE COUNSEL, THE NATIONAL LAW JOURNAL and NEW YORK LAW JOURNAL. Provided that trademarks remain in continuous use in connection with similar goods or services, their term can be perpetual, subject, with respect to registered trademarks, to the timely renewal of such registrations in the United States Patent and Trademark Office.
The Company approaches copyright ownership with respect to its publications in the same manner as is generally customary within the publishing industry. Consequently, the Company owns the copyright in all
of its newspapers, magazines and newsletters, as compilations, and also owns the copyright in most of its books. With respect to the specific articles in its publications, the Company generally obtains the assignment of all right, title and interest in original materials created by the Company's full-time journalists and editors as well as by paid contributors. For articles authored by outside contributors, the Company generally obtains only the exclusive "first-time publication" and non-exclusive republication rights. Judicial opinions, court schedules and docketing information are provided to the Company directly by the courts, on a non-exclusive basis, and are public information. In connection with the sale of the Company's Internet business to Law.com, the Company entered into an exclusive content license with Law.com which grants Law.com the right to publish all Company content in electronic or digital format. The license runs through 2004.
The Company licenses the content of certain of its publications and forms to third parties, including West Publishing Company and LEXIS/NEXIS, on a non-exclusive basis, for republication and dissemination on electronic databases marketed by the licensees. After the expiration of their initial terms (the latest of which is September 2002 and May 2002, respectively), the licenses automatically renew, subject to either parties' right to terminate at the end of each subsequent term.
Some of the Company's products, such as the DAILY DECISION SERVICE and PICS, which offers subscribers faxed copies on request of both published and unpublished state and federal court opinions for New Jersey and Pennsylvania, respectively, utilize the extensive databases of court decisions compiled by the Company. The Company also has extensive subscriber and other customer databases which it believes would be extremely difficult to replicate. The Company attempts to protect these databases and lists as trade secrets by restricting access thereto and/or by the use of non-disclosure agreements. There can be no assurance, however, that the means taken to protect the confidentiality of these items will be sufficient, or that others will not independently develop similar databases and customer lists.
EMPLOYEES AND LABOR RELATIONS
As of December 31, 1999, the Company employed approximately 960 full-time employees, 21 of whom are subject to a single collective bargaining agreement. The Company believes that its relations with its employees are satisfactory.
SIGNIFICANT TRANSACTIONS
SALE OF INTERNET ASSETS TO LAW.COM. In July 1999, the Company sold the common stock of its wholly-owned subsidiary, Professional On-Line, Inc., which held the Company's Internet business, to Law.com for $1.0 million in cash and the Company retained a preferred stock interest with a face amount of $3.75 million. In December 1999, Law.com redeemed the preferred stock for $3.75 million plus accrued dividends of $187,500. The Company and Law.com entered into an exclusive content license which grants Law.Com the right to publish all Company content in electronic or digital format through 2004 as part of the transaction. Law.com is the holding company for a leading Internet destination for legal information, e-commerce and e-services whose stockholders include substantially all of the stockholders of Holdings.
RECENT DEVELOPMENTS
RESTRUCTURING OF WEEKLY NEWSLETTER DIVISION. In February 2000, the Company restructured its weekly newsletter division by discontinuing publication of four of its weekly newsletters. The Company will continue to publish IP LAW WEEKLY and E-COMMERCE LAW WEEKLY which serve reader demand for information in these two growing practice areas.
SALE OF THE BUSINESS OF THE DAILY DEAL AND CORPORATE CONTROL ALERT. On March 28, 2000, the Company sold the business of the Company and certain of the Company's wholly-owned subsidiaries constituting THE DAILY DEAL and CORPORATE CONTROL ALERT (the "Business") to TDD, L.L.C., a newly formed limited liability company (the "Purchaser"), owned by substantially all of the same stockholders as Holdings. The
consideration for the sale was $7.5 million in cash and a $2.5 million face amount of a membership interest in the Purchaser with a preferred return (the "Preferred Membership Interest"). In addition, the Purchaser will pay the Company the aggregate amount of operating losses incurred by the Company in connection with the operation of the Business for the month of March 2000. The Preferred Membership Interest accretes at 12.25% compounded annually, is convertible into 3.0% of the common equity of the Purchaser, has anti-dilution protection for dividends in the form of additional equity interests, combinations, splits and reclassifications and has anti-dilution protection up to the first $25.0 million of equity capital including the Preferred Membership Interest issued by the Purchaser.
STOCK SPLIT. On March 7, 2000, The Board of Directors of Holdings approved a 10-for-1 split of its common stock, par value $0.01 per share. Prior to the stock split, Holdings had 200,000 shares of common stock authorized and 120,000 shares of common stock outstanding. After giving effect to the stock split, Holdings has 2,000,000 shares of common stock authorized and 1,200,000 shares of common stock outstanding.
ITEM 2.
ITEM 2. PROPERTIES
The Company operates from various locations throughout the United States. Its corporate headquarters are based in New York. Information relating to the Company's corporate headquarters and other significant regional offices which are owned or leased is set forth in the following table:
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various litigation matters incidental to the conduct of its business. The Company does not believe that the outcome of any of the matters in which it is currently involved will have a material adverse effect on its financial condition or on the results of its operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MARKETS
The Company is a wholly-owned subsidiary of American Lawyer Media Holdings, Inc. There is no public trading market for the Company's common stock.
The Company has never paid any cash dividends on its common stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
In August 1997, U.S. Equity Partners, L.P. and its affiliates and certain other investors controlled by or managed by WP Management Partners, LLC., the merchant banking arm of Wasserstein Perella Group, Inc. (the "Investors"), through Holdings, acquired substantially all of the assets and assumed certain of the liabilities related to American Lawyer Media, L.P. (the "ALM Acquisition"), and in December 1997, Holdings acquired all of the issued and outstanding capital stock of National Law Publishing Company, Inc. (the "NLP Acquisition"). The two acquisitions (the "Acquisitions") have been accounted for using the purchase method of accounting. The results of operations of American Lawyer Media, L.P. have been included in the financial statements of the Company since August 1, 1997, the effective date of the ALM Acquisition, and the results of operations of National Law Publishing Company have been included in the financial statements of the Company since December 22, 1997, the closing date of the NLP Acquisition. As a result, the Acquisitions affect the Company's results of operations in certain significant respects. In connection with the ALM Acquisition, the purchase price was $63.0 million and the excess of the purchase price over the book value of net tangible assets acquired was $67.7 million. The aggregate purchase price for the NLP Acquisition was $203.2 million, and the excess of the purchase price over the book value of net tangible assets acquired was $257.6 million. The excess purchase price of both Acquisitions has been allocated to the tangible and intangible assets acquired by the Company based upon their respective fair values as of the acquisition date.
The following tables present selected historical financial information (i) for American Lawyer Media, L.P. and its subsidiaries ("Old ALM"), as of and for the years ended December 31, 1995 and 1996, (ii) for National Law Publishing Company, Inc. and its subsidiaries ("NLP"), as of and for the years ended December 31, 1995 and 1996, (iii) for Old ALM, as of and for the seven months ended July 31, 1997, (iv) for the Company, as of and for the five months ended December 31, 1997 and the years ended December 31, 1998 and 1999, and (v) for NLP, as of and for the period from January 1, 1997 through December 21, 1997. The financial data for the Company, as of and for the five months ended December 31, 1997 and the years ended December 31, 1998 and 1999, and the financial data for Old ALM for the years ended December 31, 1995 and 1996 and the seven months ended July 31, 1997 were derived from financial statements audited by Arthur Andersen LLP. The financial data for NLP as of and for the period from January 1, 1997 through December 21, 1997 were derived from financial statements audited by Arthur Andersen LLP and financial data for NLP for the years ended December 31, 1995 and 1996 were derived from financial statements audited by Leslie Sufrin and Company, P.C. Results of operations for the interim periods presented are not necessarily indicative of the results of operations for the full year. The selected financial information should be read in conjunction with MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and the historical financial statements and notes thereto included elsewhere in this Report. See INDEX TO FINANCIAL STATEMENTS.
AMERICAN LAWYER MEDIA, L.P.
AND AMERICAN LAWYER MEDIA, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS)
- ------------------------------ (1) "EBITDA" is defined as income before interest, income taxes, depreciation and amortization and gain on sale of assets. EBITDA is not a measure of performance under generally accepted accounting principles ("GAAP"). Items excluded from income in calculating EBITDA are significant components in understanding and evaluating Old ALM's and ALM's financial performance. While EBITDA should not be considered in isolation or as a substitute for net income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with GAAP or as a measure of profitability or liquidity, management understands that EBITDA is customarily used in evaluating publishing companies. The EBITDA measures presented herein may not be comparable to similarly titled measures of other companies.
NATIONAL LAW PUBLISHING COMPANY, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS)
- ------------------------------
(1) EBITDA is not a measure of performance under GAAP. Items excluded from income in calculating EBITDA are significant components in understanding and evaluating NLP's financial performance. While EBITDA should not be considered in isolation or as a substitute for net income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with GAAP or as a measure of profitability or liquidity, management understands that EBITDA is customarily used in evaluating publishing companies. The EBITDA measures presented herein may not be comparable to similarly titled measures of other companies.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the SELECTED FINANCIAL DATA and the historical consolidated financial statements of the Company, including the notes thereto, included elsewhere in this Form 10-K.
OVERVIEW
In August and December 1997, the Investors consummated the ALM Acquisition and the NLP Acquisition, respectively. The Acquisitions have been accounted for using the purchase method of accounting. The results of operations of Old ALM have been included in the financial statements of the Company since August 1, 1997, the effective date of the ALM Acquisition, and the results of operations of NLP have been included in the financial statements of the Company since December 22, 1997, the closing date of the NLP Acquisition. As a result, the Acquisitions affect the Company's results of operations in certain significant respects. In connection with the ALM Acquisition, the purchase price was $63.0 million and the excess of the purchase price over the book value of net tangible assets acquired was $67.7 million. The aggregate purchase price for the NLP Acquisition was $203.2 million, and the excess of the purchase price over the book value of net tangible assets acquired was $257.6 million. The excess purchase price of both Acquisitions has been allocated to the tangible and intangible assets acquired by the Company based upon their respective fair values as of the acquisition date.
In March 1998, the Company acquired all the assets and certain liabilities of Corporate Presentations, Inc., an operator of legal technology trade shows ("LegalTech"), for approximately $10.8 million. The excess purchase price over the net liabilities acquired was $11.3 million. In April 1998, the Company acquired the legal publishing-related assets and certain liabilities of Legal Communications, Ltd. ("LCL") for approximately $20.1 million. The excess purchase price over the net assets acquired was allocated $14.3 million and $6.3 million to identified intangibles and goodwill, respectively. The allocation was based on the assets' respective fair values at acquisition date. The results of operations of these acquisitions have been included in the Company's results of operations since their respective acquisition dates.
The following table presents the results of operations (in thousands) for the years ended December 31, 1999 and 1998 and the pro forma calculation for the combined period ended December 31, 1997:
The total combined information for the period ended December 31, 1997 is derived from the financial information for Old ALM for the seven months ended July 31, 1997 and for ALM for the five months ended December 31, 1997, including adjustments for the ALM Acquisition and financial information for NLP for the period from January 1, 1997 through December 31, 1997. As a result, the financial information for the combined year ended December 31, 1997 has not been prepared on a basis in conformity with GAAP.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
For the year ended December 31, 1998, the financial results include the acquisitions of LegalTech in March 1998 and LCL in April 1998 as well as the acquisition of a regional publication entitled DELAWARE LAW MONTHLY (the "Delaware Acquisition") in October 1998, since their respective acquisition dates.
OVERVIEW. Revenues increased by $11.0 million, or 9.0%, from $121.5 million for the year ended December 31, 1998 to $132.5 million for the year ended December 31, 1999. Total operating costs and expenses increased $21.4 million, or 17.6%, from $121.8 million for the year ended December 31, 1998 to $143.2 million for the year ended December 31, 1999 due primarily to new initiatives launched by the
Company during 1999. These initiatives included the launch of a new daily publication entitled THE DAILY DEAL, a daily publication and Web site that focuses on international deals and the deal-making community of bankers, accountants, lawyers, venture capitalists and business professionals, which was sold in March 2000, and a new high-end newsletter division, which published six weekly newsletters focusing on various legal topics during 1999. As a result, the operating loss increased $10.5 million from a loss of $0.2 million for the year ended December 31, 1998 to a loss of $10.7 million for the year ended December 31, 1999 and EBITDA decreased $9.5 million, or 36.4%, from $26.1 million for the year ended December 31, 1998 to $16.6 million for the year ended December 31, 1999. Internet services revenues decreased $1.4 million, or 52.9%, from $2.6 million for the year ended December 31, 1998 to $1.2 million for the year ended December 31, 1999. Internet services expenses decreased $1.4 million, or 29.0%, from $4.7 million for the year ended December 31, 1998 to $3.3 million for the year ended December 31, 1999. The reduction in Internet services revenues and expenses in 1999 was due to the sale of the common stock of the entity holding the Company's Internet business to Law.com during the third quarter of 1999. Excluding the Internet services business and new initiatives, revenues increased $11.6 million, or 9.8%, from $118.9 million for the year ended December 31, 1998 to $130.5 million for the year ended December 31, 1999. In addition, excluding the Internet services business and new initiatives, EBITDA also increased $1.0 million, or 3.6%, from $28.1 million in 1998 to $29.1 million in 1999.
REVENUES. Advertising revenues increased $8.4 million, or 12.4%, from $67.5 million for the year ended December 31, 1998 to $75. 9 million for the year ended December 31, 1999. The acquisition of LCL accounted for $2.0 million of this increase recorded during the first quarter of this year with no revenue for LCL recorded during the first quarter of 1998. Excluding the revenues from LCL, advertising revenues increased $6.4 million, or 9.5% during 1999. This increase in advertising revenues was due to a growth in classified, law firm and legal advertising, but was partially offset by a decline in display advertising. Advertising growth was also due to an increase in advertising rates along with an increase in advertising pages.
Subscription revenue increased $0.4 million, or 1.7%, from $23.2 million for the year ended December 31, 1998 to $23.6 million for the year ended December 31, 1999. Growth in subscription revenue in 1999 resulted primarily from the acquisition of LCL at the end of the first quarter of 1998.
Revenue from ancillary products and services increased $3.6 million, or 12.7%, from $28.2 million for the year ended December 31, 1998 to $31.8 million for the year ended December 31, 1999. The acquisition of LegalTech and LCL during early 1998 accounted for approximately $2.5 million, or 69% of the growth, with no LegalTech and LCL revenues recorded during the first three months of 1998. The remaining increase was due to higher licensing and royalty fees received by the Company and to increased book and newsletter revenue. However, the increase in revenue was partially offset by lower printing revenue. In addition, lower information service income was recorded in 1999 as a result of the sale of the Company's Internet business to Law.com during the third quarter of 1999.
Revenue from Internet services decreased $1.4 million, or 52.9%, from $2.6 million for the year ended December 31, 1998 to $1.2 million for the year ended December 31, 1999. The decrease is attributable to the sale of the Company's Internet business to Law.com during the third quarter of 1999.
OPERATING COSTS AND EXPENSES. Total operating costs and expenses increased $21.4 million, or 17.6%, from $121.8 million for the year ended December 31, 1998 to $143.2 million for the year ended December 31, 1999. Included in operating costs and expenses for 1999 was $3.3 million recorded during the first quarter of 1999 for LCL and LegalTech with no expenses recorded during the same period of 1998. In addition, start-up and operating costs and expenses for the Company's new initiatives during 1999 totaled $11.2 million with no similar costs or expenses during 1998. Excluding the above-mentioned items, total operating costs and expenses increased $6.9 million, or 5.6%. The remaining increase in operating costs and expenses resulted primarily from higher costs in all categories due to the overall growth in revenues.
Editorial expenses increased $7.4 million, or 47.8%, from $15.5 million for the year ended December 31, 1998 to $22.9 million for the year ended December 31, 1999. The acquisition of LCL and start-up costs for the new initiatives accounted for $3.6 million of the increase and general salary increases and the hiring for a number of key vacant positions accounted for the remaining increase.
Production and distribution expenses increased $3.6 million, or 13.5%, from $26.3 million for the year ended December 31, 1998 to $29.8 million for the year ended December 31, 1999. The acquisition of LCL and LegalTech increased expenses by $1.3 million and the new initiatives launched during 1999 accounted for $1.4 million of the increase. Excluding the acquisitions of LCL and LegalTech and new initiatives, production and distribution expenses increased $0.9 million, or 3.3% over prior year costs. This increase primarily resulted from the introduction of a new weekly publication in California (CALIFORNIA LAW WEEK), which has since been discontinued, along with higher materials costs and increased runs in an effort to increase coverage in some markets.
Selling expenses increased $8.8 million, or 46.3%, from $19.0 million for the year ended December 31, 1998 to $27.8 million for the year ended December 31, 1999. LCL and LegalTech accounted for $1.0 million of the increase and costs incurred for the new initiatives accounted for $4.1 million of the increase. Excluding these items mentioned above, selling expenses increased $3.7 million, or 19.4%. This increase resulted primarily from higher commission costs related to an increase in revenues, increased headcount and increased direct mailing efforts and other marketing related costs.
General and administrative expenses increased $2.0 million, or 6.7%, from $30.0 million for the year ended December 31, 1998 to $32.0 million for the year ended December 31, 1999. This increase reflects $0.7 million of costs associated with the acquisitions of LCL and LegalTech. The remaining expense increase relates primarily to the launching of the new initiatives during 1999, which included increased total occupancy and other related general overhead costs.
Internet services expenses decreased $1.4 million, or 29.0%, from $4.7 million for the year ended December 31, 1998 to $3.3 million for the year ended December 31, 1999. This decrease is attributable to the sale of the Company's Internet business to Law.com during the third quarter of 1999.
Depreciation and amortization expenses increased $1.0 million, or 3.8%, from $26.3 million for the year ended December 31, 1998 to $27.3 million for the year ended December 31, 1999. An increase in amortization of goodwill during 1999 was due to the acquisitions of LCL and LegalTech during early 1998. The increase in depreciation during 1999 was due to increased capital expenditures in 1999 for new and upgraded systems in order to ensure Year 2000 compliance and to replace outdated systems with new systems and facilities to support the new initiatives and the Company's core growth.
OPERATING LOSS. As a result of the above factors, the operating loss increased $10.5 million from a $0.2 million loss for the year ended December 31, 1998 to a $10.7 million loss for the year ended December 31, 1999. EBITDA decreased $9.5 million, or 36.4%, from $26.1 million for the year ended December 31, 1998 to $16.6 million for the year ended December 31, 1999. Excluding the Internet services business and new initiatives, EBITDA increased $1.0 million, or 3.6% from $28.1 million at December 31, 1998 to $29.1 million at December 31, 1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
The following discussion includes the year ended December 31, 1997 which is derived from the financial information for Old ALM for the seven months ended July 31, 1997 and for ALM for the five months ended December 31, 1997, including adjustments for the ALM Acquisition, and financial information for NLP for the periods from January 1, 1997 through December 21, 1997, presented above. As a result, the financial information for the combined year ended December 31, 1997 has not been prepared on a basis in conformity with GAAP.
For the year ended December 31, 1998, the financial results include the acquisitions of LegalTech, LCL and the Delaware Acquisition, since their respective acquisition dates.
OVERVIEW. Revenues increased by $15.1 million, or 14.2%, from $106.5 million for the year ended December 31, 1997 to $121.5 million for the year ended December 31, 1998. Total operating costs and expenses increased $10.9 million, or 9.9%, from $110.8 million for the year ended December 31, 1997 to $121.8 million for the year ended December 31, 1998, due primarily to a $14.2 million increase in depreciation and amortization resulting from the ALM and NLP Acquisitions. As a result, the operating loss decreased $4.1 million, or 94.4%, from a loss of $4.4 million for the year ended December 31, 1997 to a loss of $0.2 million for the year ended December 31, 1998, while EBITDA increased $18.3 million, or 234.9%, from $7.8 million for the year ended December 31, 1997 to $26.1 million for the year ended December 31, 1998. Internet services revenues decreased $1.8 million, or 40.3%, from $4.4 million for the year ended December 31, 1997 to $2.6 million for the year ended December 31, 1998. Internet services expenses decreased $6.4 million, or 58.0%, from $11.1 million for the year ended December 31, 1997 to $4.7 million for the year ended December 31, 1998. Also included in the operating costs and expenses for 1997 was a special compensation charge of $6.9 million reflecting stock option and bonus payments related to the sale of NLP. Accordingly, excluding the net operating loss from Internet services, the shutdown charge, and the one time special compensation charge, operating income decreased $10.5 million, or 85.4%, from $12.2 million for the year ended December 31, 1997 to $1.8 million for the year ended December 31, 1998, while EBITDA increased $3.7 million, or 15.1%, from $24.4 million to $28.1 million over the same periods.
REVENUES. Advertising revenues increased $9.6 million, or 16.5%, from $58.0 million for the year ended December 31, 1997 to $67.5 million for the year ended December 31, 1998. The acquisition of LCL accounted for $3.9 million of this increase. Without LCL, revenues increased $5.7 million, or 9.8%, due principally to an increase in advertising rates as well as an overall increase in advertising pages.
Subscription revenues increased $1.7 million, or 7.9%, from $21.5 million for the year ended December 31, 1997 to $23.2 million for the year ended December 31, 1998. This increase was primarily due to the acquisition of LCL.
Revenues from ancillary products and services increased $5.6 million, or 24.8%, from $22.6 million for the year ended December 31, 1997 to $28.2 million for the year ended December 31, 1998. The additions of LCL and LegalTech accounted for $3.1 million of the increase. The $2.5 million balance of this increase was due to an increase in the number of book updates released along with increased royalty income. In addition, a portion of book sales historically recorded in the fourth quarter were shipped and included in the first quarter results of 1998.
Revenues from Internet services decreased $1.8 million, or 40.3%, from $4.4 million for the year ended December 31, 1997 to $2.6 million for the year ended December 31, 1998. This decrease is attributable primarily to the shutdown of Counsel Connect, Old ALM's Internet service.
OPERATING COSTS AND EXPENSES. Total operating costs and expenses increased $10.9 million, or 9.9%, from $110.8 million for the year ended December 31, 1997 to $121.8 million for the year ended December 31, 1998. This increase is due to a $14.2 million increase in depreciation and amortization resulting from the ALM and NLP Acquisitions. The inclusion of $7.1 million in costs and expenses of LCL and LegalTech as well as other normal operating costs and expense increases were offset by the reduction in Internet services expenses.
Editorial expenses increased by $2.3 million, or 17.8%, from $13.2 million for the year ended December 31, 1997 to $15.5 million for the year ended December 31, 1998 as a number of key vacant positions were filled. The addition of LCL accounted for $0.7 million of the increase.
Production and distribution expenses increased $3.7 million, or 16.4%, from $22.6 million for the year ended December 31, 1997 to $26.3 million for the year ended December 31, 1998. The addition of LCL and LegalTech accounted for $2.0 million of the increase. The remainder of this increase is primarily the result of the increased book sales as well as higher paper usage at ALM's printing facilities.
Selling expenses increased $2.5 million, or 15.1%, from $16.5 million for the year ended December 31, 1997 to $19.0 million for the year ended December 31, 1998. This increase is primarily the result of the additions of LCL and LegalTech.
General and administrative expenses increased $4.6 million, or 18.2%, from $25.4 million for the year ended December 31, 1997 to $30.0 million for the year ended December 31, 1998. This increase reflects $2.0 million of costs associated with the addition of LCL and LegalTech. The balance of the increase is primarily the result of transition costs associated with the Company's new corporate structure and salary increases.
Internet services expenses decreased $6.4 million, or 58.0%, from $11.1 million for the year ended December 31, 1997 to $4.7 million for the year ended December 31, 1998. This decrease is the direct result of the shutdown of Counsel Connect.
Depreciation and amortization expenses increased $14.2 million, or 116.5%, from $12.1 million for the year ended December 31, 1997 to $26.3 million for the year ended December 31, 1998. These expenses are not comparable for the two periods due to purchase accounting adjustments related to the ALM and NLP Acquisitions.
OPERATING LOSS. As a result of the above factors, the operating loss decreased $4.1 million, or 94.4%, from $4.4 million for the year ended December 31, 1997 to $0.2 million for the year ended December 31, 1998. EBITDA increased $18.3 million, or 234.9%, from $7.8 million for the year ended December 31, 1997 to $26.1 million for the year ended December 31, 1998. Excluding the one-time charges in 1997 related to the shutdown of Counsel Connect and special compensation charge, EBITDA increased $8.4 million, or 47.2%, from $17.7 million for the year ended December 31, 1997 to $26.1 million for the year ended December 31, 1998. Excluding all Internet services and the special compensation charge, EBITDA increased $3.7 million, or 15.1%, from $24.4 million for the year ended December 31, 1997 to $28.1 million for the year ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL EXPENDITURES. Capital expenditures were $11.8 million for the year ended December 31, 1999. The amount of capital expenditures in 1999 was higher than historical and expected future spending due to an investment in new editorial and advertising systems to replace outdated systems and ensure Year 2000 compliance and due to the implementation of new systems and facilities needed for the new initiatives and to support the Company's core growth.
NET CASH USED IN OPERATING ACTIVITIES. Net cash used in operating activities was $0.7 million for the year ended December 31, 1999, which primarily reflects depreciation and amortization of $27.3 million, an increase in accounts payable of $4.3 million and non-cash interest recorded during 1999 of $0.8 million, offset by a net loss of $26.4 million, an increase in accounts receivable of $3.3 million, a decrease in other non-current liabilities of $2.4 million and an increase in other assets of $1.5 million. The use of funds during 1999 primarily resulted from the Company's net loss, of which $10.6 million resulted from new initiatives started during 1999. Excluding these new initiatives would have resulted in net cash provided by operating activities of $9.9 million.
NET CASH USED IN INVESTING ACTIVITIES. Net cash used in investing activities was $8.0 million for the year ended December 31, 1999, which primarily resulted from capital expenditures of $11.8 million offset by the proceeds related to the sale of the Company's Internet business to Law.com during the third quarter of 1999.
NET CASH PROVIDED BY FINANCING ACTIVITIES. Net cash provided by financing activities totaled $9.8 million for the year ended December 31, 1999, which reflects a drawdown of $9.8 million under the Revolving Credit Facility (described below).
WORKING CAPITAL. The Company traditionally has had favorable cash flow characteristics resulting from its high level of advance payments by subscribers, low working capital investment, minimal capital expenditure needs, predictable cost structure and high margins. Because cash receipts associated with subscriptions are received toward the beginning of a subscription cycle, the Company's periodicals business requires minimal investment in working capital. During 1999, the Company incurred startup costs for the new initiatives resulting in EBITDA losses totaling approximately $10.3 million. Additionally, the Company invested $11.8 million in capital expenditures as described above. These two factors, both unusual, combined to produce an unfavorable cash flow for 1999.
LIQUIDITY. The Company's principal sources of funds are anticipated to be cash flows from operating activities, which may be supplemented by borrowings under the Revolving Credit Facility (described below). The Company believes that these funds will be sufficient to meet its current and future financial obligations, including the payment of interest on the $175,000,000 of 9.75% senior notes and the outstanding balance under the Company's Revolving Credit Facility, working capital, capital expenditures and other obligations. No assurance can be given, however, that this will be the case. The Company's future operating performance and ability to service or refinance the Notes and to repay, extend or refinance any credit agreements to which it is a party will be subject to future economic conditions and to financial, business and other factors, many of which are beyond the Company's control.
MATERIAL FINANCINGS
The Company has borrowed funds to finance its operations through the transactions described below.
REVOLVING CREDIT FACILITY. On March 25, 1998, the Company entered into a $40 million, five-year senior secured revolving credit facility (the "Revolving Credit Facility") with a group of banks to be available for working capital and general corporate purposes, including acquisitions and capital expenditures.
The Revolving Credit Facility is guaranteed by Holdings and by all existing and future subsidiaries of the Company. In addition, the Revolving Credit Facility is secured by a first priority security interest in substantially all of the properties and assets of the Company and its existing and future domestic subsidiaries, including a pledge of all of the stock of such subsidiaries, and a pledge by Holdings of all of the stock of the Company. The Revolving Credit Facility contains customary covenants commensurate with the size of the Revolving Credit Facility that, among other things, restrict the ability of the Company and its subsidiaries to take certain actions.
On April 14, 1998, Holdings contributed an aggregate of $15 million to the equity capital of the Company. The proceeds of the equity contribution were used to fund acquisitions and to provide capital for aggressive internal growth. On April 26, 1999, Holdings and the Company amended the Revolving Credit Facility, effective as of March 29, 1999. This amendment (INTER ALIA) limits the Company's ability to borrow in excess of $20 million under the Revolving Credit Facility until certain ratios are achieved, modifies certain of the covenants and modifies the interest calculation mechanism. Effective July 20, 1999, the Revolving Credit Facility was further amended to provide for the sale of the Company's Internet business to Law.com and to modify certain debt covenants. On March 8, 2000 (effective March 28, 2000), the Revolving Credit Facility was further amended to modify certain of the covenants, to permit the transaction described below under RECENT DEVELOPMENTS--SALE OF THE BUSINESS OF THE DAILY DEAL AND CORPORATE CONTROL ALERT and to increase the borrowing limit described above from $20 million to $22.5 million.
SENIOR NOTES FINANCING. In December 1997, the Company issued $175,000,000 aggregate principal amount of 9.75% Senior Notes due 2007 (the "Notes"). The Notes are unsecured general obligations of the Company and are fully and unconditionally guaranteed on a joint and several and senior unsecured basis, by each of the Company's existing and future subsidiaries. The subsidiary guarantors comprise all of the direct and indirect subsidiaries of the Company and each of the subsidiary guarantors is a wholly-owned subsidiary of the Company. Separate financial statements of, and other disclosures concerning the subsidiary guarantors are not included herein because of the subsidiary guarantors' full and unconditional guarantee of the Notes and management has determined that separate financial statements and other disclosures concerning the subsidiary guarantors are not material and would not provide any additional meaningful disclosure. There are currently no contractual or regulatory restrictions limiting the ability of the subsidiary guarantors to make distributions to the Company. The Notes may be redeemed at any time by the Company, in whole or in part, at various redemption prices that include accrued and unpaid interest. The Notes contain certain covenants that, among other things, limit the incurrence of additional indebtedness by the Company and its subsidiaries, the payment of dividends and other restricted payments by the Company and its subsidiaries, asset sales, transactions with affiliates, the incurrence of liens, and mergers and consolidations. Assuming there is no redemption of the Notes prior to maturity, the entire principal will be payable on December 15, 2007.
YEAR 2000 COMPLIANCE.
The Company did not experience any significant malfunctions or errors in its operating or business systems related to the "Year 2000" issue. Based on operations since January 1, 2000, the Company does not expect any significant impact to its ongoing business as a result of the "Year 2000" issue. However, it is possible that the full impact of the date change, which was of concern due to computer programs that use two digits instead of four digits to define years, has not been fully recognized. For example, it is possible that Year 2000 or similar issues such as leap year-related problems may occur with billing, payroll or financial closings at month, quarterly or year-end. The Company believes that any such problems are likely to be minor and correctable. In addition, the Company could still be negatively impacted if customers or suppliers are adversely affected by the Year 2000 or similar issues. The Company is not aware of any significant Year 2000 or similar problems that have arisen for its customers and suppliers.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On March 25, 1998, the Company and ALM entered into the Revolving Credit Facility. Each revolving loan shall bear interest on the outstanding principal amount from the borrowing date until it becomes due at a rate per annum equal to the "Base Rate" or the Eurodollar rate plus the "Applicable Margin" of 1.5% for base rate loans and 2.5% for Eurodollar rate loans. The Base Rate is the higher of the Bank of America publicly announced "Reference Rate" or the Federal Funds Rate plus 0.5%. The amount outstanding under the Revolving Credit Facility was $18.3 million at December 31, 1999. The interest rate at December 31, 1999 was 9.15%. A 10% increase in the average rate, during 1999, would have increased the Company's net loss to approximately $26.5 million.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Exhibits, which appears on Page hereof.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT
The following table sets forth certain information regarding each of the executive officers, directors and certain other key employees of the Company and Holdings, as of March 15, 2000.
Each Director is elected annually and serves until the next annual meeting of stockholders or until his or her successor is duly elected and qualified. The Independent Directors are each compensated $20,000 per year for their service as Directors and receive reimbursement of expenses incurred from their attendance at Board of Directors meetings. Directors will also be eligible to participate in an equity participation plan to be established.
The Board has established an executive committee (the "Executive Committee") consisting of three members, currently Bruce Wasserstein, Bruce Barnes and Anup Bagaria. The Executive Committee has been delegated the authority to approve (i) the acquisition and divestiture by the Company or an affiliate of the Company of all or a portion of one or more business entities for a price of up to $25 million, (ii) the appointment of senior officers of the Company or its affiliates and termination of such employment, (iii) the preparation and approval of short-term and long-term budgets, and (iv) other material policy-level decisions to the extent permitted by the Delaware General Corporation Law.
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES OF THE COMPANY AND HOLDINGS
Bruce Wasserstein is Chairman of the Board of Directors of the Company and Holdings since December 1997. He is Chairman, Chief Executive Officer and founder of Wasserstein Perella Group, Inc. ("WPG"). Previously, Mr. Wasserstein served as a Director and the Chairman of Maybelline, Inc. and as a Director of Collins & Aikman Corp. Before establishing WPG, Mr. Wasserstein was Co-Head of Investment Banking at The First Boston Corporation, and a Managing Director and Member of its Management
Committee. Prior to joining First Boston in 1977, Mr. Wasserstein was an attorney at Cravath, Swaine & Moore in New York City. Mr. Wasserstein graduated with honors from the University of Michigan in 1967. In 1971 he graduated from Harvard Business School as a Baker Scholar with high distinction, and earned a J.D., CUM LAUDE, from Harvard Law School. In 1972 he was a Knox Traveling Fellow at Cambridge University. Mr. Wasserstein is a member of the Council on Foreign Relations. He has served as a member of the SEC's Advisory Committee on Tender Offers and as a member of the Visiting Committees of Harvard Law School, the University of Michigan and Columbia Journalism School. Mr. Wasserstein is also on the board of numerous private companies.
William L. Pollak has served as President, Chief Executive Officer and Director of the Company and Holdings since March 1998. Before joining the Company, Mr. Pollak spent 16 years at the New York Times, where he held a variety of positions, most recently as Executive Vice President, Circulation.
Anup Bagaria has served as a Vice President and Director of the Company and Holdings since their founding since November 1998. He is a Managing Director of Wasserstein Perella & Co., Inc. He graduated from the Massachusetts Institute of Technology. Mr. Bagaria also serves on the board of various private companies.
Bruce R. Barnes has served as a director of the Company and Holdings since November 1998. Dr. Barnes has been Managing Director of Wasserstein Perella & Co., Inc. since February 1997 and has been a senior member of its Merchant Banking Group since September 1998. He was Executive Vice President of Ziff Brothers Investments, L.L.C., a private investment company, from January 1995 to June 1996. Prior to that, at Ziff Communications Company, a privately-held publishing and media company, Dr. Barnes was Senior Vice President and Chief Financial Officer from September 1993 to December 1994 and was Vice President and Special Assistant to the Chairman from November 1992 to September 1993. Dr. Barnes received a B.A. in Economics MAGNA CUM LAUDE and a Ph.D. in Economics from the University of Pennsylvania. Dr. Barnes is also a director of Collins & Aikman Corporation and various private companies.
Michael J. Biondi has served as a Director of the Company and Holdings since March 1998. He is Chairman and Chief Executive Officer of Wasserstein Perella & Co., Inc. Mr. Biondi holds M.B.A. and J.D. degrees from the Wharton School and the University of Pennsylvania Law School, respectively. Prior to joining Wasserstein Perella, Mr. Biondi was a member of the First Boston Mergers & Acquisitions Group, and practiced law at Skadden, Arps, Slate, Meagher & Flom LLP.
Robert C. Clark has served as a Director of the Company and Holdings since their founding. He has been Dean of the Harvard Law School since 1989 and is the Royall Professor of Law. Mr. Clark is a trustee of Teachers' Insurance Annuity Association (TIAA). He is currently a Director of Collins & Aikman Corp. and of Household International, Inc.
Donald G. Drapkin has served as a Director of the Company and Holdings since their founding. He has been a Director and Vice Chairman and Director of MacAndrews & Forbes Holdings Inc. and various of its affiliates since 1987. Mr. Drapkin also is a Director of the following corporations which file reports pursuant to the Exchange Act: Algos Pharmaceutical Corporation, Anthracite Capital, Inc., BlackRock Asset Investors, Cardio Technologies, Inc., The Molson Companies Limited, Revlon Consumer Products Corporation, Revlon, Inc., Playboy Enterprises, Inc., Weider Nutrition International, Inc., and VIMRX Pharmaceuticals Inc. On December 27, 1996, Marvel, Marvel Holdings, Marvel Parent and Marvel III of which Mr. Drapkin was a Director on such date, and several subsidiaries of Marvel filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code.
James A. Finkelstein has served as a Director of the Company and Holdings since March 1998. He has been President and Chief Executive Officer of JAF Communications, LLC since July 1998. Prior to that, Mr. Finkelstein served as President and Chief Executive Officer of NLP and its predecessor companies beginning in 1974. He joined the New York Law Publishing Company in 1970. He was the former publisher
of the NEW YORK LAW JOURNAL and the founder and publisher of THE NATIONAL LAW JOURNAL. He currently serves on the Faculty of Arts and Sciences Board of Overseers at New York University.
Andrew G. T. Moore, II has served as a Director of the Company and Holdings since their founding. He is a Managing Director of Wasserstein Perella and is a former Justice of the Delaware Supreme Court. Justice Moore served on the Delaware Supreme Court for 12 years until 1994. Justice Moore has served as the Lehmann Distinguished Visiting Professor of Law at Washington University in St. Louis. He has also served as an adjunct professor of law at the Georgetown University Law Center, University of Iowa College of Law and Widener University School of Law, where he taught seminars in advanced corporation law. He also teaches comparative principles of international corporation law at the Tulane University Institute of European Legal Studies in Paris, and has been a guest lecturer at various law schools and national corporate law programs in the United States, Canada and Europe.
Jack Berkowitz has served as Vice President, Strategic Planning of the Company since January 1999. Prior to joining the Company, Mr. Berkowitz served as a consultant to the Company during 1998. Mr. Berkowitz is a 25 year veteran of the publishing industry. As a consultant, in addition to the Company, his client roster has included Cowles Business Media, Hearst Magazines, Time Inc., Felker Media, Associated Newspapers and Adweek. Mr. Berkowitz had previously served as Executive Vice President of the Village Voice and President of The Nation.
Michael Cronan has served as Vice President, Marketing of the Company since September 1999 and served as the Company's Director of Circulation for National Publications from April 1999 until September 1999. Prior to joining the Company, Mr. Cronan served in various positions with McGraw Hill Cos. From February 1995 until April 1999 and most recently served as the director of sales and marketing with its Construction Information Group On-line. In this capacity, Mr. Cronan developed design, branding and content and implemented successful e-commerce subscription systems for CIG On-Line's Web sites.
Sally Feldman has served as Vice President, Professional Information Division of the Company since October 1999. Prior to joining the Company, Ms. Feldman served as Director of Marketing and Communications at Skadden, Arps, Slate, Meagher & Flom LLP where she was responsible for all aspects of global marketing and public relations.
Stephen C. Jacobs has served as Vice President, General Counsel and Secretary of the Company since May 1998. Prior to joining the Company, Mr. Jacobs was Assistant General Counsel, Global Transactions for American International Group, Inc.
Leslye G. Katz has served as Vice President and Chief Financial Officer of the Company since September 1998. Prior to joining the Company, Ms. Katz served as Vice President and Treasurer of IMS Health, Inc. Previously, she held senior financial management positions for 18 years in the publishing industry, most recently as Senior Vice President and Chief Financial Officer of Reuben H. Donnelley.
Kevin Vermeulen has been Vice President, National Advertising of the Company since 1998. Prior to that he was a Vice President of Sales for NLP, which he joined in October 1992.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following Summary Compensation Table includes individual compensation information for the Chief Executive Officer and certain other executive officers of the Company for the year ended December 31, 1999 (collectively, the "Named Executive Officers") for services rendered in all capacities to the Company during the year ended December 31, 1999. All numbers relating to option grants relate to options to purchase shares in Holdings and include the effect of a 10-for-1 stock split in March 2000. See BUSINESS--RECENT DEVELOPMENTS--STOCK SPLIT.
SUMMARY COMPENSATION TABLE
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(1) Represents payments made by the Company to Mr. Pollak pursuant to the terms of his employment agreement with the Company to reimburse him for the value of options forfeited upon his resignation from his former employer.
(2) Mr. Pollak's employment with the Company pursuant to his employment agreement commenced as of March 9, 1998.
(3) Mr. Berkowitz's employment with the Company pursuant to his employment agreement commenced as of January 1, 1999.
(4) Mr. Jacobs' employment with the Company pursuant to his employment agreement commenced as of May 4, 1998.
(5) Represents payments made by the Company to Ms. Katz pursuant to the terms of her employment agreement with the Company to reimburse her for the value of options forfeited upon her resignation from her previous employer.
(6) Ms. Katz's employment with the Company pursuant to her employment agreement commenced as of September 1, 1998.
(7) Represents commissions earned by Mr. Vermeulen pursuant to the terms of his employment agreement.
(8) The 1997 compensation information for Mr. Vermeulen includes salary, bonus and commission in the aggregate. A breakdown of this amount was not easily ascertainable.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- ------------------------
* As of December 31, 1999, each of the outstanding options was out-of-the-money and therefore the potential realizable value was less than zero.
+ Each of the options is exercisable for a share of Holdings common stock.
EMPLOYMENT AGREEMENTS
Each of William Pollak, President and Chief Executive Officer, and Leslye Katz, Vice President and Chief Financial Officer, has entered into an employment agreement with the Company for a five year term effective March 9, 1998 and September 1, 1998, respectively. The employment agreements provide for an annual salary of $400,000, in the case of Mr. Pollak, and $300,000, in the case of Ms. Katz, subject to increases of 5% annually during the term. In addition, the employment agreements provide for bonuses of (i) $400,000 after the first year of the term and between 50% and 150% of the base salary, as determined by the Board of Directors, in each of the remaining years of the term, for Mr. Pollak, and (ii) $150,000 after the first year of the term and between 25% and 75% of the base salary, as determined by the Board of Directors, in each of the remaining years of the term, for Ms. Katz. Under the employment agreements, if the executives' employment is terminated by the Company without cause or by the executive with good reason, the executive will be entitled to severance equal to the amount of the executive's salary and bonus accrued but unpaid through the termination date and one year's salary in the cases of Mr. Pollak and Ms. Katz, commencing on the termination date, together with any accrued but unpaid bonus. Each of Mr. Pollak and Ms. Katz is also entitled to payments for options granted to them and forfeited upon their resignations from their prior employers.
The Company has also entered into employment agreements with each of its executive officers providing for varying bonuses, severance provisions and termination rights.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the outstanding shares of the Company are beneficially owned by Holdings. The following table sets forth certain information regarding beneficial ownership of Holdings as of December 31, 1999 by (i) each person (or group of affiliate persons) known by the Company to be the beneficial owner of more than 5% of the outstanding Common Stock of Holdings, (ii) each Director, Director nominee, and the Chief Executive Officer and Vice President of the Company, and (iii) all directors and executive officers of
the Company as a group. The share numbers below include the effect of a 10-for-1 stock split in March 2000. See BUSINESS--RECENT DEVELOPMENTS--STOCK SPLIT.
- ------------------------
(1) Includes approximately 2.9% of the issued and outstanding common stock of Holdings held by a co-investor of U.S. Equity Partners, L.P. ("USEP") which has granted WP Management Partners, LLC ("WPMP"), the general partner of USEP, an irrevocable proxy to vote such shares of common stock. Wasserstein & Co., Inc. shares voting and dispositive power with respect to the shares held by USEP. See footnote (4).
(2) Wasserstein & Co., Inc. shares voting and dispositive power with respect to the shares held by U.S. Equity Partners (Offshore), L.P. See footnote (4).
(3) ALM Employee Partners, L.L.C. is managed by WP Plan Management Partners, Inc., a wholly-owned subsidiary of Wasserstein & Co., Inc. Wasserstein & Co., Inc. shares voting and dispositive power with respect to the shares held by ALM Employee Partners, L.L.C. See footnote (4).
(4) Does not include: 569,960 shares as to which Wasserstein & Co. shares voting and dispositive power with USEP; 144,110 shares as to which Wasserstein & Co. shares voting and dispositive power with U.S. Equity Partners (Offshore), L.P.; and 80,000 shares as to which Wasserstein & Co. shares voting and dispositive power with ALM Employee Partners, L.L.C.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is a wholly-owned subsidiary of Holdings. A majority of Holdings' equity securities are held by USEP and its affiliates. USEP is a Delaware limited partnership investment fund of which WPMP is the general partner. WPMP is controlled by Wasserstein Perella & Co., Inc. WPMP is entitled to receive a monitoring fee in an amount not to exceed $1.0 million in respect of any year.
The Company may engage in transactions with its affiliates, including entities owned or controlled by certain of its principal shareholders. The Company believes that such transactions will be no more favorable to the Company than similar transactions with non-affiliates.
In July 1999, the Company sold the common stock of its wholly-owned subsidiary, Professional On-Line, Inc., which held the Company's Internet business, to Law.com for $1.0 million in cash and the Company retained a preferred stock interest with a face amount of $3.75 million. On March 28, 2000, the Company sold its business constituting THE DAILY DEAL and CORPORATE CONTROL ALERT to TDD, L.L.C. The stockholders of Law.com and TDD, L.L.C. include substantially all of the stockholders of Holdings. See SIGNIFICANT TRANSACTIONS and RECENT DEVELOPMENTS.
In connection with the sale of the Company's Internet business to Law.com, the Company entered into an exclusive five-year license agreement with Law.com granting Law.com the right to publish all Company content in electronic or digital format. See SIGNIFICANT TRANSACTIONS. The Company believes that the transactions referred to in the preceding paragraph were effected on arms-length terms and conditions.
In 1999, $260,000 in fees, related to the sale of the Company Internet business to Law.Com, were paid to Wasserstein & Co., Inc.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS
See Index to Financial Statements that appears on page hereof. No Schedules are provided as the Schedules are either not applicable, or the information has been otherwise provided in the Financial Statements.
(B) REPORTS ON FORM 8-K
The Company has filed a report on Form 8-K, dated July 27, 1999, and filed August 24, 1999, relating to the sale of the Company's Internet business to Law.com.
(C) EXHIBITS
The exhibits listed on the Exhibit Index following the signature page hereof are filed herewith in response to this Item.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Lawyer Media, Inc.:
We have audited the accompanying consolidated balance sheets of American Lawyer Media, Inc. (a Delaware corporation) as of December 31, 1999 and 1998 and the related consolidated statements of operations, changes in stockholder's equity and cash flows for the years ended December 31, 1999 and 1998 and the five months ended December 31, 1997. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 American Lawyer Media, Inc. as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the years ended December 31, 1999 and 1998 and the five months ended December 31, 1997 in conformity with accounting principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule appearing on SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS of this Form 10-K is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York March 28, 2000
AMERICAN LAWYER MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
AMERICAN LAWYER MEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
The accompanying notes to consolidated financial statements are an integral part of these statements.
AMERICAN LAWYER MEDIA, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND FOR THE FIVE MONTHS ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
The accompanying notes to consolidated financial statements are an integral part of these statements.
AMERICAN LAWYER MEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
The accompanying notes to consolidated financial statements are an integral part of these statements.
AMERICAN LAWYER MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
1. ORGANIZATION AND OPERATIONS
American Lawyer Media, Inc. (the "Company") is a wholly-owned subsidiary of American Lawyer Media Holdings, Inc. (formerly Cranberry Partners, LLC ("Cranberry")).
Cranberry, a Delaware limited liability company, was formed on August 1, 1997. On August 27, 1997 (the "ALM Acquisition Closing"), Cranberry acquired substantially all of the assets and liabilities of American Lawyer Media, L.P. ("Old ALM") for $63,000,000 ("ALM Acquisition"). The acquisition was effective retroactive to July 31, 1997. As of the ALM Acquisition Closing, all of the membership interests of Cranberry were held by W.P. Management Partners, LLC on behalf of U.S. Equity Partners, L.P. and certain of its affiliates. Old ALM was a publisher of legal publications, which included primarily THE AMERICAN LAWYER, CORPORATE COUNSEL MAGAZINE, AMLAW TECH, THE CONNECTICUT LAW TRIBUNE, LEGAL TIMES, NEW JERSEY LAW JOURNAL, THE RECORDER, TEXAS LAWYER, FULTON COUNTY DAILY REPORT, and MIAMI DAILY BUSINESS REVIEW. In addition, Old ALM operated Counsel Connect, a membership-based online service exclusively for lawyers and legal professionals.
Prior to the ALM Acquisition Closing, Cranberry formed ALM Holdings, LLC, a Delaware limited liability company, and ALM Holdings, LLC formed two wholly-owned subsidiaries, ALM, LLC (a New York limited liability company) and Counsel Connect, LLC (a Delaware limited liability company) and one 99% owned subsidiary (the remaining 1% of which was, as of the ALM Acquisition Closing, held by W.P. Management Partners, LLC on behalf of U.S. Equity Partners, L.P. and certain of its affiliates), ALM IP, LLC (a Delaware limited liability company). On the ALM Acquisition Closing, Cranberry transferred all of the non-intellectual property publishing assets and liabilities acquired from Old ALM to ALM, LLC, all the non-intellectual property Counsel Connect assets and liabilities acquired from Old ALM to Counsel Connect, LLC, and all of the intellectual property assets acquired from Old ALM to ALM IP, LLC.
On November 26, 1997, Cranberry was merged with and into ALM Capital Corp. (a Delaware corporation), and ALM Capital Corp. was simultaneously renamed American Lawyer Media Holdings, Inc. ("Holdings"). Also on November 26, 1997, ALM Holdings, LLC was merged with and into ALM Capital Corp. II (a Delaware corporation), and ALM Capital Corp. II was simultaneously renamed American Lawyer Media, Inc. The Company's operations are based in New York with regional offices in nine states and the District of Columbia.
In December 1997, Holdings received capital contributions from its stockholders, Wasserstein & Co., Inc., U.S. Equity Partners L.P. and U.S. Equity Partners (Offshore) L.P., totaling $75 million. On December 22, 1997, Holdings issued $35 million of 12.25% Senior Discount Notes in an offering under Rule 144A promulgated under the Securities Act of 1933, as amended (the "Act"). Simultaneously, Holdings contributed capital of $108.8 million to the Company. Also on December 22, 1997, the Company issued $175 million of 9.75% Senior Notes in an offering under Rule 144A promulgated under the Act. The Company used a portion of the capital and the proceeds from the Company's 144A offering to acquire all of the outstanding capital stock of National Law Publishing Company, Inc. (a Delaware corporation) ("Old NLP") for approximately $203 million (the "NLP Acquisition") through a wholly-owned subsidiary, NLP Acquisition Co., Inc., (a New York corporation) ("Acquisition"). Old NLP was then, on December 22, 1997, merged with and into Acquisition with Acquisition surviving. Subsequent to the merger, Acquisition was renamed National Law Publishing Company, Inc. ("NLP"). At the closing of the NLP Acquisition, all intellectual property of NLP and its subsidiaries was transferred to NLP IP Company, a wholly-owned subsidiary of NLP. Old NLP was a publisher of legal publications, which include NEW YORK LAW JOURNAL, THE NATIONAL LAW JOURNAL and LAW TECHNOLOGY NEWS. In addition, Old NLP operated Law Journal EXTRA!, a
AMERICAN LAWYER MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
1. ORGANIZATION AND OPERATIONS (CONTINUED) membership-based Internet service for lawyers and legal professionals, publishes legal text and provides seminars targeted at the U.S. legal community.
On April 2, 1998, the Board of Directors authorized Holdings to issue shares of Holdings' $.01 par value per share common stock to U.S. Equity Partners, L.P., in consideration of payment by U.S. Equity Partners, L.P. of $15,000,000.
On December 29, 1998, the Company enacted an internal plan of reorganization (the "Plan") approved by a subcommittee of Holdings' Board of Directors appointed by the Board of Directors at its quarterly meeting on November 9, 1998. Pursuant to the Plan, Holdings and its subsidiaries entered into the following transactions: (i) ALM, LLC merged with and into The New York Law Publishing Company, a New York corporation, and a wholly-owned indirect subsidiary of Holdings ("NYLP"), with NYLP surviving; (ii) ALM IP, LLC merged with and into NLP IP Company, with NLP IP Company surviving; (iii) ALM Counsel Connect, Inc. merged with and into Counsel Connect, LLC, with Counsel Connect LLC surviving; (iv) ALM formed a new, wholly-owned subsidiary, Professional On-Line, Inc., a Delaware corporation ("POL"); (v) Counsel Connect LLC merged with and into POL with POL surviving; (vi) Law Journal Extra, Inc., a New York corporation, and a wholly-owned indirect subsidiary of Holdings, merged with and into POL with POL surviving; and (vii) LegalTech, LLC, a Delaware limited liability company, and a wholly-owned indirect subsidiary of Holdings, merged with and into NYLP with NYLP surviving.
Effective March 5, 1999, ALM Intermediate Offshore Holdings, Inc. ("ALM Intermediate") was merged with and into the Company with the Company surviving (the "Reorganization Merger"). Immediately prior to the effectiveness of the Reorganization Merger, (i) ALM Intermediate owned of record 14,411 shares of Common Stock, par value $.01 per share, of the Company (the "ALM Intermediate Shares") and (ii) all of the issued and outstanding capital stock of ALM Intermediate was owned of record by U.S. Equity Partners (Offshore), L.P. ("Offshore"). In connection with the Reorganization Merger, the ALM Intermediate Shares became treasury shares of the Company and were simultaneously reissued directly to Offshore. The beneficial ownership of the capital stock of the Company has not changed as a result of the Reorganization Merger.
On July 21, 1999, the Company transferred all of its and its subsidiaries' Internet and electronic commerce business to Professional On-Line, Inc. ("POL"). On July 24, 1999, POL was recapitalized by creating a class of 12.25% preferred stock, par value $0.01 (the "POL Preferred Stock"), in addition to the class of Common Stock, par value $0.01 per share, previously authorized (the "POL Common Stock"). On July 27, 1999, the Company sold all of the issued and outstanding POL Common Stock to Law.com, Inc. (f/ k/a Law.com Acquisition Corp.) ("Law.com") for $1.0 million in cash and the Company retained all of the issued and outstanding POL Preferred Stock. In December 1999, Law.com redeemed all of the 12.25% preferred stock for $3.75 million plus accrued dividends. Law.com is a web destination for legal information, e-commerce and e-services. Under a cross-licensing agreement, the Company will continue to provide content and editorial direction for Law.com. Law.com is owned by substantially the same investors that own the Company, including Wasserstein & Co., Inc., U.S. Equity Partners, L.P., and U.S. Equity Partners (Offshore) L.P.
AMERICAN LAWYER MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
2. ACQUISITIONS
Pursuant to an Asset Purchase Agreement dated as of March 3, 1998, among Corporate Presentations, Inc., its sole stockholder and LegalTech, LLC, a wholly-owned indirect subsidiary of American Lawyer Media, Inc., LegalTech, LLC agreed to purchase substantially all of the assets and assume certain of the liabilities of Corporate Presentations, Inc., for approximately $10.8 million (the "LegalTech Acquisition"). Approximately $11.3 million was recorded as goodwill for the excess purchase price over the net liabilities acquired. Corporate Presentations, Inc. is a producer of trade shows and conferences for the legal community. For advisory services rendered to the Company (as defined below) in connection with the LegalTech Acquisition, the Company paid WP Management Partners, LLC ("WPMP"), an affiliate of Holdings, a fee of 1% of the purchase price of the LegalTech Acquisition.
On April 22, 1998, effective as of April 1, 1998, the Company consummated the acquisition of substantially all of the legal publishing-related assets and assumed certain liabilities of Legal Communications, Ltd ("LCL") for an aggregate purchase price of approximately $20.1 million (the "LCL Acquisition"). The excess purchase price over the net liabilities acquired was allocated $6.3 million to goodwill and $14.3 million to identified intangibles based upon the appraisal done. LCL is a publisher of regional legal publications. For advisory services rendered to the Company in connection with the LCL Acquisition, the Company paid WPMP a fee of 1% of the purchase price of the LCL Acquisition.
The following unaudited pro forma information presents a summary of consolidated results of operations of the Company as if the LegalTech Acquisition and the LCL Acquisition had occurred on January 1, 1998 (in thousands):
These unaudited pro forma results have been prepared for comparative purposes only and include certain adjustments, such as additional amortization expense as a result of goodwill. They do not purport to be indicative of the results of operations which actually would have resulted had the combination been in effect on January 1, 1998, or of future results of operations of the consolidated entities.
On October 28, 1998, the Company consummated the acquisition of all of the assets, properties and rights of the Delaware Law Monthly for an aggregate purchase price of $280,000 (the "DLM Acquisition"). DLM is a publisher of a monthly magazine.
On November 22, 1999, effective December 1, 1999, the Company consummated the acquisition of all of the assets, properties and rights of Houston Trial Reports, Inc. and Blue Sheet Publications, Inc. (collectively, "Blue Sheet") for an aggregate purchase price of $750,000 (the "Blue Sheet Acquisition"). Blue Sheet publishes regional and statewide publications which serve the legal community and provides legal research through in-house and on-line facilities.
The LegalTech Acquisition, the LCL Acquisition, the DLM Acquisition and the Blue Sheet Acquisition have been accounted for under the purchase method of accounting and the results of operations of the acquired businesses have been included in the financial statements since the effective dates of the respective acquisitions. The excess of the purchase price over net assets acquired was allocated to goodwill.
AMERICAN LAWYER MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
2. ACQUISITIONS (CONTINUED) In the accompanying consolidated statements of operations, the excess of purchase price over net assets acquired is being amortized over fifteen years.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of American Lawyer Media, Inc. and its wholly-owned subsidiaries which, unless the context otherwise requires, are collectively referred to herein as the "Company." Intercompany transactions and balances have been eliminated in consolidation.
USE OF 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 those estimates.
CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentration of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. The Company believes it is not exposed to any significant credit risk related to cash and cash equivalents. Concentrations of credit risk with respect to trade accounts receivable are, except for amounts due from legal advertising agents ("Legal Ad Agents"), generally limited due to the large number of customers comprising the Company's customer base. Such Legal Ad Agents do not have significant liquid net worth and, as a result, the Company is exposed to a certain level of credit concentration risk in this area, which the Company believes it has adequately provided for.
REVENUE RECOGNITION
Periodical advertising revenues are generated from the placement of display and classified advertisements, as well as legal notices, in the Company's publications. Advertising revenue is recognized upon release of the related publications.
Periodical subscription revenues are recognized on a pro rata basis as issues of a subscription are served.
Ancillary products and services revenues consist principally of third-party printing revenues, newsletter subscriptions, sales of professional books, seminar and conference income, income from a daily fax service of court decisions and income from electronic products. Printing revenue is recorded upon shipment. Book revenues are recognized upon shipment and are reflected net of estimated returns. Newsletter revenues are recognized on the same basis as subscription revenues. Seminar and conference revenues are recognized when the seminar or conference is held. Daily fax service revenue is recognized upon fulfillment of orders. Income from electronic products is recognized monthly as the service is provided.
AMERICAN LAWYER MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Internet services revenues consist primarily of revenues from subscriptions and advertising. Internet subscription income is recognized on a pro-rata basis over the life of a subscription, generally one year. Internet advertising revenues are recognized upon the release of an advertisement on the website.
DEFERRED SUBSCRIPTION INCOME
Deferred subscription income results from advance payments or orders for subscriptions received from subscribers and is amortized on a straight-line basis over the life of the subscription as issues are served. Subscription receivables of $3,128,600 and $2,602,000 at December 31, 1999 and 1998, respectively, are included in accounts receivable in the accompanying consolidated balance sheet.
ADVERTISING AND PROMOTION COSTS
Advertising and promotion expenditures totaled approximately $11.0 million and $6.2 million for the years ended December 31, 1999 and 1998, respectively. These are expensed as the related advertisement or campaign is released.
CASH AND CASH EQUIVALENTS
The Company considers time deposits and certificates of deposit with original maturities of three months or less to be cash equivalents.
INVENTORIES
Inventories consist principally of paper and related binding materials utilized by the Company and its outside printers and professional books published and sold by the Company. Inventories are stated at the lower of cost, as determined by the average cost method, or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost, with the exception of fixed assets acquired as part of the Acquisitions, which are stated at approximate fair market value as of the date of the acquisitions. Significant improvements are capitalized, while expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is calculated using the straight-line method over the estimated remaining useful lives of the assets acquired as part of the Acquisitions. Assets purchased after the Acquisitions are depreciated using the straight-line method over the following estimated useful lives:
Leasehold improvements are amortized over the shorter of the remaining lease term or the estimated useful life.
AMERICAN LAWYER MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) GOODWILL
Goodwill represents the excess of purchase price over the fair value of net assets acquired. It is stated at cost less accumulated amortization and is amortized on a straight-line basis over a fifteen-year useful life. The Company periodically assesses the recoverability of goodwill by determining whether the amortization of goodwill over its estimated remaining life can be recovered through projected undiscounted future consolidated operating cash flows.
INTANGIBLE ASSETS
Intangible assets represent advertiser commitments, trademarks, customer and subscriber lists and non-compete agreements. They are stated at cost less accumulated amortization and are amortized on a straight-line basis over a weighted average life of fifteen years.
SALES OF SUBSIDIARY STOCK
The Company has elected to treat gains and losses on the sales of subsidiary stock as equity transactions. Therefore, the sale of Law.com has been reflected this way in the accompanying financial statements.
RECLASSIFICATIONS
Certain amounts have been reclassified to conform with the current year presentation.
NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS No. 133") Accounting for Derivative Instruments and Hedging Activities." The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or a liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate and assess the effectiveness of transactions that require hedge accounting.
In June 1999, the Financial Accounting Standards Board delayed the required adoption of SFAS No. 133 to be effective for fiscal years beginning after June 15, 2000. The Company is currently evaluating the impact that SFAS No. 133 will have on the Company's consolidated financial position and results of operations.
4. SHUTDOWN OF COUNSEL CONNECT
The Company had operated Counsel Connect, a major legal Internet site, since 1993. Counsel Connect operated as a subscription based service offering users the opportunity to exchange legal information such as court opinions, insights about judges and legal opinions and special written work. The
AMERICAN LAWYER MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
4. SHUTDOWN OF COUNSEL CONNECT (CONTINUED) Company, through Counsel Connect, provided general Internet access (as an "Internet service provider") to its subscribers.
During 1998, the Company essentially completed its shutdown of Counsel Connect and migrated its customers to Law News Network. The 1997 accompanying statement of operations includes a provision of $3,000,000 related to the shutdown of Counsel Connect to cover severance costs, uncollectible receivables, writedown of computer and network equipment and termination of contracts related to network services which provided Internet access. Through December 31, 1999, approximately $3.0 million was charged against the reserve established in 1997 for the costs listed above.
5. INCOME TAXES
Deferred income taxes are provided for the temporary differences between the financial reporting and the tax basis of the Company's assets and liabilities and principally consist of identified intangibles relating to NLP, accelerated depreciation, allowance for doubtful accounts, certain accrued liabilities not currently deductible for tax purposes and net operating loss carryforwards.
The reconciliation between the provision for income taxes and the amount computed by applying the statutory federal income tax rate to loss before income taxes is as follows (in thousands):
The Company had a deferred tax liability of $38,182 and $43,834 at December 31, 1999 and 1998, respectively. These deferred income tax liabilities primarily relate to the identified intangibles from the NLP Acquisition which were recorded at the acquisition date as an increase in goodwill. The liability was calculated on the identified intangibles from the NLP Acquisition using the effective tax rate of the Company.
The Company has recorded a 100% valuation allowance against its net deferred tax assets consisting primarily of net operating losses. The valuation allowance was provided as management cannot be sure of when or if they will be able to utilize these net operating losses.
AMERICAN LAWYER MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31 (in thousands):
7. INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31 (in thousands):
8. OTHER CURRENT ASSETS
Other current assets consisted of the following at December 31 (in thousands):
9. RELATED PARTY TRANSACTIONS
In July 1999, the Company sold the common stock of its wholly-owned subsidiary, Professional On-Line, Inc., which held the Company's Internet business, to Law.com for $1 million in cash and the Company retained a preferred stock, with a face amount of $3.75 million. The preferred stock was redeemed prior to December 31, 1999 for $3.75 million plus preferred dividends. On March 28, 2000, the Company sold its business constituting THE DAILY DEAL and CORPORATE CONTROL ALERT to TDD, L.L.C. The stockholders of Law.com and TDD, L.L.C. include substantially all of the stockholders of Holdings. See Note 14--Subsequent Events.
In connection with the sale of the Company's Internet business to Law.com, the Company entered into an exclusive five-year license with Law.com granting Law.com the right to publish all Company content in electronic or digital format. See Note 1--Organization and Operations.
AMERICAN LAWYER MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
9. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company believes that the transactions referred to in the preceding paragraphs were effected on arms-length terms and conditions.
The Company and CourtRoom Television Network ("CourtTV"), an affiliate of Old ALM's general partner, shared certain administrative resources and employees in 1997 only. In addition, the Company had advertising revenue from Court TV under an agreement made by the former owner of Old ALM. This agreement was terminated in October 1997. The cost associated with Court TV employees who devoted a portion of their time to the Company's activities was charged to the Company based on an estimate of the time spent on such activities. These charges amounted to $99,191, while the revenue was $44,730 for the five months ended December 31, 1997. In addition, the Company had a receivable from CourtTV of $0 and $118,500 at December 31, 1999 and 1998 respectively, reflected in accounts receivable on the accompanying balance sheets.
Approximately $5,250,000 of financing costs related to the Senior Notes, as defined in Note 12, were paid to Wasserstein Perella, an affiliate of the Company. In addition, approximately $4,150,000 of acquisition related fees and expenses were paid to Wasserstein Perella. In 1999, $260,000 in fees relating to the sale of the Company's Internet business to Law.com were paid to Wasserstein & Co., Inc.
Included in other current assets on the accompanying balance sheets is a net receivable due from Holdings of $555,300 and $447,800 at December 31, 1999 and 1998, respectively, resulting from various intercompany transactions.
10. COMMITMENTS AND CONTINGENCIES
Rent expense, including payments of real estate taxes, insurance and other expenses required under certain leases, amounted to approximately $3,685,000, $3,580,000 and $783,000 for the years ended December 31, 1999 and 1998 and the five months ended December 31, 1997. This amount includes the monthly rent payments for corporate headquarters discussed below.
At December 31, 1999, minimum rental commitments under noncancellable leases were as follows (in thousands):
Certain of the leases provide for free rent periods as well as rent escalations. The rental commitments above represent actual rental payments to be made. The financial statements reflect rent expense and rental income on a straight-line basis over the terms of the leases. Approximately $2,665,000 and $1,924,000, representing accrued pro rata future payments, net of receipts, is included in other noncurrent liabilities in the accompanying balance sheets as of December 31, 1999 and 1998, respectively.
AMERICAN LAWYER MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
10. COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company is involved in a number of legal proceedings, some of which are significant, which arose in the ordinary course of business. In the opinion of management, the ultimate outcome of these contingencies is not expected to have a material adverse effect on the Company's financial position or results of operations.
The Company has letters of credit outstanding totaling approximately $1,121,000 and $983,000 for security deposits on its corporate office space as of December 31, 1999 and 1998, respectively.
11. EMPLOYEE BENEFITS
NLP has a 401(k) profit sharing plan (the "NLP Plan") for all eligible employees who have completed one year of service. Under the NLP Plan, NLP has the option of making a matching contribution of up to 3% of a participant's compensation. NLP may also annually contribute additional discretionary amounts to participants. For the years ended December 31, 1999 and 1998 and the five months ended December 31, 1997, NLP did not make any matching discretionary contributions to the NLP Plan. In addition, approximately twenty NLP employees are covered by certain defined contribution retirement plans sponsored by the Typographical Union. NLP made contributions to these retirement plans of $0, $11,719 and $0 for the years ended December 31, 1999, 1998 and the five months ended December 31, 1997, respectively.
ALM, LLC sponsored a 401(k) salary deferral plan (the "ALM Plan") which was transferred to the Company upon the Acquisitions. Participation in the ALM Plan is available for substantially all Company employees. The ALM Plan provides for employer matching of employees' contributions, as defined. The cost of the ALM Plan for the years ended December 31, 1999 and 1998 and the five months ended December 31, 1997 was $606,979, $276,400 and $137,400, respectively.
ALM, LLC also sponsored a defined benefit plan covering substantially all ALM, LLC and Counsel Connect, LLC employees. This plan was frozen effective December 31, 1997, resulting in an insignificant curtailment gain.
Pension benefits for 1999, 1998 and 1997 for the ALM Plan consist of the following (in thousands):
AMERICAN LAWYER MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
11. EMPLOYEE BENEFITS (CONTINUED)
In determining the actuarial present value of the projected benefit obligation as of December 31, 1999, 1998 and 1997, the discount rate was 6.75%, and the expected long-term rate of return on assets was 9.00% as of December 31, 1999, 1998 and 1997.
ALM, LLC also sponsored an Excess Benefit Pension Plan providing a benefit to highly compensated employees in excess of the benefits provided by the tax qualified defined benefit plan. The plan is an unfunded, non-qualified deferred compensation plan. This plan was also frozen as of December 31, 1997.
The Company sponsors a comprehensive medical and dental insurance plan, which is available to substantially all employees.
12. LONG-TERM DEBT
On December 22, 1997, the Company issued $175,000,000 of 9.75% senior notes ("Senior Notes") due December 15, 2007. The Senior Notes accrue interest at 9.75% which is payable in cash semi-annually on June 15 and December 15 (beginning June 15, 1998) of each year. The Senior Notes are unsecured general obligations of the Company and are fully and unconditionally guaranteed, on a joint and several and senior unsecured basis, by each of the Company's existing and future subsidiaries. Separate financial statements of, and other disclosures concerning, the Guarantors are not included herein because of the Guarantors' full and unconditional guarantee of the Senior Notes and management's determination that separate financial statements and other disclosures concerning the Guarantors are not material and would not
AMERICAN LAWYER MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
12. LONG-TERM DEBT (CONTINUED) provide any additional meaningful disclosure. The Senior Notes may be redeemed at any time by the Company, in whole or in part, at various redemption prices that include accrued and unpaid interest as well as any existing liquidating damages. The Senior Notes contain certain covenants that, among other things, limit the incurrence of additional indebtedness by the Company and its Subsidiaries, the payment of dividends and other restricted payments by the Company and its Subsidiaries, asset sales, transactions with affiliates, the incurrence of liens, and mergers and consolidations. Financing costs, totaling $7,236,000, have been capitalized in 1998 and are being amortized over the term of the Senior Notes. Amortization of deferred financing costs is recorded as interest expense. Assuming there is no redemption of the Senior Notes prior to maturity, the entire principal will be payable on December 15, 2007.
On March 25, 1998, Holdings and the Company entered into a Credit Agreement with various banks that has a combined revolving commitment in the initial principal amount of $40,000,000 (the "Revolving Credit Facility"). Financial costs associated with the Revolving Facility have been capitalized and are being amortized over the term of the agreement. The Revolving Credit Facility is guaranteed by Holdings and by all subsidiaries of the Company. In addition, the Revolving Credit Facility is secured by a first priority security interest in substantially all of the properties and assets of the Company and its domestic subsidiaries, including a pledge of all of the stock of such subsidiaries, and a pledge by Holdings of all of the stock of the Company. The Revolving Credit Facility bears interest at a fluctuating rate determined by reference to (i) the Base Rate plus a margin ranging from .25% to 1.5%, or (ii) the Eurodollar Rate plus a margin ranging from 1.25% to 2.5% as the case may be. The applicable margin is based on the Company's total consolidated leverage ratio. The Base Rate equals the higher of (a) the rate of interest publicly announced from time to time by Bank of America as its reference rate, or (b) the Federal funds rate plus .5%. The Eurodollar Rate is based on (i) the interest rate per annum at which deposits in U.S. Dollars are offered by Bank of America's applicable lending office to major banks in the offshore market account in an aggregate principal amount approximately equal to the amount of the loan made to the Company and (ii) the maximum reserve percentage in effect under regulations issued from time to time by the Federal Reserve Board. The Company is also required to pay customary fees with respect to the Revolving Credit Facility, including an up-front arrangement fee, annual administrative agency fees and commitment fees on the unused portion of the Revolving Credit Facility. The Revolving Credit Facility includes both affirmative and negative covenants that include meeting certain financial ratios.
On April 26, 1999, Holdings and the Company amended the Revolving Credit Facility, effective as of March 29, 1999. This amendment limits the Company's ability to borrow in excess of $20,000,000 under the Revolving Credit Facility until certain ratios are achieved. This amendment also adjusted certain covenants contained in the original Revolving Credit Facility.
Effective July 20, 1999, the Revolving Credit Facility was further amended to provide for the sale of the Company's Internet business to Law.com (described below) and to modify certain debt covenants. On March 8, 2000 (effective March 28, 1999), the Revolving Credit Facility was further amended to modify certain of the covenants, permit the proposed transaction described below under Note 14--Subsequent Events and to increase the borrowing limit described above from $20 million to $22.5 million.
At December 31, 1999, the unused commitment was approximately $21,700,000, of which 1,700,000 is available in accordance with the April 26, 1999 Revolving Credit Facility amendment. The available balance under the unused commitment is further reduced by any letters of credit outstanding of which
AMERICAN LAWYER MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
12. LONG-TERM DEBT (CONTINUED) totaled $1,121,000 at December 31, 1999. A 10% increase in the average rate in the Revolving Credit Facility during 1999 would have increased the Company's net loss to approximately $26,506,000.
13. FASB 107--FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and notes payable. The Company believes that the carrying amount for these accounts approximates fair value.
14. SUBSEQUENT EVENTS
On March 28, 2000, the Company sold the business of the Company and certain of the Company's wholly-owned subsidiaries constituting THE DAILY DEAL and CORPORATE CONTROL ALERT (the "Business") to TDD, L.L.C., a newly formed limited liability company (the "Purchaser") owned by substantially all of the same stockholders as Holdings. The consideration for the sale was $7.5 million in cash and $2.5 million face amount of a membership interest in the Purchaser with a preferred return (the "Preferred Membership Interest"). In addition, the Purchaser will pay the Company the aggregate amount of operating losses incurred by the Company in connection with the operation of the Business for the month of March 2000. The Preferred Membership Interest accretes at 12.25% compounded annually, is convertible into 3.0% of the common equity of the Purchaser, has anti-dilution protection for dividends in the form of additional equity interests, combinations, splits and reclassifications and has anti-dilution protection up to the first $25.0 million of equity capital including the Preferred Membership Interest issued by the Purchaser.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Lawyer Media, L.P.:
We have audited the accompanying balance sheet of American Lawyer Media, L.P. as of July 31, 1997 and the related statements of operations, changes in partners' capital and accumulated deficit and cash flows for the seven 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 financial position of American Lawyer Media, L.P. as of July 31, 1997, and the results of its operations and its cash flows for the seven months then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York November 20, 1997
AMERICAN LAWYER MEDIA, L.P.
BALANCE SHEET
JULY 31, 1997
(IN THOUSANDS)
The accompanying notes to financial statements are an integral part of this balance sheet.
AMERICAN LAWYER MEDIA, L.P.
STATEMENT OF OPERATIONS (NOTE 3)
FOR THE SEVEN MONTHS ENDED JULY 31, 1997
(IN THOUSANDS)
The accompanying notes to financial statements are an integral part of this statement.
AMERICAN LAWYER MEDIA, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL AND ACCUMULATED DEFICIT
FOR THE SEVEN MONTHS ENDED JULY 31, 1997
(IN THOUSANDS)
The accompanying notes to financial statements are an integral part of this statement.
AMERICAN LAWYER MEDIA, L.P.
STATEMENT OF CASH FLOWS
FOR THE SEVEN MONTHS ENDED JULY 31, 1997
(IN THOUSANDS)
The accompanying notes to financial statements are an integral part of this statement.
AMERICAN LAWYER MEDIA, L.P.
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1997
1. ORGANIZATION
American Lawyer Media, L.P. (the "Company") is a limited partnership of Time Warner and Associated Newspapers. The sole general partner of American Lawyer Media, L.P. is Time Warner. The Company is based in New York and has operations in seven states and the District of Columbia. The Company publishes THE AMERICAN LAWYER, CORPORATE COUNSEL MAGAZINE, AMLAW TECH, THE CONNECTICUT LAW TRIBUNE, LEGAL TIMES, NEW JERSEY LAW JOURNAL, THE RECORDER, TEXAS LAWYER, FULTON COUNTY DAILY REPORT, and the DAILY BUSINESS REVIEWS, all of which are divisions of the Company. In addition, the Company consolidates its interest in COUNSEL CONNECT, a New York general partnership. The partnership, which runs a membership-based Internet service exclusively for lawyers and legal professionals, was formed in February 1994 by Mead Data Central and the Company. In February 1996, Mead Data Central assigned its interest in the partnership to the Company and also contributed the balance in its capital account of approximately $1,647,000, to the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Advertising revenues are generated from the placement of display and classified advertisements, as well as legal notices, in the Company's publications. Advertising revenue is recognized upon release of the related publications to subscribers. Allowances for estimated doubtful accounts are provided based upon historical experience.
Subscription revenues are recognized on a pro rata basis as issues of a subscription are served.
Ancillary revenues consist principally of third-party printing services, newsletter subscriptions, sales of professional books and directories, Lexis/Nexis royalty income, seminar income, and a daily fax service of court decisions.
Internet services revenues consist of income earned from COUNSEL CONNECT subscriptions and usage fees.
DEFERRED SUBSCRIPTION INCOME
Deferred subscription income results from advance payments or orders for magazine subscriptions received from subscribers.
CIRCULATION PROMOTION (SUBSCRIPTION DIRECT MAIL) COSTS
Circulation promotion costs are charged to expense upon the release of the campaign.
USE OF 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 those estimates.
AMERICAN LAWYER MEDIA, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CASH AND CASH EQUIVALENTS
The Company considers time deposits and certificates of deposit with original maturities of three months or less to be cash equivalents.
INVENTORIES
Inventories consist principally of paper utilized by the Company and its outside printers and professional books published and sold by the Company. Inventories are stated at the lower of cost or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Significant improvements are capitalized, while expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets as follows:
Leasehold improvements are amortized over the shorter of the remaining lease term or the estimated useful life. The cost and accumulated depreciation of property sold or retired are removed from the accounts upon disposition.
INTANGIBLES AND GOODWILL
Intangible assets, consisting primarily of noncompete agreements and subscription lists, are valued at the appraised market value of the assets at the date of acquisition, net of accumulated amortization. Intangibles are amortized over the expected useful lives of the respective assets, ranging from two to thirteen years. Goodwill represents the excess of purchase price over the fair value of net assets acquired, less accumulated amortization. Goodwill is being amortized on a straight-line basis over 40 years.
ACCOUNTS PAYABLE
Included in accounts payable are $425,000 of bank overdrafts as of July 31, 1997.
3. INCOME TAXES
No provision has been made in the accompanying statement of operations for income taxes since, pursuant to provisions of the Internal Revenue Code, the net loss appearing on the accompanying statement of operations is reportable by each of the partners on their individual tax returns.
AMERICAN LAWYER MEDIA, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1997
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at July 31, 1997 (in thousands):
5. RELATED PARTY TRANSACTIONS
The Company has a business relationship with Courtroom Television Network ("Court TV"), an affiliate of the Company's general partner. Revenues are generated through licensing fees charged to Court TV for editorial content and sales of advertisements. The licensing fees for American Lawyer publications totaled approximately $149,000 for the seven months ended July 31, 1997. Advertising revenues from Court TV totaled approximately $122,000 for the seven months ended July 31, 1997. In addition, the Company and Court TV share certain editorial and administrative resources and employees, as well as office facilities. The cost associated with employees who devote all or a portion of their time to Court TV activities is charged to Court TV based on an estimate of their time spent on such activities. These charges, which include an allocation for the chairman of the Company, amounted to $321,000 for the seven months ended July 31, 1997. Court TV is also charged a flat annual fee of $195,000 for use of the Company's reporters for on-camera appearances and background reports. Finally, an allocation is made to Court TV to cover general overhead costs (e.g., rent, utilities, etc.) which amounted to approximately $53,000 for the seven months ended July 31, 1997. Amounts due from Court TV are reflected as due from affiliate on the accompanying balance sheet.
The Company's general partner provides certain legal, administrative, accounting, and tax services for the Company. Charges for such services amounted to approximately $47,000 for the seven months ended July 31, 1997.
6. DUE TO GENERAL PARTNER
Due to General Partner consists of borrowings from WCI/AMLAW Inc. and interest accrued thereon. The borrowings bear interest at 1% under prime and do not have a stated maturity date. This amount has been included in long-term liabilities in the accompanying balance sheet since the amount is not intended to be repaid within the next year.
7. COMMITMENTS AND CONTINGENCIES
Rent expense, including payments of real estate taxes, insurance and other expenses required under certain leases, amounted to approximately $1,046,500 for the seven months ended July 31, 1997, including rent accruals in excess of payments of $6,600.
AMERICAN LAWYER MEDIA, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1997
7. COMMITMENTS AND CONTINGENCIES (CONTINUED) Minimum rental commitments under noncancellable leases as of July 31, 1997 were as follows (in thousands):
Certain of the leases provide for free rent periods as well as rent escalations. The rental commitments above represent actual rental payments to be made. The financial statements reflect rent expense and rental income on a straight-line basis over the terms of the leases. An obligation of $6,600, representing accrued pro rata future payments, net of receipts, is included in the accompanying balance sheet.
The Company subleases a portion of its office facilities to Court TV. The sublease charges summarized above are based on an oral agreement between the Company and Court TV.
The lease for the Company's headquarters contains a provision whereby the Company could elect not to renew the lease for the years 1999 through 2008 upon payment of a $2,200,000 termination penalty.
The Company is involved in a number of legal proceedings, some of which are significant, which arose in the ordinary course of business. In the opinion of management, the ultimate outcome of these contingencies is not expected to have a material adverse effect on the Company's financial position or results of operations.
8. EMPLOYEE BENEFITS
The Company sponsors a retirement savings plan. Participation in this plan is available for substantially all employees. The plan provides for employer matching of employees' contributions, as defined. The cost of the plan was $177,000 for the seven months ended July 31, 1997.
The Company has a defined benefit plan covering substantially all employees. The Company's general funding policy is to contribute annual amounts that satisfy the Internal Revenue Code funding requirements. The components of net periodic pension cost for the year ended December 31, 1996 were as follows (in thousands):
AMERICAN LAWYER MEDIA, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1997
8. EMPLOYEE BENEFITS (CONTINUED) The following table sets forth the funded status of the Company's defined benefit plan and amounts recognized in the balance sheet as of December 31, 1996 (in thousands):
In determining the actuarial present value of the projected benefit obligation as of December 31, 1996, the discount rate was 7.5%, the rate of increase in future compensation levels was 6%, and the expected long-term rate of return on assets was 9%.
The Company sponsors an Excess Benefit Pension Plan providing a benefit to highly compensated employees in excess of the benefits provided by the tax qualified defined benefit plan. The plan is an unfunded, non-qualified deferred compensation plan.
The Company also sponsors a comprehensive medical and dental insurance plan which is available to substantially all employees. The Company is self insured for claims submitted under this plan up to predetermined amounts, above which third party insurance applies.
9. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 107-FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and due to general partner. The carrying amount of these accounts approximates fair value.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the National Law Publishing Company, Inc.:
We have audited the accompanying consolidated balance sheet of National Law Publishing Company, Inc. (a New York corporation) and subsidiaries as of December 21, 1997 and the related consolidated statement of operations, stockholders' equity and cash flows for the period from January 1, 1997 through December 21, 1997. 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 financial position of National Law Publishing Company, Inc. and subsidiaries as of December 21, 1997, and the results of their operations and their cash flows for the period from January 1, 1997 through December 21, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York April 3, 1998
NATIONAL LAW PUBLISHING COMPANY, INC.
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 21, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of this balance sheet
NATIONAL LAW PUBLISHING COMPANY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1997 THROUGH DECEMBER 21, 1997
(IN THOUSANDS)
The accompanying notes are an integral part of this statement
NATIONAL LAW PUBLISHING COMPANY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 1, 1997 THROUGH DECEMBER 21, 1997
(IN THOUSANDS)
The accompanying notes are an integral part of this statement
NATIONAL LAW PUBLISHING COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1997 THROUGH DECEMBER 21, 1997
(IN THOUSANDS)
The accompanying notes are an integral part of this statement
NATIONAL LAW PUBLISHING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 21, 1997
1. ORGANIZATION
The National Law Publishing Company, Inc. ("National") through its wholly owned operating subsidiary, New York Law Publishing Company, Inc. ("NYLP" or the "Company") is considered a leading publisher of periodicals, books and newsletters as well as a provider of seminars and electronic information services targeted to the U.S. legal community. NYLP's principal periodical publications are the New York Law Journal (a daily newspaper), The National Law Journal (a weekly publication) and Law Technology Product News (published approximately fifteen times per year). NYLP also wholly owns Law Journal EXTRA!, Inc. ("LJX"). LJX is an on-line service available on the World Wide Web providing access to various legal information and related services including electronic versions of NYLP's principal periodicals.
On December 1, 1995, Boston Ventures Limited Partnership IV and Boston Ventures Limited Partnership IVA (collectively "Boston Ventures"), through a wholly-owned subsidiary, NLPC Acquisition, Inc. ("NAI"), acquired approximately 71,308 shares of National's common stock from Apollo Publishing Partners, L.P. ("Apollo") and James A. Finkelstein ("Finkelstein"), the chief executive of the Company, and initiated a series of related transactions which resulted in Boston Ventures acquiring approximately 94.3% of National for $141,958,454 in cash plus acquisition related costs of $757,000.
In addition, on December 1, 1995, NAI was merged into National, with National as the surviving corporation. In connection with the merger, Boston Ventures received 60,916.5954 shares of National's common stock (approximately 94.3% of National's outstanding stock) in exchange for its shares of NAI. Finkelstein retained 3,691.9149 shares of National, approximately 5.7% of its outstanding stock. In addition, under a related stock option agreement, Finkelstein was granted options to acquire up to an additional 6,461 shares of National which vest, subject to certain employment and operating performance criteria, over a five year period (Note 7).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF 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 those estimates.
CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentration of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. The Company believes it is not exposed to any significant credit risk related to cash and cash equivalents. Concentrations of credit risk with respect to trade accounts receivable are, except for amounts due from legal advertising ad agents ("Legal Ad Agents"), generally limited due to the large number of customers comprising the Company's customer base. Such Legal Ad Agents do not have significant liquid net worth and, as a result, the Company is exposed to a certain level of credit concentration risk in this area, which the Company believes it has adequately provided for.
NATIONAL LAW PUBLISHING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 21, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION
Advertising revenues are generated from the placement of display and classified advertisements, as well as legal notices, in the Company's publications. Advertising revenue is recognized upon release of the related publications to subscribers.
Subscription revenues are recognized on a pro rata basis as issues of a subscription are served.
Ancillary revenues consist principally of newsletter subscriptions, sales of professional books, software, royalty income and seminar income.
Internet services revenues are recognized upon the release of an advertisement on the website.
DEFERRED SUBSCRIPTION INCOME
Deferred subscription income results from advance payments or orders for subscriptions received from subscribers and is amortized on a straight-line basis over the life of the subscription as issues are served. Subscription receivables of $734,000 are included in accounts receivable in the accompanying consolidated balance sheet.
EXPENSE RECOGNITION
ADVERTISING AND PROMOTION COSTS--Advertising expenditures are expensed when the particular advertisement is released. The Company capitalizes direct response promotional costs. At December 21, 1997 approximately $1,152,000 of direct response promotional costs was recorded in other assets on the accompanying consolidated balance sheet. Advertising expense was approximately $3,018,000 for the period ended December 21, 1997. The amortization of direct response promotion expenditures is included in selling expense in the accompanying consolidated statements of operations.
EDITORIAL COSTS--All editorial costs are expensed as incurred.
CASH AND CASH EQUIVALENTS
The Company considers time deposits and certificates of deposit with original maturities of three months or less to be cash equivalents.
INVENTORIES
Inventories consist principally of professional books published and sold by the Company and related binding materials utilized. Inventories are stated at the lower of cost, as determined by the average cost method, or market.
PROPERTY, PLANT AND EQUIPMENT
Furniture, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Furniture, equipment and purchased software are depreciated on a straight-line basis over their respective estimated useful lives. Repairs and maintenance are charged to expense as incurred. Leasehold improvements are amortized over the lives of the improvements or the term of the related lease, whichever is shorter.
NATIONAL LAW PUBLISHING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 21, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INTANGIBLE ASSETS
Intangible assets include deferred financing costs with the amortization and/or write-off of such costs classified as part of amortization expense. Goodwill represents the excess of purchase price over the fair value of net assets acquired.
3. PROPERTY, PLANT AND EQUIPMENT, NET
The following is a summary of property, plant and equipment at December 21, 1997:
4. INTANGIBLE ASSETS, NET
The following is a summary of intangible assets at December 21, 1997:
Total amortization expense of intangibles was approximately $6,709,000 for the period ended December 21, 1997.
5. LONG-TERM DEBT
Long-term debt was comprised of the following at December 21, 1997:
NATIONAL LAW PUBLISHING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 21, 1997
5. LONG-TERM DEBT (CONTINUED) REVOLVING CREDIT FACILITIES
On December 1, 1995, the Company entered into a revolving credit facility agreement (the "Credit Agreement") with The First National Bank of Boston (the "Bank"), as a lender and as agent for other lenders, under which NAI borrowed $15,674,061 and NYLP borrowed $55,225,939 (aggregating $70,900,000) in connection with Boston Ventures' acquisition of the Company. Upon NAI's merger into National, NYLP assumed the $15,674,061 of Bank debt, in the form of a dividend from NYLP to National. The Company's borrowing capacity under the Revolving Credit Facility, including cash loans and standby letters of credit of up to $6 million, was $70.5 million through December 21, 1997, and decreases semi-annually until final maturity on December 31, 2002 as follows:
Available borrowings under this facility are further limited by the sum of (a) the Company's letter of credit exposure and (b) certain stipulated percentages of excess cash flow based on the ratio of the Company's consolidated funded debt to consolidated operating cash flow, as defined. Outstanding borrowings under the facility bear interest at a fluctuating rate, subject to the Company's elected pricing option, at either the Base Rate, Eurodollar Rate, and/or CD Rate, plus a variable margin based on the Company's ratio of consolidated funded debt to consolidated operating cash flow, as defined. The interest rate under this Revolving Credit Facility approximated 8.0% for the period ended December 21, 1997. Commitment fees are charged and payable quarterly at either a .375% or .500% annual rate, depending on the Company's ratio of consolidated funded debt to consolidated operating cash flow for the immediately preceding quarter (the "Quarterly Funded Debt Ratio") and on the average daily unused portion of the Revolving Credit Facility. In addition, letter of credit usage fees are payable at rates which range between 1.25% and 2.5% depending on the Quarterly Funded Debt Ratio and on the daily letter of credit exposure during the three month period or portion thereof ending on such payment date. The Revolving Credit Facility is secured by the assets of National and NYLP and the stock of NYLP and its subsidiaries.
The Credit Agreement requires, among other things, that the Company maintain certain minimum levels of consolidated operating cash flow and certain prescribed ratios of consolidated funded debt to consolidated operating cash flows, consolidated operating cash flow to interest expense and consolidated adjusted operating cash flow to consolidated fixed charges, as defined. The Credit Agreement contains
NATIONAL LAW PUBLISHING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 21, 1997
5. LONG-TERM DEBT (CONTINUED) other restrictive covenants, including limitations on indebtedness, investments and acquisitions, the disposition of assets, transactions with affiliates and distributions to stockholders.
The Agreement provides that within 10 days after the Eurodollar Basic Rate for three month Eurodollar Pricing Options first exceeds 5.875% per annum, the Company will obtain and thereafter keep in effect one or more interest rate protection agreements covering a notional amount of at least 50% of the outstanding borrowings under the Revolving Credit Facility for an aggregate period of not less than two years.
6. INCOME TAXES
National and its subsidiaries file a consolidated Federal and combined New York State and New York City income tax returns. NYLP also files income tax returns in California and the District of Columbia. At December 21, 1997, National had a net operating loss carryforwards available to offset future taxable income for Federal income tax purposes of approximately $2.0 million. These carryforwards expire in the years 2004 through 2010 and, as a result of the change in ownership described in Note 1, are subject to the limitations of Internal Revenue Code Section 382. At December 21, 1997, National had approximately $75,000 of operating loss carryforwards for New York State and New York City income tax purposes.
The provision for income taxes is comprised of the following for the period from January 1, 1997 to December 21, 1997:
NATIONAL LAW PUBLISHING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 21, 1997
6. INCOME TAXES (CONTINUED) The reconciliation between the provision for income taxes and the amount computed by applying the statutory Federal income tax rate to loss before income taxes is as follows for the period from January 1, 1997 to December 21, 1997:
7. STOCKHOLDERS' EQUITY
STOCK OPTIONS
In connection with and as a condition of Boston Ventures' acquisition, the Company entered into a stock option agreement (the "Agreement") with Finkelstein which, subject to certain terms and conditions of the Agreement, granted Finkelstein an option to purchase an aggregate of approximately 6,461 shares of National's common stock. One-third of the shares covered by the option vest and become exercisable in 60 equal installments of approximately 36 shares on the last day of each month commencing on January 31, 1996 and continuing until December 31, 2000. The remaining shares vest and become exercisable, subject to the Company's attainment of two separate annual operating cash flow targets, as defined, in equal annual installments of approximately 431 shares or approximately 862 shares, respectively (if such respective operating cash flow targets are reached), on December 31, 1996 through 2000 or upon sale, subject to achieving certain performance targets. The vesting of all shares is generally subject to Finkelstein being employed by the Company on such dates. The shares are exercisable at a price of approximately $1,083 per share and expire on the tenth anniversary date of the Agreement.
STOCKHOLDERS' AGREEMENT
On December 1, 1995, Boston Ventures, National and Finkelstein entered into a stockholders' agreement which, among other things, allows Finkelstein, upon the nonrenewal of his employment, as defined in his employment agreement to require the Company to purchase all of his shares and liquidate and cash out his vested option shares for fair value. The Company's obligation to acquire Finkelstein's shares is subject to it being permitted by the Credit Agreement and applicable law to do so. In addition, the stockholders' agreement gives the Company, along with Boston Ventures, the right of first refusal with respect to Finkelstein's shares.
8. RETIREMENT PLANS
The Company has a 401(k) profit sharing plan (the "Plan") for all eligible employees who have completed one year of service. Under the Plan, the Company has the option of making a matching contribution of up to 3% of a participant's compensation. The Company may also annually contribute
NATIONAL LAW PUBLISHING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 21, 1997
8. RETIREMENT PLANS (CONTINUED) additional discretionary amounts to participants. For the period ended December 21, 1997, the Company did not make any matching discretionary contributions to the Plan.
In addition, approximately twenty Company employees are covered by certain defined contribution retirement plans sponsored by the Typographical Union. Company contributions to these retirement plans for the period ended December 21, 1997 were approximately $474,000.
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office space under non-cancelable operating leases which expire at various dates through October 2008. At December 21, 1997, the future minimum payments due under these leases, net of sublease income are as follows:
Rent expense, net of sublease income, was approximately $1,153,000 for the period ended December 21, 1997.
At December 21, 1997, the Company had a letter of credit outstanding of approximately $533,000 for the security deposit on its corporate office space.
EMPLOYMENT AGREEMENT
In connection with Boston Ventures' December 1, 1995 acquisition of the Company, Finkelstein entered into a long-term employment agreement (the "Employment Agreement") with the Company. The initial term of the Employment Agreement is through December 31, 2000 and provides for, among other things, an annual base salary which, beginning on June 30, 1996, and annually thereafter, is to be increased by the greater of (i) 5% or (ii) the annual increase in the consumer price index for all urban consumers not in excess of 8%.
LEGAL MATTERS
The Company is subject to certain legal actions and complaints that arise in the ordinary course of its business. In the opinion of management, the amount of the ultimate liability, if any, which may result from these legal actions and complaints will not materially affect the consolidated financial statements of the Company.
NATIONAL LAW PUBLISHING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 21, 1997
10. FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company has a number of financial instruments, none of which are held for trading purposes. These financial instruments consist of cash and cash equivalents, long-term debt and interest rate protection agreements. The Company estimates that the fair value of all financial instruments at December 21, 1997 does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying consolidated balance sheet.
11. SUBSEQUENT EVENT
On December 22, 1997, Boston Ventures and Mr. James A. Finkelstein completed a Stock Purchase Agreement with American Lawyer Media, LLC for the sale of NLP. The purchase price for the NLP acquisition was approximately $203,200,000 in cash. In connection with the sale of the Company, Boston Ventures cashed out options held by certain management employees with a portion of the proceeds of the sale. The payment totaled approximately $6,926,000 which is included as a special compensation charge in the accompanying consolidated statement of operations (See Note 7).
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.
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints William L. Pollak and Anup Bagaria and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their, his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
* * * * *
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the date indicated.
EXHIBIT INDEX
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* Exhibits are incorporated by reference from the Company's Registration Statement on Form S-4 (File No. 333-50117).
+ Confidential treatment has been requested for certain portions of this document.
(B) FINANCIAL STATEMENT SCHEDULES
AMERICAN LAWYER MEDIA, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
For the Twelve Months Ended December 31, 1999 and the Twelve Months Ended December 31, 1998 (dollars in thousands):
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(1) Represents reversals of the allowance account and write-offs of accounts receivable, net of recoveries.