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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: MARCH 31, 2002
Commission File Number: 1-14371
INFORMATION HOLDINGS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1518007
(State of incorporation) (IRS Employer Identification Number)
2777 SUMMER STREET, SUITE 209
STAMFORD, CONNECTICUT 06905
(Address of principal executive offices) (Zip Code)
(203) 961-9106
(Registrant's telephone number, including area code)
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. /X/ Yes / / No
As of March 31, 2002, there were 21,782,091 shares of the Company's common
stock, par value $0.01 per share outstanding.
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INFORMATION HOLDINGS INC.
INDEX
PAGE NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets 1
As of March 31, 2002 (Unaudited) and December 31, 2001
Consolidated Statements of Operations (Unaudited) for the 2
Three Months Ended March 31, 2002 and 2001
Consolidated Statements of Cash Flows (Unaudited) for the 3
Three Months Ended March 31, 2002 and 2001
Notes to Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of 12
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
INFORMATION HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2002 2001
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 44,483 $ 38,612
Short-term investments 14,352 17,762
Accounts receivable (NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS AND
SALES RETURNS OF $3,585 AND $3,273, RESPECTIVELY) 36,526 35,130
Inventories 7,421 7,323
Prepaid expenses and other current assets 5,103 7,268
Deferred income taxes 3,423 3,423
----------- -----------
Total current assets 111,308 109,518
Property and equipment, net 9,576 9,868
Pre-publication costs (NET OF ACCUMULATED AMORTIZATION OF $6,498 AND
$5,758, RESPECTIVELY) 4,543 4,750
Identified intangible assets, net 106,317 111,463
Goodwill (NET OF ACCUMULATED AMORTIZATION OF $7,075 AND
$6,624, RESPECTIVELY) 104,500 102,666
Other assets 9,109 8,292
----------- -----------
TOTAL $ 345,353 $ 346,557
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capitalized lease obligations $ 504 $ 490
Accounts payable 22,820 21,598
Accrued expenses 10,818 17,793
Royalties payable 1,330 1,625
Deferred revenue 20,986 18,293
----------- -----------
Total current liabilities 56,458 59,799
Capital leases 1,827 1,959
Deferred income taxes 15,898 16,826
Other long-term liabilities 978 1,023
----------- -----------
Total liabilities 75,161 79,607
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued $ - $ -
Common stock, $.01 par value; 50,000,000 shares authorized;
issued and outstanding 21,782,091 shares at March 31, 2002
and 21,758,052 shares at December 31, 2001 218 218
Additional paid-in capital 246,351 245,911
Retained earnings 23,635 20,821
Accumulated other comprehensive loss (12) -
----------- -----------
Total stockholders' equity 270,192 266,950
----------- -----------
TOTAL $ 345,353 $ 346,557
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SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
-1-
INFORMATION HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
--------------------------------
2002 2001
Revenues $ 33,288 $ 24,244
Cost of sales 9,271 5,574
----------- -----------
Gross profit 24,017 18,670
----------- -----------
Operating expenses:
Selling, general and administrative 15,617 11,220
Depreciation and amortization 4,139 3,851
----------- -----------
Total operating expenses 19,756 15,071
----------- -----------
Income from operations 4,261 3,599
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Other income (expense):
Interest income 262 1,642
Interest expense (136) (136)
Other expense - (3)
----------- -----------
Income before income taxes 4,387 5,102
Provision for income taxes 1,573 2,098
----------- -----------
Net income $ 2,814 $ 3,004
=========== ===========
Basic and diluted earnings per common share amounts:
Net income $ 0.13 $ 0.14
=========== ===========
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
-2-
INFORMATION HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
----------------------------
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,814 $ 3,004
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,342 728
Amortization of goodwill - 981
Amortization of other intangible assets 2,797 2,142
Amortization of pre-publication costs 797 634
Change in non-current deferred income tax liabilities (413) (204)
Other 34 37
Changes in operating assets and liabilities, net of effect
of acquisitions:
(Increase)decrease in accounts receivable, net (1,396) 345
Increase in inventories (98) (37)
Decrease(increase) in prepaid and other current assets 473 (444)
Decrease in accounts payable and accrued expenses (6,341) (1,212)
Income tax benefit from stock options exercised 152 -
Net change in income taxes (receivable)payable 1,974 2,335
Increase in deferred revenue 2,693 845
Net change in other assets and liabilities (734) (347)
----------- -----------
Net Cash Provided by Operating Activities 4,094 8,807
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of businesses and equity interests - (23,891)
Purchases of property and equipment (971) (994)
Investment in pre-publication costs (579) (724)
Sales (purchases) of short-term investments 3,410 (3,928)
Capitalized internal-use software (257) -
Proceeds from disposal of property and equipment 4 2
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Net Cash Provided by (Used in) Investing Activities 1,607 (29,535)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued from stock options exercised 288 46
Principal payments on capital leases (118) (75)
----------- -----------
Net Cash Provided by (Used in) Financing Activities 170 (29)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 5,871 (20,757)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 38,612 96,375
----------- -----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 44,483 $ 75,618
=========== ===========
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
-3-
INFORMATION HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
A. BASIS OF PRESENTATION
The consolidated balance sheet of Information Holdings Inc. (IHI, or the
Company) at December 31, 2001 has been derived from IHI's Annual Report on
Form 10-K for the year then ended. All other consolidated financial
statements contained herein have been prepared by IHI and are unaudited.
These consolidated financial statements should be read in conjunction with
the consolidated financial statements for the year ended December 31, 2001
and the notes thereto contained in IHI's Annual Report on Form 10-K.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all information and footnotes required by generally accepted
accounting principles for complete financial statements. However, in the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the consolidated financial
position of IHI as of March 31, 2002, and the consolidated results of
operations and cash flows for the periods presented herein. Results for the
three months ended March 31, 2002 are not necessarily indicative of the
results to be expected for the full fiscal year.
Certain reclassifications have been made to the financial statements of the
prior period to conform to the March 31, 2002 presentation.
B. INVENTORIES
Inventories, consisting primarily of finished goods, are stated at the
lower of cost (first-in, first-out method) or market. Shipping costs, which
consist of transportation costs associated with the delivery of the
Company's products to customers, and handling costs are included in Cost of
sales. The vast majority of inventories are books, which are reviewed
monthly on a title-by-title basis for salability. The cost of inventory
determined to be impaired is charged to income in the period of
determination.
C. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARD
In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 144, ACCOUNTING FOR
THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets and supersedes SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and the
accounting and reporting provisions of APB No. 30, REPORTING THE RESULTS OF
OPERATIONS FOR A DISPOSAL OF A SEGMENT OF A BUSINESS. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2002. The Company
adopted SFAS No. 144 as of January 1, 2002. The adoption of SFAS No. 144
did not have a significant impact on the consolidated financial position,
results of operations, or cash flows of the Company.
-4-
INFORMATION HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
D. EARNINGS PER SHARE DATA
The following table sets forth the computation of basic and diluted
earnings per common share for the periods indicated:
THREE MONTHS ENDED
MARCH 31,
-------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001
Basic:
Net income $ 2,814 $ 3,004
Average common shares outstanding 21,760 21,615
------------- ------------
Basic EPS $ 0.13 $ 0.14
============= ============
Diluted:
Net income $ 2,814 $ 3,004
============= ============
Average common shares outstanding 21,760 21,615
Net effect of dilutive stock options -
based on the treasury stock method 191 178
------------- ------------
Total 21,951 21,793
============= ============
Diluted EPS $ 0.13 $ 0.14
============= ============
During the first quarter of 2002, employees exercised stock options to
acquire 24,039 shares at an exercise price of $12.00 per share. For the
three months ended March 31, 2002 and 2001, 287,823 and 330,208 stock
options, respectively, were excluded from the computation of diluted
earnings per common share due to their antidilutive effect.
E. ACQUISITIONS
On December 20, 2001, the Company completed a tender offer and acquired
all of the outstanding common shares of Liquent, Inc. (Liquent) for cash
consideration equal to $2.27 per share, or approximately $41,100,000.
Liquent is a leading provider of software and service solutions that aid
in content assembly and publishing for the life sciences industry. The
purchase price was allocated to net tangible assets of $6,349,000,
identified intangible assets of $6,750,000 and non-deductible goodwill
of $25,592,000. The Company has obtained an independent appraisal of the
fair value of the identified intangible assets and their remaining
useful lives. The Company also recorded a deferred income tax asset as a
result of Liquent's net operating loss carryforwards of $5,010,000,
offset by a deferred income tax liability as a result of the gross up of
acquired intangible assets in the amount of $2,565,000.
-5-
INFORMATION HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
E. ACQUISITIONS (CONTINUED)
On May 15, 2001, the Company acquired the stock of Parthenon Publishing
Group (Parthenon), for cash consideration of approximately $8,300,000.
Parthenon, based in the United Kingdom, is a leading provider of medical
and environmental reference products, including books, journals and medical
communication services.
On March 29, 2001, the Company acquired the IDRAC business of IMS Health
and entered into multiple perpetual agreements with IMS Health and certain
affiliates, for aggregate cash consideration of approximately $20,400,000.
IDRAC, based in France, is a leading provider to pharmaceutical companies
worldwide of regulatory and intellectual property information related to
pharmaceutical product registrations.
All acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the results of their operations have been
included in the Company's results of operations from their respective date
of acquisition. In accordance with SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS, no goodwill amortization was recorded for acquisitions
after June 30, 2001, which include Liquent.
The following unaudited pro forma information presents the results of
operations of the Company, as if the 2001 acquisitions of IDRAC and Liquent
had taken place as of January 1, 2001, is as follows:
THREE MONTHS
ENDED
--------------
MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001
Revenues $ 31,072
==============
Net loss $ (650)
==============
Basic loss per common share $ (0.03)
==============
Diluted loss per common share $ (0.03)
==============
These pro forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the operating results
that would have occurred had the acquisitions been consummated as of the
above date, nor are they necessarily indicative of future operating
results.
-6-
INFORMATION HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
F. GOODWILL AND IDENTIFIED INTANGIBLE ASSETS
In June 2001, the FASB issued SFAS No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS, which requires the use of a non-amortization approach to account
for purchased goodwill and intangible assets with indefinite lives. The
Company was required to adopt SFAS No. 142 for acquisitions completed prior
to July 1, 2001 on January 1, 2002. Effective January 1, 2002, goodwill and
intangible assets with indefinite lives are no longer amortized but are
reviewed at least annually for impairment.
During the year ended December 31, 2001, the Company began the required
transitional impairment review of goodwill and intangible assets with
indefinite lives. This review required the Company to estimate the fair
value of its identified reporting units as of December 31, 2001. For each
of the reporting units, the estimated fair value was determined utilizing
the expected present value of the future cash flows of the units. In all
instances, the estimated fair value of the reporting units exceeded their
respective book values and therefore no write-down of goodwill or
intangible assets with indefinite lives was required as of January 1, 2002.
In addition, as of January 1, 2002, the Company ceased the amortization of
goodwill and intangible assets with indefinite lives and reclassified the
December 31, 2001 carrying value of its assembled workforce acquired
intangible assets included in other identified intangibles to goodwill.
The following unaudited reconciliation presents pro forma net income, basic
and diluted EPS as if SFAS No. 142 had been adopted on January 1, 2001, is
as follows:
THREE MONTHS
ENDED
--------------
MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001
Reported net income $ 3,004
Adjustment for goodwill amortization, net of tax 637
Adjustment for trademark and tradename amortization, net of tax 78
--------------
Pro forma net income $ 3,719
==============
Basic:
Reported basic EPS $ 0.14
Adjustment for goodwill amortization, net of tax 0.03
--------------
Pro forma basic EPS $ 0.17
==============
Diluted:
Reported diluted EPS $ 0.14
Adjustment for goodwill amortization, net of tax .03
--------------
Pro forma diluted EPS $ 0.17
==============
-7-
INFORMATION HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
F. GOODWILL AND IDENTIFIED INTANGIBLE ASSETS (CONTINUED)
Identified intangible assets and goodwill subject to amortization consisted
of the following (in thousands):
MARCH 31, 2002
---------------------------------------------------------------------
Gross Amortization
Carrying Accumulated Net Period
Amount Amortization Balance (Years)
------------------------------------------ -------------- ------------------- -------------- -------------------
Trademarks and tradenames $ 11,129 $ 1,878 $ 9,251 6-20
Publishing rights 23,572 4,950 18,622 7-20
Customer lists and relationships 46,548 8,006 38,542 10-20
Databases and content 27,400 5,233 22,167 5-20
Other identified intangibles 10,632 1,704 8,928 2-20
-------------- ------------------- --------------
$119,281 $21,771 $97,510
============== =================== ==============
DECEMBER 31, 2001
---------------------------------------------------------------------
Gross Amortization
Carrying Accumulated Net Period
Amount Amortization Balance (Years)
------------------------------------------ -------------- ------------------- -------------- -------------------
Trademarks and tradenames $ 21,129 $ 2,792 $18,337 6-20
Publishing rights 23,572 4,611 18,961 7-20
Customer lists and relationships 46,548 7,039 39,509 10-20
Databases and content 27,400 4,479 22,921 5-20
Other identified intangibles 20,531 8,796 11,735 2-20
-------------- ------------------- --------------
139,180 27,717 111,463
Goodwill subject to amortization 82,367 6,624 75,743 10-20
-------------- ------------------- --------------
$221,547 $34,341 $187,206
============== =================== ==============
Total amortization expense of goodwill and identified intangible assets
amounted to $2,797,000 and $15,352,000 for the three months ended March 31,
2002 and the year ended December 31, 2001, respectively.
During the first quarter 2002, the Company removed from its Balance Sheet
fully amortized other identified intangibles with a cost of approximately
$7,100,000.
-8-
INFORMATION HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
F. GOODWILL AND IDENTIFIED INTANGIBLE ASSETS (CONTINUED)
Identified intangible assets and goodwill not subject to amortization
consisted of the following (in thousands):
MARCH 31, 2002
-------------------------------------------------------
Gross Carrying Accumulated
Amount Amortization Net Balance
------------------------------------ ------------------- ------------------ ----------------
Trademarks and tradenames $ 10,000 $1,193 $ 8,807
Goodwill 111,575 7,075 104,500
------------------- ------------------ ----------------
$121,575 $8,268 $113,307
=================== ================== ================
DECEMBER 31, 2001
-------------------------------------------------------
Gross Carrying Accumulated
Amount Amortization Net Balance
------------------------------------ ------------------- ------------------ ----------------
Goodwill $26,923 $ - $ 26,923
=================== ================== ================
Annual pretax amortization for identified intangible assets over the next
five years is estimated to be as follows (in thousands):
Year ending December 31,
2003 $11,088
2004 $10,672
2005 $10,293
2006 $ 8,708
2007 $ 8,556
The following table displays the change in the carrying amount of goodwill
(in thousands):
Balance at December 31, 2001 $102,666
========
Reclassification of assembled workforce, net 1,834
--------
Balance at March 31, 2002 $104,500
========
-9-
INFORMATION HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
G. SEGMENT INFORMATION
The Company has three reportable segments: intellectual property (IP),
scientific and technology information (STI) and information technology
learning (ITL). The intellectual property segment, which includes
MicroPatent, Master Data Center, Liquent and IDRAC, provides a broad
array of databases, information products and complementary services for
intellectual property and regulatory professionals. The scientific and
technology information segment is CRC Press, which publishes
professional and academic books, journals, newsletters and electronic
databases covering areas such as life sciences, environmental sciences,
engineering, mathematics, physical sciences and business. The
information technology learning segment is Transcender, which is a
leading online provider of IT certification test preparation products.
Foreign EBITDA from the Company's businesses was not material for the
periods presented. Transfers between geographic areas are recorded at
agreed upon prices and intercompany revenue and profits are eliminated.
The following tables set forth the information for the Company's reportable
segments based on the nature of the products and services offered for the
periods indicated:
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2002 MARCH 31, 2001
----------------------------------- --------------------------------
SEGMENT SEGMENT
(IN THOUSANDS) IP STI ITL IP STI ITL
-- --- --- -- --- ---
Revenues from external customers $ 18,919 $ 11,056 $ 3,313 $ 8,105 $ 9,011 $ 7,128
EBITDA 6,766 2,564 879 2,567 2,262 3,960
Operating income 4,153 1,074 51 839 1,140 2,332
Segment assets excluding goodwill 132,019 51,471 13,046 99,433 41,836 17,325
Goodwill, net 55,043 5,857 43,600 26,492 160 45,267
A reconciliation of combined EBITDA for the intellectual property,
scientific and technology information, and information technology learning
segments to consolidated income before income taxes is as follows:
THREE MONTHS ENDED
MARCH 31,
---------------------------------
(IN THOUSANDS) 2002 2001
Total EBITDA for reportable segments $ 10,209 $ 8,789
Corporate expenses (1,012) (708)
Interest income, net 126 1,506
Depreciation and amortization (1) (4,936) (4,485)
------------- --------------
Income before income taxes $ 4,387 $ 5,102
============= ==============
(1) Depreciation and amortization includes $797,000 and $634,000 of
amortization of pre-publication costs, classified as Cost of sales for
each of the three month periods ended March 31, 2002 and 2001,
respectively.
-10-
INFORMATION HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
H. COMPREHENSIVE INCOME
The following table is a reconciliation of the Company's net income to
comprehensive income:
THREE MONTHS ENDED
MARCH 31,
---------------------------------
(IN THOUSANDS) 2002 2001
Net income $ 2,814 $ 3,004
Other comprehensive loss
net of taxes of $5 and $0, respectively:
Foreign currency translation adjustment (7) -
------------- --------------
Comprehensive income $ 2,807 $ 3,004
============= ==============
I. SUBSEQUENT EVENTS
On April 29, 2002, the stockholders of the Company approved a 500,000 share
increase in the number of shares reserved for issuance under the Company's
1998 Stock Option Plan to a total of 2,466,886 shares reserved for
issuance.
On May 9, 2002, the Company acquired essentially all of the assets of
Aurigin Systems, Inc. (Aurigin) for cash consideration of approximately
$12.4 million and the assumption of certain liabilities. Aurigin provides
intellectual property management systems, used primarily by corporations to
search, analyze, annotate and group patent information as well as
proprietary corporate data.
-11-
INFORMATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS PRESENTS A REVIEW OF THE COMPANY FOR THE
THREE MONTHS ENDED MARCH 31, 2002 AND 2001. THIS REVIEW SHOULD BE READ IN
CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES PRESENTED
HEREIN AS WELL AS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTAINED IN THE COMPANY'S 2001 ANNUAL REPORT ON
FORM 10-K.
OVERVIEW
Impact of Acquisitions and Outlook
A key component of the Company's growth strategy is to pursue acquisitions in
attractive niche markets where opportunities exist to internally grow the
acquired companies' revenues and increase profitability through operating
efficiencies. Since beginning operations in January 1997, the Company has
completed thirteen strategic acquisitions, including seven in the
intellectual property area, five in scientific and technology information and
one in the information technology learning market, as well as some minor
acquisitions. The Company continues to actively seek acquisitions that will
further the Company's growth and operating strategies (See Note I -
SUBSEQUENT EVENTS). As the Company acquires additional companies, its sales
mix, market focus, cost structure and operating leverage may change
significantly. Consequently, the Company's historical and future results of
operations reflect and will reflect the impact of acquisitions from the date
of acquisition, and period-to-period comparisons may not be meaningful in
some respects. Historical information for companies subsequent to their
acquisition may include integration and other costs that are not expected to
continue in the future.
Consolidated Results of Operations
The Company reported net income of $2.8 million, or $0.13 per diluted common
share for the first quarter of 2002 compared with $3.0 million, or $0.14 per
diluted common share in the first quarter of 2001. Results for the first quarter
of 2001 also include amortization of goodwill and certain other acquired
intangible assets of approximately $0.7 million, net of tax. Upon adoption of
Statement of Financial Accounting Standard (SFAS) No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS, the Company ceased amortizing goodwill as well as certain
other acquired intangible assets. Excluding amortization of these items net
income for the three months ended March 31, 2001 would have been $3.7 million,
or $0.17 per diluted common share compared with $2.8 million, or $0.13 per
diluted common share for the first quarter of 2002.
The overall decrease in first quarter 2002 earnings over the prior year was
primarily due to a decrease in gross profit, the result of lower profit
contribution by the IT learning segment, which has higher gross margins than
the Company's other segments and decreased interest income, offset by strong
contributions from businesses acquired in 2001 and earnings growth in core IP
and STI businesses.
Net interest income (expense) decreased to $0.1 million from $1.5 million due
primarily to the use of cash from the secondary public stock offering to acquire
businesses during fiscal 2001 (See Note E - ACQUISITIONS). Additionally, the
average interest rate decreased from 5.6% in the first three months of 2001 to
2.0% in the comparable period in fiscal 2002.
-12-
INFORMATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The provision for income taxes as a percentage of pre-tax income for the three
months ended March 31, 2002 is 35.9%, as compared to 41.1% for the first quarter
of 2001, due primarily to the adoption of SFAS No. 142, which eliminates
goodwill amortization, the majority of which was not tax-deductible.
Additionally, the Company was also subject to foreign taxes during the first
quarter of 2002, which were immaterial in the period.
SEGMENT REVIEW
INTELLECTUAL PROPERTY (IP) IP revenue for the first three months of 2002
increased 133.4%, or $10.8 million, to $18.9 million compared to $8.1 million
in the comparable period in 2001. Operating income increased 395% to $4.2
million for 2002, compared to $0.8 million of operating income in the prior
year quarter. Liquent and IDRAC contributed operating income of $1.8 million
in the first quarter of 2002. The increase in revenues includes $1.0 million
from continued strong internal growth in existing IP information and IP
management businesses and $9.8 million in revenue as a result of the
acquisitions of IDRAC and Liquent in fiscal 2001. IP cost of sales, expressed
as a percentage of revenues, remained constant in the periods. Selling,
general and administrative (S,G & A) expenses, excluding the results of the
acquisitions of IDRAC and Liquent decreased $0.7 million, or 21.8%, as a
result of a reduction in development spending in the LPS group from prior
year levels. IP depreciation and amortization increased $0.9 million, or 51%,
primarily as a result of the amortization of intangible assets and
depreciation of purchased equipment related to the above acquisitions, as
well as depreciation related to capital expenditures in fiscal 2001 in the
core businesses. The impact of the accounting change pursuant to SFAS No. 142
on this segment in the first three months of 2002 was a reduction in
amortization expense of $0.7 million.
SCIENTIFIC AND TECHNOLOGY INFORMATION (STI) STI revenue for the first three
months of 2002 increased 22.7%, or $2.0 million, to $11.0 million from $9.0
million in the comparable period in 2001. Operating income decreased 5.8%, or
$0.1 million, to $1.0 million for 2002, compared to $1.1 million in the prior
year quarter. STI operating results for 2002 include the acquisition of
Parthenon in May of 2001, which has lower gross margins than the existing
core STI business. Total expenses, excluding the acquisition of Parthenon,
increased $0.4 million, or 5.9% over the prior year quarter, primarily due to
increased costs in book publishing operations and an overall increase in
employee benefit costs. The increase in costs also includes the amortization
of capital expenditures in fiscal 2001 for capitalized software and purchased
equipment. The impact of the accounting change pursuant to SFAS No. 142 on
this segment in the first three months of 2002 was a reduction in
amortization expense of $0.1 million.
INFORMATION TECHNOLOGY LEARNING (ITL) ITL revenue for the first three months
of 2002 decreased 53.5%, or $3.8 million, to $3.3 million compared to $7.1
million in the comparable period in 2001. Operating income was slightly
better than breakeven for 2002, a decrease of 97.8% compared to the prior
year operating income of $2.3 million. The revenue fluctuation is a result of
very strong first quarter 2001 sales of Transcender's Windows 2000
certification products, a significant decline in the overall IT market since
the first quarter of 2001 and a lack of significant new certifications by
major software companies in recent months. Revenues in future quarters are
expected to improve with the anticipated release of new products. Cost of
sales, expressed as a percentage of revenues, remained constant in the
periods, while S,G & A expenses decreased by $0.5 million, or 18.1%, as a
result of cost reduction initiatives. The impact of the accounting change
pursuant to SFAS No. 142 on this segment in the first three months of 2002
was a reduction in amortization expense of $0.8 million.
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INFORMATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter of 2000, the Company sold 4,500,000 shares of its common
stock in a public offering and received approximately $155 million of net
proceeds. As of March 31, 2002, proceeds of approximately $133 million have been
used from this offering to fund acquisitions in the Company's information and
publishing businesses. No acquisitions were made in the first quarter of 2002.
(See Note E - ACQUISITIONS for details on fiscal 2001 acquisitions). The
remaining net proceeds will be used to finance future acquisitions and for
general corporate purposes (See Note I - SUBSEQUENT EVENTS). Except as noted
above, the Company currently does not have any other agreements, arrangements or
understandings with respect to any prospective material acquisitions. Pending
such uses, the proceeds will be invested in short-term, investment grade
securities.
On September 24, 1999, the Company entered into a seven-year revolving credit
facility in an amount not to exceed $50,000,000 initially, including a
$10,000,000 sub-limit for the issuance of standby letters of credit (the Credit
Facility). Total commitments under the Credit Facility shall be permanently
reduced to $45,000,000 at the end of the third year, $37,500,000 at the end of
the fourth year, $25,000,000 at the end of the fifth year and $12,500,000 at the
end of the sixth year. The proceeds from the Credit Facility are to be used to
fund acquisitions, to meet short-term working capital needs and for general
corporate purposes.
Borrowings under the Credit Facility bear interest at either the higher of the
bank's prime rate and one-half of 1% in excess of the overnight federal funds
rate plus a margin of 0.50% to 1.25% or the Eurodollar Rate plus a margin of
1.5% to 2.25%, depending on the Company's ratio of indebtedness to earnings
before interest, taxes, depreciation and amortization. The Company also pays a
commitment fee of 0.375% on the unused portion of the Credit Facility. As of and
for the quarter ended March 31, 2002, the Company had no outstanding borrowings
under the Credit Facility.
Under the terms of the Credit Facility, the Company is required to maintain
certain financial ratios related to fixed charge coverage, leverage and interest
coverage, in addition to certain other covenants. As of March 31, 2002, the
Company was in compliance with all covenants. The Credit Facility is secured by
a first priority perfected pledge of all notes and capital stock owned by the
Company's subsidiaries and a first priority perfected security interest in all
other assets of the Company and its subsidiaries, subject to certain exceptions.
Obligations under the Credit Facility will be guaranteed by the Company and its
subsidiaries. The Credit Facility also prohibits the Company from incurring
certain additional indebtedness, limits certain investments, mergers or
consolidations and restricts substantial asset sales, and dividends.
Cash and equivalents, including short-term investments, totaled $58.8 million
at March 31, 2002, compared to $56.4 million at December 31, 2001. Excluding
cash, cash equivalents and short-term investments, the Company had a working
capital deficit of $(4.0) million at March 31, 2002 compared to working
capital deficit of $(6.6) million at December 31, 2001. Since the Company
receives patent annuity payments and subscription payments in advance, the
Company's existing operations are expected to maintain very low or negative
working capital balances, excluding cash. Included in current liabilities at
March 31, 2002 are obligations related to patent annuity payments and
deferred revenue of approximately $41.7 million.
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INFORMATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Cash generated from operating activities was $4.1 million for the three
months ended March 31, 2002, derived from net income of $2.8 million plus
non-cash charges of $4.6 million less a decrease in operating assets and
liabilities of $3.3 million. The overall decrease in operating assets and
liabilities is primarily the result of an increase in customer receivables
and deferred revenue at Liquent, a business acquired in December 2001 that
had strong first quarter 2002 results, and an increase in income tax
liabilities offset primarily by a decrease in accrued expenses related to
acquisition deal costs for Liquent.
Cash generated from investing activities was $1.6 million for the quarter
ended March 31, 2002, as a result of the Company liquidating $3.4 million in
short-term investments in commercial paper upon their maturity in the first
quarter of 2002 in anticipation of an acquisition in the second quarter (See
Note I -SUBSEQUENT EVENTS). Spending related to capital expenditures,
including pre-publication costs and internally developed software, was $1.8
million in the quarter. Excluding acquisitions of businesses, the Company's
existing operations are not capital intensive. Capital expenditures for
fiscal 2002 include approximately $0.5 million of purchases of new computer
equipment necessary to facilitate the Company's increased Internet capacity.
Cash generated from financing activities was $0.2 million for the three months
ended March 31, 2002, primarily due to net cash proceeds received from the
issuance of common stock from stock option exercises. The Company has no
outstanding debt obligations as of March 31, 2002 related to the Credit
Facility.
The Company believes that funds generated from operations, together with cash on
hand and borrowings available under its Credit Facility will be sufficient to
fund the cash requirements of its existing operations for the foreseeable
future. The Company currently has no commitments for material capital
expenditures. The Company may choose to obtain additional capital or financing
to consummate future acquisitions. Future operating requirements and capital
needs may be subject to economic conditions and other factors, many of which are
beyond the Company's control.
SEASONALITY
The Company's business is somewhat seasonal, with revenues typically reaching
slightly higher levels during the third and fourth quarters of each calendar
year, based on publication schedules and other factors. In 2001, 28% of the
Company's revenues were generated during the fourth quarter with the first,
second and third quarters accounting for 23%, 24% and 25% of revenues,
respectively. In addition, the Company may experience fluctuations in revenues
from period to period based on the timing of acquisitions and new product
launches.
EFFECTS OF INFLATION
The Company believes that inflation has not had a material impact on the results
of operations presented herein.
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INFORMATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
CRITICAL ACCOUNTING POLICIES
The Company's accounting policies are disclosed in the Company's 2001 Annual
Report on Form 10-K. There have been no material changes to these policies
during the first three months of fiscal 2002.
FORWARD-LOOKING STATEMENTS
The information above contains forward-looking statements, including, without
limitation, statements relating to the Company's plans, strategies, objectives,
expectations, and intentions that are made pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. Readers are
cautioned that forward-looking statements contained in this Form 10-Q should be
read in conjunction with the Company's disclosures under the heading IMPORTANT
FACTORS RELATING TO FORWARD-LOOKING STATEMENTS contained in the Company's 2001
Annual Report on Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK - The Company may be subject to market risks arising from
changes in interest rates. Interest rate exposure results from changes in the
Eurodollar or the prime rate, which are used to determine the interest rate
applicable to borrowings under the Credit Facility. As of March 31, 2002, the
Company had no outstanding borrowings under the Credit Facility.
FOREIGN CURRENCY EXCHANGE RATE RISK - The financial statements of the Company's
foreign subsidiaries are translated from the local currency into U.S. dollars.
Assets and liabilities are translated using current exchange rates, except
certain accounts of subsidiaries whose functional currency is the U.S. dollar,
and translation adjustments are accumulated in a separate component of
stockholders' equity. Revenue and expenses are translated at average monthly
exchange rates, and translation adjustments are charged and credited to income.
As such, the Company's operating results are affected by fluctuations in the
value of the U.S. dollar compared to the British pound and the Euro. Foreign
exchange translation gains or losses were not material in any of the periods
presented.
A subsidiary of the Company routinely enters into forward contracts to acquire
various international currencies in an effort to hedge foreign currency
transaction exposures of its operations. Such forward contracts have been
designated as hedges for future annual patent payments to related international
regulatory agencies. At March 31, 2002, the subsidiary of the Company had
entered into forward contracts to acquire various international currencies, all
having maturities of less than five months, aggregating approximately
$16,488,000. Realized gains and losses relating to the forward contracts were
immaterial for the quarter ended March 31, 2002.
The Company has only limited involvement with derivative financial instruments
and does not use them for trading purposes.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
The following report relates to the Company's secondary public stock offering:
Commission file number of registration statement: 333-30202
Effective Date: March 14, 2000
Expenses incurred through March 31, 2002:
Underwriting discounts $ 8,595,000
Other expenses $ 522,000
Total expenses $ 9,117,000
Application of proceeds through March 31, 2002:
Acquisitions of businesses, titles and equity interests $ 133,421,000
Temporary investments $ 21,579,000
(Commercial paper and money market funds)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(b) Reports on Form 8-K:
On January 10, 2002, the Company filed a Current Report on Form 8-K
(the Form 8-K) reporting the Agreement and Plan of Merger between the
Company, Fluid Acquisition Corp., a wholly owned subsidiary of the
Company, and Liquent. On March 12, 2002, the Company filed an amendment
to the Form 8-K containing the required financial statements of Liquent
and pro forma condensed consolidated financial statements of the Company.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INFORMATION HOLDINGS INC.
Date: May 15, 2002 By: /s/ Vincent A. Chippari
------------------- -----------------------
Vincent A. Chippari
Executive Vice President and Chief
Financial Officer
Signing on behalf of the registrant and
as principal financial and accounting officer
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