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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2004.
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from______ to________.
COMMISSION FILE NUMBER: 333-50119
AMERICAN LAWYER MEDIA HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3980412
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
345 PARK AVENUE SOUTH
NEW YORK, NEW YORK 10010
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 779-9200
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of August 12, 2004, there were 1,320,330 shares of the Registrant's
common stock, $.01 par value, outstanding, the majority of which was held by
U.S. Equity Partners, L.P. and its affiliates.
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EXPLANATORY NOTE
The Company is not currently required to file reports under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and is not currently an
"issuer" within the meaning of the Sarbanes-Oxley Act of 2002. The Company is
filing this quarterly report on Form 10-Q pursuant to a covenant contained in
the Indenture dated December 22, 1997 between the Company and The Bank of New
York, as Trustee, governing the Company's 12 1/4% Senior Discount Notes due
2008.
AMERICAN LAWYER MEDIA HOLDINGS, INC.
INDEX
PAGE
----
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at June 30, 2004 (unaudited)
and December 31, 2003............................................. 1
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2004 and 2003 (unaudited)................... 2
Consolidated Statement of Changes in Stockholders' Deficit for
the Six Months Ended June 30, 2004 (unaudited).................... 3
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2004 and 2003 (unaudited).......................... 4
Notes to Consolidated Financial Statements at
June 30, 2004 (unaudited)......................................... 5-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................ 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK............................................... 26
ITEM 4. CONTROLS AND PROCEDURES........................................... 26
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................. 27
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS......................... 27
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................... 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 27
ITEM 5. OTHER INFORMATION................................................. 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................. 27
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN LAWYER MEDIA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2004 2003
--------- ---------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 603 $ 1,614
Accounts receivable, net of allowance for doubtful accounts and returns of
$2,509 and $2,582, respectively ....................................... 17,098 15,657
Inventories, net ......................................................... 695 592
Other current assets ..................................................... 2,549 2,381
--------- ---------
Total current assets .............................................. 20,945 20,244
Property, plant and equipment, net of accumulated depreciation
and amortization of $26,188 and $24,291, respectively ................. 8,186 8,386
Intangible assets, net of accumulated amortization of $70,116
and $66,137, respectively ............................................. 109,052 113,030
Goodwill, net ............................................................ 148,242 148,242
Deferred financing costs, net of accumulated amortization of $6,388 and
$5,800, respectively .................................................. 4,036 4,625
Other assets ............................................................. 5,898 5,495
--------- ---------
Total assets ...................................................... $ 296,359 $ 300,022
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ......................................................... $ 4,522 $ 5,493
Accrued expenses ......................................................... 12,216 10,368
Accrued interest payable ................................................. 804 841
Deferred income (including deferred subscription income of $17,779
and $17,391, respectively) ............................................ 21,438 20,752
--------- ---------
Total current liabilities ......................................... 38,980 37,454
--------- ---------
Long-term debt:
Revolving credit
facility .............................................................. 25,000 30,400
Senior notes ............................................................. 175,000 175,000
Senior discount notes .................................................... 76,015 71,627
--------- ---------
Total long-term debt .............................................. 276,015 277,027
Other noncurrent liabilities ............................................. 10,453 11,284
--------- ---------
Total liabilities ................................................. 325,448 325,765
--------- ---------
Stockholders' deficit:
Common stock-$.01 par value; 2,000,000 shares authorized; 1,320,330 issued
and outstanding at June 30, 2004 and December 31, 2003 ................ 13 13
Paid-in-capital .......................................................... 116,488 116,488
Accumulated deficit ...................................................... (143,902) (140,656)
Accumulated other comprehensive loss ..................................... (1,688) (1,588)
--------- ---------
Total stockholders' deficit ....................................... (29,089) (25,743)
--------- ---------
Total liabilities and stockholders' deficit ....................... $ 296,359 $ 300,022
========= =========
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
1
AMERICAN LAWYER MEDIA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
REVENUES:
Periodicals:
Advertising ............................. $ 20,399 $ 19,910 $ 38,671 $ 38,466
Subscription ............................ 6,387 6,191 12,642 12,228
Ancillary products and services ............ 10,874 9,036 21,431 18,346
-------- -------- -------- --------
Total revenues .......................... 37,660 35,137 72,744 69,040
-------- -------- -------- --------
OPERATING EXPENSES:
Editorial .................................. 5,149 5,190 10,294 10,401
Production and distribution ................ 6,762 5,954 12,549 12,293
Selling .................................... 7,027 6,772 14,181 13,589
General and administrative ................. 8,984 8,478 18,942 17,838
Depreciation, amortization and other charges 2,956 4,885 5,876 8,393
-------- -------- -------- --------
Total operating expenses ................ 30,878 31,279 61,842 62,514
-------- -------- -------- --------
Operating income ........................ 6,782 3,858 10,902 6,526
Interest expense ........................... (7,000) (6,894) (14,161) (13,930)
Other income ............................... 29 -- 29 --
-------- -------- -------- --------
Loss before income taxes ................ (189) (3,036) (3,230) (7,404)
Benefit (provision) for income taxes ....... -- 1,102 (16) 1,921
-------- -------- -------- --------
Net loss ................................ $ (189) $ (1,934) $ (3,246) $ (5,483)
======== ======== ======== ========
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
2
AMERICAN LAWYER MEDIA HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
PAR ACCUMULATED
SHARES VALUE ADDITIONAL OTHER
--------- ---------- PAID-IN ACCUMULATED COMPREHENSIVE
COMMON STOCK CAPITAL DEFICIT LOSS TOTAL
--------------------- --------- ---------- ------------- ----------
Balance at December 31, 2003 ....... 1,320,330 $ 13 $ 116,488 $(140,656) $ (1,588) $ (25,743)
Net loss ........................... -- -- -- (3,246) -- (3,246)
Unrealized loss on equity securities -- -- -- -- (100) (100)
--------- --------- --------- --------- --------- ---------
Total comprehensive loss ....... -- -- -- -- -- (3,346)
--------- --------- --------- --------- --------- ---------
Balance at June 30, 2004 ........... 1,320,330 $ 13 $ 116,488 $(143,902) $ (1,688) $ (29,089)
========= ========= ========= ========= ========= =========
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
3
AMERICAN LAWYER MEDIA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................................... $(3,246) $(5,483)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation, amortization and other charges ...................... 5,876 8,393
Deferred income tax ............................................... -- (1,921)
Non-cash interest ................................................. 588 588
Accretion of interest on senior discount notes .................... 4,387 4,218
(Increase) decrease in:
Accounts receivable, net .......................................... (1,365) 684
Inventories ....................................................... (103) 102
Other current assets .............................................. (168) 327
Other assets ...................................................... 159 10
(Decrease) increase in:
Accounts payable .................................................. (971) (562)
Accrued expenses .................................................. 1,848 (790)
Accrued interest payable .......................................... (37) (382)
Deferred income ................................................... (49) (1,115)
Other noncurrent liabilities ...................................... (835) 369
------- -------
Net cash provided by operating activities ...................... 6,084 4,438
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .............................................. (1,695) (1,214)
Deferred purchase price from purchase of business ................. -- (377)
------- -------
Net cash used in investing activities .......................... (1,695) (1,591)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment under revolving credit facility ........................... (5,400) (1,400)
------- -------
Net cash used in financing activities .......................... (5,400) (1,400)
------- -------
Net (decrease) increase in cash ................................ (1,011) 1,447
------- -------
Cash, beginning of period ......................................... 1,614 824
------- -------
Cash, end of period ............................................... $ 603 $ 2,271
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period:
Income taxes ................................................... $ 16 $ 7
======= =======
Interest ....................................................... $ 9,224 $ 9,505
======= =======
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
4
AMERICAN LAWYER MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
1. ORGANIZATION & OPERATIONS
American Lawyer Media Holdings, Inc. ("we," "us," "our," or the "Company")
is the parent company of American Lawyer Media, Inc. ("ALM"). We publish
national and regional legal publications, including The American Lawyer, New
York Law Journal, The National Law Journal and Corporate Counsel. Our operations
are based in New York with regional offices in seven states, the District of
Columbia and London, England.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the interim financial statements include all adjustments, which are
of a normal recurring nature, that management considers necessary to fairly
present the financial position and the results of operations for such periods.
Results of operations of interim periods are not necessarily indicative of
results for a full year. These financial statements should be read in
conjunction with the audited consolidated financial statements in our Annual
Report on Form 10-K for December 31, 2003.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include our accounts and the
accounts of our wholly-owned subsidiaries. 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
Our financial instruments that are exposed to concentration of credit risk
consist primarily of cash and cash equivalents and trade accounts receivable. We
believe that we are 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 our customer base. Receivables from Legal Ad Agents aggregated $1.5
million as of June 30, 2004. Such Legal Ad Agents do not have significant liquid
net worth and, as a result, we are exposed
5
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to a certain level of credit concentration risk in this area, for which we
believe we have adequately provided.
REVENUE RECOGNITION
Periodical advertising revenues are generated from the placement of
display, classified and directory advertisements, as well as legal notices, in
our 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. Internet subscription revenues are
recognized on a pro rata basis over the life of the term of the subscription.
Ancillary products and services revenues consist principally of newsletter
subscriptions, sales of professional books, seminar and trade show income,
income from a daily fax service of court decisions and web and phone research
and income from electronic products. 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 trade show revenues are
recognized when the seminar or trade show is held. Daily fax service and
research revenues are recognized upon fulfillment of orders.
Internet advertising revenues are generated from the placement of display
and classified advertisements, as well as directory listings, on our websites.
Display and classified advertising revenue is recognized upon the release of an
advertisement on the particular website. Directory listing revenue is recognized
on a pro-rata basis over the life of the directory listing, generally one year.
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 approximately $2,195,000 and $2,122,200 are included in accounts
receivable in the accompanying consolidated June 30, 2004 and December 31, 2003
balance sheets, respectively.
ADVERTISING AND PROMOTIONAL EXPENDITURES
Advertising and promotional expenditures totaled approximately $1,553,000
and $1,748,000 for the three months ended June 30, 2004 and 2003, respectively,
and $3,424,000 and $3,351,000 for the six months ended June 30, 2004 and 2003,
respectively. These costs are expensed as the related advertisement or campaign
is released.
CASH AND CASH EQUIVALENTS
We consider time deposits and certificates of deposit with original
maturities of three months or less to be cash equivalents.
6
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash on our consolidated balance sheet at June 30, 2004 and December 31,
2003 includes $24,400 and $160,000, respectively, of restricted cash collected
in association with managing a technology show on behalf of one of our
customers.
INVENTORIES
Inventories consist principally of binding materials utilized by us and
our outside printers and professional books published and sold by us.
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. 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 following estimated useful lives:
Buildings 25 years
Furniture, machinery and equipment 5-9 years
Computer equipment and software 3-6 years
Leasehold improvements are amortized over the shorter of the remaining
lease term or the estimated useful life.
In June 2003, we included in depreciation, amortization and other charges
a $1.5 million adjustment to write-off certain leasehold improvements and
furniture relating to office space abandoned during a prior quarter. The lease
was obtained in connection with our acquisition of Law.com, Inc. ("Law.com") on
May 1, 2002.
INTANGIBLE ASSETS
Intangible assets represent advertiser commitments, uniform resource
locators, copyrights, trademarks, customer and subscriber lists and non-compete
agreements. Under SFAS No. 142, "Goodwill and Other Intangible Assets", an
acquired intangible asset should be separately recognized apart from goodwill if
the benefit of the intangible is obtained through contractual or other legal
rights, or if the intangible asset can be sold, transferred, licensed, rented,
or exchanged. Intangible assets deemed to have finite lives are amortized on a
straight-line basis over useful lives ranging from 6 months through 30 years.
IMPAIRMENT OF LONG-LIVED ASSETS
We evaluate whether there has been an impairment in any of our long-lived
assets on an annual basis or if certain circumstances indicate that a possible
impairment may exist. An impairment in value exists when the carrying value of a
long-lived asset exceeds its fair value. If it is determined that an impairment
in value has occurred, the carrying value is written down to its fair value.
Goodwill and certain other intangibles are tested for impairment under FAS No.
142 and all other long-lived assets are tested for impairment under FAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets."
7
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED FINANCING COSTS
Deferred financing costs are amortized over the life of the related debt
using the straight-line method.
RECLASSIFICATIONS
Certain prior period amounts may have been reclassified to conform with
the current year presentation.
INCOME TAXES
Income taxes are accounted for in accordance with SFAS No. 109,
"Accounting for Income Taxes", which requires that deferred tax assets and
liabilities be recognized using enacted tax rates for the effect of temporary
differences between the book and tax basis of recorded assets and liabilities.
STOCK OPTION PLANS
We have a stock option plan under which incentive and nonqualified stock
options may be granted periodically to certain of our employees and non-employee
directors.
Pursuant to SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure", we have elected to continue to account
for employee stock-based compensation under APB Opinion No. 25, "Accounting for
Stock Issued to Employees", using an intrinsic value approach to measure
compensation expense. Accordingly, no compensation expense has been recognized
for options granted under our stock option plan since all such options were
granted at exercise prices equal to or greater than fair market value on the
date of grant.
The following table summarizes relevant information as to our reported
results under the intrinsic value method of accounting for stock awards, with
supplemental information, as if the fair value recognition provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation", had been applied to the
three and six month periods ended June 30, 2004 and 2003 (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Reported net loss ....................... $ (189) $(1,934) $(3,246) $(5,483)
Stock-based employee compensation expense
determined under the fair value
method ................................ (163) (242) (206) (346)
------- ------- ------- -------
Pro forma net loss ...................... $ (352) $(2,176) $(3,452) $(5,829)
======= ======= ======= =======
8
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PENSION COSTS
The components of the net periodic benefit costs realized for the three
and six month periods ended June 30, 2004 and 2003 are as follows (in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------- ----------------
2004 2003 2004 2003
------ ------ ------ ------
Interest cost ................ $ 78 $ 72 $ 155 $ 144
Expected return on plan assets (65) (55) (129) (109)
Amortization of net loss ..... 25 26 51 52
------ ------ ------ ------
Net periodic benefit costs ... $ 38 $ 43 $ 77 $ 87
====== ====== ====== ======
For the year ending December 31, 2004, we expect to contribute $563,000 to
our retirement plans. As of June 30, 2004, we have contributed $107,000 to our
retirement plans.
3. DEBT
In December 1997, we issued $63,275,000 aggregate principal amount at
maturity of 12 1/4% Senior Discount Notes due 2008 (the "Discount Notes") at a
discount rate of $553.14 per Discount Note. The Discount Notes accrete interest
compounded semi-annually at a rate of 12.25% to an aggregate principal amount of
$63,275,000 by December 2002. Commencing in June 2003, cash interest would have
been payable semi-annually until maturity each June 15 and December 15 if not
for the waiver and consent entered into described in the next paragraph. The
Discount Notes are senior, unsecured obligations. The Discount Notes may be
redeemed at any time by us, in whole or in part, at various redemption prices
that include accrued and unpaid interest as well as any existing liquidating
damages. The Discount Notes contain certain covenants that, among other things,
limit the incurrence of additional indebtedness by us and our subsidiaries the
payment of dividends and other restricted payments by us and our subsidiaries,
restrictions on distributions from certain restricted subsidiaries, asset sales,
transactions with affiliates, incurrence of liens and mergers and
consolidations. Financing costs, totaling $1,693,000, have been capitalized and
are being amortized over the term of the Discount Notes. Assuming that there is
no redemption of the Discount Notes prior to maturity, the entire principal will
be payable on December 15, 2008.
On February 27, 2003, we entered into a waiver and consent with the
holders of the Discount Notes, which provides for the waiver of cash payments by
us of semi-annual interest that was to begin in June 2003. The Discount Notes
will now become "cash-pay" in December 2004, with the first interest payment due
on June 15, 2005. The Discount Notes will continue to accrete until December
2004, at which time the aggregate principal amount of the Discount Notes will be
$80,260,705. Beginning on December 15, 2004, cash interest on the Discount Notes
will accrue at the rate of 12.25% per annum. As of June 30, 2004, Bruce
Wasserstein, our Chairman of the Board of Directors, and certain of his
affiliates own approximately 10.3% of the Discount Notes issued by us.
On December 22, 1997, ALM issued $175,000,000 aggregate principal amount of
9 3/4% Senior Notes (the "Notes") due December 15, 2007. The Notes accrue
interest at 9.75% which is payable in cash semi-annually on June 15 and December
15 of each year. The Notes are unsecured
9
3. DEBT (CONTINUED)
general senior obligations and are fully and unconditionally guaranteed, on a
joint and several and senior unsecured basis, by each of ALM'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 Notes and ALM's determination that
separate financial statements and other disclosures concerning the guarantors
are not material and would not provide any additional meaningful disclosure. The
Notes may be redeemed at any time by ALM, 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 ALM and its subsidiaries, the payment of dividends and other
restricted payments by ALM and its subsidiaries (including payment of dividends
to us), asset sales, transactions with affiliates, the incurrence of liens and
mergers and consolidations. Financing costs, totaling $7,236,000, were
capitalized and are being amortized over the term of the Notes. Amortization of
deferred financing costs is recorded as interest expense. Assuming there is no
redemption of the Notes prior to maturity, the entire principal will be payable
on December 15, 2007. As of June 30, 2004, Bruce Wasserstein and certain
affiliates own less than 1% of the Notes issued by ALM.
On May 1, 2002, we, The New York Law Publishing Company ("NYLP") and ALM
entered into a credit agreement, dated as of May 1, 2002, with GE Corporate
Finance ("GECC") and the lenders signatory thereto under which GECC has provided
our operating subsidiary, NYLP, with a $40 million revolving credit facility
(the "GECC Facility"). The GECC Facility replaces our prior revolving credit
facility and proceeds from the GECC Facility were used to refinance existing
indebtedness, provide working capital and finance capital expenditures. The
obligations of NYLP under the GECC Facility are guaranteed by us, ALM and all of
our domestic subsidiaries, and are secured by all of the assets of us, ALM and
our domestic subsidiaries (including the stock of all our domestic subsidiaries,
as well as 65% of the stock of each of our first-tier foreign subsidiaries). The
GECC Facility bears interest at a fluctuating rate determined by reference to
(i) the index rate plus a margin of 2.00%, or (ii) the Eurodollar Rate ("LIBOR")
plus a margin of 3.5%. We are also required to pay customary fees with respect
to the GECC Facility, including an up-front arrangement fee, monthly
administrative agency fees and commitment fees on the unused portion of the GECC
Facility. The GECC Facility includes both affirmative and negative covenants
that include meeting certain financial ratios. The term of the GECC Facility is
60 months.
On November 13, 2002, the GECC Facility was amended to clarify language in
the GECC credit agreement, as well as to allow ALM to assume a lease by and
between 1140 Associates, Inc. and Law.com. In addition, on February 27, 2003,
the GECC Facility was amended to modify the covenants relating to the total
leverage ratio, interest coverage ratio and fixed charge ratio until December
2004. These covenants now provide alternative compliance levels and associated
incremental interest rates. In addition, the GECC Facility was amended to allow
for the transaction described above regarding the Discount Notes. Also, on
December 15, 2003, the GECC Facility was amended to consent to the acquisition
from RealLegal, LLC of a business of delivering court calendar information
("MA3000") and to amend our obligations under the lease by and between 1140
Associates, Inc. and Law.com.
At June 30, 2004, the amount outstanding under the GECC Facility was $25.0
million. The available balance under the unused commitment reduced by our
letters of credit outstanding totaled $12.6 million. A 10% increase in the
average interest rate of borrowing under the GECC
10
3. DEBT (CONTINUED)
Facility during the six months ended June 30, 2004 would have increased our net
loss to approximately $3.3 million.
4. RESTRUCTURING CHARGE
During 2002, upon the decision to restructure certain of our operations,
we accrued approximately $1.5 million of restructuring charges. These charges
primarily related to severance arrangements for approximately 55 employees in
various regions and divisions and were included in operating income. As of June
30, 2004, approximately $0.2 million, representing the unpaid charges, is
included in accrued expenses.
The following is a summary of our restructuring charge activity (in
thousands):
Unpaid restructuring charge accrual at
December 31, 2003 ................... $ 281
Less: Payments during the six months ended
June 30, 2004 ....................... (58)
----------
Unpaid restructuring charge accrual at
June 30, 2004 ....................... $ 223
==========
5. SEGMENT INFORMATION
Operating segments represent components of our business that are evaluated
regularly by our chief operating decision makers in assessing performance and
resource allocation. We have determined that our reportable segments consist of
our regional newspapers (the "Regional Newspapers"), national businesses (the
"National Businesses") and our online business, Law.com ("Online"). We have also
reflected unallocated costs related to our corporate and administrative
functions as a separate unit ("Corporate") so as to not distort our other
segments.
For the years presented herein, the Regional Newspapers are comprised of
the following: New York Law Journal; The National Law Journal and sixteen other
newspapers. The economic characteristics, products, services, production
processes, customer type and distribution methods are substantially similar.
The National Businesses are comprised of the following: our magazine group
which includes The American Lawyer and nine other magazines; our newsletters;
our hard and soft cover books; our trade shows and seminars; our licensing and
syndication business; our litigation services division; our international
operations and our MA3000 business. These businesses share substantially the
same customer type and geographic regions.
Online is comprised of Law.com, which primarily includes web content,
seminars and practice and continuing legal education ("CLE") areas.
Corporate overhead is comprised of unallocated costs relating to our
administrative offices, which include executive management, legal, human
resources, accounting, information systems,
11
5. SEGMENT INFORMATION (CONTINUED)
business development, office services, government affairs and public relations.
In addition, Corporate includes ALM and ALM Properties, Inc., one of ALM's
subsidiaries.
We evaluate performance based on the segments' income (loss) from
operations before unallocated corporate overhead and interest expense. The
accounting policies of the reportable segments are the same as those described
in Note 2.
Our operations on a segmented basis were as follows (in thousands):
For the Three Months Ended For the Six Months Ended
June 30, 2004 June 30, 2004
--------------------------------- ---------------------------------
Regional National Regional National
Newspapers Businesses Online Newspapers Businesses Online
---------- ---------- ------- ---------- --------- -------
Total net revenue $21,832 $14,183 $ 1,645 $42,733 $26,698 $ 3,313
======= ======= ======= ======= ======= =======
Segment operating
income ....... $ 7,718 $ 3,583 $ 69 $14,808 $ 5,590 $ 118
======= ======= ======= ======= ======= =======
For the Three Months Ended For the Six Months Ended
June 30, 2003 June 30, 2003
--------------------------------- ---------------------------------
Regional National Regional National
Newspapers Businesses Online Newspapers Businesses Online
---------- ---------- ------- ---------- --------- -------
Total net revenue $21,849 $12,187 $ 1,101 $44,081 $22,641 $ 2,318
======= ======= ======= ======= ======= =======
Segment operating
income (loss) $ 7,619 $ 3,254 $(2,356) $14,411 $ 5,341 $(3,214)
======= ======= ======= ======= ======= =======
A reconciliation of combined segment profit to consolidated net loss is as
follows:
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2004 2003 2004 2003
-------- -------- -------- --------
Total segment operating income $ 11,370 $ 8,517 $ 20,516 $ 16,538
Unallocated amounts:
Corporate expenses ....... (4,588) (4,659) (9,614) (10,012)
Interest expense ......... (7,000) (6,894) (14,161) (13,930)
Other income ............. 29 -- 29 --
Benefit (provision) for
Income taxes ............. -- 1,102 (16) 1,921
-------- -------- -------- --------
Net loss ..................... $ (189) $ (1,934) $ (3,246) $ (5,483)
======== ======== ======== ========
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our historical
consolidated financial statements, including the notes thereto, included
elsewhere in this Form 10-Q.
Any statements in this quarterly report concerning our business outlook or
future economic performance, anticipated profitability, revenues, expenses or
other financial items, together with other statements that are not historical
facts, are "forward-looking statements" as that term is defined under the
federal securities laws. Forward-looking statements are subject to risks,
uncertainties and other factors that could cause actual results to differ
materially from those stated in such statements. Such risks, uncertainties and
factors include, but are not limited to, changes in the levels of advertising
revenues, changes and delays in new product introductions, customer acceptance
of new products and general economic conditions, as well as other risks detailed
in our filings with the Securities and Exchange Commission.
Business Overview
The following discussion compares our financial results for the three and
six months ended June 30, 2004 to the three and six months ended June 30, 2003.
In June 2003, we included in depreciation, amortization and other charges
a $1.5 million adjustment to write-off certain leasehold improvements and
furniture relating to office space abandoned during a prior quarter. The lease
was obtained in connection with our acquisition of Law.com on May 1, 2002.
On December 31, 2003, our wholly-owned subsidiary, The New York Law
Publishing Company, acquired the assets, certain liabilities and the business of
delivering electronic court calendar information via a product called MA3000
("MA3000") from RealLegal, LLC ("RealLegal"). The purchase price for this
acquisition, including direct acquisition costs, totaled $2.2 million. With this
acquisition, we recorded $2.7 million of goodwill and $1.3 million of
intangibles. We and RealLegal share substantially all of the same common
stockholders. The purchase price was determined based on an independent third
party valuation undertaken in 2003.
GAAP refers to accounting principles generally accepted in the United
States of America. Throughout this Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A"), management discusses
financial measures in accordance with GAAP and also on a non-GAAP basis. All
references in this MD&A to earnings before interest, income taxes, depreciation,
amortization and other charges ("EBITDA") are to a non-GAAP financial measure.
We believe that the use of non-GAAP financial measures enables us and investors
to evaluate, and compare from period to period, the results from ongoing
operations in a more meaningful and consistent manner. Reconciliations of GAAP
to non-GAAP financial measures are included on page 25.
13
The following table presents the results of operations for the three and
six months ended June 30, 2004 and 2003 (in thousands):
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ----------------------
2004 2003 2004 2003
-------- -------- -------- --------
REVENUES:
Periodicals:
Advertising ................ $ 20,399 $ 19,910 $ 38,671 $ 38,466
Subscription ............... 6,387 6,191 12,642 12,228
Ancillary products and services 10,874 9,036 21,431 18,346
-------- -------- -------- --------
Total revenues ............. 37,660 35,137 72,744 69,040
-------- -------- -------- --------
OPERATING EXPENSES:
Editorial ..................... 5,149 5,190 10,294 10,401
Production and distribution ... 6,762 5,954 12,549 12,293
Selling ....................... 7,027 6,772 14,181 13,589
General and administrative .... 8,984 8,478 18,942 17,838
Depreciation, amortization and
other charges .............. 2,956 4,885 5,876 8,393
-------- -------- -------- --------
Total operating expenses ... 30,878 31,279 61,842 62,514
-------- -------- -------- --------
Operating income ........... 6,782 3,858 10,902 6,526
Interest expense .............. (7,000) (6,894) (14,161) (13,930)
Other income .................. 29 -- 29 --
-------- -------- -------- --------
Loss before income taxes ... (189) (3,036) (3,230) (7,404)
Benefit (provision) for income
taxes ...................... -- 1,102 (16) 1,921
-------- -------- -------- --------
Net loss ................... $ (189) $ (1,934) $ (3,246) $ (5,483)
======== ======== ======== ========
RESULTS OF OPERATIONS
Six months ended June 30, 2004 compared to six months ended June 30, 2003
Overview. Revenues increased by $3.7 million, or 5.4%, from $69.0 million
for the six months ended June 30, 2003 to $72.7 million for the six months ended
June 30, 2004. Operating expenses decreased $0.7 million, or 1.1%, from $62.5
million for the six months ended June 30, 2003 to $61.8 million for the six
months ended June 30, 2004. As a result, operating income increased $4.4
million, from $6.5 million for the six months ended June 30, 2003 to $10.9
million for the six months ended June 30, 2004. EBITDA increased $1.9 million,
or 12.7%, from $14.9 million for the six months ended June 30, 2003 to $16.8
million for the six months ended June 30, 2004. Net loss totaled $3.2 million
for the six months ended June 30, 2004 as compared to a net loss of $5.5 million
for the six months ended June 30, 2003.
Revenues. Revenues increased by $3.7 million, or 5.4%, from $69.0 million
for the six months ended June 30, 2003 to $72.7 million for the six months ended
June 30, 2004. Revenue growth for the six months ended June 30, 2004 compared to
the six months ended June 30, 2003 reflects revenues recorded in our MA3000
business of $1.1 million, as a result of our acquisition of MA3000 on December
31, 2003. In addition, revenues from our tradeshows and seminars, royalty and
licensing fees, online continuing legal education ("CLE") fees and subscription
revenues in our print publications increased during the six months ended June
30, 2004. These increases were partially offset by a decrease in revenues from
the elimination of editorial content fees from RealLegal as a result of our
acquisition of MA3000.
14
Advertising revenues increased $0.2 million, from $38.5 million for the
six months ended June 30, 2003 to $38.7 million for the six months ended June
30, 2004. Display advertising revenues increased $0.4 million, despite the
decision not to renew a contract to publish certain directories, which totaled
$0.4 million in revenues for the six months ended June 30, 2003. This increase
was partially offset by a decrease in classified advertising revenues of $0.1
million, and a combined decrease of $0.1 million in law firm, legal notice and
consumer advertising revenues. Classified advertising revenues in our print
publications declined $0.5 million, offset by an increase in online classified
advertising revenues of $0.4 million. Our advertising market share continues to
be strong, however, the total volume of advertising is down, as law firms still
have not yet begun to increase their volume of recruitment advertising.
Subscription revenues increased $0.4 million, or 3.4%, from $12.2 million
for the six months ended June 30, 2003 to $12.6 million for the six months ended
June 30, 2004. This increase is primarily due to an increase in marketing
efforts as well as the publication of two additional issues of The National Law
Journal in 2004 as compared to 2003.
Revenues from ancillary products and services increased $3.1 million, or
16.8%, from $18.3 million for the six months ended June 30, 2003 to $21.4
million for the six months ended June 30, 2004. The increase in revenues
resulted primarily from higher seminar and tradeshow attendance and sponsorships
at our New York and West Coast Legal Tech shows, online CLE business and The
American Lawyer's 25th Anniversary Dinner. In addition, revenues increased due
to MA3000 court research fees, higher royalty and licensing fees primarily from
the inclusion of new products in our royalty licensing contracts, higher
newsletter sales and increased book sales despite the decision not to renew a
contract which totaled $0.9 million to publish certain directors in 2003. These
increases were partially offset by the elimination of editorial content fees as
a result of our acquisition of MA3000, as we no longer derive revenue from the
sale of this content but rather through court research fees as indicated above.
Operating expenses. Operating expenses decreased $0.7 million, or 1.1%,
from $62.5 million for the six months ended June 30, 2003 to $61.8 million for
the six months ended June 30, 2004. Lower operating expenses during the six
months ended June 30, 2004 as compared to the six months ended June 30, 2003
were primarily realized through lower editorial and depreciation and
amortization expenses primarily from continued cost containment efforts and from
certain intangible assets and other capital assets becoming fully amortized or
depreciated in 2003, respectively. These savings were partially offset by
increases in production, selling, and general and administrative expenses.
Editorial expenses decreased $0.1 million, or 1.0%, from $10.4 million for
the six months ended June 30, 2003 to $10.3 million for the six months ended
June 30, 2004. The decrease in editorial expenses primarily resulted from
realized savings in salaries and related taxes and employee benefits, and
consulting and professional fees from our continued cost containment efforts.
These decreases were partially offset by an increase in contributing editor fees
and artwork and photography in our print publications.
Production and distribution expenses increased $0.2 million, or 2.1%, from
$12.3 million for the six months ended June 30, 2003 to $12.5 million for the
six months ended June 30, 2004. Production and distribution expenses increased
primarily due to an increase in production costs related to our seminar and
tradeshow revenues and The American Lawyer's 25th Anniversary Dinner. This
increase was partially offset by lower paper, printing, fulfillment and other
production costs, as we reformatted some of our print publications, and also to
a decrease in salaries and related taxes and employee benefits.
15
Selling expenses increased $0.6 million, or 4.4%, from $13.6 million for
the six months ended June 30, 2003 to $14.2 million for the six months ended
June 30, 2004. The increase in expenses is primarily due to increases in
marketing efforts and in salaries and related taxes and employee benefits. This
increase was partially offset by a decrease in direct mail efforts.
General and administrative expenses increased $1.1 million, or 6.2%, from
$17.8 million for the six months ended June 30, 2003 to $18.9 million for the
six months ended June 30, 2004. This increase resulted primarily from higher
management consulting and professional fees, salary and other compensation and
salary related taxes and employee benefits. These increases were partially
offset by a reduction in rent expense and other taxes.
Depreciation, amortization and other charges decreased $2.5 million, or
30.0%, from $8.4 million for the six months ended June 30, 2003 to $5.9 million
for the six months ended June 30, 2004. This decrease resulted primarily from a
$1.5 million adjustment in June 30, 2003 to write-off capital assets acquired
with the acquisition of Law.com. In addition, we recorded lower amortization and
depreciation expense during the six months ended June 30, 2004 as compared to
the six months ended June 30, 2003 due to certain non-compete and other
intangible assets and certain capital assets being fully amortized or
depreciated by the end of 2003.
Operating income. As a result of the above factors, our operating income
increased $4.4 million, from $6.5 million for the six months ended June 30, 2003
to $10.9 million for the six months ended June 30, 2004. In addition, EBITDA
increased $1.9 million, or 12.7%, from $14.9 million for the six months ended
June 30, 2003 to $16.8 million for the six months ended June 30, 2004.
Interest expense. Total interest expense increased $0.3 million, from
$13.9 million for the six months ended June 30, 2003 to $14.2 million for the
six months ended June 30, 2004. This increase was due to additional interest of
$0.3 million recorded on our Discount Notes, partially offset by a decrease in
the average carrying balance on the GECC Facility coupled with a lower average
interest rate.
Income taxes. We recorded a net income tax provision of $16,000 for the
six months ended June 30, 2004 as compared to a tax benefit of $1.9 million for
the six months ended June 30, 2003. The provision recorded for the six months
ended 2004 results from the tax effect of the pretax loss recognized for this
period offset by a valuation of approximately $0.9 million recorded against our
income tax benefit due to the uncertainty regarding the utilization of these
benefits.
Net loss. As a result of the above factors, our net loss narrowed $2.3
million from a loss of $5.5 million for the six months ended June 30, 2003 to a
loss of $3.2 million for the six months ended June 30, 2004.
Operating segments. Operating segments represent components of our
business that are evaluated regularly by chief operating decision makers in
assessing performance and resource allocation. We have determined that our
reportable segments consist of our regional newspapers (the "Regional
Newspapers"), national businesses (the "National Businesses") and our online
business, Law.com ("Online"). We have also reflected unallocated costs related
to our corporate and administrative functions as a separate unit ("Corporate")
so as to not distort our other segments.
16
For the six months ended June 30, 2004 and 2003 presented herein, the
Regional Newspapers are comprised of the following: New York Law Journal; The
National Law Journal and sixteen other newspapers. The economic characteristics,
products, services, production processes, customer type and distribution methods
are substantially similar.
The National Businesses are comprised of the following: The American
Lawyer and nine other magazines; our newsletters; our hard and soft cover books;
our trade shows and seminars; our licensing and syndication business; our
litigation services division; our international operations and our MA3000
business. These businesses share substantially the same customer type and
geographic regions.
Online is administered by Law.com and consists primarily of web content,
seminars and practice and CLE areas.
Corporate is comprised of unallocated costs relating to our administrative
offices, which include executive management, legal, human resources, accounting,
information systems, business development, office services, government affairs
and public relations. In addition, Corporate includes ALM and ALM Properties,
Inc., one of our subsidiaries.
Our operations on a segmented basis were as follows (in thousands):
FOR THE SIX MONTHS ENDED JUNE 30, 2004
-----------------------------------------------------
REGIONAL NEWSPAPERS NATIONAL BUSINESSES ONLINE
------------------- ------------------- -------
REVENUES:
Periodicals:
Advertising ................ $28,248 $ 8,516 $ 1,907
Subscription ............... 10,509 1,540 593
Ancillary products and services 3,976 16,642 813
------- ------- -------
Total revenues ............. 42,733 26,698 3,313
------- ------- -------
OPERATING EXPENSES:
Editorial ..................... 6,009 3,919 361
Production and distribution ... 6,846 5,158 544
Selling ....................... 6,849 6,234 1,099
General and administrative .... 7,886 5,780 1,057
Depreciation, amortization and
other charges .............. 335 17 134
------- ------- -------
Total operating expenses ... 27,925 21,108 3,195
------- ------- -------
Segment operating income ... $14,808 $ 5,590 $ 118
======= ======= =======
17
FOR THE SIX MONTHS ENDED JUNE 30, 2003
----------------------------------------------------
REGIONAL NEWSPAPERS NATIONAL BUSINESSES ONLINE
------------------- ------------------- -------
REVENUES:
Periodicals:
Advertising ................... $29,174 $ 7,904 $ 1,388
Subscription .................. 10,295 1,406 528
Ancillary products and services .. 4,612 13,331 402
------- ------- -------
Total revenues ................ 44,081 22,641 2,318
------- ------- -------
OPERATING EXPENSES:
Editorial ........................ 6,311 3,742 352
Production and distribution ...... 7,733 4,156 404
Selling .......................... 7,364 4,547 1,592
General and administrative ....... 7,932 4,850 1,084
Depreciation, amortization and
other charges ................. 330 5 2,100
------- ------- -------
Total operating expenses ...... 29,670 17,300 5,532
------- ------- -------
Segment operating income (loss) $14,411 $ 5,341 $(3,214)
======= ======= =======
Regional Newspapers
Revenues. Revenues for our Regional Newspapers decreased $1.4 million,
from $44.1 million for the six months ended June 30, 2003 to $42.7 million for
the six months ended June 30, 2004. The overall decline in revenue was due to a
decrease in advertising of $0.5 million and book sales of $0.9 million as a
result of the decision not to renew a contract to publish certain directories.
Adding to the overall decline was a decrease in advertising revenues of $1.0
million, from $29.2 million for the six months ended June 30, 2003 to $28.2
million for the six months ended June 30, 2004. The decrease was due largely to
lower classified advertising revenues of $0.5 million, primarily in attorney
related help wanted advertising as our publications continue to experience the
effects of a weak economy and also to the above-mentioned decision not to renew
a contract to publish certain directories. In addition, display advertising, law
firm advertising, legal notice advertising and directory revenues also declined.
These decreases were partially offset by an increase in subscription revenues
and from higher royalty and licensing fees.
Operating expenses. Total operating expenses decreased $1.8 million, or
5.9%, from $29.7 million for the six months ended June 30, 2003 to $27.9 million
for the six months ended June 30, 2004. Production and editorial expenses
decreased primarily due to lower paper, printing, fulfillment and other
production costs, salary and related taxes and employee benefits, book royalty
expense and other realized savings from our continued cost containment efforts.
Selling costs decreased due to lower salary and related taxes and employee
benefits, a decrease in direct mail efforts and lower allocated expenses due to
a reduction of allocated sales staff resources from the National Businesses
segment. General and administrative expenses increased primarily due to higher
salary and other compensation and salary related taxes and employee benefits.
This increase was partially offset by lower allocated corporate overhead
expenses as our overall corporate expenses declined. In addition, we realized a
net reduction in our provision for uncollectible accounts due to an improvement
in our accounts receivable aging performance, as well as lower rent expense.
Operating income. Our operating income increased $0.4 million, from $14.4
million for the six months ended June 30, 2003 to $14.8 million for the six
months ended June 30, 2004.
18
EBITDA increased $0.4 million, or 2.8%, from $14.7 million for the six months
ended June 30, 2003 to $15.1 million for the six months ended June 30, 2004.
National Businesses
Revenues. Revenues for our National Businesses increased $4.1 million, or
17.9%, from $22.6 million for the six months ended June 30, 2003 to $26.7
million for the six months ended June 30, 2004. Advertising revenues for our
National Businesses increased $0.6 million, from $7.9 million for the six months
ended June 30, 2003 to $8.5 million for the six months ended June 30, 2004. This
increase was primarily due to increases in display advertising, law firm
advertising and directory advertising revenues. In addition, ancillary revenues
increased $3.3 million due primarily to higher book sales, seminar and tradeshow
revenue, court research fees, royalty and licensing fees and newsletter sales.
These increases were partially offset by the elimination of editorial content
fees as a result of our acquisition of MA3000, as we no longer derive revenue
from the sale of this content to third parties.
Operating expenses. Operating expenses for our National Businesses
increased $3.8 million, or 22.0%, from $17.3 million for the six months ended
June 30, 2003 to $21.1 million for the six months ended June 30, 2004.
Production and editorial expenses increased primarily due to higher printing and
production, contributing editor, and artwork and photo costs resulting from the
addition of three new national magazines; and higher costs associated with the
seminar and tradeshow division, as well as an increase in book related costs.
Selling expenses increased due to increased marketing efforts, higher salary and
related taxes and employee benefits and lower allocated expenses due to a
reduction of allocated sales staff resources to the Regional Newspapers segment.
In addition, selling expenses increased as fewer costs relating to the sales
force were allocated to the selling of online products for Law.com. General and
administrative expenses increased due to higher salary and related taxes and
employee benefits, increased consulting and professional fees, and an increase
in other taxes. This increase was partially offset by a net reduction in our
provision for uncollectible accounts due to an improvement in our accounts
receivable aging performance.
Operating income. Our operating income increased $0.3 million, or 4.7%,
from $5.3 million for the six months ended June 30, 2003 to $5.6 million for the
six months ended June 30, 2004. EBITDA increased $0.3 million, or 4.9%, from
$5.3 million for the six months ended June 30, 2003 to $5.6 million for the six
months ended June 30, 2004.
Online
Revenues. Revenues for our online business increased $1.0 million, or
42.9%, from $2.3 million for the six months ended June 30, 2003 to $3.3 million
for the six months ended June 30, 2004. Advertising revenues increased by $0.5
million, from $1.4 million for the six months ended June 30, 2003 to $1.9
million for the six months ended June 30, 2004. In addition, seminar and trade
show revenues increased by $0.4 million, due to higher sales of online CLE
training, and online subscription revenues increased by $0.1 million.
Operating expenses. Operating expenses for our online business decreased
$2.3 million, or 42.3%, from $5.5 million for the six months ended June 30, 2003
to $3.2 million for the six months ended June 30, 2004. Selling expenses
declined by $0.5 million as fewer costs were allocated to Law.com from the
National Businesses sales force for online sales efforts. Depreciation and
amortization decreased by $2.0 million due to the write-off of leasehold
19
improvements and furniture in 2003. Partially offsetting these decreases was an
increase in production expense.
Operating income. Our operating income increased $3.3 million, from a loss
of $3.2 million for the six months ended June 30, 2003 to a profit of $0.1
million for the six months ended June 30, 2004. EBITDA increased $1.4 million,
from an EBITDA loss of $1.1 million for the six months ended June 30, 2003 to a
gain of $0.3 million for the six months ended June 30, 2004.
Three months ended June 30, 2004 compared to three months ended June 30, 2003
Overview. Revenues increased by $2.6 million, or 7.2%, from $35.1 million
for the three months ended June 30, 2003 to $37.7 million for the three months
ended June 30, 2004. Operating expenses decreased $0.4 million, or 1.3%, from
$31.3 million for the three months ended June 30, 2003 to $30.9 million for the
three months ended June 30, 2004. As a result, operating income increased $2.9
million, from $3.9 million for the three months ended June 30, 2003 to $6.8
million for the three months ended June 30, 2004. EBITDA increased $1.1 million,
or 11.7%, from $8.7 million for the three months ended June 30, 2003 to $9.8
million for the three months ended June 30, 2004. Net loss totaled $0.2 million
for the three months ended June 30, 2004 as compared to a net loss of $1.9
million for the three months ended June 30, 2003.
Revenues. Revenues increased by $2.6 million, or 7.2%, from $35.1 million
for the three months ended June 30, 2003 to $37.7 million for the three months
ended June 30, 2004. Revenue growth for the three months ended June 30, 2004
compared to the three months ended June 30, 2003 reflects revenues recorded in
our MA3000 business of $0.6 million, as a result of our acquisition of MA3000 on
December 31, 2003. In addition, revenues from our tradeshows and seminars,
online CLE fees, book revenues, royalty and licensing fees, advertising revenues
and subscription revenues in our print publications increased during the three
months ended June 30, 2004. These increases were partially offset by the
elimination of editorial content fees as a result of our acquisition of MA3000,
as we no longer derive revenue from the sale of this content to third parties.
Advertising revenues increased $0.5 million, or 2.5%, from $19.9 million
for the three months ended June 30, 2003 to $20.4 million for the three months
ended June 30, 2004. Higher revenues were recorded in display advertising of
$0.3 million and classified advertising of $0.1 million, for the three months
ended June 30, 2004. In addition, legal and law firm advertising revenues
increased a total of $0.1 million.
Subscription revenues increased $0.2 million, or 3.2%, from $6.2 million
for the three months ended June 30, 2003 to $6.4 million for the three months
ended June 30, 2004. This increase is primarily due to additional marketing
year-over-year as well as the publication of an additional issue of The National
Law Journal in the three months ended June 30, 2004 as compared to the three
months ended June 30, 2003.
Revenues from ancillary products and services increased $1.9 million, or
20.3%, from $9.0 million for the three months ended June 30, 2003 to $10.9
million for the three months ended June 30, 2004. The increase in revenues
resulted primarily from higher seminar and tradeshow attendance and sponsorships
at our West Coast Legal Tech show, online CLE business and The American Lawyer's
25th Anniversary Dinner. In addition, revenues increased from higher book sales,
MA3000 court research fees and higher royalty and licensing fees primarily from
the inclusion of new products in our royalty licensing contracts. These
increases were partially offset
20
by the elimination of editorial content fees as a result of our acquisition of
MA3000, as we no longer derive revenue from the sale of this content to third
parties.
Operating expenses. Operating expenses decreased $0.4 million, or 1.3%,
from $31.3 million for the three months ended June 30, 2003 to $30.9 million for
the three months ended June 30, 2004. Lower operating expenses during the six
months ended June 30, 2004 as compared to the six months ended June 30, 2003
were primarily realized through lower depreciation and amortization expenses due
to certain intangible assets and other capital assets becoming fully amortized
or depreciated in 2003. These savings were partially offset by increases in
production, selling, and general and administrative expenses.
Production and distribution expenses increased $0.8 million, or 13.6%,
from $6.0 million for the three months ended June 30, 2003 to $6.8 million for
the three months ended June 30, 2004. Production and distribution expenses
increased primarily due to an increase in production costs related to our
seminar and tradeshow revenues, The American Lawyer's 25th Anniversary Dinner
and book revenues.
Selling expenses increased $0.2 million, or 3.8%, from $6.8 million for
the three months ended June 30, 2003 to $7.0 million for the three months ended
June 30, 2004. The increase in expenses is primarily due to increases in
salaries, commissions and related taxes and employee benefits in connection with
revenue growth and an increased sales force, and increased marketing efforts.
This increase was partially offset by a decrease in direct mail efforts.
General and administrative expenses increased $0.5 million, or 6.0%, from
$8.5 million for the three months ended June 30, 2003 to $9.0 million for the
three months ended June 30, 2004. This increase resulted primarily from a net
reduction of our provision for uncollectible accounts during the three months
ended June 30, 2003, due to an improvement in our accounts receivable aging
performance. Also contributing to the increase is higher management consulting
and professional fees, salary and other compensation and related taxes and
employee benefits. These increases were partially offset by a reduction in rent
expense and other taxes.
Depreciation, amortization and other charges decreased $1.9 million, or
39.5%, from $4.9 million for the three months ended June 30, 2003 to $3.0
million for the three months ended June 30, 2004. This decrease resulted
primarily from a $1.5 million adjustment in June 30, 2003 to write-off capital
assets acquired with the acquisition of Law.com. In addition, we recorded lower
amortization and depreciation expense during the three months ended June 30,
2004 as compared to the three months ended June 30, 2003 due to certain
non-compete and other intangible assets and certain capital assets being fully
amortized or depreciated by the end of 2003.
Operating income. As a result of the above factors, our operating income
increased $2.9 million, from $3.9 million for the three months ended June 30,
2003 to $6.8 million for the three months ended June 30, 2004. In addition,
EBITDA increased $1.1 million, or 11.7%, from $8.7 million for the three months
ended June 30, 2003 to $9.8 million for the three months ended June 30, 2004.
Interest expense. Total interest expense increased $0.1 million, from $6.9
million for the three months ended June 30, 2003 to $7.0 million for the three
months ended June 30, 2004. This increase was due to additional interest of $0.2
million recorded on our Discount Notes partially offset by a decrease in the
average carrying balance on the GECC Facility coupled with a lower average
interest rate.
21
Income taxes. Our tax provision net of our valuation reserve resulted in
no provision for taxes for the three months ended June 30, 2004. For the three
months ended June 30, 2003, we recorded a tax benefit of $1.1 million. The
provision recorded for the three months ended June 30, 2004 results from the tax
effect of the pretax loss recognized for this period offset by a valuation of
approximately $0.1 million recorded against our income tax provision due to the
uncertainty regarding the utilization of the net benefit.
Net loss. As a result of the above factors, our net loss narrowed $1.7
million from a loss of $1.9 million for the three months ended June 30, 2003 to
a loss of $0.2 million for the three months ended June 30, 2004.
Operating segments. As mentioned above in Note 5 of the Consolidated
Financial Statements, and in our six month results, our reportable operating
segments are Regional Newspapers, National Businesses, Online and Corporate.
Our operations on a segmented basis were as follows (in thousands):
FOR THE THREE MONTHS ENDED JUNE 30, 2004
---------------------------------------------------
REGIONAL NEWSPAPERS NATIONAL BUSINESSES ONLINE
------------------- ------------------- -------
REVENUES:
Periodicals:
Advertising ................ $14,552 $ 4,767 $ 1,080
Subscription ............... 5,284 796 308
Ancillary products and services 1,996 8,620 257
------- ------- -------
Total revenues ............. 21,832 14,183 1,645
------- ------- -------
OPERATING EXPENSES:
Editorial ..................... 3,043 1,916 186
Production and distribution ... 3,525 2,983 253
Selling ....................... 3,472 3,009 546
General and administrative .... 3,907 2,684 525
Depreciation, amortization and
other charges .............. 167 8 66
------- ------- -------
Total operating expenses ... 14,114 10,600 1,576
------- ------- -------
Segment operating income ... $ 7,718 $ 3,583 $ 69
======= ======= =======
FOR THE THREE MONTHS ENDED JUNE 30, 2003
--------------------------------------------------
REGIONAL NEWSPAPERS NATIONAL BUSINESSES ONLINE
------------------- ------------------- -------
REVENUES:
Periodicals:
Advertising ................... $14,620 $ 4,585 $ 704
Subscription .................. 5,223 701 267
Ancillary products and services .. 2,006 6,901 130
------- ------- -------
Total revenues ................ 21,849 12,187 1,101
------- ------- -------
OPERATING EXPENSES:
Editorial ........................ 3,128 1,900 162
Production and distribution ...... 3,559 2,302 214
Selling .......................... 3,526 2,331 801
General and administrative ....... 3,853 2,397 530
Depreciation, amortization and
other charges ................. 164 3 1,750
------- ------- -------
Total operating expenses ...... 14,230 8,933 3,457
------- ------- -------
Segment operating income (loss) $ 7,619 $ 3,254 $(2,356)
======= ======= =======
22
Regional Newspapers
Revenues. Revenues for our Regional Newspapers remained flat at $21.8
million for the three months ended June 30, 2003 as compared to the three months
ended June 30, 2004. Subscription revenues increased $0.1 million from $5.2
million for the three months ended June 30, 2003 to $5.3 million for the three
months ended June 30, 2004. This increase was offset by a decrease in
advertising revenues of $0.1 million.
Operating expenses. Total operating expenses declined $0.1 million, or
0.8%, from $14.2 million for the three months ended June 30, 2003 to $14.1
million for the three months ended June 30, 2004. Production and editorial
expenses decreased primarily due to lower salary and related taxes and employee
benefits, lower contributing editor costs and other realized savings from our
continued cost containment efforts. Selling costs decreased due to a decrease in
direct mail efforts and lower allocated expenses due to a reduction of allocated
sales staff resources from the National Businesses segment. General and
administrative expenses increased primarily due to increased salary and related
taxes and employee benefits. This increase was partially offset by lower
allocated corporate overhead expenses as our overall corporate expenses
declined. In addition, we realized a net reduction in our provision for
uncollectible accounts due to an improvement in our accounts receivable aging
performance, as well as lower rent and utilities expense.
Operating income. Our operating income increased $0.1 million, from $7.6
million for the three months ended June 30, 2003 to $7.7 million for the three
months ended June 30, 2004. EBITDA increased $0.1 million, or 1.3%, from $7.8
million for the three months ended June 30, 2003 to $7.9 million for the three
months ended June 30, 2004.
National Businesses
Revenues. Revenues for our National Businesses increased $2.0 million, or
16.4%, from $12.2 million for the three months ended June 30, 2003 to $14.2
million for the three months ended June 30, 2004. Advertising revenues increased
$0.2 million, from $4.6 million for the three months ended June 30, 2003 to $4.8
million for the three months ended June 30, 2004. This increase was primarily
due to increases in display advertising and law firm advertising revenues. In
addition, ancillary revenues increased $1.7 million due primarily to higher
seminar and tradeshow revenues, book sales, court research fees and royalty and
licensing fees. These increases were partially offset by the elimination of
editorial content fees as a result of our acquisition of MA3000, as we no longer
derive revenue from the sale of this content but rather through court research
fees. In addition, subscription revenues increased $0.1 million.
Operating expenses. Operating expenses for our National Businesses
increased $1.7 million, or 18.7%, from $8.9 million for the three months ended
June 30, 2003 to $10.6 million for the three months ended June 30, 2004.
Production expenses increased primarily due to higher costs associated with the
seminar and tradeshow division and increased book costs. Selling expenses
increased due to higher salary and related taxes and employee benefits and lower
allocated expenses due to a reduction of allocated sales staff resources to the
Regional Newspapers segment. In addition, selling expenses increased as fewer
costs relating to the sales force were allocated to the selling of online
products for Law.com. General and administrative expenses increased due to
higher salary and related taxes and employee benefits and increased consulting
and professional fees.
23
Operating income. Our operating income increased $0.3 million, or 10.2%,
from $3.3 million for the three months ended June 30, 2003 to $3.6 million for
the three months ended June 30, 2004. EBITDA increased $0.3 million, or 10.3%,
from $3.3 million for the three months ended June 30, 2003 to $3.6 million for
the three months ended June 30, 2004.
Online
Revenues. Revenues for our online business increased $0.5 million, or
49.4%, from $1.1 million for the three months ended June 30, 2003 to $1.6
million for the three months ended June 30, 2004. Advertising revenues increased
$0.4 million from $0.7 million for the three months ended June 30, 2003 to $1.1
million for the three months ended June 30, 2004. In addition, seminar and trade
show revenues increased $0.4 million, due to higher sales of online CLE
training.
Operating expenses. Operating expenses for our online business decreased
$1.9 million, or 54.4%, from $3.5 million for the three months ended June 30,
2003 to $1.6 million for the three months ended June 30, 2004. Selling expenses
declined $0.3 million as fewer costs were allocated to Law.com from the National
Businesses sales force for online sales efforts. Depreciation and amortization
decreased $1.7 million due to the write-off of leasehold improvements and
furniture in 2003.
Operating income. Our operating income increased $2.5 million, from a loss
of $2.4 million for the three months ended June 30, 2003 to profit of $0.1
million for the three months ended June 30, 2004. EBITDA increased $0.7 million,
from an EBITDA loss of $0.6 million for the three months ended June 30, 2003 to
a gain of $0.1 million for the three months ended June 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities. Net cash provided by operating
activities totaled $6.1 million for the six months ended June 30, 2004, which
resulted primarily from depreciation, amortization and other charges of $5.9
million, accretion of interest on the Discount Notes of $4.4 million, an
increase in accounts payable and accrued expenses of $0.9 million and the
amortization of non-cash interest of $0.6 million. This was partially offset by
a net loss of $3.2 million, an increase in accounts receivable of $1.4 million
and a decrease in other noncurrent liabilities of $0.8 million.
Net cash used in investing activities. Net cash used in investing
activities was $1.7 million for the six months ended June 30, 2004, resulting
entirely from capital expenditures.
Capital expenditures. Capital expenditures totaled $1.7 million for the
six months ended June 30, 2004 compared to capital expenditures of $1.2 million
for the six months ended June 30, 2003. Capital expenditures for both the six
months ended June 30, 2004 and 2003 were primarily for continuing system
upgrades and development.
Net cash used in financing activities. Net cash used in financing
activities totaled $5.4 million for the six months ended June 30, 2004, which
reflects the net paydown on our GECC Facility.
Liquidity. Our principal sources of funds are cash flows from operating
activities, which may be supplemented by borrowings under our GECC Facility. The
GECC Facility had $25.0 million outstanding as of June 30, 2004 and accrues
interest as described in Note 3 to the Consolidated
24
Financial Statements. For details relating to the terms of our GECC Facility
entered into on May 1, 2002, see Note 3 to the Consolidated Financial
Statements. We believe that these funds will be sufficient to meet our current
financial obligations, which include the payment of interest on the Discount
Notes, the Notes, interest under our GECC Facility, working capital, capital
expenditures and other obligations for the next 12 months. No assurance can be
given, however, that this will be the case. Our future operating performance and
ability to service or refinance our debt, meet future debt covenants, and to
repay, extend or refinance any credit agreements to which we are a party will be
subject to future economic conditions and to financial, business and other
factors, many of which are beyond our control.
RECONCILIATIONS OF GAAP TO NON-GAAP FINANCIAL MEASURES
Reconciliations of GAAP to non-GAAP financial measures, such as EBITDA,
are provided below (in thousands). We believe that the use of non-GAAP financial
measures enables us and investors to evaluate, and compare from period to
period, our results from ongoing operations in a more meaningful and consistent
manner.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net loss ............................... $ (189) $ (1,934) $ (3,246) $ (5,483)
Adjustments to arrive at EBITDA:
(Benefit) provision for income taxes -- (1,102) 16 (1,921)
Interest expense .................... 7,000 6,894 14,161 13,930
Depreciation, amortization and other
charges ............................ 2,956 4,885 5,876 8,393
-------- -------- -------- --------
Reported EBITDA ........................ $ 9,767 $ 8,743 $ 16,807 $ 14,919
======== ======== ======== ========
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The GECC Facility is subject to interest rate volatility. A 10% increase
in the average interest rate of borrowing under the GECC Facility during the six
months ended June 30, 2004 would have increased our net loss to approximately
$3.3 million.
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. The Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this report. Based on such evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, the Company's disclosure controls and
procedures are effective in timely alerting them to material information
required to be filed under the Exchange Act.
(b) Internal Controls Over Financial Reporting. There have not been any
changes in the Company's internal controls over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during
the fiscal quarter to which this report relates that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
26
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a party to various litigation matters incidental to the conduct of
our business. We do not believe that the outcome of any of the matters in which
we are currently involved will have a material adverse effect on our financial
condition or on the results of our operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1* Certificate of Incorporation of American Lawyer Media
Holdings, Inc.
3.2* Certificate of Amendment of the Certificate of Incorporation
of American Lawyer Media Holdings, Inc.
3.16* Bylaws of American Lawyer Media Holdings, Inc.
31.1 Certification by the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None.
- -------------
* Exhibits are incorporated by reference from American Lawyer Media Holdings,
Inc.'s previous filings with the Securities and Exchange Commission.
27
SIGNATURES
Pursuant to the requirements 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.
AMERICAN LAWYER MEDIA HOLDINGS, INC.
August 13, 2004 /s/ WILLIAM L. POLLAK
------------------------------------------
William L. Pollak
President and Chief Executive Officer
August 13, 2004 /s/ ERIC F. LUNDBERG
------------------------------------------
Eric F. Lundberg
Vice President and Chief Financial Officer