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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: SEPTEMBER 30, 2001
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Commission File Number: 1-14371
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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 September 30, 2001, there were 21,757,135 shares of the Company's
common stock, par value $0.01 per share outstanding.
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INFORMATION HOLDINGS INC.
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INDEX
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PAGE NUMBER
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets 1
As of September 30, 2001 (Unaudited) and December 31, 2000
Consolidated Statements of Operations (Unaudited) for the 2
Three Months Ended September 30, 2001 and 2000 and
Nine Months Ended September 30, 2001 and 2000
Consolidated Statements of Cash Flows (Unaudited) for the 3
Nine Months Ended September 30, 2001 and 2000
Notes to Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
INFORMATION HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2001 2000
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 61,268 $ 96,375
Short-term investments 11,829 11,731
Accounts receivable (NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS AND
SALES RETURNS OF $3,598 AND $3,575, RESPECTIVELY) 28,049 23,378
Inventories 7,706 6,472
Prepaid expenses and other current assets 5,539 3,649
Income tax receivable 3,859 492
Deferred income taxes 2,489 2,489
-------- --------
Total current assets 120,739 144,586
Property and equipment, net 7,355 5,802
Pre-publication costs (NET OF ACCUMULATED AMORTIZATION OF $5,140 AND
$5,234, RESPECTIVELY) 5,306 4,188
Publishing rights and other identified intangible assets, net 110,752 91,342
Goodwill (NET OF ACCUMULATED AMORTIZATION OF $5,052 AND
$1,622, RESPECTIVELY) 73,283 61,272
Other assets 8,248 3,806
-------- --------
TOTAL $325,683 $310,996
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capitalized lease obligations $ 343 $ 308
Accounts payable 19,196 20,156
Accrued expenses 6,555 5,089
Royalties payable 1,056 1,204
Deferred subscription revenue 11,098 10,429
-------- --------
Total current liabilities 38,248 37,186
Capital leases 1,844 2,107
Deferred income taxes 19,471 14,057
Other long-term liabilities 638 1,372
-------- --------
Total liabilities 60,201 54,722
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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 21,757,135 shares at September 30, 2001
and 21,611,970 shares at December 31, 2000 218 216
Additional paid-in capital 245,894 243,075
Retained earnings 19,359 12,983
Accumulated other comprehensive income 11 --
-------- --------
Total stockholders' equity 265,482 256,274
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TOTAL $325,683 $310,996
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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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2001 2000 2001 2000
Revenues $ 26,427 $ 18,151 $ 75,985 $ 50,421
Cost of sales 6,998 5,073 18,540 14,224
--------- ---------- ---------- ----------
Gross profit 19,429 13,078 57,445 36,197
--------- ---------- ---------- ----------
Operating expenses:
Selling, general and administrative 12,754 10,009 36,310 24,792
Depreciation and amortization 4,768 2,131 13,366 6,568
--------- ---------- ---------- ----------
Total operating expenses 17,522 12,140 49,676 31,360
--------- ---------- ---------- ----------
Income from operations 1,907 938 7,769 4,837
--------- ---------- ---------- ----------
Other income (expense):
Interest income 813 2,598 3,515 5,455
Interest expense (135) (143) (407) (430)
Other income 3 - - 3
--------- ---------- ---------- ----------
Income before income taxes 2,588 3,393 10,877 9,865
Provision for income taxes 1,120 1,427 4,501 4,173
--------- ---------- ---------- ----------
Net income $ 1,468 $ 1,966 $ 6,376 $ 5,692
========= ========== ========== ==========
Basic and diluted earnings per common share amounts:
Net income $ 0.07 $ 0.09 $ 0.29 $ 0.28
========= ========== ========== ==========
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
-2-
INFORMATION HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,376 $ 5,692
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 2,389 1,530
Amortization of goodwill and other intangibles 10,977 5,038
Amortization of pre-publication costs 2,124 1,701
Deferred income taxes (808) (626)
Gain on disposal of property and equipment -- (3)
Other 104 107
Changes in operating assets and liabilities:
Accounts receivable, net (1,451) (2,850)
Inventories (358) (885)
Prepaid expenses and other current assets (1,065) (1,347)
Accounts payable and accrued expenses (6,653) 1,071
Income tax benefit from stock options exercised 830 --
Income taxes (2,995) --
Deferred subscription revenue (2,273) (1,054)
Other, net (1,316) (943)
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Net Cash Provided by Operating Activities 5,881 7,431
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of businesses and titles (36,881) (5,095)
Purchases of property and equipment (3,287) (2,345)
Pre-publication costs (2,490) (1,855)
Purchases of short-term investments (98) (6,875)
Proceeds from disposal of property and equipment 5 14
--------- ---------
Net Cash Used in Investing Activities (42,751) (16,156)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock in public offering, net -- 155,000
Common stock issued from stock options exercised 1,991 1,820
Principal payments on capital leases (228) (210)
--------- ---------
Net Cash Provided by Financing Activities 1,763 156,610
--------- ---------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (35,107) 147,885
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 96,375 7,551
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 61,268 $ 155,436
========= =========
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, 2000 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, 2000 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 Rule 10-01 of Regulation S-X for interim
financial statements required to be filed with the Securities and
Exchange Commission 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
September 30, 2001, and the consolidated results of operations and cash
flows for the periods presented herein. Results for the three and nine
months ended September 30, 2001 are not necessarily indicative of the
results to be expected for the full fiscal year.
B. INVENTORIES
Inventories, consisting primarily of finished goods, are stated at the
lower of cost (first-in, first-out method) or market. The vast majority
of inventories are books, which are reviewed periodically 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. PRE-PUBLICATION COSTS
Certain expenses related to books, primarily comprised of design and
other pre-production costs, are deferred and charged to expense over
the estimated product life. These costs are primarily amortized over a
four-year period following release of the applicable book, using an
accelerated amortization method. During 2001 and 2000, the Company
removed from its Balance Sheets fully amortized Pre-publication costs
with a cost of approximately $2,218,000 and $3,554,000, respectively.
D. INVESTMENT IN UNCONSOLIDATED AFFILIATE
On May 3, 2001, the Company completed the acquisition of a 49% interest
in GSI Office Management GmbH (GSI) for cash consideration of
approximately $3,400,000, with an option to acquire the remaining 51%
interest after three years. GSI, based in Germany, is a leading
provider of intellectual property management software. At September 30,
2001, the investment in GSI was included in the Consolidated Balance
Sheet caption Other Assets.
-4-
INFORMATION HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
E. EARNINGS PER SHARE DATA
The following table sets forth the computation of basic and diluted
earnings per share for the periods indicated.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 2001 2000
Basic:
Net income $ 1,468 $ 1,966 $ 6,376 $ 5,692
Average common shares outstanding 21,739 21,593 21,662 20,239
----------- ----------- ----------- -----------
Basic EPS $ 0.07 $ 0.09 $ 0.29 $ 0.28
=========== =========== =========== ===========
Diluted:
Net income $ 1,468 $ 1,966 $ 6,376 $ 5,692
=========== =========== =========== ===========
Average common shares outstanding 21,739 21,593 21,662 20,239
Net effect of dilutive stock options -
based on the treasury stock method 114 279 119 260
----------- ----------- ----------- -----------
Total 21,853 21,872 21,781 20,499
=========== =========== =========== ===========
Diluted EPS $ 0.07 $ 0.09 $ 0.29 $ 0.28
=========== =========== =========== ===========
During the first nine months of 2001, employees exercised stock options
to acquire 145,165 shares at an exercise price of between $12.00 and
$27.81 per share.
F. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, BUSINESS
COMBINATIONS and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS.
SFAS No. 141 prohibits the use of the pooling-of-interest method of
business combinations initiated after June 30, 2001. SFAS No. 142
requires the use of a non-amortization approach to account for
purchased goodwill and certain intangibles. Under a non-amortization
approach, goodwill and certain intangibles will not be amortized into
results of operations, but instead would be reviewed for impairment and
written down and charged to results of operations only in the periods
in which the recorded value of goodwill and certain intangibles is more
than its fair value. The Company is required to adopt SFAS No. 142 on
January 1, 2002. The adoption of SFAS No. 141 did not have a material
effect on the Company's consolidated financial position or results of
operations. The Company is currently evaluating SFAS No. 142 to
determine the impact, if any of adoption on the Company's financial
position.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 addresses the
financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS 144 is effective for fiscal years beginning
after December 15, 2001. The Company is currently evaluating SFAS No.
144 to determine the impact, if any of adoption on the Company's
financial position.
-5-
INFORMATION HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
G. ACQUISITIONS
On May 15, 2001, the Company acquired the stock of Parthenon Publishing
Group (Parthenon), for cash consideration of approximately $8,000,000.
Parthenon, based in the United Kingdom, is a leading provider of
medical and environmental reference products. Parthenon produces a wide
range of books, journals and electronic products covering environmental
topics and 35 medical subject areas. The purchase price was
preliminarily allocated to net tangible assets of $120,000, publishing
rights and other identified intangible assets of $5,480,000, goodwill
of $2,000,000 and non-compete agreements of $400,000.
On March 29, 2001, the Company acquired the IDRAC business of IMS
Health for potential cash consideration of $10,500,000, including an
initial payment of approximately $5,500,000 in cash and a contingent
payment of $5,000,000 based on the future results of IDRAC. In a
separate transaction, the Company also entered into multiple perpetual
agreements with IMS Health and certain affiliates for aggregate cash
consideration of approximately $17,000,000. IDRAC, based in France, is
a leading provider to pharmaceutical companies worldwide of regulatory
and intellectual property information related to pharmaceutical product
registrations. The purchase price was preliminarily allocated to net
liabilities assumed of $2,974,000 publishing rights and other
identified intangible assets of $15,000,000 and goodwill of $8,353,000.
The Company also recorded goodwill and an offsetting deferred income
tax liability as a result of the gross up of acquired intangible assets
in the amount of $5,850,000. This goodwill is being amortized using the
straight-line method over 15 years.
On November 6, 2000, the Company acquired all of the assets of
Transcender Corporation for cash consideration of approximately
$60,000,000. Transcender develops content and related software
distributed over the Internet and in other electronic media to
information technology professionals seeking certification in numerous
product areas and programming languages.
The above 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.
The following unaudited pro forma information presents the results of
operations of the Company, as if the 2001 acquisition of IDRAC and the
2000 acquisition of Transcender had taken place in January 1, 2000, is
as follows:
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
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(IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 2001 2000
Revenues $ 24,307 $ 77,841 $ 67,922
================== ============== =============
Net (loss)income $ (340) $ 6,150 $ 322
================== ============== =============
Basic (loss)earnings per common share $ (0.02) $ 0.28 $ 0.02
================== ============== =============
Diluted (loss)earnings per common share $ (0.02) $ 0.28 $ 0.02
================== ============== =============
-6-
INFORMATION HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
G. ACQUISITIONS (CONTINUED)
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.
H. 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, MDC, 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 was created in the fourth quarter of fiscal
2000 as a result of the Company's strategic acquisition of Transcender.
Transcender is a leading online provider of IT certification
test-preparation products.
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
----------------------------------- --------------------------
SEGMENT SEGMENT
IP STI ITL IP STI
---------- --------- ---------- ----------- -----------
(IN THOUSANDS)
Revenues from external customers $10,619 $ 10,994 $ 4,814 $ 7,597 $ 10,554
EBITDA 3,962 2,384 2,002 1,653 2,752
Operating income 1,482 925 355 20 1,666
Segment assets 132,929 55,689 59,166 99,989 41,788
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
----------------------------------- --------------------------
SEGMENT SEGMENT
IP STI ITL IP STI
---------- --------- -------- ----------- -----------
(IN THOUSANDS)
Revenues from external customers $29,293 $ 29,581 $17,111 $ 22,150 $ 28,271
EBITDA 10,657 6,588 8,502 7,238 7,465
Operating income 3,948 2,739 3,584 2,181 4,257
Segment assets 132,929 55,689 59,166 99,989 41,788
-7-
INFORMATION HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
H. SEGMENT INFORMATION (CONTINUED)
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
(IN THOUSANDS) 2001 2000 2001 2000
Total EBITDA for reportable segments $ 8,348 $ 4,405 $ 25,747 $ 14,703
Corporate expenses (850) (745) (2,488) (1,594)
Interest income, net 678 2,455 3,108 5,025
Depreciation and amortization (1) (2) (5,588) (2,722) (15,490) (8,269)
----------- ----------- --------- ----------
Income before income taxes $ 2,588 $ 3,393 $ 10,877 $ 9,865
=========== =========== ========== ===========
(1) Depreciation and amortization includes $820,000 and $591,000
of amortization of pre-publication costs, included in
operations in cost of sales for each of the three month
periods ended September 30, 2001 and 2000, respectively.
(2) Depreciation and amortization includes $2,124,000 and
$1,701,000 of amortization of pre-publication costs, included
in operations in cost of sales for each of the nine month
periods ended September 30, 2001 and 2000, respectively.
I. COMPREHENSIVE INCOME
The following table is a reconciliation of the Company's net income to
comprehensive income:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
(IN THOUSANDS) 2001 2000 2001 2000
Net income $ 1,468 $ 1,966 $ 6,376 $ 5,692
Other comprehensive income,
net of taxes of $49 and $4, respectively:
Foreign currency translation adjustment 77 -- 7 --
----------- ----------- ----------- -----------
Comprehensive income $ 1,545 $ 1,966 $ 6,383 $ 5,692
=========== =========== =========== ===========
-8-
INFORMATION HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
J. SUBSEQUENT EVENT
On November 13, 2001, the Company entered into an agreement to acquire
all of the outstanding common shares of Liquent, Inc. in a cash tender
offer at $2.27 per share. Completion of the transaction is contingent
on, among other things, IHI's receipt of greater than 50% of the shares
of Liquent in the tender offer. The aggregate cash consideration for
the acquisition of 100% of the common shares will approximate $43.5
million, excluding transaction fees. At September 30, 2001, Liquent had
approximately $12.6 million of cash and cash equivalents and debt of
approximately $0.4 million.
In addition to the merger agreement, the Company entered into an
agreement with certain stockholders representing approximately 47% of
the common shares of Liquent to acquire those shares at the tender
offer price of $2.27 per share.
-9-
INFORMATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Three Months Ended September 30, 2001 Compared to
THREE MONTHS ENDED SEPTEMBER 30, 2000
REVENUES. In the third quarter of 2001, the Company had revenues of $26.4
million compared to revenues of $18.2 million in the third quarter of 2000, an
increase of $8.2 million or 45.6%. The increase in revenues is due primarily to
strong results associated with IT learning products, as a result of the
acquisition of Transcender in November 2000. Revenues also increased in the
Company's intellectual property group based on strong internal growth in sales
of patent information and patent annuity payment services, and revenues of
IDRAC, which was acquired in March 2001. Revenues also increased in the
Company's scientific and technology information group resulting from the
acquisition of Parthenon in May 2001, offsetting lower domestic sales following
the terrorist attacks.
COST OF SALES. Cost of sales increased $2.0 million or 37.9% to $7.0 million in
the third quarter of 2001 compared to $5.0 million in the corresponding quarter
in 2000. Cost of sales expressed as a percentage of revenues in the third
quarter of 2001 decreased to 26.5% from 27.9% for the corresponding quarter of
2000. The improvement in gross profit margins over the comparable period in 2000
is primarily attributable to the acquisitions of Transcender and IDRAC, which
have higher gross margins than the other existing units, offset by higher costs
at CRC Press and MicroPatent primarily related to product mix at both, and book
publishing operations at CRC Press.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A). S,G&A expenses increased
$2.7 million or 27.4% in the third quarter of 2001, to $12.7 million from $10.0
million in the third quarter of 2000. Increased S,G&A expenses relate primarily
to operating expenses of Transcender, IDRAC, and Parthenon which were acquired
in November 2000, March 2001, and May 2001, respectively. S,G&A expenses as a
percentage of revenues decreased to 48.3% in the third quarter of 2001, compared
to 55.1% in the corresponding 2000 quarter. The improvement in margins is a
direct result of a reduction in development spending in the LPS group over prior
year levels.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization in the third
quarter of 2001 increased $2.7 million, or 123.7%, to $4.8 million from $2.1
million in the corresponding quarter in 2000, primarily as a result of the
amortization of intangible assets related to the acquisitions of Transcender,
IDRAC, and Parthenon.
INTEREST INCOME (EXPENSE). Net interest income (expense) decreased to $0.7
million from $2.4 million due primarily to lower interest earned, resulting from
cash used from our secondary public stock offering to acquire businesses over
the last four quarters. Additionally, the average interest rate earned decreased
from 6.2% in the third quarter of 2000, to 3.6% in the corresponding 2001
quarter.
INCOME TAXES. The provision for income taxes as a percentage of pre-tax income
for the three months ended September 30, 2001 is 43.3%, which differed from the
statutory rate primarily as a result of state and local income taxes and
non-deductible amortization in excess of the purchase price over net assets
acquired. This compares with an effective tax rate of 42.1% in the prior year.
In the third quarter of fiscal 2001 the Company was also subject to foreign
taxes, which were immaterial in the period.
-10-
INFORMATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Nine Months Ended September 30, 2001 Compared to
NINE MONTHS ENDED SEPTEMBER 30, 2000
REVENUES. In the first nine months of 2001, the Company had revenues of $76.0
million compared to revenues of $50.4 million in the first nine months of 2000,
an increase of $25.6 million or 50.7%. The increase in revenues is due primarily
to strong results associated with IT learning products, as a result of the
acquisition of Transcender in November 2000. Revenues also increased in the
Company's intellectual property group based on strong internal growth in sales
of patent information and patent annuity payment services, and revenues of
IDRAC, which was acquired in March 2001. Revenues also increased in the
Company's scientific and technology information group resulting from the
acquisition of Parthenon in May 2001, as well as strong results in international
book sales, offsetting lower domestic sales partly caused by the terrorist
attacks.
COST OF SALES. Cost of sales increased $4.3 million or 30.3% to $18.5 million in
the first nine months of 2001 compared to $14.2 million in the corresponding
period in 2000. Cost of sales, expressed as a percentage of revenues in the
first nine months of 2001, decreased to 24.4% from 28.2% for the corresponding
period of 2000. The improvement in gross profit margins over the comparable
period in 2000 is primarily attributable to the acquisitions of Transcender and
IDRAC, which have higher gross margins than the other existing units, offset by
higher costs at CRC Press primarily related to product mix and book publishing
operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A). S,G&A expenses increased
$11.5 million or 46.5% in the first nine months of 2001, to $36.3 million from
$24.8 million for the first nine months of 2000. Increased S,G&A expenses relate
primarily to operating expenses of Transcender, IDRAC and Parthenon, which were
acquired in November 2000, March 2001 and May 2001, respectively. S,G&A expenses
as a percentage of revenues decreased to 47.8% in the first nine months of 2001
compared with 49.2% in the corresponding 2000 period. The improvement in margins
is a direct result of a reduction in development spending in the LPS group over
prior year levels.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the first nine
months of 2001 increased $6.8 million, or 103.5%, to $13.3 million from $6.5
million in the corresponding period in 2000, primarily as a result of the
amortization of intangible assets related to the acquisitions of Transcender and
IDRAC and increased depreciation related to capital expenditures in fiscal 2001.
INTEREST INCOME (EXPENSE). Net interest income (expense) decreased to $3.1
million from $5.0 million due primarily to lower interest earned, resulting from
cash used from our secondary public stock offering to acquire businesses over
the last four quarters. Additionally, the average interest rate earned decreased
from 5.7% in 2000 to 4.6% in 2001.
INCOME TAXES. The provision for income taxes as a percentage of pre-tax income
for the nine months ended September 30, 2001 is 41.4%, which differed from the
statutory rate primarily as a result of state and local income taxes and
non-deductible amortization in excess of the purchase price over net assets
acquired. This compares with an effective tax rate of 42.3% in the prior year.
In the first nine months of fiscal 2001 the Company was also subject to foreign
taxes, which were immaterial in the period.
-11-
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 September 30, 2001, proceeds of approximately $100 million have
been used from this offering to fund several strategic acquisitions in the
Company's information and publishing businesses. See Note G - ACQUISITIONS. The
remaining net proceeds are intended to be used to finance future acquisitions,
see Note J - SUBSEQUENT Events and pending such uses, 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). 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 period ended September 30, 2001, 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 September 30, 2001, the
Company was in compliance with all covenants.
Cash and cash equivalents, including short-term investments totaled $73.1
million at September 30, 2001 compared to $108.1 million at December 31, 2000.
Excluding cash, cash equivalents, and short-term investments, the Company had
working capital of $9.4 million at September 30, 2001 compared to working
capital deficit of $(0.7) million at December 31, 2000. Since the Company
receives patent annuity payments and subscription payments in advance, the
Company's existing operations are expected to maintain low or negative working
capital balances, excluding cash. Included in current liabilities at September
30, 2001 are obligations related to patent annuity payments and deferred
subscription revenue of approximately $25.7 million.
Cash generated from operating activities was $5.9 million for the nine months
ended September 30, 2001, derived from net income of $6.4 million plus non-cash
charges of $14.8 million minus a decrease in operating liabilities and increase
in operating assets of $15.3 million. The decrease in operating liabilities and
increase in operating assets is primarily due to the operations of businesses
acquired in fiscal 2001, the payments of expenses related to book publishing
operations and income tax liabilities and the timing of deferred subscription
revenue and patent annuity billings and payments.
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INFORMATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Cash used in investing activities was $42.8 million for the nine months ended
September 30, 2001 due to acquisition costs for businesses and titles of $36.9
million and capital expenditures, including pre-publication costs, of $5.8
million. Excluding acquisitions of businesses and titles, the Company's existing
operations are not capital intensive.
Cash generated from financing activities was $1.8 million for the nine months
ended September 30, 2001, 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 September 30, 2001 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 2000, 31% of the
Company's revenues were generated during the fourth quarter with the first,
second and third quarters accounting for 22%, 22% 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.
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 2000
Annual Report on Form 10-K.
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INFORMATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has only limited involvement with derivative financial instruments
and does not use them for trading purposes.
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 September 30, 2001, the Company had
no outstanding borrowings under the Credit Facility.
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 payments to related international regulatory agencies.
At September 30, 2001, the Company had entered into forward contracts to acquire
various international currencies, all having maturities of less than five
months, aggregating approximately $16,560,000. Realized gains and losses
relating to the forward contracts were immaterial for the three and nine months
ended September 30, 2001.
The Company also enters into foreign currency transactions to hedge certain cash
flow exposures related to IDRAC to the end of the year. Such forward contracts
have been designated as hedges for future cash flow exposures on operations. At
September 30, 2001, the Company had entered into forward contracts to acquire
French francs, all having maturities of less than three months, aggregating
approximately $1,122,000. Realized gains and losses relating to the forward
contracts were immaterial for the three and nine months ended September 30,
2001.
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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 September 30, 2001:
Underwriting discounts $ 8,595,000
Other expenses $ 522,000
Total expenses $ 9,117,000
Application of proceeds through September 30, 2001:
Acquisitions of businesses and titles $ 101,743,250
Temporary investments $ 53,256,750
(Commercial paper and money market funds)
ITEM 5. OTHER EVENTS
On November 14, 2001, the Company announced that it has signed an
agreement to acquire Liquent, Inc. for cash consideration of $2.27 per share, or
an aggregate of approximately $43.5 million.
The press release announcing the transaction is attached as Exhibit
99.1 and incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
99.1 Press release dated November 14, 2001, announcing an agreement to
acquire Liquent, Inc.
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the three
months ended September 30, 2001.
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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: NOVEMBER 14, 2001 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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