10-Q 1 file001.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE --- ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES --- EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO _____________ COMMISSION FILE NUMBER 1-10263 THE OFFICIAL INFORMATION COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 73-1341805 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 250 West 57th Street, Suite 2421, New York, New York 10019 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 247-5160 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OR 12(G) OF THE ACT: NONE INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- As of August 10, 2001, 112,367 shares of common stock were outstanding, of which 72,367 were owned by VS&A T/SF, L.L.C. and 36,000 and 4,000 were owned by Fir Tree Value Fund LP. and Fir Tree Institutional Value Fund L.P., respectively. PART I Item 1. Financial Information 2 THE OFFICIAL INFORMATION COMPANY CONSOLIDATED CONDENSED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)

See accompanying notes to consolidated condensed financial statements. 3 THE OFFICIAL INFORMATION COMPANY CONSOLIDATED CONDENSED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)

See accompanying notes to consolidated condensed financial statements. 4 THE OFFICIAL INFORMATION COMPANY CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (IN THOUSANDS) (UNAUDITED)

See accompanying notes to consolidated condensed financial statements. 5 THE OFFICIAL INFORMATION COMPANY CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS)

See accompanying notes to consolidated condensed financial statements. 6 THE OFFICIAL INFORMATION COMPANY CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS)

See accompanying notes to consolidated condensed financial statements. 7 THE OFFICIAL INFORMATION COMPANY NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION. The consolidated condensed financial statements of The Official Information Company ("TOIC" or the "Company"), include the accounts of TOIC, its wholly-owned subsidiaries, TOIC Holdings, LLC ("Holdings LLC") and the limited liability companies wholly owned by Holdings LLC (the "Subsidiary LLCs"). Through its $45 million priority equity interest in Holdings LLC, TOIC has voting, operational and management control of Holdings LLC and the Subsidiary LLCs and, accordingly, the financial statements of these entities are consolidated herein. Income allocated to TOIC from Holdings LLC is the lesser of net earnings or the preferred return, such amount being defined as an 11% cumulative annual compounded return on TOIC's undistributed priority equity interest in each, respectively. Losses are allocated first to the common members of Holdings LLC. TOIC and Holdings LLC share common management, resources and control. INTERIM REPORTING. The accompanying interim consolidated condensed financial statements reflect all adjustments which, in the opinion of management are considered necessary for a fair presentation of the interim periods presented. All such adjustments are of a normal recurring nature. Due to the seasonal nature of the business, the results of operations for the six months ended June 30, 2001 are not necessarily indicative of the results to be expected for the year ending December 31, 2001. For further information, refer to the consolidated financial statements and related notes thereto included in TOIC's annual report on Form 10-K for the year ended December 31, 2000. RECLASSIFICATIONS Certain 2000 account balances have been reclassified to conform to the 2001 consolidated financial statement presentation. B. DEBT GUARANTORS Atwood Publishing, LLC and subsidiaries ("Atwood"), ExpoExchange, LLC and subsidiaries ("ExpoExchange"), GEM Communications Holdings, LLC and subsidiaries ("GEM"), Holdings LLC (collectively the "LLC Guarantors"), TISI Holdings, Inc. and subsidiaries ("TISI") (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 guarantees all of the Company's debt, on a full and unconditional basis. For accounting purposes, all Guarantors are consolidated. Separate financial 8 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 Company's $40 million ($25 million at December 31, 2000) Senior Credit Facility contains covenants, among others, restricting or limiting 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 and acquisitions; (ix) retain proceeds from asset sales; (x) transact with affiliates; and (xi) alter its lines of business. The net assets of the Guarantors approximated $84.0 million as of June 30, 2001. The Company has classified these borrowings as long-term as there is no mandatory repayment until September 2004. The following are condensed consolidating financial statements of The Official Information Company and the Guarantors for each period presented: JUNE 30, 2001 BALANCE SHEET (UNAUDITED)

10 SIX MONTHS ENDED JUNE 30,2001 CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

14 C. BUSINESS SEGMENT INFORMATION Operations of the Company are conducted principally 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 Atwood is a publisher of various convention/tradeshow publications and trade journals; ExpoExchange is a provider of e-commerce, registration, exhibitor marketing, travel, housing and information services to the exposition industry; and GEM is the owner of several tradeshows, including the World Gaming Congress & Expo, the largest trade show catering to the legalized gaming industry, and the publisher of several trade magazines and newsletters. INFORMATION SERVICES TISI is a provider 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, retail, health care, and other industries and motor vehicle reports to the insurance industry. Operating profit is net revenues less applicable operating expenses and segment general and administrative expenses. Corporate general and administrative expenses are allocated to each segment in proportion to each segment's net revenues. 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, and truck driver employment information files. During the second quarter of 2001 and 2000, no customer represented ten percent or more of the Company's revenue or operating income. 15 Summarized financial information by industry segment is as follows:

D. ACQUISITIONS AND DISPOSITIONS OF ASSETS On January 31, 2000, the Company, through TISI, acquired substantially all of the assets of STA United, Inc. ("STA") for approximately $8.3 million. STA is a leading provider of drug testing services to the pre-employment screening industry. On March 15, 2000, the Company, through TISI, acquired the stock and/or assets of a group of ten companies collectively known as United States Mutual Association ("USMA"). The Company paid approximately $27.4 million plus transaction costs, with $15.2 million paid in cash and the 16 balance in non-voting stock of TISI, valued by independent appraisal at $12.2 million, representing approximately 4.5% of the Company's interest in TISI. USMA provides pre-employment screening services to the retail industry, principally through a proprietary database of employee theft incident records. These acquisitions were accounted for under the purchase method of accounting. On April 14, 2000, the Company purchased a 4.7% common equity interest in Third Millennium Communications, Inc. ("3MC") for $5.0 million. 3MC provides software development and consulting services primarily to Internet related entities. This common equity interest was sold to 3MC for $500,000 on January 19, 2001. On June 1, 2000, the Company, through ExpoExchange, acquired substantially all of the assets of the e-Products Division (ExpoEvent Services- "EES") of 3MC, in exchange for 6,133,590 non-voting LLC units of ExpoExchange (the "LLC units") valued at approximately $30.0 million and representing approximately 20% of Holdings LLC's interest in ExpoExchange. The Company has accounted for this transaction under the purchase method of accounting. As a result of this transaction, the Company recorded approximately $30.0 million increase in minority interest on the issuance of the LLC units. On the basis of an independent valuation, identifiable intangible assets of $6.7 million and goodwill of $23.0 million are being amortized on a straight-line basis primarily over a three year life. On January 19, 2001, the Company, through Holdings LLC, acquired from 3MC the non-voting LLC units in ExpoExchange for $15.5 million. As a result of this transaction, the minority interest was eliminated and goodwill reduced by $14.5 million. The Company has subsequently restructured the EES organization and management at a cost of approximately $959,000, relating primarily to severance. Effective January 1, 2001, the Company, through GEM, acquired certain assets of Casino Journal Publishing Group ("CJPG") for approximately $2.6 million in cash, subject to certain future working capital adjustments, and 100,000 units of GEM Communications, LLC valued at approximately $1.9 million and representing approximately 10% of GEM. During the second quarter 2001 GEM paid an additional $125,000 for certain assets of CJPG and received $482,000 as a working capital adjustment. The Company has accounted for this transaction under the purchase method of accounting. Identifiable intangible assets and goodwill of $4.3 million are being amortized on a straight-line basis over a four to ten year life. The following unaudited pro forma information is presented as if the Company had completed the acquisitions as of January 1, 2000. The pro forma information is not necessarily indicative of what the results of operations would have been had the acquisitions taken place at January 1, 2000, or of the future results of operations. For the Three Months For the Six Months ended June 30, ended June 30, -------------- -------------- 2001 2000 2001 2000 ---- ---- ---- ---- (In thousands) (Unaudited) Revenues $34,557 $35,656 $69,139 $67,873 Net (loss) income $(1,473) $ (38) $ (802) $ 723 EBITDA $9,172 $ 6,221 $16,723 $12,903 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OVERVIEW The Company is a business-to-business communications and information services company which principally operates two lines of business: (i) business-to-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 provides specialized information and database services principally to the pre-employment screening market through Total Information Services, Inc. (TISI). TISI, through its on-line 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. 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 vertical markets. Business-to-Business Communications includes: (i) GEM Communications, LLC, one of the world's leading owner and operator of tradeshows and publisher of trade magazines directed to the international legalized gaming industry; (ii) Atwood Publishing, LLC, the largest domestic independent publisher of exposition and association related publications and directories; and (iii) ExpoExchange, LLC, one of the largest independent providers of e-commerce housing, travel, registration, exhibitor information and "lead" management services to the tradeshow and convention industry in the United States. On January 31, 2000, the Company acquired substantially all of the assets of STA United (STA), a leading provider of drug testing services to the pre-employment screening industry. On March 15, 2000, the Company acquired the stock and/or assets of a group of ten companies collectively known as United States Mutual Association ("USMA"), a leading provider of pre-employment screening services to the retail industry, principally through a proprietary database of employee theft incident records. On April 14, 2000, the Company purchased a 4.7% common equity interest in Third Millennium Communications, Inc. ("3MC") for $5.0 million. 3MC provides software development and consulting services primarily to Internet related entities. On June 1, 2000, the Company acquired substantially all of the assets of the e-Products Division of 3MC (ExpoEvent Services- "EES") in exchange for non-voting LLC units valued at approximately $30.0 million in ExpoExchange. On January 19, 2001, the Company acquired from 3MC the LLC units in ExpoExchange for $15.5 million and sold its stock in 3MC back to 3MC for $500,000. A write down to recognize the impairment of this investment was recorded at December 31, 2000. As a result of the acquisition of the LLC units, related minority interest was eliminated and goodwill was reduced by $14.5 million. During the first quarter of 2001, the Company restructured the EES organization and management at a cost of approximately $959,000, relating primarily to severance. Effective January 1, 2001, the Company through GEM Communications, LLC acquired certain assets of Casino Journal Publishing Group ("CJPG") for $2.8 million in cash, subject to certain future working capital adjustments, and 100,000 non-voting LLC units of GEM Communications, LLC, valued at approximately $1.9 million and representing approximately 10% of GEM. During the second quarter 2001 GEM paid an additional $125,000 for certain assets of CJPG and received $482,000 as a working capital adjustment. 18 RESULTS OF OPERATION Revenues. Revenues for the three and six month periods ended June 30, 2001 totaled $34.6 million and $69.1 million, respectively, flat and an increase of $5.4 million (9%) over the same periods in 2000, respectively. Business-to-Business Communications segment Revenue totaled $20.1 million and $39.7 million for the three and six months ended June 30, 2001, respectively, an increase of $185,000 (1%) and $3.1 million (8%) over the same 2000 periods. At ExpoExchange, increased demand for registration and exhibitor services (up 9% for the six month period) and the growth of new lead management and interactive services contributed $1.8 million to the first half revenue growth. At Atwood, increased demand for all product lines produced a 9% increase in net revenue during the first six months of 2001, compared with the same 2000 period. At GEM, continuing consolidation of suppliers in the gaming industry resulted in reduced industry advertising expenditures and lower participation at regional trade shows. For the first half of 2001, net revenue at GEM increased $291,000 (8%) compared with the same 2000 period. Declines in advertising and regional trade show revenue were offset by inclusion of Casino Journal from January 1, 2001 which contributed $898,000 to first half 2001 revenue. The Information Services segment produced revenue of $14.5 million and $29.5 million for the three and six month periods ended June 30, 2001, respectively, a $228,000 (2%) decline and an increase of $2.3 million (9%) compared with the same periods in 2000, respectively. TISI's first half 2001 revenue increased 9% over the same 2000 period, due principally to increased pre-employment screening volume at DAC, USMA, HES, and STA, partially offset by lower revenue at RSI and CrimeSearch, as compared to the prior year. Pre-employment screening volume has been negatively impacted by the weak economic environment, particularly in the retail, staffing and aviation segments. Operating Costs. Operating Costs decreased $51,000 and increased $3.4 million (12%) during the three and six months ended June 30, 2001, respectively, compared with the same periods in 2000. Business-to-Business Communications segment first half 2001 Operating Costs increased $1.9 million (10%) on 8% higher revenue compared with first half 2000. Growth was attributable principally to increased volume at ExpoExchange and Atwood, inclusion of Casino Journal from January 1, 2001, offset partially by lower costs associated with consolidation of publishing operations at GEM. Information Services segment Operating Costs increased 16% during the first half of 2001 compared with the first half of 2000. The increase was attributable principally to higher pre-employment screening volume at TISI and inclusion of STA and USMA. General and Administrative Expenses. General and Administrative Expenses decreased $823,000 (8%) and increased $2.3 million (12%) during the three and six month periods ended June 30, 2001, respectively, compared with the same periods of 2000. During the first half 2001, compared with the same 2000 period, higher general and administrative expenses were attributable principally to the acquisitions of STA ($285,000), USMA ($195,000), EES ($441,000) and Casino Journal ($207,000); increased corporate infrastructure ($870,000) at ExpoExchange to support business expansion and acquisition integration; offset partially by cost reductions at GEM ($948,000). General and Administrative expenses also included one-time costs of $959,000 related to the restructuring of EES. Depreciation and Amortization. Depreciation and Amortization increased $2.4 million and $5.5 million during the three and six month periods ended June 30, 2001 compared with the same periods in 2000. During the first half 2001, the increase resulted principally from prior period expenditures to acquire data, expand exposition and trade show capacity, upgrade information technology and increased amortization of goodwill associated with acquisitions. During the second quarter of 2001 the Company recorded additional 19 amortization of $468,000 to reflect impairment of intangible workforce assets at EES, as the result of additional staff reductions implemented during the second quarter. Interest Expense. Interest Expense totaled $3.0 million and $6.2 million for the three and six month periods ended June 30, 2001, respectively. Interest Expense results primarily from interest on the Company's long term Senior Subordinated Notes and utilization of the Senior Credit Facility. EBITDA. EBITDA totaled $9.2 million and $16.7 million during the three and six month periods ended June 30, 2001, respectively, an increase of $763,000 (9%) and $660,000 (4%), respectively, over the same periods in 2000. The increase during the first half 2001 resulted from higher EBITDA in the Business-to-Business Communications segment (up $558,000 - 6%) and the Information Services segment (up $380,000 - 5%), offset partially by higher business development costs at Corporate. One-time costs of $959,000 related to the restructuring of EES have been excluded from the calculation of EBITDA. EBITDA is included because management believes 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, unusual gains and losses (including provision for restructuring expenses of the EES Division of ExpoExchange in 2001), minority interest in consolidated subsidiaries, discontinued operations, 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 The Company's principal sources of funds are anticipated to be cash flows from operating activities and borrowings under its Senior Credit Facility which was increased from $25.0 million to $40.0 million on February 2, 2001. 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 June 30, 2001, the Company had $8.0 million of availability under the Senior Credit Facility, less letters of credit totaling $3.3 million which are secured by 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, 20 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 2001 will be approximately $10.0 million. The primary capital expenditures will be for computer equipment and software, and database acquisitions at TISI and ExpoExchange. TISI offers 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 2001, even after the anticipated capital expenditures for 2001. Thus, with the Company's available cash reserves and cash flow, management does not anticipate a need for additional capital or increased borrowing facilities during 2001 except for possible future acquisitions. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. As of the date of adoption (January 1, 2002), the Company expects to have unamortized goodwill in the amount of $72.1 million and unamortized identifiable intangible assets in the amount of $14.6 million, all of which will be subject to the transition provisions of Statements 141 and 142. Amortization expense related to goodwill was $4.7 million and $2.7 million for the year ended December 31, 2000 and the six months ended June 30, 2001, respectively. INFLATION Management anticipates the effect of inflation on the Company's operations during 2001 will be primarily limited to the effects which general inflation will have on costs in most areas in which the Company operates. 21 FORWARD-LOOKING STATEMENTS This Quarterly Report for the quarter ended June 30, 2001, as well as other public documents of the Company contains forward-looking statements which involve risks and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. When used in this Quarterly Report, the words "estimate," "project," "anticipate," "expect," "intend," "believe," "seek," "plan," as well as variations of such words and similar expressions, are intended to identify forward-looking statements. While management believes these statements are reasonable, actual results could differ materially from those projected by such forward-looking statements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) List of Exhibits: Third Amendment to Credit Agreement and Assignment (b) Reports on Form 8-K The registrant filed no reports on Form 8-K during the quarter ended June 30, 2001. 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: August 10, 2001 THE OFFICIAL INFORMATION COMPANY By /s/ Ian L.M. Thomas ---------------------------- IAN L. M. THOMAS PRESIDENT AND CHIEF EXECUTIVE OFFICER By /s/ Steven J. Hunt ---------------------------- STEVEN J. HUNT CHIEF FINANCIAL OFFICER 22

OFFICIAL INFORMATION CO 10-Q