ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Official Information Company (formerly known as T/SF Communications Corporation), a Delaware corporation formed in 1989 (together with its subsidiaries, the "Company"), is a diversified business media, communications and information company which principally operates two lines of business: (i) business and professional database information services ("Information Services") and (ii) business to business communications, publishing and related marketing services ("Business to Business Communications"). Information Services includes: (i) Total Information Services, Inc. ("TISI"), which, with its proprietary database, is the leading provider of comprehensive pre-employment screening information used by the trucking industry to facilitate compliance with U.S. Government regulations and (ii) CORSEARCH, Inc. ("CORSEARCH"), the second largest provider in the United States of trademark and trade name research to law firms and corporations. Business to Business Communications is conducted through several individual businesses, each of which is characterized by leading competitive positions within specialized market niches. Business to Business Communications includes: (i) Atwood Publishing, LLC (together with its subsidiary and affiliates, "Atwood"), the largest domestic independent publisher of exposition and association related publications and directories; (ii) Galaxy Information Services, LLC ("Galaxy"), the largest independent provider of trade show and convention registration, exhibitor information and "lead" management services in the United States and (iii) GEM Communications, LLC (together with its subsidiaries and affiliates, "GEM"), which owns and operates the World Gaming Congress(R), the world's largest trade show catering to the legalized gaming industry, and publishes trade magazines directed to the legalized gaming industry, principally IGWB (formerly International Gaming and Wagering Business), the leading publication catering to gaming industry executives. In June 1998, GEM acquired all the assets and rights to the International Gaming Business Exposition, a conference and trade show serving the casino gaming industry. In September 1998, GEM acquired all the stock of UK based InterGame Limited, the publisher of the leading series of publications for the international coin-operated amusement and gaming machines and amusement park businesses. This transaction was accounted for as a purchase. The Company's consolidated revenues and adjusted EBITDA (as defined herein) for the year ended December 31, 1998 were approximately $96 million and $22 million, respectively. Of such consolidated revenues, approximately 38% represented Information Services and approximately 62% represented Business to Business Communications. Of such adjusted EBITDA, approximately 51% represented Information Services and approximately 49% represented Business to Business Communications.
Pursuant to a tender offer (the "Tender Offer") completed on October 9, 1997 by the Company for its common stock, a purchase consummated on October 9, 1997 (the "Stock Purchase") by a subsidiary of VS&A-T/SF, L.L.C. ("VS&A-T-SF") of 881,988 shares of common stock, the repurchase consummated on October 9, 1997 by the Company of certain employee stock options (the "Option Repurchase"), a reverse stock split of the shares of common stock consummated on February 27, 1998 that resulted in the elimination of all shares of common stock other than those held by VS&A-T/SF and Fir Tree Value Fund, LP., Fir Tree Institutional Value Fund L.P. and Fir Tree Value Partners L.D.C. (collectively, "Fir Tree" and, together with VS&A-TSF, the "Equity Investors") (together with certain related transactions, the "Second Step Transaction"), and the drop down restructuring consummated on February 27, 1998 (the "Drop Down Restructuring"), in each case as described below, the Company was recapitalized and VS&A-T/SF and Fir Tree own approximately 64.4% and 35.6% of the common stock, respectively. The Tender Offer, Stock Purchase, Option Repurchase, Second Step Transaction and Drop Down Restructuring are collectively referred to herein as the "Recapitalization." Unless otherwise indicated, references herein to numbers of shares of common stock reflect the capitalization of the Company after giving effect to the reverse stock split effected on February 27, 1998 as part of the Second Step Transaction.
As part of the Recapitalization, VS&A-T/SF and Fir Tree caused the Company, directly or indirectly, to contribute to T/SF Holdings, LLC ("Holdings LLC") substantially all of the assets and liabilities of the predecessors of Atwood, Galaxy and GEM in exchange for a $45.0 million preferred equity interest in Holdings LLC and VS&A-T/SF and Fir Tree contributed $4.5 million to acquire the common equity interests in Holdings LLC in the same proportion as their ownership of the common stock immediately following the consummation of the Recapitalization. These common equity interests in Holdings LLC and all earnings and losses in excess of the
preferred stockholders' annual distributions are reflected as minority interests. The preferred equity interest held, directly or indirectly, by the Company carries an 11% annual distribution rate and, together with a voting agreement gives the Company total voting, operational and management control of Holdings LLC. As part of the Recapitalization, Holdings LLC contributed substantially all of the assets of the predecessors of Galaxy, Atwood and GEM into several limited liability companies (the "Operating LLCs"). At the time of the Recapitalization, 99% of the common equity interests of each Operating LLC were owned by Holdings LLC and gave Holdings LLC voting, operational and management control of such entities and a 1% common equity interest of each Operating LLC was owned by T/SF Operating, LLC ("Operating LLC"). The preferred equity interest in Operating LLC was owned by Holdings LLC and gave Holdings LLC voting, operational and management control of Operating LLC and the common equity interests of Operating LLC were held by VS&A-T/SF and Fir Tree in the same proportion as their ownership of the common stock immediately following the consummation of the Recapitalization. On December 31, 1998, Operating LLC was merged into Holdings LLC, with Holdings LLC being the surviving entity. As a result of such merger, Holdings LLC currently owns all of the common equity interests of each Operating LLC. A chart illustrating the Company's ownership structure set forth above is available upon request. In lieu of such chart, which is unavailable on EDGAR, the following description is useful:
The Company conducts its business through several corporate and limited liability company subsidiaries as follows:
1. Corporate Subsidiaries: The Company owns, directly or indirectly, several active corporate subsidiaries through which it conducts certain of its businesses such as Corsearch and TISI.
2. Limited Liability Company Subsidiaries: The Company, together with certain of its active corporate subsidiaries, owns all of the outstanding preferred interest in Holdings LLC, which holds all of the outstanding interest in the several operating limited liability companies through which TOIC conducts certain of its business such as GEM, Atwood and Galaxy. There is also common interests of Holdings LLC which are held by TOIC stockholders as described above.
Holdings LLC, Operating LLC and the Operating LLCs are collectively referred to herein as the "LLC's." As a result of the control of the LLCs by the Company, the financial results of the LLCs are included in the consolidated financial statements of the Company as described more fully in Note 5 of the Company's financial statements included herein.
INFORMATION SERVICES
Information Services provides specialized information and database management services to selected market segments through TISI, a leading supplier of pre-employment screening and CORSEARCH, the second largest supplier in the United States of trademark and trade name searches and information research.
TISI
Pre-Employment Screening Services
TISI, through its comprehensive databases, provides pre-employment screening information and services to selected vertical markets that by government regulation or business characteristic require a comprehensive candidate background investigation prior to hiring.
Transportation Industry
TISI, which since 1983 has operated its transportation services business under the trade name DAC Services ("DAC"), is the leading supplier of comprehensive pre-employment screening information to the trucking industry and a provider of driving record-related and other risk assessment and underwriting information to the insurance industry. DAC, endorsed by the American Trucking Associations since 1986 and the trucking associations of 41 states, currently maintains a computer network providing on-line electronic access to a proprietary employment
history database of over 2.9 million job records concerning over 1.6 million truck drivers. Management believes the demand for the information in its DAC database is driven primarily by federal government regulation, the Company's ability to provide the information on a timely basis and the Company's success in marketing to the "truckload" segment of the trucking industry, which historically exhibits high driver turnover. "Truckload" carriers, such as J.B. Hunt and Schneider, typically are differentiated from "route" carriers and "private fleet" carriers in that "truckload" carriers are hired by third parties and do not have the steady, predetermined routes of a "route" carrier, nor do they operate as an individual corporation's captive "private fleet" (e.g., a retailer's "private fleet" of delivery trucks). As a result, the Company believes the unpredictable nature of a driver's job for a "truckload" carrier leads to inherently high driver turnover, which can be more than 100% per year for some trucking companies. As federal regulations require extensive screening of new truck drivers, this high turnover rate creates demand for DAC's services.
DAC has virtually instantaneous computer access to Motor Vehicle Records (MVRs) maintained by 30 states and alternative methods to access the MVRs of the remaining 20 states. In addition, DAC maintains a database which contains certain workers' compensation records from 36 states, which may be used by prospective employers either to detect employers that have been omitted by a prospective employee in his or her employment application or to determine job suitability. In 1998, DAC began offering a manual searching capability for many of those states which the workers' compensation records are not in DAC's database.
Criminal records are maintained by approximately 3,300 jurisdictions in the U.S. and there is no single source for all such records. However, DAC can access for its customers' criminal records from any U.S. jurisdiction requested by a customer. Management believes that the database of criminal records being created by DAC will become an increasingly valuable asset, and may provide DAC access to providing criminal records and other data to industries other than trucking and insurance.
DAC obtains its MVRs, workers' compensation and criminal records information from state or county archives, utilizing a nationwide network of agents and representatives, direct computer connections and proprietary databases. The information is resold at a mark-up over state and county fees for such information. In 1998, the information was resold to approximately 14,000 customers.
Employers who access DAC's services have the option to choose only those records that meet their specific information needs. In addition, DAC offers a "Total Applicant Screening Services" product which provides a customized package of DAC's pre-employment screening products.
For customers that want to perform their own background checks, the Company publishes The Guide, a publication available to the general public. The Guide lists thousands of telephone numbers and addresses for criminal record jurisdictions, state motor vehicle departments and colleges and universities, among others, which may be found helpful to those conducting their own background searches.
Gaming Industry
During 1998 TISI formed World Gaming Network (WGN) to provide pre-employment screening services to the casino gaming industry. Employment in the casino gaming industry exceeds 400,000 people and is growing at 15% annually. The industry spends approximately $28 million annually for employee background screening. WGN, based on the successful DAC model, plans to provide comprehensive employment history, criminal record, credit report, employment verification and reference information and services to the industry.
Healthcare Industry
TISI also formed Healthcare Employment Screening Services (HESS) during 1998 to provide pre-employment screening services to the home healthcare and nursing home industries. Much like the trucking industry, employers in these industries are required by Federal and various State regulations to conduct comprehensive background checks on prospective employees. HESS plans to offer a comprehensive pre-employment screening service to this industry based on the successful DAC model.
INSURANCE INDUSTRY SERVICES
In addition to providing MVRs to the transportation industry, the Company is also a leading supplier of MVRs to the insurance industry for the screening of insurance applications. The Company, endorsed by the Professional Insurance Agents' Association, provides over 5,000 insurance industry customers' access to the Company's computer network to request MVRs and other information. Approximately 85% of these customers are insurance agents, with the remaining 15% representing branch offices, managing general agents, brokers and a small number of regional and home office locations. These customers primarily utilize the Company's data in assessing insurance underwriting risk and also purchase the Company's workers' compensation and credit report information. In its effort to provide more complete information to its insurance industry customers, May 1995 the Company became a licensed reseller of Choice Point's CLUE(R) database, an insurance company database of previous insurance claims which allows insurance companies to access claims data for underwriting purposes.
CRIMINAL RECORDS SERVICES
CrimeSearch, Inc., a wholly owned subsidiary of TISI, is a leading provider of criminal and civil court records and criminal record research to the pre-employment screening and legal industries. Through it's network of 750 researchers CrimeSearch accesses criminal records in all counties in the United States, Puerto Rico and all US territories and Canadian provinces. CrimeSearch, acquired by TISI in 1996, has experienced strong demand for its services. 1998 revenue from external sources increased more than 100%.
ELECTRONIC DATA INTERCHANGE SERVICES
In 1997, DAC developed a product line called MessageXpress(R), which provides electronic business communication services to transportation motor carriers. DAC sold the assets associated with this product in January 1999.
CORSEARCH(R)
CORSEARCH, acquired by the Company in 1996, is believed to be the second largest provider of trademark and trade name research services in the United States. CORSEARCH provides comprehensive trademark and trade name searches for 800 law firm and corporate clients. The number of basic trademark and trade name searches executed by CORSEARCH was approximately 22,165 in 1998 an increase of 11% over 1997.
CORSEARCH currently searches three major classifications of trademark information for its customers: (i) through its proprietary database, CORBASE(R), the Company searches all federal trademarks that have been filed with and registered by the U.S. Patent and Trademark Office("PTO"); (ii) through its proprietary database CORSTATE(R), the Company searches trademarks that have been filed with the Secretary of State offices of the 50 states and Puerto Rico and (iii) through databases licensed to the Company by third parties, the Company searches for common law usages of company names, product names, trade names and brand names appearing in thousands of magazines, monographs, journals, newspapers, press releases and periodicals.
The prices for CORSEARCH's basic search services vary depending upon the turn-around time requested by the client for the particular search performed. CORSEARCH provides five levels of pricing of basic searches which increase incrementally for the five levels of timing provided, from CORSEARCH's "standard" three to four day service to "ultrarush" (two hour same day service). As the costs for each search remains substantially constant, CORSEARCH's profit margins on searches increase along with the prices charged for such services when services are ordered on a "rush" basis. A typical search may consist of a search of the federal, state, common law and domain name usage databases of trade names and trademarks.
CORSEARCH's highly trained, industry-focused researchers use CORSEARCH's proprietary software, proprietary CORBASE(R) and CORSTATE(R) databases, third party databases and, to a lesser extent, published resources for completing customer searches. Although the majority of the information contained in
CORSEARCH's state databases is publicly available from governmental authorities and others, management believes that because of the cycle of intellectual property registration renewals, it likely would take a new competitor several years to compile a database containing the state registration information currently maintained by CORSEARCH and its two primary competitors. New competitors may purchase the federal database from the PTO but significant computer programming would be needed to make it usable. Management believes that CORSEARCH, which competes primarily on the quality, accuracy and timeliness of its data, provides a consistently high level of service to its clients. CORSEARCH's customers include small to mid-size law firms and corporations as well as major companies.
CORSEARCH also has international search capabilities, primarily in selected European countries, Canada and Mexico, and provides access to an international database of pharmaceutical trademarks in use in 49 countries. In 1998 an Internet-based search service called CORSEARCH(R) OnLine was introduced which serves as a quick and easy research tool for clients to "screen" the availability of trademarks and trade names before undertaking more expensive searches.
BUSINESS TO BUSINESS COMMUNICATIONS
The Company's Business to Business Communications operations are conducted through several individual businesses, each of which is characterized by leading competitive positions within specialized market niches. Business to Business Communications includes: (i) Atwood, the largest domestic independent publisher of exposition and association related publications and directories; (ii) Galaxy, the largest independent provider of trade show and convention registration, exhibitor information and "lead" management services in the United States and (iii) GEM, the world's leading owner and operator of trade shows and publisher of trade magazines directed to the international legalized gaming industry.
ATWOOD
Atwood, founded in 1982, is the leading independent publisher of daily trade show and convention newspapers, directories, and related publishing products that are directed to the attendees of U.S. trade shows and conventions. Atwood competes primarily with trade magazines and the owners and operators of expositions with in-house publishing capabilities who participate only in their particular industry and do not have diverse markets or the capabilities of Atwood. Atwood also publishes the trade journal EXPO, the official publication of the International Association of Exposition Management, and Presenting: Communications, a publication covering the audio-visual presentation industry, and maintains an Internet website which is a database for trade show managers and exhibitors.
Approximately 70% of Atwood's 1998 revenues were derived from its publication of dailies and directories. During 1998, Atwood provided publishing, communication or promotional services to approximately 51,000 exhibitors at approximately 155 trade shows and conventions, including 30 of the "Tradeshow 200" exhibitions. Of the 155 trade shows to which Atwood provided services in 1998, 60% represented trade shows served by Atwood in 1997. Related products provided by Atwood include pre- and post- convention materials, literature kiosks and LeSack, a plastic bag filled with literature, publications, product samples and other marketing information that is distributed to attendees. Atwood also produces advertising and marketing products such as Internet Guides, specialty products and restaurant and city guides distributed to show attendees. Atwood provides magazine publishing related services to trade associations, including editorial content, layout and design of trade publications, advertising sales and circulation services. Atwood's digital group provides CD ROMs, Internet applications, electronic conference planners and buyer's guides.
Atwood has recently provided the rental of Marketing-oriented Interactive Kiosks for Exhibitors ("MIKE"). MIKE permits exhibitors to create customized interactive multimedia programs which are accessed by show attendees via touchscreen technology on a kiosk that takes up minimal floor space. The program can be customized to include survey questions that elicit information from attendees, which allows exhibitors to qualify leads.
GALAXY
Galaxy, founded in 1982, markets its comprehensive registration services, automated "lead" management products and information services on an exclusive basis to trade associations, promoters, exhibitors and attendees of exposition and trade shows and conventions. Galaxy serves over 60,000 exhibitors and nearly 3 million attendees annually. Among Galaxy's active clients are 51 of the "Tradeshow 200" exhibitions, including four of the top five such exhibitions. Of the 243 trade shows Galaxy provided services to in 1998, 83% represented trade shows served by Galaxy in 1997.
Multiple versions of Galaxy's "Expocards" (magnetic stripe or "smartcards") are utilized in the registration process to allow convention and trade show exhibitors to digitally capture and manipulate attendee information for "lead" management and follow-up. Galaxy's Expocard technology encodes attendee registration data on a magnetic stripe attached to a plastic card or on a computer chip "smartcard" which can be read by trade show and convention exhibitors renting Galaxy's Expocard readers. The Expocard provides lead data to exhibitors in electronic form and allows for other product applications. For example, attendees can leave and retrieve messages at a message center kiosk established by the Company on site for a fee. The Expocard permits the conference host (usually a trade association or a for-profit show manager) to receive information including demographic data, attendance results and exhibit visitation patterns.
Galaxy's "Expocard Connect" is a PC-based system that reads the Expocard's magnetic strip, allows the exhibitor to add qualifying information to the data file, saves the data to the PC hard drive in a format compatible with any data management program and, when networked, can transfer data directly to a data management program.
Galaxy introduced a series of new information products during 1998 targeted towards show managers, attendees, and exhibitors. InfoManager is a breakthrough in the delivery of registration data to the show manager. Using InfoManager, the show manager has 24-hour access to their show registration data via the Internet. InfoManager provides a variety of reports accessing current and historical data. Matchmaker is Galaxy's first information product specifically targeted to the attendee market. Using Matchmaker, the attendee can receive via printed form or the Internet (expected in early 1999) a complete list of all of the exhibits that they visited. In addition, valuable information on each exhibitor is provided by the Matchmaker product. Lead Assistant, introduced in late 1998, converts exhibitors' leads captured through Galaxy's EXPOCARD into standard formats that are compatible with all of the popular database management packages.
Galaxy Classics provides graphic design and printing services to its and Atwood's convention and trade show and trade association customers, as well as to select customers in the geographic areas surrounding Galaxy's headquarters in Frederick, Maryland. Services include customized graphic design for multimedia use and printing services, primarily for promotional and marketing purposes.
Several of Galaxy's customers hold trade shows on a bi-annual or tri-annual basis. Consequently, Galaxy's revenues vary from year to year. The following table sets forth, for the years ended December 31, 1996, 1997 and 1998, the percentage of revenues of Galaxy generated from trade shows of varying frequencies.
Years Ended December 31, -------------------------- 1996 1997 1998 ------- ------- ------ Annual Shows................................. 85% 95% 90% Bi-Annual Shows.............................. 11 3 9 Tri-Annual Shows............................. 3 1 1 Other Shows.................................. 1 1 0 ------- ------- ------ 100% 100% 100% ======= ======= ======
GEM
GEM, founded in 1986 is the leading global provider of business information and marketing resources for the legalized gaming industry. GEM owns and operates the World Gaming Congress and EXPO, the largest legalized gaming industry trade show in the world and the only trade show endorsed by the American Gaming Association as the organization's official trade show. The conference traditionally has been held annually in Las Vegas during September or October of each year. Consequently, GEM's financial results are skewed towards the second half. In 1998, the World Gaming Congress sold approximately 195,000 square feet of exhibition space and included approximately 23,000 attendees, an increase from 116,200 square feet and 17,500 attendees in 1994. In June 1998, GEM acquired all the assets and rights to the International Gaming Business Exposition, a conference and trade show serving the casino gaming industry. In September 1998, GEM acquired all the stock of UK based InterGame Limited, the publisher of the leading series of publications for the international coin-operated amusement and gaming machines and amusement park businesses.
GEM publishes several trade magazines directed to the legalized gaming industry, including IGWB. IGWB, with a qualified audited circulation of over 25,000, is the leading trade journal directed to the worldwide legalized gaming industry. In addition, the Company owns Casino Executive, LLC (the successor to Casino Publishing Company), the publisher of Casino Executive, a trade magazine directed to casino management executives in North America.
During 1998, GEM had a 49% interest in Gaming for Africa Expo, a gaming trade show and conference held in South Africa, and Gaming for Africa, the leading trade magazine for gaming in Sub-Saharan Africa. Effective as of January 1, 1999, GEM acquired, in a series of transactions, the business of Gaming for Africa Expo and Gaming for Africa.
COMPETITION
Each of the Company's businesses is in competition with other suppliers and vendors of services or products similar to those provided by the Company and many of such competitors are significantly larger and have greater resources than the Company. The following is a brief description of the competitive environment in which each of the Company's businesses operates.
TISI
TISI has a leading market position in the trucking industry. In the insurance industry, there are two TISI competitors which are significantly larger and sell significantly more MVRs than TISI, as well as many regional providers. Management believes that TISI's ability to maintain and grow its MVR business in the insurance industry is dependent upon its ability to continue to resell Choice Point's CLUE(R) data, as described above. Choice Point is the largest competitor selling MVRs to the insurance industry. Competitors in the casino gaming industry include Choice Point, Accufact and IRCS. Competition in the home healthcare industry is fragmented along regional lines. Choice Point and Background America, another regional firm, are believed to be the largest competitors. Background America was recently acquired by Kroll-O'Gara Company. Management believes that no other competitor has developed a national vertical market strategy based on the DAC employment history record concept.
CORSEARCH
The trademark search business is dominated by Thomson & Thomson. Thomson & Thomson is owned by a large international media/information conglomerate. There is also one smaller competitor which, while doing fewer searches than CORSEARCH, is owned by a large publishing/information company which specializes in selling to law firms.
Galaxy
Galaxy has two significant competitors, both of which provide services to fewer shows in any given year than Galaxy and management believes that they do not possess the resources of the Company. There are also smaller and regional competitors as well as some large companies which provide other exposition services which will compete in certain aspects of Galaxy's business.
Atwood
As a custom publisher, Atwood competes primarily on price, quality and service and has been successful by targeting the publishing needs of the trade show, convention and trade association market. Outside of that market there are many custom publishers, some with significantly greater resources than the Company. In the trade show, convention and trade association market, there are competitors which, while concentrating on another set of services they perform for their customers, will also provide publishing services as part of their package of services. While several of these competitors are significantly larger than Atwood, management believes that stronger competitors are trade shows or associations with "in house" publishing capabilities and trade magazine publishers with specialized knowledge in the industry that is the subject of the trade show or convention.
GEM
In the gaming trade show business, there is one other significant U.S. show (which is smaller than World Gaming Congress ), a large show held in London each year (ATEI), and a variety of smaller niche or regional shows and conferences throughout the world. A few of these are owned or managed by competitors which are significantly larger than GEM. On February 4, 1999 the Company announced that it had entered into discussions with ATE, Ltd. for the acquisition of ATEI.
From a publishing standpoint, there is one other significant competitive magazine serving the U.S. casino industry and several successful magazines and newsletters serving vertical niches of the gaming industry in the U.S. and worldwide industry, such as lotteries and pari-mutuals. Internationally, there are a few magazines, particularly in Europe, which successfully serve the casino industry and compete with the Company. To management's knowledge, none of such competitors are significantly larger than GEM. In addition, GEM must compete with other media for advertising dollars, such as direct mail and direct selling. The latter is particularly important for potential U.S. casino advertisers as so much of the industry is concentrated in a few locations.
SEASONAL FACTORS
The exposition services business is affected by the timing of conventions and trade shows, with most such shows operating in the March-May and September-November time frames. IGWB's results are significantly impacted by the timing of its largest affiliate owned trade show, World Gaming Congress, which was held in October in 1996 and 1997 and in September in 1998.
EMPLOYEES
As of January 31, 1999, the Company employed 692 persons on a full-time basis including 283 in Information Services, 404 in Business to Business Communications and five at the Company's corporate offices. None of the Company's employees are subject to collective bargaining agreements. The Company considers relations with its employees to be satisfactory. Most employees are salaried, with sales personnel receiving commissions on sales.
FINANCIAL INFORMATION
For financial information regarding the Company's business segments, see Note 10 of Notes to Consolidated Financial Statements.
GOVERNMENT REGULATION
As a "consumer reporting agency," TISI is subject to the provisions of the Fair Credit Reporting Act ("FCRA") and similar acts existing in the states and is regulated by the FTC under the Federal Trade Commission Act. Under the FCRA, a consumer reporting agency may furnish a "consumer report" to a customer only for a permissible purpose allowed by the FCRA. Permissible purposes include extension or review of credit, collecting an account, employment purposes, underwriting of insurance, determining eligibility for a license or permit granted by a governmental entity, or in connection with a business transaction involving the consumer. All reports of TISI are treated by TISI as consumer reports for purposes of the FCRA. In addition, TISI's Total Applicant Screening reports are treated by TISI as "investigative consumer reports" within the meaning of that term under the FCRA because they involve contacting third parties. Certain additional restrictions apply to these reports.
The FCRA requires a consumer reporting agency to maintain reasonable procedures designed to ensure that the restrictions on the use of certain information are not violated. In addition, a consumer reporting agency must follow reasonable procedures to assure maximum possible accuracy of the information concerning the consumer about whom the report relates. The FCRA also requires a consumer reporting agency, upon request from a consumer, to disclose all information about that consumer in its file, together with the source and the recipients of the information. In some cases, this information must be delivered to the consumer at no cost, and in others the agency may charge a reasonable fee. TISI does not charge a fee to a driver or other individual or entity about whom or which data is provided to a customer if that individual or entity has been turned down for a job or denied insurance within the last 30 days. Otherwise, TISI may charge a $10.00 fee.
The Americans with Disabilities Act ("ADA") contains pre-employment inquiry and confidentiality restrictions designed to prevent discrimination against individuals in the hiring process. Although TISI's business is not directly regulated by the ADA, the use by its customers of certain information sold to them, such as workers' compensation histories or drug and alcohol test results, is regulated, both with respect to the type of information and the timing of its use. Similar state laws also affect TISI's business. Some states have human rights laws that provide more protection than the ADA. A large number of states also regulate the type of information which can be made available to the public or to a third party or impose conditions to the release of the information.
While the FCRA provides for civil liability sanctions against a consumer reporting agency by a consumer for willful or negligent noncompliance with the FCRA, and, as a result of the 1997 amendments, criminal penalties for willful violations, by complying in good faith with the FCRA, TISI is protected from liability by the FCRA even if there are inadvertent errors in the information provided. TISI has developed and implemented internal policies designed to help ensure that background information retrieved by it concerning a consumer is accurate and that it otherwise complies with the provisions of the FCRA and applicable state laws. In addition, each customer of TISI is required to sign a user agreement, in which the customer agrees to accept responsibility for using information provided by TISI in accordance with the provisions of the FCRA, the ADA and local laws. TISI also has internal checks in place regarding access and release of such information. The Company currently maintains liability insurance to cover claims by customers or the subjects of reports for alleged inaccurate information or misuse of information.
The FCRA was amended in 1997, effective October 1, 1997. Such amendments required DAC's customers to significantly increase their compliance activities and made it more difficult for them to utilize DAC's products. DAC was successful in obtaining passage of additional amendments in November, 1998 which granted relief to the trucking industry for the most burdensome of these requirements. While prior to the most recent amendments DAC's business was negatively impacted by the 1997 amendments, the Company does not expect any significant long-term impact from this legislation.
In the 15 years it has been in business, TISI has not been found liable for any violations of the FCRA, the ADA or similar state laws. The Company did settle one case out of court for a nominal amount to avoid litigation expenses. There can be no assurance, however, that the Company will not be found liable for any such violations and that, if found so liable, the Company will not be subject to adverse judgments in substantial amounts. In addition, there can be no assurance that the FCRA, the ADA or similar state laws will not be amended or subjected to different judicial or administrative interpretation in the future. It is not possible at this time to predict the impact that any such change might have on the Company's results of operations, financial condition or liquidity.
The DOT is in the process of proposing and promulgating revised regulations which, among other things, concern the requirements for pre-employment screening of truck drivers. It is not possible at this time to predict the impact that such regulations, if adopted, might have on the Company's results of operations, financial condition or liquidity. If adopted in their current form, such regulations would likely provide a greater demand for access to employment history, MVRs and drug and alcohol test results of truck drivers, such as the information provided by the Company.
FOREIGN SALES
The Company's net revenues for 1997 and 1998 to customers outside the U.S. and Canada were $2.0 million and $5.1 million, respectively, representing 2.5% and 5.3% of net revenues, respectively. All of such 1997 and 1998 net revenues are attributable to Business to Business Communications.
TRADEMARKS, LICENSES AND PATENTS
The Company has registered numerous trademarks, including DAC Services(R), CORSEARCH(R), CORSTATE(R), CORBASE(R), EXPO(R), World Gaming Congress(R) and IGWB(R), in the United States and, in certain cases, in foreign countries in which the Company does business. The Company believes that it owns or licenses all intellectual property rights necessary to conduct its business.
ITEM 2.
ITEM 2. PROPERTIES
The Company conducts its principal operations at the facilities set forth below:
- ------ (1) TISI also leases office space in Chicago, Illinois.
The Company sold its office space in Tulsa, Oklahoma in 1998.
Management believes that its facilities are suitable and adequate for its immediate needs and that additional or substitute space is available if needed to accommodate expansion.
As a result of the merger of Tribune/Swab-Fox Companies, Inc. ("Tribune/Swab-Fox") with and into the Company, the Company acquired a 49.99% membership interest in 1995 Land Company, L.L.C., an Oklahoma limited liability company which owns undeveloped real estate in Tulsa, Oklahoma. The majority member of this entity has sole management responsibility for this property and the entity's business. The entity purchased three significant parcels of raw land from the Company on December 30, 1994 for approximately $1.4 million in cash and notes. In 1998, the Company sold its interest in 1995 Land Company for $1,425,000 and recognized a gain of approximately $80,000.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company and its subsidiaries have been named as defendants in lawsuits and a party in various governmental proceedings from time to time. While in the past, such matters have not had a material adverse effect on the financial position, results of operation or liquidity of the Company, and management does not anticipate that such matters will have such an effect in the future, the outcome of suits and proceedings cannot be predicted with certainty and, due to such inherent uncertainty of litigation, there can be no assurance that the Company will not be subject to adverse judgments in substantial amounts.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
After giving effect to the Recapitalization consummated on February 27, 1998, VS&A-T/SF and Fir Tree owned approximately 64.4% and 35.6% of the common stock, respectively. VS&A-T/SF is controlled by VS&A Communications Partners II, L.P. ("VS&A Fund II"), a private equity fund affiliated with Veronis, Suhler & Associates, Inc. ("VS&A"), an investment banking and research firm specializing in the media and communications industry. Other investors in VS&A-T/SF include two institutional investors and an affiliate of Ian L. M. Thomas, the President and Chief Executive Officer of the Company. There is no established public trading market for the Company's common stock. No dividends were declared or paid during 1998. The terms of the Company's $25,000,000 Credit Agreement and 10 3/8 % Senior Subordinated Notes Due 2007 (the "Notes") currently restrict the ability of the Company to pay dividends or make distributions to its shareholders. See the Consolidated Financial Statements of the Company and the Notes thereto.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data for each of the last five years.
As of December 31, 1998 ----------------- Balance Sheet Data: Cash and equivalents...................................... $3,878 Total assets.............................................. 74,534 Total debt................................................ 100,752 Stockholders' deficit..................................... (54,193)
(1) In the merger of Tribune/Swab-Fox, then the owner of 78% of the common stock, with and into the Company on May 25, 1995, the Company was the surviving entity, from a legal standpoint. However, from an accounting standpoint, the transaction was treated as a downstream merger. Thus, for financial reporting purposes, the transaction was treated as a recapitalization of Tribune/Swab-Fox, with Tribune/Swab-Fox as the survivor. Accordingly, the historical financial statements of the Company, as the surviving legal entity, are those historical financial statements of Tribune/Swab-Fox prior to the merger. In addition, the Company was a party to several events/transactions which affect the comparability of the historical information presented above. See the Notes to Consolidated Financial Statements for additional information on certain of these events/transactions.
(a) With respect to Information Services, the Company acquired CORSEARCH and CrimeSearch in August 1996.
(b) With respect to Business to Business Communications, the Company: (i) acquired the stock of Galaxy in March 1994; (ii) sold the assets of Shopper's Guide, Inc. (the "New Jersey Shopper"), a shopper-newspaper operation, in April 1994; (iii) sold three trade journals and related assets in July 1995; (iv) acquired 88% of Casino Publishing Co. effective February 1, 1997 and the remainder effective January 31, 1998 (v) acquired a majority of Galaxy Expocard Europe, B.V. in May 1997, (vi) acquired IGBE in June 1998 and (vii) acquired InterGame, Limited in September 1998.
(2) Restated to reflect real estate as a discontinued operation as of November 30, 1994.
(3) EBITDA is included because management understands that such information is considered by certain investors to be an additional basis on which to evaluate the Company's ability to pay interest expense, repay debt and make capital expenditures. Excluded from EBITDA are interest expense, income taxes, depreciation and amortization, recapitalization and reorganizational expenses, unusual gain (including gains on disposition of real estate in 1998), minority interest in consolidated subsidiaries, discontinued operations, net and extraordinary loss, net of tax, each of which can significantly affect the Company's results of operations and liquidity and should be considered in evaluating the Company's financial performance. EBITDA is not intended to represent and should not be considered more meaningful than, or an alternative to, measures of operating performance as determined in accordance with generally accepted accounting principles. EBITDA margin represents EBITDA as a percentage of total revenues.
(4) In computing the ratio of earnings to fixed charges: (a) earnings have been based on income from continuing operations before income taxes and fixed charges and (b) fixed charges consist of interest and amortization of debt discount expense. The coverage deficiency for the year ended December 31, 1997 was approximately $15.2 million.
FORWARD-LOOKING STATEMENTS
This Annual Report for the year ended December 31, 1998 as well as other public documents of the Company contains forward-looking statements which involve risks and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. When used in this Annual Report, the words "estimate," "project," "anticipate," "expect," "intend," "believe," "seek," "plan," as well as variations of such words and similar expressions, are intended to identify forward-looking statements. While management believes these statements are reasonable, actual results could differ materially from those projected by
such forward-looking statements. See "Business," and "Management's Discussion and Analysis of Financial Condition and Results of Operations".
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a diversified business media company which principally operates two lines of business: (i) business and professional information services and (ii) business to business communications, publishing and related services. On May 25, 1995, Tribune/Swab-Fox, parent of the Company, merged with and into the Company. Though the Company was the surviving legal entity in the merger, because Tribune/Swab-Fox owned 78% of the Company's common stock prior to the merger, the transaction is accounted for as a recapitalization of Tribune/Swab-Fox with Tribune/Swab-Fox as the survivor (i.e., a downstream merger). Accordingly, the historical financial statements of the Company, as the surviving legal entity, are those historical financial statements of Tribune/Swab-Fox.
In February 1997, the Company increased its ownership in Casino Publishing Company, publisher of the trade journal, Casino Executive, to 88%, which is included in the Company's consolidated operations since that date. Effective January 31, 1998, the Company acquired the remaining interests in Casino Publishing Company. In June, 1998, GEM acquired all the assets and rights to the International Gaming Business Exposition, a conference and trade show serving the casino gaming industry. On September 1, 1998, GEM acquired all the stock of UK based InterGame Limited, the publisher of the leading series of publications for the international coin-operated amusement and gaming machines and amusement park businesses. Effective May 1, 1997, the Company acquired a majority ownership in Galaxy Expocard Europe B.V. and increased its ownership to 73% effective July 1, 1997. On August 15, 1996, the Company acquired 100% of the outstanding capital stock of CORSEARCH, which has been accounted for as a purchase. CORSEARCH provides trademark and trade name research and is included in the Company's consolidated operations since that date. On August 1, 1996 the Company acquired all of the assets of CrimeSearch, Inc.
During 1998, GEM had a 49% interest in Gaming for Africa Expo, a gaming trade show and conference held in South Africa, and Gaming for Africa, the leading trade magazine for gaming in Sub-Saharan Africa. Effective as of January 1, 1999, GEM acquired, in a series of transactions, the business of Gaming for Africa Expo and Gaming for Africa.
Consolidated Operations
The following table summarizes the Company's historical results of operations as a percentage of revenue for the years ended December 31, 1996, 1997 and 1998:
RESULTS OF OPERATIONS
Year Ended December 31, 1998 Versus Year Ended December 31, 1997
Revenues. Revenues of $96.4 million for the twelve months period ended December 31, 1998, were $14.0 million (17%) higher than 1997. Business to Business Communications segment Revenue totaled $59.5 million for the twelve months ended December 31, 1998, an increase of $10.1 million (20%), over 1997. At GEM, increased advertising and trade show volume and inclusion of the InterGame results since September 1, 1998 contributed $2.3 million to the growth. At Galaxy, the return of several bi-annual trade shows, an overall increase in the number of shows completed during 1998 and Galaxy Europe, which was not consolidated in the first quarter of 1997, contributed $5.8 million to 1998 revenue growth. Atwood increased revenues by 10% during 1998 compared with 1997 principally as a result of the addition of Dallas and Atlanta Market Center business and strong periodical publishing advertising sales and 37% growth in EXPO, a trade magazine directed at the U.S. convention and exposition industry.
The Information Services segment produced revenue of $36.1 million for the twelve month period ended December 31, 1998, an increase of $4.4 million (14%) over 1997. Corsearch increased revenue 13% during 1998, compared with 1997. This return to double-digit growth from relatively flat revenue growth during 1997, compared with 1996, resulted from increased sales and marketing efforts. TISI's revenue increased 14% contributing $3.4 million to revenue growth during 1998 over 1997, principally from increased demand for TISI's pre-employment screening information and services and a 103% increase in 1998 revenue at TISI's Crimesearch affiliate reflecting growing demand for criminal records.
Operating Costs. Operating Costs totaled $51.7 million, an increase of $8.5 million (20%) for the twelve months ended December 31, 1998. Operating Costs of the Business to Business Communications operations increased by $5.5 million (21%) for 1998, compared with 1997. The increase was attributable principally to an increase in volume at Atwood, additional trade shows at Galaxy, inclusion of Galaxy Europe for the year, two new shows managed by GEM and acquisition of InterGame.
Information Services Operating Costs increased 19% during 1998, compared with 1997. The increase was principally attributable to higher research volume at Corsearch and higher criminal records and pre-employment screening volume at TISI, offset partially in the first half of 1998 by lower costs resulting from elimination of National Employment Screening Services, Inc.("NESS"), an unprofitable business venture, closed by TISI in 1997.
General and Administrative Expenses. General and Administrative Expenses totaled $22.6 million for the twelve months ended December 31, 1998, a decrease of $1.4 million compared with 1997. General and Administrative Expenses were favorably impacted during 1998 by the elimination of NESS ($177,000), restructuring of two unprofitable magazines to consolidate overhead and reduction of corporate overhead (down $1.7 million - 57%) resulting principally from elimination of the Tulsa, Oklahoma corporate office and establishment of a smaller corporate office in New York City. The favorable impact in General and Administrative Expenses was partially offset by expenses attributable to the consolidation of Galaxy Europe ($530,000) which was not included until May 1, 1997, and consolidation of InterGame ($460,000) from September 1, 1998.
Depreciation and Amortization. Depreciation and Amortization increased $2.1 million (42%) during the twelve months ended December 31, 1998 compared with 1997. During the third quarter, the Company determined that its investment in certain foreign subsidiaries had become impaired. Accordingly, during the third quarter of 1998 the Company established an $820,000 reserve, which is included in Depreciation and Amortization, to provide for this impairment. For the twelve months ended December 31, 1998, capital spending totaled $6.5 million, an increase of $962,000 (17%) over 1997. Increased spending was attributable principally to support of new online products and expansion of capacity at Corsearch, additional reader rental boxes at Galaxy and computer system upgrades at TISI.
Interest Expense. Interest Expense totaled $10.7 million for the twelve months ended December 31, 1998, compared with $3.7 million 1997. The increase of $7.0 million over 1997 resulted from interest on the debt incurred in connection with the 1997 Recapitalization.
EBITDA. EBITDA totaled $22.0 million for the twelve months ended December 31, 1998 an increase of $6.8 million (45%) compared with 1997. The increase during 1998 was principally attributable to higher EBITDA in the Business to Business Communications segment (up $4.1 million-54%) and the Information Services segment (up $4.0 million-56%), partially offset by the impact of corporate and business development expenses. Reductions in corporate overhead express contributed $1.7 million to improved EBITDA.
EBITDA is included because management understands that such information is considered by certain investors to be an additional basis on which to evaluate the Company's ability to pay interest expense, repay debt and make capital expenditures. Excluded from EBITDA are interest expenses, income taxes, depreciation and amortization, recapitalization and reorganizational expenses, unusual gains (including gains on disposition of real estate in 1998), minority interest in consolidated subsidiaries, discontinued operations, net and extraordinary loss, net of tax, each of which can significantly affect the Company's results of operations and liquidity and should be considered in evaluating the Company's financial performance. EBITDA is not intended to represent and should not be considered more meaningful than, or an alternative to, measures of operating performance as determined in accordance with generally accepted accounting principles.
Year Ended December 31, 1997 Versus Year Ended December 31, 1996
Revenues. Revenues of $82.5 million for the year ended December 31, 1997 were $13.7 million, or 20.0%, higher than the year ended December 31, 1996. Information Services revenue increased approximately $7.3 million, or 30.0%, for 1997 as compared with 1996, of which approximately $4.8 million was attributable to Corsearch (full year 1997 compared with four months 1996) and $2.5 million was attributable principally to continued growth in TISI's criminal record volume, and higher average prices from MVRs attributable to a continued increase in the volume of TISI's premium service, "MVR Express." Business to Business Communications revenue increased $6.4 million, or 15.0%, for 1997 compared with 1996, principally because of an increase in trade show directories produced during 1997, inclusion of Casino Executive trade journal and Galaxy Europe revenue from the dates that a majority of Casino Publishing Company and Galaxy Europe were acquired by the Company, reduced in part by lower registration services due to a lower number of bi-annual trade shows in 1997, fewer pages of advertising in IGWB due to the loss of several large advertisers in the lottery segment of the gaming industry and elimination of two trade shows in 1997.
Operating Costs. Operating costs for the year ended December 31, 1997 were $2.7 million, or 6.8%, higher than the year ended December 31, 1996. Information Services costs increased $3.3 million, or 24.4%, for 1997 compared with 1996, including approximately $2.4 million related to Corsearch with substantially all of the remainder related to criminal records volume increases and new product costs. Business to Business Communications costs decreased $508,000, or 1.9%, during 1997 compared with 1996, attributable principally to lower trade show costs due to the elimination in 1997 of two trade shows partially offset by costs related to the increase in directories published during 1997, additional payroll costs in 1997 related to the increases in operating personnel throughout 1996 and early 1997, and Casino Executive costs in 1997.
General and Administrative Expenses. General and administrative expenses were $8.8 million, or 58.1%, higher for 1997, compared with 1996, substantially all of which was attributable to business growth, the acquisition of CORSEARCH and the initial consolidation in 1997 of Casino Executive and Galaxy Europe, partially offset by lower corporate expenses from staff and other cost reductions related to the Recapitalization. Corsearch expenses in 1997 reflected twelve months of operations compared with four months in 1996. The Company acquired a controlling interest in and began consolidating Casino Executive and Galaxy Europe in 1997.
Depreciation and Amortization. Depreciation and amortization were $1.0 million, or 24.3%, higher for 1997, compared with 1996, substantially all applicable to Corsearch, including amortization of goodwill related to the acquisition.
Recapitalization and Reorganization Expenses. Non-recurring recapitalization and reorganization expenses incurred in connection with the Recapitalization totaled $21.8 million during 1997 and consisted principally of stock options repurchased in connection with the Recapitalization ($9.9 million), costs associated with the Tender Offer ($3.9 million), incentive, severance and retention bonus payments ($5.5 million) and other transition costs ($2.5 million).
Interest Expense. Interest expense increased $3.1 million during the year ended December 31, 1997, compared with the year ended December 31, 1996, principally as the result of new debt incurred in connection with the Recapitalization.
EBITDA. EBITDA totaled $15.2 million for the twelve months December 31, 1997 a increase of $2.1 million (16%) compared with 1996.
EBITDA is included because management understands that such information is considered by certain investors to be an additional basis on which to evaluate the Company's ability to pay interest expense, repay debt and make capital expenditures. Excluded from EBITDA are interest expenses, income taxes, depreciation and amortization, recapitalization and reorganizational expenses, unusual gains, minority interest in consolidated subsidiaries, discontinued operations, net and extraordinary loss, net of tax, each of which can significantly affect the Company's results of operations and liquidity and should be considered in evaluating the Company's financial performance. EBITDA is not intended to represent and should not be considered more meaningful than, or an alternative to, measures of operating performance as determined in accordance with generally accepted accounting principles
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. In connection with the Recapitalization, the Company: (i) borrowed $13 million under a $25.0 million revolving senior credit facility (the "Senior Credit Facility") with First Union National Bank ("FUNB"); (ii) issued $80.0 million aggregate principal amount of notes pursuant to a facility (the "Bridge Financing Facility") provided by First Union Corporation; and (iii) received $40.0 million of equity contributions (the "Equity Contributions") from VS&A-T/SF and Fir Tree. On October 29, 1997, the Company completed the private sale to First Union Capital Markets Corp. (the "Initial Purchaser") of $100.0 million principal amount of the Old Notes at a price of 97% of the principal amount thereof. The Initial Purchaser resold the Old Notes to a limited number of qualified institutional buyers at an initial price to investors of 100% of the principal amount thereof, with net proceeds to the Company of $97.0 million (the "Offering"). The Offering was a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Rule 144A and Section 4 thereof. The net proceeds of the Notes sold pursuant to the Offering were applied to repay indebtedness incurred in connection with the Recapitalization under the Senior Credit Facility and the Bridge Financing Facility. On February 10, 1998, the Company offered to exchange up to $100.0 million aggregate principal amount of Old Notes for up to an equal aggregate principal amount of new notes (the "New Notes" and, together with the Old Notes, the "Notes"). The New Notes are obligations of the Company entitled to the benefits of the Indenture (the "Indenture") relating to the Old Notes and the form and terms of the New Notes are identical in all material respects to the form and terms of the Old Notes except that the New Notes have been registered under the Securities Act and do not contain terms with respect to transfer restrictions or interest rate increases as described herein. On September 1, 1998 the Company purchased $1.5 million of the New Notes at a price below par. The Company recorded a $60,000 gain on this transaction.
The Senior Credit Facility is a $25 million revolving credit facility which is due and payable at maturity in September, 2004. The Senior Credit Facility is secured by a first priority lien on substantially all of the properties and assets of the Company and its subsidiaries, owned now or acquired later. The Senior Credit Facility is
guaranteed by all of the subsidiaries of the Company (the "Guarantors"). At the Company's option, the interest rate per annum applicable to the Senior Credit Facility will be a fluctuating rate of interest measured by reference either to: (i) LIBOR plus the applicable borrowing margin or (ii) FUNB's base rate, which is the greater of the published prime rate of FUNB or the overnight federal funds rate plus 0.5% (the "FUNB Rate") plus the applicable borrowing margin. The applicable borrowing margin for the Senior Credit Facility will range from 1.75% to 2.75% for LIBOR based borrowings and 0.5% to 1.5% for FUNB Rate based borrowings. The Company has agreed to pay certain fees with respect to the Senior Credit Facility including (i) upfront facility fees, (ii) agent and arrangement fees and (iii) commitment fees of 0.5% per annum on the unused portion of the Senior Credit Facility. The entire amount of the Senior Credit Facility was made available to the Company concurrently with the closing of the Tender Offer. The commitments under the Senior Credit Facility are required to be permanently reduced with: (i) 100% of the net cash proceeds of all non-ordinary-course asset sales or other dispositions of the property by the Company and its subsidiaries, including insurance and condemnation proceeds, subject to limited exceptions and (ii) 100% of the net proceeds of issuance of equity or debt obligations of the Company and its subsidiaries, subject to limited exceptions (including the Offering). The Company may voluntarily reduce the commitment in amounts of $1.0 million or more at any time without premium or penalty. The Senior Credit Facility contains covenants, among others, restricting the ability of the Company and the Guarantors to: (i) declare dividends or redeem or repurchase capital stock; (ii) prepay, redeem or purchase debt; (iii) incur liens and engage in sale-leaseback transactions; (iv) make loans and investments; (v) issue more debt; (vi) amend or otherwise alter debt and other material agreements; (vii) make capital expenditures; (viii) engage in mergers, acquisitions and asset sales; (ix) transact with affiliates and (x) alter its lines of business. The Company must also make certain customary indemnification's of the lenders and their agents and will also be required to comply with financial covenants (based on adjusted pro forma EBITDA) with respect to: (i) a maximum leverage ratio; (ii) a maximum senior leverage ratio; (iii) a minimum interest coverage ratio and (iv) a minimum fixed charge coverage ratio. The Senior Credit Facility also contains certain customary affirmative covenants. Events of default under the Senior Credit Facility include: (i) the Company's failure to pay principal or interest when due; (ii) the Company's material breach of any covenant, representation or warranty contained in the loan documents; (iii) customary cross-default provisions; (iv) events of bankruptcy, insolvency or dissolution of the Company or the Guarantors; (v) the levy of certain judgments against the Company, any Guarantor, or its assets; (vi) certain adverse events under ERISA plans of the Company or the Guarantors; (vii) the actual or asserted invalidity of security documents or guarantees of the Company or the Guarantors and (viii) a change of control of the Company.
The Notes are unsecured obligations of the Company, ranking subordinate in right of payment to all Senior Debt of the Company. The Notes are guaranteed on a subordinated basis by all of the active wholly owned subsidiaries of the Company. The Notes are limited in aggregate principal amount to $100.0 million and mature on November 1, 2007. Interest on the Notes accrues at the rate of 10-3/8% per annum and will be payable semiannually in cash on each May 1 and November 1, commencing on May 1, 1998. Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from and including the date of issuance. The Notes will not be entitled to the benefit of any mandatory sinking fund. The Notes may be redeemed, at the Company's option, in whole at any time or in part from time to time, on and after November 1, 2002, upon not less than 30 nor more than 60 days' notice, at certain specified redemption prices, plus, in each case, accrued and unpaid interest thereon, if any, to the date of redemption. At any time, or from time to time, on or prior to November 1, 2000, the Company may, at its option, use the net cash proceeds of one or more Public Equity Offerings (as defined in the Indenture) to redeem the Notes at a redemption price equal to 110.375% of the principal amount thereof plus accrued and unpaid interest thereon, if any, to the date of redemption; provided that at least 65% of the principal amount of Notes originally issued remains outstanding immediately after any such redemption. In order to effect the foregoing redemption with the proceeds of any Public Equity Offering, the Company shall make such redemption not more than 90 days after the consummation of any such Public Equity Offering. The Indenture provides that upon the occurrence of a Change of Control, each Holder will have the right to require that the Company purchase all or a portion of such Holder's Notes, at a purchase price equal to 101% of the principal amount thereof plus accrued interest to the date of purchase. The Indenture contains covenants, among others, restricting the ability of the Company and the Guarantors to: (i) declare dividends or redeem or repurchase capital stock; (ii) prepay, redeem or purchase debt; (iii) make investments, (iv) transact with affiliates, (v) incur additional indebtedness, (vi) restrict the ability of subsidiaries to declare dividends of make loans to the Company, (vii) amend or otherwise alter certain interests in TOIC Holdings, LLC, (viii) sell assets,
(ix) permit restricted subsidiaries to issue preferred stock, (x) incur liens or (xi) alter business. The Indenture also contains certain customary affirmative covenants and events of default.
The Company's principal sources of funds are anticipated to be cash flows from operating activities and borrowings under the Senior Credit Facility. Based upon the successful implementation of management's business and operating strategy, the Company believes that these funds will provide the Company with sufficient liquidity and capital resources for the Company to meet its current and future financial obligations, including the payment of principal and interest on the Notes, as well as to provide funds for the Company's working capital, capital expenditures and other needs. No assurance can be given, however, that this will be the case. As of February 28, 1999, the Company had $23.7 million of availability under the Senior Credit Facility. The Company's future operating performance and ability to service or refinance the Notes and to repay, extend or refinance the Senior Credit Facility will be subject to future economic conditions and to financial, business and other factors, many of which are beyond the Company's control. In addition, any future acquisitions by the Company would likely require additional financing.
In the event of a Change of Control (as defined in the Indenture), the Company will be required to make an offer for cash to repurchase the Notes at 101% of the principal amount thereof, plus accrued and unpaid interest and Additional Interest (as defined in the Indenture), if any, thereon to the repurchase date. Certain events involving a Change of Control would result in an event of default under the Senior Credit Facility or other indebtedness of the Company that may be incurred in the future. Moreover, the exercise by the holders of the Notes of their right to require the Company to repurchase the Notes may cause an event of default under the Senior Credit Facility or such other indebtedness, even if the Change of Control does not. Finally, there can be no assurance that the Company will have the financial resources necessary to repurchase the Notes upon a Change of Control.
Capital Expenditures. Management anticipates that capital expenditures in 1999 will be approximately $7.0 million. The primary capital expenditures will be for computer equipment and software, "reader boxes" at Galaxy and database acquisitions at TISI and Corsearch. TISI continues to offer its customers in the trucking industry credits for providing employment information to be utilized in its database, which credits can be used against charges for future services from such division. All of the credits earned are considered capital expenditures for the acquisition of such data. Management anticipates positive cash flow from operations in 1999, even after the anticipated capital expenditures for 1999. Thus, with the Company's available cash reserves and cash flow, management does not anticipate a need for additional capital during 1999 except for possible future acquisitions.
INFLATION
Management anticipates the effect of inflation on the Company's operations during 1999 will be primarily limited to the effects which general inflation will have on costs in most areas in which the Company operates.
YEAR 2000 COMPLIANCE
GENERAL
TOIC's company-wide Year 2000 Project is proceeding on schedule. The project was begun in earnest during the second quarter of 1998 and is addressing the issue of information systems being unable to distinguish between the year 1900 and the year 2000. The general project phases common to all business units are: (1) inventorying Year 2000 items; (2) assigning priorities to identified items; (3) assessing the Year 2000 readiness of items determined to be material to the Company; (4) repairing or replacing material items that are determined not to be ready for the Year 2000; (5) testing repaired or replaced items; and (6) designing and implementing contingency and business continuation plans for all material items. At December 31, 1998, the inventory and priority assessment phases for each business unit had been completed and detailed remediation plans have been developed by business units
considered to have material Year 2000 issues. Based on the inventory, only TISI was determined to have material Year 2000 issues.
PROJECT
A dedicated TISI project team has been working on remediating core processing applications as well as assessing the readiness of the infrastructure portion of the systems. The project is on schedule overall and is 75% complete, with different phases of the schedule being between 40% and 95% complete. The portions of the project that are behind schedule are the portions that will require the least amount of time to complete. The most time consuming portions are on or ahead of schedule. The second half of 1999 is being reserved for final testing.
TISI's project is broken down by line of business and by steps in the value chain - customer interaction, order processing/delivery, information production/retrieval, billing, customer service, monitoring/management, infrastructure and extended enterprise. For packaged software and hardware components, TISI is evaluating vendors' statements about their products' readiness and developing test plans where the components are material and testing is possible. Several items have been identified as unready for the Year 2000 and plans are being made for remediation. All remediation in these areas is scheduled to be complete by the second quarter of 1999.
For applications that have been developed in-house, active inventorying and remediation has been underway since early in 1998. To date, all PC-based applications have been found to be ready for the Year 2000 or have required only minor changes, which have been completed. TISI has completed a general inventory of its primary VMS-based processing applications and 95% of the detailed inventory. Remediation of these systems has been divided into two phases and TISI has completed nearly 75% of the first phase and nearly 40% of the second phase. All non-critical systems (defined as cosmetically impacted or internal-use reporting only) will be deferred until all critical systems have been remediated, tested and put back into production. System level and comprehensive testing is being performed throughout the remediation process. TISI expects that all critical application remediation will be completed by the end of the second quarter of 1999.
TISI and the Company's other business units are in the process of contacting significant external entities, assessing their Year 2000 readiness and developing action plans. The company expects to complete this survey by the end of second quarter 1999 and, if necessary, will develop contingency plans based on the survey results.
COSTS
The total cost associated with required modifications to become Year 2000 compliant is not expected to be material to the Company's financial position. The estimated total cost of the Year 2000 Project is approximately $1.4 million. The total amount expended on the Project through December 31, 1998, was approximately $450,000, nearly all of which related to the cost to repair or replace software and related hardware problems. The estimated future cost of completing the Year 2000 Project is estimated to be approximately $930,000. Funds for the Project are included in existing operating budgets.
RISKS
The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. The primary business risk associated with Year 2000 is TISI's ability to provide employment screening information to customers without interruption. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third-party suppliers and customers, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on the Company's results of operations, liquidity or financial condition. The Year 2000 Project is expected to reduce significantly the Company's level of uncertainty about the Year 2000 problem and, in particular, about the Year 2000 compliance and readiness of material external entities. The Company believes that, with the implementation of new business systems and completion of the Project as scheduled, the possibility of significant interruptions of normal operations should be reduced. The Company
expects to develop contingency plans if it is determined that the Company or its external entities will not be materially Year 2000 compliant. Readers are cautioned that forward-looking statements contained in the Year 2000 Update should be read in conjunction with the Company's disclosures under the heading "Forward-Looking Statements".
NEW ACCOUNTING PRONOUNCEMENTS
The FASB recently issued Statement of Financial Accounting Standards No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits (SFAS 132) and Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 132 revises employer's disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. SFAS 133 establishes accounting and reporting standards for derivative instruments and hedging activities. These Statements are not expected to have a material impact on the Company's financial reporting as the Company does not currently sponsor pension or other postretirement benefit plans and does not engage in the use of derivative instruments.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14, Exhibits, Financial Statements, Schedules and Reports on Form 8-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
In January 1998, the Company replaced Arthur Andersen LLP with KPMG LLP as the independent public accountants for the Company. KPMG LLP are the accountants for VS&A Fund II.
Prior to engaging KPMG LLP, the Company consulted with KPMG LLP on the accounting treatment for the Recapitalization.
There has not been in the last two years any adverse opinion, disclaimer of opinion or qualified or modified opinion on the Company's audited financial statements from Arthur Andersen LLP or any disagreement with Arthur Andersen LLP on any matter which, if not resolved, would have caused Arthur Andersen LLP to reference the subject matter of the disagreement in its report.
The decision to change accountants was approved by the board of directors of the Company.
Part III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to the current Directors and executive officers of the Company and certain other key employees of the Company and its subsidiaries. All Directors of the Company hold office until the next Annual Meeting of Stockholders and until the election and qualification of their successors. Each individual listed below is a citizen of the United States, except for Ian L.M. Thomas who is a citizen of the United Kingdom.
John S. Suhler co-founded VS&A in 1981, VS&A Communications Partners I, L.P. ("VS&A Fund I") in 1987, VS&A Fund II in 1994 and VS&A Communications Partners III, L.P. ("VS&A Fund III") in 1999 with Mr. Veronis. Mr. Suhler currently is President and Co-Chief Executive of VS&A and is a Founding General Partner of VS&A Fund I. Prior to forming VS&A, Mr. Suhler was a Corporate Vice President of CBS and President of CBS Publishing Group.
Ian L. M. Thomas was previously employed as a Managing Director at VS&A. Until June 15, 1998, Mr. Thomas' services were provided to the Company by VS&A, with whom Mr. Thomas had an employment arrangement, and the Company reimbursed VS&A for such services at cost. On June 15, 1998, Mr. Thomas entered into an employment agreement which provides for his employment as President, Chief Executive Officer and a Director through October 2002. Prior to his employment at VS&A, Mr. Thomas completed a 24-year career at Reed Elsevier plc, where he served as Chairman and Chief Executive Officer of Reed Telepublishing Ltd. and as a member of the Board of Directors of both Reed Elsevier plc and Reed International plc.
John J. Veronis co-founded VS&A in 1981, VS&A Fund I in 1987, VS&A Fund II in 1994 and VS&A Fund III in 1999 with Mr. Suhler. Mr. Veronis currently is Chairman and Co-Chief Executive of VS&A and is a Founding General Partner of VS&A Fund I. Prior to forming VS&A, Mr. Veronis co-founded Psychology Today and its parent company, CRM; served as President of Curtis Magazines and Publisher of its Ladies Home Journal and was a general corporate executive at Interpublic Group of Companies.
Jeffrey T. Stevenson has served as President and General Partner of VS&A Fund III since February 1999, as President and General Partner of VS&A Fund II since November 1994 and as President of VS&A Fund I since 1989. Mr. Stevenson joined VS&A in 1982 and prior to joining VS&A Fund I was Executive Vice President of VS&A in charge of corporate finance.
S. Gerard Benford has served as Executive Vice President and General Partner of VS&A Fund III since February 1999, as Executive Vice President and General Partner of VS&A Fund II since November 1994 and as
Executive Vice President of VS&A Fund I since 1990. Prior to 1990, Mr. Benford was a Corporate Vice President of Warner Communications Corporation and a principal at Arthur Young & Company.
Jeffrey Tannenbaum founded Fir Tree Partners, a private investment firm, in January 1994. From 1988 through 1993, Mr. Tannenbaum was an investment professional at Kohlberg & Co., a corporate acquisition firm.
John Rolfe joined Fir Tree in February 1997. Prior to joining Fir Tree, Mr. Rolfe was an investment banker with Donaldson, Lufkin & Jenrette specializing in media and communications.
Stefan M. Selig has been a Managing Director in the Merger & Acquisition Department of SG Cowen Securities Corp. since March 1998. Prior to joining SG Cowen, Mr. Selig was a Managing Director in the Merger & Acquisition Department of UBS Securities since August 1994. Prior to joining UBS, Mr. Selig was an investment banker in the Mergers and Acquisitions Group at The First Boston Corporation.
Steven J. Hunt was appointed Chief Financial Officer in November 1997. Prior to joining the Company, he was the founder of Value Growth Partners, International, a strategic and financial consulting firm, from 1995 to October 1997. Mr. Hunt previously served as Executive Vice President Business Development and Planning and Chief Financial Officer of Patrick Media Group, Inc., a subsidiary of GE Capital Corp. from 1991 to 1995.
Brian A. Meyer was appointed General Counsel in November 1997. Prior to joining the Company, Mr. Meyer served as Senior Counsel at Revlon, Inc. from May 1993 to October 1997. From January 1990 to April 1993, he was an attorney at the law firm of Latham & Watkins.
Richard A. Wimbish joined TISI, a wholly-owned subsidiary of the Company, as Controller in 1987 and became Executive Vice President in 1990. Mr. Wimbish was made President and Chief Operating Officer of TISI in 1991. Prior to joining TISI, Mr. Wimbish was Controller and Chief Financial Officer of Carlson Reserve Corporation from 1981 through 1986.
William Newman joined the Company in June 1998 as President and Chief Executive Officer of Atwood. Prior to joining the Company, from 1985, Mr. Newman was President of Kansas' leading radio stations: KCFX-FM (Classic Rock); KCIY-FM (Smooth Jazz); KXTR-FM (Classical); KQLR-FM (Rock) and the Kansas City Chiefs Radio Network.
W. Michael Goodwin joined the Company in December 1996 as President and Chief Executive Officer of the predecessors of both Atwood and Galaxy and in June 1998 resigned his positions with Atwood. Prior to joining the Company, Mr. Goodwin was founder and President of Falcon Sports Group, Inc., a company which focused on developing and introducing new sports media properties. Prior to this, Mr. Goodwin was Executive Vice President and Chief Operating Officer of Professional Sports Publications, a publisher of sporting event game day magazines (1992-1995).
Richard Moeller joined the Company in September 1998 as President and Chief Executive Officer of GEM. Prior to joining the Company, from 1993 to 1995, Mr. Moeller was President of Johnson Hill Press, Inc., a magazine publisher, and from 1996 to 1998, was President and Chief Executive Officer of JDTV, Inc., a television programming database company.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Set forth below is certain information with respect to the compensation of each of the five most highly compensated executive officers of the Company and its subsidiaries, based on salary and bonus earned during 1998, for services in all capacities to the Company and its subsidiaries during each of the Company's last three fiscal years.
SUMMARY COMPENSATION TABLE
- --------------- (1) No cash compensation other than the annual amounts described was paid to any of the named executives attributable to the periods shown. (2) Includes bonuses earned for the year, even if paid in another year. (3) Consists solely of options to acquire shares of common stock. (4) These amounts include the total value of the Company's contributions made or accrued to the Company's 401(k) plan. All such persons are 100 percent vested in their accounts under the Company's plan. In the case of Mr. Hunt, this includes relocation expenses paid in 1998. In the case of Mr. Goodwin with respect to 1997, this includes relocation expenses paid in 1997. In the case of Mr. Wimbish with respect to 1997, this also includes a bonus of $535,000 in connection with the change of control. (5) Mr. Thomas served as President and Chief Executive Officer from October 9, 1997. Until Mr. Thomas' U.S. Visa was transferred from VS&A to the Company, Mr. Thomas' services were provided to the Company by VS&A, with whom Mr. Thomas had an employment arrangement, and the Company reimbursed VS&A for such services at cost. On June 15, 1998, Mr. Thomas entered into an employment agreement with the Company that provides for his employment through October 2002.
OPTIONS. The Company did not grant any options or stock appreciation rights during 1998. The Company never granted any stock appreciation rights. In 1997, the Company terminated all stock option plans, except for the Company's 1994 Incentive Stock Plan, under which Mr. Wimbish was granted options exerciseable into 16,750 shares of common stock (1,675 shares after giving effect to a 10-for-1 reverse stock split effected in 1998). The
plan will survive solely with respect to such options and no further options are outstanding, or will be granted, under such plan.
COMPENSATION OF DIRECTORS. Directors receive no additional compensation for service on the Board of Directors or any committee thereof. Directors are reimbursed by the Company for out-of-pocket expenses incurred by them in connection with their service on the Board of Directors and any committee thereof.
EMPLOYMENT AGREEMENTS. The Company is subject to employment agreements with certain directors, officers or key employees, as follows:
Ian L.M. Thomas is President and Chief Executive Officer and a Director of the Company. Until Mr. Thomas' U.S. Visa was transferred from VS&A to the Company, Mr. Thomas' services were provided to the Company by VS&A, with whom Mr. Thomas had an employment arrangement, and the Company reimbursed VS&A for such services at cost. On June 15, 1998, Mr. Thomas entered into an employment agreement with the Company that provides for his employment through October 2002 at a base salary of $175,000 per year, with annual increases based upon the Consumer Price Index, plus a bonus (of up to 100% of his base salary) based upon certain performance targets. Mr. Thomas also participates in the Company's Chief Executive Officer Equity Appreciation Plan and Supplemental Chief Executive Officer Equity Appreciation Plan. See "--Phantom Stock Plans."
Steven J. Hunt, hired by the Company in November 1997, is the Chief Financial Officer of the Company. Mr. Hunt is party to an employment agreement with the Company that provides for a five-year term at a base salary of $175,000 per year, with annual increases based upon the Consumer Price Index, plus a bonus (of up to 50% of his base salary) based upon certain performance targets. Mr. Hunt also participates in the Company's Chief Financial Officer/General Counsel Equity Appreciation Plan. See "--Phantom Stock Plans."
Brian A. Meyer, hired by the Company in November 1997, is the General Counsel of the Company. Mr. Meyer is party to an employment agreement with the Company that provides for a five-year term at a base salary of $160,000 per year, with annual increases based upon the Consumer Price Index, plus a bonus (of up to 50% of his base salary) based upon certain performance targets. Mr. Meyer also participates in the Company's Chief Financial Officer/General Counsel Equity Appreciation Plan. See "--Phantom Stock Plans."
W. Michael Goodwin was hired by the Company in December 1996, to serve as President and Chief Executive Officer of the predecessors of both Atwood and Galaxy. After a full-time Chief Executive Officer was hired for Atwood, Mr. Goodwin relinquished his position with Atwood and became the full-time Chief Executive Officer of Galaxy. Mr. Goodwin entered into a new employment agreement as of January 1, 1998 which provides for his employment through December 31, 2000 as President and Chief Executive Officer of Galaxy Registration, LLC at a base salary of $165,000 annually, with annual increases based upon the Consumer Price Index, and various incentives and bonus opportunities, including participation in the Company's Key Executive Equity Appreciation Plan.
Richard A. Wimbish entered into a new employment agreement with TISI as of January 1, 1998 which provides for his employment through December 31, 2000 as President and Chief Operating Officer of TISI at a base salary of $175,000 annually, with annual increases based upon the Consumer Price Index, and various incentives and bonus opportunities, including participation in the Company's Key Executive Equity Appreciation Plan. Mr. Wimbish continues to hold options granted under the Company's 1994 Incentive Stock Plan, 1,675 shares of common stock are issuable upon exercise of such options, 1,000 of which have an exercise price of $13.874 per share and 675 of which have an exercise price of $4.25 per share. The Company's 1994 Incentive Stock Plan, under which such options were granted, therefore will survive (solely with respect to such options).
William Newman was hired by the Company in June 1998 to serve as President and Chief Executive Officer of Atwood. Mr. Newman entered into an employment agreement as of June 22, 1998 which provides for his employment through December 31, 2000 as President and Chief Executive Officer of Atwood Publishing, LLC at a base salary of $165,000 annually, with annual increases based upon the Consumer Price Index, and various incentives and bonus opportunities, including participation in the Company's Key Executive Equity Appreciation Plan.
Richard Moeller was hired by the Company in September 1998 to serve as President and Chief Executive Officer of GEM. Mr. Moeller entered into an employment agreement as of September 1, 1998 which provides for his employment through August 31, 2001 as President and Chief Executive Officer of GEM Communications, LLC at a base salary of $160,000 annually, with annual increases based upon the Consumer Price Index, and various incentives and bonus opportunities, including participation in the Company's Key Executive Equity Appreciation Plan.
PHANTOM STOCK PLANS
The Company has established a Key Executive Equity Appreciation Plan (the "Key Executive Phantom Stock Plan") for executives of the Company. Pursuant to the Key Executive Phantom Stock Plan, executives can be awarded Equity Appreciation Units ("Units") which constitute a "phantom" equity interest in any appreciation in the value of the equity of the Company above the $59.6 million originally invested by VS&A-T/SF and Fir Tree in the Company and Holdings LLC (the "Equity Appreciation") payable only in the event of a change in control of the Company, as defined, or termination event, as defined. The Units vest 20% per year over five years, provided that the executive remains an employee of the Company and the annual EBITDA budget for the Company is achieved (or, if not achieved, that 110% of the annual EBITDA budget for the next year is achieved). Messrs. Wimbish, Goodwin, Newman and Moeller were awarded Units equal to .3%, .2%, .25% and .175%, respectively, of the Equity Appreciation under the Key Executive Phantom Stock Plan.
Ian L.M. Thomas, President and Chief Executive Officer of the Company, was awarded Units equal to 2.5% of the Equity Appreciation under the Chief Executive Officer Equity Appreciation Plan, which Units vest 20% per year over five years, provided that Mr. Thomas remains an employee of the Company. Mr. Thomas was awarded Units equal to an additional 2.5% of the Equity Appreciation under the Supplemental Chief Executive Officer Equity Appreciation Plan, which Units vest 100% upon a Change of Control (as defined in the Supplemental Chief Executive Officer Equity Appreciation Plan), in the event that VS&A-T/SF has received an internal rate of return on its investment in the common stock of greater than 20% per annum.
Mr. Hunt, Chief Financial Officer of the Company, and Mr. Meyer, General Counsel of the Company, were awarded Units equal to 1.5% and 1%, respectively, of the Equity Appreciation under the Chief Financial Officer/General Counsel Equity Appreciation Plan (together with the Key Executive Phantom Stock Plan, the Chief Executive Officer Equity Appreciation Plan and the Supplemental Chief Executive Officer Equity Appreciation Plan, the "Phantom Stock Plans"), which Units vest 20% per year over five years, provided, in each case, that such individual remains an employee of the Company.
Upon termination of an executive's employment by the Company for any reason (other than Cause (as defined in the Key Executive Phantom Stock Plan) or voluntary termination by the executive), the executive is entitled to receive an amount equal to the value of his or her vested Units, payment of which can be deferred until a Change in Control (as defined in the Key Executive Phantom Stock Plan) of the Company. All Units awarded under the Chief Executive Officer Equity Appreciation Plan and the Chief Financial Officer/General Counsel Equity Appreciation Plan vest on a Change in Control (as defined in each plan), and the executive is entitled to receive an amount equal to the value of his or her Units (unless his or her employment terminated prior to the Change in Control).
The maximum number of Units issuable under the Phantom Stock Plans would constitute approximately 10% of the common equity interests of the Company.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
On March 31, 1998, following the consummation of the Recapitalization on February 27, 1998 and a 10-for-1 reverse stock split effected on March 30, 1998, VS&A-T/SF held 72,367 shares (or approximately 64.4%) and Fir Tree held 40,000 shares (or approximately 35.6%) of the common stock, constituting all of the outstanding common stock. Upon consummation of the Tender Offer, Stock Purchase and Option Repurchase, pending the Second Step Transaction on February 27, 1998, public shareholders held 101,969 shares of the common stock (or approximately 7%), and VS&A-T/SF's shares constituted approximately 60% and Fir Tree's shares constituted approximately 33% of the outstanding shares of the common stock. No directors or executive officers of the Company own any shares of the common stock. An affiliate of Ian L. M. Thomas, President and Chief Executive Officer of the Company, has invested $750,000 to purchase 1.95% of VS&A-T/SF.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCKHOLDERS AGREEMENT
VS&A-T/SF, Fir Tree (each, a "Stockholder") and the Company are parties to a Stockholders Agreement (the "Stockholders Agreement"), dated as of October 9, 1997, with respect to the management of the Company and their ownership of shares of the common stock.
The Stockholders Agreement provides each Stockholder the right to "tag" along on any sale of shares by the other Stockholder, provides to VS&A-T/SF the right to "drag" along Fir Tree on any sale of all of the common stock and provides preemptive rights to each Stockholder.
The Stockholders Agreement provides that VS&A-T/SF and Fir Tree will vote for a board consisting of a majority of members designated by VS&A-T/SF and a number of Fir Tree designees in proportion to Fir Tree's ownership of common stock. Accordingly, the board of directors of the Company consists of eight members, five designated by VS&A-T/SF and three designated by Fir Tree. See "Management."
The Stockholders Agreement provides that certain actions require approval by a majority of the Fir Tree designees on the board, including an amendment of the Certificate of Incorporation or By-Laws, a transaction with
VS&A-T/SF or an affiliate, certain borrowings or management equity plans pursuant to which management receives more than 10% of the common equity interests of the Company.
At any time after October 9, 2002, Fir Tree has the right to force a sale of the Company or its assets and the Stockholders are required to sell their shares or vote in favor of a sale. If a definitive agreement for the sale of the Company is not executed within 18 months after the notice from Fir Tree, the Stockholders will vote their shares to elect a board consisting of a majority of members designated by Fir Tree.
The Stockholders Agreement terminates in 10 years or upon an earlier underwritten initial public offering of common stock.
Following the Recapitalization, VS&A was paid an investment banking fee of $1.5 million by the Company, which was shared with Fir Tree pro rata (based on the ratio in which VS&A-T/SF and Fir Tree own shares of the common stock).
In 1998, VS&A was paid a fee of $20,000 in connection with advisory services provided to the Company with respect to the acquisition of International Gaming Business Exposition and a monitoring fee of $90,000; approximately 18% of both such fees were shared with Fir Tree pursuant to the Stockholders Agreement.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this Report:
(1) Consolidated Financial Statements and Independent Auditors' Reports included herein: See Index on page (2) Financial Statement Schedule: The Financial Statement Schedules are omitted as they are inapplicable or the required information is furnished in the Consolidated Financial Statements of the Company or the Notes thereto. (3) List of Exhibits:
Exhibit - ------- Number Description - ------ ----------- 2.1 Stock Purchase Agreement, dated as of August 15, 1997, among VS&A Communications Partners II, L.P., VS&A-T/SF Inc. and T/SF Communications Corporation (incorporated herein by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-4 dated February 10, 1998 (the "Registration Statement")) 2.2 Stock Purchase Agreement dated as of September 1, 1998 by and among GEM Communications, LLC and the shareholders of InterGame Limited (incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated September 1, 1998). 2.3* Asset Purchase Agreement dated as of March 25, 1999 among TOIC Acquisition, LLC, The Official Information Company, International Travel Service, Inc. and William A. Patterson Jr., Stephen T. Martin and Edward A. Harris 3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the period ended December 31, 1997 (the "1997 Form 10-K")) 3.2 Amended and Restated By-laws of the Company (incorporated herein by reference to Exhibit 3.2 to the Registration Statement) 4.1 Indenture, dated as of October 29, 1997, by and among T/SF Communications Corporation, the Guarantors named therein and IBJ Schroder Bank & Trust Company, as Trustee (incorporated herein by reference to Exhibit 4.1 to the Registration Statement) 4.1(a) Form of Supplemental Indenture, by and among T/SF Communications Corporation, the Guarantors named therein and IBJ Schroder Bank & Trust Company, as Trustee (incorporated herein by reference to Exhibit 4.1(a) to the Registration Statement) 4.2 Registration Rights Agreement, dated as of October 29, 1997, by and among T/SF Communications Corporation, the Guarantors named therein and First Union Capital Markets Corp. (incorporated herein by reference to Exhibit 4.1(a) to the Registration Statement) 4.3 Form of Old Note (included in Indenture filed as Exhibit 4.1) 4.4 Form of New Note (included in Indenture filed as Exhibit 4.1) 10.1 Credit Agreement, dated as of October 9, 1997, among T/SF Communications Corporation and First Union Corporation (as Lender and Agent) (incorporated herein by reference to Exhibit 10.2 to the Registration Statement) 10.2 Security Agreement, dated as of October 9, 1997, among T/SF Communications Corporation, the Guarantors (as defined therein) and First Union National Bank (incorporated herein by reference to Exhibit 10.3 to the Registration Statement) 10.3 Stock Pledge Agreement, dated as of October 9, 1997, made by VS&A-T/SF, Inc. and Fir Tree Value Fund, L.P., Fir Tree Institutional Value Fund, L.P., and Fir Tree Value Partners, LDC, in favor of First Union National Bank (incorporated herein by reference to Exhibit 10.4 to the Registration Statement)
10.4 Stock Pledge Agreement, dated as of October 9, 1997, made by T/SF Communications Corporation in favor of First Union National Bank (incorporated herein by reference to Exhibit 10.5 to the Registration Statement) 10.5 Stock Pledge Agreement, dated as of October 9, 1997, made by T/SF Holdings, LLC, in favor of First Union National Bank (incorporated herein by reference to Exhibit 10.6 to the Registration Statement) 10.6 Stock Pledge Agreement, dated as of October 9, 1997, made by Atwood Convention Publishing, Inc., Galaxy Registration, Inc., G.E.M. Communications, Inc., Transportation Information Services, Inc., T/SF Investment Co. and T/SF of Nevada, Inc., in favor of First Union National Bank (incorporated herein by reference to Exhibit 10.7 to the Registration Statement) 10.7* Employment Agreement by and between Richard Moeller and GEM Communications, LLC, dated as of September 1, 1998. 10.8* Employment Agreement by and between William Newman and Atwood Publishing, LLC, dated as of June 22, 1998. 10.9 Employment Agreement by and between Richard A. Wimbish and Transportation Information Services, Inc., dated as of January 1, 1998 (incorporated herein by reference to Exhibit 10.8 to the Registration Statement) 10.10 Form of Employment Agreement by and between Ian L.M. Thomas and T/SF Communications Corporation (incorporated herein by reference to Exhibit 10.9 to the Registration Statement) 10.10(a) Letter Agreement, dated October 9, 1997, by and between VS&A Communications Partners, II, L.P., Veronis, Suhler & Associates, Inc. and Ian L.M. Thomas (incorporated herein by reference to Exhibit 10.9(a) to the Registration Statement) 10.11 Employment Agreement by and between Steven J. Hunt and T/SF Communications Corporation, dated as of November 10, 1997 (incorporated herein by reference to Exhibit 10.10 to the Registration Statement) 10.12 Employment Agreement by and between Brian A. Meyer and T/SF Communications Corporation, dated as of November 10, 1997 (incorporated herein by reference to Exhibit 10.11 to the Registration Statement) 10.13 Employment Agreement by and between Michael Goodwin and Galaxy Registration, LLC, dated as of January 1, 1998 (incorporated herein by reference to Exhibit 10.12 to the Registration Statement) 10.14 T/SF Communications Corporation Chief Executive Officer Equity Appreciation Plan (incorporated herein by reference to Exhibit 10.14 to the Registration Statement) 10.15 T/SF Communications Corporation Supplemental Chief Executive Officer Equity Appreciation Plan (incorporated herein by reference to Exhibit 10.15 to the Registration Statement) 10.16 T/SF Communications Corporation Chief Financial Officer/General Counsel Equity Appreciation Plan (incorporated herein by reference to Exhibit 10.16 to the Registration Statement) 10.17 T/SF Communications Corporation Key Executive Equity Appreciation Plan (incorporated herein by reference to Exhibit 10.17 to the Registration Statement) 10.18 Stockholders' Agreement, dated as of October 9, 1997, among T/SF Communications Corporation, VS&A-T/SF, L.L.C. and Fir Tree Value Fund, L.P., Fir Tree Institutional Value Fund, L.P. and Fir Tree Value Partners, LDC (incorporated herein by reference to Exhibit 10.18 to the Registration Statement) 10.19 Consulting Agreement by and between Howard G. Barnett, Jr. and T/SF Communications Corporation, dated October 9, 1997 (incorporated herein by reference to Exhibit 10.19 to the Registration Statement) 10.20 Consulting Agreement by and between Robert F. Craine, Jr. and T/SF Communications Corporation, dated October 9, 1997 (incorporated herein by reference to Exhibit 10.20 to the Registration Statement) 10.21 Consulting Agreement by and between J. Gary Mourton and T/SF Communications Corporation, dated October 9, 1997 (incorporated herein by reference to Exhibit 10.21 to the Registration Statement) 10.22 T/SF Communications Corporation 1994 Incentive Stock Plan (incorporated herein by reference to Exhibit A to the Registrant's Proxy Statement for Annual Meeting of Stockholders dated May 23, 1994)
10.23 Settlement Agreement, dated and effective as of December 12, 1995, by and between T/SF Communications Corporation and Robert J. Swab (incorporated herein by reference to Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995) 10.24 Operating Agreement for 1995 Land Company, L.L.C., dated December 20, 1994, by and between John C. Bumgarner, Jr. and Tribune/Swab-Fox (incorporated herein by reference to Exhibit 10.20 of Tribune/Swab-Fox's Annual Report on Form 10-K for the year ended December 31, 1994) 10.25 Stock Purchase Agreement, dated as of August 15, 1996, by and among T/SF Investment Co. and the shareholders of CORSEARCH, Inc. (incorporated herein by reference to Exhibit 2.1 to the Form 8-K) 10.26 T/SF Communications Corporation and T/SF Holdings, LLC Key Employee Bonus Plan (incorporated herein by reference to Exhibit 10.29 to the Registration Statement) 10.27 Voting Agreement dated as of February 6, 1998 among the Company and certain subsidiaries (incorporated by reference to Exhibit 10.27 of the 1997 Form 10-K) 12* Statement re: computation of ratios 21* Subsidiaries of the Company 23.1* Consent of Arthur Andersen, LLP 27* Financial Data Schedule
* Filed herewith.
(b) Reports on Form 8-K
THE REGISTRANT FILED NO REPORTS ON FORM 8-K DURING THE LAST QUARTER OF THE FISCAL YEAR ENDED DECEMBER 31, 1998.
THE OFFICIAL INFORMATION COMPANY
PAGE ----
Reports of independent auditors and public accountants
Consolidated balance sheets as of December 31, 1998 and 1997
Consolidated statements of operations for the years ended December 31, 1998, 1997 and 1996
Consolidated statements of changes in stockholders' equity (deficit) for the years ended December 31, 1998, 1997 and 1996
Consolidated statements of cash flows for the years ended December 31, 1998, 1997 and 1996
Notes to consolidated financial statements
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders The Official Information Company:
We have audited the accompanying consolidated balance sheet of The Official Information Company, its subsidiaries and controlled affiliates as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Official Information Company, its subsidiaries and controlled affiliates as of December 31, 1998 and 1997, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
New York, New York February 9, 1999
REPORT OF ARTHUR ANDERSEN LLP, INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of The Official Information Company (formerly T/SF Communications Corporation):
We have audited the accompanying consolidated statements of operations, changes in stockholders' equity and cash flows of The Official Information Company (formerly T/SF Communications Corporation) (a Delaware corporation) and subsidiaries for the year ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated statements of operations, changes in stockholders' equity and cash flows are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated statements of operations, changes in stockholders' equity and cash flows. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of The Official Information Company (formerly T/SF Communications Corporation) and subsidiaries for the year ended December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Tulsa, Oklahoma February 21, 1997
THE OFFICIAL INFORMATION COMPANY
CONSOLIDATED BALANCE SHEETS ((IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, 1998 AND 1997
See accompanying notes to consolidated financial statements.
THE OFFICIAL INFORMATION COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
THE OFFICIAL INFORMATION COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
See accompanying notes to consolidated financial statements.
THE OFFICIAL INFORMATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
The Official Information Company, its subsidiaries and controlled affiliates (collectively, the "Company", unless the context indicates otherwise) is a diversified business media company which principally operates two lines of business: 1) business and professional information services ("Information Services") and 2) business to business communications, publishing and related services ("Business to Business Communications"). Business to Business Communications is conducted through several subsidiaries whose specialized services include: 1) providing media services to the gaming industry with trade magazines, newsletters, conferences and a trade show; 2) providing exposition services, primarily registration and lead management and 3) publication services, primarily convention/trade show newspapers and directories. Information Services includes: 1) pre-employment screening information, primarily for the insurance and trucking industries, and 2) trademark/tradename research to law firms and corporations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company, its majority-owned subsidiaries and controlled affiliates. All significant intercompany accounts and transactions have been eliminated in consolidation. Minority interest consists of the equity interests in Holdings LLC owned by VSA-T/SF, Fir Tree Value Fund LP., Fir Tree Institutional Value Fund L. P. and Fir Tree Value Partners L.D.C.
INVENTORIES
Inventories are recorded at the lower of cost or market determined on a first-in, first-out and average cost methods.
DEPRECIATION
Depreciation of property, plant and equipment is provided using the straight-line method based on estimated useful lives of 3 years for exposition equipment and ranging from 3 to 25 years for data processing and office furniture and equipment.
INTANGIBLES AND OTHER ASSETS
Intangibles and other assets include mainly goodwill related to acquisitions and credits granted for truck driver employment information files. These assets consist of the following:
The Company's policy is to recognize an impairment of the carrying value of goodwill when management's best estimate of undiscounted future cash flows over the remaining amortization period is less than the carrying amount. Under this method, the Company has determined that its investment in certain foreign subsidiaries has become impaired. Accordingly, during the third quarter of 1998 the Company recorded a $820,000 reserve, which is included in Depreciation and Amortization.
TRANSLATION OF FOREIGN CURRENCY
The financial position and results of operations of the Company's foreign subsidiaries are measured using local currency as the functional currency. Revenues and expenses of such subsidiaries have been translated into U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange at the balance sheet date. Translation gains and losses are deferred as a separate component of stockholders' equity. Aggregate foreign currency transaction gain and losses are included in determining net income.
REVENUE RECOGNITION
Information Services revenues are recognized when the research is completed and reports are transmitted to the client. The cost of charges from state motor vehicle record departments or other agencies which are incurred by the Company as an agent for its customers are netted against revenue. As provided in the agreements with customers, the Company charges a fee for its service and is also reimbursed for direct charges.
Exposition services revenues are recognized when the services are provided.
Advertising revenues from publishing are recognized when each publication is published and distributed. Subscription revenue is recognized ratably over the subscription period.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a maturity of three months or less are considered to be cash equivalents.
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.
INVESTMENTS
Investments in the common stock of an affiliate in which the Company owns a 49% interest is accounted for by the equity method. The excess of cost of the investment over the Company's share of its net assets at the acquisition date is being amortized straight line over 20 years. See Note 3.
COMPUTER SOFTWARE
Included in property, plant and equipment are net deferred product enhancement cost aggregating approximately $790,000 and $436,000 as of December 31, 1998 and 1997, respectively. Included in depreciation and amortization is amortization for product enhancement cost of approximately $188,000 and $0 for 1998 and 1997, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying value of cash and cash equivalents, trade accounts receivable and trade accounts payable approximates the fair value because of the short maturity of those instruments. The carrying amounts of notes payable (see Note 4) approximates the fair value due to these debt instruments having variable interest rates similar to those that are currently available to the Company. The fair value of the Senior Subordinated Notes (see Note 4) at December 31, 1998, based on the current offered market price, approximates its carrying value.
NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Company adopted AICPA Statement of Position ("SOP") No.98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use." SOP No.98-1 requires certain cost in connection with the developing or obtaining internally used software to be capitalized that previousely would have been expensed as incurred. The adoption of SOP No. 98-1 resulted in the capitalization of approximately $300,000 related to software development cost.
In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130). SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. It
does not, however, specify when to recognize or how to measure items that make up comprehensive income. SFAS 130 was issued to address the concerns over the practice of reporting elements of comprehensive income directly in equity. The Company adopted SFAS 130 in 1998. There were no differences between the Company's comprehensive income and its net income as reported.
The FASB also recently issued Statement of Financial Accounting Standards No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits (SFAS 132) and Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 132 revises employer's disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. SFAS 133 establishes accounting and reporting standards for derivative instruments and hedging activities. These Statements are not expected to have a material impact on the Company's financial reporting as the Company does not currently sponsor pension or other postretirement benefit plans and does not engage in the use of derivative instruments.
RECLASSIFICATIONS
Certain 1997 and 1996 account balances have been reclassified to conform to the 1998 consolidated financial statement presentation.
2. RECAPITALIZATION
During 1997, the Company adopted a two phased leverage recapitalization plan of the Company's ownership and capital structure. Phase I included a tender offer for substantially all of the Company's outstanding common stock (the "Tender Offer"); selling newly-issued common stock to a new investor, VS&A-T/SF, L.L.C. (the "Stock Purchase"); and repurchasing substantially all of the outstanding stock options under the Incentive Stock Option Plan and the 1994 Incentive Stock Plan (the "Option Repurchase").
Phase II of the leveraged recapitalization plan of the Company was completed on February 27, 1998 which included a reverse stock split and a drop down restructuring. The reverse stock split provides that each then outstanding share of common stock other than treasury stock and stock owned by the Equity Investors (as defined below) is converted into the right to receive $40.25 for each pre-split share resulting in the elimination of all shares of common stock other than those held by Equity Investors.. Under the drop down restructuring plan, the Company contributed substantially all of the assets and liabilities of the Business to Business Communication Segment into T/SF Holdings LLC (Holdings LLC) and related operating LLC's in exchange for a $45 million preferred equity interest. The preferred equity interest will carry an 11% annual distribution and the Company will have total voting, operational and management control of Holdings LLC. The Equity Investors purchased common equity interests in Holdings LLC for approximately $4.5 million in the same proportion as their ownership of the common stock immediately following the consummation of the Recapitalization. These common equity interests in Holdings LLC and all earnings or losses in excess of the preferred stockholders' annual distributions are reflected as minority interest. Following the consummation of the Recapitalization, VS&A-T/SF and Fir Tree Partners, an existing stockholder, (together referred to as the Equity Investors) own 64.4% and 35.6% of the Company's common stock, respectively.
The Tender Offer was consummated on October 9, 1997 for 2,742,092 shares of common stock at $40.25 per share in cash or approximately $110.4 million. These shares are held in treasury at
December 31, 1997. Excluding shares owned by the Equity Investors, an aggregate of 10,197 shares remained outstanding. The Stock Purchase between the Company and VS&A-T/SF, was consummated simultaneously with the Tender Offer whereby the Company sold 881,988 shares of newly-issued common stock at $40.25 per share or approximately $35.5 million.
In connection with the Tender Offer and Stock Purchase, holders of stock options under the Company's two incentive stock option plans became fully vested in all previously issued options and received an amount equal to 1) the product of the number of shares of common stock issued upon exercise of such options, multiplied by $40.25, less 2) the exercise price of such options. The total cost of repurchasing these options was approximately $10.0 million and has been included in Recapitalization expense in the accompanying consolidated statement of operations. The Incentive Stock Plan was terminated upon repurchase of all of the outstanding options. The 1994 Incentive Stock Plan survives solely with respect to options held by one individual currently employed by the Company to purchase 1,675 shares. All of which are exercisable and have an exercise price of $4.25 per share. No further options are outstanding, or will be granted under this plan.
The Company borrowed $13 million and $80 million under a Senior Credit Facility and a Bridge Facility, respectively, to finance the Tender Offer and Option Repurchase. In October 1997, the Company issued $100 million in 10 3/8% Senior Subordinated Notes (the "Subordinated Notes") the proceeds from which were used to repay amounts owed under the Senior Credit Facility and the Bridge Facility. On September 1, 1998, the Company purchased $1.5 million of the Subordinated Notes at a price below par. The Company recorded a $60,000 gain on this transaction.
Total Recapitalization and Reorganization costs incurred in connection with Phase I are summarized below. There were no significant costs associated with Phase II.
(Thousands) ----------- Cost associated with stock option repurchase $ 9,947 Tender offer - advisory and consulting fees 3,941 Severance, incentive and retention bonuses 5,540 Legal, accounting and other professional fees 1,612 Other 734 -------- $ 21,774 =========
3. ACQUISITIONS AND DISPOSITIONS OF ASSETS
On August 15, 1996, the Company acquired all of the issued and outstanding capital stock of Corsearch, a leading provider of trademark and tradename research and information services, using both proprietary and public databases. The Company paid $14,400,000 in cash, $900,000 in notes and assumed approximately $1,300,000 in additional non-operating liabilities. In addition, the Company agreed to pay additional consideration in 2000 and 2001 to the two senior managers/stockholders of Corsearch predicated upon Corsearch achieving certain pre-tax income levels in the years 1997, 1998 and 1999. At the date of acquisition, the additional consideration expected to be paid in 2000 and 2001 was $1,500,000 and was discounted at a rate of 8 1/2% and recorded in other liabilities. Subsequent to 1997, one of the senior managers of CORSEARCH terminated his service with the Company and thus waived his rights to any additional consideration under the purchase agreement. Accordingly, a portion of the contingent consideration discussed
above was eliminated against goodwill. Costs in excess of assets acquired were approximately $16,750,000 and are recorded in "Intangible and other assets".
In June 1998, GEM acquired all the assets and rights to the International Gaming Business Exposition, a conference and trade show serving the casino gaming industry. In September 1998, GEM acquired all the stock of UK based InterGame Limited, the publisher of the leading series of publications for the international coin-operated amusement and gaming machines and amusement park industries. The Company paid approximately $8.1 million in cash. Cost in excess of net assets acquired was approximately $7.8 million and is recorded in "Intangible and other assets". Pro forma results for 1998 assuming the acquisition has been made at the beginning of the year would not be materially different from reported results.
During 1998, GEM had a 49% interest in Gaming for Africa Expo, a gaming trade show and conference held in South Africa, and Gaming for Africa, the leading trade magazine for gaming in Sub-Saharan Africa. Effective as of January 1, 1999, GEM acquired, in a series of transactions, the business of Gaming for Africa Expo and Gaming for Africa for approximately $640,000.
4. LONG-TERM DEBT AND NOTE PAYABLE
Long-term debt outstanding consists of the following:
Installments due on long-term debt during each of the five years subsequent to December 31, 1998, are as follows:
(In thousands)
1999 $ 1,367 2000 885 2001 - 2002 - 2003 - Thereafter 98,500 --------- $ 100,752 =========
(A) On October 24, 1997, the Company issued $100 million of 10-3/8% senior subordinated notes due 2007. The notes are general unsecured obligations of the Company subordinated in right of payment to all existing and future senior debt. The proceeds of the offering were used to repay borrowing under the Senior Credit Facility and Bridge Financing Facility incurred in connection with the Recapitalization transaction. On October 29, 1997, the Company completed the private sale to First Union Capital Markets Corp. (the "Initial Purchaser") of $100.0 million principal amount of Senior Subordinated Notes due 2007 (the "Old Notes") at a price of 97% of the principal amount thereof. The Initial Purchaser resold the Old Notes to a limited number of qualified institutional buyers at an initial price to investors of 100% of the principal amount thereof, with net proceeds to the Company of $97.0 million (the "Offering"). The Offering was a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Rule 144A and Section 4 thereof. The net proceeds of the Notes sold pursuant to the Offering were applied to repay indebtedness incurred in connection with the Recapitalization under the Senior Credit Facility and the Bridge Financing Facility. On February 10, 1998, the Company offered to exchange up to $100,000,000 aggregate principal amount of Old Notes for up to an equal aggregate principal amount of new notes (the "New Notes" and, together with the Old Notes, the "Notes"). The New Notes are obligations of the Company entitled to the benefits of the Indenture (the "Indenture") relating to the Old Notes and the form and terms of the New Notes are identical in all material respects to the form and terms of the Old Notes except that the New Notes have been registered under the Securities Act and do not contain terms with respect to transfer restrictions.
The Notes contain restricted covenants which include, but are not limited to: 1) incurring additional indebtedness; (2) paying dividends; (3) selling assets; and (4) making certain investments. The Notes may be redeemed in whole or in part by the Company on or after November 1, 2002. Prior to that time, only $35 million can be redeemed at 110.375% of the principal amount. On September 1, 1998, the Company purchased $1.5 million of the New Notes at a price below par.
NOTES PAYABLE
The Company has a Senior Credit Facility ("the Senior Facility") with a bank which provides for maximum borrowings of $25 million. Borrowings are secured by a first priority lien on substantially all assets and properties of the Company and its subsidiaries owned now or acquired in the future. Interest is computed upon either the LIBOR plus the applicable borrowing margin (based on the achievement of total leverage ratio) from 1.75% to 2.75% or a base rate indexed to the prime rate plus the applicable borrowing margin of 0.5% to 1.5%. An annual commitment fee of 0.5% is charged on the unused portion of the Senior Facility. The Senior Facility contains covenants similar to the Subordinated Notes as well as financial covenants with respect to: 1) a maximum leverage ratio; 2) a
maximum senior leverage ratio; 3) a minimum interest coverage ratio; and 4) a minimum fixed charge coverage ratio. The Senior Credit Facility continues through September 2004.
5. DEBT GUARANTORS
Atwood Publishing LLC, Galaxy Information Services LLC, GEM Communications LLC, Holdings LLC (collectively the "LLC Guarantors"), TISI and Corsearch, (collectively, the "Subsidiary Guarantors" and, together with the LLC Guarantors, the "Guarantors") are included in the consolidated results of the Company. Because the Company, directly or indirectly, owns all of the voting interests in the LLC Guarantors, the LLC Guarantors are considered wholly owned subsidiaries of the Company as defined by Regulation S-X. The Company indirectly owns all of the voting shares of the Subsidiary Guarantors.
Each of the Guarantors jointly and severally guarantee all of the Company's debt, on a full and unconditional basis. For accounting purposes, all Guarantors are consolidated. Separate financial statements and other disclosures concerning the Guarantors are not presented because the Company's management has determined that they are not material to investors.
The Senior Credit Facility contains covenants, among others, restricting the ability of the Company and the Guarantors to: (i) declare dividends or redeem or purchase capital stock; (ii) prepay, redeem or purchase debt; (iii) incur liens and engage in sale-leaseback transactions; (iv) make loans and investments; (v) issue more debt; (vi) amend or otherwise alter debt and other material agreements; (vii) make capital expenditures; (viii) engage in mergers, acquisitions and asset sales; (ix) transact with affiliates and (x) alter its lines of business. The net assets of the Guarantors approximated $54,300,000 as of December 31, 1998.
Included in the 1998 financial results of the LLC Guarantors are the ten months activity of Atwood Publishing LLC, Galaxy Information Services LLC, GEM Communications LLC and Holdings LLC. Included in the 1998 financial results of the Subsidiary Guarantors are the two months of operations of Atwood Publishing, Inc., Galaxy Information Services, Inc., GEM Communications, Inc. and the full year results of TISI and Corsearch. The 1997 and 1996 financial results are prior to the Recapitalization (See Note 2).
The following are condensed consolidating financial statements of The Official Information Company and the Guarantors for each period presented:
---- BALANCE SHEET -------------
---- CONSOLIDATED STATEMENT OF CASH FLOWS ------------------------------------
---- CONSOLIDATED STATEMENT OF OPERATIONS ------------------------------------
6. INCOME TAXES
The provision for income tax expense (benefit) is comprised of the following:
The reconciliation of income tax computed at the federal statutory rate (34%) to income tax expense is as follows:
Significant components of deferred tax assets and liabilities are as follows:
At December 31, 1998, the Company had available net operating loss (NOL) carryforwards for regular federal tax purposes of approximately $1.3 million which, will expire in 2012. The Company also has state NOL's available of approximately $22 million which, expire at various dates beginning in 2009 through 2012. The state NOL's were generated in prior years, however, due to the nature of these losses their existence was substantially in doubt pending the resolution of a revenue agents examination. The examination was resolved in the Company's favor during 1997.
A valuation allowance is required when it is more likely than not that all or a portion of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon future profitability. The Company has historically been profitable not withstanding 1997 in which the Company incurred recapitalization expenses. Management believes that such expenses are non-recurring. The ability to utilize the state NOL's is further dependent on tax planning strategies surrounding the drop down restructuring described in note 2. Management believes that the elimination of non-recurring expenses will result in future taxable income, however, there is no assurance of that fact. Accordingly, a valuation allowance has been established, to reduce the deferred tax assets to a level which, more likely than not, will be realized. Based upon historical taxable income trends and projections for future taxable income over the periods which the items giving rise to deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of the net deferred assets, net of the existing valuation allowance, at December 31, 1998.
7. CAPITAL STOCK
RECAPITALIZATION AND STOCK OPTIONS
The Company completed a tender offer for substantially all of its outstanding common stock during 1997 as part of a recapitalization plan (see footnote 2 - Recapitalization). In 1997 and 1996, the Company purchased and retired 50,000 shares ($27.50 per share) and 7,900 shares ($24.94 per share), respectively, of its Common Stock owned by certain officers, directors and other related parties.
All outstanding options under the Company's Incentive Stock Option Plan were repurchased in connection with the Recapitalization Plan described in footnote 2 and the option plan was terminated following the repurchase. Prior to December 31, 1996, there were options for 118,000 shares outstanding at option prices ranging from $5.50 to $15.00 per share. During 1996, options for 103,000 shares were granted; no options were exercised and options for 5,000 shares were canceled. Prior to termination of the Plan in 1997, options had been granted at the discretion of the Board of Directors' Compensation Committee at a minimum exercise price of 100 percent of the market value of the Company's Common Stock at the date of grant.
In connection with the Recapitalization, substantially all of the outstanding options under the 1994 Incentive Stock Plan were repurchased. A total of 1,675 remain outstanding to an individual at December 31, 1998, all of which are exercisable and have an exercise price of $4.25 per share. This plan will survive solely with respect to such options; no further options will be granted. Options for 50,000 shares were granted in 1996 at option prices ranging from $13.88 to $24.00 per share, and options for 15,000 shares were granted in 1995 at an option price of $6.00 per share. The options were granted at the market price of the Company's Common Stock at the effective date of the grant. Options for 33,881 shares were exercised in 1997 for a total price of $153,000 prior to the recapitalization transaction.
An Employee Stock Purchase Plan was terminated in 1997; no shares had been issued under this plan. The Company matched 20 percent of each employee's contributions with common stock (limited to 5 percent maximum employee contribution) to the qualified 401(k) defined contribution plan. During 1997 and 1996, 2,772 shares and 6,247 shares, respectively, were issued to the 401(k) plan as matching contributions.
The Company has adopted the disclosure-only provision of Statement of Financial Accounting Standards No. 123, "Accounting for Stock - Based Compensation" (SFAS No. 123). SFAS No. 123 established financial accounting and reporting standards for stock-based compensation plans and to transactions in which an entity issues its equity instruments to acquire goods and services from non-employees.
STOCK APPRECIATION PLAN
The Company has established a Key Executive Equity Appreciation Plan ("Stock Appreciation Plan") for certain executives of the Company. Pursuant to the Stock Appreciation Plan, executives can be awarded Equity Appreciation Units ("Units") which constitute a "phantom" equity interest in any appreciation in the value of the equity of the Company above the $59.6 million originally invested by VS&A-T/SF and Fir Tree in the Company and Holdings LLC payable only in the event
of a change in control, as defined, or termination event, as defined. The Units vest ratably over five years, provided the executive remains an employee of the Company and annual EBITDA budget, as defined, for the Company is achieved (or, if not achieved, that 110% of the annual EBITDA budget for the next year is achieved). The maximum number of Units issuable under the Stock Appreciation Plan constitutes approximately 10% of the common equity interests of the Company.
Certain executives were issued Units in 1998, under the Stock Appreciation Plan, which constitute approximately 9.2% of the common equity interest of the Company. Compensation expense associated with these Units, as well as future Units, will be recorded once a change in control or termination event, as defined, are deemed to be probable in accordance with SFAS No. 5 Accounting for Contingencies.
STOCKHOLDERS AGREEMENT
VS&A-T/SF and Fir Tree (each a "Stockholder") and the Company are parties to a Stockholders agreement (the "Agreement"), dated October 9, 1997, with respect to the management of the Company and their ownership of shares of the common stock. The Agreement terminates at the earlier of an underwritten initial public offering of common stock or ten years.
The Agreement provides that the Board of Directors be determined based on the ownership percentages of VS&A-T/SF and Fir Tree which is 64.4% and 35.6%, respectively. The Agreement provides that certain actions require approval by a majority of the Fir Tree designees on the board and that at any time after October 9, 2002, Fir Tree has the right to force the sale of the Company or its assets and the Stockholders are required to sell their shares or vote in favor of a sale.
8. COMMITMENTS AND CONTINGENCIES
Operating lease agreements of the Company are principally for office facilities and equipment and expire at various dates through 2009. Rent expense in 1998, 1997, and 1996 under operating leases was approximately $2,020,000, $1,460,000, and $1,190,000 respectively.
As of December 31, 1998, future minimum lease payments are as follows:
Year Ending Minimum Lease December 31, Payments ------------ -------- (In thousands)
1999 $ 1,663 2000 1,359 2001 1,179 2002 1,057 2003 580 Thereafter 2,204 -------- $ 8,042 ========
The Company is a defendant in certain litigation arising out of operations in the normal course of business. However, it is the opinion of management that the ultimate liabilities relating thereto, if
any, will not have a material adverse effect on the financial position or results of operations of the Company.
9. RELATED PARTY TRANSACTIONS
In 1998, a stockholder was paid a fee of $20,000 in connection with advisory services provided to the Company with respect to the acquisition of International Gaming Business Exposition. In addition, the Company paid its stockholders $90,000 and $20,000 in management fees in 1998 and 1997, respectively. These costs are included in the accompanying consolidated statement of operations. No such fees were paid to any stockholder in 1996. In connection with the recapitalization transactions completed in 1997, the Company paid the Equity Investors a total of $1.6 million in fees for services related to the structure and implementation of the recapitalization plan.
10. BUSINESS SEGMENT INFORMATION
The FASB issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131) in June 1997. SFAS 131 supersedes FASB Statement No. 14, Financial Reporting for Segments of a Business Enterprise, but retains the requirement to report information about major customers. SFAS 131 replaces the "industry segment" concept of Statement 14 with a "management approach" concept as the basis for identifying reportable segments. The management approach is based on the way that management organizes the segments within the enterprise for making operating decisions and assessing performance. Consequently, the segments are evident from the structure of the enterprise's internal organization. It focuses on financial information that an enterprise's decision makers use to make decisions about the enterprise's operating matters. The Company adopted SFAS 131 in 1998.
Operations of the Company are conducted primarily through two business segments primarily within the continental United States. These segments and the primary operations of each are as follows:
BUSINESS TO BUSINESS COMMUNICATIONS
Publisher (Atwood) of various convention/trade show publications and a trade journal, provider (Galaxy) of registration services, exhibitor marketing and information services all to the exposition industry and owner (GEM) of the World Gaming Congress, a trade show catering to the legalized gaming industry, and the publisher of several trade magazines and newsletters.
INFORMATION SERVICES
Provider (TISI) of pre-employment screening information including motor vehicle reports, truck driver employment information, worker's compensation information, credit reports, criminal record reports and other pre-employment screening information and services to the trucking and other industries and motor vehicle reports to the insurance industry. Provider (Corsearch) of trademark research and information services, using both proprietary and public databases.
Corporate revenues consist principally of revenues from interest, covenants-not-to-compete and miscellaneous non-operating income. Operating profit is net revenues less applicable operating expenses and segment general and administrative expenses. Corporate general and administrative expenses are generally not allocated to each segment.
Identifiable assets by segment are those assets that are used in the operations of each segment. Corporate assets consist principally of cash and cash equivalents, notes receivable, prepaid expenses and corporate furniture, fixtures and equipment. Capital expenditures include additions to property, plant and equipment, goodwill and truck driver employment information files.
During 1998, 1997 and 1996, no customer represented ten percent or more of the Company's revenue or operating profit.
Summarized financial information by industry segment is as follows:
11. SUBSEQUENT EVENT
On March 25, 1999, the Company executed an asset purchase agreement to acquire, through a subsidiary, substantially all of the assets and liabilities of International Travel Service, Inc., for approximately $22.7 million. The consummation of the transaction is subject to certain conditions, including approval under antitrust regulations. This transaction will be accounted for as a purchase.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 29, 1999
THE OFFICIAL INFORMATION COMPANY
/s/ Ian L.M. Thomas By ________________________________________ IAN L. M. THOMAS PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant on March 29, 1999 and in the capacities indicated.
SIGNATURE TITLE
/s/ John S. Suhler Chairman of the Board and Director __________________________________ (John S. Suhler)
/s/ Ian L.M. Thomas ___________________________________ President, Chief Executive (Ian L.M. Thomas) Officer and Director
/s/ Steven J. Hunt ___________________________________ Chief Financial Officer and (Steven J. Hunt) Treasurer
Director ___________________________________ (John J. Veronis)
Director /s/ Jeffrey T. Stevenson ___________________________________ (Jeffrey T. Stevenson)
Director /s/ Gerard Benford - ----------------------------------- (S. Gerard Benford)
Director /s/ Jeffrey Tannenbaum - ----------------------------------- (Jeffrey Tannenbaum)
Director /s/ John Rolfe - ----------------------------------- (John Rolfe)
Director
- ----------------------------------- (Stephan Selig)