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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 September 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 November 11, 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 September 30, 2004 (unaudited)
and December 31, 2003....................................................... 1
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2004 and 2003 (unaudited)........................ 2
Consolidated Statement of Changes in Stockholders' Deficit for
the Nine Months Ended September 30, 2004 (unaudited)........................ 3
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2004 and 2003 (unaudited)............................... 4
Notes to Consolidated Financial Statements at
September 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........................................................... 27
ITEM 4. CONTROLS AND PROCEDURES..................................................... 27
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................................... 28
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.................................................................... 28
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................................. 28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................... 28
ITEM 5. OTHER INFORMATION........................................................... 28
ITEM 6. EXHIBITS.................................................................... 28
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN LAWYER MEDIA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ................................................................... $ 786 $ 1,614
Accounts receivable, net of allowance for doubtful accounts and returns of $2,274 and $2,582,
respectively .............................................................................. 16,426 15,657
Inventories, net ............................................................................ 708 592
Other current assets ........................................................................ 3,335 2,381
------------- ------------
Total current assets ................................................................ 21,255 20,244
Property, plant and equipment, net of accumulated depreciation and
amortization of $27,030 and $24,291, respectively ......................................... 8,441 8,386
Intangible assets, net of accumulated amortization of $72,105 and $66,137,
respectively .............................................................................. 107,062 113,030
Goodwill, net ............................................................................... 148,242 148,242
Deferred financing costs, net of accumulated amortization of $6,688 and $5,800,
respectively .............................................................................. 3,836 4,625
Other assets ................................................................................ 5,900 5,495
------------- ------------
Total assets ........................................................................ $ 294,736 $ 300,022
============= ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ............................................................................ $ 6,067 $ 5,493
Accrued expenses ............................................................................ 12,095 10,368
Accrued interest payable .................................................................... 5,287 841
Deferred income (including deferred subscription income of $17,597
and $17,391, respectively) ................................................................ 21,092 20,752
------------- ------------
Total current liabilities ........................................................... 44,541 37,454
------------- ------------
Long-term debt:
Revolving credit facility ................................................................... 19,500 30,400
Senior notes ................................................................................ 175,000 175,000
Senior discount notes ....................................................................... 78,331 71,627
------------- ------------
Total long-term debt ................................................................ 272,831 277,027
Other noncurrent liabilities ................................................................ 9,523 11,284
------------- ------------
Total liabilities ................................................................... 326,895 325,765
------------- ------------
Stockholders' deficit:
Common stock-$.01 par value; 2,000,000 shares authorized; 1,320,330 issued and outstanding at
September 30, 2004 and December 31, 2003 .................................................. 13 13
Paid-in-capital ............................................................................. 116,488 116,488
Accumulated deficit ......................................................................... (146,972) (140,656)
Accumulated other comprehensive loss ........................................................ (1,688) (1,588)
------------- ------------
Total stockholders' deficit ......................................................... (32,159) (25,743)
------------- ------------
Total liabilities and stockholders' deficit ......................................... $ 294,736 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
REVENUES:
Periodicals:
Advertising ................................. $ 18,695 $ 18,457 $ 57,366 $ 56,923
Subscription ................................ 6,374 6,264 19,016 18,492
Ancillary products and services ............... 7,694 7,177 29,125 25,523
--------- --------- --------- ---------
Total revenues .............................. 32,763 31,898 105,507 100,938
--------- --------- --------- ---------
OPERATING EXPENSES:
Editorial ..................................... 5,196 5,242 15,490 15,643
Production and distribution ................... 5,644 5,778 18,192 18,070
Selling ....................................... 6,995 6,741 21,176 20,330
General and administrative .................... 8,108 7,467 27,050 25,306
Depreciation, amortization and other charges 2,831 2,796 8,707 11,189
--------- --------- --------- ---------
Total operating expenses .................... 28,774 28,024 90,615 90,538
--------- --------- --------- ---------
Operating income ............................ 3,989 3,874 14,892 10,400
Interest expense .............................. (7,112) (7,047) (21,274) (20,977)
Other income .................................. 37 -- 66 --
--------- --------- --------- ---------
Loss before income taxes .................... (3,086) (3,173) (6,316) (10,577)
Benefit for income taxes ...................... 16 1,789 -- 3,710
--------- --------- --------- ---------
Net loss .................................... $ (3,070) $ (1,384) $ (6,316) $ (6,867)
========= ========= ========= =========
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)
ACCUMULATED
OTHER
PAR PAID-IN ACCUMULATED COMPREHENSIVE
SHARES VALUE CAPITAL DEFICIT LOSS TOTAL
--------- --------- --------- ----------- ------------- ---------
COMMON STOCK
---------------------
Balance at December 31, 2003 .......... 1,320,330 $ 13 $ 116,488 $(140,656) $ (1,588) $ (25,743)
Net loss ........................... -- -- -- (6,316) -- (6,316)
Unrealized loss on equity securities
available for sale................. -- -- -- -- (100) (100)
--------- --------- --------- --------- --------- ---------
Total comprehensive loss .......... -- -- -- -- -- (6,416)
--------- --------- --------- --------- --------- ---------
Balance at September 30, 2004 ......... 1,320,330 $ 13 $ 116,488 $(146,972) $ (1,688) $ (32,159)
========= ========= ========= ========= ========= =========
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 NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................................... $ (6,316) $ (6,867)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, amortization and other charges .................................. 8,707 11,189
Deferred income tax ........................................................... -- (3,710)
Non-cash interest ............................................................. 888 882
Accretion of interest on senior discount notes ................................ 6,703 6,275
(Increase) decrease in:
Accounts receivable, net ...................................................... (769) 1,427
Inventories ................................................................... (116) 8
Other current assets .......................................................... (955) (499)
Other assets .................................................................. 271 (57)
Increase (decrease) in:
Accounts payable .............................................................. 574 1,092
Accrued expenses .............................................................. 1,726 (748)
Accrued interest payable ...................................................... 4,446 3,838
Deferred income ............................................................... (487) (953)
Other noncurrent liabilities .................................................. (1,706) (426)
-------- --------
Net cash provided by operating activities ................................... 12,966 11,451
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .......................................................... (2,794) (2,036)
Deferred purchase price from purchase of business ............................. -- (377)
-------- --------
Net cash used in investing activities ....................................... (2,794) (2,413)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment under revolving credit facility ....................................... (10,900) (7,400)
Payment of deferred financing costs ........................................... (100) --
-------- --------
Net cash used in financing activities ....................................... (11,000) (7,400)
-------- --------
Net (decrease) increase in cash ............................................. (828) 1,638
-------- --------
Cash, beginning of period ..................................................... 1,614 824
-------- --------
Cash, end of period ........................................................... $ 786 $ 2,462
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period:
Income taxes ................................................................ $ 416 $ 7
======== ========
Interest .................................................................... $ 9,236 $ 9,988
======== ========
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
4
AMERICAN LAWYER MEDIA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT
SEPTEMBER 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 U.S. 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 U.S. 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 $1.3
million as of September 30, 2004. Such Legal Ad Agents do not have significant
liquid net worth and, as a result, we are exposed to a certain level of credit
concentration risk in this area, for which we believe we have adequately
provided.
5
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Periodical advertising revenues are generated from the placement of
display and classified advertisements, as well as directory listings and 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 periodical 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 revenues are recognized upon the release of
an advertisement on the particular website. Directory listing revenues are
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 $2,364,300 and $2,122,200 are included in accounts
receivable in the accompanying consolidated September 30, 2004 and December 31,
2003 balance sheets, respectively.
ADVERTISING AND PROMOTIONAL EXPENDITURES
Advertising and promotional expenditures totaled approximately $1,616,400
and $1,625,000 for the three months ended September 30, 2004 and 2003,
respectively, and $5,040,400 and $4,976,000 for the nine months ended September
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 September 30, 2004 and December
31, 2003 includes $6,500 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 nine month periods ended September 30, 2004 and 2003 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
Reported net loss ........................... $(3,070) $(1,384) $(6,316) $(6,867)
Stock-based employee compensation expense
determined under the fair value method.... (38) (119) (244) (465)
------- ------- ------- -------
Pro forma net loss .......................... $(3,108) $(1,503) $(6,560) $(7,332)
======= ======= ======= =======
8
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PENSION COSTS
The components of the net periodic benefit costs realized for the three
and nine month periods ended September 30, 2004 and 2003 are as follows (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2004 2003 2004 2003
----- ----- ----- -----
Interest cost.................... $ 77 $ 72 $ 232 $ 216
Expected return on plan assets... (64) (55) (193) (164)
Amortization of net loss......... 25 26 76 78
----- ----- ----- -----
Net periodic benefit costs....... $ 38 $ 43 $ 115 $ 130
===== ===== ===== =====
For the year ending December 31, 2004, we expect to contribute $563,000 to
our retirement plans. As of September 30, 2004, we have contributed $500,000 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. 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 September 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 general senior obligations and are
fully and unconditionally guaranteed, on a joint and several and
9
3. DEBT (CONTINUED)
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 the 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 September 30, 2004, Bruce Wasserstein chairman of
the Board of Directors of us and ALM 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 and provided 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. Effective August 11, 2004, the GECC Facility was further
amended to modify the measurement dates and compliance levels for the total
leverage ratio, interest coverage ratio and fixed charge ratio through March
2006. This agreement also incorporated the establishment of the Deposit Account
Control Agreement between our depository banking institution, GECC and us.
As of september 30, 2004 we are in compliance with all requirements under
our debt covenant agreements.
10
3. DEBT (CONTINUED)
At September 30, 2004, the amount outstanding under the GECC Facility was
$19.5 million. The available balance under the unused commitment reduced by our
letters of credit outstanding totaled $18.1 million. A 10% increase in the
average interest rate of borrowing under the GECC Facility during the nine
months ended September 30, 2004 would have increased our net loss to
approximately $6.4 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
September 30, 2004, approximately $0.1 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 nine months ended September 30, 2004... (226)
-----
Unpaid restructuring charge accrual at September 30, 2004 ....... $ 55
=====
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 ten other magazines; our newsletters; our
hard and soft cover books; our trade shows and seminars; our licensing and
syndication business; our verdict and settlement division; our international
operations and our MA3000 business acquired at the close of business on December
31, 2003. 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.
11
5. SEGMENT INFORMATION (CONTINUED)
Corporate overhead 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 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 Nine Months Ended
September 30, 2004 September 30, 2004
------------------------------- -------------------------------
Regional National Regional National
Newspapers Businesses Online Newspapers Businesses Online
---------- ---------- ------- ---------- ---------- -------
Total net revenue... $19,866 $11,235 $ 1,662 $62,598 $ 37,934 $ 4,975
======= ======= ======= ======= ======== =======
Segment operating
Income .......... $ 6,243 $ 1,524 $ 26 $21,052 $ 7,114 $ 144
======= ======= ======= ======= ======== =======
For the Three Months Ended For the Nine Months Ended
September 30, 2003 September 30, 2003
------------------------------- -------------------------------
Regional National Regional National
Newspapers Businesses Online Newspapers Businesses Online
---------- ---------- ------- ---------- ---------- -------
Total net revenue ... $20,213 $10,539 $ 1,146 $64,294 $33,180 $ 3,464
======= ======= ======= ======= ======= =======
Segment operating
income (loss) ... $ 6,086 $ 1,623 $ (503) $20,491 $ 6,963 $(3,717)
======= ======= ======= ======= ======= =======
A reconciliation of combined segment profit to consolidated net loss is as
follows:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------- -------------------------
2004 2003 2004 2003
-------- -------- -------- --------
Total segment operating income... $ 7,793 $ 7,206 $ 28,310 $ 23,737
Unallocated amounts:
Corporate expenses............. (3,804) (3,332) (13,418) (13,337)
Interest expense............... (7,112) (7,047) (21,274) (20,977)
Other income................... 37 -- 66 --
Benefit for income taxes....... 16 1,789 -- 3,710
-------- -------- -------- --------
Net loss......................... $ (3,070) $ (1,384) $ (6,316) $ (6,867)
======== ======== ======== ========
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
nine months ended September 30, 2004 to the three and nine months ended
September 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.
In September 2004, we recovered $0.1 million of a previously recorded loss
related to the sublease of our excess building space at an annual rental lower
than our lease obligation to the lessor. This recovery is reflected as a
component of other income in our Consolidated Statement of Operations.
Also in September 2004, we recorded a loss of $0.1 million resulting from
expenses related to an unsuccessful acquisition attempt. This loss was recorded
as a component of other income in our Consolidated Statement of Operations.
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
13
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 26.
The following table presents the results of operations for the three and
nine months ended September 30, 2004 and 2003 (in thousands):
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
REVENUES:
Periodicals:
Advertising .............................................. $ 18,695 $ 18,457 $ 57,366 $ 56,923
Subscription ............................................. 6,374 6,264 19,016 18,492
Ancillary products and services ............................ 7,694 7,177 29,125 25,523
--------- --------- --------- ---------
Total revenues ........................................... 32,763 31,898 105,507 100,938
--------- --------- --------- ---------
OPERATING EXPENSES:
Editorial .................................................. 5,196 5,242 15,490 15,643
Production and distribution ................................ 5,644 5,778 18,192 18,070
Selling .................................................... 6,995 6,741 21,176 20,330
General and administrative ................................. 8,108 7,467 27,050 25,306
Depreciation, amortization and other charges ............... 2,831 2,796 8,707 11,189
--------- --------- --------- ---------
Total operating expenses ................................. 28,774 28,024 90,615 90,538
--------- --------- --------- ---------
Operating income ......................................... 3,989 3,874 14,892 10,400
Interest expense ........................................... (7,112) (7,047) (21,274) (20,977)
Other income ............................................... 37 -- 66 --
--------- --------- --------- ---------
Loss before income taxes ................................. (3,086) (3,173) (6,316) (10,577)
Benefit for income taxes ................................... 16 1,789 -- 3,710
--------- --------- --------- ---------
Net loss ................................................. $ (3,070) $ (1,384) $ (6,316) $ (6,867)
========= ========= ========= =========
RESULTS OF OPERATIONS
Nine months ended September 30, 2004 compared to nine months ended September 30,
2003
Overview. Revenues increased by $4.6 million, or 4.5%, from $100.9 million
for the nine months ended September 30, 2003 to $105.5 million for the nine
months ended September 30, 2004. Operating expenses increased $0.1 million, from
$90.5 million for the nine months ended September 30, 2003 to $90.6 million for
the nine months ended September 30, 2004. As a result, operating income
increased $4.5 million, from $10.4 million for the nine months ended September
30, 2003 to $14.9 million for the nine months ended September 30, 2004. EBITDA
increased $2.1 million, or 9.6%, from $21.6 million for the nine months ended
September 30, 2003 to $23.7 million for the nine months ended September 30,
2004. Net loss totaled $6.3 million for the nine months ended September 30, 2004
as compared to a net loss of $6.9 million for the nine months ended September
30, 2003.
Revenues. Revenues increased by $4.6 million, or 4.5%, from $100.9 million
for the nine months ended September 30, 2003 to $105.5 million for the nine
months ended September 30, 2004. Revenue growth for the nine months ended
September 30, 2004 compared to the nine months ended September 30, 2003 reflects
revenues recorded in our MA3000 business of $1.7 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
14
("CLE") fees, advertising revenues and subscription revenues in our print
publications and online business increased during the nine months ended
September 30, 2004. These increases were partially offset by a $1.1 million
decrease in revenues from the elimination of editorial content fees from
RealLegal as a result of our acquisition of MA3000.
Advertising revenues increased $0.5 million, from $56.9 million for the
nine months ended September 30, 2003 to $57.4 million for the nine months ended
September 30, 2004. Display advertising revenues increased by $1.1 million,
despite the decision not to renew a contract to publish certain directories,
which totaled $0.4 million in revenues for the nine months ended September 30,
2003. This increase was partially offset by decreases in classified advertising
revenues of $0.2 million, legal notice advertising revenues of $0.2 million,
directory advertising revenues of $0.1 million and law firm advertising revenues
of $0.1 million. Classified advertising revenues in our print publications
declined $0.7 million, offset by an increase in online classified advertising
revenues of $0.5 million. Our advertising market share continues to be strong,
however, the total volume of advertising is down as compared to the same period
last year, as law firms still have not yet begun to increase their volume of
recruitment advertising.
Subscription revenues increased $0.5 million, or 2.8%, from $18.5 million
for the nine months ended September 30, 2003 to $19.0 million for the nine
months ended September 30, 2004. Subscription revenues increased in virtually
all of our National Businesses, several of our Regional Newspapers and in our
Online Business due to an increase in marketing efforts. In addition,
subscription revenues for the National Businesses increased due to the
publication of three additional issues of The National Law Journal in 2004 as
compared to 2003.
Revenues from ancillary products and services increased $3.6 million, or
14.1%, from $25.5 million for the nine months ended September 30, 2003 to $29.1
million for the nine months ended September 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, increased online CLE business
and The American Lawyer's 25th Anniversary Dinner. In addition, revenues
increased due to MA3000 court research fees of $1.7 million, higher royalty and
licensing fees primarily from the inclusion of new products in our royalty
licensing contracts and higher newsletter and book sales. Book sales increased
despite the decision not to renew a contract which totaled $0.9 million to
publish certain book directories in 2003. These increases were partially offset
by a $1.1 million decrease in revenues from 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 increased $0.1 million, from $90.5
million for the nine months ended September 30, 2003 to $90.6 million for the
nine months ended September 30, 2004. Increased operating expenses during the
nine months ended September 30, 2004 as compared to the nine months ended
September 30, 2003 resulted from higher production, selling and general and
administrative expenses. These increases were partially offset by lower
editorial and depreciation and amortization expenses.
Editorial expenses decreased $0.1 million, or 1.0%, from $15.6 million for
the nine months ended September 30, 2003 to $15.5 million for the nine months
ended September 30, 2004. The decrease in editorial expenses primarily resulted
from realized savings in research costs 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.
15
Production and distribution expenses increased $0.1 million, or 0.7%, from
$18.1 million for the nine months ended September 30, 2003 to $18.2 million for
the nine months ended September 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.
Selling expenses increased $0.9 million, or 4.2%, from $20.3 million for
the nine months ended September 30, 2003 to $21.2 million for the nine months
ended September 30, 2004. The increase in expenses is primarily due to increases
in general marketing and research 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 $1.7 million, or 6.9%, from
$25.3 million for the nine months ended September 30, 2003 to $27.0 million for
the nine months ended September 30, 2004. This increase resulted primarily from
higher salaries and other compensation and related taxes and employee benefits
as well as higher management consulting and professional fees. Expenses further
increased due to a net reduction of our provision for uncollectible accounts
during the nine months ended September 30, 2003, due to an improvement in our
accounts receivable aging performance. These increases were partially offset by
a reduction in rent expense and other non-income taxes.
Depreciation, amortization and other charges decreased $2.5 million, or
22.2%, from $11.2 million for the nine months ended September 30, 2003 to $8.7
million for the nine months ended September 30, 2004. This decrease resulted
primarily from a $1.5 million adjustment at 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 nine months ended September 30,
2004 as compared to the nine months ended September 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 $4.5 million, from $10.4 million for the nine months ended September
30, 2003 to $14.9 million for the nine months ended September 30, 2004. In
addition, EBITDA increased $2.1 million, or 9.6%, from $21.6 million for the
nine months ended September 30, 2003 to $23.7 million for the nine months ended
September 30, 2004.
Interest expense. Total interest expense increased $0.3 million, from
$21.0 million for the nine months ended September 30, 2003 to $21.3 million for
the nine months ended September 30, 2004. This increase was due to additional
interest of $0.8 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. Income tax benefit decreased $3.7 million for the nine
months ended September 30, 2004 as compared to the nine months ended September
30, 2003. The lower income tax benefit for the nine months ended September 30,
2004 reflects a valuation allowance of $2.0 million recorded against our income
tax benefit due to uncertainties regarding future benefits and the utilization
of the total deferred tax assets.
16
Net loss. As a result of the above factors, our net loss narrowed $0.6
million, from a loss of $6.9 million for the nine months ended September 30,
2003 to a loss of $6.3 million for the nine months ended September 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.
For the nine months ended September 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 research business; our
litigation services division; our international operations and our MA3000
business acquired at the close of business on December 31, 2003. These
businesses share substantially the same customer type and geographic regions.
Online is comprised of 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.
17
Our operations on a segmented basis were as follows (in thousands):
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
---------------------------------------------------
REGIONAL NEWSPAPERS NATIONAL BUSINESSES ONLINE
------------------- ------------------- --------
REVENUES:
Periodicals:
Advertising ................................................. $ 40,716 $ 13,724 $ 2,926
Subscription ................................................ 15,785 2,322 909
Ancillary products and services ............................... 6,097 21,888 1,140
-------- -------- --------
Total revenues .............................................. 62,598 37,934 4,975
-------- -------- --------
OPERATING EXPENSES:
Editorial ..................................................... 8,997 5,904 584
Production and distribution ................................... 10,183 7,171 838
Selling ....................................................... 10,244 9,279 1,653
General and administrative .................................... 11,641 8,440 1,558
Depreciation, amortization and other charges .................. 481 26 198
-------- -------- --------
Total operating expenses .................................... 41,546 30,820 4,831
-------- -------- --------
Segment operating income .................................... 21,052 7,114 144
-------- -------- --------
ADJUSTMENT TO ARRIVE AT EBITDA:
Depreciation, amortization and other charges .................. (481) (26) (198)
-------- -------- --------
EBITDA ...................................................... $ 21,533 $ 7,140 $ 342
======== ======== ========
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
---------------------------------------------------
REGIONAL NEWSPAPERS NATIONAL BUSINESSES ONLINE
------------------- ------------------- --------
REVENUES:
Periodicals:
Advertising .................................................. $ 42,246 $ 12,579 $ 2,098
Subscription ................................................. 15,580 2,120 792
Ancillary products and services ................................ 6,468 18,481 574
-------- -------- --------
Total revenues ............................................... 64,294 33,180 3,464
-------- -------- --------
OPERATING EXPENSES:
Editorial ...................................................... 9,413 5,729 504
Production and distribution .................................... 11,202 6,245 623
Selling ........................................................ 10,824 7,089 2,415
General and administrative ..................................... 11,868 7,146 1,443
Depreciation, amortization and other charges ................... 496 8 2,196
-------- -------- --------
Total operating expenses ..................................... 43,803 26,217 7,181
-------- -------- --------
Segment operating income (loss)............................... 20,491 6,963 (3,717)
-------- -------- --------
ADJUSTMENT TO ARRIVE AT EBITDA:
Depreciation, amortization and other charges ................... (496) (8) (2,196)
-------- -------- --------
EBITDA ....................................................... $ 20,987 $ 6,971 $ (1,521)
======== ======== ========
18
Regional Newspapers
Revenues. Revenues for our Regional Newspapers decreased $1.7 million,
from $64.3 million for the nine months ended September 30, 2003 to $62.6 million
for the nine months ended September 30, 2004. Advertising revenues decreased
$1.5 million, from $42.2 million for the nine months ended September 30, 2003 to
$40.7 million for the nine months ended September 30, 2004. The decrease was due
largely to lower classified advertising revenues of $0.8 million, primarily in
attorney related help wanted advertising as our publications continue to
experience the effects of a weak economy. In addition, display advertising, law
firm advertising, legal notice advertising and directory revenues also declined.
Contributing to the overall decline in advertising revenue was a $0.5 million
decrease resulting from the decision not to renew a contract to publish certain
directories. Book sales also declined by $0.9 million as a result of the
aforementioned decision not to renew a contract to publish certain directories.
These decreases were partially offset by an increase in subscription revenues
and from higher royalty and licensing fees.
Operating expenses. Total operating expenses decreased $2.3 million, or
5.1%, from $43.8 million for the nine months ended September 30, 2003 to $41.5
million for the nine months ended September 30, 2004. Production and editorial
expenses decreased primarily due to lower paper, printing, fulfillment and other
production costs, salaries 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 salaries 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 decreased primarily due to lower
rent expense and lower allocated corporate overhead expenses. These decreases
were partially offset by higher salaries and other compensation and related
taxes and employee benefits.
Operating income. Our operating income increased $0.6 million, from $20.5
million for the nine months ended September 30, 2003 to $21.1 million for the
nine months ended September 30, 2004. EBITDA increased $0.5 million, or 2.6%,
from $21.0 million for the nine months ended September 30, 2003 to $21.5 million
for the nine months ended September 30, 2004.
National Businesses
Revenues. Revenues for our National Businesses increased $4.7 million, or
14.3%, from $33.2 million for the nine months ended September 30, 2003 to $37.9
million for the nine months ended September 30, 2004. Advertising revenues for
our National Businesses increased $1.1 million, from $12.6 million for the nine
months ended September 30, 2003 to $13.7 million for the nine months ended
September 30, 2004. This increase was primarily due to increases in display
advertising, law firm advertising and directory advertising revenues.
Subscription revenues increased $0.2 million primarily due to an increase in
marketing efforts as well as to the publication of three additional issues of
The National Law Journal in 2004 as compared to 2003. In addition, ancillary
revenues increased $3.4 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.
19
Operating expenses. Operating expenses for our National Businesses
increased $4.6 million, or 17.6%, from $26.2 million for the nine months ended
September 30, 2003 to $30.8 million for the nine months ended September 30,
2004. Production and editorial expenses increased primarily due to higher
printing and production costs and higher salaries and related taxes and employee
benefits 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 salaries and related taxes and employee benefits and a reduction
of allocated expenses of sales staff resources to the Regional Newspaper
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 salaries and related
taxes and employee benefits, increased consulting and professional fees, and an
increase in other taxes.
Operating income. Our operating income increased $0.1 million, or 2.2%,
from $7.0 million for the nine months ended September 30, 2003 to $7.1 million
for the nine months ended September 30, 2004. EBITDA increased $0.1 million, or
2.4%, from $7.0 million for the nine months ended September 30, 2003 to $7.1
million for the nine months ended September 30, 2004.
Online
Revenues. Revenues for our online business increased $1.5 million, or
43.6%, from $3.5 million for the nine months ended September 30, 2003 to $5.0
million for the nine months ended September 30, 2004. Advertising revenues
increased by $0.8 million, from $2.1 million for the nine months ended September
30, 2003 to $2.9 million for the nine months ended September 30, 2004. In
addition, seminar and trade show revenues increased by $0.6 million, due to
higher sales of online CLE courses, and online subscription revenues increased
by $0.1 million.
Operating expenses. Operating expenses for our online business decreased
$2.4 million, or 32.7%, from $7.2 million for the nine months ended September
30, 2003 to $4.8 million for the nine months ended September 30, 2004. Selling
expenses declined by $0.8 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
improvements and furniture in 2003. Partially offsetting these decreases was an
increase in production expenses due to higher royalty expense and in increase in
editorial and general and administrative expenses.
Operating income. Our operating income increased $3.8 million, from a loss
of $3.7 million for the nine months ended September 30, 2003 to a profit of $0.1
million for the nine months ended September 30, 2004. EBITDA increased $1.8
million, from an EBITDA loss of $1.5 million for the nine months ended September
30, 2003 to a gain of $0.3 million for the nine months ended September 30, 2004.
Three months ended September 30, 2004 compared to three months ended September
30, 2003
Overview. Revenues increased by $0.9 million, or 2.7%, from $31.9 million
for the three months ended September 30, 2003 to $32.8 million for the three
months ended September 30, 2004. Operating expenses increased $0.8 million, or
2.7%, from $28.0 million for the three months ended September 30, 2003 to $28.8
million for the three months ended September 30, 2004. As a result, operating
income increased $0.1 million, from $3.9 million for the three months ended
September 30, 2003 to $4.0 million for the three months ended September 30,
2004. EBITDA increased $0.2 million, or 2.8%, from $6.7 million for the three
months ended
20
September 30, 2003 to $6.9 million for the three months ended September 30,
2004. Net loss totaled $3.1 million for the three months ended September 30,
2004 as compared to a net loss of $1.4 million for the three months ended
September 30, 2003.
Revenues. Revenues increased by $0.9 million, or 2.7%, from $31.9 million
for the three months ended September 30, 2003 to $32.8 million for the three
months ended September 30, 2004. Revenue growth for the three months ended
September 30, 2004 compared to the three months ended September 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, online CLE fees,
book revenues, sales of reprints, advertising revenues and subscription revenues
in our print publications increased during the three months ended September 30,
2004. These increases were partially offset by a $0.4 decrease in revenues from
the elimination of editorial content fees from RealLegal as a result of our
acquisition of MA3000.
Advertising revenues increased $0.2 million, or 1.3%, from $18.5 million
for the three months ended September 30, 2003 to $18.7 million for the three
months ended September 30, 2004. Higher revenues were recorded in display
advertising of $0.7 million. This increase was partially offset by decreases in
legal advertising of $0.2 million, directory advertising of $0.2 million and
classified advertising of $0.1 million.
Subscription revenues increased $0.1 million, or 1.8%, from $6.3 million
for the three months ended September 30, 2003 to $6.4 million for the three
months ended September 30, 2004. This increase is primarily due to additional
marketing efforts year-over-year as well as to the publication of an additional
issue of The National Law Journal in the three months ended September 30, 2004
as compared to the three months ended September 30, 2003.
Revenues from ancillary products and services increased $0.5 million, or
7.2%, from $7.2 million for the three months ended September 30, 2003 to $7.7
million for the three months ended September 30, 2004. The increase in revenues
resulted primarily from higher book sales, MA3000 court research fees and sales
of reprints. 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 but rather through
court research fees as indicated above.
Operating expenses. Operating expenses increased $0.8 million, or 2.7%,
from $28.0 million for the three months ended September 30, 2003 to $28.8
million for the three months ended September 30, 2004. Increased operating
expenses during the three months ended September 30, 2004 as compared to the
three months ended September 30, 2003 resulted from higher selling and general
and administrative expenses. These increases were partially offset by a decrease
in production and distribution expenses.
Production and distribution expenses decreased $0.2 million, or 2.3%, from
$5.8 million for the three months ended September 30, 2003 to $5.6 million for
the three months ended September 30, 2004. Production and distribution expenses
decreased primarily due to lower tradeshow and seminar related costs.
Selling expenses increased $0.3 million, or 3.8%, from $6.7 million for
the three months ended September 30, 2003 to $7.0 million for the three months
ended September 30, 2004. The increase in expenses is primarily due to increases
in salaries, commissions and related taxes and employee benefits directly
related to revenue growth and an increased sales force, and increased marketing
and research efforts.
21
General and administrative expenses increased $0.6 million, or 8.6%, from
$7.5 million for the three months ended September 30, 2003 to $8.1 million for
the three months ended September 30, 2004. This increase resulted primarily from
higher salaries and other compensation and related taxes and employee benefits
as well as higher management consulting and professional fees. Expenses further
increased due to a net reduction of our provision for uncollectible accounts
during the three months ended September 30, 2003, due to an improvement in our
accounts receivable aging performance. These increases were partially offset by
a reduction in rent expense and other non-income taxes.
Operating income. As a result of the above factors, our operating income
increased $0.1 million, from $3.9 million for the three months ended September
30, 2003 to $4.0 million for the three months ended September 30, 2004. In
addition, EBITDA increased $0.2 million, or 2.8%, from $6.7 million for the
three months ended September 30, 2003 to $6.9 million for the three months ended
September 30, 2004.
Interest expense. Total interest expense increased $0.1 million, from $7.0
million for the three months ended September 30, 2003 to $7.1 million for the
three months ended September 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 an income tax benefit of $16,000 for the three
months ended September 30, 2004, compared to an income tax benefit of $1.8
million for the three months ended September 30, 2004. The lower income tax
benefit for the three months ended September 30, 2004 reflects a valuation
allowance of $1.1 million recorded against our income tax benefit due to
uncertainties regarding future benefits and the utilization of the total
deferred tax assets.
Net loss. As a result of the above factors, our net loss increased $1.7
million from a loss of $1.4 million for the three months ended September 30,
2003 to a loss of $3.1 million for the three months ended September 30, 2004.
Operating segments. As mentioned above in Note 5 of the Consolidated
Financial Statements, and in our nine month results, our reportable operating
segments are Regional Newspapers, National Businesses, Online and Corporate.
22
Our operations on a segmented basis were as follows (in thousands):
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
-----------------------------------------------------
REGIONAL NEWSPAPERS NATIONAL BUSINESSES ONLINE
------------------- ------------------- --------
REVENUES:
Periodicals:
Advertising ..................... $ 12,468 $ 5,208 $ 1,019
Subscription .................... 5,276 782 316
Ancillary products and services.... 2,122 5,245 327
-------- -------- --------
Total revenues .................. 19,866 11,235 1,662
-------- -------- --------
OPERATING EXPENSES:
Editorial ......................... 2,988 1,985 223
Production and distribution ....... 3,337 2,012 294
Selling ........................... 3,396 3,045 554
General and administrative ........ 3,756 2,660 501
Depreciation, amortization and
other charges ................... 146 9 64
-------- -------- --------
Total operating expenses ........ 13,623 9,711 1,636
-------- -------- --------
Segment operating income ........ 6,243 1,524 26
-------- -------- --------
ADJUSTMENT TO ARRIVE AT EBITDA:
Depreciation, amortization and
other charges ................... (146) (9) (64)
-------- -------- --------
EBITDA .......................... $ 6,389 $ 1,533 $ 90
======== ======== ========
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
-----------------------------------------------------
REGIONAL NEWSPAPERS NATIONAL BUSINESSES ONLINE
------------------- ------------------- --------
REVENUES:
Periodicals:
Advertising...................... $ 13,072 $ 4,675 $ 710
Subscription..................... 5,285 714 265
Ancillary products and services.... 1,856 5,150 171
-------- -------- --------
Total revenues................... 20,213 10,539 1,146
-------- -------- --------
OPERATING EXPENSES:
Editorial.......................... 3,102 1,987 153
Production and distribution........ 3,471 2,089 218
Selling............................ 3,458 2,541 823
General and administrative......... 3,931 2,296 359
Depreciation, amortization and
other charges.................... 165 3 96
-------- -------- --------
Total operating expenses......... 14,127 8,916 1,649
-------- -------- --------
Segment operating income (loss).. 6,086 1,623 (503)
-------- -------- --------
ADJUSTMENT TO ARRIVE AT EBITDA:
Depreciation, amortization and
other charges.................... (165) (3) (96)
-------- -------- --------
EBITDA........................... $ 6,251 $ 1,626 $ (407)
======== ======== ========
23
Regional Newspapers
Revenues. Revenues for our Regional Newspapers declined $0.3 million, or
1.7%, from $20.2 million for the three months ended September 30, 2003 to $19.9
million for the three months ended September 30, 2004. Advertising revenues
decreased $0.6 million from $13.1 million for the three months ended September
30, 2003 to $12.5 million for the three months ended September 30, 2004. This
decrease was offset by a increase in ancillary revenues of $0.3 million.
Operating expenses. Total operating expenses declined $0.5 million, or
3.6%, from $14.1 million for the three months ended September 30, 2003 to $13.6
million for the three months ended September 30, 2004. Production and editorial
expenses decreased primarily due to lower paper, printing, fulfillment and other
production costs, salaries 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 salaries and related taxes and employee
benefits and lower allocated expenses due to a reduction of allocated sales
staff resources from the National Businesses segment. General and administrative
expenses decreased primarily due to lower rent expense and lower allocated
corporate overhead expenses.
Operating income. Our operating income increased $0.1 million, from $6.1
million for the three months ended September 30, 2003 to $6.2 million for the
three months ended September 30, 2004. EBITDA increased $0.1 million, or 2.2%,
from $6.3 million for the three months ended September 30, 2003 to $6.4 million
for the three months ended September 30, 2004.
National Businesses
Revenues. Revenues for our National Businesses increased $0.7 million, or
6.6%, from $10.5 million for the three months ended September 30, 2003 to $11.2
million for the three months ended September 30, 2004. Advertising revenues
increased $0.5 million, from $4.7 million for the three months ended September
30, 2003 to $5.2 million for the three months ended September 30, 2004. This
increase was primarily due to increases in display and law firm advertising
revenues, partially offset by a decrease in directory advertising. In addition,
ancillary revenues increased $0.1 million due primarily to higher book sales and
court research 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, as well as lower seminar and tradeshow revenues. In addition, subscription
revenues increased $0.1 million.
Operating expenses. Operating expenses for our National Businesses
increased $0.8 million, or 8.9%, from $8.9 million for the three months ended
September 30, 2003 to $9.7 million for the three months ended September 30,
2004. Selling expenses increased due to higher salaries and related taxes and
employee benefits and lower allocated expenses due to a reduction of allocated
sales staff resources to the Regional Newspaper 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 salaries and related taxes and employee benefits,
increased consulting and professional fees and higher corporate allocations.
These increases were partially offset by decreased production expenses,
primarily due to lower costs associated with the seminar and tradeshow division.
Operating income. Our operating income decreased $0.1 million, or 6.0%,
from $1.6 million for the three months ended September 30, 2003 to $1.5 million
for the three months ended
24
September 30, 2004. EBITDA decreased $0.1 million, or 5.7%, from $1.6 million
for the three months ended September 30, 2003 to $1.5 million for the three
months ended September 30, 2004.
Online
Revenues. Revenues for our online business increased $0.6 million, or
45.1%, from $1.1 million for the three months ended September 30, 2003 to $1.7
million for the three months ended September 30, 2004. Advertising revenues
increased $0.3 million, from $0.7 million for the three months ended September
30, 2003 to $1.0 million for the three months ended September 30, 2004. In
addition, seminar and trade show revenues increased $0.2 million, due to higher
sales of online CLE courses.
Operating expenses. Operating expenses were flat at $1.6 million for both
the three months ended September 30, 2003 and the three months ended September
30, 2004. Selling expenses declined as fewer costs were allocated to Law.com
from the National Businesses sales force for online sales efforts. General and
administrative expenses increased primarily due to higher salaries and related
taxes and employee benefits. In addition, production and editorial expenses
increased primarily due to higher salaries and related taxes and employee
benefits, higher book royalty expense and increased contributing editor costs.
Operating income. Our operating income increased $0.5 million, from a loss
of $0.5 million for the three months ended September 30, 2003 to break-even for
the three months ended September 30, 2004. EBITDA increased $0.5 million, from
an EBITDA loss of $0.4 million for the three months ended September 30, 2003 to
a gain of $0.1 million for the three months ended September 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities. Net cash provided by operating
activities increased $1.5 million from $11.5 million for the nine months ended
September 30, 2003 to $13.0 million during the nine months ended September 30,
2004. This increase was primarily driven by the overall improvement in EBITDA of
$2.1 million and in working capital requirements during the current period. This
was partially offset by a decrease in other current liabilities of $1.7 million
resulting from a reduction of acquisition reserves from the abandonment of
properties acquired from our acquisition of Law.com and MA3000 in 2003, as well
as reductions in our long term pension and rent liabilities.
Net cash used in investing activities. Net cash used in investing
activities increased $0.4 million from $2.4 million for the nine months ended
September 30, 2003 to $2.8 million for the nine months ended September 30, 2004.
This increase was due primarily from higher capital expenditures of $0.8 million
for the nine months ended September 30, 2004 compared to the nine months ended
September 30, 2003. This was partially offset by deferred payments of $0.4
million in 2003 for acquisitions made in 2001 and 2002 for which there were no
like payments made in 2004.
Net cash used in financing activities. Net cash used in financing
activities totaled $11.0 million for the nine months ended September 30, 2004
compared to $7.4 million for the nine months ended September 30, 2003 reflecting
a higher net paydown of $3.5 million on our GECC Facility and the payment of
deferred financing costs of $0.1 million.
25
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 $19.5 million outstanding as of September 30, 2004 and accrues
interest as described in Note 3 to the Consolidated 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, 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net loss ...................................... $ (3,070) $ (1,384) $ (6,316) $ (6,867)
Adjustments to arrive at EBITDA:
Benefit for income taxes ................... (16) (1,789) -- (3,710)
Interest expense ........................... 7,112 7,047 21,274 20,977
Depreciation, amortization and other
charges.................................. 2,831 2,796 8,707 11,189
-------- -------- -------- --------
Reported EBITDA ............................... $ 6,857 $ 6,670 $ 23,665 $ 21,589
======== ======== ======== ========
26
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
nine months ended September 30, 2004 would have increased our net loss to
approximately $6.4 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) Changes in 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.
27
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. UNREGISTERED SALES OF EQUITY 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
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.
- ----------
* Exhibits are incorporated by reference from American Lawyer Media
Holdings, Inc.'s previous filings with the Securities and Exchange
Commission.
28
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.
November 12, 2004 /s/ WILLIAM L. POLLAK
------------------------------
William L. Pollak
President and Chief Executive Officer
November 12, 2004 /s/ ERIC F. LUNDBERG
------------------------------
Eric F. Lundberg
Vice President and Chief Financial Officer